Argument for Appellant.

225 U. S.

The bankrupts never agreed to give nor did Manchester stipulate to receive, possession (except after financial embarrassment had intervened)—and hence there was no contract, relative to possession, for equity to enforce by deeming it performed.

There was no equitable mortgage, as held by a majority of the Court of Appeals.

The parties did not intend to create a mortgage, but only a pledge with peculiar features, viz., possession to remain in the pledgor with absolute power of disposal.

In New York, as elsewhere, a mortgage of personal property is a transfer of title subject to be divested on condition subsequent, viz., by payment of the debt. The parties intended no such thing.

The intention of the parties is shown by their correspondence.

Even if the parties had intended to make a mortgage it would have been invalid in so far as it purported to cover after-acquired property; and in toto because of provisions in it, and in the method of carrying it out, that made it fraudulent in law and absolutely void as to creditors. The Zartman Case, 189 N. Y. 271.

The word "escrow" has usually to do with the passing of title, but it has to do with the passing of title only upon delivery, and prior to the delivery of the escrow the rights of the parties as to title remain exactly as before the escrow was created.

The Chattel Mortgage Act of New York (Lien Law, § 90) provides that all mortgages of "goods and chattels" shall be absolutely void unless there is an actual and continued change of possession, or the mortgage is filed.

Stackhouse v. Holden, 66 App. Div. 433; Risley v. Phenix Bank, 83 N. Y. 318; Hudson River Bank v. Chaskin, 28 App. Div. 311, can all be distinguished.

The learned judge was in error in stating that there was no fraud in the transaction here, and that, as no rights

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of purchasers or attaching creditors intervene, the taking possession by the Manchester house was entirely legal and proper; such is not the law of New York. Parshall v. Eggert, 54 N. Y. 18; Skilton v. Coddington, 185 N. Y. 86; Sabin v. Camp, 98 Fed. Rep. 97, are not authority as a declaration of the laws of the State of New York.

There was no declaration of trust.

Whether there was a declaration of trust, and a consequent transfer of the title, is just as much a question of local law as the other questions, namely, those of pledge and equitable mortgage. As to the law of New York, on this subject, see Martin v. Funk, 75 N. Y. 137; Matter of Totten, 179 N. Y. 112; Young v. Young, 80 N. Y. 422; Barry v. Lambert, 98 N. Y. 300; Matter of Bolin, 136 N. Y. 177; Locke v. Farmers' L. & T. Co., 140 N. Y. 135.

Unless, therefore, Kessler & Co. of New York by their letters, certificates and acts intended to divest themselves of all beneficial interest in the securities and to hold the whole interest therein for the benefit of Kessler & Co. of Manchester, the transaction cannot be sustained as a declaration of trust.


a pledge, imperfect or invalid because of want of delivery of the pledged property, can be sustained as a declaration of trust, the result will practically be to abolish technical pledges, "whose very essence" is the possession of the pledged property by the pledgee. Young v. Young, 80 N. Y. 422.

The cases where equity has given relief in insolvency cases are generally where the claimant's money has produced the very thing sought to be subjected to the lien. National Bank v. Rogers, 166 N. Y. 380; Hauselt v. Harrison, 105 U. S. 401; Hurley v. Atcheson &c. R. R., 213 U. S. 126.

The transaction between Kessler & Co. of New York and Kessler & Co. of Manchester was inequitable and in

Argument for Appellant.

225 U.S.

bad faith and deceived existing as well as prospective creditors.

The law is in favor of the appellant without respect to the appellee's good or bad faith. Robinson v. Elliott, 22 Wall. 525.

The New York house held themselves out to all the world as the owners of the securities, as the arrangement expressly authorized. The result was a credit with various bankers and customers, fictitious in fact and fraudulent in law.

This case is not one of fraud based upon express misrepresentation, and it is not necessary for the trustee in bankruptcy to show that the defendants made express representations false in fact. But the case is full of evidence to show that with the knowledge and consent of the Manchester house the New York house represented itself as the owner of the securities over which the Manchester house claimed a secret lien. Martin v. Mathiot, 14 Serg. & R. 214.

The agreement between the parties was fraudulent as a matter of law irrespective of good or bad faith, and was void as against creditors.

