Petition for Writ of Certiorari — Nelson v. Moore-McCormack Lines, Inc.

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IN THE

Supreme Court of the United

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No. ti

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Basic Toot InpustriEs, LNc.,

US.

C. Dovetas WIKLE, Trustee,

_ Respondent.

APR 20-196.

Office Supreme €. 1, US. |

FILED:

eo ee

: date DAVIS, CLERK

Petitioner,

t-)

Petition for Writ of Certiorari to Review Decision

of UnitedStates Court of Appeals for the Ninth

- Circuit.

‘J. Ropert ARKUSH.

416 West Bighth-: Street,

Los Angeles 14,‘ California,

Counsel for Petitioner.

Parker & Son, Inc., Law Printers, Los Angeles. Phone MA. 6-911.

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SUBJECT INDEX’

: PAGE

* Petition for writ of certiorari to review decision of United

States Court of — for the Ninth Cirtuit.....................-.- 1

Appendices:

Apperidix “A.” Opinion of the United States Court of

Appeals for. the Ninth Circuit.......... scensnestbeinininede 1

3 Appendix “B.” Judgment

penteiceiinnnibtinmcsamnrapinnapiggumsaettse 8

“ Appendix “C.” .Notice of intended mortgage under deiden

__-+—- - 3440 Civil Codé of the ‘State of California. Ete Rt es AMAR 9

Appendix “D.” Mortgage of erin See aoa near ne 10 ©

TABLE OF AUTHORITIES CITED

. : . Cases” PAGE

* Basic Tool Industries, Inc. v. Wikie, Trustee, ... F. 2d... 2

Booth v. Bond, 56 Cal. App. 24. 153.eecccccsccccvccreccncreretene 8

Bumb v. United ‘States, re FOE ee i 7, 9, 10, 1}

Constance v. Harvey, 245 Se SERIA See ne oe 5

First National Baik v. Kinslow, 2 Cal. App. 2d 456........... 8

Lewis, Trustee in‘ Bankruptcy v. Manufacturers ‘National Bank

of Detroit, 364 U.S. 603.000 eneeeen pelea 12

Mahana v. Van Alstyne, 179 Cal. 725.2....202:..22-2---.-- esaeansanatatt 8

Nesbitt Fruit Products, Inc. V. Del Monte Beverage Co.,

177 Cai. App. Gy __-AMREE YORE On At a pes dae ee OEE . 8

Sousa y. First California Co., 101 Cal. ‘App. ‘34 534... ascoaheiaoniidoahets oe

Stewart v. Leasure, 12 Cal. eG * Senne 12

Strain v. Security. Title Insurance Co., 124 Cal. App. 2d 195... 9

Whelan v. Swain, 132 Cal. ‘387... vA IBD Be

s

STATUTES

Bankruptey’ Act, Sec. ee Secs Pak acral hon spies 3

Bankruptcy Act, Sec. 70e(1) ln sasitiien FE ete yikeer 4,

California Civil Code, Sec. 1605. atbateelacbidabtamnsameadl SER eet <7

California Civil Code, ‘Sec. 1615............. pieces eats Saag | 8

* California Civil Code,. See. 3440.1 0.3, 5 5, 6, ¥, 8, 10, 11, 12

& nited States Code, Title 11, Sec. 47 are “atacsiee tion Weaclare WAP eh ue *;

‘Coited States Code, Title 11, Sec. MOe( 1) eccccccecicetneee 4

: IN THE

N

| Supreme Court of the. Unite States

OcToBER TERM, 1961.

A cctledunteecas

—~_ ——_ - —

.

