Ludlum Enterprises, Inc., In re

• Decision Date: 07 April 1975
• Docket Number: No. 74--1270,74--1270
• Citation: 510 F.2d 996
• Parties: In the Matter of LUDLUM ENTERPRISES, INC., Bankrupt. AMERICAN INDUSTRIAL LEASING COMPANY, Appellant, v. David S. SEARLES, Trustee, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 996

510 F.2d 996

In the Matter of LUDLUM ENTERPRISES, INC., Bankrupt.

AMERICAN INDUSTRIAL LEASING COMPANY, Appellant, v. David S. SEARLES, Trustee, Appellee.

No. 74--1270.

United States Court of Appeals, Fifth Circuit.

April 7, 1975.

Jeanne Heyward, Miami, Fla., Eugene L. Heinrich, Ft. Lauderdale, Fla., Donald E. Egan, Chicago, Ill., for appellant.

Jeffry R. Jontz, Orlando, Fla., for I.B.M., amicus curiae.

Herb Stettin, Miami, Fla., for appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before BELL, AINSWORTH and RONEY, Circuit Judges.

RONEY, Circuit Judge:

The bankruptcy court decreed the Trustee in bankruptcy of a bankrupt lessee to be the owner of leased restaurant equipment for bankruptcy purposes against the claim of ownership by the lessor, where the lease had not been recorded and possession had been with the bankrupt over two years. The court relied on Florida Statutes § 726.09 concerning fraudulent loans. Since this district court is the first state or federal court ever so to apply this 150-year old Florida statute to a lease of personal property, this case is of first impression in this Court. Holding that Florida Statutes § 726.09 does not apply to bona fide leases of personal property and does not operate to cut off the ownership interest of the owner who fails to record the lease, we reverse.

There is no material controversy as to the controlling facts and for the purpose of this opinion we can simplify them by omitting details that might otherwise be favorable to the appellant but which are not relevant to our decision. American Industrial Leasing Company leased certain restaurant and kitchen equipment to the bankrupt. At the time of bankruptcy, the equipment had been installed for more than two years on the Ramada Inn premises owned by the bankrupt. The written lease agreement was not recorded in any public records.

An involuntary petition in bankruptcy was filed on December 10, 1971, against Ludlum Enterprises, Inc., and thereafter an adjudication in bankruptcy was entered, based upon an amended involuntary petition in bankruptcy filed on May 18, 1972. The Trustee filed his report as required by the local rules for a determination of the validity, priority, and amount of liens claimed by creditors against the estate. American Industrial Leasing Company asserted a claim of ownership against the restaurant property it had leased, which was in possession of the bankrupt by virtue of the lease agreement.

The bankruptcy judge held, first, that the agreement was in fact a lease rather than a security agreement and second, that because the property had remained in the possession of the bankrupt for a period of two years prior to the filing of the petition in bankruptcy and there had been no recordation of the lease agreement itself, the provisions of § 726.09, Florida Statutes, had been violated. The Trustee as 'strong-arm' creditor was, therefore, entitled to assert a superior interest in the property to that claimed by American. See 11 U.S.C.A. § 110(c).

On review the district court agreed with the bankruptcy judge deciding first, that Florida Statutes § 726.09 applied to leases of personal property, second, that § 726.09 as it related to leases, was not impliedly repealed by the Florida version of the Uniform Commercial Code, and third, that certain financing statements filed by American did not satisfy the recording requirements of § 726.09.

There being no doubt as to possession being with the bankrupt for two years and that the lease was not recorded, the controlling question is whether Florida Statutes § 726.09 applies to the lease of personal property. The statute provides:

726.09 Fraudulent loans void

When any loan of goods and chattels shall be pretended to have been made to any person with whom or those claiming under him, possession shall have remained for the space of two years without demand and pursued by due process of law on the part of the pretended lender, or where any reservation or limitation shall be pretended to have been made of a use or property by way of condition, reversion, remainder or otherwise in goods and chattels, and the possession thereof shall have remained in another as aforesaid, the same shall be taken, as to the creditors and purchasers of the persons aforesaid so remaining in possession, to be fraudulent within this chapter, and the absolute property shall be with the possession, unless such loan, reservation or limitation of use or property were declared by will or deed in writing proved and recorded.

