Dudley v. Eberly

• Decision Date: 03 January 1962
• Docket Number: Civ. No. 61-25.
• Citation: 201 F. Supp. 728
• Parties: Frank A. DUDLEY, as Trustee of the Estate of DuVall's Inc., Bankrupt, Plaintiff, v. Edwin C. EBERLY and Elsie Eberly, husband and wife, Defendants.
• Court: U.S. District Court — District of Oregon

201 F. Supp. 728

Frank A. DUDLEY, as Trustee of the Estate of DuVall's Inc., Bankrupt, Plaintiff, v. Edwin C. EBERLY and Elsie Eberly, husband and wife, Defendants.

Civ. No. 61-25.

United States District Court D. Oregon.

January 3, 1962.

F. Brock Miller, Boyrie & Miller, Portland, Or., for plaintiff.

S. J. Bischoff, Portland, Or., Pat H. Donegan, Burns, Or., for defendant.

KILKENNY, District Judge.

Plaintiff asks that the Court declare a certain transaction between the Bankrupt and defendants to be a preferential transfer voidable under 11 U.S.C.A. § 96 (Section 60 of the Bankruptcy Act).

On and prior to October 9, 1957, defendants operated a variety store at Burns, Oregon, and on said date sold and transferred the assets of said store, including a floating stock of merchandise, to the Bankrupt, then known as Eberly's, Inc. On said date Bankrupt paid to defendants a substantial sum on the purchase price and executed and delivered to defendants a chattel mortgage on the store fixtures and said merchandise to secure the payment of the balance of the purchase price. The mortgage was duly recorded on said date. Subsequent to said sale and the execution and delivery of said chattel mortgage, the Bankrupt operated said business and sold merchandise at retail in the ordinary course of business and purchased merchandise in said business to replace the stock of merchandise previously sold. All of the stock of goods on hand at the time the defendants took possession as hereinafter mentioned was merchandise which was acquired after the execution and delivery of the chattel mortgage.

In January, 1960, at the request of the mortgagor, the monthly installments payable on said mortgage were substantially reduced, the last installment being paid on November 9, 1960, leaving a balance of $20,105.05 with interest at 6% until paid. At that time the Bankrupt was in default in the payment of one installment due under the mortgage, in failing to obtain a fire insurance policy and to pay personal property taxes for the fiscal year 1959 and the fiscal year 1960, all as required by the mortgage. A few days prior to November 15, 1960, the Bankrupt entered into negotiations for the sale of the stock of goods and fixtures to Sprouse-Reitz Co. The representative of that company proceeded to take inventory to determine the value of the property and the keys to the store were delivered to Sprouse-Reitz for that purpose. On November 15, 1960, defendants secured the keys from the representative of Sprouse-Reitz and proceeded to take possession of the goods and fixtures pursuant to the terms and conditions of the chattel mortgage. The parties agree that the merchandise which came into the possession of defendants at that time had a reasonable market value of $17,500. They also agree that the bankrupt corporation was insolvent at the time defendants took possession of such goods. Defendants claim they had no notice of such insolvency or reasonable cause to believe that such insolvency existed.

The transaction with Sprouse-Reitz Co. was never consummated and the record is clear that Sprouse-Reitz Co., while taking inventory, was acting for itself and for the Bankrupt and that defendants actually took possession of the goods from the Bankrupt on November 15, 1960. It is not material whether possession was taken for the purpose of immediate foreclosure. The record discloses that defendants proceeded to foreclose the chattel mortgage and sell the property on December 2, 1960.

Although both plaintiff and defendants made many contentions in the pretrial order, the basic questions to be answered by the court are two in number:

(1) Did the action of defendants in taking possession of the floating stock of merchandise on November 15, 1960 constitute a preferential transfer which would be voidable under the provisions of 11 U.S.C.A. § 96, sub. a?

(2) If such action did create a preference, did defendants have reasonable cause to believe that the debtor was insolvent at the time defendants took possession under the provisions of 11 U.S. C.A. § 96, sub. b?

I. To create a preference the statute requires:

(a) a transfer of property from the Bankrupt to the creditor. In this case the evidence clearly shows such transfer.

(b) that such transfer be on account of an antecedent debt. Here there is no question raised on that requirement.

(c) that the Bankrupt was insolvent at the time. Here that is admitted.

(d) that the transfer be made within four months prior to the filing of the petition of bankruptcy, and

(e) that the transfer will enable the creditor to obtain a greater percentage of his debt than some other creditor of the same class.

The parties have agreed that if defendants did not have a valid legal lien prior to taking possession, then defendants would obtain a greater percentage of their indebtedness than other secured creditors. Therefore, the question to be decided by the court is whether the transaction constituted a voidable transfer within four months prior to the filing of the petition.

The parties agree that the law of the state of Oregon is the proper measure to be used in determining the status of a chattel mortgage on a floating stock of merchandise. Commencing with Kenney v. Hurlburt, 88 Or. 688, 172 P. 490, 173 P. 158, the Oregon court has uniformly held that a chattel mortgage on a fluctuating stock of goods is valid as between the mortgagee and the mortgagor and as to creditors of the mortgagor, such mortgage amounting to an equitable pledge giving the mortgagee the right, upon default, to take possession of the goods and thus secure a position as to the goods which, under some circumstances, is superior to the rights of the general creditors who have not, prior to possession by the mortgagee, impressed the goods with a lien of their own. Turner v. Dobson, 169 Or. 362, 366, 127 P.2d 746; Wochnick v. True, 224 Or. 470, 473, 474, 356 P.2d 515. Under Oregon law the legal lien is not perfected until the mortgagee takes possession. Likewise, it is clear that the Oregon courts would recognize the lien of an attaching creditor who obtained such prior to the time the mortgagee took or attempted to take possession. The precise point was decided adversely to the position taken by defendants in the order and opinion of Judge East in Kenneth L. Davis, Bankrupt, on October 12, 1961, D.C., 201 F.Supp. 715, from which I quote:

"* * * and the recent case of Wochnick v. True, 224 Or. 470 473, 474, 356 P.2d 515 (1960) * * * indicates that if faced with the exact question, the Oregon Supreme Court would allow a creditor who has attached or exercised legal or equitable proceedings to prevail over a fluctuating stock of goods mortgagee who had not taken possession prior to the creditor's activity. Inasmuch as this is the position of the trustee herein under Oregon law, this Court accepts Wochnick v. True, supra, as a guide post. * * *"

Not only is this court committed to the position of the plaintiff, but it seems to me that this position is inherently sound. The fact that the mortgagee in the Davis case may have taken possession after the adjudication in bankruptcy is of no significance. The transfer is deemed to have been made "immediately before the filing of the petition" or "contemporaneously with bankruptcy." In re Cox, 7 Cir., 1943, 132 F.2d 881. It would be of little, if any, benefit to the profession for this court to now reexamine the subject and analyze each case cited by plaintiff and defendants. In passing I should add that Judge East had the benefit of...