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Author: 
 
 Frederick, Karl T. 
 
 Title: 
 
 The trust receipt as 
 security 
 
 Place: 
 
 New York 
 
 Date: 
 
 [1922] 
 
MASTER NEGATIVE # 
 
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 Business 
 
 1 
 
 :725#2 Frederick, Karl T 
 
 F87 The trust receipt as security, by Karl T.Freder- 
 ick. ..New York, American acceptance council, ^1922?^ 
 89 p« 16 on^ 
 
 "This pamphlet is a reprint •••of an article first 
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The Trust Receipt 
 as Security 
 
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 *«''',ui,iHb..allkj:i! 
 
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 by 
 
 KARL T. FREDERICK 
 
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 »'■ 1 
 
 AMERICAN ACCEPTANCE COUNCIL 
 
 New York 
 
 120 Broadway 
 
 
 1" 
 
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 Columbia UniberjSitp , 
 
 in ti)e Citp of ^eto gorfe ^ . 
 
 LIBRARY 
 
 School of Business 
 
The Trust Receipt 
 as Security 
 
 by 
 
 KARL T. FREDERICK 
 
 "*-n^ 
 
 I 
 
 AMERICAN ACCEPTANCE COUNCIL 
 
 120 Broadway 
 
 New York 
 
Q^ . 
 
 mm€ 
 
 
 Published by 
 Acceptance Councfl 
 120 Btoadway, New Yoik 
 (EDITION OF JANUARY, 1929) 
 
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 '^ *^ THE TRUST RECEIPT AS SECURITY 
 
 ^ I 
 
 yu v» In the typical case, the trust receipt comes into 
 % tsi existence in the following way: An importer R, 
 for example, who wishes to procure silk from China 
 for manufacture or sale in this country, requests 
 his bank to issue a letter of credit authorizing A B 
 & Company in China to draw their drafts upon 
 the bank for the cost of the silk to be supplied by 
 them. This credit is either delivered to the im- 
 porter, or sent direct to A B & Company, or trans- 
 mitted through a second institution located near A 
 B & Company, and, as a condition of its issue, the 
 importer signs an agreement with the bank on the 
 following lines: In consideration of the issue of 
 the credit, the customer agrees to repay to the bank 
 all amounts which may be paid out by it under the 
 credit, together with interest, commissions, etc., and 
 also agrees substantially as follows: 
 
 **Your bank shall remain owner of all said mer- 
 chandise, of all policies of insurance, and of all bills 
 of lading and other documents of title thereto and 
 of the proceeds thereof until the payment as above 
 promised, and also the payment of all other sums 
 that may be or become due by us to your bank. 
 Upon receipt from you of the possession of the 
 said merchandise shipped under such credit, or the 
 
f 
 
 bills of lading or other documents of title thereto, 
 we will sign and deliver a receipt therefor in such 
 form as you may require and will give such secur- 
 ity as you may demand, and the said merchandise, 
 after delivery of the custody thereof to us and the 
 proceeds thereof, if sold by us, shall be held sub- 
 ject to your order on demand as your property, 
 with authority to take possession of and dispose of 
 same at any time by public sale or otherwise for 
 your reimbursement or protection, and to charge all 
 expenses, including commissions for sale and 
 guaranty, the bank being free from all responsibility 
 whatever in respect to such sale/* 
 
 A B & Company then ship the silk in accordance 
 with directions, taking the bill of lading to the order 
 of the bank "notify R." Insurance is also effected, 
 loss, if any, payable to the bank. The seller then 
 draws its draft upon the bank for the cost or 
 purchase price of the shipment, attaches to it the 
 bill of lading, policy of insurance, consular invoice 
 and any other necessary papers, and forwards the 
 draft through banking channels for payment. In 
 many cases, A B & Company, upon exhibiting the 
 letter of credit at their own bank, obtain advances 
 upon or in anticipation of the draft. 
 
 The draft in due course is presented to the bank, 
 upon which it was drawn, and is paid. It will be 
 observed, in connection with the foregoing, that 
 title to the silk was not at the outset in the importer 
 and that it has never been transferred to him. 
 Physical possession and control of the silk likewise 
 
 » 
 
 have not been his and are not given to him. These 
 are highly important facts in our later discussion. 
 
 In due time, the importer is advised of the arrival 
 of the shipment. He goes to the bank, states this 
 fact and expresses a desire that the goods be en- 
 tered at the customhouse and placed in warehouse. 
 The bank accordingly hands the bill of lading and 
 other shipping documents to him upon his signing a 
 trust receipt ^ for this purpose. The importer has 
 not, up to this time, reimbursed the bank for the 
 amount paid by it upon the draft with agreed com- 
 missions and, under the arrangement, it is not con- 
 templated that he shall do so until a later time. If 
 he should do so at once, no occasion for the use of 
 a trust receipt would be presented. It is the intention 
 of the parties, therefore, that the bank shall retain 
 its hold upon the silk as security until such payment 
 IS made. 
 
 The entry and warehousing of the silk having been 
 accomplished in the name of and as the property of 
 
 * This may read as follows : "Property in Trust. Received from 
 the X Bank the merchandise specified in the bill of lading per 
 S. S. Juno, the property of the X Bank, viz., 100 Bales Raw Silk 
 marked A. B., imported under the terms of their letter of credit 
 No. 200, issued for our account, the said bill of lading to be used 
 by us for the sole purpose of entering the above described property 
 at the United States Customs House of the Port of New York, and 
 of immediately storing the same in the name and as the property of 
 the said X Bank, and subject only to their order, we hereby agree- 
 ing to so store the said property and to hand the storage receipt 
 for same to the said bank when obtained. We also agree to fully 
 insure said property against fire, the loss, if any, payable to the X 
 Bank, and to hand the policies of insurance thereon to the said 
 X Bank. 
 
 [Signed] 
 
 t» 
 
I 
 
 4 
 
 I Hiltffl' 
 
 the bank as agreed in the trust receipt, the importer 
 hands the warehouse receipts and insurance to the 
 bank, and the trust receipt is canceled. The entry 
 and warehousing have been accomplished in the same 
 manner and with the same effect as if the bank had 
 sent its own messengers or brokers to accomplish 
 them. It has simply saved this expense, which 
 would be chargeable to the importer, and avoided 
 this trouble, by availing itself of the assistance of the 
 importer, who, as will readily be observed, is in- 
 terested in seeing that they are properly attended 
 to and who can save some expense, by himself per- 
 forming these incidental functions. 
 
 It may happen that the importer R has already 
 found a purchaser for the silk at the time of its 
 arrival, who is to pay either cash or on some agreed 
 terms of credit, such as notes or acceptances. In 
 that case there will be no occasion for warehousing 
 the goods and consequently this first form of trust 
 receipt may never be used. 
 
 In any case, the next step is likely to be as fol- 
 lows : R advises the bank that P is prepared to buy 
 the silk and requests the bank to permit him to make 
 the sale. The bank accordingly hands him either 
 the bill of lading or the warehouse receipt, as the 
 case may be, receiving in return a trust receipt in 
 slightly different form.* 
 
 •"Property in Trust. Received from the X Bank the merchan- 
 dise spedfied in the bill of lading per S.S. Juno, tl" P^pertf. «* 
 die said X Bank, viz., 100 Bales Raw Silk marked A. B., imported 
 
 hL 
 
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 R thereupon delivers the silk to P, the purchaser, 
 who in most cases is not informed as to the interest 
 of the bank in the transaction. R collects the pro- 
 ceeds and turns them over to the bank as provided 
 in the trust receipt. The bank pays itself in full 
 with charges and interest, and credits to R's account 
 any balance remaining. The trust receipt thereupon 
 is cancelled or returned ; at any rate, it is exhausted 
 and the transaction is closed. R, by the use of this 
 machinery has, without the use of a dollar of his 
 own money, made an importation of silk from China, 
 sold it to a domestic consumer, and received his 
 
 under the terms of their letter of credit No. 200 issued for our 
 account, the said bill of lading to be used by us for the sole purpose 
 of obtaining possession of above merchandise, and delivering the same 
 to P who have purchased the same for cash/notes payable in 
 
 and to obtain from the purchasers the proceeds of the sale 
 
 of the same. . ., , j. . 
 
 "In consideration of the delivery of said merchandise to us in 
 trust as above, we agree to deliver it immediately to the said pur- 
 chasers, and to collect the proceeds of sale, and immediately deliver 
 such proceeds to the X Bank, in whatever form collected, to be 
 applied by them against the acceptances of the X Bank, on our 
 account, under the terms of letter of credit No. 200 issued for our 
 account and to the payment of any other indebtedness of ours to 
 the X Bank. It is understood, however, that if such proceeds be 
 in notes or bills receivable, they shall not be so applied until paid, 
 but with liberty meanwhile to the X Bank to sell or dscount and 
 BO apply net proceeds. 
 
 "The X Bank may at any time cancel this trust, and they may 
 take possession of said goods until the same have been delivered 
 to said purchasers and the proceeds of sale received from them, 
 and thereafter of such proceeds wherever the said goods and pro- 
 ceeds may then be found, and may collect the proceeds, and in the 
 event of any suspension or failure or assignment for the benefit of 
 creditors on our part, or of the non-payment at maturity of any 
 obligation or acceptance made by them under said credit, or any 
 other credit issued by the X Bank, on our account, or of any 
 indebtedness on our part to them, all such obligations and acceptances 
 and all indebtedness shall thereupon (with or without notice) be- 
 come due and payable. 
 
 [Dated] 
 
 [Signed] 
 
f 
 
 profit from the transaction, but at no time has he 
 held the title to any part of the silk. Nevertheless, 
 he has occupied the position of a principal ; he has 
 never been a mere broker, factor or agent. He has 
 assumed the primary risk, and his credit with the 
 bank and his business initiative have made the trans- 
 action possible. No one has a claim to any share 
 of his profits. The bank, on the other hand, has 
 obviously intended to do the business on a secured 
 basis; it has intended to obtain the title and le^l 
 control over the goods at the outset and to retain 
 them until they finally pass to P, the ultimate pur- 
 chaser, but it has no further interest in the silk 
 beyond the repayment of its advances and charges. 
 The title is, therefore, solely a security title, though 
 during part of the time divorced from physical pos- 
 session which is entrusted to the person principally 
 interested, namely, the importer. We shall proceed 
 to examine the nature, validity, extent and limita- 
 tions of this security arrangement. 
 
 Before doing so, another form of the transaction 
 should be noted. The importer may be a manufac- 
 turer of silk, and may desire to obtain possession of 
 the imported raw material for the purpose of chang- 
 ing its form and increasing its value by the applica- 
 tion of labor, before offering it for sale. He may 
 intend to accomplish these purposes by combining it 
 in various proportions by the application of labor 
 with other constituent materials, thus producing the 
 
 8 
 
 ^ 
 
 " 
 
 ■■■■^- 
 
 i 
 
 manufactured goods for sale. Or he may desire 
 merely to sell as opportunity offers. In any such 
 case, he may obtain the silk from the bank by signing 
 a trust receipt which varies from the foregoing in 
 that, instead of authorizing a sale to a named buyer, 
 it states that the property is delivered to the im- 
 porter to hold as the property of the bank, 
 
 « ^ith liberty only to manufacture or 
 
 to sell the 'same, manufactured or unmanufactured, 
 accounting for the proceeds to the said Bank, but 
 without liberty to pledge, until all bills of exchange 
 drawn for our account on the said Bank^ shall have 
 been paid or satisfactorily provided for." 
 
 It also contains provisions regarding insurance, etc. 
 In such a case, the manufacturer is expected to turn 
 over the proceeds of sale to the bank as and when 
 received. As soon as the advances made by the bank 
 are paid in full with charges and interest, it regards 
 the trust receipt as satisfied and makes no further 
 claim upon the silk or its products, regardless of 
 whether or not the proceeds of the entire shipment 
 have been delivered to it. This fact again indicates 
 the strictly security nature of the arrangement. 
 
 It is also not uncommon for the banker to deliver 
 documents or goods against trust receipt for the 
 purpose of enabling the signer to make shipment 
 to a distant buyer and to obtain bill of lading there- 
 for which he is thereupon to hand to the bank. 
 
 In the foregoing sketch, we have assumed an im- 
 
 %. 
 
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i 
 
 il 
 i 
 
 portation of goods from abroad. It is obvious that 
 the trust receipt might equally well be used in con- 
 nection with a domestic transaction, such, for ex- 
 ample, as a shipment of automobiles from a manu- 
 facturer in Detroit to a customer in Philadelphia. 
 The railway bill of lading may be taken or endorsed 
 to the order of a bank in Philadelphia, which has 
 agreed to honor drafts for the purchase price and, 
 upon arrival, the automobiles may be turned over for 
 sale on the security of a trust receipt given to the 
 bank by the customer. Such use of the trust receipt 
 is by no means infrequent, but its most extensive use 
 is in connection with importations from abroad. 
 
 II 
 
 The various forms of collateral security may 
 generally be classified under the headings: pledge, 
 conditional sale, or mortgage. The trust receipt 
 does not on its face or by its name purport to con- 
 form to any of these types. Obviously, a bailment 
 of goods takes place — a delivery of possession with 
 an intention to retain the title or at least certain 
 rights akin to title. The use of the word "receipt" 
 suggests a recognition of this fact. The word 
 "trust," however, raises further question. An 
 equitable trust requires a trustee ; the document re- 
 cites that the goods are received "in trust," thus 
 indicating the notion that the sig^ner is a "trustee" 
 for the benefit of the bank. This involves the hold- 
 
 10 
 
 ing of the so-called legal titie by the trustee for 
 the benefit of a cestui que trust who has no legal 
 title but rather certain beneficial interests cogniz- 
 able in equity. This relation is entirely contrary 
 to the expressed intention of the instrument which 
 clearly stipulates that title of "the property" shall 
 at all times, as between the parties, remain in the 
 bank. We must conclude, therefore, that the word 
 "trust" contains a fiduciary relation or perhaps 
 merely a contractual obligation respecting the prop- 
 erty. The equitable law of trusts will not provide 
 the answer as to the nature of the arrangement or 
 the rights of the parties. 
 
 The arrangement does not constitute a pledge. 
 The security of a pledge depends entirely upon pos- 
 session in the party secured. When possession is 
 lost, the security is lost. The title in the case of a 
 pledge is assumed to be in the pledgor or at least in 
 another than the pledgee. This is exactly contrary 
 to the trust receipt situation, where the title is in- 
 tended to remain in the party secured while pos- 
 session is entrusted to another who has a certain 
 interest as yet undefined in the property. 
 
 Another form of security which has come to be 
 recognized either by statute or practice is the con- 
 ditional sale. A seller of phonographs, for ex- 
 ample, delivers a machine to a buyer under a con- 
 tract whereby payments are to be made from time 
 to time on account, but with the stipulation that 
 
 11 
 
:>- '\ 
 
 I 
 
 title shall remain in the seller until full payment 
 has been completed, with the proviso that on default 
 in any payment, possession may be reclaimed by the 
 seller. This arrangement bears a closer resemblance 
 to the trust receipt than does a pledge. The courts 
 of Connecticut have even gone to the extent of de- 
 fining the trust receipt situation as a conditional 
 sale.^ There are, however, real points of differ- 
 entiation. In a conditional sale, possession cannot 
 be retaken until a default, whereas in a trust receipt 
 it can be retaken at any time. In the second place, 
 the bank is not irrterested in selling goods as a busi- 
 ness, nor is it immediately interested in the com- 
 mercial value or market for the property. If it 
 retakes the goods and sells them for an amount in 
 excess of this sum, this excess belongs to the im- 
 porter. But in a conditional sale, the buyer is in- 
 terested only in such amount as he has paid on 
 account of his contract. 
 
 But more important than any of these points of 
 difference is the fact which stands out clearly from 
 the terms of the credit agreement and the trust 
 receipt, that the importer has no intention of buy- 
 ing goods from the bank and that the bank has 
 no intention of selling goods to him. The bank 
 has loaned him credit and then advanced money 
 for his account. If he does not repay this, the 
 
 *New Haven Wire Co, Cases (1888) 57 Conn. 352, 18 Atl. 266. 
 
 12 
 
 f^i> 
 
 , 
 
 bank will sue him— not for damages for breach of 
 contract in failing to buy and pay for goods— 
 but rather for money loaned. This makes it clear 
 that the substance of the transaction is a loan of 
 money against security rather than a contract for 
 the purchase and sale of goods as between the bank 
 and its customer. In so far as goods are involved, 
 they bear a subordinate and collateral relation. The 
 obligation of the importer to repay the loan is not 
 contingent upon the arrival of the goods or upon 
 their delivery to him. They have been imported at 
 his risk and had they been lost or destroyed en 
 route, he would still and to the same extent have 
 been obliged to repay the advance.* 
 
 It remains to consider the trust receipt in respect 
 to its relation to the law of mortgages. A mort- 
 gage, whether of chattels or realty, historically is 
 a security dependent on title as distinguished from 
 a pledge which rests upon possession. Title is 
 given to the person secured, while possession may 
 be given to the mortgagor or debtor or his repre- 
 sentative. 
 
