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SCARBOROUGH v. BERKSHIRE FINE SPINNING ASSOCS.

February 10, 1955

William H. SCARBOROUGH, Trustee in Bankruptcy of Comet Manufacturing Corporation, Bankrupt, Plaintiff,
v.
BERKSHIRE FINE SPINNING ASSOCIATES, Inc., Defendant



The opinion of the court was delivered by: DAWSON

This is a motion for summary judgment made by the defendant. The action is brought by a trustee in bankruptcy to recover from the defendant $ 94,660.89 as a preference.

The following facts seem to be substantially without dispute:

1. The amount of $ 94,660.89 was received by defendant as the purchase price for cloth which defendant sold to the bankrupt to be manufactured into handkerchiefs for sale by the bankrupt to the Army under a contract which the bankrupt had with the United States Government.

 2. The bankrupt, whose place of business is in North Carolina, placed the order for the cloth with the defendant in February, 1952. Up to that time, defendant had never done any business with bankrupt, and defendant apparently was concerned about the credit standing of the bankrupt. The bankrupt referred defendant to William Iselin & Co., Inc. of New York, N.Y. who, bankrupt stated, had factored bankrupt's accounts since August, 1950. William Iselin & Co., Inc. had filed, under the North Carolina statute, *fn1" on November 27, 1950, a notice of assignment of accounts receivable, effective for a five-year period, running from the Comet Manufacturing Corp. to itself.

 3. As a result of discussions between the bankrupt, the defendant, and William Iselin & Co., Inc., four agreements were entered into as follows:

 (a) An agreement dated March 10, 1952 between the defendant and the bankrupt, reciting that William Iselin & Co., Inc. had agreed to act as fiscal agent in connection with the government contract, and that the bankrupt agreed to assign the government contract to William Iselin & Co., Inc., with irrevocable instructions to pay 80% of the proceeds to the defendant, and the defendant agreed to ship to the bankrupt the piece goods to be manufactured by the bankrupt into handkerchiefs;

 (b) An assignment dated the same day whereby the bankrupt assigned the government contract to William Iselin & Co., Inc. with irrevocable instructions to pay 80% of the proceeds to the defendant;

 (c) An agreement by William Iselin & Co., Inc. dated March 12, 1952 to pay over to defendant 80% of the proceeds of the government contract in accordance with the terms of the assignment.

 (d) A conditional sales contract dated March 20, 1952 under which the defendant agreed to deliver certain handkerchief lawn to the bankrupt, title to all goods to remain in the seller until such time as they were manufactured into handkerchiefs, accepted by and invoiced by the purchaser (the bankrupt) to the United States Government in accordance with the Terms of the United States government contract that was the subject of the assignment referred to above in subdivisions (a)(b) and (c).

 4. Between March 11, 1952 and March 14, 1952, William Iselin & Co., Inc. filed a written notice of the assignment and a copy of the assignment with the New York Quartermaster Procurement Agency, the government agency involved.

 5. Thereafter, cloth was shipped by defendant to bankrupt, manufactured into handkerchiefs by the bankrupt, and the handkerchiefs delivered to the Army. Invoices were rendered and William Iselin & Co., Inc. received from the United States Government a total of $ 118,322.88 in full payment of the shipments by the bankrupt. William Iselin & Co., Inc. then paid 80% of this amount, or $ 94,660.89, to defendant. It is this amount which the trustee seeks to recover in this action.

 6. The involuntary petition against the bankrupt was filed on August 15, 1952. All of the payments received by the defendant were received by it in the four months previous to this date.

 The plaintiff, as trustee in bankruptcy of the bankrupt, claims that the amounts received by the defendant during this four-months period constituted preferential payments, and has brought an action for their recovery.

 The defendant asserts as an affirmative defense that defendant was a secured creditor under a perfected lien granted by the bankrupt prior to four months before the filing of the petition. Defendant's position is that since the assignment of the government contract to the factor had been made on March 10, 1952 and the factor had coincidentally therewith agreed with the defendant that 80% of the proceeds would be paid to the defendant, the defendant had, prior to the four-months period, ...


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