Manchester Nat. Bank v. Roche

• Decision Date: 01 February 1951
• Docket Number: No. 4536.,4536.
• Citation: 186 F.2d 827
• Parties: MANCHESTER NAT. BANK v. ROCHE, Trustee.
• Court: U.S. Court of Appeals — First Circuit

186 F.2d 827 (1951)

MANCHESTER NAT. BANK v. ROCHE, Trustee.

No. 4536.

United States Court of Appeals First Circuit.

February 1, 1951.

Perkins Bass, Manchester, N. H. (William L. Phinney, Manchester, N. H., on the brief), for appellant.

Charles J. Flynn, Nashua, N. H. (Robert E. Earley, Nashua, N. H., on the brief), for appellee.

Before MAGRUDER, Chief Judge, WOODBURY, Circuit Judge, and FORD, District Judge.

MAGRUDER, Chief Judge.

This is an appeal from an order of the United States District Court for the District of New Hampshire, affirming an order of a referee in bankruptcy which denied a petition by Manchester National Bank that the trustee for the bankrupt estate of Standard Construction Company, Inc., be directed to turn over to the said petitioner certain accounts receivable of the bankrupt corporation.

On May 14, 1947, Manchester National Bank and Standard Construction Company entered into a factor's lien agreement covering the company's inventory and accounts receivable, under the provisions of C. 262-A, Rev.Laws of New Hampshire, as enacted in N.H.Laws 1943, C. 161, and amended by N.H.Laws 1949, C. 156. The text of a portion of § 1 of C. 262-A and of § 5 in full will be found in the footnote.¹ On the same day the statutory prerequisites for the validation of the lien on inventory were fulfilled by the posting of notice and the recording prescribed in §§ 1 and 2 of the Act;² and shortly thereafter a notice was pasted in the front of the accounts receivable ledger of the company stating that such accounts were assigned to Manchester National Bank. However, the referee found, and the finding is undisputed, that prior to November 1, 1948, no notice of assignment was given to any debtor in such accounts receivable. On or about November 1, 1948, the bank did instruct Standard Construction Company to stamp its invoices and statements with notice of the assignment.

The company filed a voluntary petition in bankruptcy on January 25, 1949, and was later duly adjudged a bankrupt. In denying the bank's petition for a turnover of the accounts receivable, the referee held (1) that the bank had failed to perfect a valid lien on such accounts prior to four months before the filing of the petition in bankruptcy, and that the belated notification of the assignment, given to debtors within the four-month period, was an attempted preference under § 60 of the Bankruptcy Act, 11 U.S.C.A. § 96; and (2) that the retention by the bankrupt of dominion over the accounts receivable and the proceeds thereof made the assignment voidable as a fraud on creditors within the doctrine of Benedict v. Ratner, 1925, 268 U.S. 353, 45 S.Ct. 566, 69 L.Ed. 991. The district court rested its affirmance of the referee's order on the first ground taken by the referee, and did not consider the alternative.

In determining whether the lien on the bankrupt's accounts receivable had become perfected more than four months prior to January 25, 1949, we must of course look to the New Hampshire law, Benedict v. Ratner, supra; In re Robert Jenkins Corp., 1 Cir., 1927, 17 F.2d 555, and in particular to the somewhat obscure provisions of § 5 of C. 262-A, quoted above in the footnote. It is stated in appellant's brief that the "sole question presented by this appeal is whether the statutory requirements of section 5 of the New Hampshire Factors Lien Act were met prior to the four month period as to certain of the bankrupt's accounts receivable. If the answer is in the affirmative, the factors lien thereon was perfected before the four month period and there was no preference under section 60, sub. a, of the Bankruptcy Act".³

In substance § 5 provides two alternative methods for effectuating the factor's lien agreement with regard to accounts receivable: (1) By the giving of notice of the assignment to the account debtor, or (2) by making and delivering a "further or formal assignment" of the account. Since it is a fact that prior to November 1, 1948 no such notice of assignment was sent to the account debtors, it must follow that the lien was not perfected more than four months before bankruptcy unless the second statutory alternative was complied with, that is, unless Standard Construction Company made a "further or formal assignment" to the bank of the accounts now in question. Subsequent to the execution of the factor's lien agreement on May 14, 1947, no instrument in the nature of an assignment of the accounts was ever executed by the bankrupt. But appellant contends that such "further or formal assignment" within the meaning of § 5 of the Act may be found in the terms of clause (3) of the factor's lien agreement itself. The said clause (3) provided as follows: "The Borrower agrees to accept the advances made or to be made, on the said line of credit in accordance with the terms hereof, and agrees to sell, assign, transfer and pledge, and does hereby sell, assign, transfer and pledge to the Bank all of the merchandise, inventory and accounts receivable owned by it (described in Schedule A attached hereto), and also agrees to, and does hereby, sell, assign, transfer and pledge to the Bank any and all merchandise, inventory and accounts receivable of any kind, nature and description whatsoever that subsequently may be acquired by the Borrower, and whether or not resulting from the sale or other disposition of any of said merchandise, inventory and accounts receivable."

