The
following are the opinion and order of D. W. Amram, Referee:
This
matter comes before me upon the petition of the First
Mortgage Guarantee & Trust Company, hereinafter called the
'Bank,' filed March 6, 1911, the answer of the
trustee of the Cotton Manufacturers' Sales Company
hereinafter called the 'Bankrupt,' filed March 15
1911, the cross-petition of the trustee filed March 15
1911, the answer of the bank to said cross-petition filed
April 21, 1911, and the agreements made between the said
parties filed March 16, 1911, and May 17, 1911.
From
the pleadings and testimony taken before me I find the
following facts:
The
bankrupt corporation was engaged in the business of buying
and selling cotton yarns and hosiery on commission. In
order to raise money it was accustomed to pledge its book
accounts as collateral security, and, at the time when its
business relation with the bank began, all of its accounts
had been assigned for loans made by the Bank of Commerce.
By reason of the fact that the Bank of Commerce had
invariably notified debtors of the bankrupt as soon as
assignments of book accounts were made to it, the bankrupt
deemed it expedient to discontinue its business with the
Bank of Commerce and to transfer the same to the bank which
had established the practice of never notifying debtors of
its assignors. Before entering into business with the
bankrupt, the bank obtained what its vice president called
'excellent bank references' as to the financial
standing of the bankrupt, the exact nature of which does
not appear, and also obtained a statement in writing from
the bankrupt showing its financial standing as of May 1,
1910, which statement was in the following form:
|
'Assets.
|
|
Merchandise, cost value in warehouse .......
|
$ 9,513 33
|
|
Merchandise, in transit to warehouse .........
|
2,157 79
|
|
Notes or amounts due by partners .................
|
None
|
|
Outstanding accounts, not due ...............
|
37,007 08
|
|
Outstanding accounts, past due ...............
|
7,898 70
|
|
Cash in bank and on hand .....................
|
2,256 40
|
|
Special deposit-- certificate deposit ........
|
2,400 00
|
|
Office fixtures & furniture ....................
|
807 55
|
|
Commission due on orders not completed .......
|
1,625 90
|
|
|
__________
|
|
|
$63,666 75
|
|
'Liabilities.
|
|
Notes payable for merchandise ...............
|
$2,678 57
|
|
Owe for merchandise .........................
|
22,663 37
|
|
Owe to banks assignment accounts advanced ...
|
23,753 09
|
|
Loans advanced by warehouse ..................
|
4,428 03
|
|
Capital paid in .............................
|
10,100 00
|
|
Surplus .........................................
|
43 69
|
|
|
__________
|
|
|
$63,666 75
|
'Annual
sales $250,000 to $300,000 approximately.
'Banking
reference-- Commercial National Bank, Statesville, N.C.
First
National Bank, Do
Merchants'
& Farmers' Bank, Do
Girard
National Bank, Philadelphia, Pa.
Fourth
Street National Bank, Do
First
National Bank, Do
Merchants'
National Bank, Do
Corn
Exchange National Bank, Do
'The
above statement is a true statement of our conditions this
first day of May, 1910.
'(signed)
Cotton Manufacturers' Sales Co.,
'John
E. Nattress, President.
'(Seal.)
W. E.
Nattress, Secty-Treas.'
This
statement was given in August shortly before the agreement
made between the bank and the bankrupt on August 26th. The
bank made no further investigation into the affairs of the
bankrupt either at this time or at any time thereafter during
the entire period of its dealings with the bankrupt; nor did
the bank examine the books, accounts, papers, or
correspondence of the bankrupt. The agreement between the
bank and the bankrupt is in the following form:
'This
agreement, made and entered into this 26th day of August,
1910, between Cotton Manufacturers' Sales Company,
party of the first part, and the First Mortgage Guarantee &
Trust Company, a corporation organized under the laws of
the state of Pennsylvania, party of the second part:
'Whereas,
said party of the first part desires to obtain
accommodations and advances in money, from time to time, from
said party of the second part, and said party of the second
part has agreed upon the terms and conditions hereinafter
stated, to make certain accommodations and advances,
'Now
witnesseth: That for and in consideration of said premises,
and for the sum of one dollar ($1.00) paid by said party of
the first part to said party of the second part, receipt
whereof is hereby acknowledged, as well as for other good
and valuable considerations to it moving, said Cotton
Manufacturers' Sales Company hereby assigns and agrees
to deliver to the First Mortgage Guarantee & Trust Company
all accounts receivable by it (the said party of the first
part) obtained for goods and merchandise sold and delivered
after this date (except sales for cash in hand and sales of
consigned merchandise), and it agrees to make special and
specific assignment of each and all of said accounts
receivable, and deliver the same to the party of the second
part within three (3) days after the shipment of the
merchandise represented therein and thereby, said
assignment to be made in such form and accompanied by such
representations, guaranties and agreements as the party of
the second part shall prescribe.
