Eberly v. Dudley

• Decision Date: 11 December 1962
• Docket Number: No. 17758.,17758.
• Citation: 314 F.2d 8
• Parties: Edwin C. EBERLY and Elsie Eberly, Husband and Wife, Appellants, v. Frank A. DUDLEY, as Trustee of the Estate of DuVall's, Inc., Bankrupt, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

314 F.2d 8 (1962)

Edwin C. EBERLY and Elsie Eberly, Husband and Wife, Appellants, v. Frank A. DUDLEY, as Trustee of the Estate of DuVall's, Inc., Bankrupt, Appellee.

No. 17758.

United States Court of Appeals Ninth Circuit.

December 11, 1962.

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

Boyrie & Miller, F. Brock Miller and Boyd J. Long, Portland, Or., for appellee.

Before CHAMBERS, MAGRUDER and HAMLEY, Circuit Judges.

HAMLEY, Circuit Judge.

This is an action by a trustee in bankruptcy to recover the value of property alleged to have been received by defendants as a preferential transfer, voidable under section 60 of the Bankruptcy Act (Act), 11 U.S.C. § 96. Judgment in the sum of $17,000 was entered for plaintiff and defendants appeal.

The district court found and concluded that there was a transfer by the bankrupt to appellants at a time when the bankrupt was insolvent, that the transfer was preferential, and that appellants had reasonable cause to believe that the bankrupt was insolvent at the time the transfer was made. Accordingly the transfer was adjudged voidable under section 60 of the Act. Appellants challenge each of these findings and conclusions.

The basic facts are not in dispute. On October 9, 1957, Edwin C. Eberly and his wife, Elsie Eberly, sold to DuVall's Inc., the bankrupt, a variety store at Burns, Oregon. Included in the sale were the stock of merchandise and fixtures.

The purchase price was $43,700, of which DuVall's paid $10,000 cash. The balance of $33,700 was covered by a purchase money note payable in seventy-two monthly installments. This note was secured by a chattel mortgage on the assets sold and on after-acquired merchandise purchased to replace merchandise sold. The mortgage contained a covenant prohibiting the mortgagor from selling or delivering the mortgaged property to a third party. It also gave the mortgagee a right of possession on breach of covenant or default in performance of any terms.

The note and chattel mortgage were delivered on October 9, 1957, which was the day of sale. On the same day the mortgage was duly recorded in the records of Harney County, Oregon. DuVall's went into immediate possession of the variety store and in the operation of that business sold merchandise at retail and purchased merchandise to replenish the stock.

DuVall's failed to pay the 1959-60 personal property taxes on this property, in the sum of $301.57, prior to delinquency, and failed to pay 1960-61 taxes in the sum of $821.45 which were due November 15, 1960. DuVall's also permitted the fire insurance upon the fixtures and stock to expire on October 1, 1960, and failed thereafter to obtain fire insurance policies on said assets. The last installment payment on the note was made on November 9, 1960, at which time there was an unpaid balance of $20,105.07, payments then being somewhat in arrears.

For some time Sprouse-Reitz Co., Inc., a variety store chain, had endeavored to buy DuVall's store. On November 8, 1960, it was agreed that Sprouse-Reitz would buy for inventory at retail less thirty-five per cent, plus $5,000 for the fixtures. Crews employed by the two companies completed an initial inventory listing on Sunday, November 13, 1960. A set of keys was given to Vern Hoare, a Sprouse-Reitz representative, on that day.

Mr. DuVall and Donald M. Whaley, a representative of Sprouse-Reitz, were both present when the store opened for business on Monday morning, November 14. About noon of that day DuVall left, his manager Kathryn Hauth, remaining behind.

In the meantime, on November 12, the Eberlys had heard a rumor that DuVall's was attempting to sell the store. On Monday afternoon, November 14, Mr. Eberly called at the store to verify the rumor. DuVall had already left, but Mr. Whaley confirmed the rumor and stated that he was to run the store pending compliance with the Oregon bulk sales law.

Tuesday morning, November 15, Mr. Eberly demanded possession of the property from Sprouse-Reitz on the ground that default was made in the payment of an installment and that the sale and delivery to Sprouse-Reitz was in violation of the covenant in the mortgage. Sprouse-Reitz delivered the keys, and possession of the property, to Eberly at that time. All of the merchandise on hand which then came into the possession of the Eberlys was after-acquired merchandise within the meaning of the mortgage referred to above.