 It is almost universally provided in this country 
 that a chattel mortgage is valid as against creditors 
 or bona fide purchasers for value, only if it is 
 recorded. Inasmuch as it is not the common practice 
 to record trust receipts, it becomes decidedly im- 
 
 * See In re McElheny (1904) 91 App. Div. 131, 86 N. Y. Supp. 
 326. 
 
 13 
 
 

 portant to consider the trust receipt in the light 
 of the law of mortgages. If it be argued that the 
 banker has a "lien" on some theory akin to the 
 lien theory of mortgage as applied in various juris- 
 dictions to real estate, it is difficult to see how the 
 theory can be reconciled with the facts.' The im- 
 porter never had title to the goods up to the time 
 when the bank made its loan of credit or advance 
 of money. The goods were the property of 
 strangers perhaps in China. They were not the 
 agents of the importer but were sellers of goods. 
 They clearly transferred their title to the bank by 
 taking and delivering a bill of lading to its order.* 
 It is quite impossible to say that when they did 
 this act they transferred title to the importers. 
 So to hold would be to overturn much of the law 
 regarding negotiable and semi-negotiable documents 
 of title and would also be to violate the plain in- 
 tention of the parties. The title was at that moment 
 voluntarily transferred to the bank by the clear and 
 effective acts of the parties. At that moment, the 
 rights of the bank became fixed. It acquired, not 
 a lien, but legal title.^ The importer was never in a 
 position to grant either a lien or title for he has 
 never either owned or controlled the property. The 
 
 • The so-called lien theory of mortgages does not apply to chattds. 
 Noyes v. Wyckoi (N. Y. 18S3) 30 Hun 466, a#'<f, (1889) 114 N. Y. 
 204. 21 N. E. 158; Weeks v. Baker (1890) 152 Mass. 20. 24 N. E. 
 
 905 
 
 •See Southern Flour & Grain Co. v. Central Texas Exch. Nat. 
 
 Bk. (Ga. 1921) 109 S. E. 685. .^« «. . ... 
 
 »See In re Liberty Silk Co. (D. C. 1907) 152 Fed. 844. 
 
 14 
 
 ,^ 
 
 seller has retained no interest in the property, but 
 has conveyed his entire title to some one else. It 
 would be quite contrary to the fact and to the 
 express stipulations of the parties to say that the 
 seller, by delivering to the bank a bill of lading 
 drawn to the bank's order, had thereby conveyed 
 title to the importer, but had at the same time given 
 a lien to the bank. The bank, therefore, prior to 
 the delivery of the goods to the importer against his 
 trust receipt, is clearly the title holder — not a lien 
 holder. 
 
 When the bank delivers possession to the im- 
 porter upon receiving the trust receipt, it is express- 
 ly stipulated that, as between itself and the importer, 
 title shall remain in the bank. By what casuistry 
 can it be argued that this stipulation means exactly 
 the opposite of what it says? Can it be said that 
 this act gives title to the importer and at the same 
 moment retains a mere lien for the bank? This 
 is neither what the parties stipulate nor what they 
 intend, and, as between the parties, there is cer- 
 tainly no principle of law which makes it impos- 
 sible for them to accomplish their express purpose, 
 or which necessarily implies the accomplishment 
 of an opposite result. When the rights of third 
 parties are involved, it may very well be that this 
 delivery may have results not entirely consonant 
 with the intention of the parties, but we are not now 
 considering that situation. Such rights can hardly 
 
 15 
 
Km 
 
 affect the true nature of the transaction as between 
 the parties. 
 
 It remains to determine possible identity of the 
 trust receipt with a chattel mortgage apart from 
 any hypothesis of "lien." The essence of a mort- 
 gage may be said to be a conveyance of title to the 
 mortgagee as security, coupled with certain rights 
 in the property — equitable in their origin — in the 
 mortgagor. 
 
 How closely do the facts of this arrangement coin- 
 cide with those existing under a trust receipt? 
 Title is found in the mortgagor prior to the mort- 
 gage. He conveys this title to the mortgagee as 
 security for the performance of his obligation or 
 for the obUgation of another. In the case of a 
 trust receipt title has never been in the importer and 
 he consequently cannot convey it to the bank. It 
 may happen, however, that a mortgagor conveys his 
 title to the mortgagee as security for the perform- 
 ance of an obligation by a third person.® In that 
 case, the equity of redemption belongs to him and 
 not to the third person and the property reverts to 
 him upon the performance of the obligation by the 
 third person. But in a trust receipt, under no 
 circumstances is the title to revert to the foreign 
 seller. This fact, however, does not prove that 
 there is not a mortgage. The mortgagor who has 
 conveyed his title as security for the obligation of 
 
 •See Blake v. Corbett (1890) 120 N. Y. 327, 24 N. E. 477. 
 
 16 
 
 f < 
 
 i 
 
 another, may readily convey his "equity" to the 
 third person who owes the debt. That person then 
 stands in the shoes of the mortgagor, for he has all 
 the rights of the mortgagor, although he has never 
 held the legal title. 
 
 Is that not exactly the situation which exists 
 in the case of a trust receipt? An arrangement is 
 made by the importer with the seller abroad looking 
 to the purchase of goods. This cleariy contemplates 
 the acquisition of at least the beneficial interest in 
 the property by the importer, subject to such ar- 
 rangements for financing as he may make. He 
 directs the seller to convey the legal title for the 
 purpose of security to the bank and, by necessary 
 implication, to convey, at the same moment, to him 
 —the importer— the "equity," "equitable title," 
 "equity of redemption," "residue of ownership," or 
 by whatever name the rights of a mortgagor may 
 be known.® From that time forth, the beneficial 
 interest in the property is his, subject to the legal 
 title in the bank as security for the performance 
 of his obligations to it. Upon the performance of 
 those obligations, the legal title reverts or passes to 
 him as the person who has acquired and owns what 
 we may for convenience continue to refer to as 
 the "equitable title." This we submit is the correct 
 
 •See In re Richheimer (C. C. A. 1915) 221 Fed. 16, 22, 23, 
 "residue of ownership." 
 
 17 
 
I 
 
 explanation and definition of the relationship which 
 exists between the importer and the bank. It is 
 generically a chattel mortgs^e. Why, then, is it 
 not so classified by the cases? 
 
 Our answer is that there are exceedingly strong 
 reasons why the business should be done and the 
 arrangement upheld without the necessity of record- 
 ing the trust receipt. To record the numerous trust 
 receipts which are taken by a bank having a letter of 
 credit business of any magnitude, would be an al- 
 most intolerable burden and expense. And in prac- 
 tice neither banks nor merchants can take the time 
 and trouble to search the records of the county 
 clerk in handling the business of the day. To 
 record a discharge of the trust receipt whenever it 
 has served its purpose would again be an intolerable 
 nuisance. Furthermore, it is too much to expect 
 buyers to search the county clerk's files every time 
 they do business with an importer. In short, busi- 
 ness necessity renders recording entirely imprac- 
 ticable while at the same time it renders the use of 
 the trust receipt highly convenient. Another reason 
 why it should not be classed with ordinary chattel 
 mortgages is the simple fact that it is not an ordinary 
 chattel mortgage. The method of effecting sales 
 and carrying on business involving transfers of title 
 by means of draft with negotiable bill of lading at- 
 tached, to be delivered upon payment of the draft, 
 
 18 
 
 I 
 
 is quite as old as the recording acts relating to chattel 
 mortgages, and it is a practice equally old, for 
 bankers to make advances for the payment of these 
 drafts upon the security of the goods or the docu- 
 ments. 
 
 We have said that this creates a security which is 
 generically a chattel mortgage. It is perfectly clear, 
 however, that the situation is not one that would 
 be recognized as a chattel mortgage by the man in 
 the street. A chattel mortgage as generally under- 
 stood means a conveyance of property by a borrower 
 as security for his own obligation and the policy 
 of the recording acts is directed at the apparent 
 ownership based upon previous and continued pos- 
 session by such borrower of property which former- 
 ly belonged to him. A secret transfer of title by 
 such a borrower ought not to be effective to the 
 injury of creditors who have relied upon his reten- 
 tion of possession. This vice does not exist in the 
 trust receipt situation, for the borrower has not 
 hitherto had possession. In construing the term 
 "chattel mortgage," as used in recording acts, it is 
 fair and proper to consider the normal, natural and 
 common understanding of the meaning of the words, 
 and, thus construed, the trust receipt situation is not 
 a chattel mortgage, in spite of the fact that strict 
 legal analysis shows that it possesses the attributes 
 of that type of security. This is particularly true 
 in view of the fact that the construction referred to 
 
 19 
 
I 
 
 •M 
 
 I 
 
 is called for by the needs of business convenience 
 and commercial usage.^® 
 
 The trust receipt is, as we say, distinguishable 
 from the ordinary chattel mortgage. The distinc- 
 tion is one that exists in fact — it is real and it is 
 clear-cut and workable. This ground of differ- 
 entiation is the fact that title does not pass to the 
 bank from the importer but rather from a third 
 person. The importer has never held the legal 
 title. He has arranged a purchase money mortgage 
 to the banker, who makes the loan, without himself 
 appearing in the chain of title.^^ 'No one is de- 
 ceived by the fact that the bank has acquired a 
 security title which is unrecorded, because there is 
 no "retention of possession" by the importer. He 
 has never had either possession or title. 
 
 To state it again the difference between the true 
 trust receipt situation and the ordinary chattel mort- 
 is See Williston (1921) 34 Harvard Law Rev. 741, 758, 759; 
 In re Cattus (C. C. A. 1910) 183 Fed. 733; In re Richheimer, 
 supra, footnote 9. 
 
 " In re Shulman (D. C. 1913) 206 Fed. 129, was a case where 
 the owner attempted to give security for his own debt, agreeing to 
 hold the property "in trust" for the lender. The court said: "To • 
 make such a sale or pledge effective delivery or its equivalent is 
 essential. . . . The Trust Receipt cases . . . differ in this 
 vital fact: In those cases the debtor had never acquired title to the 
 property in question; the title had always been in some one else; 
 and his creditors were not allowed to deal with the property of this 
 other person as if it were the debtor's, although the property had 
 come into the debtor's actual custody." In re Dunlap Carpet Co. 
 (D. C. 1913) 206 Fed. 726, 730-31: "Much of this trade could 
 hardly be carried on by any other means, and therefore it is of first 
 importance that the fundamental factor in the transaction, the 
 banker's advance of money and credit, should receive the amplest 
 protection. . . . This security is not an ordinary pledge by the 
 importer to the banker, for the importer has never owned the goods, 
 and moreover he is not able to deliver the possession" (author's 
 italics). 
 
 20 
 
 
 
 O 
 
 I 
 
 I 
 
 gage is the fact that, in the trust receipt, title 
 passes to the bank (the mortgagee) from the seller 
 of goods, as security for the debt of a third party, 
 while in the ordinary chattel mortgage, title passes 
 to the bank (the mortgagee) directly from the party 
 owing the debt. Let us look for a moment at an 
 illustration. If a merchant having goods on hand 
 belonging to himself transfers the title to a bank 
 as security for a loan, the bank acquires a security 
 title as between the parties and so long as it has 
 possession of the goods or the documents of title 
 it is safe, but if it were to redeliver the goods to the 
 merchant or turn over to him the documents of 
 title upon his signing a document worded in all 
 respects like a trust receipt, without recording the 
 same, there can hardly be any question that the 
 transaction would be held to be a chattel mortgage 
 (assuming it is not a pledge) and that such a trust 
 receipt would be valueless by way of special se- 
 curity. But, if the merchant being about to buy 
 goods, directs the seller to convey the title direct 
 to the bank which advances the purchase price, and 
 if the bank then delivers the goods to the merchant 
 against a trust receipt, the legal situation between 
 the parties will be essentially the same as in the 
 last case, but the legal results will not by any means 
 be the same. 
 
 The failure to recognize the distinction to which 
 we have called attention has led occasionally to 
 
 21 
 
I 
 
 
 I 
 
 the use of the trust receipt in circumstances where 
 it cannot assure any special rights beyond those 
 secured by an ordinary contract or unrecorded chat- 
 tel mortgage." To take an example: A borrower 
 pledges warehouse receipts, negotiable stocks or 
 bonds, or goods with a bank as security for a loan. 
 Not infrequently he asks, shortly thereafter, that 
 the property be returned to him against his trust 
 receipt and sometimes his request is granted, pre- 
 sumably on the supposition that the bank is retain- 
 ing some special security rights in the property by 
 reason of holding the trust receipt. In this, it is 
 entirely mistaken. It has from that moment no 
 security whatever which it would not have as holder 
 of an unrecorded chattel mortgage or a mere con- 
 tract. It may not, in fact, have even that, if the 
 deposit was by way of pledge rather than mortgage. 
 It should be remembered that security is generally 
 needed only in time of trouble. However honest 
 the intentions of the borrower, if bankruptcy in- 
 tervenes, the property will be held as part of his 
 estate by the receiver or trustee ; the bank will not 
 be able to recover it or its proceeds, but will be 
 
 "See In re Gerstman (C. C. A. 1907) 157 Fed. 549; In re Shul- 
 mtm, supra, footnote 11; In re Demherg & Son (1921) 66 N. Y. 
 L J 1200.* This decision was affirmed and a contrary holding 
 upon' similar facts In re Fountain (not reported below) was reversed 
 by the C. C. A., 2nd Circuit 282 Fed. 816. See also In re CuUen 
 282 Fed 902 (D. C. Md.) American & British Sec. Co. v. 
 American & British Mfg. Co. (D. C. 1921) 275 Fed. 121 ; Salinas 
 CUyBk. V. Graves (1889) 79 Cal. 192, 21 Pac. 732; Bell v. New 
 Y^k Safety, etc. Co. (C. C. 1910) 183 Fed. Z7A\ Fletcher^ Amencan 
 Nat. Bk. y. McDermid (Ind. 1920) 128 N. E. 685; Lewis v. Bwnk 
 of MobUe (Ala. 1920) 87 So. 176. 
 
 22 
 
 
 ill \ 
 
 r 
 
 f/ 
 
 
 ^ 
 
 obliged to claim as a general creditor.^' It would 
 seem from experience that these facts are not 
 appreciated by the users of trust receipts. A trust 
 receipt can afford superior protection as compared 
 with an unrecorded chattel mortgage only when 
 it is used in the circumstances which we have de- 
 scribed, namely, when the title to the property (as 
 distinguished from mere possession which connotes 
 a pledge) is given to the bank by some one other 
 than the debtor and where the later delivery of 
 possession against trust receipt is made to the debt- 
 or. In commercial practice, this situation seems 
 to exist only in connection with the financing of im- 
 portations or domestic purchases. 
 
 Ill 
 
 At this point it is perhaps desirable to refer more 
 particularly to the recording laws and the policy 
 upon which they are founded. Recording laws 
 were, until recently at least, peculiar to the United 
 States. A mortgage of property is undoubtedly 
 valid, as between the parties, without recording. 
 But, to protect the mortgagee against a bona fide 
 subsequent grantee or mortgagee or against the 
 
 *•/« re Gerstman, supra, footnote 12; In re Shulman, supra, 
 footnote 11; In re Dernbetg & Son, supra, footnote 12. A pledge or 
 mortgage of choses in action is not within the recording act. Sec 
 New York Lien Law § 230, N. Y. Cons. Laws (2d ed. 1920) 1093, 
 am. 1921; Sexton v. Kessler & Co., Ltd. (C. C. A. 1909) 172 Fed. 
 535, aff'd (1912) 225 U. S. 90, 32 Sup. Ct. 657; Stockyards Nat, 
 Bk. V. First Nat. Bk. (C. C. A. 1918) 249 Fed. 421. 
 
 23 
 
fl 
 
 claims of creditors, it is necessary, unless the mort- 
 gagee retains possession of the property, to record 
 the instrument. Such recording is generally re- 
 garded as notice to all concerned. In the case of 
 personal property, the reason for the rule is some- 
 what different than in the case of realty. Pos- 
 session of real property is only to a slight extent an 
 evidence of ownership, but in the case of personalty 
 it has long been asserted that possession is one of 
 the strong evidences of title, and the policy has, 
 to a great extent, been adopted, that we will not 
 "suffer without notice to the world the real owner- 
 ship to be in one person and the ostensible owner- 
 ship in another" for the reason that it gives a false 
 credit to the latter which leads to injury to third 
 persons." Consequently, laws are in general force 
 providing for the recording of chattel mortgages 
 and conditional sales. There can be no question as 
 to the power of the legislature to include trust 
 receipts under this principle. It has been held, how- 
 ever, in many states that the trust receipt is not a 
 "mortgage" or "conditional sale" within the meaning 
 of the existing recording laws. Such a ruling finds 
 its justification in business necessity and in a real 
 difference in the situations as has already been 
 pointed out. It is, however, entirely possible to 
 frame a recording act in such a way as to include 
 
 
 i,i- 
 
 
 " See Century Throwing Co. v. MtUler (C. C. A. 1912) 197 Fed. . 
 252. 258. 
 
