The legal effect of a transaction involving pledge or
hypothecation depends upon the local law, and if the state law
permits the pledged property to remain under certain conditions in
the possession of the pledgor and those conditions exist, the
trustee in bankruptcy of the pledgor takes subject to the rights of
the pledgee.
Taney v. Penn Bank, 232 U.
S. 174.
There is a well recognized distinction between a chattel
mortgage and a pledge, and a state statute requiring the delivery
of the chattel or recording of the instrument does not necessarily
apply to a pledge of personal property so situated that it is not
within the power of the owner to deliver it to the pledgee.
Where property is, from its character or situation, not capable
of actual delivery, the delivery of a warehouse receipt or other
evidence of title is sufficient to transfer the property and right
of possession.
Gibson v.
Stevens, 8 How. 384.
Notwithstanding §§ 8560 and 8619, General Code of
Ohio, the law of that state recognizes the force of long continued
commercial usage and the effectiveness of a symbolical delivery of
personal property by the transfer of warehouse receipts
representing the same.
Where neither statutes nor decisions of the courts are directly
to the contrary, the courts may refer to established trade customs
as evidence of what has been long understood to be the law.
Gibson v.
Stevens, 8 How. 384.
The law of Ohio not being dissimilar from that of Pennsylvania
in recognizing the validity of transfers by delivering warehouse
receipts representing property under conditions similar to those
involved herein, this case is controlled by
Taney v. Penn
Bank, 232 U. S. 174.
196 F. 5 affirmed.
David Rohrer for many years prior to November 5, 1909, owned and
operated a distillery in Montgomery County, Ohio. On that day, he
was adjudicated a bankrupt,
Page 234 U. S. 400
and the appellants were appointed his trustees. In the following
month, they filed an application in the bankruptcy proceedings,
setting forth that in the distillery warehouses of the bankrupt
there were stored about 9,800 barrels of Bourbon and rye whiskies,
to which there were many conflicting claims; among the claimants
being certain named persons to whom it was alleged the bankrupt had
pledged or hypothecated certain barrels of the whiskies. One of the
parties so named was the respondent, Edward M. Pattison. The
application prayed that all of the claimants be notified of the
proceedings, be made parties thereto, and be required to set up
their respective claims. Pattison filed an answer and intervening
petition, claiming that 210 barrels of whisky (specifying them by
numbers) were a part of a lot of 800 barrels that had been pledged
or hypothecated to him by Rohrer as security for certain loans; the
remainder of the 800 barrels having been sold by Rohrer without the
knowledge of Pattison. It was denied that the whiskies were or ever
had been in Rohrer's possession, it being alleged that all of them,
as soon as manufactured, were placed in the storage warehouse in
the possession and control of the government of the United States,
and that certain moneys were loaned by Pattison to Rohrer, to
secure payment of which the latter assigned and transferred in
writing to the former his entire interest in certain designated
barrels of whisky then on storage in said warehouse, the agreement
and transfer being evidenced by documents in the form of warehouse
receipts, of which the following is a sample, of their manufacture,
the warehouse stamps thereon, and the number of the bonded
"
No. 750"
"
Stored in Warehouse"
"
56 bbls. in No. 2"
"
94 bbls. in No. 1"
"
The David Rohrer Distillery, Montgomery County"
"
Fire Copper Bourbon and Pure Rye"
"
Brand and Distillery Established in 1847
Page 234 U. S.
401
"
"Germantown, O., Feb. 23, 1906."
"Received in my distillery, Bonded Warehouse No. 11, First
District of Ohio, for account and subject to the order of E. M.
Pattison, deliverable only on the return of this warehouse receipt
and the written order of the holder thereof, and on payment of the
United States government tax and all other taxes and storage at the
rate of five cents per barrel per month from storage free,"
"One hundred and fifty barrels D. Rohrer pure Bourbon whisky,
entered into bond as follows: 56 bbls. Rye; 94 bbls. Bourbon."
Special Net wine Proof When Warehouse
number gallons Proof gallons made stamp
107,853
------- Feb. 10, 12, 13, Y
108,002 7,600.48 102 7,405.70 14, & 15/06 44,953
------
45,102
56 Rye
94 Bourbon
Gauged by F. P. Thompson, U.S. Gauger.
