In re Mannington Pottery Co.

• Court: U.S. District Court — Northern District of West Virginia
• Citation: In re Mannington Pottery Co., 104 F.Supp. 506 (N.D. W.Va. 1952)
• Decision Date: 17 April 1952
• Docket Number: No. 232-F.,232-F.
• Parties: In re MANNINGTON POTTERY CO.

104 F. Supp. 506

In re MANNINGTON POTTERY CO.

No. 232-F.

United States District Court N. D. West Virginia, Fairmont Division.

April 17, 1952.

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Tusca Morris, Fairmont, W. Va., for RFC.

Wm. P. Lehman, Fairmont, W. Va., for New York Terminal Warehouse, Inc.,

Thomas A. Hite, Mannington, W. Va., for Wm. T. Nutter, trustee.

Earl S. Goodwin, Fairmont, W. Va., for Automatic Sprinkler Co., Sutter Roofing Co. and Moore Electric Co.

George W. May, Fairmont, W. Va., for Pritchard Supply Co.

Howard Caplan, U. S. Atty., Clarksburg, W. Va., for F. Roy Yoke, Collector of Internal Revenue.

Stathers & Cantrall and John R. Morris, all of Clarksburg, W. Va., for Sutter Roofing & Metal Co.

WATKINS, District Judge.

This case is before me upon petition for review of an order of the referee entered herein on the 16th day of May, 1951, in the bankruptcy proceeding of Mannington Pottery Company, a corporation.

Mannington Pottery Company was a large manufacturer of sanitary bowls and tanks at Mannington, W. Va. The pottery plant had operated successfully for many years but its equipment had become obsolete and inefficient. In the early part of 1949 two new modern kilns were installed which were paid for by borrowing $250,000 from the Reconstruction Finance Corporation, hereinafter referred to as petitioner. This loan was secured by a deed of trust lien upon the plant and equipment. From these new kilns, the company was able to get only a small percentage of grade A ware. The bowls would crack or otherwise become defective in going through the kilns. Substantial losses followed, and on April 14, 1949, the company filed a petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., in this court. Petitioner had much money invested in the plant and was anxious to get it in operation promptly in order to get the kilns adjusted so that grade A ware could be produced. Petitioner loaned the trustees $150,000 as working capital, taking trustee certificates as security. The trustees operated the plant, but neither the trustees nor the manufacturer of the kilns were able to find the trouble. The production of defective ware continued and it was necessary for petitioner to advance an additional $25,000 to the trustees as working capital. Losses continued, and on November 17, 1949, the debtor was adjudicated a bankrupt and the case was referred to the referee for liquidation. The plant was purchased by petitioner for $413,000. Petitioner was allowed to apply its liens against the purchase price and required to pay only prior liens and its proportionate part of the costs. Petitioner is not satisfied with the priority of liens and method of allocation of proceeds of sale as ordered by the referee and filed a petition for review alleging 22 points of error. At the time of argument on the review before the District Judge, counsel for the petitioner stated that it now relied on only 4 points of error. The facts and the law as I find them upon each of these four subjects follow:

Warehouseman's Lien.

Chapter X, Sec. 257 of the Bankruptcy Act, U.S.C.A. Title 11, Sec. 657, provides that trustees in a corporate reorganization proceeding have the right to immediate possession of all property of the debtor. Chapter X, Sec. 111 of the Bankruptcy Act, U.S.C.A. Title 11, Sec. 511, grants to the court for the purpose of this chapter, "* * * exclusive jurisdiction of the debtor and its property, wherever located." The courts have held that such trustees are entitled to immediate possession of all pledged property in the hands of a pledgee or warehouseman. Reconstruction Finance Corporation v. Kaplan, 1 Cir., 185 F.2d 791; In re Waltham Watch Co., 1951, D.C.Mass., 95 F.Supp. 229; In re Waltham Watch Co., D.C.Mass., 1950, 92 F. Supp. 871; Continental Illinois National Bank & Trust Co. v. Chicago, Rock Island & Pacific Ry. Co., 294 U.S. 648, 55 S.Ct. 595, 79 L.Ed. 1110; In re Prudence-Bonds Corp., 2 Cir., 77 F.2d 328; In re Moulding-Brownell Corp., 7 Cir., 101 F.2d 664; In re Philadelphia & Reading Coal & Iron Co., 3 Cir., 117 F.2d 976.

