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WOLF v. AERO FACTORS CORP.

June 28, 1954

Alex WOLF as Trustee in Bankruptcy of Regent Case Co., Inc., Bankrupt, Plaintiff,
v.
AERO FACTORS CORPORATION, Defendant



The opinion of the court was delivered by: LEIBELL

This is a suit by the Trustee in Bankruptcy of Regent Case Co., Inc. (A) to have a chattel mortgage, given by the bankrupt to the defendant, Aero Factors Corporation, adjudged invalid and void and to recover the value of the mortgaged property, which the defendant allegedly preferentially seized and sold within the four months' period preceding bankruptcy; and (B) to recover certain alleged preferential payments made by the defendant to itself within the four months' period preceding bankruptcy out of money due the bankrupt.

In June, 1949, the bankrupt, a New York corporation with offices at 2926 White Plains Road, Bronx, N. Y., was engaged in the manufacture and sale of ladies compacts. The defendant, a New York corporation with offices at 540 Myrtle Avenue, Brooklyn, N. Y., was engaged in the business of factoring. On or about June 9, 1949, the bankrupt executed and delivered to the defendant a chattel mortgage to secure a loan of $ 7,500, which was evidenced by a series of ten promissory notes each in the sum of $ 750. The mortgage recites that the mortgagor, Regent Case Co., Inc., had offices and a factory at 2926 White Plains Road, Borough of Bronx, and that the machinery, fixtures and chattels set forth in Schedule 'A' annexed to the mortgage were 'in the premises at 2926 White Plains Road, Bronx, New York, and in care of Otto Schreiber, 1947, Flushing Avenue, Brooklyn, New York.' The particular chattels at each location were not specified. The chattel mortgage was filed in the City Register's office in the Borough and County of Bronx and in the Borough of Brooklyn, County of Kings. Street number 1947 Flushing Avenue, Brooklyn, was the actual and proper mailing address of Otto Schreiber, the person to whom some of the chattels, certain dies, had been delivered to do certain work for the bankrupt, and these chattels were located at Schreiber's said place of business. However, although Schreiber's premises were serviced by the Brooklyn post office, they were in fact located in the Borough and County of Queens, New York. The chattel mortgage was never filed in the Register's office in the Borough and County of Queens.

 The trustee asserts that the defendant's failure to file the chattel mortgage in the County of Queens completely invalidates the mortgage for lack of compliance with Sections 230 and 232 of the New York Lien Law, McK.Consol.Laws, c. 33. *fn1" The defendant contends that the mortgage is entirely valid; but that if its filing was defective as to chattels in Queens County, the mortgage should be held valid as to the chattels situated at the bankrupt's place of business in Bronx County where the mortgage was properly filed.

 I have concluded that the chattel mortgage is invalid as to the chattels situated in Queens County. The problem as to the Queens chattels is answered by In re National Browne Co., Inc., 2 Cir., 151 F.2d 595, 596. In that case all the mortgage chattels were located at No. 1852 Flushing Avenue, which was actually within the County of Queens, although it had a Brooklyn post office number. The appellate court affirmed a ruling that the chattel mortgage was invalid since it was not filed in compliance with Section 232 of the New York Lien Law.

 Although 'strict compliance with the statute is required to create the lien', In re National Browne Co., Inc., supra, nevertheless a court of bankruptcy is a court of equity and the lien should be recognized as valid in relation to the mortgaged chattels located in Bronx County, where the mortgage was properly filed. The proof has established which chattels were situated in the Bronx. The purpose of the filing statute is to enable the public to know whether particular personal property is encumbered or not. The principal office of Regent Case Co., Inc. was in the Bronx. Filing the chattel mortgage in the Bronx was all the notice the statute required as to the chattels in the Bronx. It would be unreasonable to hold that the fact that some of the chattels listed in the mortgage schedule were in the Borough and County of Queens should destroy the entire security and render the chattel mortgage void as against the other chattels located in the Bronx, in respect to which the filing sections of the Lien Law were fully satisfied. Hubbardston Lumber Co. v. Covert, 35 Mich. 25; In re Soldier's Business Messenger & Dispatch Co., D.C.N.Y., 22 Fed.Cas. No. 13,163, p. 781.

 The trustee contends that the chattel mortgage is totally invalid and void on a further ground. When the defendant loaned the bankrupt the $ 7,500 it deducted $ 150 by way of prepaid interest upon the loan. It is the trustee's position that this 'interest in advance' was in violation of the New York General Corporation Law, Section 18, McK.Consol.Laws, c. 23, *fn2" and the New York Banking Law, § 131 sub. 1, McK.Consol.Laws, c. 2, *fn3" and that these violations voided and made invalid the chattel mortgage. But the New York Court of Appeals has expressly held that a business corporation may lend money on real and personal security without in any form conducting a banking business. Meserole Securities Co. v. Cosman, 253 N.Y. 130 at page 134, 170 N.E. 519. A factoring business is not a form of banking business. Pennsylvania Factors Corporation v. S. Oldman Inc., 272 App.Div. 1049, 74 N.Y.S.2d 670.

 The statute sanctions the mortgage loan transaction involved in this case, but it is silent on the question of interest paid in advance. Bankers are expressly authorized by statute to deduct interest in advance, New York Banking Law, § 108, subd. 1, but such authorization does not preclude all but bankers from taking interest in advance. Hungerford Brass & Copper Co. v. Brigham, 47 Misc. 240, 243, 95 N.Y.S. 867. Although a small additional advantage is thus acquired by the lender, it has been held that, in view of long established commercial custom, individuals and corporations, as well as banks, may lawfully deduct interest in advance on short term negotiable instruments. New York Firemen Insurance Company v. Ely, 2 Cow., N.Y., 678 at page 704. The deduction of interest in advance did not invalidate either the loan Aero made to Regent or the security of the chattel mortgage that Regent gave Aero.