Basic Toor INvusTRIEs, Inc.,

5 Petitioner;

VS. °

C. DoveLas WIKLE, Trustee, Fit

: = iene ; Respondent.

ea Te —_; : or : . Y é

& 7

Petition for Writ of Certiorari to Review Decision

_ of United States Court of Appenys for the Ninth

Circuit. | ee 3

‘4 |

To the oasnialé Earl wane Chief Justice of the’

- United States of’ Ameriéa, and to the Honorable

the Associate J ustices: Of the Supreme C ourt of the

United States: | &

The Petition .of Baste Tool Industries, sa! ' a Cali-

fornia-corporation, for a Writ of, Certiorari to be di-

rected to the United States Court of Appeals for the

“Ninth Circuit to review a judgment of that Court en-

‘tered on the/6th day of December, 1961; rehearing de-

a

_~ nied on Ҥe 23rd day of January, 1962, in favor of re-.

sponden

cnaidiiagli .

Wetitioner changed its corporate name from “Basic Tool In-

stries, Inc.” to “Basic Industries, Inc.” effective as of No-

vember 1, 1961.

and against petitioner, respectfully shows: °

7

a“

(1) The case avas initiated by a Petition to the Hon-

orable, District Court of the United States for the

_Southern District -of California, Central Division, for

review of the Findings of Fact, Conclusions of Law

and Order of the Referee in Bankruptcy to whom an

‘involuntary | petition in bankruptcy against Jet Air-A

Inc.,-a California corporation, had been’ referred

by whom the respondent trustee in bankruptey had been

appointed. Said District Court subsequently issued its °

Order affirming said Order Gf the Referee in Bank-

ruptcy and from that Order of the District Court pe-

titioner filed an appeal in the United States Court of

* Appeals for the Ninth Circuit. Said bankrupt was the °

_ chattel mortgagor of the chattel mortgage in question

and petitioner was the chattel mortgagee.

(2) The United States Court of Appeals for the

Ninth Circuit>in an opinion filed on December 6, 1961 ~

affirmed the Order of. the District Court which had

affirmed the Order of the Referte holding the chattel

mortgage to be infalid. Thereafter, on January 23,

1962, said Court of Appeals denied this petitioner’s

‘ Petition for Rehearing.» The opinion of the Court of

Appeals is reported ag iy 4 Tool Industries, Inc. v.

Wikle, Trustee (C. A. 9, 19619... F. 2d ......, and is

set forth in Appendix-“A to this Petition. -

(3). The grounds on which the jurisdiction of this

Court is inv oked. are as follows:

(a) * The judgment: of the Court of aerne sought |

to be reviewed was dated and entered December 6, (1961.

(b) An Order of the Court of Appeals denying peti-

tioner’s Petition for Rehearing was made on January

23. 1962 which Order provided that petitioner herein had _

90 days thereafter in which to file a Petition for Cer-

‘tiorari in this Court. « ,

| oar al mn

(cy The statutory provision believed to confer .on

this Court jurisdiction to review the judgment in ques-

tion of the Court of Appeals is, Section 24c of me

Bankruptcy Act, 11 U.S. C. Sec. 47, .

(4) The basic question presented. for review is

_ whether the federal courts m a bankruptcy matter can

construe and apply an applicable state statute in a man-

net wholly at variance with established state law.

The statute “in- question, Sectjon 3440.1 ef the Cali-

fornia Civil Code (quoted below) provided that the

notice of intended chattel mortgage should specify the

date and place where the “consideration js to be paid.”

(That language remains. unchanged.) State law has

authoritatively established- that “consideration” and

“payment of -consideration” is not limited to cash or

cash payment but applies to anything of value. (See

_ authorities cited in petitioner 's argument, infra.) .

“ “The Court of Appeals,- in flagrant disregard ‘of

state law, takes the position that the statutory language

“consideration is to be paid” is limited to cash gonsidera-

tion, That Court thus declares invalid as against a

trustee in bankruptcy a chattel mortgage otherwise ad-

mittedly valid because the “consideration” which was

“paid” consisted in part of cash and in part of the satis-

faction of pre-existing promissory notes. The effect

of .such an interpretation on uncounted security trans-

actions entered into in good faith and in compliance

with state law is both shocking and frightening.