"Loss or damage by fire, the elements, riots, accidents,
evaporation, and shrinkage at owner's risk. It is hereby guaranteed
that the loss by natural evaporation and on account of defective
cooperage on each and every barrel of this whisky shall not be more
than one gallon in excess of the government allowance during the
first seven years of the bonded period."
"It is expressly provided that in the payment of excess under
this guaranty, the basis of settlement shall be the cost price of
said whisky in bond at the date of tax, payment figured upon the
original contract price therefor, and the carrying charges thereon
at the rate of tax imposed by the internal law upon distilled
spirits at the date of the withdrawal. "
Page 234 U. S. 402
"The owner of the whisky under this receipt, in accepting it,
agrees to furnish the money to pay all taxes when the same become
due."
"This warehouse receipt is given in conformity with the
warehouse laws of the State of Ohio and the laws of the United
States in force at this date."
"DAVID ROHRER,
Proprietor"
By an amendment to his intervening petition, Pattison set
forth:
"That for more than forty years last past, and ever since the
enactment by the Congress of the United States of the laws relating
to the storing by distillers of whisky in distillery bonded
warehouses, it has been and still continues to be the usual and
customary course of doing business by distillers of whisky to sell,
pledge, and transfer whisky deposited by them in their distillery
bonded warehouses by the making, issuing, and delivering by them of
their warehouse receipts to the vendee or pledgee of the barrels of
whisky sold or pledged (describing and identifying in said
warehouse receipts the barrels of whisky sold or pledged, by their
serial numbers, the date warehouse in which situated), and agreeing
in said warehouse receipts to hold said barrels of whisky sold or
pledged for the account and subject to the order of the vendee or
pledgee thereof, and in and by the sale and pledge as aforesaid of
barrels of whisky in their distillery bonded warehouses to obtain
money and advances of money to enable them to carry on business as
distillers, and during all of said time it has been and continues
to be among distillers and bankers, brokers, dealers in whisky, and
all persons having transactions with distillers, an established
custom and a commercial usage generally known and acted upon to
regard and consider said warehouse receipts as giving constructive
possession of the barrels of whisky mentioned therein, and as
conveying
Page 234 U. S. 403
either an absolute title or a special interest, according to the
nature of the transaction, and as partaking in many respects of the
character of commercial paper, transferable by indorsement, either
absolutely or as collateral security, and as investing the holder
of the warehouse receipts with the title, property in, or
possession of the barrels of whisky mentioned in said warehouse
receipts according to the rights of the original parties to the
transaction, and as constituting the owner of the distillery bonded
warehouse issuing and delivering such warehouse receipts, as the
bailee for the vendee or pledgee of the barrels of whisky in said
warehouse receipts mentioned, and this practice and method of doing
business has obtained for more than forty years, and become an
important part of the commercial system of the country, so that it
is well understood and according to the usual course of business
that the use and purpose of a warehouse receipt is to enable the
owner of said distillery bonded warehouse to sell, pledge, and
transfer the title or the possession of the barrels of whisky in
his bonded warehouse for the purpose of raising money or securing
advances thereon either by sale or pledge."
The trustees filed a general demurrer, which was sustained by
the referee, and the order sustaining it was affirmed by the
district court (186 F. 997). The circuit court of appeals reversed
the district court, and remanded the case for further proceedings
(196 F. 5). Thereupon the district court, in obedience to the
mandate, overruled the demurrer and rendered final judgment in
favor of Pattison, which was affirmed by the court of appeals, and
an appeal to this Court was then allowed.
Page 234 U. S. 404
MR. JUSTICE PITNEY, after making the foregoing statement,
delivered the opinion of the Court.
