(289 F.)

or less, in its hands, which it would have been entitled to treat as liquidated damages. None of these payments or deposits were ever made. From one standpoint, by the bankrupt's failure to make them, the government has been damaged approximately to the amount named; but is a demand for compensation for such failure, in any proper sense, one of the other claims specially reserved? The authorities are practically unanimous that, in such a contract as this, the taking back by the seller of the thing sold puts an end to that portion of the agreement which binds the other party to pay the purchase price and extinguishes any claim that the seller has against the buyer for any installments that have not been paid. Doubtless the parties may stipulate otherwise, and if they do, and their bargain is a reasonable one, the courts will enforce it. In view of the settled law, such an understanding will not be presumed, and must be proved, and that has not been done. On the contrary, the clear implication, from the terms of the agreements and the language in which they are couched, is that the parties purposed that until 50 per cent. of the purchase price was paid, the taking back of the ships should extinguish all obligations growing out of either the covenant of the buyer to pay the purchase money or the implied promise of the seller to return any installments of the price which it had received when its repossessing itself of the ships had extinguished the original consideration for them. It follows that the government had no claim against the bankrupt for any part of the purchase money of the ships or for hire of them.

The result after all may not be unfair. The bankrupt kept the government's ships insured for the latter's protection at a cost of about a half a million. All the vessels were kept both in operation and in repair without charge to the seller, and when they were taken back they were doubtless in far better condition than they would have been, had they remained at their docks. $195,469 was actually received by the government from the bankrupt, which had the use of the ships for an average period of about 21 months. The United States therefore got for them $93,000 a month, or something over 17 cents a dead weight ton. The evidence of the value of them for chartering purposes was conflicting, but I am inclined to think that, if they had been demised on the bare boat basis, with the charterers assuming all the expense of insuring and maintaining them in good condition, 17 cents. would have been quite as much as the government would have been able to get for them.

The government may have left the ships with the bankrupt too long, but that was its affair. It could have taken them back a year earlier, if it wished. When it decided it wanted to do so, it could have instituted a proceeding in equity, in which it could have had the ships sold and obtained a decree against the bankrupt for the balance of the purchase money. It made up its mind to take them back in the quickest way, and not to waste any time for the purpose of increasing its claim against an estate in which there was no probability that there would be any assets of great value. The choice it made was doubtless wise.

[5] As already stated, at the time the United States took possession of the ships, the bankrupt had in its possession a few thousand dol

lars, which the lending companies, or rather one of them, says belonged to it, because it claims to have shown the money came from freights which had been assigned to it. There are other freights which have been collected since the seizure and the filing of the petition in bankruptcy. These, or most of them, the bankrupt had previously assigned to one or the other of the lending companies. Some of them had been completely earned before the vessels were seized; others had not been. The lending companies concede that the United States is entitled to be reimbursed out of the latter for such expenditures as it was necessary for it to make in earning them. There are still due and uncollected freight bills to the amount of a number of thousands of dollars. Some of these belong to one and some to the other of the classes above mentioned. There is very little room for difference of opinion as to the freights upon such portions of the cargoes of any of the ships as had not been completely delivered at the time the government repossessed itself of the ships. The agreements of sale under which it took possession of the vessels long antedated the assignments upon which the companies rely, and there is no room for question that under such circumstances, when the government took the ships, it became entitled to all freights not then completely earned. Merchants' Banking Co., Limited, v. Cargo of the Afton, 134 Fed. 727, 67 C. C. A. 618. The subject is there fully examined and many of the English cases, which lay down this rule unqualifiedly, are cited and approved.

An examination of the authorities there relied on, and of others as well, shows that there is really no question about the rule. Shillito v. Biggert, 9 Aspinall's Maritime Cases, 396; Brown v. Tanner, Law Reports 3 Chancery Appeal Cases, 597; Dobbyn v. H. Comerford, 10 Irish Chancery Reports, 327; Pelayo v. Fox, 9 Pa. 489. Most of the above cases were those in which mortgagees had taken possession of the mortgaged ships. Others were where the owner of a chartered vessel had done the like. In the instant case, the bankrupt was an agreed purchaser in possession. It had no title to the ships, and that the lending companies knew. With that knowledge, it makes very little difference whether they ever took the trouble to inquire as to what the precise terms of the contract of sale were. They did know perfectly well the general financial condition of the bankrupt, and they must be held to have known, as of course they did, that the government had reserved the right to repossess itself of the ships, if the terms of its agreements with the bankrupt were not performed. When they accepted assignments and made advances upon them, they knew what the law was, and they took the chance of collecting the freights before the government repossessed itself of the ships.

