Costello v. Bank of America National Trust & Sav. Ass'n, 15321.

• Decision Date: 24 June 1957
• Docket Number: No. 15321.,15321.
• Citation: 246 F.2d 807
• Parties: John COSTELLO, as Trustee of the Estate of William Jason Evans, Bankrupt, Appellant, v. BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION, a Corporation, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

246 F.2d 807 (1957)

John COSTELLO, as Trustee of the Estate of William Jason Evans, Bankrupt, Appellant, v. BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION, a Corporation, Appellee.

No. 15321.

United States Court of Appeals Ninth Circuit.

June 24, 1957.

Shapro & Rothschild, Daniel Aronson, Jr., San Francisco, Cal., for appellant.

Samuel B. Stewart, George Chadwick, Jr., San Francisco, Cal., for appellee.

Before STEPHENS, CHAMBERS and BARNES, Circuit Judges.

BARNES, Circuit Judge.

Plaintiff, Trustee in Bankruptcy of the estate of William Jason Evans, appeals from a judgment of the United States District Court for the Northern District of California, Southern Division, disallowing his claim under Section 70, sub. e, of the Bankruptcy Act¹ to recover the sum of $20,300.00, which represents the aggregate amount collected by the defendant, Bank of America, from the State of California as assignee of the bankrupt's contract for the construction of a bridge. The bankrupt, doing business as Evans Construction Co., entered into said contract with the State on September 15, 1948. That same day the bankrupt executed an assignment to appellee of the right to money due or to become due under the contract, as security for financing the performance of the job. The bankrupt had previously assigned the same rights to Glens Falls Indemnity Company from which appellee obtained a subordination agreement. No notice of the assignment was filed with the county recorder. However, actual notice was given to the obligor, the State. Thereafter, appellee made a series of loans to the bankrupt. From time to time, as the work progressed, the State Controller drew and issued warrants payable to the order of appellee. None of these payments were made within four months prior to the filing of the voluntary petition in bankruptcy. In fact, the last payment is dated April 7, 1949, whereas the petition was not filed until February 27, 1950. But at the time of the assignment, the bankrupt did have certain creditors who remained such when the petition was filed. The Trustee claims that the failure to record the assignment in accordance with the then existing provisions of Section 3017 et seq., of the California Civil Code renders the assignment invalid and a constructive fraud as to at least some of the bankrupt-assignor's creditors, and therefore entitles the Trustee to recover all moneys paid pursuant to the invalid assignment.

The main issues tendered by this appeal are (1) whether the right assigned appellee constituted an "account" within the meaning of Section 3017, and, if so, (2) whether the trustee in bankruptcy can rely on the failure to record the assignment as a basis for recovering the payments made thereunder.

Appellant contends that this transaction entailed the assignment of an "account"; that the assignment, in the admitted absence of recordation, is invalid; and hence, he has a supportable claim to all moneys collected under it. Appellee argues that the State's indebtedness was not evidenced by an "account." And further, even assuming recordation was required, collection by the assignee eliminates or renders insignificant non-compliance with the Code requirements.

The court below accepted and adopted all of appellant's contentions except the ultimate one. It held that this was an assignment of an "account" and necessitated the filing of notice. It held the omission to comply with the statute rendered the assignment invalid. But despite this infirmity in the assignment, the court held the assignee could retain payments made to it more than four months prior to the filing of the petition in bankruptcy. When any portion of the account is collected, reasoned the District Court, the account is pro tanto extinguished and the statute cannot apply if there is nothing left upon which it can operate. A contrary conclusion upon that identical point was reached by another able district judge in this Circuit in Menick v. Carson, D.C., 96 F.Supp. 817.

To understand fully the questions presented herein and the applicable law which controls their determination, it is necessary to review a bit of legislative history. The origin of the issues which confront us is the commercial practice of non-notification financing of accounts receivable, and the legislative endeavors to maintain that practice. Ironically, the instant cause does not involve the keystone of this business system, namely, non-notification to the account debtor. Nevertheless, the case at bar must be considered in the light of principles and enactments governing this practice.

