Garbe v. HUMISTON-KEELING AND COMPANY

• Decision Date: 16 August 1956
• Docket Number: Civ. No. 1393-D.
• Citation: 143 F. Supp. 776
• Parties: Martin GARBE, Trustee in Bankruptcy of the Mattoon City Drug, Inc., a Bankrupt, Plaintiff, v. HUMISTON-KEELING AND COMPANY, Inc., a Corporation, Defendant.
• Court: U.S. District Court — Eastern District of Illinois

143 F. Supp. 776

Martin GARBE, Trustee in Bankruptcy of the Mattoon City Drug, Inc., a Bankrupt, Plaintiff, v. HUMISTON-KEELING AND COMPANY, Inc., a Corporation, Defendant.

Civ. No. 1393-D.

United States District Court E. D. Illinois.

August 16, 1956.

Ralph E. Suddes, Mattoon, Ill., for plaintiff.

Rose, Burt & Pierce, Chicago, Ill., for defendant.

PLATT, Chief Judge.

Martin Garbe, Trustee in Bankruptcy of the Mattoon City Drug, Inc., brings this action under Section 60, sub. b, of the Bankruptcy Act, 11 U.S.C.A. § 96, sub. b, to recover an alleged preferential transfer of practically all of the assets of the bankrupt to the defendant, Humiston-Keeling Company, Inc., a corporation.

The essential facts are undisputed. The bankrupt conducted a drug store in the city of Mattoon, Coles County, Illinois. The registered office of the corporation, as shown by its charter, was in the city of Canton, Fulton County, Illinois. The office of the corporation was maintained by the registered agent, Bernard G. Maxwell, the president of the corporation. The books and records of the bankrupt were kept under the supervision of Bernard G. Maxwell, at the office in Canton, Illinois. The defendant, a duly incorporated Illinois Corporation with its office and warehouse in Chicago, Illinois, employed salesmen, some of whom resided in the Eastern District of Illinois, who called upon drug stores throughout the State of Illinois and other states for the purpose of receiving orders for the sale of its merchandise. The orders obtained were delivered personally, by mail, or by telephone to the office of the defendant in Chicago, Illinois, where they were approved and filled. Payment for the merchandise was made to the Chicago office where the books, records and accounts were kept. In November, 1955, when this suit was filed, the total sales of defendant were $1,200,000, of which $47,350, or 4%, were to drug stores in the Eastern District of Illinois. On February 1, 1954, the bankrupt was indebted to the defendant for merchandise on an open account in the amount of $10,072.49 and balance due on a note in the amount of $5,495.98. On March 1, 1954, Mr. Maxwell and his wife were called to the Chicago office where they executed for the corporation a note for $16,696.09 secured by chattel mortgage covering all of the stock and fixtures in the drug store at Mattoon, Illinois. The note was also signed by the Maxwells individually. The defendant paid $1,915.31 which was due on three fixtures sold to the bankrupt on conditional sales contracts and this amount was included in the mortgage note. After May 1, 1954, the defendant sold merchandise to the bankrupt on a cash basis. The bankrupt became delinquent on other accounts and did not pay promptly the installments on the note secured by the chattel mortgage. The June installment was not paid. May 27, 1954, the defendant received the bankrupt's check for $1,731.06 which was returned by the bank for insufficient funds. On July 6, 1954, the defendant took possession of the bankrupt's drug store in Mattoon, Illinois. July 9, 1954 the Mattoon City Drug Company filed a voluntary petition in bankruptcy and was adjudged a bankrupt. The schedules filed by the bankrupt disclosed assets in the amount of $35,260.31 and liabilities in the amount of $39,060.15. The value of the stock was scheduled at $19,850 and fixtures at $15,000. The trustee in bankruptcy filed a petition in the bankruptcy court requesting that an order be entered directing the defendant to turn over to the trustee the personal property which it had in its possession. The defendant objected to the summary jurisdiction of the referee to allow the petition on its merits. The petition was dismissed by the referee for want of jurisdiction. However, the referee ordered the sale postponed to permit a more complete advertisement of the sale. The sale was widely advertised and the property was sold as a unit at public sale, to the highest bidder for the amount of $14,000.

The defendant presents the following defenses to the claim of the trustee in bankruptcy:

(1) That this court does not represent proper venue for this action.

(2) That the mortgage was valid and properly recorded.

(3) That the consideration for the transfer was not wholly antecedent.

(4) There is no evidence that the Mattoon City Drug, Inc. was insolvent at the time the defendant took possession; and the defendant did not have reasonable cause to believe debtor was insolvent.

(5) That the trustee is barred by the proceeding before the referee in bankruptcy which is res judicata of this action.