The transactions in question, as between Rohrer, the bankrupt,
and Pattison, the appellee, are not distinguishable from those that
were under consideration in
Taney v. Penn. Bank,
232 U. S. 174. In
that case, the distilling company deposited as security for the
loan made by the bank certain gauger's certificates, in addition to
warehouse receipts issued by itself. But the sole significance of
the gauger's certificates was that they constituted evidence that
the whiskies had been deposited in the storehouse in barrels marked
and numbered as required by the act of Congress. Since it is
admitted in the present case that the whiskies in question were in
fact on storage, as mentioned in the warehouse receipts delivered
by Rohrer to Pattison, and that the barrels were stamped, marked,
and numbered as therein stated, the fact that no gauger's
certificate was delivered to Pattison is of no present
consequence.
The legal effect of such a transaction depends upon the local
law. In
Taney v. Penn Bank, upon finding that, by the law
of Pennsylvania, the ordinary rule as to the effect of the
retention of physical possession by the vendor of personal
property, which he is capable of delivering to the vendee, is not
applied by the courts of that state to cases where the inherent
nature of the transaction and the attendant circumstances are such
as to preclude the possibility of a delivery by the vendor that
would be consistent with the avowed and fair purpose of the sale,
or where the absence of a physical delivery is excused by the
usages of the trade or business in which the sale is made, we held
that, considering the situation of the property and the usages of
the business, the transaction between the distiller and the bank
was valid, and gave to the latter a lien upon the whisky superior
to that of the trustee in bankruptcy.
The question here presented is whether the local law of
Page 234 U. S. 405
Ohio so far differs from that of Pennsylvania that a different
result should be reached. In behalf of appellants, it is insisted
that there is in Ohio a settled legislative policy with reference
to the change of possession necessary for the creation of liens on
personal property. Section 8560 of the General Code is cited
(formerly § 4150, Rev.Stat.). It reads as follows:
"SEC. 8560. A 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, shall be absolutely void as
against the creditors of the mortgagor, subsequent purchasers, and
mortgagees in good faith, unless the mortgage, or a true copy
thereof, be forthwith deposited as directed in the next succeeding
section."
It is insisted that this clearly and unmistakably establishes
the doctrine that any transaction designed to give a security in
personal property, if not accompanied by an actual change of
possession, must be placed in the form of a chattel mortgage and
filed for record, in order to be good as against creditors. It
seems to us, however, that we should not fail to consider the well
recognized distinction between a chattel mortgage and a pledge. A
mortgage of chattels imports a present conveyance of the legal
title, subject to defeasance upon performance of an express
condition subsequent, contained either in the same or in a separate
instrument. It may or may not be accompanied by a delivery of
possession. On the other hand, where title to the property is not
presently transferred, but possession only is given, with power to
sell upon default in the performance of a condition, the
transaction is a pledge, and not a mortgage.
There is no question that in Ohio, as elsewhere, a chattel
mortgage, as well as a pledge, is valid between the parties,
although not recorded. And, without the statute, it would
Page 234 U. S. 406
be good as against creditors, purchasers, and mortgagees in good
faith. The primary purpose of the act is to protect persons of
these classes, who might otherwise sustain losses by relying upon
the possession and apparent ownership of the chattels by the
mortgagor. In the case of an ordinary pledge, there is no need of
recording, since the pledgor at once parts with possession.
But what shall be said when the transaction relates to personal
property which is so situated that it is not within the power of
the owner to deliver it to mortgagee or pledgee, and of which he
has no such visible possession and apparent ownership as would
probably be relied upon by creditors, purchasers, and mortgagees?
Does § 8560, Gen.Code, which declares that mortgages in such
case shall be invalid against the designated third parties unless
recorded necessarily apply to transactions in the nature of a
pledge, which are not mentioned in terms? The effect would be to
greatly hamper, sometimes to prevent, transactions in the nature of
a pledge, where only constructive possession of the property could
be transferred. We cannot give to the section cited so extensive a
meaning in the absence of a decision by the state court adopting
that construction. None such is referred to.
It is contended that a different rule exists in Ohio as to the
delivery of possession in the case of pledges from that which
obtains in the case of sales. Section 8619, Gen.Code (Rev.Stat.
§ 4197), is cited.
