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In re Freeman

July 25, 1961

IN THE MATTER OF SAMUEL FREEMAN, INDIVIDUALLY AND TRADING AS PEDI-TRED SHOES, BANKRUPT, INTERNATIONAL SHOE COMPANY, APPELLANT.


Author: Forman

Before GOODRICH, STALEY and FORMAN, Circuit Judges.

FORMAN, Circuit Judge.

International Shoe Company (International) claimed the security of a factor's lien*fn1 in the bankruptcy of Samuel Freeman, trading as Pedi-Tred Shoes (the bankrupt). The lien was contested by the trustee. The Referee held the lien void as a secured obligation and the United States District Court for the District of New Jersey affirmed the Referee. This appeal followed.

The parties to the litigation are not in disagreement as to the basic facts. The bankrupt conducted a retail shoe business in Newark, New Jersey. In June 1959 he was indebted to International in the sum of fifteen hundred dollars for previously acquired merchandise. He desired to obtain a larger inventory from International but neither his credit rating nor his business to that date warranted a further extension of credit. International describes the events that followed thus:

"After meetings with International's agent, it was agreed that the bankrupt would be allowed to draw on International for its merchandise up to a maximum amount of Eight Thousand Five Hundred ($8,500.00) Dollars, during a three year period, in return for which International was to be secured by a factor's lien on inventory, proceeds and accounts receivable from the sale thereof during the existence of the lien. This agreement for the factor's lien was entirely separate and apart from the purchases which bankrupt had made on credit previously, of approximately Fifteen Hundred ($1500.00) Dollars. A 'Factor's Lien Agreement' was entered into (J5a-J12a) as provided by the Revised Statutes of New Jersey, 2A:44-178 et seq. A proper notice of lien (J13a-J14a) as required by R.S. 2A:44-180 was duly filed in the office of the Register of Essex County on August 4, 1959.

"Subsequently, the bankrupt drew on International as provided in the 'Factor's Lien Agreement' (J5a-J12a), for merchandise to the stated maximum amount of Eight Thousand Five Hundred ($8,500.00) Dollars. In the meantime, his credit purchases remained at approximately Fifteen Hundred ($1500.00) Dollars."

The relevant portion of the factor's lien agreement provides:

"(2) Amount and Duration of Loan or Credit - International has presently extended a loan or credit to the Borrower in the amount of approximately Fifteen Hundred Dollars ($1500.) on open account and/or installment notes and, while International shall not be obligated to furnish the Borrower future credit in any specific amount, all such further advances, loans or credits as may be extended by International to the Borrower from time to time in the future during the ensuing three (3) years (if requested by the Borrower), to the maximum amount of Eighty-five Hundred Dollars ($8500.), shall, nevertheless, be subject to the provisions of this agreement and secured by the factor's lien herein created. * * *"*fn2

On June 28, 1960, the bankrupt filed a voluntary petition in bankruptcy. A receiver was appointed on June 28, 1960. Upon his application, returnable July 25, 1960, an order, consented to by International, was made by the Referee for a public sale of the bankrupt's assets free and clear of encumbrances, but providing that the lien of International, if valid, was to be transferred to the proceeds of the sale. The merchandise brought $5,997.60.

After the public sale the respondent trustee presented further legal argument as to the validity of International's lien and the Referee, on September 14, 1960, entered an order declaring the lien invalid because "the Factor's Lien Act of the State of New Jersey was applicable only to loans and advances of money and not to the extension of credit for goods and merchandise. * * *"

The Factors' Lien Act of the State of New Jersey (Act) N.J.S.A. 2A:44-178 et seq. was adopted in 1942. Laws, 1942, c. 182. It defines a factor in the following language:

"The terms 'factor' and 'factors' wherever used in this article include persons, firms, and corporations, and their successors in interest, engaged in the business of factoring or financing sales of merchandise or of purchasing or lending on the security of receivables arising out of such sales who as part of or incidental to such business lend upon the security of merchandise, and any consignee or consignees, pledgee or pledgees, who advance money on goods consigned to or pledged with them, whether or not such consignee or pledgees are employed to sell such goods, and their successors in interest." N.J.S.A. 2A:44-178.

It further provides:

"If so provided by any written agreement all factors shall have a continuing general lien upon all goods and merchandise from time to time consigned to or pledged with them, whether or not in their constructive, actual or exclusive occupancy or possession, and upon any accounts receivable or other proceeds resulting from the sale or other disposition of such goods and merchandise, for all their loans and advances to or ...


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