In re Yale Express System, Inc.

Decision Date16 December 1966
Docket NumberNo. 165,Docket 30707.,165
PartiesIn the Matter of YALE EXPRESS SYSTEM, INC., Debtor. FRUEHAUF CORPORATION, Appellant, v. YALE EXPRESS SYSTEM, Appellee.
CourtU.S. Court of Appeals — Second Circuit

Marvin F. Hartung, New York City, (Myron D. Cohen, Conboy, Hewitt, O'Brien & Boardman, New York City, on the brief), for appellant.

William R. Glendon, New York City, (Caesar L. Pitassy, David W. Bernstein, Royall, Koegel & Rogers, New York City, on the brief), for appellee.

Before LUMBARD, Chief Judge, MEDINA and KAUFMAN, Circuit Judges.

IRVING R. KAUFMAN, Circuit Judge.

This appeal seeks to have us determine whether a creditor, armed with a security interest perfected under the Uniform Commercial Code, is entitled to reclaim property held by the trustee for a debtor being reorganized under Chapter X of the Bankruptcy Act.

The basic facts underlying the present controversy are not in dispute. At various times during the summer and fall of 1964, the Yale Express System ("Yale"), purchased 50 trailers and 62 truck bodies from the Fruehauf Corporation ("Fruehauf"). The cost of these vehicles was $379,208.50. Yale agreed to make cash payments 30 days after delivery of each unit of truck bodies and 90 days delivery after each unit of trailers.

Fruehauf contends that in extending this credit it relied on information furnished in a Dun & Bradstreet report issued on June 9, 1964, with respect to Yale's financial state. That report, which rated Yale as "Aa A1," summarized the consolidated financial statement prepared by Yale's certified public accountants, Peat, Marwick, Mitchell & Company, for the year ending December 31, 1963. This statement disclosed that Yale's net income for 1963 was $1,140,665.

In February 1965, approximately two months after delivery to the debtor of the last piece of equipment, Fruehauf was told by Yale's representatives that the financial statement for the year ending December 31, 1963 was inaccurate. Fruehauf's auditors announced that Yale's operations for 1963, originally reported as showing a profit in excess of $1,000,000., had resulted, in fact, in a net loss of $1,254,602. Upon learning of this, Fruehauf took the position that it had a right to reclaim the trailers and truck bodies it had sold to Yale on credit. Thereafter, negotiations ensued between the two parties, and eventually an agreement was entered into on March 26, 1965. In it Fruehauf waived its asserted right to reclaim the trailers and truck bodies, and allowed Yale to pay for the equipment on an installment basis over a period of 68 months. To secure these payment obligations, Yale gave Fruehauf chattel mortgage liens on the trucks and trailers. These security interests were duly filed in accordance with the provisions of the New York Uniform Commercial Code ("Code").1

Two months later, on May 24, 1965, Yale filed a petition for reorganization under Chapter X of the Bankruptcy Act. On October 11, 1965, Fruehauf, claiming that Yale had failed to make 5 of the required installment payments that had become due, informed Yale's trustee that it was exercising its right under the security agreements to repossess the collateral. A formal demand was made for immediate possession, but the trustee refused to release the collateral valued at $380,000., on which less than $15,000. had been paid.

Following this refusal, Fruehauf filed its Petition for Reclamation in Yale's Chapter X proceedings. Judge Tyler there concluded that even if he assumed that Fruehauf had a valid security interest, it would not be entitled to reclaim unless it demonstrated that the trucks and trailers were not the "property of the debtor." He went on, "Since this court must follow the still viable appellate decisions in point, the distinction between a chattel mortgage and a conditional sale must remain operative for the purpose of determining what property is `property of the debtor'." 250 F.Supp. 249, 254 (S.D.N.Y. 1966).

Judge Tyler held that the security agreements, which were in the form of chattel mortgages, were intended to give Fruehauf only a "lien," and therefore the vehicles were the property of Yale. Moreover, the District Judge found cogent "equitable" reasons for not forcing Yale to surrender possession of the collateral, and, accordingly, denied the Petition for Reclamation. This appeal followed.

I.

A reclamation proceeding is designed to "afford the opportunity to claimants not in possession to assert their claims or title to various property in the hands of the trustee or receiver and thus regain possession thereof." 4 Collier, Bankruptcy ¶ 70:39, p. 1302 (1964). More than thirty years ago, in the leading case of In re Lake's Laundry, Inc., 79 F.2d 326 (2d Cir.), cert. denied, sub nom. Lake's Laundry v. Braun, 296 U.S. 622, 56 S.Ct. 144, 80 L.Ed. 442 (1935), this Court decided that property sold under a conditional sales contract was not "property of the debtor. For that reason it is not a part of the subject-matter of the reorganization * * *." Id. at 328. The conditional seller there was permitted to reclaim his property.

