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IN RE MAGNUS HARMONICA CORP.

March 4, 1958

In the Matter of MAGNUS HARMONICA CORPORATION, Debtor


The opinion of the court was delivered by: MEANEY

The Referee has certified two questions for review.

(1) Was error committed in refusing to order a return to the Trustee of overcharges made by Credit Industrial Company prior to December 15, 1955?

 (2) Was error committed in refusing to allow Credit Industrial Company interest or other charges subsequent to December 15, 1955?

 Factual Background

 Credit Industrial Company acted as a factor. It obtained an assignment of accounts receivable by Magnus. This agreement exacted a certain percentage of interest daily from Magnus. Credit Industrial overcharged Magnus small amounts on each computation period by aggregating the percentage stipulated instead of making a daily charge. The Referee decided to allow Credit Industrial to hold the funds thus obtained because the overcharges were paid without protest by Magnus. The Referee reasoned that the Trustee could not protest where Magnus had not and where no fraud had been shown. Now Credit Industrial seeks interest payments on the sums so exacted. The Referee denied this demand because this would constitute a charge of interest upon interest.

 Both the Trustee and Credit Industrial protest the Referee's decision. The Trustee contends that under New York law the factor has no right to an overcharge of interest regardless of whether or not there was protest by the debtor and that an agreement to pay interest on interest is void. Credit Industrial contends that a bankruptcy court has no equity powers by which it can disallow a 'legal' claim for interest on the fund resulting from the overcharge.

 I.

 The Trustee alleges a right to a return of all overcharges made by Credit Industrial prior to December 15, 1955. It is contended that these charges are based on a computation of interest totally at variance with that stated in the factoring agreement. Credit Industrial acknowledges that the rate charged by it is effectively more than that agreed upon (hearing January 30, 1957, pages 21-27 transcript, especially page 27). The Referee, however, could find no fraud; nor could he find a protest by Magnus concerning the overcharge. The Referee allowed the factor to retain these gains.

 The Trustee is not in accord with this finding and contends that New York law should apply, and that thus the agreement is void and no interest is chargeable. The Referee does not state which law he chooses to apply, but he does employ a rule of law enunciated in his conclusions of law, which is:

 'In the absence of fraud, which is not an issue here, the trustee cannot rectify the mistakes of the bankrupt. Since the bankrupt never questioned the overcharges, the trustee is without power to do now what the bankrupt should have done during the years the contract was in effect.'

 This point is well taken and finds support in the law of this circuit, in other federal courts *fn1" and in Collier on Bankruptcy. *fn2" Collier, however, adds this caveat

 'In view of the paramount purpose of bankruptcy proceedings, such waiver should not be implied without clear necessity, and it is certainly subject to close scrutiny as to the presence of a fraudulent or collusive intent.' Supra, p. 1250.

 The Referee in his 9th finding of fact states that Credit Industrial provided monthly statements to Magnus under the agreement and that Magnus never protested; nor did Magnus complain that the statements were erroneous.

 The Referee holds that this constitutes a waiver by Magnus of its rights to the return of the interest money overcharged. The Court agrees with the Referee's finding of fact in this regard and so the question of what rights would have accrued to the Trustee does not arise since the ...


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