For approximately 15 years prior to June 22, 1962 plaintiff Atlas Sewing Centers, Inc. was engaged in the business of selling sewing machines and certain other equipment. Many of these sales were pursuant to installment sales contracts supported by notes. Sometime around mid-1960 a number of the 50-odd financial institutions to which Atlas was indebted to the extent of almost 14 million dollars became apprehensive. Atlas presumed, probably quite correctly, that unless these institutional creditors could be appeased by prompt financial arrangements, Atlas' financial picture would deteriorate forthwith in a manner fatal to continued operation. Its projection into involuntary bankruptcy was candidly suggested by one or more of these institutional creditors.
Accordingly, on November 9, 1960 Atlas and its subsidiaries entered into an agreement with these institutional creditors providing, inter alia, for the "transfer, pledge, assignment and delivery" to a named custodian, of all customer contracts, chattel mortgages, notes, and like commercial instruments, as "collateral security for the payment of" indebtedness to these creditors. Provision was made for periodic deposit of newly generated commercial paper. While this agreement abounds with infinite protective phraseology favoring the institutions, including the subordination of certain prior debentures of Atlas to the "Superior Debt" of the agreement and including such warranties as that of Atlas not to "discount, sell, pledge, transfer, assign or dispose of" the subject commercial obligations "except as contemplated herein," it appears clear that this was a security arrangement, designed (a) to assure these creditors of the application of money received on the obligations to the obligation of Atlas to them, and (b) to inspire in Atlas renewed and more regular efforts to turn its commercial paper into cash. In this latter regard
a provision of this agreement required Atlas to "sell" at least 25% of its newly generated obligations each month, and after noting that this percentage could be increased or decreased "at the sole discretion" of a certain class of the institutional signatories called the "Majority Holders," further provided that Atlas should "at any time or from time to time * * * sell [its commercial paper] in such amounts and upon such terms and provisions as the Majority Holders shall direct."
In any event, Atlas was to continue to collect the receivables and such collections were to be deposited in a special trust account for the exclusive benefit of these institutional creditors.
On January 27, 1961 Atlas entered into several further agreements relating to its commercial paper. The prime contracts of that date were denominated "Master Agreement No. 1" and "Master Agreement No. 2." The parties to each were Atlas and its subsidiaries, and Beneficial Finance Co. of North Jersey, defendant herein. Each Master Agreement was executed in the context of two collateral agreements, the first of which was between the Majority Holders and Beneficial and the second of which was between the Majority Holders and Atlas and its subsidiaries.
It appears that the principal distinction between the two Master Agreements is that No. 1 concerned itself with existent obligations and No. 2 contemplated obligations to be generated by future sales activity. Irrespective of this, Master Agreement No. 2 and its collateral contracts were evidently abandoned by consent of all parties on or about March 24, 1961, for reasons which do not appear. Further reference herein to the Master Agreement or its collateral agreements will be to Master Agreement No. 1 unless specific reference appears to the contrary.
The Master Agreement between Atlas and Beneficial professed Atlas' desire "to sell" certain obligations to Beneficial. This concept of a "sale" is reiterated throughout the instrument in such phrases as "any note sold," "of such purchase [of the notes]," etc. On occasion "sale" appears conjunctively
with "assignment" and at other places reference is to "assignment" alone. The physical transfer was to be accomplished by a vehicle called an "Assignment in Bulk," which recited that Atlas did thereby "sell, assign and transfer" the obligations.
The consideration was expressed in a section of the Master Agreement entitled "Purchase Price of Notes." The consideration to be paid warrants quotation:
"The amount which you [Beneficial] will pay for the assignment of any such note shall be 75% of the actual collections on such note, giving effect of course, in determining such amount, to any refund or credit of the time price differential, finance charge or the like."
Provision appears for remittances to be made to Irving Trust Company, "as Agent for the Institutions under the agreement made as of November 9, 1960, as amended."
In a section entitled "Reassignment" it was agreed that if Beneficial determined a note to be uncollectible, or a six-month lapse from the date of last payment occurred, Beneficial "may reassign and deliver such note" to a designee of Irving Trust Company. Atlas, in precise terms, surrendered completely its right to make any further collection and acknowledged an obligation to refuse any payments. The debtor was to be referred to Beneficial.
The Master Agreement and each of the subordinate agreements made specific reference to the November 9, 1960 agreement. Each of the subordinate agreements also referred to the Master Agreement. The subordinate agreement between Atlas and the Majority Holders referred to the Beneficial-Majority Holders subordinate agreement. While the Beneficial-Majority Holders agreement does not refer specifically to the Atlas-Majority Holders agreement, the parties acknowledge that Beneficial was given at least an abridged copy of this agreement. Beneficial asserts that paragraph 3 (recited at length below) was not contained in this copy but concedes they did receive a copy of the balance.
The Atlas-Majority Holders agreement stipulated:
"3. You [Majority Holders] and we [Atlas] hereby confirm that the Master Agreement constitutes an agreement for servicing the collection of the notes by Beneficial and a security device for the benefit of the Institutions and certain other creditors of the undersigned as aforesaid supplementing the provisions of aforesaid Agreement made as of November 9, 1960 and all assignments heretofore executed and delivered by the undersigned for such purpose, and, notwithstanding anything herein or in the Master Agreement to the contrary, does not constitute a loan by, or other disposition of the notes to, Beneficial. We will make no changes in the Master Agreement without first consulting you and obtaining your prior written consent.
5. (a) This agreement, the Master Agreement, and Agreement No. 1 dated January 27, 1961 between the Majority Holders and Beneficial shall constitute a supplement within the terms and provisions of the Agreement made as of November 9, 1960, with Beneficial being hereby substituted for the Custodian with respect to the notes delivered to it and also for the banks of deposit."
