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MERCHANTS NATIONAL BANK NEW YORK AND BANQUE COMMERCIALE DE BALE v. SEXTON

decided: May 26, 1913.

MERCHANTS NATIONAL BANK OF NEW YORK AND BANQUE COMMERCIALE DE BALE
v.
SEXTON, TRUSTEE IN BANKRUPTCY OF KESSLER & COMPANY.



APPEAL FROM THE CIRCUIT COURT OF APPEALS FOR THE SECOND CIRCUIT.

Author: White

[ 228 U.S. Page 635]

 MR. CHIEF JUSTICE WHITE delivered the opinion of the court.

In July, 1904, Kessler & Company, bankers, contracted to give the R.B. McLea Company, engaged in business as importers and jobbers of dry goods, a line of credit up to $50,000 and in addition to advance money on the invoice price of goods imported and for the purpose of paying the duties thereon. The advances, it was agreed, should be evidenced by negotiable notes of the company in such amounts and to be furnished at such times as desired by Kessler & Company. It was also agreed that the company would hold its stock in trade as a security for all the advances to be made with interest charges and commissions, and that the company, when required to do so, would execute any assignments or deeds reasonably necessary to the accomplishment of the purpose in view. It was moreover agreed that all sales of merchandise made by the company should be subject to approval by Kessler & Company, and when approved, Kessler & Company would guarantee the amount and that the account sales should be transferred to them as security, the accounts, when collected, to be applied to the extinction of the debt. On October 30, 1907, Kessler & Company made a general assignment and were adjudicated bankrupts on November 6 following, when Lawrence E. Sexton was designated as receiver and was appointed trustee on December 30. In the nearly three and one-half years which elapsed between the agreement of July, 1904, and the adjudication in bankruptcy, in 1907, Kessler & Company advanced a

[ 228 U.S. Page 636]

     large amount of money to the company, and at the date of the bankruptcy there were outstanding notes to the amount of $96,000 given by the company under the agreement. Only one note for $7,000 was then held by Kessler & Company, the other notes having been used by the firm in the course of its business as collateral security for money by it borrowed, as follows: With the Merchants Bank of New York City, notes for $30,000; with the Bank commerciale de Bale, notes for $15,000 with the National City Bank of New York City, notes for $39,000, and a note for $5,000 with Kessler & Company, Limited, Manchester, England.

It is not disputed that the Time Kessler & Company delivered the notes as collateral or when the arrangements were made for obtaining the credit to secure which the collaterals were given, the nature and character of the contract with the company was as stated and it is not controverted that as the result of these statements and the delivery of the collateral notes, holders of the notes became entitled to participate in the security. After the appointment of the receiver pending a rule taken by him against the company for the purpose of asserting his rights to the accounts and stock of merchandise securing the notes, an agreement was made between the receiver and the company which was sanctioned by the court and put in the form of an order in substance providing as follows: First, directing the receiver to collect any unpaid account sales of the company assigned under the contract of 1904 to Kessler & Company and forbidding the company from interfering with the discharge by the receiver of this duty; second, directing the company to pay over to the receiver the proceeds of any assigned account sale which had been collected by the company after the service upon them of the rule to show cause on November 16, 1907; and third, providing that an inventory be taken by the receiver and the company, of all merchandise

[ 228 U.S. Page 637]

     purchased "during the life of the contract" between the company and Kessler & Company, the possession of which was in controversy between the parties, without prejudice to the right of the trustee when appointed to enforce any claims as such trustee arising from sales or deliveries of merchandise by the McLea Company prior to November 16, 1907. The McLea Company was authorized to deliver any of the inventoried merchandise in fulfillment of orders theretofore received and to make further sales and deliver goods so sold, all however with the approval of the receiver. Provision was made for the deposit by the receiver of the proceeds of the accounts and by the McLea Company of the proceeds of the merchandise, to await further action, it being specially declared that the making of the order was without prejudice to any of the rights of the McLea Company as against Kessler & Company, the receiver or trustee in bankruptcy when appointed, and that the consent of the McLea Company to the order should not be construed as an admission against its interests or waiver of its rights. The trustee realized from the accounts a sum slightly in excess of $32,000, and the McLea Company, acting under the agreement approved by the court realized from the stock of goods a sum slightly in excess of $12,000, making about $44,000 held as security under the contract of 1904 for the payment of the McLea notes. The Merchants Bank and the Commercial Bank of Bale by proceedings not necessary to state, acquired for a small price, which was credited on the debt due them by Kessler & Company, the collateral notes of the McLea Company. On some or all of these notes, judgments were obtained and execution issued or threatened to be issued against the stock of the McLea Company. That company and the two banks thereupon entered into an agreement by which the stock of merchandise was assigned to a named trustee with the duty, as the stock was realized on, to turn over the

[ 228 U.S. Page 638]

     proceeds for the purpose of paying the two banks. As this agreement was made after the rule to show cause, issued on behalf of the receiver and the order of the court consequent thereon, it was expressly provided in the agreement that it was not intended to violate the order of the court, but that it was subject to the approval of the court.

At the time of the adjudication in bankruptcy, Kessler & Company had a deposit account in the National City Bank to which there was a credit balance of $27,000. Although it is not controverted that the bank held as collateral the McLea notes to the amount of $39,000, there is a contention as to the adequacy of the proof, showing the amounts due that bank, back of which the notes were held as collateral. We content ourselves, however, on this subject with saying that we think it is not subject to be controverted on the record that the National City Bank had a claim for $39,000 and that it set off the deposit of $27,000 against this claim of $39,000 and that the trustee, in order to protect the bankrupt estate, paid the additional $12,000 and received from the National City Bank the $39,000, of McLea collateral notes, along with some other collaterals, the nature and amount of which is not disclosed.

The Merchants Bank and the Commercial Bank of Bale, having made a claim to a special right to the proceeds of the stock of merchandise, concerning which they had made the agreement above stated with the McLea Company, their claim was referred for consideration, to a special master. The receiver, the two banks, and Kessler & Company, Limited, of Manchester, being before the master, and agreement was entered into by which it came to pass that the master was called upon to consider and determine upon the facts, as we ...


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