Petition for Writ of Certiorari — Heller v. Shaw

LIBRARY | — eee

ae | | ee-Supreme. Geust,

7UPREME COURT. U,& 9 |. FILED

FEB 23 1086

IN THE P

HN F, DAVE, CLERK

Supreme Court of the United Sta |

' October Term, 1967 ie

m114g

WALTER E, HELLER AND COMPANY

Petitioner, |

v.

CHARLES C. SHAW, Trustee in Bankruptcy for

BEMPORAD CARPET MILLS, INC.,

Respondent. - -

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT.

Of Counsel’ 2. | | 2

CHARLES L. GOWEN *

_ WILLIAM H. IZLAR, JR.

A. BRUCE SCHIMBERG

MICHAEL J. FREED

Curr sre

es

fe,

IL Last

_ INDEX

Opinions below.

Jurisdiction .

Question presented :.

Statutes involved ..

Statement a oe

Reasons for granting the writ .

Conclusion . i Oe ak eb aes

Appendix A-Opinions and judgment below .

B-Statutes . ye oe

CITATIONS

Cases: a , : :

Bank of Marin v. England, 385 U.S. 99 (1966) .

Blue v. Herkimer Nat’l Bank, 30 F.2d 256 (2d

Cir. 1929), cert. denied, 281 U.S. 750 (1930) .

Citizens Nat’] Bank v.. Lineberger, 45 F.2d 522

(4th Cir..1980). .

First National Bank v. Julian, 383 F.2d 329 ( ih

Cir.), cert. denied, 88 Sup. Ct. 593. (1967) .

‘Cir, 1940)°. 6s oe

Hughes v. Lawyers Trust Co., 108 F.2d 792 (2d

New York Courity Nat’! Bank v. Massey, 192 |

US. 188 (1904). . 2.

Pasadena Investment Co. v. Pasadena Air Prods, .

. Inc., 234-F. Supp. 128 (S.D. Cal. 1964) .

Porter v. Strevell-Paterson Fin. Corp., 292 F.2d

706 (10th Cir. 1961) . . oe & 6%

Sexton v. Kessler & Co., 225 U.S. 90 (1912) . ..

Wolf v. Aero Factor’s Corp., 221 F.2d 291 (2d

Cir. 1955), affirming 126 F. Supp 872 |

(S.D.N.Y. 1954)

i ,

Shiiutes:

Section 60a of the Bankruptcy Act, it U. s. C. A.

ae ~ 3

Section 60b of the Bankruptcy Act, ‘W U. S. C. A.

i... ee 2

Section 68a ‘of the Bankruptey J Act, W U. S. G. A.

§ 1082 . ie 4 160 tt oe

Sensis:

Daily News Record, February 5, 1968 (Fairchild ~ .

| Publication, New York, New York) . . . . 10

G. GILMORE, SECURITY INTERESTS IN Per: |

SONAL PROPERTY (1965) . . . . . 7,10

REMINGTON, BANKRUPTCY (5th. ed. repl. vol

NS eae Ge ‘ . +e

Silbert, Financing end Factoring atounts Re-

ceivablé, 30 HARV. Bus. REv. 89 (1952) . .. . 711 |

W. COLLIER (14th ed. 1967) . . . .-. .. .5,9

ii

»

“3 IN THE

| . Supreme Court of the United States.

October Term, 1967

No.

WALTER E. HELLER AND COMPANY -

: ° V.

CHARLES C. SHAW, Trustee in Bankruptcy for :

. BEMPORAD CARPET MILLS, INC.,

| | os « Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT.

‘Petitioner prays that a writ of certiorari issue to

_review the judgment of the United States Court of Ap-

peals for the Fifth Circuit entered in the above-entitled

case on November 27, 1967.

CITATIONS TO OPINIONS BELOW

_ The opinion of the Court of Appeals, printed in Ap-

pendix A attached to this petition, infra, pp. Al-A12, is

reported in 385 F.2d 353. The opinion of the United

States ‘District Court for the Northern District of

Georgia printed in Appendix A, A13-A33, is reported

in 258 F. Supp. 394, ; erate

6.

Petitioner,

an tbh pleas as ot oe te ee

2

~ SURISDICTIONS |

(i) The judgment of the Court of Appeals was en-

tered on September 14, 1967 (R. 210-21). .