This court finds that it has proper venue under 28 U.S.C.A. § 1391(c), (1948 Revision), which provides:

"A corporation may be sued in any judicial district in which it is incorporated or licensed to do business or is doing business, and such judicial district shall be regarded as the residence of such corporation for venue purposes."

The defendant, being an Illinois Corporation, although its office and warehouse are in Chicago, in the Northern District of Illinois, is certainly licensed to do business in the Eastern District of Illinois. Barron and Holtzoff, Federal Practice and Procedure, Rules Ed., vol. 1, sec. 80, p. 154, express it:

"Congress took the next long step by enacting into law the provision that `a corporation may be sued in any judicial district in which it is incorporated or licensed to do business * * *.' Presumably, if the state of incorporation has more than one district a corporation may be sued in any district thereof, on the theory that it is `licensed to do business' throughout the whole state. Previously the rule in such cases was that the corporation would be deemed a resident only of the district wherein it kept its principal office and transacted its general corporate business."

If the defendant corporation was a non-resident, it could be sued in the Eastern District of Illinois had it been licensed to do business in Illinois. Ronson Art Metal Works v. Brown & Bigelow, Inc., D.C., 104 F.Supp. 716, 724, affirmed 2 Cir., 199 F.2d 760; Hadden v. Barrow, Wade, Guthrie & Co., D.C., 105 F.Supp. 530; Wagner Mfg. v. Cutler-Hammer, Inc., D.C., 84 F.Supp. 211. There is no reason why a different rule on venue should apply to an Illinois Corporation which is qualified to do business any place in Illinois than to a foreign corporation which is licensed to do business in Illinois. The defendant corporation solicited a substantial amount of its business in the Eastern District of Illinois, and again it would come within the venue section 1391(c). Riverbank Laboratories v. Hardwood Products Corp., 350 U.S. 1003, 76 S.Ct. 648, reversing 7 Cir., 220 F.2d 465. The logical conclusion is that this court has jurisdiction of the parties.

The defendant's chattel mortgage in the first place was obviously invalid as to the stock in trade. The stock was left in the possession of the bankrupt to be used in the usual course of business, and the mortgage cannot be valid against the trustee in bankruptcy, who represents the creditors. Deering & Co. v. Washburn, 141 Ill. 153, 29 N.E. 558; Huschle v. Morris, 131 Ill. 587, 23 N.E. 643; Dunning v. Mead, 90 Ill. 376. The defendant in its answer to the complaint practically admits this in the fifth defense wherein it stated:

"Defendant alleges that the chattel mortgage if invalid was invalid only as to stock in trade * * *."

Furthermore, the chattel mortgage was unenforceable against creditors for the reason that it was not properly recorded. The validity of the chattel mortgage must be determined in accordance with the Illinois Statute. Ch. 95, Mortgages, sec. 4, 1953 (Which is applicable here) provides in part:

"No mortgage * * * of personal property * * * shall be valid as against the creditors of the mortgagor * * * unless it shall be deposited for filing or recording in the office of the recorder of deeds of the proper county or counties within 15 days of its execution * * *. Such mortgage * * * shall be filed or recorded with the recorder of the county in which the mortgagor shall reside at the time when the instrument is executed and * * * a certified copy thereof shall be filed with the recorder of the county where the personal property is then situated, * * * and shall thereupon if bona fide, be good and valid from the time it is received for filing or recording * * *."

The defendant recorded the chattel mortgage in Coles County, Ilinois, where the personal property was situated in the possession of the bankrupt, but failed to record it in Fulton County, Illinois, where the registered office of the bankrupt corporation was located and the books and records of the corporation were kept.

"The right given by a chattel mortgage, where possession is not taken by the mortgagee, is in derogation of the common law, and the person claiming under it must show that it has the necessary elements to establish the right. (Citing cases.)

"Recording in the proper county * * * is as essential to the validity of such a mortgage as any other element entering into its making. Blatchford v. Boyden, 122 Ill. 657, 13 N.E. 801." Second National Bank v. Thuet, 124 Ill. App. 501, 504, 505.

Prior to the 1953 amendment a chattel mortgage was required to be recorded in the county "in which the mortgagor shall reside at the time when the instrument is executed and recorded, * *." In 1953 said section 4 chapter 95, Ill.Rev. Stat. was amended by the legislature adding the requirement that a certified copy be recorded in the "county where the personal property is then situated". In Fairbanks Steam Shovel Co. v. Wills, 240 U.S. 642, 36 S.Ct. 466, 60 L.Ed. 841, the Supreme Court held that the principal office of a corporation, as shown by its charter, determined the county of residence where the chattel mortgage is to be recorded. In 1933 the Illinois Legislature amended the Corporation Act to require that the Articles of Incorporation set forth the location...