The order of April 14, 1949 authorized the trustees to take possession of debtor's property and also enjoined and restrained all creditors and other persons "from doing any act or thing whatsoever to interfere with the possession or management by said * * * trustees of the property and assets of the within estate, * * *".

Mannington Pottery Company was the owner of a large amount of raw material and fittings used in the manufacture of its vitreous products, which the New York Terminal Warehouse Company was holding as warehouseman to secure a lien held by American Business Credit Corporation. Because of the refusal of both companies to turn over such materials to the trustees it became necessary for the trustees to cease operation of debtor's plant. Upon motion of trustees the court issued a rule against both companies and their employes to show cause why they should not be held in contempt of court and punished for their refusal to turn over such property in violation of the injunction order. A hearing was had on such rule, and when it became apparent to New York Terminal Warehouse Company and American Business Credit Corporation that they must obey the order of the court or be punished therefor, they announced to the court that they would surrender all such materials to the trustees, and this was done. They surrendered this property to the trustees in order to save themselves from being adjudged in contempt of court and punished accordingly.

In the petition asking for the rule the trustees stated "That the rights of neither the New York Terminal Warehouse nor the American Business Credit Corporation will be in any manner impaired by the surrender of such property * * *". At the hearing the court assured both claimants that their interests in the property would be protected and that their rights would not be impaired. The formal entry of an order transferring the lien on the property to the proceeds of sale was for some reason overlooked, perhaps on account of assurance given to the claimants from the bench at the time, that their rights would not be prejudiced by turning over the pledged property.

The referee allowed New York Terminal Warehouse a warehouseman's storage lien first in priority on the proceeds of sale of these materials in the amount of $2,734.95, and allowed American Business Credit Corporation a lien second in priority in the amount of $27,740.96 by reason of its warehouse receipts covering the same materials. In its petition for review petitioner claims that the warehouseman lost its lien by surrender of possession of the pledged property. This claim is so obviously without merit that a mere statement of the facts completely answers such contention. Involuntary surrender of possession of stored goods does not result in the loss of a lien by a warehouseman. Here the surrender of the stored goods was involuntary under threat of punishment for contempt of court. Even had there been no threat of punishment for contempt of court a waiver of the lien would not be implied from that fact alone. Before a waiver of lien may be implied from the mere surrender of possession to bankruptcy trustees, there must be circumstances indicative of a waiver of the lien claim by the warehouseman. If the injunction or turnover order had been invalid, the warehouseman was obliged to obey it. United States v. United Mine Workers of America, 330 U.S. 258, 67 S.Ct. 677, 91 L.Ed. 884. Cases in which the courts have held that so-called possessory liens were not lost where the pledgee surrendered the property to trustees in corporate reorganization proceedings are cited above.

On March 9, 1950, the referee entered an order fixing priority of liens, in which the lien of the warehouseman on the materials pledged was given priority ahead of petitioner. No petition for review was filed to this order. The record shows that petitioner not only acquiesced in the allowance of this claim before the referee but that it filed a petition on March 25, 1950, in which it asked that, as part of the purchase price of the whole property, it be directed to pay the sum of $2,734.95 to the bankruptcy trustee to discharge this particular claim of New York Terminal Warehouse, thereby acknowledging this lien to be superior to its own trustee certificates lien insofar as these pledged materials were concerned. Thereafter, on April 3, 1950, the referee ordered the payment of such claim as a lien prior to the trustee certificates held by RFC. No objections were made, and no petition for review has been filed by anyone to this order. That order remains in full force and effect, but the trustee has never made payment thereunder.

Petitioner purchased the $27,740.96 claim of American Business Credit Corporation, holder of the warehouse receipts upon this same material. American Business Credit Corporation joined with the warehouseman in refusing to turn over this material to the trustee, and both were cited for contempt and both then agreed to surrender the material to the trustees. While petitioner claims that the warehouseman lost its lien by this arrangement, it does not make a similar claim in its appeal that American Business Credit Corporation, its assignor, also lost its lien. The effect of this would be to put the lien of the holder of the warehouse receipts ahead of the lien of the warehouseman for his services in storing the materials.

The referee correctly allowed both liens, and correctly allowed the warehouseman's lien of $2,734.95 as first in priority, and American's lien of $27,740.96 by reason of the warehouse receipts as second in priority upon the proceeds of sale of such materials. There was no waiver of either lien, and even though there had been a waiver under a mistake of fact, justice and equity would warrant the bankruptcy court in declaring an...