( 5) The statutes which the case invoke es, and their

“terms, are as follows: »

(a) California Civil Code Sec. 3440.1:

. the sale. transfer. assignment. or mortgage of

— A

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r e . ‘ ° : ‘ . ‘ > ° . . .

the fixtures or store equipment of a... machinist

. is conclusively presumed fraudulent and void

- as against the existing creditors oi the . . . mort-

gagor, unl¢ss before the consummation of he’

mortgage cae the mortgagor, or the intended

_ mortgagee ‘does all of the following: ° -*-

“ucay Records at least 10° days before the con-

summation of the . . . mortgage

_a notice of the intended . . . mortgage,

‘Which ‘states the riame and address of the

intended ... mortgagor and the name and ad-

dress of the intended . . . mortgagee. The notice

shall contain a general statement of the character

of the merchandise or property intended to be

. miortgaged, and show the date and. place

vitae ‘the purchases price or conside ration is to’

- be paid. ” (Emphasis added. )

(b) BankrupteyeAct, Sec. 70e(1), MI U. S. C.-See:

110e(1):

* “A transfer made or suffered or obligation aaeaie’

_ by a debtor adjudged a bankrupt under this Act

which, under any Federal or State law applicable,

thereto, is- fraudulent as against or voidable for

any other reason by any creditor of the debtor,

having a claim provable under this Act, shall be

-null and void as against the trustee of such .debter.”

(6) Statement of the,Case: ‘The facts in the case

_are generally undisputed. On August 22, 1958, a pe-

tition in bankruptcy was filed agairist Jet Air-Age, Inc..,

_the bankrupt involyed herein. Prior to that time the

bankrupt was engaged in the machine shop business.

Among. the assets of the bankrupt taken into possession

‘by the respondent trustee in bankruptcy were various

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4

items of machinery, equipmer nt,’ fixtures, “ete.,- which

were the subject of and described in a chattel mortgage

which had been executed in favor of petitioner. Dur-

_ ing the period from February 19, 1958, to August 5,

1958, petitioner made varioits loans: to the. bankrupt

Which are materfal herein, as follows:

.

_ Dates ; Amounts

February 19, 1958 . . $ 500.00

February 201938 i : 500.00

March 7, 1958 | 500.00

March 14, 1958 23,500.00

March 28, 1958 ? 5,000.00

March 28, 1958 é 5,000.00

June 9, 1958 ‘ 10,000.00

June 12, 1958 ‘ ‘ — 4,700.00

June 20, 1958 ; ~ 3,300.00.

August 5, 1958 e - 7 * ***3,000.00

The’ advances madé: prior to March 28, 1958, were

originally evidenced by demand notes executed by the

bankrupt. The chattel mortgage transaction in ques-

tion was consummated by means of an escrow held in

a designated place, As part of the escrow transac;

tion the bankrupt’s new, installment note dated March

_ 28, 1958, in the sum of $25,000.00, was substituted for

its previous’ demand notes representing: prior advances

also totalling $25,000.00. It was the intention of the

parties that the chattel mortgage was to secure all ad-

vances made by petitioner to the bankrupt, but not to

exceed the maximum indebtedness set forth in the chat-

tel mortgage. :

A Notice of Intended Chattel Mortgage. as required

by California Civil, Code Sec/ 3440.1. was published °

and recorded. The notice recited that the chattel mort-

_ - . > 4

mics . — . 6 : Q’

| gage would: Dé delivered “and the msideration there-

__ fort paid-at “10°00 o'clock AJM. on the 2xth day ‘of

-Mafch,, 1958" at’ the specified office. An additional

$10,000.00 was advayced to the bankrupt on March 28, ..

1958. That sum and. the new. promissory note (which —

’ is ae . a

Was an installment note -specitying deterred installment

payments as disting suished trom the démand notes .

which it replaced) were delivered tu the bankrupt at

approximately 10:45 A.M. .on that date, at the place.

specified in the Notice.”

