Case Name: In re GARDEN CITY PARLOR FURNITURE CO. RUSNAK v. COMMERCE TRUST CO.
Court: United States Court of Appeals for the Seventh Circuit
Jurisdiction: United States
Decision Date: 1920-10-05
Citations: 268 F. 318
Docket Number: No. 2610
Parties: In re GARDEN CITY PARLOR FURNITURE CO. RUSNAK v. COMMERCE TRUST CO.
Judges: Before BAKER, ALSCHUGER, and PAGE, Circuit Judges.
Reporter: Federal Reporter
Volume: 268
Pages: 318–326

Head Matter:
In re GARDEN CITY PARLOR FURNITURE CO. RUSNAK v. COMMERCE TRUST CO.
(Circuit Court of Appeals, Seventh Circuit.
October 5, 1920.)
No. 2610.
1. Corporations <@=487(1) — Assignment of accounts to secure ultra vires loan by corporation invalid, and accounts not collectible by it.
Assignments of accounts, made in pursuance of a contract for the purchase of accounts which was in fact a loan with the accounts as collateral security, and which loan was void because beyond the powers of the loaning corporation, are themselves void, and do not entitle the corporation to collect amounts of such accounts, even to the extent of reimbursing itself for the money loaned.
2. Equity <@=66 — Equity does not protect possession wrongfully obtained from receiver or trastee; who comes into equity must do equity.
Collection of money by the assignee of the accounts of a bankrupt under void assignments, after the receiver in bankruptcy and the trustee were appointed, was wrongfully taking possession of such collections from an officer of the court or from the trustee, and such wrongful possession does not authorize retention of the funds to the extent of the loans to the bankrupt, under the maxim that the trustee, coming into a court of equity, must do equity.
Alschuler, Circuit Judge, dissenting.
Petition to Review and Revise an Order of the District Court of the United States for the Eastern Division of the Northern District of Illinois.
Involuntary proceeding in bankruptcy against the Garden City Parlor Furniture. Company, bankrupt. On the finding of the District Court that the Commerce Trust Company was entitled to retain, from amounts received by it on claims assigned by the bankrupt, sufficient sums to reimburse it for money advanced to the bankrupt, with interest, Samuel Rusnak, as trustee in bankruptcy, brings petition to .review and revise.
Finding reversed, and cause remanded, with directions.
Jacob G. Grossberg, of Chicago, Ill., for petitioner.
E. A. Stebbins, of Chicago, Ill., for respondent.
Before BAKER, ALSCHUGER, and PAGE, Circuit Judges.

Opinion:
PAGE, Circuit Judge.
This is a petition to review and revise the finding of the District Court of the Northern District of Illinois in favor of the respondent upon the following facts:
The Garden City Parlor Furniture Company, an Illinois corporation, was adjudged a bankrupt on an involuntary petition filed April 4, 1916. On April 5th the Central Trust Company was appointed receiver of the estate and assets of the bankrupt. Respondent, a corporation under the general incorporation laws of _ Illinois, was chartered for the purposes shown in the agreed statement of facts filed in this case and set out hereinafter.
Bankrupt and respondent entered into the following agreement:
"Articles of agreement, entered into at Chicago, Illinois, this 2d day of January, A. I). 1915, between Garden City Parlor Furniture Company, an Illinois corporation, hereinafter designated as first party, and Commerce '.Cnist Company, an Illinois corporation, hereinafter designated as second party, wilnesseth, that whereas, the first party is desirous of selling- to second party contracts, accounts receivable, and dioses of action, hereinafter designated as accounts, evidencing shipments of personal property: Now, therefore, in consideration of the premises, the parties agree as follows:
"First. Second party agrees to buy the accounts belonging to first party which are acceptable to the second party and pay therefor in cash and services the following: Cash, 98 per cent, of the face value (less all deductions taken by the debtor) of all accounts or parts or installments thereof that are paid to the second party within 30 days. On accounts, parts of accounts, or installments not so paid within 30 days, the said 98 per cent, shall be reduced by 1 per cent, for each additional period of 30 days, or a fraction thereof, that such accounts, parts, or installments thereof shall remain unpaid to second party.