"SEC. 8619. When goods and chattels remain for five years in the
possession of a person, or those claiming under him, to whom a
pretended loan thereof has been made, they shall be the property of
such person, unless a reservation of a right to them is made to the
lender in writing, and the instrument recorded within six months
after the loan is made, in the recorder's office of the county
where one or both of the parties reside, or unless such instrument
is filed as provided by law with respect to chattel mortgages.
Page 234 U. S. 407
But if a loan of goods and chattels is made to an art museum
association within this state, such reservation of a right to them
may be so made and recorded at any time within five years from the
date of the loan."
But in the Code this section is made a part of Chapter 4,
entitled "Statute of Frauds and Perjuries." It partakes also of the
nature of a statute of limitations. We are unable to see anything
in it to establish the asserted distinction between sales and
pledges, and we are unable to find that any such force has been
given to it by the courts of Ohio.
The cases to which particular reference is made are
Gibson
v. Chillicothe State Bank, 11 Ohio St. 311;
Thorne v.
Bank, 37 Ohio St. 254, and
Hunt v. Bode, Assignee, 66
Ohio St. 255. All are decisions by the supreme court of the state.
In the
Gibson case, in an action of trespass for levying
upon and detaining certain property by virtue of an execution
against their bailees, plaintiffs, in order to prove their property
and right of possession, gave in evidence certain warehouse
receipts, reading in substance as follows:
"Received, Chillicothe, November 13, 1852, of Messrs. Gibson,
Stockwell, & Company, and for their account, the following
property, in good order, which we agree to hold irrevocably subject
to their order, they having a lien thereon for the full cost of the
same."
It was held that the legal effect of such a receipt was to pass
the general property and right of possession to the holder, and
that this effect was not impaired by the recital that the holder
had a lien upon the property. The court, in its opinion, recognized
that receipts of this kind, from long and general use in commerce
and trade, had come to have a well understood import among
businessmen, which (as the court said) ought not to be confounded
or perhaps even qualified by a strict construction of the literal
and grammatical meaning of the words employed. And the court
proceeded to say (p. 317):
"The receipts in this case are in
Page 234 U. S. 408
some particulars variant from each other, and yet we have no
doubt they would all be recognized by commercial men as of like
import and equal validity as warehouse receipts. And if so, they as
absolutely transfer the general property of the goods and chattels
therein expressed as would a bill of sale. They are a kind of
instrument extensively used by commercial men as the most
convenient mode of transfer and constructive delivery of property,
and facilitating the ready realization of the price of products by
the producer remote from market. Public policy, as well as respect
to good faith, require that those, like other instruments of
commerce, should be so regarded in courts as not to unjustly impair
confidence in them elsewhere. And this view of the legal effect of
such instruments, we think, fully sustained by the authorities
cited by counsel, and especially by the case of
Gibson v.
Stevens, 8 How. 384."
It was therefore held that, in spite of the recital that Gibson,
Stockwell & Company had a "lien thereon for the full cost of
the same," the warehouse receipts tended to prove that the
plaintiffs had a general ownership in the property, and that the
trial court erred in ruling otherwise. The citation of
Gibson
v. Stevens is significant, because in that case, this Court,
in an opinion by Mr Chief Justice Taney, recognized that where
personal property is, from its character or situation, not capable
of actual delivery, the delivery of a warehouse receipt or other
evidence of title is sufficient to transfer the property and right
of possession to another, and also because this decision was based
in large part upon the usages of trade and commerce.
In
Thorne v. Bank, ubi supra, it was held that an
instrument in the form of a warehouse receipt, executed by a debtor
to his creditor, upon property owned by the debtor, who was not a
warehouseman, and made for the sole purpose of securing the
creditor, was void as against other creditors where the property
remained in the possession of the debtor. The court cited and
relied upon Rev.Stat.
Page 234 U. S. 409
§ 4150, above quoted, and in effect held that the attempt
by the warehouse receipts to establish a lien upon the personal
property was in conflict with the policy of that section, and
therefore invalid as to a creditor.
Gibson v. Chillicothe
Bank was distinguished upon the ground that, in that case, the
warehouse receipts were offered to show ownership, and not a mere
agreement for securing an indebtedness. It will, however, be
observed that, in the
Thorne case, the property in
question was in the possession of the borrowers, and there was
nothing in its character or situation to prevent an actual delivery
of it to the lender.