THe trustee in bankruptey filed a Petition addressed -

tothe Referee in Bankruptey asking that the ‘chattel

™m rigage be declared invalid because-the transaction was

not consummated i ina manner complying with the terms

of the Notice of Intention. as’ required by California

Civil Code Sec. 3440.1. It was the granting of such

an’ order and whe - ‘affirming of it on appeal that led

‘to the present Petition.

4) Argun ent tn Support of Pelttion: “Jt is peti-

tioner’s bagic cotitention that the Court of Appeals has

decided an important state question in a manner witich

conflicts with the applicdble law ef the state involved,

California. The case arose in a bankruptcy matter °

and the principal statute involved is that of the state -

in.which the bankruptcy court was sitting, not a stat-

-ute of the U nited States. However, the state statute

in question is cone Which is frequently involved in bank-

ruptcy cases, singe it deals with’ the rights of cred-

itors, to which the trustee in bankruptcy succeeds, to

‘avoid the priority ‘of chattel mortgages executed by the

bankrupt. prea ta of the type involved in this

“The Court of Appeals expressly df not base its decision on

“the time variance from 10:00 A.M. to 10:15 A.M. +See Note °

3 to that Court's opinion. )

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case have been comm min California tor many years

and the efiact G1 the: decision’ ct the Court of Ap-

peals in this case and of its own previous decision in

Bumb wv. United States -C. A, 9, 1961), 276 F. 2d

729, on which it relies in its decision in this case, has

had, and continues to. have, serious implications in an

enormous volume of credit transactions, both private

_ and ‘institutional, in- the State of Calitornias

California .Civil Code Section 3440.1, the California

codification of its Bulk Sales Law. requires that a no-—

tice of the intended chattel mortgage be recorded within -

a specified time and published in a specified mariner in :

a- newspaper of general circulation. It is undisputed

that both steps were carried out in the proper manner

and within the proper time. The riotice involved here-

ify is set torth verbatim in Appendix: “C™ of the. Court

of Appeals. The only question, is whether the noice

complied with the provisions of the statute with respect

to the nature of the consideration to be paid.

The Notice of Intended Mortgage stated that the

“consideration” would be “paid” on March 28, 1958.

The chattel mortgage, which 1S set forth verbatim in

Appendix “D.” provided that it was security for a prom-.

issory note on $25 000.00 and future advances of up to

$50,000.06.. It i$ undispated that $25.000.00 in cash was

not transferred on the specified date. Rather, what oc-

curred on that date was that. pursuant to the previous

‘intention of the parties. four eMting demand promissory

notes were cancelled and were simultane nasly replaced

by one new installment promissory note. That such a

transaction generates tresh consideration of a type suf-

ficient ‘to support the contracts involved and that “‘con-

sideration” can be “paid” other than in cash is thorough-

ly established by applicable state law, as, indicated, be-

Civil Code Section 3440.1 itself does. n t require that.

the “consideration” for «the chaitel mortgage be cash

or that the nature or ameunt thereof be sti tted in the

notice. California Civil Code Section 1605, enacted *in-

1872 and not,amended since, defines consideration as |

~ follows: “Any benetit conferred, or-agreed. to be con-

ferred, upon the ‘promissor by any other person, to

which. the promisser- is not lawfully entitled, or any

prejudice suffered, or agreed to be suffered, by such

person, other than such as he is at the time of can-

sent lawfully bound to sifier as an inducement to the

promissor, is a good consideration for a promise.” The

definition nowhere mentions or implies that ‘“considera-

tion” need be in the torm of money. (Section 1615

of that.Code proves that “The burden of showing a

want of consideration sufficient to support an instru-

ment lies with the party seeking to invalidate or avoid

ag |

The cancellation of existing demand notes and their -

replacement by a. new, installment. note secured by a

chattel mortgage certainly is a transaction supported

by new consideration: (Ihelan 7, Swain, 132 Cal. 387,

391: First National Bank v, Kanslow, 2 Cal. App. 2d

456. 457; Mahana v. Van Alstyne, 179 Cal. 725, 726;

Booth v. Bond; 56 Cal. App. 2d 153,. 157; Nesbitt

“Fruit Products, Inc. v. Del Monte Bez iti dcaddl acne 177: °

Cal. App. 2d 353, 361.)

