UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF PENNSYLVANIA
June 14, 1961
Roger MATTES, as Trustee in Bankruptcy of Carpet Center, Inc., Bankrupt,
AMERICAN ACCEPTANCE CORPORATION and Bigelow-Sanford Carpet Company, Inc.
The opinion of the court was delivered by: MURPHY
In this non-jury proceeding plaintiff as trustee in bankruptcy of Carpet Center, Inc.,
seeks to recover alleged preferences allowed in violation of § 60 of the Bankruptcy Act as amended, 11 U.S.C.A. § 96.
December 1, 1950, Carpet Center, as a borrower, entered into a Limited Factor Lien Agreement with American Acceptance Corporation, a factor, and Bigelow-Sanford Carpet Company, Inc., a supplier. In return for advances made by American to enable Carpet Center to purchase carpets from Bigelow, American, as security, was to have a factor's lien upon all merchandise purchased and accounts receivable created as a result of sales thereof as permitted by applicable Maryland law. Carpet Center agreed as agent for American to collect all proceeds arising from sales and accounts receivable, to hold such funds in trust in a separate account without mingling with other funds, and to make monthly remittances to American.
See and cf. In re Nizolek Furniture & Carpet Co., D.C.D.N.J.1947, 71 F.Supp. 1012, 1015-1016, affirmed 3 Cir., 165 F.2d 788. Such an account was opened. American policed and audited the account.
April 30, 1951, because of common ownership and the advantage of consolidation, a supplemental superseding Factor Lien Agreement was entered into between American, Bigelow, Carpet Center and Carpet Mart, Inc. The agreement provided inter alia that Carpet Mart would purchase from Bigelow for its own use and on behalf of Carpet Center and resell to the latter at cost.
In due course memoranda of lien were filed and notices recorded in the appropriate offices in Maryland and Pennsylvania. Carpet Center's accounts receivable ledger reflected the interest of American.
By reason of sundry defaults in the Factor Lien Agreement and notes given in connection therewith, merchandise located in the Silver Spring store
subject to lien was repossessed by American on October 13, 1953, and on December 28, 1953, pursuant to notice, sold at private sale to Bigelow.
Under applicable state law,
which determines when a transfer is perfected for purposes of § 60 sub. a of the Bankruptcy Act, see McKenzie v. Irving Trust Co., 1945, 323 U.S. 365, 369-370, 65 S. Ct. 405, 89 L. Ed. 305, defendant acquired a continuing general lien effective against subsequent lien creditors from the time of recording, on all merchandise described in the lien agreement and in separate written statements, and on the proceeds resulting from the sale of such merchandise, i.e., the accounts receivable, whether in existence at the time of execution of the agreement or subsequently acquired by the bankrupt. See Maryland Factors Lien Act, June 1, 1945, L.1945, Chap. 1019, Art. 2, §§ 21-27, Ann. Code of Maryland, as amended April 27, 1951, L.1951, Chap. 583; Pennsylvania Factors Lien Act, June 10, 1947, P.L. 529, §§ 1-10, as amended April 1, 1949, P.L. 391, 6 P.S. §§ 221-229.
In accordance with 60 sub. a (2) the transfer and assignments are deemed to have been perfected at the time American's lien became effective against subsequent lien creditors, i.e., upon recording, prior to the four month period, and are therefore not preferential under 60 sub. a (1). See 3 Collier, Bankruptcy (14th Ed. 1956) Par. 60.39, p. 912; Id. Par. 60.48, pp. 966, 967; and see legislative history in re amendment to 60, Vol. 2, 1950 U.S.Code Congressional Service, p. 1985 et seq.
The evidence establishes compliance by defendant in all respects with the lien agreements and applicable state law. The trustee, having the burden of proof, Cohen v. Sutherland, 2 Cir. 1958, 257 F.2d 737, 740, failed to show purchases by bankrupt directly from Bigelow subsequent to April 30, 1951, contrary to the supplemental agreement. There was uncontradicted testimony that a sign designating defendant as factor was posted conspicuously at the main office of Carpet Center throughout the period in question, as required by § 2 of the Pennsylvania Act, supra. § 7, Id., relieved defendant of the necessity of complying with the provisions of the Pennsylvania 'book marking' statute.
In view of substantial evidence demonstrating adequate 'policing' of accounts and dominion by defendant over the property subject to the lien, plaintiff's alternative claim, raised for the first time after trial, that the assignment of accounts was fraudulent as a matter of law under the doctrine of Benedict v. Ratner, 1925, 268 U.S. 353, 45 S. Ct. 566, 69 L. Ed. 991, is without merit. See and cf. In re New Haven Clock & Watch Co., 2 Cir., 1958, 253 F.2d 577, 579-581; In re Nizolek Furniture & Carpet Co., supra, Id.; Bloch v. Mill Factors Corp., 2 Cir. 1943, 134 F.2d 562, 563-564.
For the foregoing reasons, judgment will be entered in favor of American Acceptance Corporation, defendant, and against Roger Mattes as Trustee in Bankruptcy of Carpet Center, Inc.