The financing of accounts receivable on a non-notification basis developed and flourished in modern times in response to the ever present need for working capital. When this useful method of credit accommodation is employed, the accounts are assigned as security for a loan or loans upon the mutual understanding between the assignor and the assignee that the account debtor will not be notified of the assignment. Usually the borrower himself is entrusted with the collection of the accounts assigned by him. Secrecy is based on various business considerations including the feared loss of good will, prestige and credit standing.² But secrecy invariably entails certain risks. For example, in California and other jurisdictions following the minority or English rule of Dearle v. Hall,³ one of the perennial dangers the assignee encounters is the threat of double assignments. However, because double assignments are a rarity, this hazard was long regarded as negligible.

That was the situation which prevailed in 1943 when the Supreme Court of the United States, decided Corn Exchange National Bank & Trust Co. v. Klauder, 318 U.S. 434, 63 S.Ct. 679, 87 L.Ed. 884, 144 A.L.R. 1189. There Section 60, sub. a, of the Chandler Act, 11 U.S.C.A. § 96, sub. a, was construed to mean that a transfer of property was not perfected as to the trustee in bankruptcy until such time when no creditor of or bona fide purchaser (a second assignee for value and without notice would qualify) from the debtor could thereafter have acquired any rights in the property transferred superior to those of the transferee. It should be noted that the mere possibility of acquisition of senior rights rendered the transfer voidable by the trustee.⁴

The effect of the Klauder decision was to add another substantial risk to the business of non-notification financing. The assignee stood in constant danger of losing his security to a trustee in bankruptcy. This situation was viewed with grave concern. Remedial measures were proposed and adopted in order to preserve and strengthen this popular security device. The state statutes took different forms.⁵ California was one of three states which enacted a recording statute.⁶ This comprehensive chapter, 766 of the California Statutes of 1943, page 2542, adding sections 3017-3029 to the Civil Code, "was designed to facilitate non-notification financing of accounts receivable by substituting the filing requirements of section 3019 for the former requirement that each customer-debtor be notified of the assignment." Durkin v. Durkin, 133 Cal.App.2d 283, 284 P.2d 185, 192.

The statutory scheme set forth a definition of an "account" (section 3017); and in section 3019 provided that:

"No assignment of an account shall be valid as against present or future creditors of the assignor without notice of such assignment or as against a subsequent purchaser or assignee of such account without notice of such assignment, unless such assignment shall be (recorded)."

Procedures were established for filing notice of the assignment with the county recorder.

We may take judicial notice that the Klauder decision furnished the impetus for this legislation.⁷ The substance of the statute clearly indicates an intention to avoid the consequences of that decision. However, the statute went further than Klauder required. In so doing, it brought vast changes in the law of assignments. It modified the rule of priority as between successive bona fide assignees for value. Mere record notice now gave the first assignee indefeasible rights. Moreover, recordation was made the exclusive means of perfecting the assignment.⁸ Actual notice to the obligor, which hitherto sufficed, was no longer enough. The statute also revised existing law as it related to creditors of the assignor. It placed such creditors in the same position vis-a-vis the first assignee as successor assignees in respect to priority of rights. This was more than Klauder compelled for it had long been the law in California that a non-notifying assignee was entitled to priority over creditors of the assignor.⁹ Thus, the 1943 statute required the assignee to file the assignment to perfect his rights as against both subsequent assignees and creditors of the assignor. That is the setting which we find. We deal now with the interpretation of that statute.

We are faced initially by the question of the applicability of the statutory requirement of recordation to the instant factual context. Precisely, it must be ascertained whether or not the State's obligations were represented by an "account." A negative resolution of that question could be dispositive of this appeal because the recording statute would thence not apply and under the law of California governing assignments in general,¹⁰ the assignee, as heretofore noted, had superior rights to any creditor and giving actual notice to the State perfected its rights as against subsequent assignees.

An "account" was defined in the 1943 statute as follows:

"(1) `Account\' means an open book account, mutual account, or account stated, due or to become due, carried in the regular course of business and not represented by a judgment, note, draft, acceptance, or other instrument for the payment of money; it includes rights under an unperformed contract for work, goods or services which in the regular course will result in an

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