In re Petition of National Discount Co.

• Decision Date: 18 March 1921
• Docket Number: 3458,3468.
• Parties: Petition of NATIONAL DISCOUNT CO. v. EVANS et al. NATIONAL DISCOUNT CO. In re HITT LUMBER & BOX CO.
• Court: U.S. Court of Appeals — Sixth Circuit

272 F. 570

Petition of NATIONAL DISCOUNT CO.

NATIONAL DISCOUNT CO. v. EVANS et al.

In re HITT LUMBER & BOX CO.

Nos. 3458, 3468.

United States Court of Appeals, Sixth Circuit.

March 18, 1921

Howard F. Burns, of Cleveland, Ohio (White, Johnson, Cannon &amp Spieth, of Cleveland, Ohio, on the brief), for petitioner and appellant.

J. W Thompson, of Chattanooga, Tenn. (Lusk & Thompson and Finlay &amp Campbell, all of Chattanooga, Tenn., on the brief), for respondent and appellees.

Before KNAPPEN, DENISON, and DONAHUE, Circuit Judges.

KNAPPEN Circuit Judge.

On April 19, 1917, about 2 1/2 months before the filing of petition for bankruptcy herein, the bankrupt entered into contract with the National Discount Company for the assignment to the latter from time to time of notes and accounts due from the bankrupt's debtors, for advances thereon by the Discount Company, and for collection of the assigned accounts by the bankrupt and the remittances of their proceeds to the Discount Company. Between the filing of the petition in bankruptcy and the appointment of the trustee, the receiver in bankruptcy collected upon these assigned accounts $6,924.16, remitting to the Discount Company the entire of such collections; also the further sum of $1,110.83, no part of which was remitted to the Discount Company, the entire amount having been expended by the receiver in the administration of the bankrupt's estate. The trustee in bankruptcy collected from such accounts the further sum of $217.71, none of which was remitted to the Discount Company. Included in the accounts assigned by the bankrupt to that company were accounts against the Chattanooga Manufacturing Company aggregating $9,989.35 and against the Brock Candy Company aggregating $437.28. The bankrupt (previous to bankruptcy), without authority from or knowledge of the Discount Company, received from the Chattanooga Manufacturing Company in payment of its account lumber of a value exceeding the face of the account, and received from the Candy Company an automobile truck in lieu of payment by money.

The Discount Company filed in the court below its intervening petition, alleging its purchase from the bankrupt of both accounts in question; their payment in the manner stated; that both lumber and truck were in the bankrupt's hands at the time of the filing of the petition in bankruptcy; that the bankrupt obtained no right or title to the lumber, but at the time of bankruptcy held it in trust for the Discount Company; and that both the lumber and the truck were in law and equity the Discount Company's property-- and asking either the delivery to it of both lumber and truck or a preferred claim for the values of the two items of property, alleged to aggregate $10,426.53.

Upon issues joined upon this petition (in part informally, with the idea of disposing of the entire controversy between the parties) the court found that the lumber was intermingled by the bankrupt with other lumber of like character, and used from day to day in its manufacturing business; that when the petition in bankruptcy was filed the bankrupt had on hand an amount of such lumber, or of lumber substituted therefor and intermingled therewith, exceeding in value the face of the Chattanooga Manufacturing Company's account; that this remaining lumber was used by the receiver; that the proceeds of neither the lumber nor the truck (sold by the receiver) were traceable into any fund or property coming into the trustee's hands. For this reason the Discount Company was denied a lien, or any other superior right to the lumber or truck or their proceeds. It was further found that of the $6,924.16 collected by the receiver and remitted to the Discount Company $6,104.35 was collected from debtors residing in Tennessee, and the remaining sum of $819.91 from debtors residing in Ohio; that as to the latter sum the Discount Company was entitled to priority over the bankrupt's general creditors, but that as to the former it was not so entitled. The same ruling was made as to the $217.71 collected by the trustee, and for the same reason. It was further held that the contract between the bankrupt and the Discount Company was one of loan, that it was an Ohio contract, and that under the laws of that state it was usurious and nonenforceable as to interest above 6 per cent. per annum.

The final order required the Discount Company to return to the trustee in bankruptcy the $6,104.35 collected by the receiver from Tennessee debtors; that upon such return the Discount Company's claim be allowed as an unsecured claim in the sum of $15,450.28-- being the $16,270.09 due the Discount Company at the time of bankruptcy (purged of usury), less the $819.81 collected by the receivers from debtors residing in Ohio-- and without any lien upon or preference with respect to 'any of the amounts collected by the receiver or trustee and not remitted to' the Discount Company. The case is here both on appeal and on petition to revise under section 24b of the Bankruptcy Act (Comp. St. Sec. 9608).

