In re Pusey, Maynes, Breish Co.

• Decision Date: 25 August 1941
• Docket Number: No. 7739.,7739.
• Citation: 122 F.2d 606
• Parties: In re PUSEY, MAYNES, BREISH CO. HERR v. PHILADELPHIA NAT. BANK.
• Court: U.S. Court of Appeals — Third Circuit

122 F.2d 606 (1941)

In re PUSEY, MAYNES, BREISH CO.

HERR v. PHILADELPHIA NAT. BANK.

No. 7739.

Circuit Court of Appeals, Third Circuit.

August 25, 1941.

Percival H. Granger and Howard S. Spering, both of Philadelphia, Pa. (Hugh D. Scott, Jr., of Philadelphia, Pa., on the brief), for appellant.

Arthur Littleton, of Philadelphia, Pa. (Murdoch K. Goodwin and Morgan, Lewis & Bockius, all of Philadelphia, Pa., on the brief), for appellee.

Before MARIS, JONES, and GOODRICH, Circuit Judges.

GOODRICH, Circuit Judge.

The use of current accounts receivable as a security device is attacked in this case by a trustee in bankruptcy.

The facts deemed pertinent by the court are not in dispute. In 1935 the Pusey, Maynes, Breish Company (now the bankrupt) assigned to the Philadelphia National Bank current accounts receivable to secure an existing indebtedness of $20,000. Pursuant to a contract between the parties, the company over a period of seventeen months collected the accounts assigned by it and deposited the proceeds with the Philadelphia National Bank in a special account from which no withdrawals could be made without the consent of the bank. The bank received an assignment of each account, a notation of each assignment was made upon the books of the company and a check of the records of the company was made monthly by the bank. The bank, pursuant to the agreement, permitted no withdrawals from the special account unless it received prior thereto an assignment of additional accounts. Proceeds of cash sales by the company, also deposited in this account, could be and were withdrawn only upon proper proof and with the consent of the bank. There was no evidence of a material amount of return merchandise on assigned accounts but in any event, the company was under the duty to substitute new accounts for such credits. The total security held by the bank, consisting of the unpaid balance of assigned accounts and the special bank account, varied from time to time. Thus, at the outset, it was $21,995.25 and thereafter it remained at approximately $25,000. Four months before the bankruptcy of the company it was $24,640.10 and on August 4, 1936, the date of bankruptcy, it was $25,367.41. In these four months the total varied from a minimum of $23,017.89 on April 21, 1936, to a maximum of $28,812.45, on May 16, 1936. During all the period from the making of the contract until bankruptcy took place, there was assigned a great number of accounts, because the business of the company was done on the basis of very short terms of credit to its customers.

The trustee in bankruptcy filed a petition with Referee Deininger to compel the bank to return the security and the proceeds thereof as of the date of bankruptcy. Ten hearings on the petition were held over the period from January 8, 1937, to January 24, 1938. For some reason, unexplained by the referee, he did not decide the matter until June 15, 1940, a delay of almost two and a half years.

Eventually the referee concluded that the substitution of collateral, not being made simultaneously with and in equal amounts to the release of cash by the bank to the bankrupt from the special account, constituted a fraud on creditors within the rule of Benedict v. Ratner, 1924, 268 U.S. 353, 45 S.Ct. 566, 69 L.Ed. 991. He ordered the bank to turn over to the trustee all the security held by it as of the date of bankruptcy. The District Court, 37 F.Supp. 316, reversed the order of the referee and decreed that the assignments were valid and effective.

The Supreme Court in Benedict v. Ratner, supra, applied a rule of New York law. The same rule is applicable in Pennsylvania. In re Fergusson Drug Co., D.C., E.D.Pa.1937, 19 F.Supp. 206 affirmed sub nomine, Markovitz v. Taylor, 3 Cir., 1938, 94 F.2d 782; cf. East Lewisburg L. & M. Co. v. Marsh, 1879, 91 Pa. 96. Under this rule an assignment of accounts receivable is deemed fraudulent as to the rights of creditors, if the assignor has control over the accounts to the extent that he is free to use the proceeds for his own purposes. The basic reason for the rule is not actual fraud but, at most, the avoidance of the possible fraud which...