In re Gotham Can Co., 347.

Decision Date06 April 1931
Docket NumberNo. 347.,347.
CourtU.S. Court of Appeals — Second Circuit

Oppenheimer, Haiblum & Kupfer, of New York City (Eli S. Silberfeld, of New York City, of counsel), for petitioner-appellant Merchants' Transfer & Storage Company.

Joffe & Joffe, of New York City (Louis Joffe, of New York City, of counsel), for respondent-appellee trustee in bankruptcy.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

Merchants' Transfer & Storage Company, hereafter called finance company, advanced money to Gotham Can Company, the bankrupt, prior to its adjudication, upon the security of accounts receivable assigned by the latter. The contract of the parties provided that the finance company should advance in cash 77 per cent. of the face value of the accounts and the remaining 23 per cent. upon collection of the accounts subject to the following charges:

(a) A charge of $5 per thousand on the first $100,000 of accounts assigned during any one year.

(b) A "service charge" of one-thirtieth of 1 per cent. per day upon the outstanding balance of uncollected accounts.

(c) Attorneys' fees and other expenses incurred by the finance company in the collection of accounts not paid in full at maturity.

The bankrupt agreed to collect the accounts and to remit the proceeds in specie to the finance company. On October 3, 1929, when the adjudication in bankruptcy occurred, the finance company held accounts having a face value of $10,674.97 as security for actual cash advances of $8,231.25. After the bankruptcy, the finance company made collections of these assigned accounts to the amount of $8,156.21; and the trustee to the amount of $529.52. On February 28, 1930, the finance company filed a proof of debt against the bankrupt estate, and in March, 1930, it filed a petition praying that the trustee pay over the above collections of $529.52 in his hands, together with any further collection which he had received. As a basis for its petition, the finance company claimed that there was due it the following sums:

                  Amount advanced by it in excess of
                   collections which it had received
                   from assigned accounts                     $ 75.04
                  Service charges accrued after adjudication
                   at the rate of one-thirtieth
                   of 1 per cent. per day on outstanding
                   accounts                                    384.87
                  Disbursements after adjudication incurred
                   in collecting accounts                       29.95
                  Attorneys' fees                              300.00

According to the contention of the finance company, there was therefore a balance of $260.34 due it in excess of the $529.52 representing accounts which the trustee had collected.

The trustee filed a cross-petition asking that the proof of claim of the finance company be expunged, that the service charges for $384.87 and the miscellaneous charges for $29.95 be disallowed, and that an allowance of reasonable attorneys' fees be made by the court. The District Court directed the finance company to turn over the uncollected accounts receivable, then amounting to $1,854.57, to the trustee upon payment by him of $75.04, which was the difference between $8,231.25, the amount due at the date of adjudication, and the $8,156.21, which it had collected from the accounts. The court also ordered the referee in bankruptcy to fix the reasonable value of the fees of the attorneys for the finance company and expunged the latter's claim.

The court rejected the item of $384.87 for service charges on the ground that it in fact represented interest and that under the rule of Sexton v. Dreyfus, 219 U. S. 339, 31 S. Ct. 256, 55 L. Ed. 244, interest should not be allowed after the filing of the petition in bankruptcy.

The arrangement between the parties was in form a sale of accounts receivable with an agreement on the part of the finance company to advance 77 per cent. of the face value of the accounts at once, and to advance the remaining 23 per cent. as soon as it might be received from the payment of the accounts, after deducting therefrom the charge of $5 per thousand on the first $100,000 of accounts, the charge of one-thirtieth of 1 per cent. on all unpaid accounts, and, in the event of bankruptcy or other default, expenses incurred in making collections.

The finance company might be regarded as entitled to hold the accounts until they were all collected, even though its cash advances and expenses up to any particular date were satisfied. If so, the one-thirtieth of 1 per cent. daily charge could continue to roll up so long as any accounts remained unpaid. And this would be true whether the transactions were regarded as sales or loans. We think they were not sales, and to regard them as loans which Gotham Can Company could not pay off until all the accounts were collected seems an unreal interpretation of the arrangement. Such a construction would imply that the Gotham Can Company borrowed on time and had no right to pay off its obligations until the accounts were all collected. No such obligation fairly appears from agreement of the parties.

The transactions were had under a contract whereby the Gotham Can Company warranted that every account assigned would...

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