In re Freeman
| Decision Date | 25 July 1961 |
| Docket Number | No. 13517.,13517. |
| Citation | 294 F.2d 126 |
| Parties | In the Matter of Samuel FREEMAN, Individually and Trading as Pedi-Tred Shoes, Bankrupt, International Shoe Company, Appellant. |
| Court | U.S. Court of Appeals — Third Circuit |
Martin L. Duyk, Newark, N. J. (Furst, Furst & Feldman, by George Furst, Newark, N. J., on the brief), for appellant.
James E. Masterson, Newark, N. J. (Kleinberg, Moroney & Masterson, Newark, N. J., on the brief), for respondent, Meyer Dubow, trustee in bankruptcy.
Before GOODRICH, STALEY and FORMAN, Circuit Judges.
International Shoe Company (International) claimed the security of a factor's lien1 in the bankruptcy of Samuel Freeman, trading as Pedi-Tred Shoes (the bankrupt). The lien was contested by the trustee. The Referee held the lien void as a secured obligation and the United States District Court for the District of New Jersey affirmed the Referee. This appeal followed.
The parties to the litigation are not in disagreement as to the basic facts. The bankrupt conducted a retail shoe business in Newark, New Jersey. In June 1959 he was indebted to International in the sum of fifteen hundred dollars for previously acquired merchandise. He desired to obtain a larger inventory from International but neither his credit rating nor his business to that date warranted a further extension of credit. International describes the events that followed thus:
The relevant portion of the factor's lien agreement provides:
"(2) Amount and Duration of Loan or Credit — International has presently extended a loan or credit to the Borrower in the amount of approximately Fifteen Hundred Dollars ($1500.) on open account and/or installment notes and, while International shall not be obligated to furnish the Borrower future credit in any specific amount, all such further advances, loans or credits as may be extended by International to the Borrower from time to time in the future during the ensuing three (3) years (if requested by the Borrower), to the maximum amount of Eighty-five Hundred Dollars ($8500.), shall, nevertheless, be subject to the provisions of this agreement and secured by the factor\'s lien herein created. * * *"2
On June 28, 1960, the bankrupt filed a voluntary petition in bankruptcy. A receiver was appointed on June 28, 1960. Upon his application, returnable July 25, 1960, an order, consented to by International, was made by the Referee for a public sale of the bankrupt's assets free and clear of encumbrances, but providing that the lien of International, if valid, was to be transferred to the proceeds of the sale. The merchandise brought $5,997.60.
After the public sale the respondent trustee presented further legal argument as to the validity of International's lien and the Referee, on September 14, 1960, entered an order declaring the lien invalid because "the Factor's Lien Act of the State of New Jersey was applicable only to loans and advances of money and not to the extension of credit for goods and merchandise. * * *"
The Factors' Lien Act of the State of New Jersey (Act) N.J.S.A. 2A:44-178 et seq. was adopted in 1942. Laws, 1942, c. 182. It defines a factor in the following language:
"The terms `factor\' and `factors\' wherever used in this article include persons, firms, and corporations, and their successors in interest, engaged in the business of factoring or financing sales of merchandise or of purchasing or lending on the security of receivables arising out of such sales who as part of or incidental to such business lend upon the security of merchandise, and any consignee or consignees, pledgee or pledgees, who advance money on goods consigned to or pledged with them, whether or not such consignee or pledgees are employed to sell such goods, and their successors in interest." N.J.S.A. 2A:44-178.
It further provides:
"If so provided by any written agreement all factors shall have a continuing general lien upon all goods and merchandise from time to time consigned to or pledged with them, whether or not in their constructive, actual or exclusive occupancy or possession, and upon any accounts receivable or other proceeds resulting from the sale or other disposition of such goods and merchandise, for all their loans and advances to or for the account of the person creating the lien (hereinafter called the borrower), * * *." N.J.S.A. 2A:44-179.
International contends that:
It further contends that the word "advances" as used in N.J.S.A. 2A:44-179 should not be restricted to money but should be interpreted as credit advanced for merchandise as in this case and that in N.J.S.A. 2A:44-185 liberal construction is called for "to secure the beneficial interests and purposes thereof."
At the common law a factor was an agent employed to sell goods for a principal and receive a commission thereon. The factor had a lien on the goods for any advances made by him and for his commissions. The common law factor's lien was founded on the possession of the goods of his principal and served the function of securing him for the advances owed by the principal. In re Tele-Tone Radio Corp., D.C.D.N.J.1955, 133 F.Supp. 739; 4 Collier, Bankruptcy § 70.77 (14 ed. 1942); Skilton, The Factor's Lien on Merchandise, 1955 Wis.L. Rev. 356, 367.
The modern factor, however, is a financier who generally lends monies and takes in return an assignment of accounts receivable or some other security. He is not a selling agent. In re Tele-Tone Radio Corp., supra; 4 Collier, op. cit. supra. It is the modern factor who is the primary beneficiary of the factors' lien statutes of the various states. They were enacted to foster his growth and function. Those statutes authorize a floating lien on inventory giving the modern factor a lien without the necessity of taking and maintaining possession of the pledged property. In re Frederick Speier Footwear Corp., D.C. D.Conn.1955, 129 F.Supp. 434; Ogline, The Factor's Lien Act as a Method of Inventory Financing, 4 W.Res.L.Rev. 336, 339 (1953).
The legislative history of the New Jersey Act discloses that it originated in Senate Bill No. 65, February 9, 1942. As introduced it read, in the part pertinent here, as provided in the margin.3 Changes were made before the bill was adopted into law. The principal one involved the section defining the term "factor". After the opening words — "The terms `factor' and `factors' wherever used in this article include" — there was added the following clause:
"persons, firms, and corporations, and their successors in interest, engaged in the business of factoring or financing sales of merchandise or of purchasing or lending on the security of receivables arising out of such sales who as part of or incidental to such business lend upon the security of merchandise, and".
In introducing the original bill its sponsor accompanied it by a statement which read:
"The purpose of this bill is to amend the lien law of New Jersey so as to give factors and other persons who advance money against goods a lien to protect the same and is similar to provisions contained in the lien laws of New York and a number of other States."
The definition of "factor" under the New York law is as follows:
"The terms `factor\' and `factors\' wherever used in this section include any consignee or consignees, pledgee or pledgees, who advance money on goods consigned to and/or pledged with them, whether or not such consignees or pledgees are employed to sell such goods and their successors in interest." McKinney\'s Consol. Laws, New York Personal Property Law, c. 41, § 45.
This language was identical with the bill as introduced. As we have seen the term "factor" was defined by additional language in the New Jersey Act as adopted, but it still did not encompass the seller of merchandise on credit as contended by International.4
The Wisconsin Factors' Lien Act describes the eligible lender as being one who is engaged "in whole or in part in the business of lending or advancing money on the security of merchandise." Wis.Stats. (1951) § 241.145. This is a variation from the language of the New Jersey Act, but the difference is insignificant because both statutes are for the protection of a group of financiers who lend or advance money.5
In discussing the Wisconsin statute Professor Charles Bunn cogently commented:
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