 24 
 
 ^ 
 
 *> 
 
 W 
 
 trust receipts. The wisdom of so doing is open to 
 serious question. Some of our states have, how- 
 ever, taken this step. 
 
 In In re Bettman- Johnson Co./" the question arose 
 with respect to the Ohio recording statute. Cherries 
 had been imported in the usual way and delivered to 
 the importer against his trust receipt. They were 
 in his possession at the time of his bankruptcy and 
 the bank endeavored to recover possession of them. 
 The court admitted that the bank held the title for 
 the purpose of security, but held that as against 
 general creditors or a receiver or trustee, the prop- 
 erty could be claimed by the bank only if the trust 
 receipt had been verified and filed in the recorder's 
 office in accordance with the recording act. The 
 trust receipt is, therefore, practically valueless in 
 Ohio when not recorded. In Illinois, also, it ap- 
 pears to be conclusively settled that a trust receipt 
 is valueless as against creditors or a trustee in 
 bankruptcy unless duly acknowledged and re- 
 corded.^® 
 
 « (C C A. 1918) 250 Fed. 657. „ . • _. . 
 
 w In 'the' case of In re Richheimer, supra, footnote 9, the importer 
 repledged a large part of the goods imported and delivered to him 
 under trust receipt. As to such portion tl}«nghts of the pledgee 
 were held to be superior to those of the holders of the t™st «. 
 ceipts. That result occasions no comment at this point, althougn 
 there is no factors' act in Illinois. The court further held, how- 
 ever, that the holders of the trust receipts could not recover the 
 possession of a portion of the shipment which had not been so 
 pledged, but which had remained in the possession of the importer 
 and thence passed into the hands of the trustee in bankruptcy. 
 This holding was explicitly made upon the strength of the recording 
 act, upon the ground that the trust receipt fell within the policy of 
 that act as to secret liens and reservations of title. Ihe trust 
 receipt in Illinois, therefore, if unrecorded, is without special value 
 
 I. 
 
I 
 
 lll 
 
 I 
 
 ! 
 
 
 In Virginia the standing of a trust receipt ap- 
 pears uncertain. In Boice v. Finance & Guaranty 
 Corporation,^'^ a dealer in automobiles financed the 
 purchase of several cars with the aid of the Finance 
 Corporation and gave to it chattel mortgages which 
 were duly recorded and which did not contain any 
 express power of sale. He then sold one of the 
 cars to Boice and failed to pay off the mortgage with 
 the proceeds. The Finance Corporation brought 
 an action of detinue against Boice. The court held 
 that under the statutes and policy of Virginia, the 
 car belonged to Boice in spite of the constructive 
 notice of the record, since he had no actual notice. 
 The theory was that the property was put in the 
 hands of a dealer ostensibly for sale and that this 
 in effect constituted a power of sale. The court 
 said : 
 
 a 
 
 Property bought for the express purpose of daily 
 indiscriminate sale to the general public, exposed 
 for such sale at the place of business of a licensed 
 dealer, and over which the dealer is permitted to 
 exercise the dominion of owner, cannot be made 
 the subject of a valid chattel mortgage . 
 
 as security. Sec Union Trust Co. v. Trumbull (1891) 137 HI. 146, 
 27 N. E. 24. In In re Hamden (D. C. 1912) 200 Fed. 175, it was 
 held that in New Mexico a chattel mortgage of goods is not void 
 as a matter of law because the mortgagor retains possession and 
 can sell in the usual course of business without accounting to the 
 mortgagee. ^ The federal courts, of course, follow the local state 
 law on this question. It is interesting to contrast the reasoning 
 and result of the Richheimer case with that of In r# B, Reboulin 
 Fits (D. C. 1908) 165 Fed. 245, decided with reference to the law 
 of New Jersey, which permitted the recovery of goods or their 
 proceeds from a trustee in bankruptcy. 
 " (1920) 127 Va. 563, 102 S. E. 591. 
 
 26 
 
 ^m9 
 
 the powers which the dealer is permitted to exercise 
 over the property in such case are inconsistent with 
 a mortgage thereon."^® 
 
 This does not, of course, directly bear upon the 
 trust receipt, since a power of sale is usually given 
 in that instrument. There is, however, language in 
 the opinion which affords basis for the view that 
 such a mortgage, even though recorded, is invalid 
 in Virginia as against creditors of the mortgagor. 
 It seems doubtful whether the court in a square 
 case would go to the full extent of that expression. 
 The principle seems to be of doubtful validity in any 
 case except that of a purchaser in ordinary course 
 of business from a dealer.^^ General creditors who 
 were such at the time of the making of the mort- 
 gage have not been deceived or injured. Later 
 pledgees or mortgagees of the property should cer- 
 tainly be charged with notice of the earlier mort- 
 gage which has been recorded, since they are not 
 in a similar position to that occupied by ordinary 
 buyers. The same may be said of later general 
 ^ creditors. The opinion in this case, however, raises 
 doubt as to the validity of trust receipts in Vir- 
 ginia 
 
 20 
 
 « See also O'Neil v. Cheatwood (1920) 127 Va. 96, 102 SE, 596. 
 
 ^ See Bryant v. Swofford Bros, (1909) 214 U. S. 279, 29 Sup. 
 Ct. 614; In re Pierce (C. C. A. 1907) 157 Fed. 757. 
 
 » See also Glass v. ConHnental Guaranty Co. (Fla. 1921) 89 So. 
 876. In that case the dealer had no express power of sale. Ihc 
 agreement was not recorded. The holder of the trust receipt failed 
 in an effort to recover possession from a bona fide purchaser. 
 
 27 
 

 II 
 
 A recent decision^^ of the United States District 
 Court for the Eastern District of South Carolina 
 raises most serious questions as to the law of South 
 Carolina. Here a domestic purchase was financed 
 and the goods turned over under a trust receipt 
 which was not recorded. The court held that the 
 instrument was in the nature of a chattel mortgage 
 and that under the South Carolina statute such an 
 instrument was void as against subsequent creditors 
 without notice unless recorded. Possession of the 
 goods had been retaken by the holder of the trust 
 receipt prior to the bankruptcy, but the court 
 directed that it be returned to the trustee in bank- 
 ruptcy for administration as part of the general 
 assets of the estate. 
 
 This decision seems to be open to serious ques- 
 tion. By "subsequent creditors'' can hardly be 
 meant general creditors, but rather subsequent 
 pledgees, mortgagees or others who have obtained 
 specific rights in the property by attachment, levy 
 or otherwise.^^ There were none such at the time 
 when the possession was retaken by the defendant 
 prior to the bankruptcy. How could the fact that 
 temporary possession had been given to the signer 
 of a trust receipt under a contract presumably good 
 between the parties, affect the rights of the de- 
 
 ^Cappleman v. Industrial Finance Corporation (1921),* aff*d C. 
 
 C. A. 284 Fed. 8. , ,0.^., 
 
 **See Union Trust Co. v. Trumbull, supra, footnote 16; Sktlton 
 
 ▼. Codington (1906) 185 N. Y. 80, 77 N. K 790. 
 
 28 
 
 || 
 
 1* 
 
 i 
 
 f endant as a security holder in possession after such 
 possession had been retaken? Obviously, it could 
 affect the rights only if the contract was void as be- 
 tween the parties. Only on this basis could the de- 
 livery be held to constitute a preference. If the 
 contract was good as between parties, then redelivery 
 was not preferential."" The decision, unless based 
 upon the express statutes of South Carolina, is op- 
 posed to the overwhelming weight of authority. 
 
 The law in Louisiana, on the other hand, goes to 
 the opposite extreme. In In re Dreuil & Co.,^^ the sit- 
 uation was not what we have termed a proper one 
 for the use of a trust receipt. The bankrupt pledged 
 bills of lading to a bank. It regained possession by 
 signing a trust receipt. It then warehoused the 
 goods and pledged the warehouse receipts and again 
 obtained possession by signing a trust receipt. In 
 Louisiana, a pledgee apparently obtains title and the 
 case therefore presents what would ordinarily be 
 called a chattel mortgage. The banks (pledgees) 
 combined and asked for the possession of the goods 
 ' from the trustee in bankruptcy. In other jurisdic- 
 tions they would have failed."^ In Louisiana they 
 were successful."* This can only mean that the re- 
 turn of pledged property to the pledgor is not neces- 
 
 »/n re Perlhefter (D. C. 1910) 177 Fed. 299. 
 
 **(D. C. 1913) 205 Fed. 573. ^, , 
 
 ^ In re Gerstman, supra, footnote 12; In re Shulman, supra, 
 footnote 11; In re Dernberg & Son, Inc., supra, footnote 12. 
 
 »See also Commercial Nat. Bk. v. Canal Bk. (1916) 239 U. S. 
 520, 36 Sup. Ct. 210; In re Dreuil, supra, footnote 24; s. c. (C 
 C. A. 1914) 211 Fed. 337. 
 
 29 
 

 \ 
 
 sarily fatal in that state. Prior to 1918, chattel 
 mortgages were in general apparently unknown in 
 Louisiana law.*^ They now depend upon a 
 statute^® the form of which is quite different from 
 that in common use elsewhere. A Louisiana pledge 
 has hitherto been similar in effect to what is known 
 elsewhere as a mortgage, and possession could only 
 be returned to the pledgor for a special or tem- 
 porary purpose.** The Dreuil case can only be ex- 
 plaint satisfactorily by reference to the special 
 legal system of Louisiana. 
 
 IV 
 
 We will now examine in some detail the history 
 of the peculiar doctrine of trust receipts. They rep- 
 resent a comparatively recent development in the 
 law relating to commercial banking and security. 
 
 In 1843, Judge Story rendered a decision'® in the 
 federal Circuit Court of Massachusetts, under the 
 following circumstances : The plaintiffs had loaned 
 money to the bankrupt for the purchase of goods 
 under his agreement to pledge the property bought 
 as security for the loan and, meantime, to hold the 
 bills of lading and other documents for the plain- 
 tiffs' account. He disposed of part of the goods. 
 
 -i^-ir 
 
 -♦ 
 
 « See DHoP v. Windsor (1874) 26 La. Ann. 185. 
 
 «Law8 1918, Na 198. -..«...., 
 
 ^BrUton v. Harvey (1895) 47 La. Ann. 259. 16 So. 747; Jacqu€$ 
 V. CrgdUars (1886) 38 La. Ann. 863. ^ 
 '^Fletcher v. Morey (C. C. 1843) 2 Story 555. 
 
 30 
 
 I 
 
 
 He later became bankrupt, his assignee (i. e., trus- 
 tee) held part of the goods and the proceeds of 
 other parts sold. The plaintiffs brought an action 
 in equity to establish a lien on the property and 
 proceeds in the assignee's bonds. Judge Story up- 
 held the bill and gave the property to the plaintiffs. 
 He spoke of the case as an "equitable lien" with- 
 out determining whether it was an equitable pledge 
 or mortgage, and held in principle that it was en- 
 y forcible against all except bona fide purchasers from 
 the bankrupt for valuable consideration and without 
 
 notice. 
 
 Equitable mortgages of realty had long been en- 
 forced, but this appears to be one of the earliest 
 cases in which an analogous equitable right was rec- 
 ognized and enforced in respect to personalty.*^ 
 
 This case is really similar to a trust receipt case. 
 It would have been precisely such a case if the bills 
 of lading had been drawn to the order of the lender 
 and by him delivered against a trust receipt The 
 agreement seems to have contemplated that the title 
 t^-^hould pass directly to the lender as security even 
 though it was spoken of as a "pledge." If so, the 
 decision is in accord with modern law on the sub- 
 ject. In later cases, we find that the rights of the 
 
 •* Equitable assignment: Lowery v. Steward (1862) 25 N. Y. 
 239; see also German Bk, v. Edwards (1873) 53 N. Y. 541; Par- 
 shall V. Eggert (1873) 54 N. Y. 18. Equitable mortgage to secure 
 the debt of a third person: Blake v. Corbett, supra, footnote 8. 
 Equitable mortgage: National Bk. of Deposit v. Rogers (1901) 166 
 N. Y. 380, 59 N. E. 922; Sexton v. Kessler & Co., Ltd., supra, 
 footnote 13. 
 
 ^ 31 
 
II 
 
 I 
 
 I 
 
 f 
 
 1 
 
 I 
 
 lender are upheld, even though no trust receipt has 
 been used, provided the agreement between the 
 parties is clearly shown and no superior equities 
 have intervened.«2 The case is illustrative of the 
 readiness of the courts to recognize the needs and 
 practices of business and to protect creditors in con- 
 nection therewith so long as superior equities do not 
 intervene. In later trust receipt cases, the funda- 
 mental principle of this decision seems often to have 
 been in the minds of the court. Again possession 
 is said in general to be essential to the rights of a 
 pledgee, but the courts have repeatedly recognized 
 the principle that a pledgee might relinquish posses- 
 sion to the pledgor "for a special purpose," giving 
 him what might be termed custody or a limited 
 control without losing his rights as pledgee.^^ 
 
 Another early case which resembles the trust re- 
 ceipt situation was decided in New York in 1874." 
 The plaintiff discounted a draft drawn on the con- 
 signee and received the bill of lading with the draft. 
 The consignee refused to pay the draft but obtained 
 the goods by an attachment and sold them.**^ It was 
 held that the plaintiff was a mortgagee in possession 
 
 «/n re Marks & Co, (C. C. A. 1915) 222 Fed. 52; Merchants' 
 Exch. Bk. V. McGraw (C. C. A. 1896) 76 Fed. 930; Southern Flour 
 & Grain Co. v. Central Texas Exch. Nat. Bk. (Ga. 1921) 109 S. E. 
 685. It must be noted, however, that in none of these cases have 
 the goods previously belonged to or been in the possession of the 
 borrower and prospective buyer. r^ . , . ,.«««x 
 
 »Hutton V. Arnett (1869) 51 111. 198; Thayer v. Dvnght (1870) 
 
 104 Mass 254 
 ^ First' Nat.' Bk. v. Kelly (1874) 57 N. Y. 34. 
 » See also Merchants^ Exch, Bk. v. McGraw, supra, footnote 32. 
 
 32 
 
 \ through its possession of the bill of lading, that it 
 
 '^ ^ j was not required for that reason to record the mort- 
 gage, and that it was entitled to be paid the amount 
 of the draft out of the proceeds of the property. 
 This case is interesting because it recognizes the sit- 
 uation as a chattel mortgage. The plaintiff was in 
 exactly the same situation as the banker who hands 
 the importation to his customer against a trust re- 
 ceipt. In this case, the buyer obtained the prop- 
 • erty without signing a trust receipt, but also with- 
 out the bank's consent. The court, therefore, was 
 able to give protection to the bank while at the same 
 time it recognized that the bank was the holder of 
 an imrecorded chattel mortgage. When the next 
 step was presented by facts similar to those found 
 in a trust receipt case^® in which the debtor obtained 
 possession with the bank's consent, the court still 
 gave protection to the bank (although it was as the 
 court had already held in the last case, the holder of 
 a special variety of unrecorded chattel mortgage) 
 by declining to admit that the arrangement was in 
 ^all respects a mortgage. The ultimate result was, 
 • in effect, the recognition that it was not such a chat- 
 tel mortgage as to come within the terms of the re- 
 cording acts. 
 
 The line of cleavage thus becomes clear. In the 
 later cases, in New York at least, there is a distinct 
 
 ^Mechanics & Traders* Bk., etc. v. Farmers & Mechanics* Nat, 
 Bk. (1875) 60 N. Y. 40. 
 
 33 
 
) 
 
 II 
 
 . 
 
 unwillingness to define the rights of the bank by 
 name, but it is universally recognized that it has a 
 security title. In Mechanics & Traders' Bk., etc. v. 
 Farmers & Mechanic^ Nat. Bk., etc.," the court 
 said: 
 
 "The judge ruled at the trial that the plaintiff [the 
 lending bank] was a mortgagee of the grain ; but 
 whether the plaintiff held it as mortgagee, pledgee, 
 or by any other title is not material, so long as the 
 title or the right to the possession was vested m the 
 plaintiff. To all intents and purposes the plaintiff s 
 property in the wheat was clearly established and 
 beyond any question." 
 
