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Sigman v. Claar Bros. Inc.

June 16, 1961


Author: Moore

Before WATERMAN, MAGRUDER and MOORE, Circuit Judges.

MOORE, Circuit Judge.

Plaintiff, Trustee in Bankruptcy of Kunstler Importing Corp., Bankrupt (Kunstler), appeals from a judgment dismissing his complaint in an action against Claar Bros., Inc. (Claar) to recover a sum of money retained by Claar upon the discount of various notes given to Kunstler by its customers. The theory of plaintiff's action is that Claar, not having been organized under the Banking Law of the State of New York, had no power to discount commercial paper and that the retention of 1 1/2% per month on the face amount of the notes constituted a discount which Claar, organized under the Stock Corporation Law of the State of New York, § 1 et seq., was not authorized to take.

The business transactions between Kunstler and Claar were, in substance, as follows: Kunstler sold diamonds at wholesale and frequently accepted noninterest bearing notes from its customers. Kunstler, desirous of obtaining cash, endorsed the notes and delivered them to Claar, receiving the principal amount less the stated discount. Claar would collect the notes from Kunstler's customers but if they were not paid could look to Kunstler on the endorsements.

Claar contends that it was engaged in a factoring business and was, in effect, buying Kunstler's accounts receivable. This type of business, Claar argues, is not prohibited by New York's banking laws. Kunstler, on the other hand, claims that the transactions were loans by Claar secured by the customers' notes.

The controlling statutes are Section 131 of the New York Banking Law and Section 18 of the General Corporation Law.*fn1 The question to be resolved is whether the transaction consists of "making discounts" prohibited by Section 131 or discounting notes as banned by Section 18, or was it the purchase of accounts receivable represented by notes? Do these provisions render illegal a purchase of issued and outstanding notes at a discount?

The New York Court of Appeals faced this problem squarely in Meserole Securities Co. v. Cosman, 1930, 253 N.Y. 130, 170 N.E. 519, 525. The court there differentiated between a discount taken in consideration of the loan and the purchase of already outstanding notes at a discount saying that "they [business corporations] are not restrained or prohibited from purchasing notes at a discount where such purchase is not a mere device for carrying on the business of advancing or loaning money at interest * * *." In Wolf v. Aero Factors Corp., 126 F.Supp. 872, 877, affirmed 2 Cir., 1955, 221 F.2d 291, the district court in the Southern District of New York said, "A factoring business is not a form of banking business," citing Pennsylvania Factors Corporation v. S. Oldham Inc., 1947, 272 App.Div. 1049, 74 N.Y.S.2d 670.

However, in May, 1956, the New York Court of Appeals decided Miller v. Discount Factors, Inc., 1 N.Y.2d 275, 152 N.Y.S.2d 273, 276, 135 N.E.2d 33, which was probably intended to strike a blow at illegal moneylending practices. Actually the Miller case involved loans against notes from which bonus charges had been deducted in advance. The notes in effect were given by the borrower. The court held that these notes had "no prior legal inception," thus distinguishing the situation in the Meserole case.

Relying upon the then newly-announced Miller doctrine, Kunstler brought this suit in September, 1956. The Miller decision created consternation in financial and factoring circles in New York.*fn2 However, the effect of the Miller case was short-lived because the Legislature in 1958 amended both § 131 (Banking Law) and § 18 (General Corporation Law).*fn3

Kunstler argues that his characterization of the transactions as "loans" and the entry of certain items in the Claar books as "interest earned" are determinative against Claar. Other entries, in the Claar books, however, would lead to a different inference. The trial court's findings that the notes transferred to Claar had a prior legal inception; that they were not made simply for the purpose of securing a loan; that Kunstler was selling its accounts receivable, represented by the notes; and that the transactions were not loans are amply supported by substantial proof.

The judgment dismissing the complaint on the ...

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