Manufacturers Finance Co v. Key

• Decision Date: 04 March 1935
• Docket Number: No. 522,522
• Citation: 294 U.S. 442,79 L.Ed. 982,55 S.Ct. 444
• Parties: MANUFACTURERS' FINANCE CO. v. McKEY
• Court: U.S. Supreme Court

294 U.S. 442

55 S.Ct. 444

79 L.Ed. 982

MANUFACTURERS' FINANCE CO.

v McKEY.

No. 522.

Argued Feb. 13, 14, 1935.

Decided March 4, 1935.

Messrs. Edward I. Rothbart, of Chicago, Ill., and Samuel A. Dew, of Kansas City, Mo., for petitioner.

Mr. Thomas L. Marshall, of Chicago, Ill., for respondent.

Mr. Justice SUTHERLAND delivered the opinion of the Court.

This writ brings here for consideration certain questions in respect of the enforcement of a contract between petitioner and Grigsby-Grunow Company (hereinafter referred to as the company) made October 5, 1933. The contract purports to be one for the purchase of designated accounts receivable for which petitioner promised to pay 100 per cent. of the actual net amounts thereof, less a charge for interest on the purchase money outstanding and less compensation for certain services rendered or to be rendered by petitioner. Fifty per cent. of the actual net amounts was to be paid in cash upon acceptance of the accounts; and the remainder, with specified deductions and additions, was to be paid immediately upon payment of the accounts. All original checks, drafts, notes, etc., received by the company in full or partial payment of any of the accounts so purchased were to be delivered to petitioner at its office on the day of their receipt. Attorneys' fees, costs and expenses incurred by petitioner were to be paid by the company. Compensation for services was to be at the rate of 83 1/2 per cent. of one-thirtieth of 1 per cent. of the net face amount of accounts for each day from the date of purchase. Total charges against the company, as estimated by the parties, would equal about 20 per cent. per annum upon the outstanding balance of cash advances up to November 24, 1933.

Among other services, petitioner agreed to furnish to the company specified information upon request in respect of customers; to furnish information and advice as to the most desirable method of keeping books, records, and accounts of the company; to give, upon request, financial and business advice; to obtain and have on hand at all times funds to make prompt remittance for acceptable accounts; to supply forms needed for assignment of accounts; to put its credit and collection department at the disposal of the company; and to furnish advice and opinions as to the form and legality of the company's sales contracts with its customers.

On November 24, 1933, in a suit brought by a creditor against the company, a federal District Court for the Northern District of Illinois appointed receivers to preserve the property and assets of the company. The company was solvent, having assets greatly exceeding its liabilities; and the receivers were directed to continue the business as a going concern and to do all things necessary to that end and to preserve the property. They were directed to take charge of all assets, books of account, etc.; to employ and discharge and fix compensation of employees, agents, etc.; to collect, sell, and liquidate accounts, etc.; and to purchase on credit or otherwise such supplies and equipment as might be necessary to continue the business as a going concern. All persons were enjoined from interfering with the receivers in their possession of the property, the administration of their trust, or in the performance of the duties imposed upon them.

The receivers refused to pay over to petitioner anything collected on the assigned accounts unless directed to do so by the court. Subsequently, such direction being given, the receivers from time to time paid to petitioner various sums which, together with an amount collected by the petitioner itself, finally liquidated the amount due petitioner up to the time when the receivers were appointed. This liquidation was effected between the date of the receivership and December 29, 1933; a period of 35 days. Petitioner had already (on November 29, 1933) intervened in the receivership proceeding with a petition seeking compliance on the part of the receivers with the terms of its contract; and, after the liquidation to the extent stated above had been effected, petitioner continued the proceeding under its petition, demanding payment at the contract rate of a sum aggregating, at the end of the 35-day period, $4,394.48, together with reasonable attorneys' fees and costs. No accounts were purchased or assigned after the receivership, and the only obligation which remained was to carry out the terms of the contract in so far as they affected the accounts already assigned.

The gross sum which petitioner received under the contract for the time prior to the receivership was equal to the estimated 20 per cent. per annum on the moneys actually advanced to the company. The amount which it was claimed had accrued during the 35-day period was equivalent to an average of about 28.3 per cent. per annum from the date of the appointment of the receivers. The petition asked for reasonable attorneys' fees without specifying any amount. The only testimony on the subject was that of an attorney who said the sum of $7,800 was reasonable.

