Kenneally v. Standard Electronics Corporation

• Decision Date: 28 September 1966
• Docket Number: No. 18090.,18090.
• Parties: Edward R. KENNEALLY, Trustee in Bankruptcy of General Magnetics, Inc., a Corporation, Bankrupt, Appellant, v. STANDARD ELECTRONICS CORPORATION and First National Bank of Minneapolis, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

364 F.2d 642 (1966)

Edward R. KENNEALLY, Trustee in Bankruptcy of General Magnetics, Inc., a Corporation, Bankrupt, Appellant, v. STANDARD ELECTRONICS CORPORATION and First National Bank of Minneapolis, Appellees.

No. 18090.

United States Court of Appeals Eighth Circuit.

August 17, 1966.

Rehearing Denied September 28, 1966.

COPYRIGHT MATERIAL OMITTED

M. L. Culhane, of Culhane & Culhane, Minneapolis, Minn., for appellant and James E. Culhane, of Culhane & Culhane, Minneapolis, Minn., was with him on the brief.

Robert O. Flotten, of Dorsey, Owen, Marquart, Windhorst & West, Minneapolis, Minn., for appellee, First Nat. Bank of Minneapolis and filed brief.

Joseph Mast, St. Paul, Minn., for appellee, Standard Electronics Corp. and Lawrence Perlman, of Wheeler & Fredrikson, Minneapolis, Minn., was with him on the brief.

Before VAN OOSTERHOUT and MEHAFFY, Circuit Judges, and HARPER, District Judge.

MEHAFFY, Circuit Judge.

General Magnetics, Inc., a Minnesota corporation (hereafter Bankrupt), filed a voluntary petition in bankruptcy on June 25, 1962. Adjudication followed and the Trustee was elected on July 6, 1962. Certain of Bankrupt's property was sold at public auction free and clear of alleged liens. The property included Bankrupt's machinery and equipment and sold for $53,741.09. It was provided that the alleged liens be transferred and attached to the sum realized from the sale leaving validity and priority of the liens for later determination.

Upon petition to the District Court for review of the order of the referee, the District Court remanded the case and ordered the findings of fact and conclusions of law be numbered. An appeal to this court was premature and we dismissed the same for lack of jurisdiction. Standard Electronics Corp. v. Kenneally, 336 F.2d 394 (8th Cir.1964). Subsequently, the District Court ordered a full transcript of the proceedings to be certified and the referee reconsidered the matter and filed numbered findings of fact and conclusions of law.

The referee's findings of fact and conclusions of law upheld the validity and enforceability of some of the liens of First National Bank of Minneapolis (hereafter Bank) and Standard Electronics Corporation (hereafter Standard). Jurisdiction was retained to trace the specific property subject to the liens into the proceeds of the auction sale. The District Court approved and affirmed the referee's findings and conclusions and the Trustee brings this appeal from the District Court's order. We affirm.

The Bank's Claim.

The Bank's claim was based upon a chattel mortgage dated November 28, 1961, covering certain office and shop equipment and reciting a consideration of $33,839.39. It also contained a "dragnet" clause purporting to secure all additional amounts hereafter advanced or loaned and all other indebtedness due or to become due from the mortgagor.¹ The Bank's claims under the mortgage totaled $21,817.67, comprising $13,816.86 balance due on the note dated November 28, 1961; $3,107.34 for additional amounts subsequently loaned Bankrupt to cover overdrafts; and $4,893.47 for services rendered as the Bankrupt's stock transfer agent.

The Trustee attacks the validity of the mortgage on numerous grounds. First, he maintains that the property descriptions without available serial numbers were insufficient. Some of the items were described by serial number and others by brand names, model names, trademarks, etc. As indicated in the mortgage, this property was located at Bankrupt's place of business. The property was used in the ordinary course of Bankrupt's business and was not offered for sale to the general public.

Trustee argues that the case of McDonald Mfg. Co. v. Read, 210 Minn. 232, 297 N.W. 739 (1941), establishes the necessity for the property description to contain the respective serial numbers in order for the mortgage to be valid. In McDonald the Minnesota court held that in a mortgage on an oil furnace, which was part of a retail stock offered for sale to the unsuspecting public, the identifying serial number was "an essential part of its description if instruments affecting title, recorded, are to be depended upon as constructive notice." The referee and the District Court correctly concluded that the McDonald case is inapposite and sustained the validity of the property description based on the factual descriptions and the long standing Minnesota rule that a description in a chattel mortgage is sufficient if it will enable a third person, aided by inquiries which the instrument itself suggests, to identify the property. Tragar v. Jackson, 230 Minn. 544, 42 N.W.2d 16 (1950); Munson v. Bensel, 169 Minn. 434, 211 N. W. 838 (1927); Tolbert v. Horton, 33 Minn. 104, 22 N.W. 126 (1885). See also and compare Tobin v. Kampe, 132 F.2d 64, 145 A.L.R. 366 (8th Cir.1942).