(ii) Rehearing was denied on November 27, 1967

/(R. 267-70). es pee

____ (iti) The jurisdiction of this Court is invoked under

BUSCA SII. Fk

QUESTION PRESENTED _.

Is a set off by a factoring compahy within‘four_ -

.. months of. bankruptcy against a reserve account main- -

tained by that.company, a transfer of the bankrupt’s

property within the meaning of section 60a of the.

_ Bankruptcy Act, 11. U.S.C.A. §A6a. -

, >

STATUTES INVOLVED,

_The statutory provisions involved are § 60a of the

Bankruptcy Act, 11 U.S.C.A. § 96a; §.60b of the Bank

ruptcy Act, 11 U.S.C.A. § 96b; and § 68a of the Bank-

ruptcy Act,.11 U.S.C.A. -§ 108a. These sections are

printed in Appendix B, infra, pp. B1-B2. .

' STATEMENT ° | |

__ The trustee in bankruptcy of Bemporad Carpet

Mills, Inc.,-(Bemporad) brought an action-in’ the dis-.

‘trict court against Walter E. Heller and Company .

(Helier) to recover approximately $287,000 of alleged

_ preferential transfers arising out of a traditional fac- |

toring arrangement (R. 9-11). The district court in

holding that Heller received no preferential transfers

set forth detailed findings of fact and conclusions of

_ law (Appendix A, infra, pp. A13-A34).1 The Court of

1A ppendix A is hereinafter cited only to the page number.

tnd ld a De anh Se aaa QR

3

eee Appeals for. the Fifth Circuit reversed; a rehearing

was deriied on November: 27, 1967 by a written opinion

_. . (A1-A12).

For eighteen months prior to bankruptcy Heller

purchased accounts receivable.from Bemporad under

a factoring contract (A14). The transfers of accounts

were perfected in accordance with applicable state law

at or prior to the time of the transfer, and the question

of-perfection was not controverted nor is it an issue in

the case. Under the factoring contract, Heller con- —

_ currently with the assignment of each account became

. obligated ‘to pay a’ fixed purchase price’ at’ a fixed

time (R. 198). The credit risk on each account was as-

sumed by Heller (R. 198-99). Heller maintained a fac-

toring reserve which represented ‘the indebtedness

owed by Heller to Bemporad on the purchase of the

accounts. eee 7 ane,

_ Bemporad on its own credit was unable to acquire

the bulk of its manufacturing inventory (A18, A23-

A24). Before and during the four-months period im-

- mediately preceding bankruptcy, in order to obtain

this inventory, Bemporad directed Heller to guarantee

payment to suppliers of that inventory (A18). Immedi- :

__ ately prior to shipment Heller guaranteed payment to

“the suppliers.2 Each time Heller made a guaranty the

_ factoring reserve was sufficient to cover the amount -

4 ee.

*The transactions were of two types. With respect to four

of the suppliers, Heller first guaranteed payment and sub-.

"sequently purchased the account receivable.- These four

suppliers were factoring customers of Heller and sold ac-

counts receivable to Heller under a factoring contract vir-

tually identical to Bemporad. With respect to one supplier,

duPont, Heller did not purchase the accounts receivable

» /

. upon which it had guaranteed payment. :

e. 8

PRE RENTER Raye PO Na ON ER ey

4

of the guaranty. These transactions created a debt

. from Bemporad to Heller: | oo

' In due course after each payment to a supplier Hel-

ler set off its debt to Bemporad represented by the

factoring reserve against the debt of Bemporad to

_’ Heller resulting from Heller’s guaranties and’ pay-

ments to those suppliers (A19). Each set off was ef-

fected by a charge against the factoring reserve as’

, contemplated and authorized by the factoring contract

(R. 199). At the time of each set off the factoring re-

serve was sufficient to cover the amount of the set off.

. These set offs against the factoring reserve are the .

transfers which the Trustee alleged and the Fifth

Circuit held to be voidable preferences.

The basis of the Fifth Circuit’s opinion is that while .

there were in existence debts of Bemporad to Heller

arising from the guaranties, Heller received collections

on the assigned accounts and made set offs against.

the factoring reserve. The court reasoned that these

debts were “antecedent” to thé collections and set offs,

a fact which Heller had stipulated,’ and concluded that

8Originally the Fifth Circuit held that Heller had stipulated

that the transfers of the accounts receivable were for an -

antecedent debt (A4). Heller’s motion for rehearing ve-

hemently attacked this interpretation of the stipulation

(R. 223-52). Heller, in that motion, conceded that it had

stipulated that the chargé against the factoring reserve was

to satisfy an antecedent debt (R. 225). The Fifth Circuit’s

opinion, in response to Heller’s motion, denied that its

opinion was based on a stipulation that the accounts re-

‘ceivable were transferred for an antecedent debt, (A11),

but said that the “payments” (charge against the factor-

ing reserve) “did relate back to the délivery over of the

accounts” (A11-A12). .

