Story Case

The Southeastern Grocery Company was a partnership engaged in the wholesale grocery business in Memphis, Tennessee. They had in their employ several traveling salesmen who sold groceries and supplies to retail grocers throughout that section of the country. On the 15th day of June, 1912, they found that they were in an insolvent condition, and on that day filed a petition for voluntary bankruptcy. Mr. Taylor, a retail grocer in Memphis, heard of the insolvency that day, and knew that the petition had been filed, but on the afternoon of that day, he purchased a consignment of groceries from a salesman of the company, who knew nothing of the facts above given. A trustee in bankruptcy was appointed in the course of time to settle upon the affairs of the bankrupt partnership; in doing so, he took possession of all the assets of the firm. Mr. Taylor contended that he was entitled to the groceries which he had purchased from the agent. He insisted that the authority of the agent to sell was not revoked until the agent heard or learned of the bankruptcy of his principal. What should the Court decide under the foregoing circumstances?

Ruling Court Case. Turquand Vs. Elliott, Law Reports, Volume 7 Appeal Cases (English), Page 79

Messrs. Cottam, Morton & Company were West India merchants. Charles Elliott was an agent, by them employed to look after and manage several large estates owned by the company in Jamaica. Elliott was instructed to sell one estate, called the Savoy Estate. On the 1st of October, 1877, he made a sale of this estate to one MacCormack, who paid part of the purchase price in cash, and agreed to pay the balance thereof in certain stated installments. At this time, and previous thereto, as well, the company had been indebted to the agent in a sum aggregating about 750 pounds. The company gave Elliott the authority to collect the purchase price from the Savoy Estate and apply the same to the payment of this indebtedness. On August 17, 1878, the company committed an act of bankruptcy. On August 26, of the same year, Mac-Cormack paid 560 pounds on the Savoy Estate, the final installment. At this time, neither the agent nor MacCormack knew of the insolvency or bankruptcy of Messrs. Cottam, Morton & Company. Elliott, in accordance with his authority, received the 560 pounds, and credited it to his account against the company. On September 26, same year, William Turquand was appointed trustee in bankruptcy of Messrs. Cottam, Morton & Company. Thereupon, Turquand brought this action to recover from Elliott this 560 pounds. Whether this recovery should be allowed, depended upon the question whether the authority of Elliott to collect this money and credit it against the account of the company was revoked by the bankruptcy, concerning which he knew nothing at the time he made the collection and credit.

It was insisted by Turquand that bankruptcy revokes the authority of an agent and his right to do any act as agent is gone.

Decision: An act of bankruptcy, committed by the principal, revokes the authority of the agent, provided that the agent knew of the bankruptcy. Until the insolvent person is finally adjudged a bankrupt and a trustee is appointed to take charge of his property, an agent, who knows nothing of the circumstances, is entitled to act. In this case, the agent, Elliott, had acted before he knew of the condition of his principal, and before his principal was finally adjudged a bankrupt. Consequently, his act was valid against the trustee.

Sir Montague E. Smith, who delivered the opinion of the Court, said in part: "The subject of the revocation of general powers by an act of bankruptcy with reference to protected sales came before the Lord Justices in the case of Ex Parte Snowball. Lord Justice Mellish, in giving the judgment of the Court in that case, said: 'We are of opinion that though, no doubt, as a general rule, a power of attorney must be treated as revoked by an act of bankruptcy committed by the giver of the power as against the trustees under a subsequent bankruptcy, still, if, after the act of bankruptcy, but before the adjudication, property is conveyed under the power to a bona fide purchaser, the purchaser may hold the property as against the trustee. It is obvious that a power of attorney is not revoked for all purposes by an act of bankruptcy committed by the giver of the power, because, if no adjudi-cation follows, a sale under the power is binding on the giver himself; and whenever a sale would be binding on a bankrupt if no adjudication follows, it is binding on the trustee under a subsequent adjudication if the purchaser had no notice of an act of bankruptcy committed by the seller at the time of the sale.' Their Lordships think that this principle applies to the authority in this case, a payment having been made in pursuance of it which became a debt in a mutual account within the scope of the bankruptcy act."

Judgment was given for Elliott.

Ruling Law. Story Case Answer

It is the general rule that an act of bankruptcy committed by the principal terminates the authority of the agent to act for him thereafter. But until notice reaches third persons of the act of bankruptcy, they are protected in such dealings as they have with the agent. When the bankrupt has been adjudicated such, the agent has no more power, in any case, to act for and bind the bankrupt, because the bankrupt himself could no longer act in his own right.

The bankruptcy of the agent also generally terminates his authority, in cases where his solvency is an important element in his competency as an agent, as for instance, where he is engaged in a mercantile business for his principal. But an agent may continue to perform certain ministerial acts, even though he is bankrupt.

In the Story Case, the authority of the agent was revoked as to Mr. Taylor, because at the time he made the purchase he knew that the grocery company had committed an act of bankruptcy. So he was not entitled to insist that the goods contracted for should be delivered.