Irving Trust Co. v. Commercial Factors Corp., 264 N.Y. 169 (1934)

A factor’s lien, whether arising from common law or statute, depends on the nature of the factoring agreement and compliance with statutory requirements; statutory amendments regarding factor’s liens do not abrogate common-law liens for “ordinary factors” but do require notice for liens on goods in possession.

Summary

Irving Trust, as trustee for a bankrupt textile company (Cliffoyd), sued Commercial Factors to recover the value of merchandise and accounts receivable. Commercial Factors claimed a lien on Cliffoyd’s assets based on a factoring agreement. The court addressed whether Commercial Factors had a valid lien under New York Personal Property Law §45, as amended. The court held that Commercial Factors did not have a common-law factor’s lien because it didn’t function as an “ordinary factor” (selling agent). It also failed to comply with the notice requirements of the amended statute for goods coming into its possession after the amendment’s effective date, thus forfeiting a statutory lien on those goods.

Facts

Cliffoyd Manufacturing, a textile company, entered a factoring agreement with Commercial Factors where Commercial Factors would have a lien on Cliffoyd’s merchandise and assigned accounts receivable. Commercial Factors was to approve customer credits, send invoices, maintain Cliffoyd’s books, and advance up to 75% of approved accounts. The agreement stipulated that Commercial Factors was not responsible for sales contracts or merchandise pricing. Neither the original agreement nor a supplement were filed, and no notice of lien was given as per Personal Property Law §45.

Procedural History

Cliffoyd Manufacturing was adjudicated bankrupt. Irving Trust, as trustee, sued Commercial Factors to recover assets. The trial court denied Commercial Factors’ motion to dismiss several causes of action. The appellate division certified questions of law to the Court of Appeals. The Court of Appeals modified the order, affirming in part and reversing in part.

Issue(s)

1. Whether the 1931 amendment to Personal Property Law §45 required Commercial Factors to file a notice to perfect a lien on merchandise that came into its possession after the amendment’s effective date.
2. Whether Commercial Factors qualified as a “factor at common law,” thereby exempting it from the notice requirements of the amended statute for goods in its possession.
3. Whether Commercial Factors was entitled to retain collections made on assigned accounts receivable within four months prior to bankruptcy, considering the terms of the factoring agreement and applicable law.

Holding

1. Yes, because the amended statute requires notice for liens on merchandise in the factor’s possession, unless the factor qualifies for a common-law lien.
2. No, because the agreement between Cliffoyd and Commercial Factors did not contemplate that Commercial Factors would act as an “ordinary factor” (selling agent) with the duties and obligations of one.
3. No, because the factoring agreement assigned ownership of the accounts receivable to Commercial Factors, and the trustee’s allegations of an agreement provision allowing Commercial Factors to surrender the lien were not supported by the agreement’s terms.

Court’s Reasoning

The court reasoned that the 1931 amendment to Personal Property Law §45 required factors to provide notice to perfect a lien, even on goods in their possession, unless they possessed a common-law factor’s lien. The amendment aimed to prevent fraudulent transfers before bankruptcy by ensuring creditors had notice of the factor’s lien. The court stated: “The amendment has the effect of preventing the evasion of the Bankruptcy Law… in that manner by requiring that notice shall be posted and the agreement filed so that prospective creditors may have notice of the rights of the factor.”

The court emphasized that a common-law factor is an “ordinary factor” – an agent entrusted with possession of goods and the duty to sell them. Because Commercial Factors’ agreement expressly disclaimed responsibility for sales, it was not an “ordinary factor.” The court stated: “All common-law lien rights existing by reason of a relationship of factor to principal are based upon the continuance of the duty and obligation resting upon an ‘ordinary factor’ intrusted with the possession of goods and charged with the duty of selling them, and not by reason of the creation by the agreement of a relationship whereby the person termed a factor becomes a mere ‘commercial banker.’”

Regarding the accounts receivable, the court found that the agreement assigned ownership to Commercial Factors. The trustee’s argument that Commercial Factors lost its lien by