Phoenix v. Kovacevich

• Decision Date: 01 December 1966
• Citation: 55 Cal.Rptr. 135,246 Cal.App.2d 774
• Court: California Court of Appeals Court of Appeals
• Parties: , 3 UCC Rep.Serv. 1082 W. W. PHOENIX and Dolores Phoenix, Plaintiffs and Appellants, v. Vincent KOVACEVICH and Savage Rock Co., Third-Party Claimants and Respondents. Civ. 662.

Page 135

55 Cal.Rptr. 135

246 Cal.App.2d 774, 3 UCC Rep.Serv. 1082

W. W. PHOENIX and Dolores Phoenix, Plaintiffs and Appellants, v. Vincent KOVACEVICH and Savage Rock Co., Third-Party Claimants and Respondents.

Civ. 662.

Court of Appeal, Fifth District, California.

Dec. 1, 1966.

Dorris, Fleharty & Underhill and Thomas Underhill, Bakersfield, for appellants.

Savage & Shepard and James S. Shepard, Fresno, for third-party claimants and for respondents.

STONE, Justice.

This is an appeal from an order for the release of personal property to third party claimants. In an attempt to satisfy a judgment against Raymond S. Froehlich, appellants levied an execution upon property the subject of this third party claim proceeding.

On July 27, 1962, Froehlich sold four tractors and one set of Murphy portable truck scales to Lakeside Sand & Gravel Company, a corporation of which he was president. In payment he accepted a promissory note for $32,900 secured by a chattel mortgage covering the property sold. On July 9, 1963, Lakeside was adjudicated a bankrupt and B. E. Shields, Trustee in Bankruptcy, took possession of the personal property covered by the mortgage.

On August 29, 1963, at a hearing before the referee in bankruptcy on an order to show cause challenging the validity of the chattel mortgage, Froehlich introduced into evidence the original promissory note and chattel mortgage. The claim of Froehlich was determined to be valid by the district court on December 15, 1964, but the note and mortgage remained a part of the bankruptcy file in the possession of either the bankruptcy court or the federal district court.

On July 9, 1964, appellants obtained judgment against Froehlich, individually, for $39,200, on an unrelated claim. On December 24, 1964, the referee in bankruptcy ordered the personal property abandoned as burdensome, since the amount due under the chattel mortgage exceeded the appraised value of the property.

On December 23, 1964, one day prior to the order of abandonment, appellants levied upon any property of Froehlich in the hands of B. E. Shields, Trustee in Bankruptcy. The tractors and scales were then in the custody of the trustee so the sheriff was unable to take possession of them.

On December 29, 1964, appellants attempted a levy upon the promissory note and chattel mortgage by serving Froehlich, but the documents were then in the custody of the bankruptcy court.

A second attempt to levy upon the promissory note and chattel mortgage was made on December 30, 1964, by serving S. B. Gill, who at that time was attorney for Froehlich. As Gill did not have possession of the note and mortgage, the levy was fruitless.

Appellants again levied upon B. E. Shields, Trustee in Bankruptcy, on December 30, 1964. Answering the garnishment, the trustee stated:

'Nothing held. All property released and abandoned as per abandonment order dated December 24, 1964.'

On January 4, 1964, appellants attempted to levy upon the note and chattel mortgage by serving William A. McGugin, Referee in Bankruptcy, and by serving Georgia Madsen, Chief Clerk of the Bankruptcy Court. The referee answered:

'You are hereby advised that any money or property I have in my possession in which the above named Froehlich has any interest is in my possession in my capacity as Referee in Bankruptcy and therefore, is in custodia legis and not subject to attachment, garnish or levy. See 7 Moore's Fed.Practice Sec. 67.06, page 2208; (Bucher v. Vance, 2 Cir.,) 36 Fed.2d 774; (In re Chakos, W.D.Wis.) 36 Fed.2d 776; 6 Am.Jur. 581, 584, 623; Weidhorn vs. Levy, 253 U.S. 268, 40 S.Ct. 534, (64 L.Ed. 898); (United States for use of Magill-Weinsheimer Co. v. Sykes) 44 Fed.2d 334; 19 Cal.Jur.2d p. 425.

'You are further advised that I have no money, goods, credit, effects or other personal property, or promissory note, or chattel mortgage in my possession or under my control belonging to Raymond S . Froehlich.'

Mrs. Madsen's answer was identical, save for omission of the citations.

On January 6, 1965, Froehlich sold the Murphy portable scales to Savage Rock Co. for $3,250 in cash, executing and delivering to the purchaser a bill of sale. On January 7, 1965, Froehlich sold the four tractors to Vincent Kovacevich for $15,000 in cash, executing and delivering to the purchaser a bill of sale.

On January 11, 1965, appellants caused a levy of execution to be made on the tractors which were taken into possession by the sheriff; and on January 14, 1965, appellants caused a levy of execution to be made on the Murphy scales which were also taken into possession by the sheriff.

Kovacevich and Savage, respondents herein, then filed third party claims and when appellants failed to post undertakings, the sheriff released the property to the claimants.

Appellants contend respondents' titles purportedly deriving from Froehlich are defective and the third party claims are invalid, upon two grounds: first, the mortgage under which Froehlich is alleged to have sold was levied upon by appellants before the sales were made, thus preventing use of the mortgage as a vehicle to transfer title to the property; and second, the sales failed to comply with statutes then in effect, so that each was a nullity.

Appellants concede they were unsuccessful in getting possession of the note and mortgage by the levies of execution, and that the weight of authority in California is that levy upon a promissory note is ineffectual unless the note is taken into possession by the levying officer. (Hoxie v. Bryant, 131 Cal. 85, 63 P. 153; Haulman v. Crumal, 13 Cal.App.2d 612, 57 P.2d 179; Jubelt v. Sketers, 84 Cal.App.2d 653, 191 P.2d 460; Hecht v. Smith, 183 Cal.App.2d 723, 7 Cal.Rptr. 209.) They contend, however, there should be an exception to the foregoing rule when levy is made on personal property that cannot be taken into possession because it is in Custodia legis. According to appellants' theory, the note became property not capable of manual delivery under section 542, subdivision (5) of the Code of Civil Procedure, which provides:

'Debts and credits and other personal property not capable of manual delivery must be attached by leaving with the persons owing such debts, or having in his possession, or under his control, such credits and other personal property, or with his agent * * * a copy of the writ * * * and, in every case, a notice that the debts owing by him to the defendant, or the credits and other personal property in his possession, or under his control, belonging to the defendant, are attached in pursuance of such writ; * * *'

Technically, the property here is not a debt or a credit but, rather, a note and chattel mortgage evidencing an indebtedness, and levy upon them as tangible personal property was attempted. Had appellants followed available procedures a valid levy could have been made upon such personal property. Rule 20 of the Rules of the Federal District Court of the Southern District provides for application to the district court or to the bankruptcy court for an order directing the clerk to recognize a writ of execution. The California courts have...