Before LUMBARD, WATERMAN and MOORE, Circuit Judges.
This is an appeal from a judgment of the District Court for the Southern District of New York, entered after a trial before Judge Ryan sitting without a jury, dismissing the complaint and granting judgment for the defendant.
The plaintiff is a receiver appointed by the Chancery Court of Delaware in an action brought by the Attorney General of Delaware for the liquidation of the Eastern Insurance Company. After qualifying, the receiver was expressly authorized on March 3, 1954, by the Delaware Court to bring this action. The defendant was, at the times complained of, a national bank, but on March 31, 1955 it merged with the Bank of Manhattan Company and became The Chase Manhattan Bank, a New York corporation. Jurisdiction of the federal courts was invoked by reason of diverse citizenship.
By this action the plaintiff seeks to recover certain bonds which Eastern put up as collateral for two loans extended by the Chase bank. Two theories of recovery are advanced by the plaintiff, (1) that the bank converted the bonds, and (2) that the pledge constituted a voidable fraudulent conveyance under New York Debtor and Creditor Law, McKinney's Consol.Laws, c. 12, § 270 et seq.
On January 10, 1951, Eastern, which had not previously done business with Chase, opened a deposit account with Chase with an initial deposit of $290,308.34.Copies of corporate resolutions in the usual form designating the officers authorized to make withdrawals and loans on Eastern's behalf were filed with Chase on January 12, 1951.Thereafter the bank received for Eastern, United States Treasury Bonds in face amount of $275,000 against payment out of the insurance company's account. The bonds were held in a "safekeeping" or custodian account.
In the early part of March 1951, Chase was approached by Joseph N. Boland, the accountant for Eastern, to ascertain whether the Chase bank would loan money to Eastern, assertedly for funds needed in its business. Eastern then applied for a loan of $490,000 and as security proffered $500,000 face amount New York City Housing Authority 2% Bonds (due from 1998 to 2001) and the $275,000 face amount United States Treasury Bonds previously deposited in the custodian account. The loan application was approved and Eastern then delivered to Chase a duly executed demand note for $490,000 together with authorizing corporate resolutions. Chase paid the $490,000 to a stockbroker for the $500,000 New York City Housing Authority Bonds which Chase then retained.
On May 24, 1951 Eastern borrowed an additional $50,000 from Chase and executed a new demand note for $540,000 the total then owed.
Following this, on July 16, 1951, Eastern borrowed an additional $100,000 from Chase and executed a separate demand note and deposited with Chase on July 26 additional collateral of $100,000 Port Authority Bonds and $100,000 New York City Housing Authority 2 1/4% Bonds, due in 1996. This collateral by the terms of the note was to stand as security for the payment of "* * * this note and of all other liabilities" of Eastern. The term "liabilities" was thereafter defined as including "any and all indebtedness, notes * * * and liabilities of any kind * * * now or hereafter existing * * * and whether heretofore or hereafter incurred."
On July 26, 1951 Eastern instructed Chase to sell the $100,000 Port Authority Bonds and apply the proceeds in payment of the July 16, 1951 note for $100,000. This was done and the loan was paid in full. Chase continued to hold the remaining collateral, the $100,000 Housing Authority Bonds, as security for the May 24 loan, which at the time of trial remained unpaid to the extent of $412,123.91. The application of the $100,000 Housing Authority Bonds to the collateral pledged for repayment of the May note was pursuant to the express contract provision noted above and the definition of security in the May and July notes. The term "security" was therein defined to include any property owned by Eastern "which [has] been or at any time shall be delivered to or otherwise come into the possession * * * of the Bank."
Although in the district court the plaintiff attempted to secure the return both of the Treasury Bonds and the New York City Housing Authority Bonds, he has limited his claim on appeal to the question of the legality of Chase's retention of the $100,000 Housing Authority Bonds as collateral.
In attempting to make out a conversion the plaintiff advances the ingenious argument that Eastern was insolvent when the bank retained the $100,000 Housing Authority Bonds as collateral for the May note after the July note was paid and that in so doing Chase unlawfully converted the bonds because the general property rights to them had passed to the creditors of insolvent Eastern under the New York "Trust Fund Doctrine." We cannot agree that there was an illegal conversion under such a doctrine or any other theory.
While the exact meaning and limits of the New York "trust fund" doctrine are unclear, the doctrine has never been applied against a good faith purchaser for value. Cf. Barr & Creelman Mill & Plumbing Supply Co. v. Zoller, 2 Cir., 1940, 109 F.2d 924; Reif v. Equitable Life Assurance Society, 1935, 268 N.Y. 269, 276, 197 N.E. 278, 100 A.L.R. 55. The theory that the assets of a corporation constitute a "trust fund" for its creditors on insolvency has been used in actions brought against directors of the insolvent corporation [e.g. New York Credit Men's Adjustment Bureau v. Weiss, 1953, 305 N.Y. 1, 110 N.E.2d 397; New York Stock Corporation Law, McKinney's Consol.Laws, c. 59, §§ 15, 60]; stockholders who diverted corporate funds [e.g. Trotter v. Lisman, 1913, 209 N.Y. 174, 102 N.E. 575; New York Stock Corporation Law, § 15] and third parties who took a conveyance from an insolvent corporation with knowledge of the insolvency [e.g. Ward v. City Trust Co., 1908, 192 N.Y. 61, 84 N.E. 585; Stefanzyn v. Brooklyn Nat. Bank of New York, 1st Dept. 1937, 251 App.Div. 259, 296 N.Y.S. 160; New York Stock Corporation Law, § 15].
It is clear, however, that the trust fund doctrine has no application to a transferee who takes in good faith and for value. Cole v. Millerton Iron Co., 1892, 133 N.Y. 164, 168, 30 N.E. 847; Reif v. Equitable Life Assurance Society, supra; ...