Summary
In Titusville Iron Co. v. City of New York, 207 N.Y. 203, 100 N.E. 806 (1912), a bankruptcy trustee also prevailed against a creditor claiming entitlement to an equitable lien. Again, the Court of Appeals reiterated the applicable law: “Mortgages or contracts pledging subsequently acquired property, though void at law, will nevertheless be enforced in equity as between mortgagor and mortgagee as agreements to give liens, and also as against purchasers with notice.
Summary of this case from In re MinorOpinion
Argued December 2, 1912
Decided December 31, 1912
George W. Alger and Glenn Ford McKinney for appellant.
Archibald R. Watson, Corporation Counsel ( Terence Farley of counsel), for city of New York et al., respondents. George W. Olvany and John Ingle, Jr., for William J. Olvany, respondent.
On January 27th, 1906, one Hillman entered into a contract with the defendant board of education to furnish and install a heating and ventilating apparatus in a public school. Subsequently the plaintiff sold and delivered to Hillman certain boilers, castings and other parts of a heating apparatus which Hillman intended to use in the performance of his contract, but, so far as appears in the evidence, were not installed in the building, nor delivered to or accepted by the board of education. The plaintiff was never paid by Hillman for the property. In June following proceedings in involuntary bankruptcy were commenced against Hillman, and on the 18th of that month a receiver of his estate was appointed by the United States District Court. On July 9th Hillman was adjudicated a bankrupt. Meanwhile, on the 27th of June, the board of education declared Hillman's contract forfeited under the following provision contained therein:
"If the work to be done under this contract shall be abandoned by the contractor, or if this contract shall be assigned, or the work sublet by him, otherwise than is herein specified, or if the contractor shall at any time refuse or neglect to supply a sufficiency of workmen and materials of the proper skill and quality, or shall fail in any respect to prosecute the work required by this contract with promptness and diligence, or shall omit to fulfill any provision herein contained, or if at any time the superintendent of school buildings shall be of the opinion and shall so certify in writing to the committee on buildings, that the performance of the contract is unnecessarily or unreasonably delayed, or that the contractor is wilfully violating any of the conditions or covenants of this contract or specifications, or is executing the same in bad faith, or not in accordance with the terms thereof, or if the work be not fully completed within the time named in the contract for its completion, the committee on buildings shall notify the contractor to discontinue all work, or any part thereof, under this contract, by written notice, signed on behalf of said committee by its chairman or acting chairman, to be served upon the contractor either personally or by leaving said notice at his place of residence or business, or with his agent in charge of the work, or with an employe found on the work, and thereupon the contractor shall discontinue the work or such part thereof, and the Board of Education shall thereupon have the power to contract for the completion of the contract in the manner prescribed by law, or to place such and so many persons as it may deem advisable, by contract or otherwise, to work at and complete the work herein described, or such part thereof, and to use such materials as he may find upon the line of the work and to procure the material for the completion, so as to fully execute the same in every respect, and the cost and expense thereof at the reasonable market rates shall be a charge against the contractor, who shall pay to the party of the first part the excess thereof, if any, over and above the unpaid balance of the amount to be paid under this contract; and the contractor shall have no claim or demand to such unpaid balance, or by reason of the non-payment thereof to him and shall forfeit all claim to any moneys retained; and no molds, models, centres, scaffolding, planks, horses, derricks, tackle, implements, power plants, or building material of any kind belonging to or used by the contractor shall be removed so long as the same may be wanted for the work."
It also directed the superintendent to proceed with the completion of the work in accordance with the original plans and specifications, and advertised for proposals therefor. On August 11th the receiver of the bankrupt notified the board of education that he claimed the boilers and property heretofore mentioned, and on September 6th, in pursuance of an order made by the United States District Court, the receiver sold all his right and title to the plaintiff. On August 20th the board of education entered into a contract with the defendant Olvany for the performance of the Hillman contract, and in such performance that defendant, with the consent and at the instigation of the board of education, appropriated the boilers and other property of Hillman and installed them in the school building. For this conversion the plaintiff has sued the defendants.
