of all of the assigned accounts were placed in a separate bank account, from which withdrawals could be made only upon counter-signature of the assignee bank after new collateral had been assigned.
Additionally, it must be noted that in the Lambert & Braceland Co. case "no entries were made upon the company's books setting aside the accounts assigned, except at the time of the last substitution." 29 F.2d at page 759, supra. In the instant case, under the May 3d loan agreement, as previously stated, it was required that the bankrupt should make suitable endorsement on its books, disclosing the assignments of the accounts to the bank, and it is undisputed that this provision was carried out.
The books of the company were examined by the representatives of the bank at least once a month, in order to verify that the assignments of the accounts receivable were properly noted in the company's ledger.
The record discloses that the assignee bank gave adequate consideration for the assigned accounts, as required by law, In re Monumental Shoe Mfg. Co., D.C., 14 F.2d 549; that the bank maintained control over the accounts and, in fact, allowed the bankrupt assignor no dominion whatever over the assigned accounts; and that the dominion and control by the assignee necessary to maintain a valid pledge of accounts receivable under the cases were fully exercised, see Greey v. Dockendorff, 231 U.S. 513, 34 S. Ct. 166, 58 L. Ed. 339; Benedict v. Ratner, 268 U.S. 353, 45 S. Ct. 566, 69 L. Ed. 991; McCluer v. Heim-Overly Realty Co., 8 Cir., 71 F.2d 100; In re Hawley Down-Draft Furnace Co., 3 Cir., 238 F. 122; In re Monumental Shoe Mfg. Co., supra; In re Prudence Co. Inc., 2 Cir., 88 F.2d 420; and In re Vanity Fair Slippers, Inc., D.C., 4 F.Supp. 83.
It is well settled that: "The mere exchange of one kind of property security for another of equal value, the renewal of a mortgage, or a pledge of property for a present consideration are not void as preferences, though done within four months of the filing of a bankruptcy petition, since one creditor is not favored or preferred over others and the bankrupt's estate is not diminished." In re Hunt, D.C., 18 F.Supp. 338, 339.
See, also, Sexton v. Kessler, 225 U.S. 90, 32 S. Ct. 657, 56 L. Ed. 995; Gorman v. Littlefield, 229 U.S. 19, 33 S. Ct. 690, 57 L. Ed. 1047; and Stewart v. Platt, 101 U.S. 731, 25 L. Ed. 816. The following quotation from Stewart v. Platt, supra, is particularly pertinent (101 U.S. at page 742, 25 L. Ed. 816): "This was, in its substance and effect, a mere exchange of securities, not forbidden by the letter or the spirit of the bankrupt law. In Cook v. Tullis (18 Wall. 332 [21 L. Ed. 933]), we said that 'a fair exchange of values may be made at any time, even if one of the parties to the transaction be insolvent. There is nothing in the Bankrupt Act, either in its language or object, which prevents an insolvent from dealing with his property, selling it or exchanging it for other property at any time before proceedings in bankruptcy are taken by or against him, provided such dealing be conducted without any purpose to defraud or delay his creditors or give preference to any one, and does not impair the value of his estate. An insolvent is not bound in the misfortune of his insolvency to abandon all dealing with his property; his creditors can only complain if he waste his estate or give preference in its disposition to one over another. His dealing will stand if it leave his estate in as good plight and condition as previously. ' Substantially the same doctrine was announced in Clark v. Iselin, 21 Wall. 360 [22 L. Ed. 568]; Sawyer v. Turpin, 91 U.S. 114 [23 L. Ed. 235]." (Italics supplied.)
It is clear in the instant case that the deposit of new accounts receivable simply constituted a substitution of collateral security.
The law does not require that the substitution be exactly equal in amount to the fund withdrawn. See In re Bernard & Katz, Inc., 2 Cir., 38 F.2d 40, which held, in part: "The sum advanced by the lender is a present consideration for the assignment of accounts, whatever their value. Of course, the lender may take more security than just enough to cover the advance; for the surplus, if he realizes more than enough to satisfy the debt, he will have to account at the proper time." 38 F.2d at page 42.
It is necessary to discuss one other point.
The referee found that the company was insolvent during the four months prior to bankruptcy, and that the bank during said period "had reasonable cause to believe that the enforcement of assignment of accounts receivable during the said four months' period under the circumstances would effect a preference."
The evidence sustains the finding of the referee as to this insolvency; it does not, however, sustain his finding that the bank had reasonable cause to believe that the assignments during that period would constitute a preference.
Section 60, sub. b of the Bankruptcy Act, 11 U.S.C.A. § 96, sub. b, defines "voidable preference". It reads as follows: "If a bankrupt shall have * * * made a transfer of any of his property, and if, at the time of the transfer * * * and being within four months before the filing of the petition in bankruptcy * * * the bankrupt be insolvent and the * * * transfer then operate as a preference, and the person receiving it * * * shall then have reasonable cause to believe that the * * * transfer would effect a preference, it shall be voidable by the trustee and he may recover the property or its value from such person."
It is well settled that only assignments within the four months' period which diminish the estate of the bankrupt are preferences, and that a pledge or assignment for a present consideration does not constitute a preference. See First National Bank v. Pennsylvania Trust Co., 3 Cir., 124 F. 968; Robertson v. Hennochsberg, D.C., 1 F.2d 604; Doggett v. Chelsea Trust Co., 1 Cir., 73 F.2d 614; Nolen v. Ware Trust Co., D.C., 10 F.Supp. 297; and Petition of Post, 1 Cir., 17 F.2d 555.
There is nothing in the record to sustain a conclusion that the bank had "reasonable cause" to believe that its transactions with the bankrupt during the four-month period would effect a preference. It is important, of course, to remember that the assignment of the accounts receivable was originally made to the bank considerably more than a year and a half prior to the bankruptcy. It is also important to remember that when the March 12, 1935, collateral note, which marked the inception of the arrangement between the bankrupt and the bank, was "put on" by the bank on March 18, 1935, that the amount of accounts receivable assigned as collateral at the time was in the sum of $21,995.25, compared to the proved indebtedness at the time of bankruptcy of $20,122.22.
There is not the slightest basis for any finding of insolvency in March, 1935 (when the collateral was assigned), or on May 3, 1935 (when the loan agreement was executed); in fact, there is no contention by the trustee in bankruptcy that there was any insolvency until approximately four months before the bankruptcy.
It is perfectly clear that the operation of the revolving fund, under the agreement of May 3, 1935, did not work any fraud on creditors or in any way result in any preference.
Accordingly, the petition of the Philadelphia National Bank is granted, and the order of the referee to turn over to the trustee in bankruptcy the assigned accounts and the proceeds thereof is reversed.