Brown v. Deford

Advance of Money Under Agreement that Property Purchased Therewith Shall Belong to the Lender—Construction of Contract—Assignment for the Benefit of Creditors—Rights of Subsisting Creditors— Interest. When A. advances money to 15., who is indebted to him, under an agreement that B. shall use the same in the purchase of articles to be prepared for the market by B. and then sent to A. for sale on commission, the net proceeds to be placed to B.’s credit, and it is also agreed that the things so purchased shall be the property of A., such * agreement entitles A. to claim the articles so purchased in B.’s possession as against pre-existing creditors of B. and his assignee for the benefit of creditors. Certain tanners who shipped leather to D. & Co. to be sold on commission became indebted to the latter on drafts in advance of sales. An agreement in writing was then made between the parties which set forth that the money advanced by D. & Co. was for the purchase of hides and bark ; that the leather was to be sent to D. & Co. for sale, and after deducting charges the net amount was to be placed to the credit of the tanners to pay their indebtedness to D. & Co. It was also agreed that the leather, &c., “is the property of D. & Co., and they are authorized at any time to come forward and take possession of the same, and there are no other parties furnishing us money for the purpose of buying hides and bark.” Subsequently the tanners made an assignment for the benefit of creditors, there being at that time upon their premises a large quantity of hides purchased with money advanced by D. & Co. These were sold by the assignees under an agreement that the rights of the parties should be transferred to the fund. The claim of D. & Co. to the same was contested by the trustees and by creditors of the tanners who were such at the time the agreement with D. & Co. was made. Held, ist. That D. & Co.’s claim to the property could not be disputed by the trustees under the assignment, since they stand in the shoes of the assignors and take the property subject to all equities enforceable against them. 2nd. That the agreement between D. & Co. and the tanners was not void under the insolvent law as creating a lien for an antecedent debt, since this proceeding is not under that law. 3rd. That said agreement could not be sustained so as to entitle D. & Co. to claim the property, if in prejudice of the rights of subsequent creditors or purchasers in good faith. 4th. That the rights of D. & Co. to the property purchased with money advanced by them under the agreement was enforceable againstpreexisting creditors of the tanners. 5th. That D. & Co. were entitled to interest on the fund arising from the sale of the property..

Appeals from the Circuit Court for Frederick County. The opinion of the Court below (McSherry, C. J., Lynch and Henderson, JJ.), after setting forth the course of dealing between Deford & Co. and Brown & McKinney, and the contract between the firms, as stated in the opinion of this Court, proceeded as follows : “ This paper (the said contract) was not executed on the day it bears date, but some few days afterwards Mr. McKinney went to Baltimore, and there, in behalf of the firm, signed it. After theexecution of the paper, Brown & McKinney shipped their leather ex clusively to Deford & Co., and upon advices from the latter, drew, after such shipments, only the amounts which the consignees would by letter indicate their willingness to advance. Whilst at the outset of this new arrangement the value of the shipments -exceeded by about twelve hundred -dollars the amount of the advances, and resulted in a corresponding reduction of the old debt; yet, in May, 1891, when the firm of Brown & McKinney failed, it owed Deford & Co. the sum of $14,197.58, or nearly $2,000 in excess of the amount due when the agreement was executed in July, 1888. As against this, Deford & Co. held in store in Baltimore 2,262 sides of leather shipped to them by Brown & McKinney at various times, and which, when sold, produced the net sum of $8,566.30. This being deducted from the amount due at the- time of Brown & McKinney’s failure, reduced the indebtedness to $5,631.28. On May the 19th, 1891, Brown & McKinney executed a deed of trust to Col. Chas. E. Trail and Samuel Brown for the benefit of the creditors of the firm and of its individual members. There were then in process of tanning on the yard of Brown & McKinney a considerable number of hides which were afterwards sold for about $ 12,000. These hides Deford & Co. claimed as their property, and six days after the date of the deed of trust so notified the trustees in writing, and a few days later filed a petition in the trust proceedings, setting forth the grounds upon which they based that claim. Deford & Co. insist that they furnished the funds with which these hides, when green, were purchased by Brown & McKinney, and that under the agreement dated July 24th, 1888, the hides continued to be the property of Deford & Co., for whom they were tanned by Brown & McKinney. By arrangement the trustees completed the tanning of these hides and then sold them, and now have the funds in Court to stand in the place of the leather and to be dealt with as though there had been no sale of the leather at all. The trustees resist the claim of Deford & Co., and the Farmers’ and Mechanics’ National Bank of Frederick, one of the creditors of Brown & McKinney, contests its validity. Both the trustees and the bank have answered the petition filed by Deford & Co. A considerable amount of evidence has been taken, and the single question before us is whether Deford & Co. are entitled, under the agreement of July, 1888, to the fund in Court, to the extent of the balance due to them by Brown & McKinney. “ The bank resists the claim of Deford & Co. on the ground that the agreement of July, 1888, has relation only to the hides and leather on the yard of Brown & McKinney at the time the paper was executed, and that it has no reference to future transactions at all; whilst the trustees under the deed of trust contest the validity of Deford & Co.’s claim on the ground that the agreement of July 24th is a fraudulent and prohibited preference under the insolvent law, and is therefore void as against the conventional trustees. It is apparent, then, that the case turns upon the construetion of the agreement of July, 1888, unless the provisions of the insolvent law intervene and strike it down as an unlawful preference.” After showing that the trustees under the assignment could not question the validity of the agreement as creating a void preference, the Court proceeded as follows : “Now the manifest object which Deford & Co. had in procuring the agreement of July 24, 1888, was to reduce the antecedent indebtedness due to them by Brown & McKinney ; and the equally obvious motive of the latter in executing the paper was to effect that reduction without crippling their business. But in accomplishing these results none of the parties designed to create a new or additional debt, for ultimately such a proceeding would have been but a continuation