In no aspect of the case did the plaintiff prove any liability on the part of the city of New York. It took no part in the transactions of which the plaintiff complains. The board of education is a corporation separate and distinct from the city of New York. (Charter, sec. 1062; Gunnison v. Bd. of Education of N Y, 176 N.Y. 11.) No relation of principal and agent exists between the two and the city was not liable for the torts of the board. ( Ham v. Mayor, etc., of N.Y., 70 N.Y. 459.) The judgment in favor of the city must, therefore, be affirmed, with costs.
It is urged that the board of education is not liable for the torts of its subordinates. It is unnecessary to consider that question. The evidence shows that the board of education, as such, participated in the appropriation of the property claimed by the plaintiff and for such act, if wrongful, the board was subject to suit. ( Wahrman v. Bd. of Education of N.Y., 187 N.Y. 331.)
This brings us to the consideration of the respective claims of title to the property. The plaintiff had no lien on the property for the unpaid purchase money, but at the time of the appointment of the receiver title to the property was in Hillman. It then became vested in the receiver of the bankrupt and through the sale by the receiver passed to the plaintiff unless, under the provisions of the contract with Hillman, already quoted, the board of education had the right to appropriate the property. For one reason at least the judgment below cannot be sustained. Referring to the contract, it is to be observed that where a contractor makes default it is provided that "the Committee of Buildings shall notify the contractor to discontinue all work, or any part thereof, * * * by a written notice, signed on behalf of said committee by its Chairman," to be served on the contractor in the manner specified, and " thereupon" the board of education shall have power to contract for the completion of the contract, "and to use such materials as they may find on the line of the work." The service of the notice on the contractor is made, by the contract, a condition precedent to the right to forfeit the contract and appropriate the materials of the contractor. The complaint was dismissed at the close of the plaintiff's case. There was no evidence that such a notice was ever served. We are unwilling, however, to dispose of the case on this narrow ground, as on the record before us, even had the notice been served, still the act of the board would have been wrongful.
At the time of the execution of the contract Hillman had no title to the property, the subject of this suit, nor does it appear even that the property was then in existence. Therefore, he could create no lien thereon cognizable at law, whether by way of mortgage, pledge or otherwise. "It is common learning in the law that a man cannot grant or charge that which he hath not." (See Thomas on Chattel Mortgages, sec. 157; Jones on Chattel Mortgages, sec. 138.) Mortgages or contracts pledging subsequently acquired property, though void at law, will nevertheless be enforced in equity as between mortgagor and mortgagee as agreements to give liens, and also as against purchasers with notice. ( McCaffrey v. Woodin, 65 N.Y. 459; Kribbs v. Alford, 120 id. 519.) But it seems settled law, at least in this state, that they will not be enforced as against creditors. ( Rochester Distilling Co. v. Rasey, 142 N.Y. 570; Zartman v. First Nat. Bank of Waterloo 189 id. 267.) In the first case Judge GRAY said: "The proposition that a mortgage upon chattels having no actual, nor potential, existence, can operate to charge them with a lien, when they come into existence, as against an attaching, or an execution creditor, has frequently been discountenanced and repudiated." (p. 575.) In the second, Judge VANN said: "In other words, the agreement and intention of the parties to a mortgage upon property not yet in existence will be given effect by a court of equity so far as practicable, provided no interest is affected except that of the mortgagor and mortgagee, who entered into the stipulation, but equity closes its doors and refuses relief if the interests of creditors are involved. The result thus announced is founded on principle and sanctioned by authority." (p. 272.) In the opinions in these two cases the authorities are so fully examined and discussed as to make further review unnecessary.
The title of the contractor passed to the receiver in bankruptcy before the forfeiture authorized by the contract had accrued or the defendant taken possession, and the decision in Skilton v. Codington ( 185 N.Y. 80) as well as that in the Zartman Case ( supra) are authorities to the effect that the trustee can assert the rights of creditors. We must not be misled by some of the early decisions of the Supreme Court of the United States which were made in cases arising under the Bankruptcy Act of 1867. Under that act the assignee succeeded only to the title of the bankrupt except in cases where, by the express terms of the statute, certain transactions were made fraudulent and void as against the act. So it was held in Stewart v. Platt ( 101 U.S. 731) that the assignee could not attack chattel mortgages void against creditors by reason of the failure to file them in the proper place. In Hauselt v. Harrison ( 105 U.S. 401) an agreement somewhat similar in effect to that before us was held to create a lien good between the parties, even though void as against subsequent purchasers without notice and creditors levying executions and attachments, and, therefore, immune from attack by the assignee in bankruptcy. This rule, however, has been changed by the present statute, which enacts that "Claims which for want of record or for other reasons would not have been valid liens as against the claims of the creditors of the bankrupt shall not be liens against his estate." Therefore, the title of the plaintiff was superior to any lien of the defendants.
