Roberts v. Norrell, Civ. A. No. 1199.

• Decision Date: 14 January 1963
• Docket Number: Civ. A. No. 1199.
• Parties: Oscar W. ROBERTS, Jr., Trustee in Bankruptcy, Plaintiff, v. M. J. NORRELL, Defendant.
• Court: U.S. District Court — Northern District of Alabama

212 F. Supp. 897

Oscar W. ROBERTS, Jr., Trustee in Bankruptcy, Plaintiff, v. M. J. NORRELL, Defendant.

Civ. A. No. 1199.

United States District Court N. D. Alabama, E. D.

January 14, 1963.

Clinton J. Morgan, of Rogers, Magruder, Hoyt, Wright & Walther, Rome, Ga., and Lybrand, Sides & Casey, Anniston, Ala., for plaintiff.

Merrill, Merrill, Vardaman & Williams, Anniston, Ala., for defendant.

LYNNE, Chief Judge.

This suit is by a trustee in bankruptcy to recover the fair market value of thirteen motor vehicles sold prior to their bankruptcy by Owell Foster and Dewey E. Walls, doing business as Foster-Walls Motor Company, a partnership, to the defendant, M. J. Norrell, contending in the alternative that such sale constituted a fraudulent transfer under the provisions of either Section 70, sub. e or Section 67, sub. d(3) of the Bankruptcy Act, 11 U.S.C.A. §§ 110, sub. e and 107, sub. d(3).

From approximately February 1959 until their bankruptcy, Owell G. Foster and Dewey E. Walls operated in Bowdon, Carroll County, Georgia, the Foster-Walls Motor Company, engaging in the retail sale of new Ford and used automobiles and trucks and in repairing and servicing motor vehicles. From its commencement the partnership had borrowed quite heavily from Woodrow McLeod, Foster's father-in-law, who interested himself in the sales activities of the partnership. At least part of this indebtedness was secured, although it appears that the security might not have been given until an undetermined time within four months of the filing of the petition in bankruptcy.

From conflicting evidence the court has proceeded to reconstruct the circumstances surrounding the sale under attack. Several days prior to the date of the transfer, one or both of the partners of Foster-Walls telephoned Ed Pepper, who operated an automobile leasing business at Ashland, Alabama, and who for some time had mentioned informally to Walls that he might be interested in acquiring a number of vehicles for his business, to inquire whether Pepper was interested at that time in purchasing any automobiles from Foster-Walls. After preliminary negotiations by telephone and in Bowdon, Walls went, on July 16 or 17, 1960, to Ashland, where Pepper agreed to purchase thirteen assorted 1960 model Ford vehicles at a cost per unit averaging approximately $250 below factory invoice price. Upon learning, however, that the number of trucks in the lot was too large for use in his leasing business, Pepper, either immediately before or after delivery of the vehicles at his house during the evening and early night of July 18, asked Norrell, who operated a Pontiac automobile and GMC truck agency in Ashland, whether he would be interested in buying them.

The following morning, July 19, Norrell examined the vehicles parked at Pepper's house; then went with his attorney, Sam McKay, to Carrollton, the county seat of Carroll County, Georgia, for the purpose of searching the records to determine whether the vehicles were incumbered. Finding only a mortgage in favor of Woodrow McLeod, in an undetermined principal amount, on repair parts owned by Foster-Walls, they returned to Ashland, and Norrell communicated to Pepper his assent to the transaction. Pepper then delivered to Norrell signed blank bills of sale and factory invoices. Norrell's bookkeeper prepared the check, made payable jointly to "Foster & Walls Ford Co. & Woodrow McLeod" in the amount of $23,935.63, which Pepper delivered either to Walls or McLeod, who were waiting in their car at Pepper's house.

On July 28, 1960, Motor Contract Company of Atlanta filed in the District Court for the Northern District of Georgia a petition in involuntary bankruptcy proceedings against the partnership and against Foster and Walls individually. Motor Contract, which had "floor-planned" the vehicles sold by Foster-Walls, alleged an unsecured claim against Foster-Walls in the amount of $2,587.23 and that the partnership's disposition of the vehicles constituted an act of bankruptcy. On March 8, 1961, the debtors withdrew their answer, admitted insolvency, and consented to adjudication; whereupon they were adjudicated bankrupts.

On May 17, 1962, the District Court for the Middle District of Alabama granted summary judgment in favor of the trustee and against Woodrow McLeod in the principal sum of $28,795.13, representing the amount claimed by the trustee to have constituted preferential or fraudulent transfers by the bankrupts to McLeod, which claim included the amount of $23,935.63 paid to McLeod as a result of the transaction involved here. By order of October 31, 1962, that case was marked "settled" by a compromise for the sum of $15,148.00.