The District Court entered a decree in favor of petitioner for.$1,087.93, being at the rate of 7 per cent. instead of 28.3 per cent. per annum, upon the outstanding balances. That court denied all further relief on the sole ground that petitioner's demand was inequitable and that in making it petitioner had not come into equity with clean hands. The decree was affirmed by the Circuit Court of Appeals. P. R. Mallory & Co. v. Grigsby-Grunow Co., 72 F.(2d) 471, 473. The basis of that court's decision cannot be better stated than in its own words: 'The insistence of appellant upon its claim for the full rate of interest plus attorneys' fees at a preposterous rate, when it appeared that there was no more business to be done under the contract because of the receivership of the Company savors too much of the exaction of the pound of flesh from the creditors of the insolvent company to be enforcible in a court of equity. If this case arose in an action at law between the original parties it may well be that the court could not refuse to enforce the contract according to its strictest terms. But where the creditor goes beyond the practice of the parties under the original contract and tries to enforce rights never asserted against the other contracting party, and in addition tries to collect counsel fees exceeding 177% of the maximum amount claimed against the receiver who is attempting to salvage the assets for the benefit of the other creditors who have a substantial interest in the estate of the debtor, we can not feel that a court of equity is any place for him to press his demands.'

February 18, 1934, while the appeal was pending in the Court of Appeals, a petition in bankruptcy was filed in the federal District Court against the company; and this was followed by an adjudication of bankruptcy and the selection, April 16, 1934, and qualification, later, of the respondent McKey as trustee in bankruptcy. Subsequently, upon the application of both parties, McKey was substituted in the Court of Appeals as appellee.

In connection with the discussion which follows, two considerations are to be borne in mind: (1) When the receivers were appointed November 24, 1933, the company was solvent, having assets exceeding its liabilities in the sum of $13,000,000, and there is nothing in the record to suggest that this condition of solvency did not continue until after the completion of the 35-day period here involved. (2) What effect, if any, an act of bankruptcy might have had upon the life or operation of the contract we need not determine, since it is plain that the appointment of a receiver upon the application of a creditor is not an act of bankruptcy except in cases of insolvency. Title 11, U.S.C. § 21(a), as amended May 27, 1926, Title 11, U.S.C. Supp. VII, § 21(a)(5), 11 USCA § 21(a), (5); Nolte v. Hudson Nav. Co. (C.C.A.) 8 F.(2d) 859, 866; Meek v. Beezer (C.C.A.) 28 F.(2d) 343, 345; In re Edward Ellsworth Co. (D.C.), 173 F. 699, 700, 701; In re Guardian Building & Loan Ass'n (D.C.) 53 F.(2d) 412, 415.

The effect of the contract was to bind the company as agent of petitioner to collect the purchased accounts and deliver to the latter the proceeds in kind from day to day as fast as they were collected. The receivers were equally bound.

The extent of the benefit which accrued to the company by reason of the advantages which evidently were expected to result from the opportunity to avail itself of the use of a large part of the proceeds of the accounts in advance of their payment, and from the services of petitioner, is not a matter for judicial inquiry. The parties dealt at arm's length. The contract was voluntarily executed by the board of directors of the company. It is not suggested that there was any mistake or any fraud or overreaching on the part of petitioner. The contract, it is conceded, is valid under the statutes of Illinois as construed by the Supreme Court of the state, Tennant v. Joerns, 329 Ill. 34, 160 N.E. 160; and, so far as the record discloses, it was performed on the part of petitioner in all respects up to, at least, the appointment of the receivers.

But the court below refused to be bound by the law of Illinois, upon a theory which it had advanced in a former case, In re Chicago Reed & Furniture Co., 7 F.(2d) 885, namely, that a state law cannot 'abrogate the rule that courts of equity will not lend their aid to enforce contracts which upon their face are so manifestly harsh and oppressive as to shock the conscience.' With that view as here applied we are unable to agree.

The contract was in force when the receivers were appointed; and it continued effective until the expiration of 35 days thereafter, at which time it was brought to an end. During that period, if there were no default on petitioner's part, the contract, in so far as it remained unperformed, was enforceable against these receivers...