Lackawanna Pants Mfg. Co. v. Wiseman

• Decision Date: 09 February 1943
• Docket Number: No. 9257.,9257.
• Citation: 133 F.2d 482
• Parties: LACKAWANNA PANTS MFG. CO. et al. v. WISEMAN.
• Court: U.S. Court of Appeals — Sixth Circuit

133 F.2d 482 (1943)

LACKAWANNA PANTS MFG. CO. et al. v. WISEMAN.

No. 9257.

Circuit Court of Appeals, Sixth Circuit.

February 9, 1943.

Rhodes & Rhodes, of Detroit, Mich., for appellants.

Field, Lovejoy & Kaplan, of Detroit, Mich., and Harvey Bielfield, of Hamtramck, Mich., for appellee.

Before HICKS, SIMONS and ALLEN, Circuit Judges.

SIMONS, Circuit Judge.

The appellants filed a reclamation petition against assets of the bankrupt estate in the hands of the receiver, based upon a recorded purchase money chattel mortgage executed more than one year prior to the filing of the bankruptcy petition. The receiver contested, the referee held the mortgage invalid, and the District Court affirmed. The mortgagee and the assignee of a part interest therein, appealed.

The bankrupt corporation was wholly owned and controlled by the four Kahrnoff brothers. The mortgagee was originally one Koppelman who assigned the mortgage to the Lackawanna Pants Company of which he is the senior partner, the partnership later assigning an interest therein to the appellant Davidson as will later appear. The circumstances leading to the execution of the mortgage follow. Prior to the organization of the bankrupt corporation the Kahrnoff brothers were doing business at the same address under the style "Raymond's Inc." and "Raymond's Cut Rate." Raymond's Inc. was a corporation in which all of the brothers were interested. Raymond's Cut Rate was owned and operated by Harry, one of the brothers, individually. In 1938 both concerns were in financial difficulties and executed trust mortgages for the benefit of creditors. Bankruptcy proceedings were started against Harry Kahrnoff, and a receiver was appointed. By agreement between the bankruptcy receiver and the trustee under the mortgage of Raymond's Inc., the trustee foreclosed upon the latter's trust mortgage and offered the property of both insolvents for sale simultaneously. Together the stocks had cost $18,609.73 and their total appraised value was $11,131.65.

The largest creditor of the Kahrnoffs was the Lackawanna Pants Company to which they owed $5,795.32. Part of this indebtedness was claimed to have resulted from a delivery of goods on consignment for return of which a replevin action had been brought. Koppelman attended the sale on behalf of Lackawanna with the expectation of recouping its losses if he could buy the stocks cheaply enough. The assets were sold to him and one Marcus, a stockbuyer, for $7500, the money for the purchase being furnished by Koppelman. Almost immediately thereafter Koppelman, upon the alleged assertion of Marcus that he was unable to finance his share of the purchase, paid Marcus $750 for his interest.

The Kahrnoffs desired to remain in business, but having no money with which to repurchase the stocks Koppelman agreed to resell to them without any down payment, provided the price was made high enough to cover not only Koppelman's purchase price and expenses but also the previous indebtedness of the Kahrnoffs to Lackawanna. The price finally agreed upon was $13,275. A corporation was promptly organized to take title under the style "Monroe Merchandising Company," to which Koppelman gave a bill of sale and from which he received a promissory note secured by chattel mortgage upon the stocks. The mortgage obligated the corporation to pay $250 a week upon the principal, without interest, and was to extend both to after-acquired property of the mortgagor and to any further advances or sales to be made to it by the mortgagee. The note required the weekly payments to be made on Monday of each week, but the mortgage required checks to be mailed to Koppelman each Sunday.

The sale of the Kahrnoff stocks took place on Thursday, July 7, 1938. The mortgage was executed in the afternoon of Friday, July 8, and recorded the following Monday, July 11. It purported to have been authorized at a directors' meeting of the corporation on Friday. Of three directors two were present, and agreed to the execution of the mortgage. The third director, one Harry Cohen, had no notice of the meeting, nor did he waive it. Shortly after the execution of the mortgage Koppelman assigned it to Lackawanna. The Kahrnoffs promptly reopened their store and one of their first acts was to place an order with one Baker for $33 worth of neckties. Baker received the order on July 8 and at once set aside the merchandise. It was not, however, delivered to the bankrupt till the 11th, after the recording of the mortgage. Baker was paid in full for the shipment before he had extended further credit to the corporation.

For several months the bankrupt made its weekly payments to the assignee of the mortgage, but in 1939 began to default. Under pressure from Lackawanna it sought additional capital and finally induced appellant Davidson, related to one of the Kahrnoffs, to come to its aid. This Davidson did by purchasing from Lackawanna at 10% discount, a $3,275 interest in the mortgage, secured by an assignment. Later Davidson purchased a further interest in the mortgage by two payments to Lackawanna of $500 each. His assignment was, however, not recorded. The corporation was finally forced into bankruptcy, its receiver refused to recognize the mortgage lien and opposed allowance of the reclamation petition.

The referee sustained the objections of the receiver on numerous grounds: (1) That the mortgage was not properly authorized by the corporation; (2) that it was void as calling for performance on Sunday; (3) that it was not made in good faith and so was a fraud on creditors; (4) that it has been fully paid; and (5) that it was invalid as to Baker and so void as to all other creditors. Over exceptions by the appellants, the District Court affirmed on all grounds of invalidity.

The third ground alone gives us difficulty. The others may be dismissed, without extended discussion, as failing to disclose infirmity in the mortgage. It is true that the Michigan Corporation Law, Act 327, Public Acts of 1931, §§ 10, 13 and 39, provides that the business of a corporation must be carried on by its directors. Zachary v. Milin, 294 Mich. 622, 293 N.W. 770; Doyle v. Mizner, 42 Mich. 332, 3 N.W. 968; Broughton v. Jones, 120 Mich. 462, 79 N.W. 691. But where no director or stockholder objects, and there has subsequently been tacit approval of the action of the corporation, the validity of its acts may not by others be questioned. Kalamazoo Spring & Axle Co. v. Winans, Pratt & Co., 106 Mich. 193, 64 N.W. 23; Nevada Nickel Syndicate v. National Nickel Co., C.C.Nev., 96 F. 133. The Michigan Statute, § 9078, C.L.1929, § 1, provides that no person shall do any manner of labor, business, or work on Sunday. If the mailing of a check, as provided in the mortgage, comes within the condemnation of this statute, notwithstanding the requirement in the note for Monday payments, this provision is separable and without it the contract is still complete. We think it should not be stricken down on this ground. The referee's finding that the mortgage was fully paid, rests upon premises that it was valid only to the extent of the $7500 paid by Koppelman at the sale, that it did not secure future advances, and that Davidson's payments were on behalf of the bankrupt and did not buy a share in the mortgage. There is no soundness in the first premise unless the mortgage was fraudulently executed, in which case it is wholly invalid. We have no doubt that a mortgage securing future advances may be assigned, with the assignee succeeding to all rights under its covenants. The conclusion that Davidson's payments to Lackawanna were gratuitous and without intent that he be secured by the mortgage, is wholly lacking in support on the record. While the order given to Baker was prior to the recording of the mortgage, delivery took place after its filing and Baker has been paid. While the Uniform Sales Act, Mich.C.L. § 9458, provides that title passes when an order for merchandise is given, nevertheless it has been held that the date of delivery determines when credit is given, since before that time the vendor can always protect himself, Friedman v. Sterling Refrigerator Co., 4 Cir., 104 F.2d 837. The instrument not being void as to Baker is not void as to all other creditors under the rule...