"Services. — Second party shall make or cause to be made such credit investigations and audits and take such other steps as it deems necessary for fhe protection of itself and the first party. First party agrees to and does hereby accept said cash and services as full consideration for the sale of said accounts. Said cash shall be. paid at the time following: 76 per cent, of the face value of said accounts upon acceptance of the same by the second party, the balance upon the payment of said accounts, to the second party: Provided, however, that no portion of such balance need be paid so long as any accounts purchased hereunder shall he in default.
"Second. First party agrees to buy from second party on demand all accounts purchased as aforesaid that are in default and to pay second party the face value thereof.
"Third. The term default as used in this contract is construed to mean the nonpayment of an account to second party at maturity; insolvency of the debtor; failure or refusal of debtor to accept, receive and retain the property evidenced by such an account. First party agrees to pay to second party all expenses and attorney's fees incurred by second party in and about the collection of any account in default.
"Fourth. It is agreed that, contemporaneously with the purchase of accounts, first party shall assign and set over to second party such accounts purchased by it, to the end that second party shall be and become subro-gated to all of the rights possessed by first party in respect thereto. Second 'party shall have the right to indorse the name, of first party on all evidences of shipment or payment pertaining to accounts purchased hereunder. First-party shall make entries upon its books disclosing' the sale to second party of accounts purchased hereunder, and all records pertaining thereto shall at all times be open to the inspection of the second party.
"Fifth. It is expressly understood that the purchase of accounts by the second party is made upon representations in writing concerning the financial responsibility of the first party, statements of which are to be furnished second party once every calendar year.
"Seventh. This agreement and all its provisions shall inure to and become binding upon the heirs, executors, administrators, successors, and assigns of the parties hereto.
"In witness whereof, the parties hereto have caused these presents to be executed on the day and year first above written."
On the back of which was printed the following:
"The following guaranty and waiver is to be signed by individuals:
"In consideration of the sum of one ($1.00) dollar and other valuable considerations paid by Commerce Trust Company to each of the undersigned, receipt of which is hereby acknowledged, they and each of them do hereby jointly and severally guarantee to Commerce Trust Company, its successors or assigns, the full, prompt, and faithful payment, performance and discharge by Garden City Parlor Furniture Company of each of the provisions and conditions of the agreement on reverse side hereof, or any other instrument given or executed in pursuance thereof.
"The undersigned hereby jointly and severally waive all notice or default by first party, and waive notice of acceptance of this guaranty by Commerce Trust Company, its successors or assigns.
"In witness whereof, we have hereunto set our hands and seals this 2d day of January, A. D. 1915."
On May 22, 1916, the adjudication in bankruptcy was made, and petitioner Rusnak was elected trustee. He filed his petition in the bankruptcy proceeding, in which he alleged that prior to the filing of the petition bankrupt had executed a certain instrument purporting to be an assignment of accounts payable to the said bankrupt aggregating many thousands of dollars to the Commerce Trust Company; that such assignments were merely given as security for certain usurious loans; that respondent had no authority to loan money or receive security therefor; that the assignments were ultra vires and void; that respondent, since the filing of the petition in bankruptcy, had made collections on the void assignments of moneys that were the property of the trustee; that there were certain accounts unpaid, and respondent was proceeding to collect them. Petitioner prayed that respondent be required to make answer to the petition, and be ordered to account for moneys collected under the purported authority of such assignments since the filing of the petition in bankruptcy, and also be required to pay all moneys so collected to petitioner; that respondent be restrained from making further collections.
Respondent filed its answer to the petition, and also filed a cross-petition. The cross-petition prayed for an accounting by the trustee in bankruptcy and by the receiver, and that the trustee in bankruptcy should be enjoined from making further collections.