of the old method of dealing, from which a departure was incontestably contemplated. To reduce the old indebtedness without putting the firm into liquidation, it was necessary that the tannery of Brown & McKinney should be kept a going concern. “To avoid the creation of an additional indebtedness, if Brown & McKinney continued .in business, it was necessary that the previous course of dealing should be materially changed, for from that course of dealing the then existing indebtedness had arisen. To effect both objects—the preservation of the business and the payment of the debt—it was necessary for Deford & Co. to have supervision over the debtor’s business, and in a lárge measure to control and direct it after July 24th, 1888. In doing this Deford & Co. acted throughout in the best of good faith, and there is not the slightest reason to impute to them any sinister motive whatever. At the time the agreement of July was signed, the stock of hides in process of tanning and the unused bark upon the yard of Brown & McKinney were together estimated to be worth about $20,000.00, which was largely more than sufficient to pay the balance of $9,179.36 due to Deford & Co. after crediting the value of the sides they then had in store unsold. Had the parties contemplated that the agreement of July 24th was a lien on, or a pledge of, only the stock then on the yard of Brown & McKinney and was not to be prospective in its operation and not to cover or apply to subsequent acquisitions of bark and hides, Deford & Co. would obviously not have continued to furnish money to the extent of $78,325.00 for the purchase after that date of other raw materials by Brown & McKinney; because such a course would have been merely a continuation of the method pursued prior to the execution of the agreement of July, and would have left the parties precisely where they were before they undertook to make a different arrangement. A construction of the paper which leads to this result cannot be the correct one, for it would give to the agreement no significance at all and would impute to the parties no motive for its execution. The agreement is in-artificially drawn, but its object seems reasonably clear. It is expressed not in technical terms, but in the language ordinarily employed in mercantile transactions. It begins with the declaration ‘ ‘ that all money advanced to Brown & McKinney by Deford & Co. is for the purpose of purchasing hides and bark,” but does not state that all money theretofore advanced had been advanced for the purpose named. In commercial correspondence and memoranda, it is not at all infrequent that the infinitive mood of the auxiliary verb “ to be ” is dropped, causing an ellipsis, which is seldom misleading, because generally understood. The advances referred to are obviously advances to be made—■ advances of capital—for it does not appear that prior to the agreement of July any money was furnished by Deford & Co. except upon actual consignments of leather. Though the agreement speaks of the bark and hides as contained in the tannery and on the premises of Brown & McKinney, it clearly means such bark and hides as may be purchased and placed there, the reference to the tannery and premises being made to indicate not any particular lot of bark or hides contained in the tannery at any special point of time, but merely to describe the locality where all hides and bark purchased after the date of the agreement with money to be advanced by Deford & Co. were to be manufactured into leather. The last sentence of the .paper states that “ there are no other parties furnishing us money for the purpose of buying hides or bark.” And this was manifestly to preclude any claim by anyone else upon the raw materials or the finished stock. The import of the whole paper has relation to the future ; and if confirmation of this view were needed, the contemporaneous acts and conduct of all the parties, and their own construction of its meaning, as evidenced by those acts and that conduct, must set any controversy on this subject forever at rest. “ That it was so understood is plain from the subsequent acts and conduct of the parties.” Mitchell et ux. v. Wedderburn et ux., 68 Md. 145. Deford & Co. suggested the prices which Brown & McKinney ought to pay for green hides and for bark, and regulated the amounts which Brown & McKinney might draw from time to time. Some of these drafts were drawn for the express purpose of purchasing hides, as is shown by a letter of Brown & McKinney, dated February 24, 1891 ; and some for the purchase of bark, as is shown by other parts of the record. Finally, when there seemed to be but little hope of extricating Brown & McKinney from their difficulties, Deford & Co., on March 19th, 1891, expressed a wish that someone else would furnish Brown & McKinney with the “capital to run” theirbusiness. This scheme coming to naught, the final collapse ensued on May the 19th, 1891, and then Brown & McKinney suspended, with upwards of twelve thousand dollars worth of stock on hand, all of which had been purchased with Deford & Company’s money. This money had been furnished on the faith of the agreement of July, 1888. The fund now in Court, which arose from the sale of leather made from hides bought with the money of Deford & Co., the trustees claim should be distributed pro rata among all the creditors of Brown & McKinney, though the bank and most of the other creditors were subsisting creditors long before the agreement of July the 24th was executed, and consequently never trusted Brown & McKinney on the faith of the stock so purchaaed with the money of Deford & Co. In view of the construction placed upon this agreement by the parties themselves, as evidenced by their course of dealing and their their conduct, and in view of the fact that the chief creditors of the extinct firm were such prior to the date of this agreement, we do not feel warranted in placing upon that agreement a construction, or in giving to it an interpretation, which will take the funds realized from a sale of the property bought with the money of Deford & Co., and will apply those funds ratably amongst pre-existing creditors, to the prejudice of Deford & Co. The agreement of July the 24th stands directly across the path of such a proceeding. “ Its force and effect reach and bind the fund into which the property has been converted.” Gibson v. Warden, 14 Wall. 244. “ Whatever view may be taken of the agreement, there can be no possible foundation for the other claim made by the trustees to recover from Deford & Co. the amount realized by the latter by a sale of the leather which they had on hand when Brown & McKinney failed. If this leather did not belong to Deford & Co. under the contract of July the 24th, it had been more than fully paid for by advances previously made ; and Deford & Co. had the undoubted right to sell it, and to apply the net proceeds to the reduction of the amount which Brown & McKinney owed them. We will accordingly sign an order directing the auditor to allow in full, out of the proceeds of the leather sold by the trustees, the claim of Deford & Co.”