5

the collections and set offs were transfers for an ante- | |

.

cedent debt. ° ,

The court then ruled that the collections and set offs

were used to satisfy then existing debts and this “re-

late[d] back” and tainted the original underlying as-

signment of the accounts receivable making the as- d

signment of the a¢count a transfer for an antecedent.

debt. This decision was reached notwithstanding the

unecontroverted fact that the accounts were assigned

and transferred before the debts which were satisfied

_ arose. ‘Thus, in effect, the Fifth Circuit treated as de-

cisive the time when the accounts were collected instead

of the time when the accounts were assigned.

REASONS FOR GRANTING THE WRIT -

I. The Fifth Cireuit’s Decision Conflicts With De-

cisions in Other Circuits Holding Set Offs Against

Reserve Accounts Valid. __

__ Section 68a of the Bankruptcy Act, 11 U.S.C.A. §

108a, permits a creditor of “the bankrupt to set off

_ against the bankrupt’s debt any indebtedness owed by

that creditor to the bankrupt. This provides a prefer-

_ence for a creditor over other créditors who do not

have the availability of set off. Nevertheless, this type

. of preference is clearly Sanctioned by this Court and by ”

recognized authorities.‘

(a) The decision of the Fifth Circuit im the present

case is in direct conflict with First Nat’! Bank v. J ulian,

‘See New York County Nat'l Bank v. Massey, 192 U.S. 138,

147 (1904); 4 W. CoLLIER 68.16, at 778 (14th ed. 1967) ;

3 REMINGTON, BANKRUPTCY @ 1434, at 376-77 (5th ed.

repl. vol. 1957). One commentator has characterized a sec- —

tion 68a transfer of property as a “legal preference.” 3

. W. COLLIER $60.15, at 827 (14th ed. 1967). --

2

“yee

rs 6 2

383 F.2d 329 (8th Cir.) cert. denied, 88 Sup. Ct. 593

(1967) which held that a creditor could set off against

a reserve account other indebtedness owed by an in-

solvent to that creditor. In Julian an automobile dealer

was selling his retail automobile paper to a bank. The

reserve account was created in large part by the dealer

having to deposit the difference in the interest it paid

to the bank and the interest it charged to its customer.:

The Eighth Circuit held that the charge against the

reserve account was not a transfer of property that —

constituted a voidable preference. By so holding, the

Eighth Circuit recognized the legitimacy of a reserve

account which the Fifth Cireuit has denied. In the

present case the Fifth Circuit found the charge by

Heller against the factoring reserve account to be a

voidable preference. The Fifth Circuit’s position is in

direct conflict with that of the Eighth Circuit.

' (b) The decision of the Fifth Circuit is also i in direct

conflict with the Second Circuit’s decision in Wolf v.

Aero Factor’s Corp., 221 F.2d 291 (2d Cir. 1955), affirm-

ing 126 F. Supp. 872 (S.D.N.Y. 1954). In Wolf, the

finance company which was lending ‘on the security

of accounts receivable Would only advance 80 per cent

on those receivables and retained 20 per cent.5 The

5There is basic distinction between factoring and accounts

receivable financing: In factoring the person who acquires

the accounts actually purchases them and by doing so as-

sumes the credit risk of the debtors on the account. In ac-

counts receivable financing, no credit risk is assumed ; there

» is only a loan on the security of the assigned accounts. In

’ Wolf v. Aero Factor’s Corp., 221 F.2d 291 (2d. Cir. 1955,

affirming 126 F. Supp. 872 (S.D.N.Y. 1954), the court held

that the creditor there involved, was not factoring, but

was lending on the security of assigned accounts. See 126

F. Supp. at 882. For a general discussion of the distinction

betweerl factoring and accounts receivable financing see 1

7

Second Circuit held that the creditor could set off the

funds it had collected (in what was tantamount to a

20 per cent reserve) and therefore owed to the bank-

‘ yupt, against other indebtedness owed by the bankrupt

to the creditor. See Wolf v. Alero Factor’s Corp., 126 F.

