Solomon v. Northwestern State Bank

• Decision Date: 24 February 1964
• Docket Number: No. 17297.,17297.
• Citation: 327 F.2d 720
• Parties: Lewis E. SOLOMON, Trustee of the Estate of Northwood Millwork, Inc., a Corporation, Bankrupt, Appellant, v. NORTHWESTERN STATE BANK, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

327 F.2d 720 (1964)

Lewis E. SOLOMON, Trustee of the Estate of Northwood Millwork, Inc., a Corporation, Bankrupt, Appellant, v. NORTHWESTERN STATE BANK, Appellee.

No. 17297.

United States Court of Appeals Eighth Circuit.

February 24, 1964.

M. L. Culhane, James E. Culhane, Minneapolis, Minn., for appellant.

Joe A. Walters, Thomas A. Keller, III, Minneapolis, Minn., and O'Connor, Green, Thomas & Walters, Minneapolis, Minn., Clinton W. Redlund, St. Paul, Minn., of counsel, for appellee.

Before VAN OOSTERHOUT and BLACKMUN, Circuit Judges, and HANSON, District Judge.

HANSON, District Judge.

This is an appeal from a bankruptcy review. The Northwestern State Bank filed a Petition for Reclamation in the Bankruptcy Court. This petition in part alleged: (1) That on March 24, 1961, the reclaimant, Northwestern State Bank, entered into a Factor's Lien Agreement with the bankrupt, Northwood Millwork, Inc., and that it had been filed in the office of the Register of Deeds of Ramsey County, Minnesota, on March 30, 1961; (2) That the reclaimant loaned to the bankrupt on December 14, 1961, $45,000.00 to be secured by the factor's lien which was subsequently reduced to $20,841.05; and (3) That the December 14, 1961, loan was also secured by certain specified accounts receivable.

The trustee answered and admitted that a purported agreement was filed on March 30, 1961, but denied that the factor's lien was valid upon the trustee. The trustee also denied that there was any valid lien as security or otherwise on the bankrupt's accounts receivable.

A hearing was held before the Referee in Bankruptcy on this matter. There was no question but that the Factor's Lien Agreement was executed and recorded as alleged, that the loan was made in the amount of $45,000.00 and that it had since been reduced to $20,841.05, and that the agreement purported to give the Bank a lien on the bankrupt's inventory and accounts receivable.

The trustee claimed that the Factor's Lien Agreement was invalid as to the trustee for the reason that it failed to describe the property and failed to give the location of the property which was to be subject to the lien. The applicable Minnesota statutes read as follows:

"514.81 Continuing lien

"If so provided by any written agreement with the borrower, a factor shall have a continuing lien upon all merchandise of the borrower generally described in such agreement, or any separate written statements thereafter signed by the borrower and delivered to the factor * * * and upon any accounts receivable or other proceeds resulting from the sale or other disposition of such merchandise, and * * * such lien shall secure the factor for all his loans and advances to, or for the account of, the borrower made within the time specified in a notice filed * *."

"514.82 Execution of lien; contents; amendment of notice

"Notice of the creation of a factor\'s lien shall be signed by the factor and the borrower, shall be filed as hereinafter provided, and shall contain the following information: * * *

"(c) The general character of merchandise subject to the lien, or which may become subject thereto, together with the place or places where such merchandise is or will be situated."

"514.83 Notice, filing of

"* * * no factor\'s lien created pursuant to sections 514.80 to 514.91 shall be valid or enforceable against creditors of the borrower until the notice provided for in section 514.82 has been so filed. * * *"

"514.91 Construction

"* * * A substantial compliance with their several provisions shall be sufficient for the validity of a lien * * *."

The Bank states in its brief that it is admitted that no description of the merchandise was given in the Notice which was filed. The Bank asserted that there was constructive notice of the location of the merchandise and that the factor's lien is valid because there was substantial compliance with the several provisions of the Factor's Lien Act.

The Referee found for the trustee and against the reclaimant Bank. Although other issues were presented to the Referee and the District Court, it is the disposition of this one issue which will be determinative of this appeal.

There is a discussion of factor's liens in Collier on Bankruptcy, 14th Ed. Section 70.77. The statutory factor's lien authorizes floating liens on inventory in favor of banks and various other types of lenders. The common-law factor's lien was usually a possessory type lien while the statutory lien is not. Collier states that the factor's lien is the most notable legislative development in the attempt to obtain by legislation the freeing of commercial lenders of the rule in Benedict v. Ratner, 268 U.S. 353, 45 S. Ct. 566, 69 L.Ed. 991. See also Knapp v. Milwaukee Trust Co., 216 U.S. 545, 30 S. Ct. 412, 54 L.Ed. 610. That rule as it was applied in Minnesota made any transfer of property as security which reserves to the transferor the right to dispose of the property void or voidable as against certain creditors. There appears to be at least three purposes behind this rule. One reason was that it left ostensible ownership in the transferor. The theory of a conceptional repugnancy between the actualities of the transaction and the purported security interest is another reason. A third reason is found in In Re Summit Hardware, Inc., 302 F.2d 397 (6th Cir.). In that case, the court said the records would serve to identify the property subject to the lien in the event of enforcement proceedings. The court was apparently aware that there might be fraud or collusion at the time of enforcement.

This court in In Re Frey, 15 F.2d 871 (8th Cir.) many years prior to the enactment of the present Minnesota statutes, recognized that Minnesota adhered to the general rule that an agreement that the mortgagor may retain possession and sell or dispose of the property as his own, without satisfaction of the mortgage debt, is fraudulent as a matter of law and voidable as against creditors. Since the mortgage in that case was recorded, the court apparently did not feel that Minnesota invalidated the lien only on the theory of ostensible ownership. Section 514.89 of the Minnesota Code contains an anti-Benedict clause and renders the reservation of dominion over the property innocuous provided that the several parts of the Act are substantially complied with as Section 514.91 prescribes. It might be contended that the reasons for requiring substantial compliance with the factoring statute are the same reasons that are behind the general rule that an exercise of dominion over the property by the mortgagor renders any lien voidable as against creditors. Of course, that is not necessarily so. See 28 Minnesota Law Review, 260, "The Retention of Dominion in Security Financing."

Collier Section 70.77, supra, pps. 1595-1596, In Re Cut Rate Furniture Co., D. C., 163 F.Supp. 360, In Re Summit Hardware, Inc., supra, and In Re Adams Machinery Inc., 20 Wis.2d 607, 123 N.W.2d 558, 564, tend to show that the purpose of the factor's lien statute in some States is only to prevent creditors from relying on ostensible ownership of the debtor while other jurisdictions require a designation of the property liened and give greater protection to the creditors.

In this case, the trial court felt that the purpose of the Minnesota Act was to prevent reliance by creditors on ostensible ownership. The court said: "The fact, therefore, that the filed agreement did not describe the merchandise liened or its location with greater particularity did not place upon interested third parties a burden of independent inquiry which they would not otherwise have." The court, however, also stated that the purpose of the statute was to prevent fraud upon creditors, to give certainty to the Notice, and to prevent lenders from later claiming their lien to be more extensive than it actually was.

In finding that the Factor's Lien Agreement substantially complied with the statutes, the trial court stated that "(2) the reference to all merchandise or its equivalent can be derived from the written agreement and the statute and (3) it was the Bank's money which presumably created the accounts receivable and inventory which the unsecured creditors now wish...