 As the action was for conversion of the wheat, the 
 case can hardly be explained as one of equitable 
 mortgage or pledge. If it was a pledge, the bank 
 had surrendered possession, whether for a special 
 purpose or not. But the court said further : "The 
 [warehouse] receipt taken for the wheat by W 
 [the intended buyer] , in his own name, was without 
 authority and did not divest the plaintiff of the title 
 which had been lawfully acquired." " 
 
 The general doctrine was upheld by the Supreme 
 Court of the United States in 1875 in Dows v. 
 National Exchange Bank of Milwaukee,*^ an im- 
 portant case coming from the State of New York. 
 
 «/wi.' 51. * For the later litigation growing Jfrom the facts of 
 this case, sec Farmers & Mechanics' Nat. Bk, v. Erte Ry. (1878) 72 
 N. Y. 188. 
 
 » (1875) 91 U. S. 618. 
 
 34 
 
 /%|e,* 
 
 A bank discounted a draft accompanied by a bill 
 of lading drawn to its order. It forwarded the 
 papers to its correspondent with instructions to de- 
 liver only on payment of the draft. The goods were 
 placed in a warehouse of the drawee who acknowl- 
 edged receipt as warehouseman only. He, however, 
 sold the goods and delivered them to another. The 
 court held that the bank's correspondent could not 
 divest its title prior to payment of the drafts ; that 
 the goods were placed in the drawee's hands not 
 as owner but as bailee, i. e., for a special purpose; 
 that the title of the bailor was not lost by such de- 
 livery and that a sale or delivery by the bailee gave 
 no title to the purchaser, who was therefore liable 
 for conversion. 
 
 The bearing of these early cases is obvious. They 
 contain the essential principle of the trust receipt 
 doctrine. It is interesting to note, however, that 
 every one of them arose in connection with a do- 
 mestic transaction, whereas the name of trust re- 
 ceipt is chiefly associated with importations from 
 
 abroad. 
 
 The earliest reported case in which the word 
 "trust receipt" is used appears to be Barry v. 
 Boninger,^'' decided in 1877. The precise form of 
 the instrument is not stated but in substance it ap- 
 pears to have resembled those now in use. It was 
 used in connection with the delivery of an importa- 
 
 ^46 Md. 59. 
 
 35 
 
I 
 
 tion of sugar to the importer, who had obtained 
 a credit therefor from the bank. It gave a right 
 of sale with the obligation to account for the pro- 
 ceeds until all drafts were paid. Sale was effected 
 through brokers. The importer failed and the 
 brokers attempted to withhold from the proceeds 
 not only their commission for the particular sale, 
 but other commissions due them from the importer. 
 The court held that the property in the sugar was 
 in the bankers under the letter of credit and the 
 trust receipt, and that the brokers could not with- 
 hold from the proceeds the amount of commissions 
 due them from others (i. e., from the importers). 
 
 We may be permitted to pause at this point to 
 consider further the origin of the name "trust re- 
 ceipt." The use of the word "receipt" is obviously 
 appropriate, but, as has already been remarked, the 
 equitable notions of a "trust" are quite different 
 from those connected with the importer's obliga- 
 tions. Perhaps the word "bailment" would more 
 accurately describe the situation.*^ Indeed, the 
 term "bailee receipt" is not unknown in connection 
 with documents intended to accomplish the same 
 purpose as trust receipts. It is, however, uncom- 
 mon and it would appear from various points of 
 view to be undesirable to use a new or unaccustomed 
 name for documents which have become generally 
 
 **Sec Century Throwing Co. v. Muller, supra, footnote 14. 
 
 36 
 
 
 . 
 
 familiar to the courts as well as to the business 
 world as trust receipts. 
 
 Fiduciary obligations are not, however, within 
 the exclusive province of equity. If A delivered 
 property to B, whether goods or a sum of money, 
 for a special purpose such as for the purpose of de- 
 livery to C or to sell and turn over the proceeds to 
 A, this constituted a bailment and gave rise in early 
 English law to the law action of account. This is 
 now obsolete, but its successors are detinue and 
 replevin, and the relation between the parties was 
 that of a common law trust — an entrusting or bail- 
 ment. In this sense, the use of the word "trust" 
 is entirely apt, but its significance is in sharp con- 
 trast to that of the creature known to equity as a 
 "trust." In a common law trust the title is in the 
 entrusting party — ^the bailor. In an equitable trust, 
 title is in the entrusted party — the trustee. It seems 
 highly probable, therefore, that the name "trust re- 
 ceipt" is derived from the common law notion of 
 trust and in that view the name, as a whole, is ap- 
 propriate. It is doubtless also a fact that the word 
 "trust" has a value in business where legal refine- 
 ments mean little. Its use may unconsciously cause 
 the importer to observe the obligation with greater 
 care because of a high respect for, though unaccom- 
 panied by a refined understanding of, the obliga- 
 tions of a "trustee." 
 
 37 
 
■ 
 
 i 
 
 It was not long before other decisions in New 
 York were handed down which firmly established 
 the foundations upon which trust receipts are built. 
 The most important is Farmers & Mechanics' Nat. 
 Bk. V. Logan.*' This case, like its predecessors in 
 New York, arose in connection with a domestic 
 shipment of grain. The bank took the bills of lading 
 to its own order against draft drawn on the buyer, 
 who had initiated the transaction. Upon the ac- 
 ceptance of the draft, he was handed the bills of 
 lading without endorsement, accompanied by a writ- 
 ing saying that the grain was pledged with the bank 
 and was put into his custody "in trust" as security 
 for the payment of the draft. He was given no 
 power of disposal. He, however, sold to the de- 
 fendant Logan and another. The court held dis- 
 tinctly that the bank was not a mere pledgee, as it 
 was agreed that retention of possession by the bank 
 was essential to a pledge as against a bona fide pur- 
 chaser from the pledgor. In resting its case upon 
 the title of the bank, it laid preeminent stress upon 
 the fact that such title had come to it from another 
 source than the buyer. It recognized that he had 
 some interest or right in the property but it did not 
 define that right and it carefully avoided any men- 
 tion of what it may have regarded as a disastrous 
 term— "mortgage." The opinion reads as if the 
 court thought the great principle involved was 
 
 (1878) 74 N. Y. 568. 
 
 i 
 
 i 
 
 38 
 
 "caveat emptor." " In this case, the defendant had 
 actual notice of the rights of the plaintiff. It is, of 
 course, obvious tiiat if a trust receipt is vaUd as be- 
 tween the parties, it loses none of its validity by a 
 transfer of the property to one who has notice of 
 the rights of the holder of the trust receipt.** 
 
 Following these decisions, instruments framed to 
 give security under the principles established by 
 them began to be used in business in New York. 
 One such instrument resembling a trust receipt is 
 found in Carter v. Arguimhau*'' decided in 1884. 
 In tiaat case, imported goods had been delivered to 
 an importer who signed a receipt giving him power 
 to sell. The receipt contained the obligation to hold 
 the goods and their proceeds "under Uen" as agent 
 of the bankers. The word "lien" is sometimes 
 found in trust receipts in use at the present time. 
 It invariably gives rise to difficulty, although the 
 courts are careful to explain it.*' There is no oc- 
 casion for its use and it should be scrupulously 
 avoided. The banker has titie, not a lien. As was 
 said in In re Liberty Silk Co." 
 
 «See also Farmers & Mechanics' Nat. Bk. v. Atkinson (1878) 
 74 N. Y. 587; Farmers €r Mechanics' Nat. Bk. v. Haseltine (1879) 
 
 78 N. Y. 104. 
 
 «See Cole v. Mann (1875) 62 N. Y. 1. 
 
 «31 Abb. N. C. 3. 
 
 *• See In re Cattus, supra, footnote 10. 
 
 " (D. C. 1907) 152 Fed. 844. In this case there was no trust 
 receipt, but a mere provision to "retain a prior lien upon the under 
 noted goods until payment has been made." The contract also 
 purported to give "a prior lien upon the goods ... or an 
 equivalent value until payment has been made." The customer was 
 obviously intended to sell the goods or use them m the course of 
 
 39 
 
f 
 
 \ 
 
 "A seller cannot at the same time retain title to that 
 which he sells and a lien on the article sold. A lien 
 in favor of A, whether it be regarded as a jus in re 
 or a jus ad rem, presupposes title in another and 
 A's acquirement of title extinguishes his lien." 
 
 In the case of Carter v. Arguimhau, the importer's 
 property was in the hands of an assignee for the 
 benefit of creditors, and the banker sought to re- 
 cover the possession of the goods remaining un- 
 sold and of the proceeds of those sold. The hold- 
 ing was that he was entitled to such goods and pro- 
 ceeds in so far as they could be traced.*® The court 
 expressly refused to construe strictly the words 
 "under lien" saying that they should be regarded as 
 meaning "subject to the prior claim of the bankers." 
 This case does not involve the factors' act, but it 
 was of necessity a direct decision that the receipt 
 which was in the nature of a trust receipt was ef- 
 fective, even though not recorded.*® The court did 
 
 *. f 
 
 manufacture, and the terms of the delivery imposed no obligation 
 to account for the proceeds. Quite naturally the arrangement was 
 overthrown in favor of the trustee in bankruptcy. There seems 
 to have been no attempt to do the business on the basis of trust 
 receipts or upon the theory of reservation of title upon which they 
 depend, although it would seem that the transaction could have been 
 carried through in such a manner as to gain the protection afforded 
 by trust receipts. 
 
 «See also Dennistown v. Barr (1893) 31 Abb. N. C. 21; 28 N. 
 Y. Supp. 255. 
 
 • It seems that an unrecorded chattel mortgage would be valid 
 in New York under similar circumstances. Skilton v. Codington, 
 supra, footnote 22. The earlier rule seems to have been more 
 severe- Stephens v. Perrine (1894) 143 N. Y. 476, 39 N. E. 11. 
 An assignee for the benefit of creditors, however, has no rights 
 superior to those of his assignor. Bell v. New York Safety, etc. 
 Co., supra, footnote 12; Wilson v. Esten (1885) 14 R. I. 621. 
 
 40 
 
 
 i 
 
 not attempt to define the nature of the security po- 
 ^ sition of the bank. 
 
 In Moors v. Kidder,^^ an importation was deliv- 
 ered to the importer under an agreement analogous 
 to a trust receipt, for the sole purpose of making 
 customs entry and warehousing. The importer, 
 however, pledged it to a lender who did not, how- 
 ever, take it in reliance upon the bill of lading, which 
 was in the importer's hands. This is an important 
 case in connection with the factors' act, and the 
 pledgee was unsuccessful in maintaining the pledge 
 because the importer had no power of sale, and be- 
 cause the lender had not placed reliance upon the 
 importer's apparent title represented by the bill of 
 lading which was not shown to him. The receipt 
 spoke of the goods as being "pledged and hypothe- 
 cated" with the bankers. The court refused to con- 
 strue these words strictly, saying very pertinently 
 thati "very likely the transfer was rather in the 
 nature of a mortgage in which the title passes than 
 ^' in that of a pledge in which the pledgor is the gen- 
 eral owner." 
 
 The first reported case which has been found m 
 New York in which the term "trust receipt" is used 
 is English Bank of Rio de Janeiro v. Barr.^^ The 
 decision was in accord with Carter v. Arguimbau. 
 
 « (1887) 106 N. Y. 32, 12 N. E. 818. 
 » (1888) 31 Abb. N. C. 7. 
 
 ' 41 
 
By this time the trust receipt was in common use 
 under that name. 
 
 At about the same time, the Massachusetts courts 
 established the law of that state in harmony with 
 the New York decisions referred to.**^ They up- 
 held the claim of the banker on the ground that he 
 had a title which was not lost by delivery of the 
 custody of the goods to the importer. At the same 
 time, they were deciding that an unrecorded bill of 
 sale or chattel mortgage, given to secure a loan made 
 to the mortgagor, was not effective when not ac- 
 companied by possession of the property.** The 
 only real distinction between the cases was that to 
 which we have already called attention, namely, that 
 in the first case the security title of the banker was 
 derived from a person other than the debtor, where- 
 as in the second the security title of the banker was 
 derived from such debtor. This is the line of dif- 
 ferentiation which must mark the proper trust re- 
 ceipt situation from! that of the ordinary chattel 
 mortgage." 
 
 ••.'■ 
 
 ^* Moors V. IVyman (1888) 146 Mass. 60, 15 N. E. 104; see also 
 Forbes v. B. & L. Ry, (1882) 133 Mass. 154, as to the effect of 
 delivery of a bill of lading. 
 
 ^Copeland v. Barnes (1888) 147 Mass. 388, 18 N. E. 65; see 
 also Salinas City Bk, v. Graves, supra, footnote 12. 
 
 " See also the opinions in the more recent case, Peoples Nat. Bk. 
 V. Mulholland (1916) 224 Mass. 448, 113 N. E. 365, as contrasted 
 with the same case in (1917) 228 Mass. 152, 117 N. E. 46, where, 
 on further examination, the case was held to come within the trust 
 receipt doctrine. Note dso Professor Williston's criticism of the 
 latter opinion in Progress of the Law 1919-20 (1921) 34 Harvard 
 Law Rev. 759. 
 
 42 
 
 
 f 
 
 In 1889, the courts of Connecticut passed upon 
 the trust receipt and again upheld the banker." 
 They explicitly declared that the transaction was a 
 conditional sale by the banker to the importer. The 
 important thing was that they upheld the arrange- 
 ment without recording. The use of the term "con- 
 ditional sale" was probably due to the fact that in 
 Connecticut a conditional sale agreement was valid 
 without recording, whereas a chattel mortgage en- 
 joyed no such immunity. The true nature of and 
 justification for the doctrine was not as yet entirely 
 
 clear.*^® 
 
 These cases were shortly followed by a decision 
 in Wisconsin in which the right of the banker to the 
 proceeds of goods sold by the importer who held 
 them under a trust receipt was upheld as against the 
 claims of creditors.*^^ The creditors endeavored to 
 persuade the court that the transaction was a con- 
 ditional sale, which required recording in Wiscon- 
 sin, but the court refused to affix a definite label, 
 saying that if it was a conditional sale, it had in the 
 particular case been made in either Connecticut or 
 
 ^New Haven Wire Co. Cases, supra, footnote 3. 
 
 "See comment in Charavay v. York Silk Mfg. Co. (C. C- 1909) 
 170 Fed. 819, 822. In Drexel v. Pease (1892) 133 N. Y. 129, 136, 
 30 N. E. 732, the court said, in respect to a situation rather similar 
 to that in a trust receipt, "the correspondent [the bank] occupies 
 the position of an owner under a contract to sell and deliver when 
 the purchase price is paid." In this case, the court refused to 
 allow the bank to hold a balance remaining after the payment of 
 the specific advances, as security for a prior debt, as against the 
 claim of a third party who had a proprietary interest m the prop- 
 erty unknown to the bank. .^ ^^ „, «- 
 
 ^•^Mershon v. Moors (1890) 76 Wis. 502, 45 N. W. 95. 
 
 43 
 
Massachusetts, in both of which states it was valid 
 without recording.*® 
 
 In connection with these Massachusetts, Connec- 
 ticut and Wisconsin cases, the case of Moors v. 
 DruT'f^ is noteworthy, although it does not directly 
 involve a trust receipt. The plaintiff had advanced 
 money for imports and received the bills of lading. 
 The agreement specified that he should sell in his 
 own name and turn over any surplus to the client 
 in this country. The client became insolvent and his 
 estate was under administration in the state court. 
 A Massachusetts statute provided that holders of 
 security, by way of mortgage, pledge or lien, must 
 liquidate such security under the direction of the 
 court if they were to be allowed to prove against 
 the estate for any deficiency. The plaintiff did not 
 do so and objection was made to his claim. The 
 court held that he was not a mortgagee or pledgee 
 within the terms of the statute, and allowed his 
 claim. It relied upon the foregoing decisions. The 
 case is inconsistent with the notion that the banker 
 is a conditional vendor, for it is general law that a 
 retaking and sale by a conditional vendor terminates 
 the contract ; that the consideration for the obliga- 
 tion of the vendee thereby fails, and that any de- 
 ficiency which may result by a sale below the con- 
 tract price cannot be recovered from the vendee or 
 
 * (1904) 186 Mass. 424. 70 N. E. 430. 
 
