Appeal from the District Court of the United States for the Southern District of New York.
Before SWAN, CHASE, and CLARK, Circuit Judges.
The bankrupts were the sole partners in a brokerage firm known as Wyser & Diner. On October 27, 1937, they borrowed $4,000 from Kurt F. Mayer, the claimant-appellee herein, and gave him their promissory note wherein it was recited that certain specified stocks were collateral security for the note. Mayer was about to depart, and in a short time did depart, on a protracted trip to the Orient. The stock certificates were not placed in the hands of the claimant, but were immediately segregated by the bankrupts and put in an envelope, on the outside of which was written the name of Kurt F. Mayer. The envelope was placed in the safe deposit value of the bankrupts, and the transaction was noted on their books. Some of the securities belonged to the bankrupts, while others were the property of customers who had purchased them on margin. It was agreed between claimant and the bankrupts that they might substitute other securities for those called for by customers.
At three times thereafter the bankrupts withdrew securities from the envelope; on the first occasion they substituted others; on the remaining ones they made no replacements. Upon the occurrence of bankruptcy the market value of the securities was no more than $1,100, although the debt was then in excess of $3,500. When the bankruptcy receiver took over custody of the assets, he found the envelope containing the securities in the bankrupts' vault. Mayer demanded the stocks and bonds and filed a claim to recover them. The referee denied the claim, but the District Court sustained Mayer's petition to review, and the bankruptcy trustee appeals.
The referee based his decision on the conclusion that, because possession of the securities was not delivered, the transaction was an imperfect pledge, invalid against the trustee in bankruptcy. They District Court also concluded that, for want of delivery, the transaction did not constitute a valid pledge, but held that the arrangement could be viewed as a chattel mortgage and as valid without being filed for record. Since no instrument embodying the transaction had been filed, the court's decision required that it hold inapplicable § 230, N.Y. Lien Law (Consol. Laws, c. 33), prescribing the conditions under which chattel mortgages and certain liens on stocks and bonds must be filed to be valid against creditors. The court analyzed this statute carefully and came to the conclusion that it did not apply to the lien created by the instant arrangement. The claimant now relies on this finding to support his demand for the securities; he also urges that the transaction amounted to a valid pledge; and as further alternatives he claims either an equitable lien or a declaration of trust in his favor.
Under the decisions the transaction cannot be upheld as a valid pledge in the absence of delivery of possession of the property to the pledgee. McCoy v. American Express Co., 253 N.Y. 477, 171 N.E. 749; Casey v. Cavaroc, 96 U.S. 467, 24 L. Ed. 779; Goldstein v. Rusch, 2 Cir., 56 F.2d 10, certiorari denied 287 U.S. 604, 53 S. Ct. 9, 77 L. Ed. 526. Appellee asserts that constructive possession may be relied upon as a substitute, but we know of no decision that would dignify the arrangement adopted in the instant case by calling it a delivery of constructive possession. Some symbolic or "constructive" act may be permissible when the property is in the hands of third parties or by its nature is not conveniently susceptible of manual delivery. Here not only did the securities fail to reach the pledgee; they never departed from the possession and dominion of the pledgor. It is doubtful whether the mode of delivery here selected would satisfy (as against creditors) the requirements for a declaration of trust. Compare In re A. E. Fountain, Inc., 2 Cir., 282 F. 816, 25 A.L.R. 319. Much less, then, is it able to satisfy the requirements for a valid pledge. Restatement of Security, T.D. No. 1, §§ 1, 5-8, 10.
But since the parties acted in apparent good faith, we should not hold ourselves bound to test the validity of this transaction by the literal and technical rules of pledge alone. In the similar case of Sexton v. Kessler & Co., 225 U.S. 90, 32 S. Ct. 657, 56 L. Ed. 995, Mr. Justice Holmes declared:
"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 conduct should be construed as adopting whatever method consistent with the facts and with the rights reserved is most fitted to accomplish the result. If an express declaration of an equitable lien, or, again, a statement that the New York firm constituted itself the servant of the English company to maintain possession for the latter, or that it held upon certain trusts, or that a mortgage was intended, or any other form of words, would effect what the parties meant, we may assume that it was within the import of what was done, written, and said. So the question is whether anything in the situation of fact or the rights reserved prevents the intended creation of a right in rem, or, at least, one that is to be preferred to the claim of the trustee." 225 U.S. at page 97, 32 S. Ct. at page 658, 56 L. Ed. 995.
Conseivably, therefore, the arrangement at bar might be viewed as a pledge, a chattel mortgage, a declaration of trust, or as the mysterious equitable lien*fn1 to which Mr. Justice Holmes refers. But whatever name is ultimately applied, we are of the opinion that the transaction is invalid against creditors, and hence against the trustee in bankruptcy, under Section 230 of the N.Y. Lien Law. Since that section speaks of "the mortgage or pledge of or lien upon stocks or bonds," we conclude that the statute, if applicable at all, includes mortgages, pledges, declarations of trust, and so-called equitable liens.
That statute, in its main enacting clause, has long provided:
"Every mortgage or conveyance intended to operate as a mortgage of goods and chattels * * *, which is not accompanied by an immediate delivery, and followed by an actual and continued change of possession of the things mortgaged, is absolutely void as against the creditors of the mortgagor, * * * unless the mortgage, or a true copy thereof, is filed as directed in this article."
In 1916, the statute was amended by the addition of the following sentence:
"This article shall not apply to agreements creating liens upon merchandise or the proceeds thereof for the purpose of securing the repayment of loans or advances made or to be made upon the security of said merchandise and the payment of commissions or other charges provided for by such agreement, where the conditions specified in section forty-five of the personal property law are complied with, nor shall this article apply to the mortgage or pledge of or lien upon stocks or bonds mortgaged or pledged to secure payment of a loan, which stocks or bonds, by the terms of a written instrument creating such mortgage, pledge or lien and setting forth the conditions of such loan, are to be delivered to the lender on the day such loan is made, and every such mortgage, pledge or lien, of such securities, shall be valid as against creditors of such mortgagor or pledgor, provided, however, that if such securities are not delivered to the pledgee or mortgagee on the day such loan is made, the mortgage, lien or pledge therein intended to be created shall be absolutely void and of no effect as against the creditors of such mortgagor, pledgor or lienor unless such instrument, or a true copy thereof, is filed as directed in this article, on the day following the making of such ...