Supp. 882-84 . (SDNY. 1954), aff'd, 221 F.2d°291 (2d

Cir. 1955).

(c) The decision in the present case is in direct con-

flict with the implied holding in Porter v. Strevell-Pater-

son Fin. Corp., 292 F.2d 706 (10th Cir. 1961). In Porter, ..

the trustee attacked the charge against a reserve ac-

count on the grounds that the finance company had not

given him notice or demand for payment before set-

ting off but the Tenth Circuit held that the finance.

company did not have to’give such notice and left the

set off standing as valid.

(d) The decision in the present case also conflicts

with a well-reasoned and comprehensive opinion by a

district court in the Ninth Circuit, Pasadena Investment

Co. v. Pasadena Air Prods. Inc., 234 F. Supp. 128 (S.D.

Cal. 1964). While Pasadena is not a circuit court de-

cision its fine analysis and similarity to ‘the. present

case justifies bringing it to this Court’s attention. In

Pasadena, the bankrupt held contracts with two air-

- eraft manufacturers. A factoring company agreed to

purchase from the bankrupt all of the bankrupt’s ac-

ceptable accounts receivable and in the process, pur-

chased accounts receivable owing by the aircraft com-

panies to the bankrupt. The court held that although

the factoring company had advanced to the bankrupt |

_G. GILMORE, SECURITY INTERESTS IN PERSONAL PROPERTY

§§ 5.1-5.2 at 132 (1965) ; Silbert Financing and Factoring Ac-

counts Receivable, 30 HARV. Bus. REV. 39, 41 (1952).

GE tetanic -- - ioe

8

funds in excess of the amount then standing in the re-

serve account, thus putting the bankrupt in an over-

drawn position, even this did not create an antecedent

debt which would upon satisfaction be a preference be-

cause the finance company “being a debtor, could apply

such amount of overdrafts as advancements upon

future purchases under the continuing mutual factor-

ing agreement.” 234 F. Supp. at 134-35.

The decisions in the four circuits permitting a set

_ off against a factoring reserve are in line with a host

of decisions. which have permitted a bank to set off

under section 68a an insolvent’s deposit against a debt

owed to the bank by a bankrupt. See e.g.. New York

County Nat’! Bank v. Massey, 192 U.S. 138 (1904);

Citizens Nat’l Bank v. Lineberger, 45 F.2d 522, 529-31

(4th Cir. 1930). A reserve account for the purposes of

set off is essentially equivalent to a bank deposit; both

are debts owed by the creditor the the bankrupt. None

of those cases has.questioned the right of the creditor

to set off where it is clear that the creditor’s debt is a

genuine debt and not merely a masquerade for an un- .

lawful.payment by the. bankrupt. In other words, in

the bank cases, if the bankrupt made a genuine deposit

which established a genuine debtor-creditor relation-

ship between the bank and the bankrupt, set off is

‘ permitted. Set off will. be deniéd, however, if the court

finds that the transfer to the bank was not a genuine

deposit but merely a payment. See Blue v. Herkimer

Nat’! Bank, 30 F.2d 256, 259 (2d Cir. 1929), cert: denied,

281 U.S. 750 (1930). |

_ The Fifth Circuit foufid that antecedent debts were

paid by the transfer of accounts receivable rather

than extinguished by a set off against a factoring re-

o ‘

9

serve.6 To reach this result the court said that the

payments did “relate back to the delivery over of the

accounts” (A12). Consequently, the Fifth Circuit found

a payment for an antecedent debt rather than a valid

factoring reserve even though there was no evidence

in the record to suggest that the factoring reserve was

not bona fide. Therefore, the holding that Heller was

‘ not entitled to set off its debt represented by the -

factoring reserve, which was a valid and bona fide

debt, brings the present case into direct conflict with

those circuits which have amowee set offs ——, valid .

‘reserve accounts.

At the heart of the Fifth Circuit’s error is its insis-

' tence-on treating the collections of the arccunts re-

ceivable as,the controlling incident in the enuire trans- ©

- action. This holding is contrary to existing law; where

there is a valid assignment of accounts ‘receivable

collections on those accounts are not preferential. See

~ Sexton v. Kessler & Co., 225 U.S. 90 (1912) ; Hughes v.

Lawyers, Trust Co., 108 F.2d 792 (2d-Cir. 1940) ; 3 W.