 44 
 
 "•« 
 
 his estate,*® It seems to be unsafe to say that the 
 trust receipt situation is classified in Massachusetts 
 as a conditional sale. It is not, however, such a 
 mortgage as to be included within the scope of 
 statutes relating to "chattel mortgages" of the com- 
 mon sort.^^ In Irhy v. Cage, Drew & Co.,'''' prop- 
 erty which had been delivered under trust receipt 
 was retaken from the receiver and sold by the 
 banker for less than the amount of the debt. The 
 receiver claimed that such retaking ended the obli- 
 gation to pay, as the arrangement constituted a con- 
 ditional sale. The court held that it was not a con- 
 ditional sale and that the banker could claim for the 
 deficiency.** 
 
 The next important case was Brown Bros. v. BiU 
 lington.^^ In this decision, the court repudiated the 
 notion that the trust receipt constituted a condi- 
 tional sale. It defined it as a "bailment" and upheld 
 the rights of the bank as against the general cred- 
 itors of the importer. The case is interesting be- 
 cause under the law of Pennsylvania the creditors 
 ^ would have prevailed if the court had been per- 
 suaded to classify the transaction as either a con- 
 
 00 
 
 \ 
 
 Earle v. Robinson (1895) 91 Hun 363, 36 N. Y. Supp. 178, 
 afd (1898) 157 N. Y. 683, 51 N. E. 1090; Minneapolis Harvester 
 Works V. Hally (1881) 27 Minn. 495, 8 N. W. 597. 
 
 «^ See Charavay v. York Silk Mfg. Co,, supra, footnote 56. 
 
 «» (1908) 121 La. 615, 46 So. 670. 
 
 ^ See also Barber Asphalt Paving Co. v. St. Louis Cypress Co. 
 (1908) 121 La. 152, 46 So. 193. 
 
 «♦ (1894) 163 Pa. St. 76, 29 Atl. 904; see also Monjo v. French 
 (1894) 163 Pa. St. 107, 29 Atl. 907; Bank v. Baum (1898) 187 
 Pa. St. 48, 40 Atl. 975. 
 
 45 
 
ditional sale'" or an ordinary chattel mortgage.*' It 
 is further interesting because resort is had to the 
 common law principle of bailment which gives rise 
 to a common law trust out of which g^rew the law 
 action of account to which we have already re- 
 ferred.'^ It again shows the readiness of the court 
 to uphold the transaction in spite of the recording 
 acts when that can by any means be done. It would, 
 however, have been impossible to reach the result 
 in this case had the title to the goods come to the 
 bank from the importer instead of from a third per- 
 son. The vital nature of that distinction — ^already 
 referred to — ^is here peculiarly clear." 
 
 In 1895, an interesting case, Blydenstein v. New 
 York Sec. & Tr. Co.;'' was decided by the Circuit 
 Court of Appeals for the Second Circuit. The par- 
 ticular facts were somewhat involved, but for our 
 present purposes may be briefly summarized. A 
 Scotch firm having a branch house in New York de- 
 livered bills of lading of goods, shipped to them- 
 selves in New York, to a London banker (the plain- 
 tiff) as security for advances. These bills of lading ^ 
 were redelivered to the firm in New York against 
 a trust receipt giving powe r of sale with the obliga- 
 
 «0« V. Stveatman (1895) 166 Pa. St. 216, 31 Atl. 102. 
 
 ««Pa Stat. (1920) §S 8906 et seq. A chattel mortgage is an 
 unusual form of security in Pennsylvania. 
 
 ^^ "Bailment is a recognized form of security in Pennsylvania." 
 uf^T^' ^^J^""^^^ 088?) 125 Pa. St. 606, 17 Atl. 504; Keystone 
 W^ch Case Co. v. Bank (1900) 194 Pa. St. 535, 45 Atl. 328 
 
 167 vl tr^Z^\ At\ 1^40^^* ^' Nathan {Bank's Appeal) (1895) 
 • (C* C. A. 1895) 67 Fed. '469. 
 
 46 
 
 4 
 
 tion to account for the proceeds. The goods were 
 warehoused in the name of the firm and the nego- 
 tiable warehouse receipts handed to the defendant 
 as security for a present loan. The firm then failed. 
 The banker claimed from the defendant the pro- 
 ceeds of goods delivered under trust receipt which 
 formed a part of this security. It will be observed 
 that the facts in this case are precisely those of the 
 ordinary unrecorded chattel mortgage where the 
 possession of the goods is returned to the mort- 
 gagor. It is not the case where the title of the bank 
 was derived from a person other than the debtor, 
 which is the feature which diflFerentiates the trust 
 receipt situation from the ordinary chattel mort- 
 gage. 
 
 Had all of the essential events, therefore, taken 
 place within the State of New York, the easy, nat- 
 ural and proper decision would have been to uphold 
 the position of the defendant pledgee upon the 
 ground that the transaction was a chattel mortgage, 
 that it was not followed by delivery to and con- 
 ^ tinned possession of the property by the mortgagee, 
 and was not recorded. It appears, however, that 
 the mortgage was made, and possession of the prop- 
 erty as well as title thereto (represented by the bills 
 of lading) was delivered in England where, until 
 recently at least, it seems that a chattel mortgage 
 was valid without recording. Either for this rea- 
 son or because the true nature of the transaction 
 
 47 
 
was not perceived, the decision was based upon the 
 factors' act. It was necessary, if the plaintiff were 
 to succeed, that he should establish that he had ac- 
 quired title by the transaction in London and that 
 this title had not been lost by delivery under the 
 trust receipt. For the purpose of the case, the court 
 conceded both points and such concession was in 
 accord with the facts so far as the parties themselves 
 were concerned. The plaintiff lost because the de- 
 fendant was in the position of a bona fide pur- 
 chaser for value without notice and protected in 
 that position by the factors' act. The court said :^^ 
 
 "Assuming that the ownership of the goods 
 passed from Lipman & Co. [the Scotch firm] to the 
 plaintiffs in London and did not pass back by the 
 subsequent transaction, Lipman & Co. were indis- 
 putably factors intrusted with the possession both of 
 the documentary evidence of title and of the goods." 
 
 It should be noted in this particular case that had 
 the defendant not been in the position of a bona fide 
 purchaser for value, but rather a mere creditor 
 without a specific claim obtained against the goods 
 for value and without notice, the plaintiff would 
 have been successful. But he would have succeeded, 
 not because of his trust receipt as such, but be- 
 cause his rights as chattel mortgagee, valid where 
 obtained, were not subject to the recording acts of 
 New York. It was not a proper case for the use 
 
 »<»/Wd. 478. 
 
 of a trust receipt, if, by the use of such a docu- 
 ment, the banker supposed himself to be securing 
 greater protection than he would obtain by taking 
 an unrecorded chattel mortgage.*^^ 
 
 That the proper field for the use of the trust re- 
 ceipt is not yet generally understood, is shown by a 
 recent case. In re Carl Dernberg & Sons, IncP The 
 facts are quite similar to the Blydenstein case. A 
 borrower delivered documents of title to the bank 
 as security for a loan. He later received them back 
 on trust receipt and became bankrupt. The court 
 very properly declined to direct their return by the 
 receiver to the bank. The transaction was an ordi- 
 nary unrecorded chattel mortgage.^^ The principle 
 of the decision was in no sense new. It was a 
 fundamentally improper case for the use of a trust 
 receipt, and the only surprising thing about it is that 
 it should have been supposed that a trust receipt 
 was of any greater value under the state of facts 
 than an unrecorded chattel mortgage. The trust re- 
 ceipt should not be used when the property is to be 
 ^returned to the person from whom it was received 
 and for whose obligation it is security. If the 
 property is to be returned under such circumstances, 
 
 "For another case growing out of the same situation, see New 
 York Security & Trust Co. v. Lipman (1899) 157 N. Y. 551, 52 
 N. E. 595. The court declined to consider the nature of the 
 agreement contained in the trust receipt as between the parties 
 
 *^'«(D. C, S. D. N. Y. 1921) supra, footnote 12,* afiPd 282 Fed. 
 
 816, see * footnote 12. ,, ^^ .- *▼ « -,*% 
 
 "See Moors v. Reading (1897) 167 Mass. 322, 45 N. E. 760; 
 Skilton V. Codington, supra, footnote 22. 
 
 48 
 
 4 
 
 49 
 
- 
 
 M 
 
 I 
 
 i 
 
 the agreement by which it was mortgaged should be 
 recorded.^* 
 
 National Bank of Deposit v. Rogers" is an inter- 
 esting decision which does not impair the force of 
 the foregoing in any way. An importer having 
 goods in bonded warehouse wished to borrow money 
 with which to pay the duty. He showed the bills 
 of lading to the bank (the plaintiff) and obtained 
 a loan upon signing a trust receipt. He then made 
 an assignment for the benefit of creditors. After 
 some earlier litigation, the bank pressed this action 
 in equity to establish an equitable right in the goods 
 and their proceeds (either by way of lien or mort- 
 gage) and to enforce the same. The court sus- 
 tained the claim of the bank as against the assignee. 
 It said that the parties had made an agreement with 
 respect to goods which the importer did not yet con- 
 trol, that as between the parties this agreement was 
 good, and that as the assignee represented antecedent 
 debts, there were no intervening equities which could 
 defeat the rights of the bank. It did not undertake . 
 to decide whether this agreement contemplated a 
 mortgage, a pledge or a mere lien by contract. If 
 it were an agreement to give a mortgage, it could 
 
 • '*See In re Geritman, supra, footnote 12- 7« n> Cliui«.<.. «.a.. 
 footnote 11; American & iritish Sec!'co'y AZe2aL"^^' sTitk 
 Mfg. Co.. supra, footnote 12; Bell v. New York Safetv .^rri 
 
 F&elT:^ '^L/'^r ^i^ ;?*• V> Graves, su^tf^^e % 
 y-Ji^k orM^lZXf^a, Voo^^fe'lS*"' """' '°°*°°*' ''' "^ 
 » 0901) 166 N. y. 380, 59 N. E. 922. 
 
 50 
 
 4 
 
 hardly have been more effective than an actual mort- 
 gage would have been under the circumstances and 
 these circumstances included the fact that the mort- 
 gagee did not have possession and that the agree- 
 ment was not recorded. It is the general rule, how- 
 ever, that an unrecorded chattel mortgage can only 
 be voided by a bona fide purchaser, mortgagee or 
 pledgee for value, or by a creditor armed with a 
 judgment or some other legal process authorizing 
 the seizure of the property. A trustee in bank- 
 ruptcy is included in this class." Since the assignee 
 for the benefit of antecedent creditors had no bet- 
 ter rights than those creditors themselves would 
 have had, the contract was as valid against him as 
 against the importer himself." The case is illustra- 
 tive of the fact that circumstances may exist under 
 which an unrecorded chattel mortgage is effective. 
 These occasions are, however, rare. The bank suc- 
 ceeded, not because there was any special virtue, in 
 the circumstances, in the use of a trust receipt, for 
 there was none, but because an unrecorded chattel 
 mortgage or an agreement to give a chattel mort- 
 gage would have been equally effective in the case. 
 We repeat that it was not a proper occasion for the 
 use of a trust receipt if, by its use, the bank ex- 
 
 "See Saiton v. Coiington, supra, footnote 22; Federal Bank- 
 ruptcy Act of 1898 5 70, (1903) 32 Stat. 7?7, U. S. Comp. Stat 
 (1916) § 96S4; In re Garcewich (C. C. A. 1902) IIS Fed. 87 
 (unrecorded conditional sale). ,. . ^ , _ /-. ._. 
 
 " See discussion in Bell v. New York Safety, etc. Co., supra, 
 footnote 12; Wilson v. Esten. supra, footnote 49. 
 
 51 
 

 I 
 
 pected to obtain any rights which it could not have 
 secured by an unrecorded chattel mortgage or by 
 an agreement to give security. 
 
 The next case of importance in the development 
 of the law of trust receipts was Moors v. BirdJ' 
 It indicates that responsibilities as well as rights 
 may grow out of the use of a trust receipt. The 
 defendant had made a contract with the importer 
 for the purchase of paper, the price being based up- 
 on the cost of the paper to the importer. Upon the 
 arrival of the goods, the documents were turned 
 over to the importer by the plaintiff (the banker) 
 upon a trust receipt and delivery made to the de- 
 fendant. The importer handed the invoices to the 
 plaintiff and the defendant made payment direct 
 to him, the plaintiff having no knowledge of the 
 contract of sale between the importer and the de- 
 fendant. Through a secret arrangement made by 
 the importer, the shipper rebated to the importer a 
 portion of the price which was fictitiously increased 
 without the knowledge of the plaintiff, thus de- 
 frauding the defendant. The defendant claimed 
 the right, after discovery, to deduct the amount of 
 this loss from an amount later to be paid to the 
 plaintiff as a result of a later transaction between 
 the same parties, upon the ground that the first 
 overpayment was made as a result of a mistake of 
 fact. The plaintiff had turned over to the importer 
 
 " (1906) 190 Mass. 400, 77 N. E. 643. 
 
 52 
 
 1 
 
 
 r 
 
 all sums in excess of his advances. His agree- 
 ment with the importer, however, had given him a 
 right to apply such excess against any debt owing 
 to him by the importer. The court held that the 
 plaintiff was owner of the goods and that the sale 
 was made by him to the defendant in pursuance of 
 the importer's contract ; that as the defendant had 
 under mistake paid more than was really due 
 under this contract, he could later reclaim or recoup 
 it from the plaintiff, since the plaintiff was not the 
 importer's agent in receiving payment but had a 
 right to retain the proceeds as such as against the 
 obligations of the importer to him; that the im- 
 porter had a mere contract right to receive from the 
 plaintiff any surplus that might remain after the 
 payment of his obligations. The result of this case 
 seems open to question. Was not the buyer estopped 
 from recovering the overpayment from the banker 
 who was entirely innocent, because of the change 
 which had taken place in his position after such pay- 
 ment upon his delivery of the balance to the im- 
 porter ? 
 
 In re E. RebouUn Fils'^ squarely raised the ques- 
 tion of the effect of a trust receipt in a bankruptcy 
 case in the District Court of New Jersey. The bank 
 sought to repossess itself of the goods or their iden- 
 tifiable proceeds from the trustee in bankruptcy. He 
 resisted on the ground that the transaction was 
 
 i 
 
 ^ Supra, footnote 16. 
 
 53 
 

 \i 
 
 either a conditional sale or a chattel mortgage within 
 the terms of the recording acts. The court rejected 
 this view and directed the delivery of the goods and 
 their proceeds to the bank. The trust receipt thus 
 obtained explicit recognition in the federal courts 
 in bankruptcy. If, therefore, they constitute a 
 species of chattel mortgage, such species is distin- 
 guished from the species ordinarily required to be 
 recorded. 
 
 The fiduciary nature of the obligation growing 
 out of the trust receipt was recognized in In re 
 Coe}"" In this case, the bankrupts had misappro- 
 priated the proceeds of the goods received by them 
 under trust receipt. It was held that the bank could 
 prove its claim against the estate of the partner- 
 ship for the amount of the unpaid debt represented 
 by its advances, and that it could also prove claims 
 against the individual estates of the partners 
 founded at its election in tort or quasi-contract, 
 based upon the misappropriation of the bank's prop- 
 erty.®^ 
 
 This case suggests that the persons responsible 
 for the misappropriation thereby made themselves 
 liable to criminal prosecution for embezzlement or, 
 in those states where by statute this crime is included 
 
 745. 
 
 (D. C. 1909) 169 Fed. 1002, aff'd (C. C. A. 1910) 183 Fed. 
 *^ Accord, In re W. S, Kuhn & Co. (D. C. 1917) 241 F#<1 oic. 
 
 A^'l9ilf-18rFU'^61h'^- ^' ^'^^''''' ^- ^- ^- ''''^' ^^- <C. C. 
 
 54 
 
 in the definition, for larceny. And such a conclu- 
 sion would appear to be sotmd.®^ This case is criti- 
 cised in the Columbia Law Review,®" but such 
 criticism would not be applicable to a conviction re- 
 sulting from a trust receipt situation.®* No in- 
 stance of a criminal conviction in such a case has, 
 however, come to the writer's notice. Specific 
 statutes have been adopted in at least two states im- 
 posing severe penalties for the violation of the ob- 
 ligations of a trust receipt.®** 
 
 During the past fifteen years, substantially all of 
 the litigation with respect to trust receipts has taken 
 place in the federal courts in connection with bank- 
 ruptcy proceedings or equity receiverships. Charor- 
 vay & Bodvin v. New York Silk Mfg. Co} was one 
 of the latter kind. The bank in that case, after a 
 contest in Pennsylvania, recovered all of the goods 
 and their proceeds which could be identified and then 
 presented a claim against the estate for the de- 
 ficiency. The receiver vigorously contested on the 
 ground that the transaction was a conditional sale 
 ^ and that the retaking had exhausted the bank's 
 rights.^ The opinion clearly points out the fallacy 
 
 { 
 
 » See, e. g.. People ex rel. Zotti v. Flynn (1909) 135 App. Jhw. 
 276, 120 N. Y. Supp. 511. 
 
 ■•(1921) 21 Columbia Law Rev. 517. 
 
