Matthews v. James Talcott, Inc.

• Decision Date: 15 June 1965
• Docket Number: No. 14745.,14745.
• Citation: 345 F.2d 374
• Parties: Robert W. MATTHEWS, as Trustee in Bankruptcy of Beard & Company, Inc., Plaintiff-Appellant, v. JAMES TALCOTT, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

345 F.2d 374 (1965)

Robert W. MATTHEWS, as Trustee in Bankruptcy of Beard & Company, Inc., Plaintiff-Appellant, v. JAMES TALCOTT, INC., Defendant-Appellee.

No. 14745.

United States Court of Appeals Seventh Circuit.

April 30, 1965.

Rehearing Denied June 15, 1965.

COPYRIGHT MATERIAL OMITTED

Donald A. Schabel, C. Severin Buschmann, Jr., Indianapolis, Ind., Buschmann, Carr, Schabel & Tabbert, Indianapolis, Ind., of counsel, for appellant.

Charles B. Feibleman, Gene E. Wilkins, Indianapolis, Ind., Bamberger & Feibleman, Indianapolis, Ind., of counsel, for appellee.

Before SCHNACKENBERG, KILEY and SWYGERT, Circuit Judges.

SWYGERT, Circuit Judge.

This is an appeal from a judgment in favor of defendant James Talcott, Inc. in a plenary action brought by the trustee in bankruptcy of Beard & Company, Inc., an Indiana corporation.

Beard & Company had conducted a lumber business in Indianapolis for a number of years before it was adjudicated a bankrupt on October 15, 1962, following the filing of a creditors' petition in involuntary bankruptcy.

James Talcott, Inc., a New York corporation, with a principal office in Chicago, claimed rights as a secured creditor in all of the inventory, accounts receivable, and machinery and equipment. The inventory consisted of lumber and mouldings. Talcott had advanced money to Beard & Company, Inc., under a factor's lien agreement dated October 5, 1960, and on the security of warehouse receipts issued by a company known as Douglas-Guardian Warehouse Corporation. At the time of the bankruptcy, the total amount owed by Beard & Company to Talcott was $512,785.46.¹

Talcott received word about September 25, 1962, that Beard & Company had issued credit memoranda in the approximate sum of $200,000 against various accounts receivable. An investigation disclosed that certain of the accounts were fictitious. On September 27, 1962, Talcott took physical possession of all merchandise covered by its lien agreement. The following day the involuntary bankruptcy petition was filed.

Following the appointment of a trustee, the physical assets of the bankrupt were sold by the trustee with the approval of the district court. The net proceeds were turned over to Talcott under an agreement that if the trustee questioned the validity of the secured obligations claimed by Talcott, a plenary action might be filed. That is the genesis of the instant action.

Five issues were presented to the district court for decision: (1) whether designations of lumber inventory made within four months prior to bankruptcy were voidable preferences under section 60 of the Bankruptcy Act, 11 U.S.C. § 96; (2) whether the bankrupt's inventory of wood mouldings was subject to the factor's lien; (3) whether warehouse receipts held by Talcott covering lumber deposited in a field warehouse located on the bankrupt's premises were valid; (4) whether accounts receivable assigned by the bankrupt to Talcott within ten days of bankruptcy and growing out of sale of lumber covered by the factor's lien constituted voidable preferences; and (5) whether a chattel mortgage held by Talcott covered leasehold improvements and other items of equipment.

The district court entered findings of fact and conclusions of law, deciding in favor of Talcott on all issues. From the judgment this appeal was taken.

A general description of the arrangements by which Beard & Company secured financing from Talcott will now be stated. Additional details, however, will be considered when we treat the separate issues.

Prior to October, 1960, the bankrupt factored its accounts receivable with a lending company known as Walter E. Heller & Company. It also obtained inventory financing from that company on the security of warehouse receipts issued by Douglas-Guardian. In connection with the latter financing, the bankrupt sublet to Douglas-Guardian its entire lumber yard storage area on its premises.

On October 5, 1960, the bankrupt entered into a financing plan with Talcott to replace its arrangement with Heller & Company. The new arrangement contemplated financing by Talcott to the bankrupt secured by four types of security devices:

(1) The bankrupt agreed to assign to Talcott all of its accounts receivable then existing or thereafter created as security for loans and advances made or to be made by Talcott for the account of the bankrupt. Talcott agreed that at the time of assignment of receivables it would advance to the bankrupt, at Talcott's discretion, a sum not exceeding eighty-five per cent of the net amount of receivables, less the agreed charge for interest. In practice, the bankrupt sent Talcott a daily schedule of assigned receivables listing the name and address of each account debtor, invoice date and number, and gross invoice amount.

