Source: https://www.legalcrystal.com/case/97522/corn-exchange-nat-l-bank-trust-co
Timestamp: 2018-05-23 13:26:11
Document Index: 482679173

Matched Legal Cases: ['§ 60', '§ 60', '§ 60', '§ 60', '§ 60', '§ 60', '§ 60', '§ 60', '§ 60']

Corn Exchange Nat L Bank and Trust Co - Citation 97522 - Court Judgment | LegalCrystal
Corn Exchange Nat'l Bank and Trust Co. - Court Judgment
LegalCrystal Citation legalcrystal.com/97522
Case Number 318 U.S. 434
Appellant Corn Exchange Nat'l Bank and Trust Co.
.....took supervision of the business, and, in 1938, arranged with the petitioner bank to advance from time to time money for payroll and other needs on concurrently made assignments of accounts receivable. at the time of bankruptcy, the company was indebted to the bank for loans so made on contemporary assignments between january 19, 1940, and april 5, 1940. on april 12, 1940, petitioner dearden made a loan on similar security. an involuntary petition in bankruptcy was filed against the company on april 18, 1940, followed by adjudication on may 7, 1940. when the assignments were made, they were recorded on the company's books, but neither petitioner had ever given notice of assignment to the debtors whose obligations had been taken as security. because of this omission, the trustee.....
Corn Exchange Nat'l Bank & Trust Co. - 318 U.S. 434 (1943)
U.S. Supreme Court Corn Exchange Nat'l Bank & Trust Co., 318 U.S. 434 (1943)
Held, that the assignments were preferential under § 60(a) of the Bankruptcy Act, and thus avoidable by the trustee in bankruptcy under § 60(b) thereof. P. 318 U. S. 439 .
This case requires us to determine the application of the preference provisions of § 60(a) of the Bankruptcy Act as amended by the Chandler Act of June 22, 1938, [ Footnote 1 ] to loans made on assignments of accounts receivable.
The Quaker City Sheet Metal Company became embarrassed for want of working capital in 1938. Creditors representing a large percentage of claims later proved in bankruptcy agreed to subordinate their claims to those which might be incurred for new working capital. A creditor's committee took supervision of the business, and, in 1938, arranged with the petitioner Bank to advance from time to time money for payroll and other needs on concurrently made assignments of accounts receivable. At the time of bankruptcy, the Company was indebted to the Bank for loans so made on contemporary assignments between January 19, 1940, and April 5, 1940. On April 12, 1940, petitioner Dearden made a loan on similar security. An involuntary petition in bankruptcy was filed against the Company on April 18, 1940, followed by adjudication on May 7, 1940. When the assignments were made, they were recorded on the Company's books, but neither petitioner had ever given notice of assignment to the debtors whose obligations had been taken as security. Because of this omission, the trustee challenged their right to the benefits of their security. He was overruled by the referee and the District Court, but his position was sustained by the Circuit Court of Appeals for the Third Circuit [ Footnote 2 ] on an interpretation of § 60(a) which conflicts with an interpretation by the Circuit Court of Appeals for the Fifth Circuit. [ Footnote 3 ] Hence, we granted certiorari. [ Footnote 4 ]
Section 1(30) specifically provides that "transfer" includes an assignment. [ Footnote 5 ]
The Circuit Court of Appeals has determined, and we accept its conclusion, that, at all relevant times, it was the law of Pennsylvania, where these transactions took place, that, because of the failure of these assignees to give notice to the debtors whose obligations were taken, a subsequent good faith assignee, giving such notice, would acquire a right superior to theirs. [ Footnote 6 ] It held that the assignments were preferences under § 60(a), and therefore, under the terms of § 60(b), [ Footnote 7 ] inoperative against the trustee.
applicable state law [ Footnote 8 ] would enforce against a good faith purchaser. Only when such a purchaser is precluded from obtaining superior rights is the trustee so precluded. So long as the transaction is left open to possible intervening rights to such a purchaser, it is vulnerable to the intervening bankruptcy. By thus postponing the effective time of the transfer, the debt, which is effective when actually made, will be made antecedent to the delayed effective date of the transfer, and therefore will be made a preferential transfer in law, although, in fact, made concurrently with the advance of money. In this case, the transfers, good between the parties, had never been perfected as against good faith purchasers by notice to the debtors, as the law required, and so the conclusion follows from this reading of the Act that the petitioners lose their security under the preference prohibition of § 60(b).