 "On civil arrest also, see Moffatt v. Fulton (1892) 132 N. Y. 
 507, 30 N. E. 992. 
 
 » Md. Gen. Laws art. 27, § 119; La., Laws 1914, No. 9. 
 
 * (D. C. 1909) 170 Fed. 819. 
 
 *Earle v. Robinson (1895) 91 Hun 363, 63 N. Y. Supp. 178, 
 aff'd (1898) 157 N. Y. 683, 51 N. E. 1090. 
 
 55 
 
of this position and asserts emphatically that the 
 bank held a security title as collateral to the prin- 
 cipal obligation, 
 
 A corollary of this last case is presented in In re 
 Perlhefter* This is a case of a domestic transac- 
 tion and while the name trust receipt does not ap- 
 pear, the situation and the agreement used were 
 similar. A trust receipt would have been entirely 
 appropriate. The goods were delivered to the bank 
 under an agreement reserving title, but giving power 
 of sale accompanied by the obligation to turn over 
 the proceeds to the bank until the advance was re- 
 paid. These proceeds were turned over to the bank 
 within four months of the filing of the petition in 
 bankruptcy and the question was whether these pay- 
 ments constituted preferences. The court held that 
 they did not. It said very pertinently* "it is quite 
 obvious that the contract was in the nature of a 
 mortgage, and not of pledge, for title was reserved 
 to the bank" and pointed out that under the cir- 
 cumstances a chattel mortgage would not have been 
 invalid. This case is interesting because it did not 
 seem necessary to the court to adopt the usual in- 
 definite language regarding the nature of the trans- 
 action. Let us,' follow its reasoning, however, a 
 little further. If the payment of proceeds was not 
 a preference, it must have been because the bank 
 
 4 JB:. ^ "*°> ^77 Fed. 299. 
 *lb%d., p. 303. 
 
 
 56 
 
 < 
 
 had a proprietary interest in such proceeds by which 
 it was entitled to receive them, even as against the 
 creditors of the bankrupt. In other words, if such 
 proceeds had remained in the bankrupt's hands and 
 were identifiable as such, the bank could have re- 
 claimed them from the receiver or trustee. Cases 
 already cited support this conclusion. But had this 
 been the situation, the transaction would have been 
 no less "in the nature of mortgage." In other 
 words, the case is authority for our view that the 
 true trust receipt is a variety of chattel mortgage to 
 which the ordinary rules are held not to apply. The 
 special or exceptional law with respect to a trust 
 receipt is anomalous but is justified for reasons 
 already stated. When we get away from the special 
 facts where a trust receipt can be properly used, we 
 find the ordinary rules applied as to chattel mort- 
 gages.*' 
 
 In In re Cattus,^ the Circuit Court of Appeals 
 definitely settled the law of trust receipts in the Sec- 
 ond Circuit in accord with the foregoing authorities 
 and permitted the bank to reclaim the property de- 
 livered under trust receipt from the trustee in bank- 
 ruptcy. Its language is decidedly interesting^ : "The 
 
 »See In re Carl Dernberg & Sons, Inc, (1921) 66 N. Y. L. J. 
 1200* aff*d 282 Fed. 816, see also In re Fountain 282 Fed. 816; In 
 re Cullen, 282 Fed. 902; In re Gerstman (C. C. A. 1907) 157 Fed. 
 549; Copeland v. Barnes (1888) 147 Mass. 388, 18 N. E. 65; Amer- 
 ican & British Sec. Co. v. A. & B. Mfg. Corp. (D. C. 1921) 275 Fed. 
 121; Bell v. New York Safety Steam Power Co. (D. C. 1910) 183 
 Fed. 274. 
 
 • (C. C. A. 1910) 183 Fed. 733. 
 
 »/&«., p. 735. 
 
 57 
 
purpose of the parties, describe the trust receipt as 
 you will, was to keep the title to the goods in the 
 bankers until their acceptances for the price of the 
 goods were paid. The courts, without always de- 
 fining exactly what the relation between the parties 
 IS or always defining it in the same way, still are 
 astute to protect the rights of the banker in such 
 ^se. ... It would be most inequitable that the 
 bankrupt or his trustee should escape from the per- 
 formance of this obligation for the benefit of any 
 one except a bona fide purchaser for value or cred- 
 itors protected by statute." « 
 
 The law was shortly afterward settled in the 
 Third Circuit by the decision in Century Throwing 
 Co. V. MuUer.^ The banker had delivered the doc- 
 uments for the raw silk imported to the importer 
 under trust receipt giving power of sale. The im- 
 porter wished to have it thrown. Throwsters were 
 by statute given a lien for their claims on silk in 
 their hands. They already held thrown silk of the 
 importer upon which they claimed payment and 
 which he wished to release. He consequently de- ' 
 ivered the silk in question to the throwsters to be 
 thrown and agreed that they should have a lien upon 
 
 the'S,u^" ^'idf ^teVuslie iStend Ah '.'".> ^22 Fed. S3. 56. 
 the conduct of the parties coSsthut^, '.w» *,'''*' documents and 
 
 58 
 
 < 
 
 it for their prior claim in consideration of their re- 
 leasing the silk already thrown, which they did. 
 They then proceeded to throw the silk delivered 
 under trust receipt (of which they appear to have 
 been ignorant). After the bankruptcy of the im- 
 porter, the banker tendered the amount due the 
 throwsters for throwing the particular silk, but they 
 refused to deliver, claiming a lien for the prior 
 debt. The banker then sued in trover. The banker 
 had already recovered, by order of the court, such 
 trust receipt silk as was held by the receiver. The 
 language of the court is so illtuninative of the ac- 
 cepted view that we shall quote at some length: 
 "The customary character of the transaction is at- 
 tested, not only by the record before us, but by the 
 judicial notice elicited in many modem cases more 
 or less similar to the present one. . . . The exi- 
 gencies of trade and commerce have caused many 
 exceptions to be made to the rigid rule founded on 
 the policy underlying the Statute of Frauds, by 
 which the divorce of title from possession is de- 
 clared either evidence of fraud or to be fraudulent 
 per se. . . . The law has long been settled that 
 such title and ownership [of the banker] will be 
 recognized, so far as they are necessary to the se- 
 curity they were intended to give for the payment 
 of the purchase money of the goods bailed, and 
 this, although a dishonest bailee is thereby enabled, 
 by violating his contract of bailment, to avail him- 
 
 59 
 
self of such possession to represent the property as 
 his own and thus practice a fraud on third persons 
 with whom he deals in respect thereto. But such 
 cases are an exception to the ancient rule founded 
 on the policy of the Statute of Frauds. . The 
 courts have not attempted to define exactly what 
 the relation between the credit lending banker and 
 the merchant is, as to the goods. ... It is hardly 
 necessary to add that where, under a contract, de- 
 hvery of possession without transfer of title or 
 ownership is consistent with the honest and Wti- 
 ttiate purpose of the parties to the contract, and 
 where the real owner is not estopped to assert his 
 title by conduct fraudulent or otherwise, his title 
 cannot be divested by anything done by the one in 
 possession, in fraud of or inconsistent with such 
 contract And the court adds, by way of estab- 
 lishing the anomaly: "We find no ground upon 
 which we can hold that the transaction here in 
 question was tantamount to a mortgage, equitable 
 or otherwise." Judgment for the banker was 
 affirmed." 
 
 KUlian Mfg. C^ (D. C ms/^'no T5*'li*^'°ir *'*'' «"»>. In re 
 established in the 1st Circuit U^,' "*'*■ ^^ Principte is alio 
 (C. C. A. 191S) 218 Fed 7fio ff! ■^•'''^„^- ^ass. Hide C^ 
 
 203 App. Div. 108 (1922). ""'"'^ ^«"* v. New York Dock Co. 
 
 60 
 
 iaM>ilaMMh„itjmiil^im^ 
 
 As a recc^nition of the general doctrine, the 
 Century Throwing case is very strong. Let us now 
 look at some of its implications. A release of prop- 
 erty held in pledge or subject to lien in considera- 
 tion of a delivery of other property to be held sub- 
 ject to the same lien has uniformly been held to be 
 present consideration for such lien or pledge.^^ It 
 matters not that the first pledge or lien existed by 
 statute — ^the second pledge by contract makes the 
 '^ property subject to the same lien which formerly 
 covered the first. It must be said, therefore, that 
 the throwsters were bona fide pledgees for value of 
 the imported silk as security for their earlier debt. 
 The decision, therefore, means that in New Jersey 
 at least a person entrusted with a power to sell (we 
 may call him a factor) cannot make a valid pledge 
 or mortgage. Such is the general rule, not only in 
 New Jersey, but elsewhere, in the absence of a fac- 
 tors* act or special legislation.^^ In other words, if 
 the importer had pledged the property with another 
 bank by delivery of the silk, or (in the absence of 
 the Bills of Lading Act) of the bill of lading there- 
 for, as security for a present loan, such bank would 
 have been unsuccessful in retaining the goods as 
 against the claim of the banker who held the trust 
 receipt. We may inquire, therefore, why the banker 
 
 ( 
 
 ^Blydenstein v. New York Sec. & Tr. Co, (C. C. A. 1895) 67 
 Fed. 469. 
 
 ^Towne v. Goldman (1902) 26 N. J. L. J. 47; see also dtationi 
 in (1921) 25 C. J. 351. 
 
 61 
 
i£ 
 
 -r-s-— ^ ••^^7' 
 
 m this case tendered to the throwsters the amount 
 of their bill for throwing the particular silk. The 
 answer is doubtless to be found either in the New 
 Jersey Statute giving throwsters of silk a lien for 
 the value of their service or in a quasi-contractual 
 obligation based on the enhancement in value due to 
 the throwsters' service. 
 
 Factors' Act: It is, as we have said, the com- 
 mon law rule that a factor for sale cannot make a 
 valid pledge. This rule has, however, in New York 
 and Massachusetts been modified by factors' acts." 
 The decision last discussed should, therefore, have 
 been otherwise, had the case arisen under the law 
 of New York or of Massachusetts (or in England 
 where, however, the trust receipt is not in common 
 use although it is sometimes used under the name 
 of "Letter of Lien" or a similar title)." Unless, 
 therefore, a similar modification of the common law 
 rule is effected by some other piece of legislation— 
 a question which we shall immediately consider— 
 it may be said that the protection afforded by a trust 
 receipt is somewhat less in New York and Massa- 
 chusetts than in other states by reason of the fact 
 Aat the factors' acts in those two states uphold a 
 
 -See Bly,Unstein v. Nev, York 5?r. S^fr^ cV.; suPra. footnote IL 
 
 62 
 
 bona fide pledgee or mortgagee as against the banker 
 who holds the trust receipt, whereas in other states 
 such bona fide pledgee or mortgagee acquires no 
 rights as against the holder of the trust receipt. In 
 this connection, it will be recalled that we have 
 already referred to Ohio, Illinois and a few other 
 states, with special reference to the form and effect 
 of the recording acts in those states.^" 
 
 Uniform Conditional Sales Act: "§ 1. In 
 this Act 'Conditional Sale' means (1) any contract 
 for the sale of goods under which possession is de- 
 livered to the buyer and the property in the goods 
 is to vest in the buyer at a subsequent time upon the 
 payment of part or all of the price, or upon the 
 performance of any other condition or the happen- 
 ing of any contingency; or (2) any contract for the 
 bailment or leasing of goods by which the bailee or 
 lessee contracts to pay as compensation a sum sub- 
 stantially equivalent to the value of the goods, and 
 by which it is agreed that the bailee or lessee is bound 
 y to become, or has the option of becoming the owner 
 of such goods upon full compliance with the terms 
 of the contract." From what has already been said 
 about the trust receipt in relation to conditional 
 sales, it is clear that it does not come within the 
 
 \ 
 
 " But a promise by the signer of the trust receipt given to 
 another lender, to repay him out of the proceeds of trust receipt 
 property, is not enforceable as against the holder of the trust 
 receipt. Munroe v. Bonanno (1893) 31 Abb. N. C. 1, 28 N. Y. 
 Supp. 375. 
 
 63 
 
mti 
 
 I 
 
 If 
 
 "-Vj^l 
 
 iirst part of this definition. As to the second part, 
 the same is equally clear if it be noted that the pay- 
 ment must be "as compensation" for the goods. 
 This statute, therefore, has no bearing on trust re- 
 ceipts except as it may be adopted in a jurisdiction 
 like Connecticut which has judicially defined the 
 trust receipt as a conditional sale. As yet it has 
 not been adopted in any such jurisdiction. If it 
 should be so adopted, we may anticipate that the 
 court will find a way to bring its decisions regarding 
 trust receipts into line with the general current of 
 authority. 
 
 Uniform Bills of Lading Act : This has been 
 adopted in more than twenty jurisdictions. Among 
 its provisions are the following: 
 
 "§31. A negotiable bill may be negotiated by 
 any person in possession of the same, however such 
 possession may have been acquired if, by the terms 
 of the bill, the carrier undertakes to deliver the 
 goods to the order of such person, or if at the time 
 of negotiation, the bill is in such •£ orm that it may 
 be negotiated by delivery." ^® 
 
 "§32. A person to whom a negotiable bill has 
 been duly negotiated acquires thereby: (a) Such 
 title to the goods as the person negotiating the bill 
 to him had or had ability to convey to a purchaser 
 in good faith for value and also such title to the 
 
 "E. g., if it is endorsed in blank— see S 29. 
 
 64 
 
 goods as the consignee and consignor had or had 
 power to convey to a purchaser in good faith for 
 
 value. 
 
 "§53. . . . 'Purchaser' includes mortgagee 
 
 and pledgee. 'Value' is any consideration sufficient 
 to support a simple contract. An antecedent or 
 pre-existing obligation, whether for money or not, 
 constitutes value where a bill is taken either in 
 satisfaction thereof or as security therefor." " 
 
 This Act obviously accomplishes the results of 
 the factors' act in so far as bills of lading are con- 
 cerned in states which hitherto have had no factors' 
 act. It would not, however, had it been the law 
 in New Jersey at the time, have affected the result 
 in Century Throwing Co. v. Muller,^^ since a bill 
 of lading was not involved in that case. It, how- 
 ever, goes farther than the factors' act by including 
 a pre-existing obligation as "value." The result 
 is that if a banker endorses and delivers a negotiable 
 bill of lading to the importer upon any sort of 
 y trust receipt, whether it be limited to an entry of 
 the goods in the custom house, to warehousing, or 
 whether it broadly gives the right to manufacture 
 and sell, he puts it in the power of the importer to 
 mortgage, pledge or sell the bill of lading or to 
 deliver it in payment of or as security for an exist- 
 
 " See also §S 38, 39. This definition of "value" has not been 
 adopted in New York in its enactment of the Bills of Lading Act 
 N". Y. Pers. Prop. Law § 239. 
 
 ^ Supra, footnote 9. 
 
 65 
 
■-m 
 
 t^ 
 
 ing obligation. He cannot recover it from any such 
 transferee in good faith. Obviously this consider- 
 ably impairs the security of the banker in dealing 
 with bills of lading.!® The banker can doubtless 
 still recover the bill of lading from the importer 
 or his receiver or trustee. The Act, of course, 
 ceases to be pertinent as soon as the bill of lading 
 is spent, as it does not affect transfers otherwise 
 than by means of the document. It also has no 
 effect in cases where non-negotiable bills of lading 
 are used. 
 
 Uniform Warehouse Receipts Act : This Act 
 has been adopted in more than forty jurisdictions. 
 Its provisions are similar to those quoted above in 
 connection with the Bills of Lading Act, and its 
 definition of "value" is the same.^^ In fact, the 
 legal eflFect of these two statutes is to give to bills 
 of lading and warehouse receipts the quality of 
 negotiable instruments, which they have long pos- 
 sessed in practice to a much more limited extent. 
 This has the necessary effect of making the pos- 
 
 »See WiUiston, Sales (1909) 9 437; see also Roland M, Baker 
 Co. y Brown (1913) 214 Mass. 196, 100 N. E. 1025 In that cas7 
 
 S^thf M^r ^^'^%^°iS^5> indorsed and delivered the biU of lading 
 to the Massadiusetts Hide Co. against a trust receipt. That con- 
 cern wrongfully transferred the biU of lading to the Columbia Co 
 tn payment of an existing obligation. The Columbia Co. "ctcd in 
 good faith. It later transferred the biU of lading to the plaintiff 
 S^ tr««f' '"^-^ ^^J*''* had knowledge of defendlnt's claim 1Sd«? 
 ?,?! tSfl ""tr^ ^?!, ^'^^^r H^^ *^^*» ^» ^^^ Columbia Co. obtSnS 
 u i!J*l^t! t^c^Jmowledge of the plaintiff was not material and h 
 
 St tenk^r."*^'' ""^ '^"^ ^^""'^ *^ ^" ^^^ ^« agai^t the drfld! 
 * Sec 55* 37-43, 47, 48, 58. 
 
