Irving Trust Co. v. Commercial Factors Corporation

• Decision Date: 15 January 1934
• Docket Number: No. 85.,85.
• Citation: 68 F.2d 864
• Parties: IRVING TRUST CO. v. COMMERCIAL FACTORS CORPORATION. In re NATHAN & COHEN CO., Inc.
• Court: U.S. Court of Appeals — Second Circuit

68 F.2d 864 (1934)

IRVING TRUST CO. v. COMMERCIAL FACTORS CORPORATION In re NATHAN & COHEN CO., Inc.

No. 85.

Circuit Court of Appeals, Second Circuit.

January 15, 1934.

Krause, Hirsch & Levin, of New York City (Sydney Krause and George C. Levin, both of New York City, of counsel), for appellant.

Hughes, Schurman & Dwight, of New York City (Charles E. Hughes, Jr., Phillip

W. Haberman, Frank C. Fisher and Frederick W. P. Lorenzen, all of New York City, of counsel), for appellee.

Before MANTON, L. HAND, and SWAN, Circuit Judges.

SWAN, Circuit Judge.

Prior to adjudication upon an involuntary petition in bankruptcy filed April 20, 1931, Nathan & Cohen Company, Inc., was an old and favorably known silk and cotton converter doing business at 60 Leonard street, New York City. Its business consisted in purchasing greize goods from various mills, sending them to dyers and finishers for processing, which is known as "converting," and selling the finished goods. The business was financed by Commercial Factors Corporation under a factoring agreement dated August 16, 1926. In the latter part of March, 1931, when the bankrupt was concededly insolvent and when, as the trustee in bankruptcy contends, the factor knew or had reasonable cause to know of its insolvency, certain merchandise of the bankrupt was transferred to the factor as security for or payment of an indebtedness for prior advances. Such merchandise, or accounts receivable resulting from its sale, the trustee seeks to recover. Its bill of complaint contains two counts; one based on section 60b of the Bankruptcy Act (11 USCA § 96 (b), the other on section 15 of the New York Stock Corporation Law (Consol. Laws N. Y. c. 59). Only the former is relied upon on this appeal. After trial the District Court dismissed the bill, stating in its opinion that the factor had a valid lien upon much of the merchandise in question and that knowledge of the bankrupt's insolvency was not chargeable to the factor until after March 18th, the critical date now asserted by the plaintiff, although at the trial an earlier date was claimed.

As to the main part of the goods there was no preference because the factor proved a valid lien under section 45 of the New York Personal Property Law (Consol. Laws N. Y. c. 41). This section provides that liens upon merchandise, or the proceeds thereof, "created by agreement" for the purpose of securing advances made upon the security of the merchandise, shall be valid without delivery of possession, provided the conditions specified in the statute are complied with. These relate to displaying the factor's name conspicuously at the entrance of the building where the goods are located, and filing a notice of lien in the office of the register of the appropriate county. The purpose of the statute is to allow the intent of the parties to be effective, under the prescribed conditions of notoriety, without regard to questions of possession. It is conceded that a sufficient sign was displayed at 60 Leonard street and that a proper notice was filed in New York county. The dispute is whether the parties intended to create a lien by their factoring agreement. The agreement leaves no doubt about that; by the second paragraph the bankrupt agreed "to consign" to the factor at 60 Leonard street all goods dealt in by the bankrupt, and the eleventh paragraph provided that the factor should have a general lien upon all goods consigned to it by, or on behalf of, the bankrupt. It was, however, the practice of the bankrupt to send to the factor unpaid invoices of purchased merchandise and to rubber-stamp upon them an assignment of the bankrupt's interest in the merchandise represented thereby. The plaintiff contends that the assignment stamped upon the invoices was the agreement which created the lien. This contention cannot be sustained. It is plain that the goods were consigned to the factor irrespective of the stamped assignment and, in general, long before the invoices were so stamped, for usually the invoices were not delivered to the factor until just prior to their maturity, which might be 60 or 90 days after the goods had been delivered at 60 Leonard street. The factoring agreement provided elaborate machinery to secure to the factor control of merchandise from the moment of its receipt at the bankrupt's place of business. The bankrupt executed a formal lease of the premises to the factor at a nominal rental. Three of the factor's employees worked there daily; they were Ross, the receiving and shipping clerk, McAvoy, the stock room clerk, and Harris, the billing clerk. Ross had keys and testified to locking the building at night and opening it in the morning. All goods received at 60 Leonard street or shipped therefrom came under the control of one or more of these employees, and an elaborate procedure involving the use of printed forms was put into effect. Thus the factor obtained effective control of the goods as soon as they were delivered at the premises. This was the consignment contemplated by the factoring agreement, and the stamped assignment can be regarded as nothing more than an added and unnecessary precaution. In connection with all outshipments, printed forms were used which gave full notice that the factor, not the bankrupt, was the shipper or consignor. We hold that upon all goods located at 60 Leonard street before March 18, 1931, the factor had a valid lien under the statute.

