Mason v. CITIZENS'NAT. TRUST & SAVINGS BANK

• Decision Date: 31 May 1934
• Docket Number: No. 7267.,7267.
• Citation: 71 F.2d 246
• Parties: MASON v. CITIZENS' NAT. TRUST & SAVINGS BANK OF LOS ANGELES. In re LOS ANGELES MFG. CO.
• Court: U.S. Court of Appeals — Ninth Circuit

71 F.2d 246 (1934)

MASON v. CITIZENS' NAT. TRUST & SAVINGS BANK OF LOS ANGELES In re LOS ANGELES MFG. CO.

No. 7267.

Circuit Court of Appeals, Ninth Circuit.

May 31, 1934.

Bicksler, Parke & Catlin and W. G. Danielson, all of Los Angeles, Cal., for appellant.

H. W. O'Melveny, Walter K. Tuller, Louis W. Myers, and Clinton La Tourrette, all of Los Angeles, Cal., for appellee.

Atlee Pomerene and Frank Harrison, both of Cleveland, Ohio, and Mortimer A. Kline, of Los Angeles, Cal., amici curiæ.

Clarence M. Hanson, of Los Angeles, Cal., and Joseph V. Kline, of New York City (Freston & Files, of Los Angeles, Cal., and Mudge, Stern, Williams & Tucker, of New York City, of counsel), for Chase Nat. Bank of New York and Bank of America, amici curiæ.

Before WILBUR, SAWTELLE, and GARRECHT, Circuit Judges.

SAWTELLE, Circuit Judge.

On December 31, 1926, the Los Angeles Manufacturing Company, engaged primarily in the manufacture of water well and oil well casing, pipes, tanks, and similar equipment, executed and delivered to a predecessor of the appellee herein, as trustee, an indenture dated July 1, 1926, to secure the payment of a bonded indebtedness of $150,000 that had been theretofore created by the corporation.

No question is raised as to the propriety of the bond issue. The indenture was accompanied by the affidavit of each of the parties that the former was made in good faith and without any design to hinder, delay, or defraud creditors, and was duly recorded in the office of the county recorder of Los Angeles county on December 31, 1926, and indexed as a deed, a mortgage, a trust deed, a chattel mortgage, and a power of attorney.

By the terms of the indenture, the present bankrupt "granted, bargained, sold, aliened," etc., to the trustee, certain described real and personal property. No question is raised as to the lien created upon the real property.

The indenture then set forth, with reference to the personal property:

"Parcel Two.

"All other property real or personal, and wheresoever situate * * * including all machinery, tools and equipment, trucks and other vehicles, stock of raw steel on hand or hereafter purchased, together with the merchandise of every kind and nature, and wheresoever situated, which the Company now owns or holds, or may hereafter acquire, whether the same is specifically enumerated herein or not, it being the intent of the Company to include hereunder all property of every kind or description owned by it * * * and which it may hereafter acquire, together with all rights, claims, privileges and immunities, whether now owned or hereafter acquired, together with any and all buildings, improvements, and appurtenances, now standing, or at any time hereafter constructed or placed upon any lands of the Company, or any part thereof, and all and singular the tenements, hereditaments and appurtenances thereunto belonging * * * and the reversion and reversions, remainder and remainders, rents, issues and profits thereof, now owned or hereafter acquired or constructed for the use of this corporation."

The company agreed that it would not declare dividends except out of surplus earnings remaining after providing for sinking fund payments, operating expenses, and other deductions; that it would not distribute its assets or earnings to preferred stockholders, except by way of dividends; that the trust indenture would always be kept a first lien upon the property described therein, and upon all other property thereafter acquired, and that the company would not voluntarily suffer to be created any lien upon the trust estate of priority to that of the indenture; that, if any paramount title should be established on the property covered by the indenture, the company would proceed to extinguish it; that no reorganization of the company should be allowed to impair the lien of the indenture, etc.; that, until default, the company would retain actual possession of the trust estate, its income, etc.; that it might sell its property, both real and personal, but that it should in that event "renew the same or substitute other property," which renewed or substituted property would be subject to the lien of the indenture; that, in lieu of such renewal or substitution, the company might pay the proceeds derived from the property sold, into its sinking fund; that failure to renew any building, as required by the indenture, would be considered an act of default; that, if an event of default should happen, the trustee might enter into the trust estate, with power of use, management, maintenance, restoration, insurance, etc.