 66 
 
 V 
 
 session of the document, when combined with its 
 form and apparent ownership, the all-important 
 fact. It is now possible for a dishonest bailee of 
 goods represented by these negotiable documents 
 of title, to cause injuries to his principal or bailor 
 by negotiating the documents when he could not 
 cause such injury by the delivery of the goods 
 themselves. The documents may be transferred ef- 
 fectively in ways that would be quite ineffective if 
 employed with reference to the goods themselves. 
 The documents are, therefore, more than mere 
 representatives of the goods. For example, in New 
 York a factor cannot pledge the goods themselves as 
 security for an antecedent obligation, but he can do 
 so if he delivers a negotiable warehouse receipt 
 therefor which is regular on its face. On the other 
 hand, a thief cannot, by obtaining a bill of lading 
 or warehouse receipt for the stolen goods, thereby 
 enable an honest purchaser to retain them as against 
 the true owner.^^ 
 
 An interesting decision in connection with this 
 statute is In re Richheimer,^^ already referred to in 
 connection with the recording acts. Imported 
 coffee was delivered tmder a trust receipt. The 
 
 » Commercial Bank v. Canal Bank (1916) 239 U. S. 520, 525-26, 
 36 Sup. Ct. 194, infra; Mechanics & T. Bk. v. F. 6* M. Bk, (1875) 
 60 N. Y. 40; Farmers & M. Bk. v. Atkinson (1878) 74 N. Y. 587; 
 Hentg V. Miller (1883) 94 N. Y. 65; Thacher v. Moors (1883) 134 
 Mass. 156; Soltau v. Gerdau (1890) 119 N. Y. 380; Williston, op. 
 cit. 5 421. 
 
 « (C. C. A. 1915) 221 Fed. 16. 
 
 67 
 
 
mimM 
 
 ' \i. • -^ ■-; 
 
 11 
 
 
 importer placed most of it in warehouse and pledged 
 the negotiable warehouse receipts as security for 
 present loans. There is no factors' act in Illinois 
 where the case arose. The court decided against 
 the banker holding the trust receipt. The decision 
 appears to rest as to a large part of the goods upon 
 the Warehouse Receipts Act. If so, the question 
 arises whether the importer was authorized to place 
 the coffee in warehouse and to take negotiable re- 
 ceipts therefor and whether by so doing he could 
 put the banker in a worse position than he occupied 
 when he delivered the goods. But further examin- 
 ation indicates that the Warehouse Receipts Act 
 was not necessary to the decision. It appears that 
 seven bags of coffee were still in the importer's 
 hands against which no warehouse receipt had been 
 issued. The court refused to return these to the 
 banker, and held that the trust receipt was invalid 
 in Illinois as being contrary to its public policy 
 and the Recording Act. This is the key to the 
 decision. It follows that the banker could not re- 
 cover any of the coffee and consequently that the 
 taking of the warehouse receipts and the pledge of 
 these documents did him no additional injury. He 
 could not have recovered the coffee, even if it had 
 remained in the hands of the importer. The ques- 
 tion of the importer's authority to warehouse the 
 goods and to take negotiable warehouse receipts to 
 
 68 
 
 his own order, therefore, is not necessarily answered 
 by this decision.^* 
 
 Another important decision is Commercial Bank 
 v. Canal Bank,^^ reversing In re DreuU & Co}^ 
 In this case, the bankrupt having already received 
 bills of lading, pledged them to the Canal Bank. 
 In Louisiana a pledge carries title ; the transaction, 
 therefore, amounted to a chattel mortgage. It 
 should be noted at the outset that the facts are 
 not such as lay the foundation for the distinctive 
 doctrine of the trust receipt under principles al- 
 ready pointed out, since the title did not pass to 
 the bank from a third person but directly from tKe 
 debtor. This fact was not apparently noted by 
 the court. The Canal Bank, however, returned the 
 bills of lading against a trust receipt giving power 
 of sale and also power to warehouse the goods. 
 The bankrupt then warehoused the goods (cotton) 
 after having had it picked, and took negotiable 
 warehouse receipts to its own order which it pledged 
 to the Commercial Bank. It later again withdrew 
 the warehouse receipts against a similar trust receipt. 
 It then withdrew the goods which, upon the bank- 
 ruptcy, passed into the possession of the trustee. 
 The question is not whether the trustee can retain 
 
 \ 
 
 ^The trust receipt in this case was delivered in Louisiana and 
 the bankers contended that the transaction was governed by the 
 law of that state. See Mershon v. Moors (ia90) 76 Wis. 502, 45 
 N. W. 95. The court, however, rejected this contention. 
 
 ** Supra, footnote 21. 
 
 * (C. C. A. 1914) 211 Fed. 337; (D. C. 1913) 205 Fed. 568. 
 
 69 
 
rtMM 
 
 ifeta 
 
 the property as part of the estate,— the court con- 
 cedes that he cannot,— (that in Louisiana the holder 
 of a trust receipt would be protected as against the 
 trustee in bankruptcy seems to be settled by In re 
 Dreuil & Co.y^ it is rather as to which bank is 
 entitled thereto.^^ 
 
 It is clear that had the bankrupt re-pledged the 
 bills of lading to the Commercial Bank after re- 
 ceiving them against a trust receipt from the Canal 
 Bank, the former would have been protected. The 
 court found that the bankrupt was authorized by 
 the Canal Bank to take negotiable warehouse re- 
 ceipts for the goods which it would hold subject to 
 the same obligations which covered the bills of 
 lading and that, while the negotiation of these re- 
 ceipts constituted a wrong on the part of the bank- 
 rupt toward the Canal Bank, nevertheless, the bona 
 fide pledgee (the Commercial Bank) acquired there- 
 by a valid title in accordance with the provisions of 
 the Warehouse Receipts Act. It, therefore, awarded 
 possession of the goods to the second pledgee. This 
 conclusion is inevitable from the facts found and 
 is the same as would have resulted had the bills 
 
 ^T^^^^^' footnote 25; see The Trust Receipt as Security I fl922^ 
 ^^ti^TU^^'J^'tJ^^'^ ^r i^^* t^^^ P' ^ discussion of this case! ^ 
 ,vr ^/^"'l ^°u^ farther than is necessary on this point beine 
 nfluenced either by. the admission of the trustee or the fact that 
 m Louisiana an ordinary chattel mortgagee (pledgee) would under 
 even these circumstances, be protected The thilt receipt easel 
 
 ncS U^'^'in'thf^ *^.l^' ??^r *""?J 'r^^^' situation which dM 
 .^J V * .* r ?^*^- J-^' ^* ^^ ^^^^ D ember g & Sons, Inc 
 
 70 
 
 of lading themselves been re-pledged. The lower 
 court appears to have decided otherwise upon the 
 ground that the bankrupt had no authority to take 
 a negotiable warehouse receipt to his own order. 
 A careful reading of the agreement involved seems 
 to leave it open to question whether it was not the 
 duty of the bankrupt to store the goods in the name 
 of the Canal Bank and consequently whether the 
 Supreme Court was correct in finding that the 
 taking of negotiable warehouse receipts to the order 
 of the bankrupt was authorized. The agreement 
 made it the duty of the bankrupt to deliver any 
 warehouse receipt to the bank within one day after 
 receipt and apparently limited its right to the re- 
 ceipt of any document of title "for account of the 
 said bank." If the trust receipt had expressly 
 provided that any warehouse receipts should be 
 taken in the name of the bank, the case before the 
 Supreme Court would have presented a different 
 question, namely, the one which we have already 
 raised. 
 
 Let us look at it from the standpoint of principle. 
 Suppose, in a proper trust receipt case, the goods 
 themselves are delivered to the importer with power 
 to sell to a named buyer, who is represented as being 
 ready at once to take under a contract already made. 
 In this case, a warehousing would seem to be out- 
 side the contemplation of the parties. The taking 
 of a negotiable warehouse receipt to the order of 
 
 71 
 
^■rifa 
 
 J&i 
 
 i^ 
 
 pi 
 
 '. if 
 
 I 
 
 the importer would, therefore, seem to amount to 
 a conversion of the property. The result should 
 be that a pledgee of such warehouse receipt would 
 not acquire any greater rights by reason of receiv- 
 ing such document than he would have acquired by 
 the pledge of the goods themselves.^® 
 
 If, on the other hand, the trust receipt gave mere- 
 ly the power to sell generally, it might be argued 
 that in the meantime storage must be contemplated 
 as a reasonable incident. Even so, it is not at all 
 necessary that a negotiable warehouse receipt should 
 be obtained and, in view of the fact that the risks 
 of the bank are increased by the issue of such a 
 document, it would seem improper for the importer 
 to do so without the express consent of the banker. 
 The same may be said of a trust receipt giving ex- 
 press power to warehouse. In view, however, of 
 the opinion last commented upon, it seems probable 
 that when the question is squarely presented, the 
 holding will be that, if the power to warehouse is 
 expressed or implied, the taking of a negotiable re- 
 ceipt in the name of the importer will not be held / 
 to be a breach of duty on his part. The conse- 
 quence will be, as decided by the Supreme Court, 
 that a bona fide pledgee or mortgagee of this ware- 
 house receipt, whether for a present or past con- 
 sideration, will acquire a good title. A purchaser 
 as such will, of course, be protected. 
 
 * See Mechanics & T. Bk. v. F, & M. Bk., supra, footnote 21. 
 
 72 ; 
 
 i 
 
 \ 
 
 For the protection of the banker, therefore, the 
 trust receipt should, in view of the Warehouse Re- 
 ceipts Act and this decision, contain an express 
 provision that in case of warehousing, all receipts 
 must be issued in the name of and immediately 
 delivered to the banker or his agent. If this is in- 
 convenient, it should at least be provided that only 
 non-negotiable receipts be taken by the importer. 
 These provisions will not, of course, afford any 
 protection as against the factors' act ; but, apart from 
 that act, it would seem that the taking of a nego- 
 tiable warehouse receipt by the importer in the face 
 of such a provision of the trust receipt would be 
 tortious and that a pledgee or mortgagee thereof 
 would fall without the scope and protection of the 
 Warehouse Receipts Act.^® 
 
 VI 
 
 The problem of identifying the goods or of trac- 
 ing their proceeds is an important and sometimes a 
 difficult one. In certain aspects, it is distinct from 
 the questions which we have already considered. It 
 might be argued since the property of the claimant 
 has gone to the general enrichment of the estate of 
 the holder, who has converted it, that the claimant 
 should be allowed an equivalent amount in prefer- 
 ence to general creditors. Such a view has at times 
 been taken in various jurisdictions, but is opposed 
 
 » Moors V. Kidder (1887) 106 N. Y. 32, 12 N. E. 818; Mechanics 
 & T. Bk. V. F. d M. Bk., supra, footnote 21. 
 
 73 
 

 t 
 
 to the great weight of authority.'" It is undoubted- 
 ly the general rule that the burden of tracing the 
 fund or property into the property claimed rests 
 with the beneficiary who claims it." It is obvi- 
 ously impossible to consider the problem of tracing 
 the goods in every form in which that question 
 may be raised. We will, however, consider a num- 
 ber of hypothetical situations. 
 
 (a) The question often arises with respect to 
 the proceeds of property sold under the power of 
 sale contained in the trust receipt. Suppose the 
 purchase price has not yet been collected from the 
 purchaser. This account receivable is clearly the 
 proceeds of the trust receipt property. The banker 
 may notify the buyer of his rights and collect such 
 account from the buyer, just as he could retake the 
 proceeds from the signer of the trust receipt. If 
 the buyer fails or refuses to recognize or protect 
 the banker's rights, he becomes directly liable to 
 him for any loss caused thereby.'^ A buyer, how- 
 ever, who purchases from a signer of a trust receipt 
 will be protected if he has paid the purch ase money ' 
 
 7ir;^"so*rCyrsiS i^sZ ''""•"'» ^''- C- ^'02) 116 Fed. 715. 
 «^?^*>^^'^ V. Ballou (1885) 114 U S ioa c c„^ r** o^a 
 
 (1874) 57 N. Y. 34- FirrtNJ Rb / ? L'^ CtHnnnati v. Kelly 
 
 Banking Co. (19 1) 108 mJ. 79 7^ V^^ tITi \ ^"'^'T^- ^''- * 
 ing because it was thiit W(\i 1.1- \ ^?* '*** =*«e is interest- 
 
 not app^r to hive Wn f-,"'^"^^ ^t?""" mortgage which d(is 
 made no claims trtheornoiH?"'''!^:,. ^'" *"«»«« "^ bankrupt^ 
 had done so it woSd "y^m t1,,f h*?' °«'J]iR¥'^ property. If ^ 
 under principles* a^dTnth'^ieJ'lU^d/^fiss'r '"" "^"^'"^ 
 
 74 
 
 
 to him.'^ This account receivable may, however, 
 have been pledged, mortgaged or assigned by the 
 signer of the trust receipt. Such a pledge or mort- 
 gage of a chose in action is not subject to the record- 
 ing acts. It is not, however, within the protection 
 of the factors* act and it is the general rule that 
 the assignee of a chose in action takes subject to 
 all existing equities. Since the signer of the trust 
 receipt was a trustee of this account for the benefit 
 of the holder of the trust receipt, the pledgee, 
 mortgagee or assignee of the account would fail in a 
 claim thereto as against the holder of the trust 
 receipt. 
 
 (b) Suppose the signer of the trust receipt has 
 collected the purchase price and instead of immedi- 
 ately delivering it to the banker, has deposited it 
 in his own bank account,** in which he continues to 
 make deposits and from which he pays out by check 
 or otherwise. Obviously, the identity of the money 
 is lost. Nor is it exactly like a mingling of fungible 
 goods, for the depository owes a debt therefor in- 
 > stead of holding a sum of money belonging to the 
 depositor. Nevertheless, it has a certain resem- 
 blance to a mingling of fungible goods. Any rules 
 regarding the identity of the funds used from time 
 to time are largely arbitrary — mere presumptions. 
 They are, nevertheless, well recognized. What is 
 
 ** Brown Bros, & Co, v. WUliam Clark Co, (1900) 22 R. I. 36. 
 46 Atl. 239. 
 
 ^English Bank v. Barr (N. Y. 1888) 31 Abb. N. C. 7. 
 
 ^ 75 
 
'>- 
 
 ^- 
 
 I 'I 
 
 known as the rule in Clayton's Case ^^ holds that in 
 an ordinary bank account, money is presumed to 
 have been withdrawn in the order in which it was 
 deposited. This, however, is held not to apply to a 
 case where a fiduciary or trustee has mingled his 
 own funds with funds belonging to the trust estate. 
 He can hardly be heard to say that he has wrong- 
 fully used trust funds so long as his own funds 
 were equally available. It is consequently the rule 
 in such cases that he is presumed to have used his 
 own funds in preference to trust funds.«*» This is 
 the rule with respect to the proceeds of trust receipt 
 property.^^ 
 
 (c) Suppose, however, the signer of the trust 
 receipt has also deposited in the bank account the 
 proceeds of other goods covered by trust receipts 
 held by other parties and has withdrawn so much 
 of the deposit that insufficient remains to satisfy 
 the claims of all holders of trust receipts. It is 
 obviously unfair to say that he shall be presumed 
 to have withdrawn the property of one trust re- 
 ceipt holder in preference to that of another. Two 
 courses are possible— either to divide the fund pro- ' 
 portionately, or according to the rule in Clayton's 
 Cuse}^ A proportionate division seems more just; 
 but this presupposes the possibility of determining 
 
 i 
 
 "(1816) 1 Men 572. 
 
 w f** ''^ ^?^\^'^ ^^^^ (1S79) 13 Ch. Div. 696. 
 "i« re MuUtgan, supra, footnote 30. 
 "/» re Mulligan, supra, footnote 30. 
 
 76 
 
 the proportions, which in turn requires the determi- 
 nation of the amounts belonging to each holder of 
 trust receipts which have gone into the fund. This 
 is sometimes impossible. No definite rule has as yet 
 been adopted covering this situation.®^ But the ten- 
 dency is to support a proportionate distribution. 
 The rule of Clayton's Case rests upon a mere pre- 
 sumption which is highly unsatisfactory in the cir- 
 ^ cumstances. It is unfair to presume that there was 
 an intention of wronging one beneficiary rather than 
 the other. The only reasonable view is that the 
 wrong should be taken to have been inflicted ratably 
 on each and that any unconverted balance should 
 be turned over to them in proportion to their origin- 
 al interests.* 
 
 (d) Suppose the balance of the account is 
 claimed by the bank in which it is deposited, in 
 whole or in part, under a lien created either by con- 
 tract or by what is known as a banker's lien, which 
 is really a right of set-off. If the bank has already 
 X applied any portion of the deposit toward the pay- 
 ment of a claim which is due without knowledge 
 of the claim of the holder of the trust receipt, it 
 has been held that such application is equivalent to 
 a payment by the depositor out of the f und.*^ The 
 
 ^ In re Mulligan, supra, footnote 30; Litchfield v. Ballou, supra, 
 footnote 31. 
 
