Utley v. UNITED STATES (SMALL BUSINESS ADMINISTRATION)
| Decision Date | 28 June 1962 |
| Docket Number | No. 17605.,17605. |
| Citation | 304 F.2d 746 |
| Parties | Ernest R. UTLEY, Trustee of the Estate of Prototype Service Co., Inc., a California corporation, Bankrupt, Appellant, v. UNITED STATES of America (SMALL BUSINESS ADMINISTRATION), Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Craig, Weller & Laugharn, and Norman E. Stolba, Los Angeles, Cal., for appellant.
Francis C. Whelan, U. S. Atty., Donald A. Fareed, Asst. U. S. Atty., Chief, Civil Div., Jordan A. Dreifus, and Robert A. Smith, Asst. U. S. Attys., Los Angeles, Cal., for appellee.
Before BARNES, JERTBERG and BROWNING, Circuit Judges.
Before us is an appeal by the Trustee of a bankrupt estate (hereinafter called "appellant") from an Order of the District Court vacating the Referee in Bankruptcy's Amended Findings of Fact, Conclusions of Law and Order Declaring Chattel Mortgage of United States of America, appellee, (hereinafter designated "Small Business Administration") Void, and Modification of and Supplemental Findings of Fact, Conclusions of Law, and Order Declaring Chattel Mortgage of Small Business Administration Void.
The District Court's jurisdiction to review the Referee's Order is under Title 11 U.S.C.A. § 67, sub. c, and this Court has jurisdiction to review the District Court's Order under Title 11 U.S.C.A. § 47.
Proceedings in bankruptcy commenced with the filing of a Voluntary Petition in Bankruptcy by Prototype Service Co., Inc. (hereinafter referred to as "the bankrupt"), a California corporation. Adjudication in bankruptcy occurred on the 6th day of March, 1959, and appellant is the duly appointed, qualified, and acting Trustee of the bankrupt estate. The appellant took possession of the physical assets of the bankrupt. Appellee, on behalf of the Small Business Administration, filed a claim in bankruptcy proceedings in the amount of $13,520.04, with interest, arising out of its chattel mortgage lien against the bankrupt's personal property. Priority was claimed under Section 64, sub. a(5) of the Bankruptcy Act, Title 11 U.S.C.A. § 104, and Title 31 U.S.C.A. § 191.
Appellant sought to avoid the secured claim of the Small Business Administration on the ground that its chattel mortgage was void for non-compliance with the California bulk sales statute, Section 3440.1 of the Civil Code of the State of California. Following a hearing before the referee, the validity of the lien claimed by the Small Business Administration was submitted to the Referee for decision pending the decision of this Court in the then pending appeal of A. J. Bumb, Trustee in Bankruptcy, etc. v. United States. The parties agreed before the Referee that the decision of this Court on such appeal would be determinative of all the issues in the instant proceedings.
The decision of this Court in the above mentioned case was adverse to the Small Business Administration and is reported in 276 F.2d 729 (Mar. 16, 1960). Thereafter the Referee rendered a Memorandum Opinion holding the chattel mortgage null and void.
On petition of the Small Business Administration, the cause was reopened and resubmitted to the Referee on a Statement of Agreed Facts and Contentions. The Referee again held the chattel mortgage invalid and rendered Findings of Fact, Conclusions of Law, and Order Declaring Chattel Mortgage Void.
After certain amendments to the Referee's Findings of Fact, the Small Business Administration petitioned the United States District Court for a review of the Referee's Order. The District Court returned the Record to the Referee for further proceedings and for further hearing. Thereafter the Referee rendered a Modification of and Supplemental Findings of Fact, Conclusions of Law and Order, again declaring the chattel mortgage void.
On review, the District Court reversed the Referee's ruling that the chattel mortgage was invalid, and thereafter the Court rendered Findings of Fact, Conclusions of Law and Order vacating the findings and conclusions of the Referee and holding valid the lien of the chattel mortgage.
