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Benedict v. Ratner - 268 U.S. 353, 45 S. Ct. 566 (1925)

Rule:

The results, which flow from reserving dominion inconsistent with the effective disposition of title, must be the same whatever the nature of the property transferred. The doctrine, which imputes fraud where full dominion is reserved, must apply to assignments of accounts although the doctrine of ostensible ownership does not. There must also be the same distinction as to degrees of dominion. Thus, although an agreement that the assignor of accounts shall collect them and pay the proceeds to the assignee will not invalidate the assignment which it accompanies, the assignment must be deemed fraudulent in law if it is agreed that the assignor may use the proceeds as he sees fit.

Facts:

The Hub Carpet Company was adjudicated bankrupt by the federal court for southern New York in involuntary proceedings. Benedict, who was appointed receiver and later trustee, collected the book accounts of the company. Ratner filed a petition in equity in that court, praying that the amounts  collected be paid over to him because he claimed them under a writing given May 23, 1921, which was four months and three days before the commencement of the bankruptcy proceedings. By it the company purported to assign to him, as collateral for certain loans, all accounts present and future. Those collected by Benedict were all accounts which had arisen after the date of the assignment, and were enumerated in the monthly list of accounts outstanding which was delivered to Ratner on September 23. Benedict resisted the petition on the ground that the original assignment was void under the law of New York as a fraudulent conveyance. For this reason, the delivery of the September list of accounts was inoperative to perfect a lien in Ratner and it was a preference under the Bankruptcy Act. He also filed a cross-petition in which he asked that Ratner be ordered to pay to the estate the proceeds of certain collections which had been made by the company after September 17 and turned over to Ratner pursuant to his request made on that day. The company was then insolvent and Ratner had reason to believe it to be so. These accounts also had apparently been acquired by the company after the date of the original assignment. The trial court decided both petitions in Ratner's favor. He ruled that the assignment executed in May was not fraudulent in law and that it created equity in the future acquired accounts. According to the trial court, because of this equity, Ratner was entitled to retain, as against the bankrupt's estate, the proceeds of the accounts which had been collected by the company in September and turned over to him and that by delivery of the list of the accounts outstanding on September 23, the equity in them had ripened into a perfect title to the remaining accounts. The trial court further ruled that there was no finding of fraud in fact. The appellate court affirmed and Benedict appealed.

Issue:

Did the court err in its decision to rule in favor of the creditor Ratner?

Answer:

Yes.

Conclusion:

The Court reversed the decision of the trial court and found that under state law, the arrangement for the unfettered use by the debtor of the proceeds of the accounts precluded the effective creation of a lien and rendered the original assignment fraudulent in law. Consequently, the payments to Ratner were unlawful preferences recoverable by the trustee, Benedict.

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