'Furthermore,
the first party also agrees to deliver with said invoices
bills of lading, railway receipts or other satisfactory
evidence of actual shipment of the goods and merchandise
represented in the invoices, and when required so to do,
furnish satisfactory evidence of the actual receipt of the
merchandise by the purchaser, and on demand it agrees to
bring and deliver to the party of the second part, all
correspondence with the purchaser relative to the sale,
delivery of and payment for the merchandise represented in
said invoices and accounts receivable.
'It
is mutually and expressly agreed that the title and right
of possession of said accounts receivable is to be and
remain in said second party, and it shall have the right to
collect the same direct from the debtor, and whatever the
first party does in connection with the collection of said
accounts it agrees to do as the agent and representative of
the second party and in trust for said second party, and it
expressly agrees to indorse and deliver to said second
party immediately upon the receipt thereof, all checks,
drafts, notes, moneys, securities and collateral of any and
every kind which shall come to said first party in payment
or settlement of any account receivable for goods and
merchandise sold from and after this date.
'It
is mutually agreed that the party of the second part shall
have access at all times to the books, papers and
correspondence of the party of the first part with every
opportunity to keep advised concerning the business of said
first party, the character of its sales, the standing of
the parties to whom it sells, and said first party agrees
promptly to furnish the second party any information which
it may receive concerning the financial standing of any
purchaser and suits pending or begun against the same, and
notify immediately the party of the second part of any
material rejection or return of goods, set-off or
counterclaim made by any purchaser or deduction or discount
claimed by him against any of said accounts receivable or
the merchandise referred to therein.
'The
second party reserves the right to place the proceeds of
any collection to the account of the first party without
allowing credit upon any note or advancement made by it to
the said second party, the intention being that as the
accounts receivable are paid the second party shall have
the right to accept new and substituted accounts receivable
and release the proceeds of such accounts, thus enabling
the First Mortgage Guarantee & Trust Company to grant a
continuous line of credit without being called upon to
account by indorsements or otherwise for each and every
credit (so long as the uncollected accounts receivable
afford approved security for the amount advanced).
'The
first party agrees to pay to the second party for its
services in investigating the credit and financial standing
of the customers of the said second party in keeping the
accounts and collecting the accounts receivable whether
done directly or through the agency of the first party, an
amount equal to one per cent. of the face value of all
accounts assigned under this agreement.
'In
consideration of the foregoing assignment and other
covenants, the First Mortgage Guarantee & Trust Company
agrees to extend to the first party a credit, with interest
at the rate of six per cent. (6) per annum, equal to eighty
per cent. of the face value of all accounts receivable
approved by it, the First Mortgage Guarantee & Trust
Company, against debtors of the party of the first part,
not to exceed the aggregate sum of ...
'It
is mutually agreed that in making up the estimates of said
aggregate sum of $25,000, neither past-due accounts nor any
accounts deemed by said party of the second part as
undesirable, shall be considered, although the assignment
of all such accounts, whether past-due or otherwise, shall
continue in full force and effect until actually paid by
the debtor.
'It
is mutually agreed that this contract may be canceled by
the second party at any time without notice, and by the
first party at any time by payment of the amount of all
advances, with interest, according to the terms of the
notes given in evidence thereof, and thereupon the second
party
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