Greey v. Dockendorff
Headline: Court affirms bankruptcy ruling allowing a finance company’s repeated security assignments of future accounts, finding the lender’s lien valid and not fraudulent when made in good faith before insolvency was known.
Holding:
- Allows lenders to take security in future accounts when advances enable the goods' acquisition.
- Makes such secured advances valid if made in good faith before insolvency was known.
- Limits trustee arguments that general assignment clauses are automatically fraudulent.
Summary
Background
A lender, Dockendorff, provided successive advances to the Schwab-Kepner Company, a New Jersey corporation doing business in New York as a cotton converter. The company agreed to assign its future accounts receivable as security while Dockendorff agreed to lend up to $175,000 and to pay commissions. Under the May 1910 agreement Dockendorff would advance on approved credit sales, take shipping documents and notes, and the company would assign accounts within days after shipment. On November 29, 1910 an involuntary bankruptcy petition was filed; the company then owed Dockendorff $252,838.54 and many assignments had been made after sale but before delivery.
Reasoning
The Court reviewed whether those repeated assignments were automatically fraudulent even though neither side intended to cheat creditors. A special master and the lower courts found no knowledge of insolvency and no intent to defraud, and the Supreme Court agreed. The Court said the contract operated as a transfer when the company acquired the rights, and the advances were what let the company obtain the goods. Because the lender’s lien attached before anyone knew of insolvency and before any attachment, and because there was no active concealment, the assignments were valid in good faith. English statutes about reputed ownership do not apply here.
Real world impact
The ruling confirms that lenders who make secured advances to let a business obtain goods can hold a valid lien on future accounts if the transactions are in good faith and occur before insolvency is known. The trustee’s challenge failed and the decree for the lender was affirmed.
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