The Beneficial-Majority Holders agreement contained the following language:
"2. Subject to your [Beneficial's] paramount right, title and interest in the notes as provided in said Master Agreement, the rights of the Institutions as provided in the aforesaid Agreement made as of November 9, 1960, as amended, and in any assignments made pursuant thereto, or otherwise, in and to the notes, the property covered thereby and the proceeds therefrom, are hereby expressly preserved and maintained; * * *."
One of the issues here joined, and considered at length infra, concerns itself with whether such agreements constituted a sale of the obligations to Beneficial, or instead, the creation of an agency. Irrespective of the determination in this regard, it appears without dispute that Beneficial did embark upon some program of collection, some remittances were made, and some obligations returned. Whatever these agreements were, they were, on significant dates as they shall hereafter appear, partly executed and partly executory.
In June 1962 Atlas Sewing Centers, Inc. filed a petition in the United States District Court for the Southern District of Florida, for reorganization under chapter X of the Federal Bankruptcy Act. 11 U.S.C.A. § 501 et seq. Irwin Ray, a plaintiff herein, was appointed trustee.
In September 1962, pursuant to 11 U.S.C.A. § 516 (1), commonly known as section 116(1) of the Bankruptcy Act, the trustee filed a petition in the District Court seeking to "reject the executory contract by and between" Atlas and Beneficial. He also sought an accounting, an order that Beneficial return all the commercial paper, and permission to undertake collection of the returned receivables. Among other allegations this petition charged Beneficial with "not exercising its best efforts in the collection of ATLAS paper remaining in its hands." The petition also showed a purported "unverified accounting" of prior collections by Beneficial under Master Agreement No. 1, and claimed that the trustee was in a position "to effectuate collection of all paper presently in the hands of Beneficial" and at less expense to Atlas than the "executory contract with Beneficial" was costing.
On November 8, 1962 a hearing on this petition was held in the District Court. Beneficial appeared by counsel and participated actively. In addition to making its position clear by an insistence in colloquy with the presiding judge that, "It is our [Beneficial's] position it [the Master Agreement] is a purchase," Beneficial filed a motion to strike the prayers of the trustee's petition which sought the accounting, the return of the paper and permission for the trustee to collect the receivables. This motion challenged the jurisdiction of the court in connection with the proposed application of section 116.1 to this transaction. Of interest is the fact that this motion did not specifically seek to dismiss the trustee's prayer that he be allowed to reject the contract, although clearly a successful challenge to the jurisdiction would have accomplished this purpose. Beyond this, had Beneficial prevailed on its motion as stated, even a permitted bare "rejection" would have been an obvious futility.
Beneficial did not prevail on its motion. After the hearing on the petition, involving both testimony and the introduction of exhibits, Beneficial was given additional time to produce evidence on its behalf, but no such evidence was offered.
On December 14, 1962 an order was entered dismissing Beneficial's motion and granting all prayers of the trustee's petition. This order recited a finding by the Court that "the contract by and between the debtors in reorganization and Beneficial Finance Company is executory and burdensome to the estate of the debtors," and its entry was "deemed to constitute a rejection of said contract by the Trustee."
On December 20, 1962 Beneficial appealed to the United States Circuit Court from this order. The District Court, on March 6, 1963, entered a supplementary order, preserving the rights and positions of the parties pending the appeal, and providing the details of the mechanics necessary to effectuate its order of December 14.
Beneficial's notice of appeal recited the directions of the District Court's order, and concluded, "* * * all as against the special appearance and claim by appellant that these properties were held in a bona fide claim of title, with fee simple title vested in appellant, and against the further claim that the United States District Court, Southern District of Florida, did not have jurisdiction in a summary proceeding to institute such procedure or to make such orders and grant the relief covered in said order." (Emphasis supplied) In its brief before the Circuit Court, Beneficial argued at length, as set forth in the headnote to its first point, that according to the contract between Atlas and Beneficial, the latter became "the absolute assignee and title holder to the various securities and accounts receivable * * *; that the contract was not executory so far as [Atlas] was concerned, and therefore was not the subject matter of this Court's action in purporting to cancel the executory contract under the apparent authority of Section 116 of the Federal Bankruptcy Act."
The Circuit Court disagreed with Beneficial and affirmed the District Court. It said, in a brief per curiam opinion:
"It appearing that the written documents under which the conditional sales contracts here were transferred to appellant constituted appellant an agent only for collection of the contracts, we conclude that the trial court did not err in entering a summary turnover order.
A reading of the contracts under which Beneficial obtained possession of the property makes it plain that it had no adverse claim of title to the contracts that was more than colorable. As we stated in B.F. Avery & Sons Co. v. Davis, 5 Cir., 192 F.2d 255, quoted with approval in Spach, Trustee v. Fisher, 5 Cir., 310 F.2d 328, 330:
'Where a controversy arises as to whether there is such an adverse claim, the rule is that the referee can summarily enquire into it, and if it clearly appears that possession was in or for the bankrupt, and the adverse claim or right is only colorable, he may make a judgment accordingly; but if there be a possession before bankruptcy that was really adverse and asserted in good faith, the referee may not adjudge its merits, but the trustee must seek relief by a plenary suit.'
The order of the trial court is affirmed."
328 F.2d 55 (5 Cir. 1964).
Beneficial's petition to the Circuit Court for a rehearing, reciting that the opinion of that Court was "based upon a finding of fact and law which was not involved in the proceedings in the lower [District] Court, and counsel for the appellant has not had an opportunity to present to this Court any argument as to the facts of [ sic ] the law on this subject matter" was denied, as was Beneficial's petition for a writ of certiorari in the Supreme Court of the United States. 379 U.S. 827, 85 S. Ct. ...