The following agreed statement of facts presents fully the facts in this case:
"On January 2, 1916, tbe Garden City Parlor Furniture Company, an Illinois corporation, entered into a contract witb tbe Commerce Trust Company, a corporation organized under the general incorporation laws of the state of Illinois (a copy of which contract is hereto attached, marked Exhibit A, and made a part hereof), and pursuant'to the terms of said contract the said Garden City Parlor Furniture Company executed various assignments of its accounts receivable to said Commerce Trust Company, as hereinafter set forth, and said Commerce Trust Company paid to said Garden City Parlor Furniture Company certain sums of money therefor, as hereinafter set forth.
"The purpose for which said Commerce Trust Company was formed, as set forth in its charter, was 'to buy and sell choses in action and other personal property of every kind, nature and description; to borrow money, assign, -mortgage or otherwise pledge or charge any or all of its property or property rights owned and held by it; to issue corporate obligations and to secure the payment of moneys borrowed; to do a general brokerage and commission business, and to enter into and carry out contracts for all lawful purposes. This statement of purposes shall not include the business of real estate brokerage or banking.'
"On the date of the filing herein of the involuntary petition to adjudge said Garden City Parlor Furniture Company a bankrupt, on April 4, 1916, the Commerce Trust Company had in its possession assignments of accounts receivable of said Garden City Parlor Furniture Company, made and delivered in pursuance to the terms of the aforesaid contract, amounting to §8,602.78 (an itemized list of which is hereto appended, marked Exhibit B, and made a part hereof).
"In consideration of the assignment of said §8,602.78 of accounts receivable, the said Commerce Trust Company had paid in cash to said Garden City Parlor Furniture Company before the filing .of the petition herein to adjudge said company a bankrupt, pursuant to the terms of the aforesaid contract, 76 per cent, of the said sum, of §6,588.11. Five per cent, interest on the said sum of §6,588.11 from April 4, 1916, to March 32, 1917, is §808.98.
"Subsequent to the filing' of said involuntary petition on April 4, 1916, the said Commerce Trust Company has proceeded to collect said accounts receivable and has collected on said accounts the sum of §5,270.97. (An itemized list, showing the amounts and dates of .such collections is hereto appended, marked Exhibit 0, and made a part hereof.)
"Said Commerce Trust Company still holds assignments of uncollected accounts receivable amounting to §3,331.81. (An itemized list of which is hereto appended, marked Exhibit D, and made a part hereof.)
"The average due date of said collections is July 20, 1916, and interest at 5 por coni. on the aforesaid sum of §5,270.97 from said date to March 12, 1917, is §169.84.
"On April 5, 3916, the Central Trust Company of Illinois was appointed receiver for the said Garden City Parlor Furniture Company, and from time to time thereafter debtors whose accounts had been assigned as aforesaid to said Commerce Trust Company remitted moneys due on said accounts to said Garden City Parlor Furniture Company, and said receiver collected and held said moneys so remitted, and refused to turn over said moneys to the Commerce Trust Company.
"Of the aforesaid,balance of §8,331.81 of assignments of accounts receivable, held by said Commerce Trust Company, said receiver has collected §1,453.86 (an itemized list of which is hereto appended, marked Exhibit E, and made a part hereof), and still holds said amount, less exchange thereon, amounting to §3.85.
"Of the said balance of uncollected accounts receivable the assignments of which are held by the Commerce Trust Company, the trustee herein, Samuel Itusnak, has collected §40.05, being an account for that amount of M. Kaplan, of Scranton, Pa.
"Subsequent to the filing of said involuntary petition on April 4, 1916, the said Commerce Trust Company has from time to time received remittances from debtors of the said Garden City Parlor Furniture Company, in payment of accounts receivable not owned by said Commerce Trust Company or assigned to it. Said Commerce Trust Company has applied said moneys so received towards the partial satisfaction of the moneys alleged by it to be due from said bankrupt, and as a set-off to the moneys collected as aforesaid by the receiver and trustee herein. The moneys so collected by said Commerce Trust Company amount to 8456.21 (an itemized list of which is hereto appended, marked Exhibit E, and made a part hereof). The average due date of said money so 'collected is August 4, 1916, and interest at 5 per cent, on said sum from said date to March 12, 1917, is §13.81."