[6] If the government's claim to the freights which were completely earned before it retook the vessels is to be sustained, it must be upon other considerations. The contentions made in argument on its behalf, that the right to freight is so inseparably bound up with the ship that a transfer of ownership of the latter automatically transfers the right to the former which was still uncollected, although it was earned before the transfer took effect, is in conflict with practically all the authorities. There is no doubt that freights may be assigned.

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independently of the ship. That was settled nearly 90 years ago. Leslie v. Guthrie, Law Journal, New Series, 4 C. P. 227. When such an assignment has been made, an assignee of the freights from the mortgagee is entitled to such freights as are earned while the mortgagee is in possession. Merchants' Banking Co., Ltd., v. Cargo of the Afton,

supra.

[7] The government replies that, if it be true that the freights may be mortgaged or assigned by way of mortgage apart from the ship, there is nothing to prevent such assignment or mortgage being made with the ship and to the same person. All that is required is that the language of the agreement between the parties shall show clearly that such was their purpose. It says that in the instant case that was precisely what was done. By the terms of the contract between the government and the bankrupt, the former retained title, not only in the ships, but in their earnings as well. These latter were all to be deposited in a special account. It is true that, until the government chose to take over the account, the bankrupt was vested with authority to draw checks against it, provided they were for certain definitely limited purposes. The agreements between the government and the bankrupt antedated the assignments under which the lending companies claim, so that the rights of the latter are junior to those of the United States. The argument is forcible, and indeed conclusive, to the extent, if any, to which the government can show a diversion or misapplication of the funds in which the contracts give it rights. There was a separate contract for each ship, and each of these authorized the bankrupt out of the deposits of the earnings of the ship to make bona fide disbursements incurred in the operation of that particular vessel. With the knowledge of the Shipping Board, and without any objection on its part,. earnings from all the ships were deposited in a single account and payments on account of any of the ships were made out of it.

This way of dealing with the earnings was convenient and could not in itself have altered anything of real importance, but there were other departures from the letter of the agreements of which not so much can be said. The consolidated deposit was drawn upon for the general expenses of the bankrupt, such as the salaries of its officials and other shore employees, the cost of the upkeep of its offices, interest on the money it borrowed, and indeed for every expenditure the bankrupt had to make for it, was destitute of any other source of income of any moment. It goes without saying that there might well be question as to whether some of these outlays could be included in the description of "bona fide disbursements incurred in the operation of the vessel" or vessels. The agreements required that the bankrupt should give bond, with surety, that it would make the deposits as stipulated. When it asked a bonding company to write such obligation, the latter wanted an authoritative interpretation of what was meant by the phrase "bona fide disbursements incurred in the operation of the vessel." The bankrupt thereupon put the question up to the assistant counsel of the Shipping Board, and he in turn submitted it to the board's general comptroller, who on November 25, 1920, some months before some of the agreements were executed, gave a written answer in which he said:

"That the disbursements first to be paid out of the operating funds shall be the ordinary operating expenses of the vessels, such as wages of officers and crew, supplies, fuel, food, pilotage, towage, wharfage, loading and unloading expenses, agency fees and commissions, insurance premiums, maintenance, repairs, as well as brokerage, for obtaining freights and any other expenses incidental to securing cargo or operation of the vessel. The bona fide disbursements shall also include the ordinary and incidental expenses of conducting the business, such as office rental, supplies, salaries (clerical), ordinary salaries of officers, interest on money borrowed, and any other ordinary expenses pertaining directly to the operation of the vessel secured under this agreement."