This clause does by its terms purport to be an agreement to assign and a general assignment in praesenti of all existing and future accounts receivable; and it is contended that, as each account materialized in the future course of business, appellant's lien automatically attached thereto.

The bank's contention in this regard has apparently not been discussed in any New Hampshire cases, and the statute itself gives no specific answer. Nor has there been, so far as we can find, any authoritative interpretation of the phrase "further or formal assignment", found also in § 45 of the N.Y. Personal Property Law, McK.Consol.Laws, c. 41, from which C. 262-A, Rev.Laws of N.H., was apparently derived almost verbatim. In Bloch v. Mill Factors Corp., 2 Cir., 1941, 119 F.2d 536, 538, 134 A.L.R. 1188, it is said: "Section 45 of N.Y. Personal Property Law provides two alternative methods by which a merchant can give to a factor a lien upon his accounts receivable: first, by a general agreement that the factor shall have such a lien, which must be implemented by notice to each of the merchant's customers that the account is payable to the factor; and, second, by a separate assignment of each account to the factor of which he need not advise the customer. The defendant followed both methods and the trustee does not question the validity of the assignments, so far as concerns the accounts themselves."

While the above-quoted language was by way of dictum, since in the Bloch case the corporation had executed a separate assignment of each account as it came into existence, it does lend some support to the conclusion we have reached that a purported general assignment of future accounts, contained in the factor's lien agreement itself, is insufficient to perfect a lien on such accounts under § 5 of C. 262-A. The interpretation thus made in the Bloch case seems to have met with approval in 4 Collier, Bankruptcy ¶ 70.83 n. 12 (14th ed. 1942).

We do not decide that a clause in the factor's lien agreement itself can never be an effective assignment of accounts in existence when the agreement was executed, though the statutory reference to a "further" assignment might raise some doubt on this point. What we do hold is that to perfect the lien on future accounts, the after-acquired accounts must be assigned as or after they come into existence; that the statute does not contemplate a general assignment of future accounts.

Several considerations lead us to this conclusion.

First, the language of § 5 seems most naturally to refer to assignments of existing, ascertained accounts. Indeed the word "assignment" normally imports a present transfer by the assignor; and the assignor cannot presently transfer an interest which he has not yet acquired, though he may contract to assign such an interest in the future upon his acquisition of it.

Second, it is not without significance that in § 1 of C. 262-A the New Hampshire legislature specifically provided that the lien on merchandise would be valid from the time of filing the prescribed notice "whether such merchandise shall be in existence at the time of the agreement creating the lien or at the time of filing such notice or shall come into existence subsequently thereto or shall subsequently thereto be acquired by the borrower". In other words, the res which is the subject of the lien provided in § 1 is the merchandise or stock in trade, conceived of as a unit presently and continuously in existence — a "floating mass", the component elements of which may be constantly changing without affecting the identity of the res. Cf. Hopkins v. Baker Bros. & Co., 1894, 78 Md. 363, 28 A. 284, 22 L.R.A. 477; Pullman's Palace Car Co. v. Pennsylvania, 1891, 141 U.S. 18, 26, 11 S.Ct. 876, 35 L.Ed. 613. So conceived, it is not inconsistent with the existence of the lien or floating charge on the inventory, as it may be made up at any particular time, that the borrower is free to withdraw an item from stock for sale in the regular course of business, without any obligation to account to the lienholder for the proceeds. Colbath v. Mechanicks National Bank of Concord, 1950, 96 N.H. 110, 70 A.2d 608. By analogy it might be possible to treat a merchant's accounts receivable as a unit presently and continuously in existence, the component elements of which (the particular accounts) may be constantly changing, without affecting the identity of the res; so that a general assignment by way of security of accounts receivable present and future might be deemed to create in...