Such a construction is capable of harsh results, [ Footnote 9 ] and it is said that it will seriously hamper the business of "non-notification financing," of which the present case is an instance. This business is of large magnitude, and it is said to be of particular benefit to small and struggling borrowers. [ Footnote 10 ]
The Committee of the House of Representatives which reported § 60(a) as quoted above was fully aware of the vicissitudes of its predecessors. [ Footnote 11 ] These are recited in detail elsewhere, and need not be repeated here beyond a general statement that, for thirty-five years, Congress has consistently reached out to strike down secret transfers, and the courts have, with equal consistency, found its efforts faulty or insufficient to that end. [ Footnote 12 ] Against such a
"The new test is more comprehensive, and accords with the contemplated purpose of striking down secret liens. It is provided that the transfer shall be deemed to have been made when it has become so far perfected that neither a bona fide purchaser nor creditor could thereafter have acquired rights superior to those of the transferee. As thus drafted, it includes a failure to record and any other ground which could be asserted by a bona fide purchaser or a creditor of the transferor, as against the transferee. A provision also has been added which makes the test effective even though the transfer may never have actually become perfected. [ Footnote 13 ]"
Receivables often are assigned only when credit in a similar amount is not available through other channels. [ Footnote 14 ]
Interest and other charges are high, [ Footnote 15 ] and an assignment often is correctly understood as a symptom of financial distress. [ Footnote 16 ] The borrower does not wish his customers to learn of his borrowing arrangement, for the reason, among others, that customers, particularly in placing orders for future delivery, prefer to rely on solvent suppliers. And often the borrower desires to conceal the fact that he is being financed by this method, lest knowledge lead to a withdrawal of further credit or refusal of new credit. [ Footnote 17 ] The borrower and the lender on assigned accounts receivable thus have a mutual interest in not making the transaction known. So long as the transaction may remain a secret, it is not apt to become known to the trade. When the transaction is communicated to the trade debtors, it is known where there is less motive to keep in under cover. Commercial and trade reporting agencies are diligent to
It is said that assignments such as are involved in this case could not have been within the contemplation of the Act, since its application will have but little effect in remedying whatever secrecy attends them. It is true that notice to the debtors sufficient to satisfy the requirements of applicable state law might never have been communicated to the creditors, and that many states do not require notice to the debtor to foreclose possible superior rights of subsequent assignees. [ Footnote 18 ] So also is it true that conflicts and confusion may result where the transaction or location of the parties is of such a nature that doubt arises as to which of different state laws is applicable. But the fact that the remedy may fall short in these respects does not justify denying it all effect.
Questions of this sort arising in bankruptcy cases were solved by reference to state law even before the decision of Erie Railroad Co. v. Tompkins, 304 U. S. 64 . Holt v. Crucible Steel Co., 224 U. S. 262 ; Benedict v. Ratner, 268 U. S. 353 . The decision in Salem Trust Co. v. Manufacturers' Finance Co., 264 U. S. 182 , that, as a matter of "general law," absence of notice to the debtor of the assignment of his account did not open the door to a subsequent assignee to obtain superior rights was not rendered in a bankruptcy case, and is, in any event, inapplicable since the decision of the Tompkins case.
See statement of Professor McLaughlin, Hearings, Revision of the Bankruptcy Act, House Judiciary Committee, 75th Cong., 1st Sess., pp. 122-125. He stated Thompson v. Fairbanks, 196 U. S. 516 , as applying a rule of state law that a mortgagee, by taking possession of the mortgaged property at a time subsequent to the execution of the mortgage, thereby validated it as of the time of execution. He said that § 60(a) would prevent such validation by relation back. Similar disapproving reference was made to Bailey v. Baker Ice Machine Co., 239 U. S. 268 ; Carey v. Donohue, 240 U. S. 430 , and Martin v. Commercial National Bank, 245 U. S. 513 , with the explanation that