Clauses permitting the debtor to use the securities as his own make the agreement fraudulent in law and void ab initio as to creditors; and if the debtor and creditor act in such a way that the debtor uses the property as his own, the result is the same. Zartman v. Bank, 189 N. Y. 267, 273; Skilton v. Codington, 185 N. Y. 80; Bowdish v. Page, 153 N. Y. 104; Scherl v. Flam, 129 App. Div. 561; Hangen v. Hachemeister, 114 N. Y. 566; Southard v. Benner, 72 N. Y. 424; Potts v. Hart, 99 N. Y. 168; Russell v. Winne, 37 N. Y. 591; Mandeville v. Avery, 124 N. Y. 376; Wood v. Lowry, 17 Wend. 492; Chatham Bank v. O'Brien, 6 Hun, 231; Griswold v. Sheldon, 4 N. Y. 584; Gardner v. McEwen, 19 N. Y. 123; Brackett v. Harvey, 91 N. Y. 214; Bainbridge v. Richmond, 47 Hun, 391.

225 U.S.

Opinion of the Court.

When an agreement for security or protection is thus fraudulent in law and void, it may be attacked by any creditor, whether having a judgment or not, if it is impracticable or useless to obtain a judgment. Skilton v. Codington, 185 N. Y. 80, 86, 89; Russell v. St. Mart, 180 N. Y. 355, 359, 360; Karst v. Gane, 136 N. Y. 316, 323; Stephens v. Perrine, 143 N. Y. 476: Knapp v. Milwaukee Trust Co., 216 U. S. 545.

Mr. Abram I. Elkus and Mr. F. C. McLaughlin, with whom Mr. Rufus W. Sprague, Jr. was on the brief, for appellees.

MR. JUSTICE HOLMES delivered the opinion of the court.

This is a bill brought by a trustee in bankruptcy to set aside an alleged fraudulent preference. The Circuit Court of Appeals reversed a decree of the District Court for the plaintiffs and dismissed the bill. 172 Fed. Rep. 535. 97 C. C. A. 161. It will be enough for our decision to state the following facts: The appellee was an English company and the bankrupts a New York firm intimately connected with it which for many years had drawn upon it. In February, 1903, the English house requested the New York firm to set aside securities for their drawing credit. The New York firm wrote on June 30 that they had that day placed in a separate package in their safe deposit vaults certain securities named, the package being marked 'Escrow for account of Kessler & Co., Limited, Manchester;' adding 'This escrow is intended as a protection against our long drawings against your good selves.' This letter was acknowledged and it was added "If at any time you have the opportunity of realizing these securities or any part of them, you are at liberty to take them and to replace them by others of equal value, though in that case we should of course like to see rather better quality." In

Opinion of the Court.

225 U. S.

December of the same year the English house suggested a form of certificate as follows: "We certify that we have specially set aside and hold for your account, on this, the 31st day of December, '03, as security for the drawing credit which you accord us, the following securities. Name secs. and market value." This was conformed to and the New York house also entered the securities and all substitutions on their loan book. Substitutions were made from time to time and the English house notified. The securities always were either negotiable by delivery or indorsed in blank. They were marked and kept as stated in the letter upon a separate shelf of the New York firm's vault, and they never were removed except in 1905 and 1906 when they were taken to the office to be examined and checked off by representatives of the English company. Business went on in this way until the panic of 1907. On October 25 of that year, the stability of the New York firm being in doubt, it handed over the escrow securities to an agent of the English company then in New York and he deposited them in a safe deposit vault in the name of the company. On November 8 a petition of bankruptcy was filed and on November 27 the New York firm was adjudged bankrupt. Notwithstanding arguments to the contrary it may be assumed that the arrangement between the parties was made in good faith and intended and believed to be valid, and on the other hand that at the time of the change of custody on October 25, within four months of the petition, the New York firm was insolvent and that the English company had reasonable cause to believe that a preference was intended if its rights began only on that date.

So far as the interpretation of the transaction is concerned it seems to us that there is only one fair way to deal with it. The parties were business men acting without lawyers and in good faith attempting to create a present security out of specified bonds and stocks. Their

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