In the first count of his complaint, the trustee invokes the aid of a state bulk sales act by proceeding under Section 70, sub. e of the Bankruptcy Act.¹ There is sharp disagreement between the trustee and the defendant as to whether the applicable state law is that of Georgia, for which the trustee contends, or that of Alabama. Since the bulk sales acts of the two states differ materially, a choice-of-law problem is initially posed. A subordinate threshhold question is whether, in applying state law assimilated in the Bankruptcy Act, a federal court is governed by the choice-of-law rules of the forum state, as required in cases in which jurisdiction is based upon diversity of citizenship,² or whether the choice is to be made in accordance with a rule fashioned by the federal court as part of its general problem of applying the Act.³ Both the Supreme Court⁴ and the Fifth Circuit⁵ have carefully avoided a decision of this question in the context of the Bankruptcy Act, and since in the present case the same result is achieved by application of either the Alabama choice-of-law rule or what is independently determined to be the preferred rule, here too the problem will be left unanswered.

In determining the formal and substantial validity of conveyances of tangible movables, the most widely held modern view is that the law of the actual physical situs of the property at the time of the transfer controls.⁶ This principle is considered applicable generally to fraudulent transfers⁷ and more particularly to bulk sales.⁸ However, plaintiff contends, following the fictive maxim mobilia sequuntur personam, that the situs of personalty is the domicile of its owner. It is true that for some purposes the domicile still is determinative, while for others it is not; certainly no uniform rule embracing all transactions and interests in property can be stated.⁹ The cases¹⁰ cited by plaintiff which, relying on this maxim, hold that a federal tax lien is valid as against third-party purchases of personalty if filed at the owner's domicile are simply inapposite to the question of the validity of a sale or transfer of chattels, to which the decisions apply a different rule. Furthermore, in the tax-lien decisions, equitable and practical considerations are also involved, as expressed in Grand Prairie State Bank v. United States, 206 F.2d 217, 219 (5th Cir., 1953): "To hold otherwise, would be to overlook the practical necessities of the situation and would require the Collector to file tax liens in every jurisdiction to which the taxpayers may at any time remove the property." But as to choice of the law by which the validity of a chattel conveyance is to be determined, the practical and equitable considerations are quite different. In Royal Baking Powder Co. v. Hessey, supra, the Fourth Circuit was urged to apply the New York Bulk Sales Act to a transfer of property situated in Argentina when the sale was consummated through a New York contract. Holding the New York Act applicable, Judge Soper, after a discussion of the above-mentioned sections of the Restatement concerning the validity of conveyances of chattels, observed in 76 F.2d at 649 that, "If the rule were otherwise, purchasers at the place where the merchandise is situated would be charged with knowledge of the laws of a foreign jurisdiction." It might be added that because of the substantial affirmative responsibilities placed upon the purchaser by bulk sales acts, this statement has particular significance in respect to such statutes.

Although it appears that Alabama courts have not had occasion to decide the particular question of choice of law as respects bulk sales, the recent case of McRae v. Bandy, 270 Ala. 12, 115 So. 2d 479 (1959), and the authorities relied upon there, demonstrate that the Alabama choice of law rule is in accord with the above-discussed principle that the validity of the conveyance of a chattel is controlled by the law of the state where the chattel is actually situated at the time of the transfer.

The undisputed evidence at trial establishes that the vehicles involved in the present case were located in Ashland, Alabama, at the time their transfer was consummated. The provisions of the Alabama Bulk Sales Act therefore control.

It is stipulated by the parties that defendant Norrell made no attempt to comply with the provisions of any bulk sales law. The Alabama Bulk Sales Act, Ala.Code, Tit. 20, § 10 (Recomp.1958), provides:

"A sale of any portion of a stock of merchandise otherwise than in the ordinary course of trade or in the regular and usual prosecution of the seller's business and a sale of an entire stock of merchandise in bulk or substantially in bulk shall be presumed to be fraudulent and void as against the creditors of the seller, and the purchaser thereof shall be considered to hold the merchandise in trust as trustee for the benefit of the creditors of the seller for a period of ninety days from the date of sale, unless at least 10 days before the sale: The seller shall have * * *. Emphasis added."

It must first be determined whether the Act applies to the transaction in this case; if it does, then it must be determined whether the purchaser, Norrell, has met his burden¹¹ of rebutting the presumption¹² of...