The referee found that the contract was not, as it purported to be, a contract of sale of accounts, but that it was in fact a loaning contract, and the transactions thereunder were a series of loans, with accounts receivable transferred as collateral security, and that, as loaning transactions, the contract was illegal and ultra vires the Commerce Trust Company. The referee found that the respondent had a right to collect and apply the accounts until the actual advances thereon, with interest at 5 per cent., were repaid to respondent, and that the trustee and receiver should be enjoined from making collections on the assigned accounts until respondent had collected its account in full, and directed the receiver, though not a party, to pay over the money collected by it, with interest thereon, to respondent. The prayer of the trustee was wholly"denied, except as to any accounts remaining after respondent's advances, with 5 per cent, interest, were repaid, and relief granted on the cross-petition of the respondent. The District Judge affirmed the referee's findings.
Necessity for discussion of the facts is very much narrowed because, of the concession and assertion of respondent that the alleged sale contract was and is void, and because respondent has staked its whole case upon two alleged facts, which it claims were reciprocal, co-ordinate, and contemporaneous: First, respondent paid bankrupt a sum of money; second, bankrupt made and delivered to respondent, and respondent had in its possession at the time of the bankruptcy, various assignments of the accounts receivable of the bankrupt. The conditions present two questions:
(1) Were the so-called assignments valid? While it is probably true that the respondent, at the time it paid the money to the bankrupt, received the various assignments of accounts, yet it seems to have overlooked the fact that it is provided in the agreement that—
"First party agrees to and does hereby accept said cash and services as full consideration for the sale of said accounts."
and:
"Fourth. It is agreed that contemporaneously with the purchase of accounts, first party shall assign and set over to second party such accounts purchased by it."
This binds up the assignment with and makes it a part of the agreement as fully as though its words had been written into the body of the agreement. Consequently the assignments were just as void as the agreement. Although respondent held the assignments, they were as void and useless in its hands as though they had never been written.
(2) Should the rule that he who seeks equity must do equity be applied- to petitioner? The trustee's petition was limited solely to the receivables covered by the purported assignments and uncollected at the time of the filing of petition in bankruptcy. Upon the filing of the petition and the appointment of the receiver, all property rights of the bankrupt passed under the jurisdiction of the court; and when the trustee was appointed the title and right to possession vested in him, and it was at all times after the appointment of the receiver in the possession of the court. This extended to book accounts and receivables. Of the accounts in question under the petition, respondent had no possession at the time of the filing of the petition in bankruptcy. The intention of the bankrupt that it should have them was not the equivalent of possession, 'and no possession taken after the filing of the petition in bankruptcy could avail respondent. In re Jules & Frederic Co. (D. C.) 193 Fed. 533; Edison Co. v. Tibbetts, 241 Fed. 468, 154 C. C. A. 300; State Bank of Chicago v. Cox, 143 Fed. 91, 93, 74 C. C. A. 285. It not only could not avail respondent anything, but was a wrongful' invasion of the rights of the court's officers, which rights the court was bound to protect.
Even if the assignment had been valid, it is conceded that it was only as collateral security and was not a sale, and under such circumstances an attempt to take possession without the consent of the bankruptcy court would be wrongful. One may not take the law into his own hands, and acquire possession by force or by a ^wrongful act, and then invoke the aid of a court of equity to maintain him in that possession. It would lead to a strange anomaly in the law to hold, upon a petition by the trustee, brought to protect him against the violations of his rights as an officer of the court by the wrongful act of the respondent, that, because the trustee is seeking to protect his rights against such wrongful acts, the court must grant him no relief whatever, but is compelled, under the rule that he who seeks equity must do equity, not only to give the respondent the fruits of his wrongdoing, but as was done in this case, give him affirmative relief by way of injunction against the trustee, and by way of an order upon the receiver, not only to pay over money which the receiver had rightfully collected, but to pay'interest thereon as well. In re Grand Union Co., 219 Fed. 353, 135 C. C. A. 237.
The prayer of the trustee in his petition should have been allowed, anddt is ordered that the finding of the District Court should be reversed, and the cause remanded, with directions to proceed in harmony with this opinion.