206 F. 309 (E.D.Ky. 1913), 831, In re American Fibre Reed Co.

Docket Nº:831, 832.
Citation:206 F. 309
Case Date:June 19, 1913
Court:United States District Courts, 6th Circuit, Eastern District of Kentucky

Page 309

206 F. 309 (E.D.Ky. 1913)



Nos. 831, 832.

United States District Court, E.D. Kentucky.

June 19, 1913

The following is the report of Special Master D. W. Lindsey:

The Home Bond Company, by its intervening petition filed in the above-styled proceedings in bankruptcy pending in this court, asserts claim, as the owner, of certain sums of money alleged to be in the hands of H. V. McChesney, the trustee of said bankrupt estates, which claim is contested by the trustee. The contention of the intervening petitioner is that under the terms and provisions of two certain contracts with the said bankrupt corporations, respectively, the one with the New England Chair Company, dated March 6, 1911, and the other with the American Fibre Reed Company, dated November 9, 1911, it bought from each of said corporations certain accounts owing to the corporation, and that, these bankrupt proceedings having been instituted by the petitions filed February 2, 1912, and said H. V. McChesney having been by order of this court appointed custodian and afterwards the trustee of the said bankrupts' estates, he proceeded to and did collect certain of the accounts as alleged to have been purchased by the petitioner from the bankrupt corporations respectively, and now has the money so collected by him in his possession as trustee as aforesaid; that the purchases of such accounts by the petitioner from the New England Chair Company were between the dates of April 26, 1911, and November 16, 1911, inclusive, and from the American Fibre Reed Company between November 18, 1911, and January 24, 1912, inclusive; and that the amounts of such accounts so collected by the custodian and trustee from the New England Chair Company accounts was $2,571.37 and from the American Fibre Reed Company accounts was $2,358.32.

The defense interposed by the trustee rests primarily upon the contention that the transactions between the petitioner and the bankrupt corporations, respectively, were not the buying by the former from the latter of the accounts, but were in substance and effect and in fact nothing more or less than the pledging of the accounts by the latter to the former for a loan, in each instance, of a certain per cent. of the face value of the accounts and at the usurious rate of not less than 24 per cent. per annum interest, with the right and duty retained and devolved upon the bankrupt corporations in their own names and at their expense to collect the accounts, the proceeds in each instance to be applied first to the payment of the amount advanced and loaned by the petitioner to the bankrupt and the stipulated interest thereon, and the 'remainder' of the amounts collected being the property of and to go to the bankrupt corporation or for its benefit; that the petitioner has since these proceedings in bankruptcy were instituted itself collected a number of said accounts, and now has in its hands the money arising from such collections, amounting to $ . . ., and also has a large number of the accounts uncollected, amounting to $ . . .; and that if a settlement of the transactions is made between the petitioner and the bankrupt corporations, or the trustee, under the said contracts, upon a legal and equitable basis and purged of usury, but a very small sum, if anything, will be coming to the petitioner upon the surrender to the trustee of all uncollected accounts.

The two contracts, copies of which are exhibited, are upon printed forms, are identical in every respect, except as to their dates, and that the one is with the New England Chair Company and the other with the American Fibre Reed Company, and it was admitted by counsel for both parties in the argument, and is practically stated in the agreed facts, that in each instance of the alleged purchase of accounts by the intervening petitioner from the bankrupt corporations the transactions were had and made under the terms and conditions of said contracts respectively. The case is submitted to the special master upon the pleadings and exhibits and the agreed statement of facts filed, with the agreement in writing filed that the affirmative matter contained in the trustee's response to the intervening petition and amended petition is controverted of record, and after argument by counsel.

The question first to be considered is whether the transactions had between the intervening petitioner and the bankrupt corporations, under the contracts exhibited, were sales by the bankrupts to the petitioner of the accounts involved, or in the nature of pledges of such accounts as security for moneys advanced or loaned thereon to the bankrupts. The following cases cited in the brief of counsel for the trustee, to wit: Bright v. Wagle, 3 Dana (Ky.) 252; Boli v. Irwin & Son, 51 S.W. 444, 21 Ky.Law Rep. 367; McKibben v. Diltz, 138 Ky. 684, 128 S.W. 1083, 1085, 1086, 137 Am.St.Rep. 408-- are in point as illustrative of the extent to which the courts have gone in holding that an instrument, purporting on its face to be a deed or bill of sale, is in effect in the nature of a mortgage or as security, and not a sale. And that the courts will penetrate devices used to cover up or conceal usury is well illustrated by the case of Missouri Valley Life Ins. Co. v. Kittle (C.C.) 2 Fed. 113, where, quoting from the syllabus, it is said: 'Any agreement, device, or shift to reserve or take more than the law permits for use of money loaned is usury, and whether by such means more than the legal rate of interest has been contracted for is a question of fact, to be collected from the whole of the transaction as it passed between the parties.'

As was said by the Kentucky Court of Appeals in Edrington v. Harper, 3 J. J. marsh. 354, 20 Am.Dec. 145: 'It is often very difficult to discriminate between mortgages and conditional sales. Every case must be determined by a consideration of its own peculiar circumstances, and it is proper that no specific rules should be defined for distinguishing mortgages from conditional sales: otherwise, the usurer, with the rules before him, would be able to evade the laws against usury, and oppress the necessitous with impunity. ' And again on page 355 of 3 J. J. Marsh. (20 Am.Dec. 145): 'The intention of the parties is the only true and infallible test. That is to be collected from the condition or conduct of the parties, as well as from the face of the written contract. ' And again: 'The fact that the real transaction between the parties was a borrowing and lending will, whenever or however it shall appear, show that a deed, absolute on its face, was intended as a security for money; and whenever it can be ascertained to be a security for money it is only a mortgage, however artfully it may be disguised. ' To the same effect in substance is the ruling of the court in Baldwin v. Crow, 86 Ky. 679, 7 S.W. 146. And that such rules apply for the construction of the contracts in question cannot well be doubted.

To distinguish a sale from other transfers of property, it is said in Cyc. vol. 35, page 27: 'The essence of a sale is the transfer of the property in the thing from seller to buyer. The elements which distinguish a sale from other transfers are: (1) That the transfer is of the property; that is, of the general or absolute property, as distinguished from a special property; and (2) that it is for a price. ' And again, in the same volume, pages 39 and 40: 'If, however, there is a right reserved by the buyer to demand and enforce repayment, the transaction is not a sale, but in the nature of a mortgage. ' And the author cites in the note the case of Robinson v. Farrelly, 16 Ala. 472, as holding: 'When the vendee retains the right to demand repayment of the vendor, notwithstanding the purchase, it is conclusive to show that the transaction was intended as a security and not a sale.'

In the light of the authorities cited, the intention of the parties is to govern, and that intention is to be ascertained from the contract and the conduct of the parties in the transactions there under. In the agreed statement of facts, and in the argument of counsel, it was agreed that all of the accounts involved in these transactions between the petitioner and the bankrupt corporations were accounts that were due in 120 days, and that the amount retained or collected thereon as interest (called in some places service charge) was at least at the rate of 24 per cent. per annum. In arriving at the proper construction of the...

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