In
Hunt v. Bode, ubi supra, which is the most recent
case upon the subject to which our attention has been called, one
Stothfang had delivered to a bank certain warehouse receipts for
whisky as collateral for a loan of money made to him by the bank,
and thereafter undertook to make a second transfer or pledge to
another party, subject to the claim of the bank. A copy of this
instrument was served upon the bank, and it was notified to retain
possession of the warehouse receipts pledged with it as collateral
security for its claim against the pledgor, and after it was duly
paid, the balance of the receipts were to be turned over to the
second pledgee. The transaction was sustained, the court
remarking:
"Delivery of the property pledged is generally essential to a
valid pledge, and it is equally true that to make a valid sale or
transfer of any species or article of personal property, a delivery
of the property sold or transferred is necessary. . . . But it does
not follow that actual or physical delivery should always accompany
the sale or transfer, and this is also true as to the pledging of
choses in action or other kinds of personal property. The delivery
in some cases may be symbolical, such as the handing over the
writing which constitutes the title to the property, just as was
done in this case, to secure the Atlas National Bank
Page 234 U. S. 410
for the money it had loaned to Stothfang. He delivered to the
bank not the 165 barrels of whisky, but the warehouse receipts for
the same, which were its muniment of title and control of the
property they represented. And when the pledgor desired to secure
the payment of the note held against him by Dieckmann, he executed
and delivered to him the transfer of all interest in the receipts
which would remain after the bank's claim should be satisfied. This
transfer was not strictly a pledge, but an assignment and transfer
of the stated interest in the warehouse receipts; but if it is
desired that we call it a pledge, as has been done by counsel, we
still observe that constructive possession in the second pledgee
would be sufficient if the intent to deliver such possession is
clearly apparent. It is the application of the familiar rule that
the transfer is complete and delivery made when the owner has done
all that he can do in the premises, and has given such possession
to the pledgee or transferee as the nature of the property and its
situation will permit. In this case, Stothfang owned a valuable
equity in the warehouse receipts held by the bank, as their sale
afterwards made manifest, and it was such interest in them that
could be made the subject of sale and transfer, and even pledge,
and certainly Stothfang gave to Dieckmann possession of all
interest in and title to the receipts which would remain after the
debt due the bank was satisfied. This was all the delivery that
could then be made, and it was at least a constructive delivery,
and this, we think, meets the demands of the law."
We are unable to find in these decisions a recognition of the
distinctions insisted upon by counsel for appellants. On the
contrary, the Supreme Court of Ohio clearly recognizes the
effectiveness of a symbolical delivery.
It is evident also that that court recognizes the force of a
long continued commercial usage. And this lends peculiar
significance to the conceded existence for more
Page 234 U. S. 411
than forty years of the custom and commercial usage set up by
appellee in the amendment to his intervening petition, quoted in
the prefatory statement. It is no answer to say that a trade custom
or usage should not prevail against clear and unequivocal rules of
law. This is a
petitio principii. The question under
consideration is whether certain portions of the written law are to
be given by construction an effect different from that expressed in
their language on the ground that, by authoritative decisions of
the supreme court of the state, the asserted policy has been found
to be implied in them. Since it seems to us that neither the
statutes nor the decisions go to the extent that is claimed for
them by appellants, we may refer to the established custom as
evidence of what has long been understood as the law; for, as this
Court held in
Gibson v. Stevens, and as the Supreme Court
of Ohio held in
Gibson v. Chillicothe Bank, such usages
are to be judicially recognized as a part of the law.
It results that, by the local law, the transactions in question,
as between Rohrer and Pattison, had the effect of transferring to
the latter the legal title and right to possession for the purposes
of the agreement between them, and we think it is a matter of
indifference whether the transaction be called a pledge or an
equitable pledge or an equitable lien. The substance of the matter
is, for present purposes, the same.
This being so, the superiority of Pattison's right over that of
the trustees in bankruptcy is established by the decision of this
Court in
Taney v. Penn Bank, 232 U.
S. 174.
Decree affirmed.