COLLIER 4 60.48, at 1016 (14th ed. 1967).

- Even if Heller had not collected one penny on the

accounts assigned to it Heller would have still been

°The Fifth Cireuit in its original opinion seemed to’ indicate

that Heller was arguing that even though Heller had re-

ceived a voidable preference it could set off the amount of

the bankrupt’s debt against the Trustee’s action to recover

that voidable preference (A6-A7). Heller had never made

this contention. However, in its opinion in response to

Heller’s motion for rehearing the court held that “by pay-

ing antecedent debts with accounts previously assigned to

it [this is the setting off against the reserve account]

Helier completed a transaction’ resulting in a voidable

preference and hence was precluded from claiming a right

of set off against the Trustee” (A12). 7

ve die e

10

obligated to pay Bemporad for the accounts receivable

which Heller had purchased. However, Heller would .

have also been able to set off its obligation represented

by the factoring reserve against Bemporad’s debt to

it arising from the guarantiés to thé suppliers.*In this

connection it is important to realize that the factoring

reserve was got comprised of collections. The: collec-

tions on the accounts were irrelevant to a determina-

’ tion of the legitimacy of charges against the e factoring

reserve. Nevertheless, the Fifth Circuit, in an unprece-

dented holding, separated an account from the pro-

ceeds of that account, made the time of collection

the determining factor in the case and thus invalidated .

‘ an otherwise valid factoring.reserve. In all of the four .

cases cited in this petition where the different circuits

involved upheld the validity of charges against reserve —

accounts, the collections, just as in the present case,

- were subsequent to the creation of the bankrupt’s

- debt and in none of those cases was that point controll-

ing nor even discussed. The Fifth Circuit’s decision in _

this case is clearly an aberation.

II. The Fifth Circuit’s Decision Could Substantial-

ly Reduce the Availability of Factoring As a Source

of Funds and It Produces Uncertainty in Conven-

tional Commercial Relationships.

The total amount of factoring in the United States

for the year 1967 was $8.993 billion dollars. Daily News

Record, Feb. 5, 1968; at 1. (Fairchild Publication, New

York, New York). Factoring had its origin in the

textile industry. See Fig. I G. GiILMorE, SECURITY IN-

TERESTS IN PERSONAL PROPERTY §§ 5.1, 5.2, at 128-53

(1965). The factor was a significant element in that

industry because “the small; textile manufacturer has

always needed financing and has always looked like

11

an unattractive risk to the banker.” Jd at 130: See °

generally Silbert, Financing and Factoring Account

Receivable, 30 HARV. BUS. REV. 39 (1952). The factoring

- eoncern is obviously a substantial adjunct to the com-

mercial finance industry and is principally used by —

small or moderate size businesses. The present decision

if uncorrected could severely limit the availability of

factoring as a source of funds for these businessmen.

The Fifth Circuit’s decision also interjects uncer-

tainty into established commercial practices. By -hold-

ing that the time of collection of the account receivable

establishes the time when the account is transferred ©

the Fifth Circuit assumesa position contrary to section

9-106 of the Oniform Commercial Code (enacted in all .

_ states but Louisiana) which provides in part that “an

‘account’ means any right to payment for goods sold —

..” Therefore an assignment of an account includes

_ an assignment of the proceeds. This court in. Bank of

Marin v. England, 385 U.S. 99 (1966) stated that it

would be unequitable to hold a bank liable for accept-

ing and paying a check when it had no knowledge of

the intervening bankruptcy of its depositor. Similarly,

it is equally inequitable and subversive of predictable

commercial practices to hold, as does the Fifth Circuit,

that Heller’s rights on accounts receivable for which

it is exchanging valuable consideration are not fixed

until the accounts are collected at some time in the

future.

Cate ada

LRT RPE TRY ineienrerm tre pois eo oe

12

- CONCLUSION

_ For the Sevens reasons, this petition for a writ

of certiorari should be granted. )

"Respectfully submitted,

. CHARLES L. GOWEN

Counsel for petitioner.

_ February 21,1968

. ( e

19

CERTIFICATE OF SERVICE.

I hereby certify that I have this day mailed a copy

of the attached petition with appendices to Clinton J.

Morgan, attorney for the Respondent, at his business

address with sufficient postage attached this 22d day

of ila 1968. .

CHARLES L. GOWEN

Attorney for petitioner

e