 ^Meyers v. New York Co. Nai. Bk, (1899) 36 App. Div. 482, 
 55 N. Y. Supp. 504; London & River Plate Bk. v. Hanover Nat. 
 Bk, (1899) 36 App. Div. 487, 55 N. Y. Supp. 941. This was a 
 trust receipt case, although that fact docs not appear from the 
 decision. School District v. First Nat. Bk. (1869) 102 Mass. 174. 
 ^ * An interesting note on this point will be found in 23 Columbia 
 Law Review, p. 567. 
 
 77 
 
I) 
 
 1 
 
 t 
 
 J f 
 
 IJ j 
 
 ii i 
 
 general banker's lien applies only to accounts which 
 are already due and payable.*^ It is held further 
 that a depositor may by contract give the bank a lien 
 upon the deposit for the pa3mient of obligations not 
 yet due,*^ and that an application by the bank when 
 any such obligation is due is equivalent to payment 
 by the depositor. Whether such lien is effective 
 as against the holder of the trust receipt before 
 application is actually made is another question. It 
 should apparently be determined on the analogy of 
 rules relating to collateral security. As to obliga- 
 tions incurred coincident with or subsequent to the 
 deposit, and in reliance thereon, it should every- 
 where be held that the lien of the bank is superior 
 to the rights of the holder of the trust receipt. 
 Where, however, the lien is claimed as security for 
 an existing obligation, it should prevail as against 
 a holder of a trust receipt only if a pledge of the 
 goods themselves as security for a past obligation 
 (whether as yet due or not) would be upheld.*' 
 
 Where, however, the deposit is made with knowl- 
 edge on the part of the bank that the money in fact 
 belongs to the holder of a trust receipt, it should 
 be treated as a special deposit, since in that case 
 the bank is not a bona fide taker.** 
 
 ^Jordan v. National Shoe & Leather Bk, (1878) 74 N. Y. 467. 
 
 ^Meyers v. New York Co. Nat, Bk., supra, footnote 40; Hatch 
 V. National Bk. (1895) 147 N. Y. 184, 41 N. E. 403. 
 
 ^Drexel v. Pease (1892) 133 N. Y. 129, 30 N. E. 732. 
 
 ^Lowery v. Steward (1862) 25 N. Y. 239; Heidetbach v. National 
 Park Bk, (1895) 87 Hun 117. 33 N. Y. Supp. 794. The signer of 
 
 78 
 
 If knowledge of the rights of the holder of the 
 trust receipt came to the bank at a time subsequent 
 to the deposit where it is already claiming its lien 
 under proper circumstances, the acquisition of such 
 knowledge cannot impair its rights, since its 
 equitable position has already been established.** 
 It would be unsafe, however, to say with respect to 
 the position of the bank that the right to make ap- 
 plication of the deposit to the payment of a debt is 
 ^ in law equivalent to its having made such applica- 
 tion in fact. For example — application is payment 
 and the bank may retain the funds actually received 
 in payment as against a cestui que trust of whose 
 interest it was ignorant. But, prior to application, 
 the bank is in the position of a holder of security 
 and if such security was given for an existing debt, 
 the bank cannot retain it as against the cestui que 
 trust after notice of his right, nor can it thereafter 
 make application (f. e., take payment) out of such 
 trust funds. In other words, actual application 
 ends the matter, but prior to such application, notice 
 received of the rights of third persons may, in cer- 
 tain circumstances, deprive the bank of its right to 
 make application. 
 
 the trust receipt who has received the money proceeds of a sale 
 fPP^ars to be a genuine trustee of such money for the benefit of 
 the holder of the trust receipt and the principles relating to tracing 
 trust funds are entirely applicable to the situation. First Nat, Bk. 
 of Auburn v. Eastern Tr. & Banking Co., supra, footnote 32. 
 
 **See, however, Meyers v. New York Co, Nat. Bk., supra, foot- 
 «ote 40, p. 485. 
 
 79 
 
 Tf" 
 
I* 
 
 K 
 
 I 
 
 (e) Suppose, now, that the proceeds of trust 
 receipt property have been invested by the signer 
 of the trust receipt in other property. Undoubted- 
 ly such proceeds may be retaken by the holder of 
 the trust receipt, provided they can be traced and 
 identified and no superior equities have intervened. 
 The problem, however, often presents great practic- 
 al difficulties, as appears from the case of In re Mid- 
 ligan.^^ The proceeds of trust receipt property to 
 the extent of $4,000 were paid to stockbrokers for 
 the credit of the signer of the trust receipt in a 
 current and running account, apparently involving 
 frequent transactions. Later the customer became 
 bankrupt and, after paying off the claim of the 
 broker, the securities remaining were found to have 
 a value of $1,100. This was claimed as the pro- 
 ceeds of the trust receipt property. There was no 
 evidence as to the state of the account between 
 the time when the $4,000 was paid in and the end. 
 Consequently, if the analogy of a bank account and 
 the rule of Hdlett's case*^ had been applied, the. 
 claimant would have failed for want of proof. The 
 court, however, expressed the view rather strongly 
 that this principle did not apply in cases other than 
 bank accounts. "The priority . . . which has 
 sometimes been given to the cestui in the applica- 
 tion of the cash assets of a bank which has mingled 
 
 ^ Supra, footnote 37. 
 ^ Supra, footnote 36. 
 
 the trust fund with its own funds, whether de- 
 fensible or not, is limited to the case of the cash 
 assets of a bank, and is not extended to other kinds 
 of defaulting trustees or to other assets of the 
 bank. . . . This is not the case of a bank 
 account, which, as has been said, is affected by a 
 rather artificial rule." *® 
 
 So far as the estate of the signer of the trust re- 
 ceipt is concerned, this is doubtless sound. Any 
 ^ other rule would result in giving to the holder of the 
 trust receipt in effect a priority out of the general 
 assets without regard to the identification of the 
 property or its proceeds.^® If, however, the signer 
 of the trust receipt had, for example, received cash 
 in payment and had placed this in his cash box, and 
 if it were shown that from that time there had 
 always been at least that amount in the cash box, 
 would it not be reasonable to apply the analogy of 
 the bank account to the case and to deliver the 
 amount to the holder of the trust receipt? Or, if 
 the contents of the cash box had at times fallen be- 
 ^low the sum, would it not be fair to say that the 
 trust fund had been depleted only in part and that 
 the holder of the trust receipt was entitled to the 
 balance? In such cases, the rule of Hailetfs case 
 is equitable and there seems no reason for restricting 
 its operation to banks or bank accounts. 
 
 I 
 
 80 
 
 \ 
 
 ^ Supra, footnote 37, p. 719. 
 
 ^ In re K. Marks & Co., supra, footnote 8. 
 
 81 
 
 lAl 
 
 
>/r 4^. 
 
 
 n 
 
 I 
 
 (f) Suppose that the signer of the trust receipt 
 has altered the form, appearance or value of the 
 property by the application of labor, but without 
 the addition of any other materials. This situation 
 existed in the case of In re Dreuil & Co.,'" where 
 100 bales of cotton were put through a "pickery" 
 and turned into 150 bales of cotton. There can be 
 no doubt that the holder of the trust receipt retains 
 his rights in the goods as long as they can be iden- 
 tified and that labor spent upon them by the signer 
 of the trust receipt is without effect of any sort in 
 the way of impairing the r^hts of the holder of the 
 trust receipt, whether the labor results in an in- 
 crease or decrease of value. Qn the other hand, if 
 an outsider is employed to do the work, he may in 
 many cases obtain a superior lien upon the goods 
 for the value of his services." 
 
 (g) Suppose that the goods are altered in form, 
 appearance or value, by the addition of other 
 materials as well as by labor. This is the most 
 common form of manufacture. In so far as the 
 added materials come from the property of the 
 signer of the trust receipt, they are mere accretions 
 and the resultant product, if identifiable, is still the 
 property of the holder of the trust receipt. If such 
 new material and labor are supplied by an outsider, 
 
 — Supra, footnote 25. 
 
 82 
 
 \ 
 
 he may have a superior lien for their value, after 
 the satisfaction of which the holder of the trust re- 
 ceipt may reclaim the goods in their manufactured 
 state." 
 
 (h) Suppose the manufactured product is com- 
 posed of material obtained against a trust receipt, 
 held by A, and of other material obtained against 
 a trust receipt held by B, combined with labor sup- 
 plied by the signer of the trust receipt. It would 
 seem to be clear that A and B are co-owners (not 
 joint owners) of the product and that they may 
 divide the product between them in proportion as 
 their respective goods have gone into this resultant. 
 It may happen, however, that the contribution made 
 by one of tiiem cannot be ascertained satisfactorily 
 or is not capable of division.'* In that case, it would 
 seem to be impossible to allot any part to either of 
 them. This situation is analogous to that presented 
 by the second case covered by In re Mulligan.^^ It 
 may, however, sometimes be possible to allot a share 
 to A, based on his known contribution and upon a 
 computation of the maximum contribution conceiv- 
 able to have been made by B. 
 
 (i) Suppose the goods obtained under trust re- 
 ceipt are fungible and have been mixed with other 
 goods belonging to the signer of the trust receipt. 
 
 "* Brown v. Mcus, Hide Corp., supra, footnote 10. 
 ■•See Litchfield v. Ballon, supra, footnote 31. 
 ** Supra, footnote 37. 
 
 83 
 
 p--" 
 
 
 t:/ 
 
 rf.-s^sC>f; 
 

 I 
 
 V 
 
 m 
 
 \\ 
 
 May we not apply the analogy of a bank account 
 and hold that, as this mass has been consumed by 
 the signer of the trust receipt, he will be held to 
 have misappropriated the goods of the holder of the 
 trust receipt, only when and to the extent that such 
 a conclusion is made necessary by the facts? In 
 other words, may he not be presumed to have used 
 his own goods so long as he owned any share of 
 the combined mass? Such a rule commends itself 
 as equitable, but only to the extent that the use made 
 of the goods by the signer of the trust receipt has 
 been inconsistent with his obligations thereunder." 
 (j) Suppose fungible goods obtained from A 
 against trust receipt are mingled with similar goods 
 similarly obtained from B. They appear clearly to 
 be co-owners of the mass in proportion to their 
 respective contributions. The problem here seems 
 to be very similar to those considered under (c) and 
 (h).«« 
 
 A bond or insurance is sometimes taken to secure 
 the faithful performance of the obligations of the 
 signer of the trust receipt. It is hardly necessary to 
 remark that the assured must show a strict com- 
 pliance on his own part with the terms of the trust 
 receipt."^ 
 
 vV^S/'^nf'S^ ^f*' ^*- J- ^'J'H^^-**^ Q^17) 228 Mass. 152, 117 
 ^^,\^^'^P^^u^?^^^l\^V^ K^^r^.^ec. & Tr. Co., supra, footnote 
 
 N. £^^95 ^' ^^'^'^ ^^^^^^ ^^^ ^- ^- ^^^» 52 
 
 JJ See B/W^ijj^^n V. /\^«£; York Sec. & Tr. Co., supra, footnote 11. 
 
 84 
 
 < 
 
 A great part of the difficulty which bankers have 
 experienced in connection with trust receipts has 
 been due to the failure on the part of the banker 
 to follow the transaction or to make sure that the 
 signer of the trust receipt lives up to his part of the 
 arrangement. This, of course, involves trouble, but 
 so long as bankers are content to rely on the honesty 
 and good faith of their customers in this regard, 
 they can hardly expect to avoid substantial losses 
 through the failure of such customers to scrupu- 
 lously live up to such obligations. Such failure is 
 as often due to the fact that the customer does not 
 understand those obligations as it is to wilful wrong- 
 doing on his part. 
 
 VII 
 
 CONCLUSIONS. 
 
 (1) The only situation in which a trust receipt 
 may properly be used is one in which the title of 
 property by way of security is conveyed to the 
 ^creditor by an owner who is not the person respon- 
 sible for the satisfaction of the obligation which the 
 property secures* but where such obligor has a con- 
 tractual or beneficial interest in the property sub- 
 ject to the satisfaction of such obligation. The 
 creditor may then deliver the property to the obligor 
 who has hitherto had neither title thereto nor pos- 
 session thereof, against an appropriate trust receipt 
 
 * Quoted In re Cullen, 282 Fed. 902 (D. C. Md. 1922.) 
 
 85 
 
 , -".I 
 
 m 
 
 -.:^,. ■ «..i;. .—■!_, 
 
The rights of the creditor in the property will be 
 protected to the extent of the special trust receipt 
 doctrine. In practice, the trust receipt situation ex- 
 ists only in connection with advances for the pur- 
 chase of goods by way of the payment of drafts 
 against bill of lading. 
 
 (2) The trust receipt should never be used in 
 connection with the redelivery of property pledged 
 or mortgaged by the person signing the trust re- 
 ceipt. 
 
 (3) In the proper trust receipt situation, the 
 creditor, generally a bank or banker, has legal title 
 to the property for the purpose of security. This 
 creditor is a mortgagee and the arrangement is a 
 chattel mortgage, but of a peculiar type, distin- 
 guishable from the usual chattel mortgage by rea- 
 son of the fact that the obligor has not prior to the 
 arrangement had either title to or possession of the 
 property mortgaged. 
 
 (4) Except in Ohio, Illinois, and perhaps South ^ 
 Carolina and Virginia, cases so far decided hold that 
 the trust receipt does not come within the provisions 
 of the recording acts respecting chattel mortgages 
 or conditional sales. 
 
 (5) In New York and Massachusetts, where the 
 factors* act is in force, a bona fide mortgagee or 
 pledgee for present value obtains from the signer of 
 
 86 
 
 the trust receipt a right superior to the title of the 
 creditor who holds the trust receipt. 
 
 (6) The adoption of the Uniform Bills of Lad- 
 ing Act and the Warehouse Receipts Act by various 
 states has given to those instruments in large de- 
 gree the qualities of negotiable instruments. These 
 laws accomplish the results of the factors' act. In 
 those states which have adopted the definition of 
 "value" as recommended by the Committee on Uni- 
 form Legislation, an antecedent debt constitutes 
 value, and a bona fide purchaser, pledgee or mort- 
 gagee of such a document, regular on its face and 
 from one to whom it has been entrusted by the 
 holder of the trust receipt, obtains a title superior 
 to the rights of the holder of the trust receipt. 
 
 (7) If goods themselves are entrusted under 
 trust receipt, appropriate language should be used 
 to negative any presumption of right in the signer 
 to take negotiable warehouse receipts to his own 
 order. 
 
 (8) Except as noted in (4), property delivered 
 to the signer of a trust receipt under circumstances 
 suitable for the use of such an instrument may, if 
 identified, be retaken from the signer at any time 
 before the satisfaction of the obligation secured by 
 the property. It may also be retaken from his re- 
 ceiver, assignee, trustee in bankruptcy or an attach- 
 
 87 
 
 '♦I 
 
 >i 
 

 I 
 
 \i 
 
 
 
 ing creditor. Its proceeds may likewise be retaken, 
 provided they can be identified. 
 
 (9) The unpaid purchase price of property de- 
 livered to the signer against his trust receipt and by 
 him sold to a bona fide purchaser may be recovered 
 by the holder of the trust receipt directly from such 
 buyer. 
 
 (10) The property delivered in a proper case 
 against trust receipt may be recovered by the holder 
 of the trust receipt, prior to payment of the obliga- 
 tion secured thereby, from any person to whom the 
 signer has delivered the same, unless such right of 
 recovery is cut off by the exercise of a power of 
 sale, express or implied, or statutory provisions 
 which include a bona fide pledge or mortgage within 
 the scope of such power. 
 
 (11) The trust receipt cannot assure to the 
 holder thereof any rights beyond those which he 
 would have had as the holder of an unrecorded 
 chattel mortgage, an equitable pledge or mortgage, 
 or a simple contract, if it is used in any case other 
 than that which has been defined as a proper trust 
 receipt case. 
 
 (12) The benefit of the trust receipt doctrine is 
 not dependent upon any special virtue in the name 
 or the precise form or appearance of the agreement. 
 If the agreement can in substance be shown to have 
 
 been clearly made between the parties in a proper 
 case, the legal results will follow, even though re- 
 sort is had to the original credit agreement for the 
 purpose of establishing the existence of the security 
 arrangement. 
 
 Karl T. Frederick. 
 
 New York City, 
 
 ''f/ 
 
 *5 
 
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