 As stated above, the schedule of chattels annexed to the mortgage does not show which of the chattels were located at the Flushing Avenue premises of Otto Schreiber and which were at the bankrupt's premises at White Plains Road in the Bronx. However, Abraham Golub, Esq., who drew up the chattel mortgage, and who then was, and now is, the attorney for the defendant, testified that after the mortgage was originally executed on June 1, 1949, he went to the White Plains Road premises of the mortgagor and compared the equipment there located with the list of equipment in the chattel mortgage schedule; that all the equipment was located at the Bronx premises, except fifty items; that those fifty items Mr. Golub found at 1947 Flushing Avenue, the premises of Otto Schreiber; that they were special dies which Schreiber used in stamping some of the compacts for the bankrupt.

 After his inspections of the chattels subject to the mortgage, Mr. Golub made a change in the mortgage to declare that some of the chattels were located at Schreiber's premises. The mortgage was then, on June 9, 1949, re-executed by the parties and 'within one or two days' thereafter was filed in Bronx County and in Kings County.

 Counsel have stipulated that the value of the chattels located at the Flushing Avenue premises of Otto Schreiber represented one-third of the total value of all of the chattels described and listed in the chattel mortgage and that the value of the chattels located at White Plains Road in the Bronx represented two-thirds.

 Apparently the mortgagee discovered the error of failing to file the chattel mortgage in Queens County, and on April 10, 1950 instituted an action against the mortgagor in the Supreme Court, County of Kings, for the sum of $ 5,531.49 as the balance due and unpaid on the notes representing the loan secured by the chattel mortgage. On May 5, 1950, judgment was entered by default in that action in the sum of $ 5,659.74. On May 8, 1950 execution on said judgment was issued to the Sheriff of the City of New York, Queens County Division, and acting thereunder the sheriff levied upon the chattels (dies) located in No. 1947 Flushing Avenue, Borough of Queens, City of New York, which were a part of the chattels listed in the schedule annexed to the chattel mortgage. Those dies were the same chattels which Mr. Golub found at No. 1947 Flushing Avenue at the time of his inspection in June 1949. On May 15, 1950, under the said default judgment, the sheriff sold the said chattels for the sum of $ 100 to Mr. Golub, who acted for defendant in making the purchase.

 The parties have stipulated that at all times after March 1, 1950, the bankrupt was insolvent within the meaning of the Bankruptcy Act and that the defendant had reasonable cause to delieve that the bankrupt was insolvent after March 1, 1950. Under those circumstances the sheriff's sale conducted under an execution issued on a default judgment was a preferential transfer of bankrupt's property, voidable by the trustee in bankruptcy in a suit such as this. Grant v. National Bank of Auburn, D.C.N.Y., 232 F. 201 at page 212; Adler v. Greenfield, 2 Cir., 83 F.2d 955.

 About April 20, 1950, the chattel mortgagee, Aero Factors Corporation, took possession of the chattels then located at the premises of Regent Case Co., Inc., at 2926 White Plains Road, Borough of Bronx, claiming to act under the chattel mortgage. On April 26, 1950, at 9:00 A.M., through one Jack Kasper, an auctioneer, the defendant purported to sell these chattels for the sum of $ 500, under a foreclosure of the mortgage. The purchaser was Arthur Baer, president of defendant, acting for defendant. The only public notice of this sale was published in the Journal of Commerce on April 26, 1950, the day of the sale. Since the chattels were sold at 9:00 A.M. on that date, for all practical purposes the sale had taken place before anyone could have read and acted on the notice. The inadequacy of such an advertisement has been noted and the procedure condemned. Morrisania Laundry Service v. Strauss, 137 Misc. 488, 242 N.Y.S. 579. The chattels were sold to the defendant for $ 500 and there is no proof that anyone attended the sale except the defendant. In effect it was no sale, or at best a private sale by Aero to itself.

 In making a sale under the chattel mortgage the mortgagee was required to act in good faith, obtaining as far as possible the fair market value of the property. Fleischmann v. Clausen, 222 App.Div. 7, 225 N.Y.S. 288. A mortgagee of chattels after default is at law the owner. If he sells, and the sale is valid, he cuts off the mortgagor's equity of redemption. If he resumes possession, but fails to sell within a reasonable time, or sells unfairly or irregularly, the mortgagor will be credited with payment of the debt up to the actual value of the security thus sold. Harrison v. Hall, 239 N.Y. 51, 145 N.E. 737. The sale of the chattels by the mortgagee, Aero Factors Corporation, to itself was unfair and irregular and the mortgagor must be credited with payment of its debt up to the true value of the property sold. Casserly v. Witherbee, 119 N.Y. 522, 23 N.E. 1000. That presents the question -- What was the value?

 On or about July 21, 1950, four days after a petition in involuntary bankruptcy was filed against the Regent Case Co., Inc. in this court, the defendant sold all of the chattels originally listed in the chattel mortgage, which it had purchased at the execution sale conducted by the sheriff on May 15, 1950, and at the sale under the mortgage on April 26, 1950, to Bendict B. Zimet for the sum of $ 8,500. The defendant paid a broker $ 425 as a commission of 5% on the sale price to Zimet. In ...


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