Before SCHNACKENBERG, KILEY and SWYGERT, Circuit Judges.
This is an appeal from a judgment in favor of defendant James Talcott, Inc. in a plenary action brought by the trustee in bankruptcy of Beard & Company, Inc., an Indiana corporation.
Beard & Company had conducted a lumber business in Indianapolis for a number of years before it was adjudicated a bankrupt on October 15, 1962, following the filing of a creditors' petition in involuntary bankruptcy.
James Talcott, Inc., a New York corporation, with a principal office in Chicago, claimed rights as a secured creditor in all of the inventory, accounts receivable, and machinery and equipment. The inventory consisted of lumber and mouldings. Talcott had advanced money to Beard & Company, Inc., under a factor's lien agreement dated October 5, 1960, and on the security of warehouse receipts issued by a company known as Douglas-Guardian Warehouse Corporation. At the time of the bankruptcy, the total amount owed by Beard & Company to Talcott was $512,785.46*fn1
Talcott received word about September 25, 1962, that Beard & Company had issued credit memoranda in the approximate sum of $200,000 against various accounts receivable. An investigation disclosed that certain of the accounts were fictitious. On September 27, 1962, Talcott took physical possession of all merchandise covered by its lien agreement. The following day the involuntary bankruptcy petition was filed.
Following the appointment of a trustee, the physical assets of the bankrupt were sold by the trustee with the approval of the district court. The net proceeds were turned over to Talcott under an agreement that if the trustee questioned the validity of the secured obligations claimed by Talcott, a plenary action might be filed. That is the genesis of the instant action.
Five issues were presented to the district court for decision: (1) whether designations of lumber inventory made within four months prior to bankruptcy were voidable preferences under section 60 of the Bankruptcy Act, 11 U.S.C. § 96; (2) whether the bankrupt's inventory of wood mouldings was subject to the factor's lien; (3) whether warehouse receipts held by Talcott covering lumber deposited in a field warehouse located on the bankrupt's premises were valid; (4) whether accounts receivable assigned by the bankrupt to Talcott within ten days of bankruptcy and growing out of sale of lumber covered by the factor's lien constituted voidable preferences; and (5) whether a chattel mortgage held by Talcott covered leasehold improvements and other items of equipment.
The district court entered findings of fact and conclusions of law, deciding in favor of Talcott on all issues. From the judgment this appeal was taken.
A general description of the arrangements by which Beard & Company secured financing from Talcott will now be stated. Additional details, however, will be considered when we treat the separate issues.
Prior to October, 1960, the bankrupt factored its accounts receivable with a lending company known as Walter E. Heller & Company. It also obtained inventory financing from that company on the security of warehouse receipts issued by Douglas-Guardian. In connection with the latter financing, the bankrupt sublet to Douglas-Guardian its entire lumber yard storage area on its premises.
On October 5, 1960, the bankrupt entered into a financing plan with Talcott to replace its arrangement with Heller & Company. The new arrangement contemplated financing by Talcott to the bankrupt secured by four types of security devices:
(1) The bankrupt agreed to assign to Talcott all of its accounts receivable then existing or thereafter created as security for loans and advances made or to be made by Talcott for the account of the bankrupt. Talcott agreed that at the time of assignment of receivables it would advance to the bankrupt, at Talcott's discretion, a sum not exceeding eighty-five per cent of the net amount of receivables, less the agreed charge for interest. In practice, the bankrupt sent Talcott a daily schedule of assigned receivables listing the name and address of each account debtor, invoice date and number, and gross invoice amount.
(2) The bankrupt also agreed that for all of the advances made by Talcott the latter would have a continuing general lien upon all goods and merchandise from time to time designated, consigned to, or pledged with Talcott, by the bankrupt, whether or not in Talcott's constructive, actual, or exclusive possession, and regardless of whether or not such goods and merchandise was in existence on October 5, 1960, or should come into existence subsequently thereto, or should subsequently thereto be acquired by the bankrupt, and upon any accounts receivable or other proceeds resulting from the sale or other disposition of such goods and merchandise. Notice of this lien was filed by Talcott on October 5, 1960, in the office of the Recorder of Marion County, Indiana, pursuant to the provisions of the Indiana Factor's Lien Act, Burns Ind.Stat.Ann. §§ 43-1201 to 43-1210 (1963 Supp.)*fn2 Commencing in October, 1960, the bankrupt periodically executed and delivered consecutively numbered written designations of lumber being subjected to this continuing general lien. The designations listed the total dollar amount of lumber covered thereby and had attached the invoices of the suppliers containing specific descriptions of the lumber. In practice, all purchases of lumber by the bankrupt not placed in the field warehouse were included in designations under the factor's lien. In addition, the bankrupt ...