Thereafter, the Eberlys foreclosed the mortgage in the manner provided for therein, sold the property, and applied the proceeds to the satisfaction of the mortgage debt. On November 22, 1960, the petition in bankruptcy was filed. After DuVall's was adjudicated a bankrupt an investigation disclosed that the company had been insolvent on November 14, 1960.

In order to hold that there was a transfer by the bankrupt to appellants it was necessary for the district court to find and conclude that when appellants obtained possession on November 15, 1960, title in the store and its stock was still in DuVall's, and had not passed to Sprouse-Reitz. The court did so find and conclude. Contending that this was error, appellants argue that on November 15, 1960 the sale to Sprouse-Reitz had already been consummated.

The procedure to be followed in consummating the sale was specified by Sprouse-Reitz. It included the taking of an inventory and compliance with the Oregon bulk sales law, ORS 79.010-040. Delivery of a bill of sale containing certain warranties and the prorating of personal property taxes were also specified as prerequisites of the closing.

Except for minor errors to be adjusted, the inventory had been completed before November 15, 1960, and a representative of Sprouse-Reitz was on the premises while business was being carried on. It is not clear in the record, however, that the store was then being run only for the benefit of Sprouse-Reitz. While Mr. DuVall had left by then, DuVall's manager, Kathryn Hauth, who had a set of keys, remained on the premises until November 17, 1960.

In any event, the parties had not complied with the Oregon bulk sales law, which required that notice of the impending sale be given each creditor of DuVall's by telegram or registered letter at least five days before the consummation of sale. Nor had there been a delivery of a bill of sale, a prorating of personal property taxes, or the payment of any consideration by Sprouse-Reitz.

Assuming that the contract between DuVall's and Sprouse-Reitz was one to sell specific or ascertained goods, the property in them would transfer to Sprouse-Reitz at the time the parties intended it to be transferred. ORS 75.180. We are convinced that the finding of the district court that the parties intended the title to pass only upon completion of all the procedures specified by Sprouse-Reitz, is not clearly erroneous. We base this conclusion not only upon a consideration of all the evidence, which affirmatively discloses such an intent, but also upon the fact that implicit in a contrary ruling would be a finding that DuVall's and Sprouse-Reitz intended to engage in a fraudulent transfer.¹

We hold that the district court did not err in finding and concluding that the transfer of the store and stock of goods was made by the bankrupt to appellants.²

Appellants further argue that if there was a transfer of this property from DuVall's to appellants, it should be deemed to have occurred, not on November 15, 1960, but more than four months before the filing of the petition in bankruptcy. If this is true the district court erred in holding this transfer to be a preference, since, by definition, only transfers made within four months before the filing of the petition in bankruptcy may be so regarded. See section 60, sub. a(1) of the Act, 11 U.S.C. § 96, sub. a(1).

Under section 60, sub. a(2) of the Act, 11 U.S.C. § 96, sub. a(2), a transfer of personal property is deemed to be made when it becomes so far perfected that no subsequent lien upon such property obtainable by legal or equitable proceedings on a simple contract could become superior to the rights of the transferee. In determining what the circumstances must be in order for a transfer to reach this state of perfection, state law governs. See McKenzie v. Irving Trust Co., 323 U.S. 365, 370, 65 S.Ct. 405, 89 L.Ed. 305.

Our inquiry then, is what priorities obtain according to Oregon law, between one who holds a recorded mortgage on after-acquired property but has not taken possession of the property, and a subsequent lienholder whose lien is founded on a simple contract. If it is necessary for the mortgagee to take possession of the property in order to prevail over such a lienholder, that is the end of the matter. Under these circumstances the transfer would be deemed to have been made when appellants took possession of the property. Since in our case possession was taken within the four-month period before the petition in bankruptcy was filed, the transfer would have to be set aside as preferential if appellants had reasonable cause to believe that the bankrupt was insolvent when they took possession.

Appellants have not cited and we have not found any cases in which the Oregon court has adjudicated the relative priorities of an after-acquired mortgagee who has not taken possession and a lienholder whose claim arises out of a simple contract. Appellants urge, however, that if faced with that problem the Oregon court would be constrained by its past decisions to hold in favor of the mortgagee. This argument is bottomed on either of two alternate theories.

The first of these theories, and the one which we first discuss, is that the chattel mortgage lien on after-acquired property, although equitable when the mortgage is executed, attaches and becomes a legal lien as soon as the property is acquired by the mortgagor. We have examined every case that appellants cite as authority for this proposition. None of them support it....