Appellant American, the lessor of the property, contends that Florida Statutes § 726.09 applies to 'loans,' not leases, and therefore, the 'absolute property' does not go with the possession but remains with the owner. Neither party was able to cite this Court to any reported Florida court decision applying or refusing to apply this ancient statute to a lease of tangible personal property. Our own independent research uncovered one short Florida Supreme Court case which arguably appeared to apply this section to a lease of personal property, Dixon Lumber Co. v. Jennings, 63 Fla. 405, 57 So. 615 (1912). But there the lease was a vehicle of actual fraud and the case is only moderately instructive on the precise issue we face here: whether a pure lease, unattended by any incidents of actual fraud, is subject to Florida Statutes § 726.09 (1973).

Although the Trustee is given the status of a hypothetical lien creditor under the so-called 'strong-arm' clause of the Bankruptcy Act, he must look to state law for a definition of his rights as such creditor. Our role in this case is to define state law. In deciding that Florida law does not defeat the lessor's right to the leased property in this case, we construe § 726.09 by considering first, the wording of the statute itself; second, the title of the statute and the Florida Constitutional provision pertinent to the title; and third, the interpretation given to similar statutes in other states.

Section 726.09 basically provides that when 'any loan of goods and chattels' is made and the possession of the goods has remained in the borrower 'for the space of two years without demand,' or where 'any reservation or limitation' is made of a use or property 'by way of condition, reversion, remainder or otherwise in goods and chattels' and the possession is similarly in one other than the owner for two years, the goods 'shall be taken, as to the creditors and purchasers of the persons aforesaid so remaining in possession, to be fraudulent' and 'the absolute property shall be with the possession, unless such loan, reservation or limitation of use or property were declared by will or deed in writing proved and recorded.' It is easy to see why the Florida courts have consistently applied this statute to conditional sales contracts. The parties and amicus curiae cited us many Florida cases concerning conditional sales and chattel mortgages. See Dillon v. Mizell Live Stock Co., 66 Fla. 425, 63 So. 824 (1913); Onyx Soda Fountain Co. v. L'Engle, 53 Fla. 314, 43 So. 771 (1907); Hudnall v. Paine, 39 Fla. 67, 21 So. 791 (1897); Campbell Printing Press & Manufacturing Co. v. Walker, 22 Fla. 412, 1 So. 59 (1886); White v. County Mortgagee Corp., 211 So.2d 254 (Fla.App.1968); Rood v. Miami Air Conditioning Co., 193 So.2d 216 (Fla.App.1966); Maas Brothers, Inc. v. Guaranty Federal Savings & Loan Assoc., 180 So.2d 195 (Fla.App.1965); Dade National Bank of Miami v. University Transfer & Storage, Inc., 151 So.2d 868 (Fla.App.1963); Richardson Tractor Co. v. Square Deal Machinery & Supply Co., 149 So.2d 388 (Fla.App.1963). Such contracts clearly fall within the statute's second prescription. Such a contract is a 'reservation . . . made of . . . property by way of condition, . . . (to) goods and chattels, and the possession thereof' has remained, when the statute has been found to apply, in a person other than the title holder. It is equally clear to us that a lease does not involve such a condition on the title to the property, nor does it involve a reversion, remainder or any other similar future interest, legal or equitable. See Templeman v. Gibbs, 86 Tex. 358, 24 S.W. 792 (1894); Black's Law Dictionary 1483, 1456 (rev.4th ed. 1968). The lessor owns the only legal and equitable title in the property, subject only to the lessee's right to possession for the lease term. This right to possession does not give the lessee any legal or equitable title in the property subject to the lease, and under no circumstance can the lessee himself cut off the lessor's interest in the property. A lease simply is not an interest of the same character as conditional title, reversions or remainders, and the portion of the statute covering those type interests does not apply to a lease. Templeman v. Gibbs, 86 Tex. 358, 24 S.W. 792 (1894). Consequently, if a lease transaction is to be brought within the statute, it must be under the first clause relating to 'any loan of goods and chattels.'

The Florida legislature, when it intended to declare a lease fraudulent as against creditors, used the term 'lease.' See Fla.Stat. §§ 726.01, 726.07 (1973). Yet in § 726.09 it referred to a 'loan' not a 'lease.' The words are not coextensive and it seems only reasonable that had the Florida legislature intended § 726.09 to apply to a lease it would have said so. The fundamental difference between conditional sales contracts and leases has been noted in the Uniform Commercial Code, Fla.Stat. 671.1--201(37) (1973).

The only Florida case we found shedding any light on this question, Dixon Lumber Co. v. Jennings, 63 Fla. 405, 57 So. 615 (1912), appears to support the conclusion that this statute does not apply to leases. In Dixon Lumber, Perkins, the original owner of a locomotive engine, sold it to Dixon Lumber Co., but retained possession under a lease-back 'for more than two years after its alleged sale to ...