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In re Rosen

decided: November 19, 1946.


Author: Goodrich


GOODRICH, Circuit Judge.

This case involves the much discussed subject*fn1 of the effect of an assignment of book accounts when the assignor has subsequently become a bankrupt. The assignor did business in New Jersey with New Jersey customers. Forth-four assignments are involved, all made to one assignee, Standard Factors Corporation. The debtors were not notified until November 18, 1942. The assignor was declared a bankrupt on November 23, 1942. The trustee claims that under Section 60, sub. a of the Bankruptcy Act, as amended in 1938,*fn2 the assignments may be avoided as preferences. The District Court decided to the contrary and the trustee appeals.

We have had the question before. In re Quaker City Sheet Metal Company, 3 Cir., 1942, 129 F.2d 894, affirmed in Corn Exchange National Bank & Trust Co. et al. v. Klauder, 1943, 318 U.S. 434, 63 S. Ct. 679, 87 L. Ed. 884, 144 A.L.R. 1189. In affirming this Court the Supreme Court held that the command of Section 60, sub. a, is to test the effectiveness of the transfer, as against the trustee by the standards which applicable state law will enforce against a good faith purchaser.*fn3 The trustee won and the assignee lost in that litigation because we found, and the Supreme Court accepted our finding, that the applicable state law, Pennsylvania, at that time gave to a subsequent good faith assignee, who gave notice, a right superior to the first assignee.*fn4 The rule is, therefore, clear to this extent, that we determine the efficacy of the transfer against the trustee under Section 60, sub, a, by the applicable state law.*fn5

Before we turn to state decisions or statutes to discover the applicable state law we must, of course, decide which state law is applicable to the instant case. The initial problem is the one mentioned by the Supreme Court in the Klauder case [318 U.S. 434, 63 S. Ct. 683] where it was stated that "* * * 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."*fn6 In the present case the assignor and assignee agreed upon the terms by which credit was to be extended and incorporated those terms into a written contract. That contract provided in its twenty-fifth paragraph that the agreement should not become effective until accepted by the assignee in Philadelphia, Pennsylvania. It was so accepted. The twenty-first paragraph also contained the provision that the agreement and "all transactions, assignments and transfers hereunder, and all rights of the parties, shall be governed as to validity, construction, enforcement, and in all other respects by the laws of the State of Pennsylvania."

No reason appears why this paragraph was inserted. The parties surely could not have been attempting to create for themselves difficult conflict of laws problems. Furthermore, the law of Pennsylvania, as we found it to be in the Quaker City case, was not such as to bring sweet repose to an assignee who had not notified a debtor of the assignment.

While the provisions quoted have possibilities of great difficulty we think we do not have to face those difficulties in this case. The agreement from which the quotation was made was one for the subsequent assignment of accounts receivable. It provided the terms which should govern the parties, how each advance was to be made, method of collection, etc. But nothing was assigned by this contract. The accounts were not, at the time, even in existence. They were to arise when the assignor sold goods to his customers. The assignor lives and did business in New Jersey; so did his customers.Their accounts were payable at the assignor's New Jersey place of business and the assignor deposited the money in a New Jersey bank. From time to time the assignor assigned these accounts to Standard Factors Corporation. So we distinguish here between the general agreement to assign claims which would subsequently arise and the actual transaction of assignment. The validity of the contract to assign is not here in question. What is here involved is the effect of the actual assignment. This took place in New Jersey and, by the usual conflict of laws rule, is determined by New Jersey law.*fn7 The distinction just made has come up many times in cases involving the transfer of land and the distinction is pretty well marked out between the rule of reference which has to do with the contract to convey and that which is looked to in order to determine the effect of the conveyance itself.*fn8

The District Court discussed the cases and reached its conclusion on the basis of New Jersey law. In presenting the case to this Court the parties have made most of their argument on the New Jersey authorities. We are deciding the case on New Jersey law also, the reason being that on the conflict of laws question we think this is the proper reference. In making it we do not need to decide whether this conflict of laws question must be resolved by state law or not.*fn9 We think probably not; we believe it to be a question for our own determination since we are engaged in the general problem of applying a federal statute. But, in either event, the distinction we have talked about in the paragraphs above so far as it has appeared at all, is recognized in the New Jersey cases.*fn10

We come then to the measure of the non-notifying assignee's rights under New Jersey law.

The first step is clear. Vice Chancellor Emery in Jenkinson v. New York Finance Co.*fn11 discussed the prior New Jersey cases with great thoroughness, likewise the English decisions beginning with Dearle v. Hall.*fn12 He came to the conclusion that "notice by a prior assignee to the trustee is necessary in order to protect him against a subsequent assignee who is a purchaser for value in good faith and without notice." In other words, he followed the English rule and did so following an analysis of prior New Jersey decisions which convinced him that the matter was res nova in his state. That, we think, is sufficient evidence of New Jersey law for a federal court so long as the decision remains in force.*fn13

The second step is equally clear. It is the superseding of the Jenkinson case by the decision in Moorestown Trust Co. v. Buzby.*fn14 The court posed the question whether, as between successive assignees of the same chose in action, prior notice to the debtor of the later assignment, without more, subordinates the rights of the earlier to those of the later assignee. The answer given was no. Authorities relied on were Salem Trust Co. v. Manufacturers' Finance Company et al., 1924, 264 U.S. 182, 44 S. Ct. 266, 68 L. Ed. 628, 31 A.L.R. 867,*fn15 and Restatement, Contracts (1932) ยง 173.

This Section of the Restatement protects the first assignee, in general, but permits the second assignee to keep what he has obtained if he secures payment of the claim, judgment against the debtor, a novation or the possession of a tangible token or title document.*fn16 As shown in the New Jersey Annotations to the Contracts Restatement, there is some doubt whether these qualifications of the first assignee's rights are recognized in New Jersey.*fn17 If so, that is additional support for the proposition we set out below.

At this point it will be helpful to consider our New Jersey decisions along with the federal statute, to see just what it is that we are trying to find out from the state law. Our question is the time at which these assignments became effective. If it was when they were made, they escape the charge of being avoidable preferences under Section 60, sub. a.*fn18 If not, the trustee wins and the assignee loses. The relevant language of the statute on this point is: "A transfer shall be deemed to have been made at the time when it became so far perfected that no bona-fide purchaser from the debtor and no creditor could thereafter have acquired any rights in the property so transferred superior to the rights of the transferee therein, * * *."

We need not worry about creditors; they cannot, under New Jersey decisions, acquire rights superior to the assignee.*fn19 The Moorestown decision seems to go the whole way in holding that the second ...

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