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IN RE CUT RATE FURNITURE CO.

June 13, 1958

Matter of CUT RATE FURNITURE CO., Inc., Bankrupt


The opinion of the court was delivered by: FOLEY

Two petitions for review in this bankruptcy matter are filed as to a decision and order of Referee Ryan, dated July 29, 1957; one by the Trustee in Bankruptcy, the petitioner below, and one by A. J. Armstrong, Inc., the respondent below. Each petition challenges certain findings and conclusions adverse to contentions made before the Referee, i.e. each side is satisfied with one part or phase of the decision and discontent with the other portion not in its favor. Usually, when you have such dissatisfaction by both sides it is an augury of perfect decision.

The problem presented has been a difficult one for me to grasp and analyze with a fair degree of good comprehension. The facts as made in the Record before the Referee are not too involved when stated *fn1" but the application of the law to these practically undisputed facts has been tricky and evasive for my mind. The pulse of the situation is the facts and the legal answer rests mainly upon the much discussed principles as to certain commercial transactions laid down long ago by Justice Brandeis in Benedict v. Ratner, 1924, 268 U.S. 353, 45 S. Ct. 566, 69 L. Ed. 991. My approach and consideration has been slow and cautious mainly because of my high regard for the competence and judgment of the Referee evidenced often in his sound disposition of these intricate financial questions that are so vital to the heartbeat of the business world. The usual clarity and detail is again present in his decision but despite persuasive reasoning that gave prolonged hesitation and doubt on my part I am inclined to disagree as to one phase of his conclusions.

 The facts can be generalized. A. J. Armstrong, Inc., at least in this instance, is in the business of advancing money to retail merchants (as Cut Rate Furniture, Inc., was in the sale of furniture to the public), upon the security of the assignment of accounts receivable from the sale of the merchandise and/or the pledge of the merchandise inventory itself. In our situation here, the continuing transactions between Armstrong and Cut Rate from 1952 to 1955 relating to the advance and loan of money encompassed both methods of agreement as to security. When the merchandise itself is so pledged or liened, together with the proceeds thereof, Armstrong would be known in the trade as a 'factor', and also come within such description as set forth in Section 45 of the Personal Property Law of New York, McKinney's Consol.Laws, c. 41, the terms of which shall become of the utmost importance in this discussion.

 By written agreement dated August 5, 1952, Armstrong and Cut Rate entered into a contract or 'Accounts Receivable Agreement' whereby Armstrong agreed to advance moneys to Cut Rate upon acceptable accounts receivable. (Trustee's Exhibit 1.) Apparently, such agreements are often used, and pursuant to it both parties cooperated in an elaborate system of supervision, control, audit, reporting, checking and verification over the accounts receivable; actually conditional sales contracts forwarded to Armstrong after being signed by the customers who bought the furniture at the Cut Rate store.

 This detail, of course, was performed to a great extent as Armstrong requested it and on its forms and reports because the cold fact of life was present that Armstrong had the money and apparently Cut Rate needed it. The witnesses at the trial, Mr. Greenspan of Armstrong, and Mr. Steinberg of Cut Rate, agreed that this detail was carried out as to this agreement. (R. 155, 197, 202, Exhibits B, C.) Substantial moneys in the neighborhood of one million dollars were involved from 1952 to 1955 in these account receivable transactions. (R. 207.)

 An important event occurred on June 23, 1954. Cut Rate filed a petition for an arrangement with its creditors under a Chapter XI proceeding of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq. and was allowed to remain as a debtor in possession in the conduct of its business during the proceeding. Apparently, money was needed to consummate the plan for arrangement and Armstrong agreed to advance Cut Rate $ 16,200 as debtor in possession. This new agreement entitled 'Supplement' dated September 27, 1954, in one portion states that it shall be attached to and constitute a part of the original Accounts Receivable Agreement. This agreement, by its terms, purported to bestow upon Armstrong a continuing, general factor's lien in accordance with the broad provisions of Section 45 of the New York Personal Property Law. By an order dated October 4, 1954, the Referee upon the ex parte application of Cut Rate as debtor in possession in the arrangement proceeding, authorized it as such to execute this 'Supplement' agreement as of September 27, 1954, and consent to the filing of Notice of Lien, as attached to the application in the Albany County Clerk's Office pursuant to Section 45 of the Personal Property Law of New York. This filing was done and an exhibit seems to indicate that the Notice of Lien was also filed in the Office of City Register, New York County, although not necessary under the order of the Referee. (Trustee's Exhibit 3.) Thereafter, the record discloses the parties carried on about the same as previously except that now, because the lien extended to the merchandise itself, there were weekly reports of inventory filed by Cut Rate with Armstrong (Exhibit D). It is worthy of note that in June 1954, when Cut Rate became a debtor in possession, Armstrong asked Cut Rate to have a credit man to work in Cut Rate's store and supervise the accounts. A Mr. Leahy was so hired and he made weekly reports to Armstrong and passed on new credits and paper assigned to Armstrong. (R. 126, 127, 162.) Also, during this period, as I read the record, conditional sales agreements affecting the merchandise under the factor's lien were still assigned in the same manner to Armstrong, reported and supervised exactly as done before September 27, 1954. (R. 76, 135.) Under the factor's lien agreement besides the advance of $ 16,200, new advances by Armstrong and several substantial repayments by Cut Rate were made during the ensuing months, leaving a computed balance due of $ 16,835.44 as of August 1, 1955. (R. 193, 194.) The last repayment by Cut Rate was in March, 1955, and Cut Rate was adjudicated a bankrupt on May 6, 1955.