The rationale and holding of In re Lake's Laundry were subsequently adopted by the courts in other Circuits as well. See, e. g., In re Sun Cab Co., 67 F.Supp. 137 (D.D.C.1946). "The rule is well-settled that the property of a third person in the possession of the bankrupt, where proper proof of valid title is shown by the claimant, should not be included in the assets of the bankrupt's estate, but should be restored to the claimant." Collier, supra at 1303 (footnote omitted).

But, the courts have been fairly consistent in denying reclamation where the petitioner only had a lien on the property, rather than title to it, and repossession would, in the court's opinion, jeopardize the reorganization. See, e. g., In re United States Realty & Improvement Co., 153 F.2d 853 (2d Cir. 1946); Lincoln-Alliance Bank & Trust Co. v. Dye, 108 F.2d 38 (2d Cir. 1939). Where the petitioner is merely the holder of a lien reclamation will be allowed, nevertheless, if the court concludes that such relief is equitable under the circumstances. See In re Sun Cab Co., supra (dicta).

II.

This judicially developed doctrine that a creditor's right to reclamation is dependent on who has "title" to the property, has not gone unchallenged. See generally, Coogan, Hogan & Vagts, "Secured Transactions Under the Uniform Commercial Code" 978-80 (1963). It is not inappropriate to note that the decision in In re Lake's Laundry, supra, was reached only over the dissent of Judge Learned Hand. With his usual keen insight he stated:

It seems to be a barren distinction, though indubitably true, that title does not pass upon a conditional sale; "title" is a formal word for a purely conceptual notion; I do not know what it means and I question whether anybody does, except perhaps legal historians. The relations resulting from conditional sales are practically the same as those resulting from mortgages; I would treat them as the same when we are dealing with the re-organization of the debtor\'s property. 79 F.2d at 328-29.

Judge Hand postulated that the reorganization court should be able, in the exercise of its equitable discretion, to refuse the conditional vendor's request to reclaim property held by the trustee.

Perhaps the distinction drawn by the majority in In re Lake's Laundry between conditional sales agreements and other security arrangements, was defensible at the time, in light of the important consequences that the various commercial laws of the states attached to the particular form of the security agreement. But the body of commercial law has not stood still. It has made great and progressive strides, and 47 states, the District of Columbia, and the Virgin Islands have now enacted the Uniform Commercial Code.2 Section 9-202 declares the policy of Article 9 of the Code stating that "each provision of this Article with regard to rights, obligations and remedies applies whether title to collateral is in the secured party or in the debtor." In short, it does not matter whether the security agreement is in the form of a chattel mortgage or a conditional sales contract. In either case, the secured party has the right upon default by the debtor to take possession of the collateral (§ 9-503) and to sell, lease or otherwise dispose of it, applying the proceeds to the indebtedness (§ 9-504).

Even more relevant to our particular inquiry is the Official Comment to § 9-507 of the Code:

A power to control the manner of disposition of the debtor\'s property is no doubt inherent in a Federal bankruptcy court, and perhaps in other courts of equity administering insolvent estates. Traditionally it has not been exercised where the secured party claimed under a title retention device, such as a conditional sale or a trust receipt. See In re Lake\'s Laundry, Inc., 79 F.2d 326 (2d Cir. 1935) and the remarks of Clark, J., concurring, in In re White Plains Ice Service, Inc., 109 F.2d 913 (2d Cir. 1940). But since this Article adopts neither a "title" nor a "lien" theory of security interests (see Section 9-202 and Comment thereto), the granting or denying of, for example, petitions of reclamation in bankruptcy proceedings should not be influenced by speculations as to whether the secured party had "title" to the collateral or "merely a lien".

The "Official Comments" of the Code are, of course, not binding on a federal court which is in the process of exercising its equitable discretion in a reclamation proceeding. But, they are powerful dicta for the Code is "well on its way to becoming a truly national law of commerce," and is, therefore, as we have noted, a most appropriate source of federal law. United States v. Wegematic, 360 F.2d 674, 676 (2d Cir. 1966). We would indeed be myopic if we failed to recognize the revolution in commercial law that the Uniform Commercial Code has occasioned in...

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