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In re Prince

May 3, 1937

IN RE PRINCE ET AL.; NEW YORK CREDIT MEN'S ASS'N
v.
SCHNUR



Appeal from the District Court of the United States for the Southern District of New York.

Author: Hand

Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

Meyer Prince and George Prince, a copartnership doing business as Paris Maid Dress Company, and also as Prince Dress Company, made agreements with the appellant Max Schnur under which they were to assign to Schnur certain of their accounts for merchandise as collateral security for loans thereon, and Schnur was to advance 70 per cent. of the face of the accounts. The agreements provided for payment by the borrowers of a service charge of 3 per cent. upon the net amount advanced by the lender for a period of thirty days. This charge was afterwards reduced to 2 1/2 per cent. The borrowers collected the accounts and the lender had nothing to do with them except to receive the list on making the advances and to check them up with the invoices and to keep track of the collections and returns of merchandise by having an accountant examine the books of the borrowers. Any receipts from the assigned accounts in excess of the amounts required to repay Schnur belonged to the borrowers. The charges for the services were far in advance of the legal rate of interest and varied from 22 1/2 per cent. to 42 per cent. per annum. The arrangement was usurious under the New York law and was so held by the court below. The service charges made were for the benefit of Schnur and not for that of the borrowers. Although, under the terms of the written agreement, the lender might have collected the accounts, he did not do so and the services rendered by the auditor and others of his staff were in watching the collateral and otherwise safeguarding his loan. In that respect the services differed from those for which compensation has been allowed by courts to lenders such as for examination of title preliminary to making loans, for actually collecting pledged accounts and for work of attorneys in enforcing collections under agreements. Security Mortgage Co. v. Powers, 278 U.S. 149, 49 S. Ct. 84, 73 L. Ed. 236; In re Gotham Can Co. (C.C.A.) 48 F.2d 540, 542. In the case at bar the service charge was continuous from the time when the loan was made and was in fact a charge by the lender only "for a service he renders to himself." Commercial Security Co. v. Holcombe, 262 F. 657, 662 (C.C.A. 5). Agreements to pay more than the legal rate of interest, though in form for services rendered, have been treated as usurious under circumstances such as we find here. Home Bond Co. v. McChesney, 239 U.S. 568, 36 S. Ct. 170, 60 L. Ed. 444; Commercial Security Co. v. Holcombe, 262 F. 657 (C.C.A. 5); Grannis v. Stevens, 216 N.Y. 583, 111 N.E. 263; Quackenbos v. Sayer, 62 N.Y. 344. Such cases as Houghton v. Burden, 228 U.S. 161, 33 S. Ct. 491, 57 L. Ed. 780, and In re Mesibovsky (C.C.A.) 200 F. 562, where actual services were performed by the lender at an agreed rate of compensation in excess of legal interest are distinguishable.The court in Home Bond Co. v. McChesney, 239 U.S. 568, 36 S. Ct. 170, 60 L. Ed. 444, distinguished Houghton v. Burden, 228 U.S. 161, 33 S. Ct. 491, 57 L. Ed. 780, on the ground that the services there were not a cover for usury.

The contention of the appellant that the transaction was a sale and not a loan is palpably without foundation. The agreement was: "To make advances to the Customer from time to time, provided the Customer shall assign and deliver to the Company as collateral security for such advances, accounts receivable for goods actually sold and delivered by the Customer, or for work, labor and services actually performed and/or materials actually furnished by the Customer, or notes, or trade acceptances received in settlement thereof, which accounts, or notes, or trade acceptances shall be approved by and be acceptable to the Company, and which will hereinafter be designated as 'Accounts'. Each advance to be seventy (70%) per cent. or less, of the net face value of the accounts assigned."

The assignments plainly were not sales but loans under arrangements made in order to obtain an excess rate of interest for the use of money in evasion of the usury law.

The question before us is the effect to be given to collections of the pledged accounts under the following circumstances: A petition in bankruptcy was filed against Meyer Prince and George Prince, and the appellant, New York Credit Men's Association, was appointed receiver on November 6, 1935, and afterwards was elected and qualified as trustee. The receiver collected $2,729.19 on the assigned accounts and turned this sum over to Schnur under a stipulation whereby it was provided that the receiver should turn over to Schnur all moneys collected on the accounts, and that the delivery of such moneys should be "without prejudice to the rights of said * * * Receiver and/or Trustee in bankruptcy." The fact that the accounts receivable were assigned upon a non-notification basis and that at the time of the filing of the petition in bankruptcy they were being collected by the bankrupts gave the bankruptcy court jurisdiction to determine the validity of all claims or liens thereto under the doctrine that the accounts were in custodia legis.

A situation similar to that before us here was discussed by Swan, J., in Matter of Borok (C.C.A.) 50 F.2d 75, 77, where he remarked that: "One cannot speak of 'possession' of a chose in action in the same sense as of tangibles; but if such terminology is to be used it would seem that the bankrupt was as much in 'possession' of the assigned accounts as he could be of any chose in action. He had the right to collect from the debtors and to use the proceeds as he saw fit. * * * Under such circumstances we believe that the bankruptcy court has power to determine summarily the respective rights of the trustee and the assignee in respect to the assigned accounts outstanding at the date of the petition."

If in the present case the receiver had retained the proceeds of collection and turned them over to the trustee Schnur would have had to sue the latter who could have defended on the ground of usury under the following provisions of the General Business Law of the State of New York (Consol. Laws, c. 20):

"§ 370. Rate of interest. The rate of interest upon the loan or forbearance of any money, goods, or things, in action, except as otherwise provided by law, shall be six dollars upon one hundred dollars, for one year, and at that rate, for a greater or less sum, or for a longer or shorter time."

"§ 371. Usury forbidden. No person or corporation shall, directly or indirectly, take or receive in money, goods or things in action, or in any other way, any greater sum or greater value, for the loan or forbearance of any money, goods or things in action, than is above prescribed."

"§ 373. Usurious contracts void. All bonds, bills, notes, assurances, conveyances, all other contracts or securities whatsoever, except bottomry and respondentia bonds and contracts, and all deposits of goods or other things whatsoever, whereupon or whereby there shall be reserved or taken, or secured or agreed to be reserved or taken, any greater sum, or greater value, for the loan or forbearance of any money, goods or other things in action, than is above prescribed, shall be void.

"Whenever it shall satisfactorily appear by the admissions of the defendant, or by proof, that any bond, bill, note, assurance, pledge, conveyance, contract, security or any evidence of debt, has been taken or received in violation of the foregoing provisions, the court shall declare the same to be void, and enjoin any prosecution thereon, and order the same to be surrendered and canceled."

We can see no distinction between a situation where the receiver or trustee in bankruptcy or a stakeholder holds the fund and the one here where there was a stipulation that the moneys collected from the accounts by the receiver should be turned over to Schnur, but such transfer should "be deemed to have been and to be ...


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