1. The case presents, in our opinion, a 'controversy arising in bankruptcy proceedings,' appealable under section 24a of the act. Hewit v. Berlin Machine Works, 194 U.S. 296, 300, 24 Sup.Ct. 690, 48 L.Ed. 986; Knapp v. Milwaukee Trust Co., 216 U.S. 545, 30 Sup.Ct. 412, 54 L.Ed. 610; Rode & Horn v. Phipps (C.C.A. 6) 195 F. 414, 418, 115 C.C.A. 316. The remedies by appeal and by petition to revise under section 24b being mutually exclusive (Matter of Loving, 224 U.S. 183, 188, 32 Sup.Ct. 446, 56 L.Ed. 725; In re Mueller (C.C.A. 6) 135 F. 711, 715, 68 C.C.A. 349), the petition to revise is dismissed.

2. The contract between the bankrupt and the Discount Company is, in our opinion, governed by the usury laws of Ohio. The preliminary contract was executed in that state, in which the Discount Company resided and did business; from time to time schedules of assigned accounts were forwarded by the bankrupt to the Discount Company, where each account was considered and either accepted or rejected. The collections were to be remitted to the Discount Company at Cleveland. It was thus to be performed in Ohio. We agree with the District Judge that the contract did not contemplate a purchase of accounts and bills receivable by the Discount Company, but was intended to provide merely for loans secured by assignment of such accounts and bills. The question is, of course, one of intent.

The Discount Company was to advance to the bankrupt 80 per cent. of the face value of the accounts, charging for expenses and services rendered 1 per cent, per month on their face value until paid, which means 15 per cent. per annum on the amounts advanced. In case the accounts were not paid at maturity, the bankrupt was required to repurchase them at their full face value, whereupon it would apparently be entitled to receive the reserved 20 per cent. less the Discount Company's charges-- in effect, 15 per cent. per annum of the amount advanced. We agree with the District Judge that the 9 per cent. thus reserved, in excess of the 6 per cent. authorized by the Ohio laws, bore no reasonable relation to the character of services to be rendered. We are also impressed, as was the District Judge, that no substantial services justifying anything like the charges made were actually rendered, or intended to be rendered, for the bankrupt, but that language employed expressive of actual sale was used merely as a cover for a fictitious and usurious contract of loan. The case, in our judgment, is in no substantial respect distinguishable from Home Bond Co. v. McChesney, 239 U.S. 568, 575, 36 Sup.Ct. 170, 60 L.Ed. 444. The provisions relative to notes, while perhaps not so glaring as those relating to accounts are in harmony with the conclusion we have reached.

3. Unless the rights of the parties are governed by the rule in Tennessee the Discount Company was entitled to retain the entire $6,924.16 collected by the receiver from the assigned accounts, instead of merely the $819.81 collected from debtors residing in Ohio, notwithstanding the accounts were held as security only, for the debt which they secured far exceeded the amount collected. We agree with the District Judge that, if the Discount Company was 'doing business' in Tennessee (which we do not decide), the fact that it had not complied with the laws of Tennessee, in respect of conditions precedent to the right to do business in that state, does not forbid its recovery of sums collected upon the assigned accounts by either the bankrupt or its receiver. See State v. O'Brien, 94 Tenn. 79, 28 S.W. 311, 26 L.R.A. 252; Insurance Co. v. Kennedy, 96 Tenn.at page 716, 36 S.W. 709.

Under the generally accepted rule of law, and where, as here, the rights of the debtors owing the accounts are not involved the assignments in question, made, as they were, in good faith, were valid as against both the bankrupt and its creditors, notwithstanding no notice was given the latter, and in spite of the facts that the assigned claims remained in the bankrupt's possession, and that those liable to pay the claims were not notified of the assignment. Greey v. Dockendorff, 231 U.S. 513, 516, 34 Sup.Ct. 166, 58 L.Ed. 339; In re Cincinnati Iron Store (C.C.A. 6) 167 F. 486, 490, 93 C.C.A. 122; Union Trust Co. v. Bulkeley (C.C.A. 6) 150 F. 510, 516, 517, 80 C.C.A. 328; In re Hawley Furnace Co. (C.C.A. 3) 238 F. 122, 125, 151 C.C.A....