After December 31, 1926, the present bankrupt continued in possession of its place of business and operated upon an extensive basis until the bankruptcy proceedings. Materials were purchased and manufactured into usable products, which, in turn, were sold. Old machines and equipment were discarded and new machinery and equipment were added to the plant. All acts performed by a normal operating business concern for a period of nearly six years after the recordation of the indenture were performed by the present bankrupt.

On November 9, 1932, a creditors' involuntary petition in bankruptcy was filed against the company, and a receiver was appointed to preserve and manage the property. The case was then referred to a referee in bankruptcy, as special master. The receiver took immediate possession of the assets of the bankrupt. The appellee served the receiver with notice that the bankrupt had defaulted under the terms of the indenture, and declared that all rights of the bankrupt to possession of the real and personal property covered by the indenture had ceased. The existence of an event of default was stipulated in the court below.

The receiver thereupon prayed for an order to show cause against the appellee why all of the property then in the possession of the receiver should not be determined to be free of any right of lien arising from the trust indenture.

By a general order of reference for general administration made in the interim, the case had been referred to the same person as referee in bankruptcy who had theretofore been the special master, so that at the time of hearing all parties stipulated to the jurisdiction of the court to hear the matter. A stipulation of facts, together with specific questions, was presented to the court.

In answer to those questions, the referee in bankruptcy filed an order as to the validity and the extent of the lien of the trust indenture. The only paragraph of that order and decree challenged on this appeal is the following: "4. That the personal property located in Los Angeles County which has been acquired after the delivery and recordation of said trust indenture, December 31, 1926, is not effected affected by said trust indenture and the same creates no lien thereon."

A review of certain paragraphs of the referee's order, including the one just quoted, was sought by the appellee. The court below affirmed all parts of the referee's order save paragraph 4, set forth above. As to that paragraph, the District Judge, in the closing portion of a "Memorandum of Ruling on Reviews of Referee's Order," held: "In conclusion, I am of the opinion that the lien of the Chattel Mortgage arose and was imposed upon the personal property described and included in the Trust Instrument when such personal property was acquired by the Los Angeles Manufacturing Company."

From the foregoing holding of the court below, the present appeal is being prosecuted.

At the outset, we may state that the entire question of the operation of chattel mortgages on after-acquired property was fully discussed by this court in the case of Howell v. War Finance Corporation, 71 F.(2d) 237, decided May 31, 1934. The authorities referred to hereinbelow are in addition to the many quoted and cited in that opinion.

It is well settled that, "while chattel mortgages are instruments of general use, each state has a right to determine for itself under what circumstances they may be executed, the extent of the rights conferred thereby, and the conditions of their validity." Etheridge v. Sperry, 139 U. S. 266, 276-277, 11 S. Ct. 565, 569, 35 L. Ed. 171; Security Warehousing Co. v. Hand, 206 U. S. 415, 425, 27 S. Ct. 720, 51 L. Ed. 1117, 11 Ann. Cas. 789.

Nor does the fact of bankruptcy, save in so far as is specifically provided for in the Bankruptcy Act (11 USCA), affect the validity of liens authorized by state law.

In the case of In re Brannon (C. C. A. 5) 62 F.(2d) 959, 961, certiorari denied, Ryan v. City of Dallas, 289 U. S. 742, 53 S. Ct. 692, 77 L. Ed. 1489, the court said: "The view generally taken is that true liens, however arising, which are not expressly invalidated by the Bankruptcy Act, remain good, and the trustee takes his title under section 70 (11 USCA § 110) subject to them." See, also, Britton v. Western Iowa Co. (two cases) (C. C. A. 8) 9 F.(2d) 488, 490, 45 A. L. R. 711, and cases there cited.

Under section 47a of the Bankruptcy Act (11 USCA § 75 (a), "* * * such trustees, as to all property in the custody or coming into the custody of the bankruptcy court, shall be deemed vested with all the rights, remedies, and powers of a creditor holding a lien by legal or equitable proceedings thereon; and also, as to all property not in the custody of the bankruptcy court, shall be deemed vested with all the rights, remedies, and powers of a judgment creditor holding an execution duly returned unsatisfied."

Regarding the effect of this provision, which was incorporated into the Bankruptcy Act by an amendment passed in 1910, this court, in the case of In re Lane Lumber Co., 217 F. 550, 552, 553, said:

"The amendment was obviously designed to cure what was deemed a defect in this regard, and to confer the power upon the trustee, in the interest of the general creditors, to contest the sufficiency of any claimed lien, pledge, or security that `a lien creditor or a...