 First, as to the August 5, 1952 agreement, the Referee found and concluded that the transactions under this 'Accounts Receivable Agreement' were so conducted that at no point thereunder did Armstrong agree or acquiesce in reservation by Cut Rate of dominion over the assigned accounts receivable or proceeds thereof inconsistent with the effective disposition of title and creation of a lien. (Findings 4, 5. Conclusions 1, 2 -- Referee's decision.)

 This part of the decision, in my judgment, is unalterably right under the evidence before the Referee. It is difficult to imagine what more dominion or supervision could have been employed by Armstrong, and I say in humor that after Mr. Leahy came into the Cut Rate store in behalf of Armstrong's interest in June 1954, the only next step imaginable would be to have the FBI drop in occasionally and look over the situation. In a recent case in the Court of Appeals, Second Circuit, Matter of New Haven Clock & Watch Company (First National Bank of Chicago v. O'Keefe) 253 F.2d 577, Judge Medina gives recent discussion to the Benedict v. Ratner doctrine and interprets succinctly the rule to require the creditor to so 'police' the accounts receivable that the debtor does not reserve dominion over them. The facts here indicate clearly that under the August 5, 1952, agreement and its transactions such was done.

 As to the Supplement Agreement dated September 27, 1954, which the Referee authorized Cut Rate to enter by order dated October 4, 1954 and referred to by the parties and the Referee as a factor's lien agreement, the Referee reached a contrary conclusion. It was: 'That the transactions and conduct of the parties to the September 27, 1954 factor's agreement were such as to render said agreement of September 27, 1954 illegal and void in its entirety.' (Conclusion 3 of Referee's Decision.)

 The basis for this conclusion is the fact established in the testimony that after the execution of the factor's lien agreement the parties conducted their affairs as they had been doing under the Accounts Receivable Agreement. The important feature which the Referee found fatal to the Supplement of factor's lien agreement was the free and quick admission by Mr. Greenspan of Armstrong that the down payments were kept by Cut Rate and not forwarded or deposited in the account of Armstrong, and such procedure was his understanding of the factor's agreement. (R. 79, 80.) There are no specifics I find in the testimony as to the amount of down payments received by Cut Rate over the intervening months to the date of bankruptcy. If the amounts involved as down payments were to be considered as important, the overall picture indicates mainly a credit business with small down payments, and there was testimony that actually 95% or 98% of the sales were in the form of accounts receivable, and any cash sales for the full amount of articles were reported to Armstrong and they made return checks to Cut Rate. (R. 76, 77.) However, my disagreement with the Referee is based upon other considerations.

 A copy of the factoring agreement, as I find it in the Record, is attached to the order of authorization of the Referee dated October 4, 1954, the agreement itself being dated September 27, 1954. There is also attached a copy of the Notice of Lien in the form prescribed by the Statute admittedly filed properly in two public filing offices. The agreement is a printed form and just as wordy as Section 45 of the Personal Property Law upon which it is based. Paragraph 3 of the agreement confers among many other things upon Armstrong a continuing general factor's lien upon all the merchandise of Cut Rate 'and upon any accounts receivable or other proceeds resulting from the sale or other disposition of such merchandise * * *.' (Italcis mine.) Much of the wording of this paragraph is in the terms of the first paragraph of Section 45, and the last quoted part is as exactly set forth in the Statute except for the elimination of the words 'goods and' before merchandise. The next paragraph, 4, is the one to which the Referee attaches the great weight to conclude that the parties did not live up to the written agreement into which they entered. The result being, in his judgment, that dominion was actually reserved to such extent by Cut Rate, contrary to the writing, that the factor's lien, legal in its inception on the merchandise and proceeds, became illegal and void in its entirety. It states:

 '4. All accounts receivable and other proceeds resulting from the sale of any of said merchandise shall be your property, and shall be reported, assigned and delivered to you. Such accounts receivable shall be governed by the provisions of the Accounts Receivable Agreement.' (Italics mine.)

 It is obvious that the retention of down payments by Cut Rate would not be in accord with a strict and confined construction of this wording alone, although the simple description 'down payments' is not used at all.

 But my impression here, and it may be based mainly upon instinct, is that the retention of down payments was considered by the parties to be in accord with their written contract as a whole and that was their honest business ...


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