200 F. 287 (S.D.N.Y. 1911)
The trustee filed suit in equity against the National City Bank of New York seeking recovery of specific securities in specie along with any dividends received on them.1 The bank had extended clearance loans to the brokers by certifying checks that the brokers withdrew to pay for securities or to release securities from existing liens held by third parties.2
The brokers were required to repay the loans by three o'clock on the same day, often by delivering the released securities or other collateral to the bank.3 The bank claimed that a custom among banks and brokers created an equitable lien or trust on any securities obtained with the loan proceeds.4 This lien would persist even after the brokers sold or further pledged those securities and reinvested the proceeds.5 In practice, the brokers mingled all securities indiscriminately without segregation, and the bank's loan notes expressly reserved liens only upon securities already in the bank's possession.6
The bank gathered securities upon the brokers' failure without limiting itself to those released by its own funds, including some stocks never touched by its advances.7 Testimony from bank officer Carse described an understanding that the securities were held in trust for the bank, but the actual course of dealing showed no such distinction or assertion of rights before bankruptcy.8 The case reached the district court after referral to a master for testimony and report, with the matter treated as a final hearing on the evidence submitted.9
Whether proof is required that the defendant knew the bankrupts intended a preference?10
In this circuit, to set aside a transfer as a preference the trustee must prove that the defendant knew the bankrupts intended a preference.11
Yes. Alexander v. Redmond holds that the element of intent to prefer must be shown and reverses a decision lacking that element. The district judge had decided the case on other grounds, yet the reversal addressed the preference knowledge point expressly, settling the requirement for this circuit.12
Proof is required that the defendant knew the bankrupts intended a preference.13
Whether the custom of banks and brokers created an equitable lien or trust on securities released or purchased with certified checks from clearance loans?14
No. The brokers mingled all securities indiscriminately and the bank's loan notes reserved liens only on securities already in its possession. Upon the brokers' failure the bank seized whatever securities came to hand, including stocks never released by its own advances.17 Carse's testimony characterizing the arrangement as a trust is incompetent because it usurps the judicial function of interpreting the parties' acts.18 No instance occurred in which the bank asserted lien rights between certification and repayment, and the daily mingling of funds and securities is inconsistent with any identifiable res subject to a lien.1920
The custom of banks and brokers did not create an equitable lien or trust on the securities.21
Whether the bank is entitled to subrogation when it paid claims with its own funds?22
No. The bank advanced its own funds through certified checks and held no prior equitable interest in those funds once they left its control. If the bank had some kind of equitable lien on the checks in the hands of the broker, it would be entitled to be subrogated, but not if those funds were the funds of the broker in every sense.25 Hurley v. Atchison, Topeka & Santa Fe Railroad is distinguishable because the advance there purchased a specific, definable quantity of coal that remained identifiable.26
The bank is not entitled to subrogation when it paid claims with its own funds.27
Whether the trustee may recover specific securities in equity without first rescinding the transfer at law?28
Yes. The trustee filed suit in equity seeking delivery of the securities in specie together with dividends received on them. It is quite likely that the trustee may have had the right to sue at law after rescinding the transfer and making a demand, because the refusal would have been a conversion. However, he did nothing of the kind, but proceeded in equity to reclaim the securities, and he cannot now blow hot and cold.
Having elected the equitable remedy and having obtained a decree for delivery, the trustee is bound by that choice and need not have rescinded the transfer at law beforehand.31
The trustee may recover specific securities in equity without first rescinding the transfer at law.32