The District Court sustained the lien not only under the statute but also as a valid possessory lien. In adopting the former ground we are not to be understood as disapproving the latter. Upon that it is unnecessary to pass.

In addition to goods delivered at 60 Leonard street, there are three other classes of goods to be considered: (1) Goods shipped directly from the mills to the dyers before March 18, 1931, and delivered in their converted condition on or after that date at 60 Leonard street; (2) goods returned by Schreiber who held them on consignment for sale; and (3) goods purchased and delivered on or after March 18th. These will be discussed seriatim.

As to goods sent directly from the mill to the dyer, the factor could have no lien under section 45, since the statutory conditions were not complied with in respect to them. It is clear, however, from the factoring agreement that the parties intended the lien to cover such goods. The eleventh paragraph granted a general lien on all goods consigned to the factor by, or on behalf, or for the account of the bankrupt, "whether at dyers, finishers, selling offices, warehouses or elsewhere." In the case of goods going direct from the mill, the practice of the bankrupt was to send the dyer a "process sheet." This stated that the goods were consigned by the factor and were to "remain" its property. We see no reason why the intention of the parties to give the factor a lien upon goods in the hands of dyers should not be given effect. The chief reason for the rule requiring delivery of possession in order to create a valid pledge is to prevent possession by the pledgor from giving him a false credit. This reason ceases when the thing pledged is not in the possession of the pledgor but of a third party. Hence it has been held that property so situated may be pledged without any change of possession or control if notice of the fact of the pledge be given to the person in possession. Pierce v. Nat. Bank of Commerce, 268 F. 487 (C. C. A. 8), and cases therein cited. It is but a short step to the situation here presented: The delivery of goods to a bailee with instructions to hold them for the account of another (the factor). The New York cases indicate, although the precise situation has not been clearly passed upon, that such a deposit amounts to a pledge to the person for whom the goods are held and that the depositary becomes bailee for him. See First Nat. Bank v. Exchange Nat. Bank, 179 App. Div. 22, 153 N. Y. S. 818, 164 N. Y. S. 1092, affirmed 226 N. Y. 633, 123 N. E. 368; Hickok v. Cowperthwait, 210 N. Y. 137, 103 N. E. 1111, Ann. Cas. 1915B, 1002. We hold that the factor had a valid lien upon goods delivered from the mill to the dyers and by them held as bailees of the factor. Therefore receipt of the goods by the factor after March 18 did not deplete the bankrupt's estate and could not be a preference, even if the factor was chargeable with knowledge of the insolvency. Israel v. Woodruff, 299 F. 454 (C. C. A. 2); Petition of Chattanooga Savings Bank, 261 F. 116 (C. C. A. 6).

The goods returned by Schreiber are governed by similar principles. Indeed, the factor's position is even stronger as to them, for they had been in stock at 60 Leonard street before shipment to Schreiber and so were subject to the factor's lien before being consigned to Schreiber for sale. They were packed for shipment to him upon "manipulation memos" which, like the "process sheets" above referred to, named the factor as consignor and declared that the goods covered thereby should "remain the property" of the factor. The bills of lading named only the factor as shipper. Under these documents it is clear that Schreiber was intended to receive and hold the goods as bailee of the factor, not of the bankrupt. The possession of goods on consignment may give the consignee a deceptive credit of which his creditors might conceivably complain, but as between the bankrupt and the factor there is no reason for not recognizing and giving effect to their intention to make Schreiber bailee for the factor. No creditors whom the plaintiff represents have been deceived by Schreiber's apparent possession. Although the factor seems to have had some doubt of the validity of its lien and sought to get an acknowledgment from Schreiber that he held the goods for it, this was an unnecessary precaution and does not affect the legal relations of the parties. There was no preference in receiving these goods from the factor's bailee.

The remaining goods are...