It does not appear that anything paid out of this fund was not included within the definition above given, except quite possibly the larger part of the interest or so-called service charge exacted by the credit companies. This amounted for the Commercial to about 20 per cent.; for the International, to 1814 per cent. As, however, there is not the slightest chance of either of these companies collecting even the principal which they advanced, the question of whether they would be entitled to the excess interest is of no moment in this case. It does not, therefore, appear that any of the funds once deposited by the bankrupt were misapplied. It is unquestionably true, however, that much money which the agreements contemplated should have gone into this deposit never did. When checks were received for any freights which had been assigned to the Commercial, they were by the bankrupt frequently, probably usually, turned over to the Commercial without going through the bankrupt's bank. No such method of business wast contemplated by the agreements, but it does not appear that the government was injured by it. The money which the Commercial advanced upon the security of the assigned freights was used by the bankrupt for the disbursements authorized by the Shipping Board's general controller to be paid out of the special fund. The aggregate of these advances will exceed the amount which upon any theory the Commercial can possibly get back, so that the government has not lost and will not lose anything because some of the freight checks did not pass through this special account.

The United States, however, contends that it is entitled to freight earned before it repossessed itself of the vessels, but at that time still unpaid. It says that as these moneys were earned before the seizure, they were also payable before that time, and should have been then in the special deposit, in which case the government would have been entitled to take them over. It argues that the mere accident that the persons who owed them did not pay them as promptly as they should have done cannot change the rights of the parties, and that the amounts of these bills must be treated as if they had been at the time of the seizure of the ships in the fund, and, if so, they belonged to the United States. Some of the assumptions upon which this reasoning rests do not appear to be in accord with the facts or with the established course of business, at least so far as concerns the transactions in which the Commercial was interested. The money, if collected, would not have been deposited in that account because funds of an equal amount advanced by the Commercial on the faith of the assignment of the freights had already gone through that account, and had been used

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in the way the agreement between the government and the bankrupt contemplated it should be. Moreover, the agreements specifically provided that all these disbursements should take precedence over those which were to be made to the government out of the ship's earnings. If the special deposit is to be regarded as a trust fund, as the government contends, would not the unpaid bills for the operation of the ships be the first charge upon it? Nor does the letter of the agreement upon which the government relies support its contention. It is there said that the moneys derived from the operation of the vessel shall be deposited "as received." Among the items to which the government is to be entitled as part of its liquidated damages was "any balance remaining in" the trust fund.

If these more or less technical contentions and answers be put to one side, it is doubtless true that the method by which the bankrupt, with the assistance of the lending companies, financed itself, was in substance very different from that which the agreements contemplated. Instead of the bankrupt collecting its freights and paying its expenses out of them, it was always behindhand. It had sold its freights before they were earned, and was habitually forced to use the money received from their sale to pay obligations of earlier voyages. It is quite possible to believe that in the end the government would have been far better off if the bankrupt had not been forced to live in this hand to mouth fashion. But the lending companies were not in any sense responsible for the fact that the bankrupt began life without any working capital. The government, before it entered into any contract relations with the bankrupt, could and doubtless did inform itself as to the latter's financial condition. It is affirmatively shown that the Shipping Board was later advised that the bankrupt was borrowing money from lending companies and at rates which were described as ruinous. It did not, upon receiving this information, nor for months afterwards, feel that it should avail itself of the bankrupt's then existing defaults to repossess itself of the ships, nor did it exercise its power of taking over the control of the bank account in which the bankrupt deposited its earnings. Under the circumstances, it does not seem that the government is now entitled to say that the lending companies are to blame, because they did not, by withholding advances, compel the bankrupt to shut down its business.

It follows that the lending companies, who before bankruptcy obtained assignments of freights in circumstances under which they would not be voidable under the Bankruptcy Act, have a better title than the government to them, provided that, before the government took back the ships, the bankrupt had completely earned them by the delivery of the cargo from which they arose. The trustee in bankruptcy cannot attack the assignments unless they constitute voidable preferences. Greey v. Dockendorff, 231 U. S. 513, 34 Sup. Ct. 166, 58 L. Ed. 339. Each assignment of freight to the Commercial was for a present consideration, and therefore was not preferential.

The situation of the International differs in important respects. The bankrupt persuaded it that an assignment of the uncollected westbound freights to an aggregate of $125,000 would be ample security for an advance of $100,000. The International lent that sum, and the