Court Opinion

ID: 9448502
Source: CourtListenerOpinion
Date Created: 2023-08-03 23:38:06.937625+00
Date Added: 2024-06-11T17:31:27.578065
License: Public Domain

MAGRUDER, Circuit Judge
(dissenting).
I think that the district court’s order was correct and should be affirmed.
The referee’s order denied a claim by Everett L. Foote of a factor’s lien on certain inventory, which the referee treated merely as an unsecured claim against the bankrupt estate. The district court, on the contrary, ruled that the lien was good and had priority over the claims of the unsecured creditors and over the trustee in bankruptcy, appellant herein, representing those creditors.
The statutory material with which we are concerned is the Ohio Factors Lien Law. The factors lien laws were enacted because of the inadequacy of the chattel mortgage and other familiar security devices. See Silverman, “Factoring: Its Legal Aspects and Economic Justification,” 13 Law & Contemp.Prob. 593 (1948). Beginning in New York in 1911, these laws, with more or less variation in detail, are now in force in nearly one half of the States. The Factors Lien Law of Ohio dates from 1945 and is now found in Ohio Rev.Code, §§ 1311.59-1311.64. It is conceded that the law of Ohio applies to this transaction. See Benedict v. Ratner, 268 U.S. 353, 45 S.Ct. 566, 69 L.Ed. 991 (1925); In re Robert Jenkins Corp., 17 F.2d 555 (C.A.1st, 1927). However, I am not aware of any decision of the Ohio courts on the precise point here in question. Under such circumstances a federal court must do the best it can with the Ohio statutory language, paying heed to any indications that it may find as to how the Ohio courts would probably construe the Ohio statute.
Under the Ohio act, there is no doubt that Everett L. Foote qualifies as a “factor” according to § 1311.59, which describes factors as persons who advance money on the security of merchandise,“whether or not they are employed to sell such merchandise.” The bankrupt, Summit Hardware, Inc., is a “borrower,” as also defined in § 1311.59. “Merchandise” is stated to mean “materials, goods in process, and finished goods intended for sale, whether or not requiring further manufacturing or processing, but does not include motor vehicles, whether or not intended for sale, or machinery, equipment, or trade fixtures of the borrower.”
What was needed, and what § 1311.60 obviously sought to provide, was a lien upon inventory, conceived of as a “floating mass,” which inventory would remain in the possession of the borrower, who would be free to withdraw an item from stock for sale in the regular course of business without any obligation to account to the lienholder for the proceeds. The res which would be the subject of *403the lien is the merchandise or inventory, whose component elements may be constantly changing with no effect on the identity of the res. Cf. Hopkins v. Baker Bros. & Co., 78 Md. 363, 28 A. 284, 22 L.R.A. 477 (1894); Pullman’s Palace-Car Co. v. Pennsylvania, 141 U.S. 18, 26, 11 S.Ct. 876, 35 L.Ed. 613 (1891). I know of no constitutional reason why the legislature of Ohio should not create such a lien if it chooses to do so. In doing this it would not be bound by common law analogies. See In re Comet Textile Co., Inc., 15 F.Supp. 963, 965 (S.D.N.Y.1936). If this type of lien on the inventory is valid, as I think it is, it is not necessary for a factor to take possession of the merchandise, and thus to accomplish the socially undesirable result of putting the pressed borrower out of business. See In re Comet Textile Co., Inc., supra at 964.
The text of § 1311.60 of the Ohio statute is given in the court’s majority opinion.
The “written agreement” between the borrower and the factor in this case, after reciting that the factor had lent the borrower the sum of $25,000 evidenced by a note, specified that the borrower “hereby gives, grants and pledges to the said Factor, Everett L. Foote, a lien on all its hardware, screws, nuts, bolts, work in process, tools, merchandise, and all other chattel property, excepting the fixtures in said building and the office equipment permanently there, including any and all chattel property held for sale,” as security for the said loan. “Said Factor’s lien shall cover any and all chattel property including nuts, bolts, hardware, tools, supplies, or merchandise hereafter acquired.” The agreement went on to state that the borrower should furnish the lender “each thirty (30) days or of tener a list of all merchandise acquired by it and shall at any time at his request furnish a list of all merchandise which it has on hand.”
It does not appear that the borrower ever gave the factor a separate written statement dated and signed by him. Both the referee and the district court found this as a fact, and I accept this finding. The referee thought that this absence of a “separate written statement” was fatal to the existence of the statutory factor’s lien upon after-acquired inventory. But as it was seen above, in the written agreement between the borrower and the lender in this case, the borrower had contractually bound himself to furnish such “separate written statements,” so that, if the borrower performed his contract, that would complete the legal lien according to the Ohio statutes. I see no reason why the equitable lien which thus arises in favor of the factor should not be good as against unsecured creditors or as against the trustee in bankruptcy.
The referee, it seems to me, attaches undue importance to the absence in the Ohio Factors Lien Law of language which is found in the New York statute to the effect that the factor’s lien is to be interpreted liberally in order to create a lien as intended by the parties. Since the statutory factor’s lien was in derogation of the common law, the referee decided that the statute so imposing the factor’s lien should be “strictly construed.” He concluded that § 1311.-62 was applicable, with the result that, upon the “filing,” as required by § 1311.-61, “the lien of the factor shall be effectual upon and shall attach to the property from time to time designated in the written statements provided for in section 1311.60 of the Revised Code, as against all claims of unsecured creditors of the borrower and as against subsequent liens of creditors.”
I entirely agree with the opinion of the court that whether the Ohio Factors Lien Law is given a strict or liberal construction, the statutory steps necessary to obtain the legal lien must be substantially followed in order to accomplish that object. But I rest upon the equitable lien which, while it is not good as against a bona fide purchaser, may be deemed to be valid as against unsecured creditors under the Ohio law. I think that the spirit of Bown & Sons v. Hona*404barger, 171 Ohio St. 247, 168 N.E.2d 880 (1960), compels this result.
The lower court was impressed by the fact, which the referee readily admitted, that the factor does not have to file a new notice of lien under § 1311.61 whenever new property is acquired by the borrower and added to inventory and is listed in “separate written statements dated and signed by the borrower and delivered to the factor.” See also In re Wyse Laboratories, Inc., 55 Ohio Law Abst. 321, 325 (1949). There may have been some other purposes served by requiring the borrower to issue these “written statements,” as set forth in § 1311.61. But certainly the district judge was right in stating that the primary purpose of requiring these separate written statements was “for the protection and convenience of the parties to the agreement.” 192 F.Supp. 489, 491. Therefore the court could not “understand how any prospective creditor could have been misled into a sense of false security by the lack of these separate written statements.” Ibid, at 492.