(2) The bankrupt also agreed that for all of the advances made by Talcott the latter would have a continuing general lien upon all goods and merchandise from time to time designated, consigned to, or pledged with Talcott, by the bankrupt, whether or not in Talcott's constructive, actual, or exclusive possession, and regardless of whether or not such goods and merchandise was in existence on October 5, 1960, or should come into existence subsequently thereto, or should subsequently thereto be acquired by the bankrupt, and upon any accounts receivable or other proceeds resulting from the sale or other disposition of such goods and merchandise. Notice of this lien was filed by Talcott on October 5, 1960, in the office of the Recorder of Marion County, Indiana, pursuant to the provisions of the Indiana Factor's Lien Act, Burns Ind.Stat.Ann. §§ 43-1201 to 43-1210 (1963 Supp.)² Commencing in October, 1960, the bankrupt periodically executed and delivered consecutively numbered written designations of lumber being subjected to this continuing general lien. The designations listed the total dollar amount of lumber covered thereby and had attached the invoices of the suppliers containing specific descriptions of the lumber. In practice, all purchases of lumber by the bankrupt not placed in the field warehouse were included in designations under the factor's lien. In addition, the bankrupt would usually write a monthly letter to Talcott setting forth the dollar amount of mouldings shown by the perpetual inventory records of the bankrupt but containing no specific description of the mouldings. Various amounts were loaned by the defendant to the bankrupt on the security of the inventory of lumber and mouldings covered by the factor's lien.

(3) The bankrupt also agreed that all loans and advances theretofore or thereafter made for its account and all other amounts owed by it to Talcott should be secured by a pledge to Talcott of goods and merchandise deposited in field warehouses acceptable to Talcott under agreements between the bankrupt and such warehouses pursuant to which negotiable or nonnegotiable warehouse receipts for such goods and merchandise should be issued. Pursuant to the agreement, Talcott approved the use of the field warehouse operated by Douglas-Guardian. The bankrupt purported from time to time to place lumber in this field warehouse, and Douglas-Guardian issued nonnegotiable warehouse receipts therefor in the name of Talcott. Talcott would lend the bankrupt amounts equal to 66 2/3 per cent of the cost of the lumber evidenced by such receipts.

(4) On October 17, 1960, the bankrupt executed to Talcott a chattel mortgage on certain described machinery, equipment, office furniture, and fixtures owned by the bankrupt. The chattel mortgage secured a loan by Talcott to the bankrupt in the sum of $25,000, payable in twenty-two monthly installments of $500 each, commencing on November 15, 1960, and a final installment of $13,500 payable on October 15, 1962.

I.

Between October 13, 1960, and September 27, 1962, the bankrupt delivered to Talcott twenty-five separate designations of lumber inventory. Each described the lumber thereby designated. Invoices directed to the bankrupt were attached. The trustee did not question the validity of the last four designations made within four months prior to bankruptcy, but attacked them as preferential and voidable. These designations, dated respectively June 6, 1962, July 24, 1962, August 28, 1962, and September 27, 1962, had an aggregate value of $193,751.03.

The district court ruled that the four designations, although made within the four-month period prior to bankruptcy, did not constitute preferences under section 60, sub. a of the Bankruptcy Act because "the designations of merchandise related back to October 5, 1960, when the Notice of Factor's Lien was filed by Talcott."

To determine when a transfer has been perfected under section 60, sub. a, the law of the state where the transaction takes place must be consulted. McKenzie v. Irving Trust Co., 323 U.S. 365, 65 S.Ct. 405, 89 L.Ed. 305 (1945). The Indiana Factor's Lien Act gives a continuing lien upon the merchandise of the borrower as designated in separate written statements "dated and signed by the borrower and delivered to the factor." The act further provides that the lien shall cover "accounts receivable or other proceeds resulting from the sale or other disposition of any such merchandise."

The trustee contends that although the Indiana statute attempts to relate the effectiveness of the lien back to the date when notice of the factoring agreement was filed,³ the lien does not attach to specific merchandise until such merchandise is designated. He further argues that a literal interpretation of sections 60 and 1(30) of the Bankruptcy Act, 11 U.S.C. §§ 96, 1(30), indicates that a separate transfer under these provisions occurs whenever a borrower acquires rights in new collateral since a creditor cannot acquire an interest in the goods before the borrower does.

Talcott, on the other hand, contends that the Indiana legislature anticipated the problem of an attempted avoidance by a trustee in bankruptcy...