The items of property did not constitute part of a stock for retail sale. It was in possession of the mortgagor at the address listed in the mortgage. For the most part, the property not specified by serial numbers was described by brand names, model numbers, nature of the machine, and most was specialized engineering equipment and machinery. It was highly unlikely that other such machinery would be found in the same building. A third person could, given the information in the mortgage, identify the property without difficulty. We sustain the District Court's holding that the general rule of Minnesota governs and the description was legally sufficient.

The Trustee also contends that certain items of the mortgaged property were so affixed to the building as to become fixtures, thus requiring a realty mortgage which was not executed. Some of the items involved were indeed attached to the leased building by bolts, duct work, conduits for electrical wiring systems, etc. Some damage resulted from the removal of the machinery after the sale. For example, one of the machines was resting on a thick concrete slab. Upon removal of the machine, the concrete was broken up, necessitating the broken pieces to be carried away. The Bankrupt had installed special wiring systems for operation of some of the machinery. The building was constructed of concrete blocks. Apparently, the most important affixation of this machinery to the building was the wiring conduits for ovens. The removal of this required taking out and replacing of one or two of the concrete blocks. Although the landlord was concerned about the damage to the building by removal of some of these items and claimed them as fixtures, he was more concerned with repair of the damage caused by removal. He was paid for damage resulting from moving the machinery. This apparently satisfied the landlord.

The mortgage was executed some time after the machinery was installed and both the mortgagor and mortgagee considered the property personalty. It does not appear that the items were attached to the realty with a sufficient degree of permanence that the attachment alone would change the character of the property from personalty to realty. It has long been settled by the law of Minnesota that to constitute a fixture, in addition to the physical attachment, many other factors must be taken into consideration, such as intent of the parties in making the annexation, the nature of the thing annexed, the adaptability to the use of the land and the end sought by annexation. Wolford v. Baxter, 33 Minn. 12, 21 N.W. 744 (1884). The manner of the annexation usually is not decisive but only one of several factors to be taken into account in determining whether the article loses its character as personalty and becomes a part of the realty. Hanson v. Vose, 144 Minn. 264, 175 N.W. 113, 7 A.L.R. 1573 (1919). Furthermore, the property was used by Bankrupt in its business, and Minnesota is committed to the "trade fixtures" rule which permits trade fixtures to be removed no matter how permanently attached, so long as such removal does not result in material and permanent injury to the freehold. Moffat v. White, 203 Minn. 47, 279 N.W. 732 (1938) (gasoline pumps, storage tanks, electric motors, etc. on gasoline station premises held not to be realty); Northwestern Lumber & Wrecking Co. v. Parker, 125 Minn. 107, 145 N.W. 964 (1914) (boiler set upon permanent foundation, smoke pipe through building wall connecting boiler to smoke stack outside, engine bolted to engine bed supported by braces on another floor, steam heat — radiator heating system on two floors connected to boiler with usual plumbing apparatus in building, held not to be fixtures under the trade fixtures doctrine). See also Bee Bldg. Co. v. Daniel, 57 F.2d 59 (8th Cir.1932) (metal cages, marble railings, office partitions, steel vault doors, steel safe deposit boxes, mahogany booths, all electric fixtures, exhaust ventilating fans, wooden cabinets in savings and loan office, held not to be realty under trade fixtures doctrine); 4 Collier, Bankruptcy (14th Ed.) ¶ 70.20, p. 1157. There is no record evidence of any material and permanent injury to the free-hold. Under the Minnesota rule, the referee and the District Court were fully justified in determining that the mortgaged property remained personalty. Our conclusion here precludes occasion to discuss other arguments advanced by Trustee on this issue.

Trustee challenges the District Court's allowance of advances made to Bankrupt by Bank under the "dragnet" clause of the Bank's mortgage. Such allowance affected the priority of the Bank's lien as, subsequent to the Bank's mortgage, Bankrupt mortgaged the same property to Standard. Prior to execution of Standard's mortgage, an official of Bankrupt obtained from the Bank copies of the Bank's mortgage and informed the Bank of the possibility and likelihood of a second mortgage. Trustee does not question the validity of a properly drawn mortgage on after-acquired property or that the law of the state would be controlling. Indeed, the state law is controlling. See 4 Collier, Bankruptcy...