The following facts in the case are not in dispute:
Prior to bankruptcy the bankrupt corporation was engaged in the business, broadly speaking, of furnishing precision machining of metal stock and castings for ultimate use in the missile industry. About the middle of December, 1955, the corporation made written application to the Small Business Administration for a loan. The loan was authorized and provided for a loan in the amount of $40,000 to be secured by a first chattel mortgage on all machinery, equipment, fixtures, and furniture then owned or thereafter acquired by the corporation; an assignment of accounts receivable; and the individual guaranties of the president and vice-president of the corporation. The loan proceeds were to be used in part to pay certain existing debts of the corporation and in part for operating expenses. On June 25, 1956 the corporation executed and delivered to the Small Business Administration a promissory note in the principal amount of $40,000.00. On the same date the corporation executed and delivered to the Small Business Administration a chattel mortgage on all its personalty and an assignment of its accounts receivable.
On June 28, 1956 the Small Business Administration caused to be recorded in the office of the County Recorder for Los Angeles County a Notice of Intention to Chattel Mortgage. This Notice recited that the corporation intended to mortgage its personal property and stated that the consideration therefor was to be paid on July 16, 1956 at the office of the Small Business Administration in Los Angeles. The Notice did not state the amount of the consideration which was to be paid, nor did it state the mode or manner in which it was to be paid.
On June 29, 1956, one day after the Notice of Intention to Chattel Mortgage was filed, the chattel mortgage was recorded. On July 5, 1956 there was published in a newspaper of general circulation a notice of the chattel mortgage and of the transfer of consideration to take place on July 16, 1956. On July 16, 1956 the Small Business Administration disbursed loan proceeds of $25,000 by United States Treasury checks. Approximately $18,000 thereof went to the creditors of the corporation. These checks were payable to the corporation and the particular creditor jointly, were endorsed by the president of the corporation at the regional office of the Small Business Administration in Los Angeles on July 12, 1956, and mailed to the particular creditor on July 16, 1956. The remaining sum, approximately $7,000.00, was disbursed by check to the corporation on July 16, 1956.
The remaining $15,000 of the authorized loan of $40,000 was never disbursed, and on September 21, 1956 the corporation requested, in writing, the cancellation of this undisbursed balance, and the same was cancelled on that date.
Basically it is the position of the appellant that the chattel mortgage here involved is void as against him in that it was not executed in full compliance with the provisions of Section 3440.1 of the Civil Code of the State of California, commonly known as the bulk sale statute. It is undisputed that prior to the recordation of the chattel mortgage the corporation was indebted to an existing creditor. The appellant stands in the shoes of such creditor under the provisions of Section 70, sub. e(1) of the Bankruptcy Act, Title 11 U.S.C.A. § 110, sub. e(1).
The appellant contends, in substance, that the District Court committed reversible error in holding certain findings of the Referee clearly erroneous and in modifying and changing the same, and erred in several of its conclusions of law.
We deem it unnecessary to review in this opinion all of the specifications of error relied upon by the Trustee but will restrict this opinion to certain selected ones.
The first to be considered relates to the nature or character of the business in which the bankrupt was engaged at the time of the execution and delivery of the chattel mortgage. Was the bankrupt a "machinist" within the meaning of that term as used in Section 3440.1 of the Civil Code of California? That statute, in pertinent part, provided:
"* * * the mortgage of the fixtures or store equipment of a * * * machinist, * * *, or retail or wholesale merchant, is conclusively presumed fraudulent and void as against the existing creditors of the * * * mortgagor, unless before the consummation of the * * * mortgage, * * * the mortgagor, or the intended * * * mortgagee does all of the following * * *."
The Referee made specific and detailed findings of fact as to the character and nature of bankrupt's business, and in his conclusions of law found:
"The bankrupt was a machinist within the meaning of that term in Section 3440.1 of the California Civil Code."
On review the District Court in its findings of fact on this subject adopted all of the findings of fact of the Referee and added this additional finding of fact:
"nor was the bankrupt itself engaged in wholesale or retail merchandising or selling as a wholesale or retail merchant of either goods or services."
In its conclusions of law the District Court found:
"The bankrupt was not a machinist and was not a retail or wholesale merchant within the meaning of those terms in California Civil Code § 3440.1 as in effect on the date of the events described in the Findings."
In its written decision the District Court made the following comment:
Since the District Court adopted in its findings of fact on this subject all of the ...
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