Mount v. Norfolk Savings & Loan Corp.
| Decision Date | 05 November 1951 |
| Docket Number | No. 6264.,6264. |
| Citation | 192 F.2d 286 |
| Parties | MOUNT v. NORFOLK SAVINGS & LOAN CORP. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Israel Steingold, Richmond, Va. (Samuel A. Steingold and Steingold & Steingold, all of Norfolk, Va., on the brief), for appellant.
Henry J. Lankford, Norfolk, Va., for appellee.
Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.
The trustee in bankruptcy of Legum Furniture Corporation brought this suit against Norfolk Savings and Loan Corporation, hereinafter called the bank, to set aside and avoid the assignment of certain conditional sales contracts pledged by Legum with the bank as collateral security for loans, and to recover, as voidable preferences under Section 60 of the Bankruptcy Act, 11 U.S.C.A. § 96, certain moneys collected by the bank on assigned contracts. The District Judge gave judgment for the bank and dismissed both claims of the trustee.
Legum was engaged in the retail sale of furniture in Norfolk, Virginia, under conditional sales contracts whereby the purchaser, having made an initial payment, was given possession of the goods, and agreed to pay the balance of the purchase price in monthly installments, and the seller retained title to the goods pending full payment with the right in case of default to repossess them. The contracts were valid and were duly docketed under the Virginia statutes. See Section 55-88 of the Virginia Code of 1950.
A petition in involuntary bankruptcy was filed in the District Court against Legum on May 3, 1950 and was followed by an adjudication on May 16, 1950. The bankruptcy schedule showed assets of $42,638.02 and liabilities of $125,115.63. The trustee collected accounts receivable in the amount of $1600.95 and sold the remaining assets for $11,300. At the time of bankruptcy the bank held assigned accounts in the sum of $17,992.06. At the time of the hearing in the District Court it had collected $6206.95 on the accounts assigned to it and held assigned accounts of the face value of $11,785.11. Its claim at the time of bankruptcy amounted to $15,416.
For six or seven years prior to bankruptcy Legum had been borrowing money from the bank on promissory notes payable in monthly or weekly installments, and had assigned, as collateral security, conditional sales contracts of its customers. The contracts were docketed as required by the state statute, and were then assigned by endorsement and delivered to the bank. Assignments were also stamped on the customers' accounts on the Legum ledger. There was no other written agreement between the parties defining the procedure for the collection, control and distribution of the proceeds of the accounts; and the agreement in these respects can be ascertained only from the oral testimony of the officers of the participating corporations as to their understanding, and particularly from what was actually done in carrying on the business.
The procedure may be described as follows: When Legum borrowed money from the bank it gave a promissory note for the amount of the loan payable in installments and assigned and delivered sales contracts to the bank in such an amount that the average weekly payments due on the contracts approximated the amount of the installment payments due on the note. The purchasers were not notified of the assignment of the accounts but the understanding was that Legum was to make the collections and to remit to the bank the amount of the installments due on its promissory note. If the amount collected was more than the installments due on the note Legum kept the balance and used it in its business; and if the amount was less Legum was expected to make up the deficiency. There was no specific agreement that Legum should make the collections and remit the proceeds to the bank; and in fact the moneys collected were not remitted to the bank; but the executive officers of both lender and borrower in charge of the transactions testified that Legum collected the accounts as agent of the bank.
There was no attempt by Legum to segregate its collections on the assigned accounts, which constituted about 25 per cent of all of its accounts, from its collections on other accounts. All collections were deposited by Legum in a national bank of deposit and used in Legum's business. The bank exercised no control over the collections and required no accounting thereof. The judge found that it "was interested in these collections, and showed interest in the collections, only so far as it was necessary to obtain from the bankrupt the money sufficient to meet its obligations at the bank."
Legum did not report to the bank the collections on assigned accounts as they were made, or assign new accounts to the bank to take the place of those which were paid at the time that they were closed out. Usually Legum's representative brought new accounts to the bank, especially when Legum desired to renew a note, and on these occasions the bank's agent would go to Legum and check the accounts on the ledger to ascertain whether the open accounts were sufficient in amount to secure the loans. There was no regularity about the procedure and no attempt on Legum's part to segregate or hold the collections for the bank until such time as new accounts of equal amount were assigned.
Legum repossessed purchased goods from delinquent customers and resold the goods whenever it saw fit to do so without notice to the bank. There is no evidence that it ever became necessary to bring suit against a defaulting customer on an assigned contract in the hands of the bank or to make use of the document to repossess the goods which it covered. Legum was supposed to substitute a new contract for repossessed goods but the substitutions for such accounts were made at irregular intervals in the same manner as substitutions for accounts closed by payment.
The course of events during the year preceding bankruptcy gives evidence of the control and use of the moneys collected on the assigned accounts which Legum exercised with the bank's consent. During this period Legum was continuously in default in its payments to the bank and continuously used the proceeds of the accounts in its business. For example, on September 16, 1948 Legum gave its collateral note to the bank for $3000 payable in installments of $300 per month; but the payments were not made as agreed, and on January 6, 1950 the note was renewed for $1050.
On January 8, 1949 Legum gave its collateral note for $2500 payable in monthly installments of $500; but the only payment was $1000 on April 20, 1949 and thereafter nothing was paid but interest in the sum of $100 on September 15, 1949 and $31.75 on January 21, 1950.
On April 8, 1949 Legum gave a collateral renewal note for $11,263 payable in weekly installments of $225, but paid thereon only $450 on June 29, 1949 and $216 as interest on September 3, 1949.
On December 12, 1949 the last mentioned note was renewed for $11,663, payable in like manner, but only $450 was paid thereon on February 10, 1950 with interest in the sum of $83 on March 6, 1950. When this note was given Legum owed the bank $16,123, which was secured by assigned accounts in the sum of $13,679.26. A condition of the renewal was the promise of Legum to assign additional accounts as collateral, and accordingly accounts in the sum of $4312.50 for goods sold in January, 1950 were assigned to the bank in February, 1950.
The District Judge found that there was no evidence to show that in February, 1950, within four months of bankruptcy, the bank had reasonable cause to believe that Legum was insolvent. It is, however, established...
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