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IN RE NOVELTY BELTS MFG. CO.

April 30, 1959

In the Matter of NOVELTY BELTS MANUFACTURING CO., Inc., Bankrupt


The opinion of the court was delivered by: WEINFELD

Petitioner, Eastern Factors, Inc., seeks review and reversal of an Order of the Referee in Bankruptcy which declared null and void a chattel mortgage executed to it by the Bankrupt, Novelty Belts Manufacturing Co., Inc.

The Referee found that the mortgage was intended to operate as a mortgage upon a stock of merchandise in bulk or upon merchandise and fixtures pertaining to the conduct of the business of the Bankrupt, and since notice was not given to creditors, held it was void under section 230-a of the New York Lien Law,

 The Referee based his conclusion upon an interpretation of two documents -- the chattel mortgage and a 'Memorandum of Agreement' executed the same day.

 The 'Memorandum of Agreement' was in effect a factoring agreement under which the Petitioner was to make advances against an assignment of accounts receivable. The Agreement required the Bankrupt to execute a first chattel mortgage on its 'equipment, fixtures and merchandise' as further security for the payment of any balance due the Petitioner. *fn1" It is this chattel mortgage which the Referee declared void.

 Since his determination did not rest upon an appraisal of witnesses' credibility or a resolution of conflicting evidence as to what items were intended by the parties to be covered by the chattel mortgage, the general rule that a Referee's findings will not be disturbed unless clearly erroneous *fn2" is not applicable. Under the circumstances presented here, the District Judge, as a court of review, 'can more freely draw differing inferences from the undisputed facts.' *fn3"

 The lien of the chattel mortgage as executed extended to specifically enumerated items, 'including any and all equipment, fixtures, chattels of every kind and description' located at the Bankrupt's manufacturing plant in New York City.

 Section 230-a of the New York Lien Law, by its express terms, is intended to apply to chattel mortgages on stocks of merchandise as distinguished from other personal property. The statute condemns as void 'every mortgage or conveyance intended to operate as a mortgage upon a stock of merchandise in bulk or any part thereof, or upon merchandise and fixtures pertaining to the conduct of the business of the mortgagor' unless notice is given to creditors and other requirements are complied with.

 In deciding whether a chattel mortgage comes within the proscription of section 230-a, the basic inquiry in each case is whether it was 'intended to cover, not only the machinery, fixtures, chattels, etc., but the stock of goods and merchandise owned by (the mortgagor), by it made and intended for sale.' *fn4"

 Significantly, the instant chattel mortgage nowhere refers to 'merchandise'. Nonetheless, the Referee found that the parties intended the mortgage to operate as one upon a stock of merchandise in bulk and also upon merchandise and fixtures pertaining to the conduct of the business of the Bankrupt.

 The Referee reasoned that the clause 'chattels of every kind and description which are located at #48 West 25th Street' included merchandise consisting of the raw material used by the Bankrupt in its factory at these premises, *fn5" as well as the finished goods used in 'the selling end of its business.'

 In further support of his conclusion that the parties intended the mortgage to cover 'merchandise', although nowhere mentioned therein, the Referee relied upon two paragraphs of the Memorandum of Agreement. Paragraph 32 of that instrument gave the Petitioner the right to receive all moneys or checks remitted by the Bankrupt's customers, including the further right to

 'Receive any monies or merchandise, payment in part or whole, from the (Bankrupt's) customers, whether or not same is on an account assigned to the (Petitioner) and such remittance or return of merchandise may be applied on account of the general indebtedness from the (Bankrupt) to the (Petitioner).'

 Paragraph 48 provided that the Bankrupt 'will execute a first chattel mortgage on its equipment, fixtures and merchandise' to Petitioner as security for the payment of any balance due.

 In reaching his conclusion, the Referee either overlooked or seemingly disregarded not only the fact that the word 'merchandise' nowhere appeared in the final version of the basic document, the chattel mortgage -- but also ignored the demonstrable fact that although it originally ...


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