Nor can the right of the defendant to appropriate the property as a pledge be sustained under the law of this state. Transfer of possession to the pledgee is necessary to create a valid pledge and the possession must be actual, not merely constructive, unless from the nature of the case the property is not susceptible of manual delivery and possession. ( Wilson v. Little, 2 N.Y. 443; Black v. Bogert, 65 id. 601; McFarland v. Wheeler, 26 Wend. 467.) There is no evidence in the case that the board of education ever had any control or possession of the property prior to the bankruptcy. Agreement between the parties could not make that possession which was not in fact such. ( McFarland v. Wheeler, supra.) At most, delivery of possession was a question of fact for the jury. ( Seidenbach v. Riley, 111 N.Y. 560.)
There is a vital distinction between the contract in the case of Duplan Silk Co. v. Spencer (115 Fed. Rep. 689), and the one in the case at bar. There, as pointed out in the opinion, there was no forfeiture of unused materials, but they were applied to the completion of the contract, and if the contract was completed at a cost less than that which would be due the contractor, had he finished the contract, he was entitled to the surplus. In the present case it is expressly provided that the contractor shall have no claim for any unpaid balance and shall forfeit all claims to any moneys retained. Therefore, if on the other questions the case cited were an authority in this state, the distinction pointed out would make the decision there rendered inapplicable to the present case. It is to be also noted that in the Duplan Silk Co. case the opinion cites the old cases of Hauselt v. Harrison and Stewart v. Platt, to which I have already referred and which are not authorities under the present Bankruptcy Act.
The judgment appealed from so far as relates to the defendants board of education and Olvany should be reversed and a new trial granted, with costs to abide the event.
I concur in the result on the ground first stated. I do not concur on the ground last stated. By the contract with Hillman he agreed "to furnish and provide all the work and materials necessary and proper in, toward or about the said contract according to the several plans and drawings prepared therefor and the specifications."
The "heating and power boilers, castings and appurtenances" described in the complaint were delivered "upon the line of the work" for use in the public school building as provided by the contract, and to that extent the contract was performed.
Paragraph "Q" of the agreement expressly provides that in case the contract is abandoned by the contractor the board of education shall have the power to contract for the completion of the contract and "to use such materials as he may find upon the line of the work and to procure other materials for the completion so as to fully execute the same in every respect."
It is conceded that the materials described in the complaint were delivered at the school building early in June, 1906, and that as between the plaintiff and Hillman became the property of Hillman, the contractor, and they were subsequently and after the abandonment of the contract by Hillman and his bankruptcy used in the completion of the building.
The claim of the Titusville Iron Company in this action is not based upon the fact that it was a sub-contractor under Hillman, the contractor. It rests wholly upon its purchase of the "heating and power boilers, castings and appurtenances" from the assignee in bankruptcy and is the same as that of any stranger who might have become such purchaser.
Under the contract and the facts shown by the record the personal property so delivered upon the line of the work became, as between the contractor and the owner, subject to the qualified property of the owner therein.
It also became on delivery sufficiently in the possession of the owner to protect its qualified property therein by virtue of the contract even as against the creditors of the contractor, and the contract was not in fraud of the Bankruptcy Act. ( Duplan Silk Co. v. Spencer, 115 Fed. Rep. 689, 695.)
As soon as the materials, necessary and proper to carry out the contract by Hillman, were delivered by him upon the line of the work, the contract became an executed one as to such materials, at least for the purpose of giving the owner a qualified title to the same, the only qualification in the title being that such materials could be used by the contractor in completing the contract and could be retaken by him or his assignee in case the contract was completed without the same being so used.
HAIGHT, VANN and WILLARD BARTLETT, JJ., concur with CULLEN, Ch. J., and HISCOCK, J., concurs in result; COLLIN, J., absent.
Judgment accordingly.