The statutory requirement that the notice of inten-

tion show the date and place where the consideration.

is to be “paid” does not necessarily mean that the con-

sideration must be money, as is indicated by the dictum

°

a

in the Bumb case. It is well established in California

that payment may, take place by the delivery and -ac- *

-ceptance vt other things of value instead of money.

(Sousa v. First Caligornia Co., 11 Cal. App. 2d 534,

540; Strain, v. Security Title Insurance Co., 124 Cal.

App. 2d-195, 200.) “i

Thus it would seem that there was “consideration”,

; that it, was “paid” within ‘the meaning of the’ statute

and that the notice stating when and where the “con-

sideration” would be “paid” tully complied with the

statute. However, in this regard the upinion or the

Court of Appeals, states as fullows:

“The -notice of intended mortgage stated that

_ the consideration would be paid on March 28, 1958.

However, in tact the $25,00U was not transferred

on the specitied date. “The bankrupt did not re-

ceive $25,000 in cash on that day; rather, it re-

ao ~——

e

‘ ceived only $10,000. in cash and the return of four

unsecured notes totaling $25,000. Thus, the con-

sideration Was not paid in the manner and mode

set out in the notice of intended chattel mortgage.”’

We submit that this interpretation of the Notice of

Intended Mortgage in this case and of the decision in

Bumb wv. United States, supra, as applied to this case

by the Court of Appeals are completely inconsistent with

the plain language contained in that Notice and with

the law of the: State of California, and that those in-

terpretations- do great. violence to the rights of those

engaged in security transactions in California and per-

haps’ elsew here.

"+ The portion of its decision in Bumb wv. United States,

supra, upon which the Court of Appeals relied in its

opinion in this case reads as follows:

—10—-—=—si_s.

“Appellee [the chattel mortgagee] contends that

the payment of the consideration was. substantially

-in accordance with the recorded notice. We can-

not agree with such conterition. The notice stated |

that the consideration for said chattel mortgage is

“to be paid on the 21st day of November, 1956.

¢ The-undisputed: fact is that only 58% -per cent of

the consideration to be paid was. paid on that date.

2114 per cent of the consideration was paid 37.

days later by government warrant made payable

jointly-to the mortgagor and one Of its creditors.

20 per cent of the consideration was paid 44 days

late. Appellee argues that,the recorded notice did

‘not represent that the entire $10,000 would be paid.

on November 21, 1956, nor did it- specify the kind

or amount of consideration to be paid, It is un-

disputed. that the ‘consideration to be paid for the

chattel mortgage was’$10,000. The notice stated

that the consideration would be paid on the 21st

_day of November, 1956. The only reasonable in-

terpretation which can be placed on the notice is

that the eatire consideration to be paid would be

paid in lawful money of the United States on

November 21,.1956. 4f the- consideration to be

paid was to be paid in installments the notice —

‘should have so. stated, and if the consideration

_.Was to be other than lawful money of the United

‘States the notice should likewise have so stated.”

Obviously, in the Bimb- case the requirements of

Section 3440.1 were not met, and the -spirit of the law,

which %as Ynterided to protect creditors of the chattel -

mortgagor, as well as its letter. weré violated.’ A

_ simple statement to that effect would have disposed of

that phase of the case. We submit that the statement

“so

vv

oi.

in the opinion that * ‘the only reasonable interpretation

which can be placed on’ the gg tice is that the entire

consideration to be paid would be paid-in lawful money

of the United States on November 21,°1956" is based

only on gn interpretation of the ‘specific facts of the

Bumb case, or that it is a pure diction, since the notice

itself contained no such statement; Also, the statement

in the opinion that “If the consideration tobe paid was

to be paid in installments, the notice | should have so

stated and if the consideration Was to be other than

lawful money of the United States the notice should

‘likewise have so stated” is clearly dictum. Whatever

that notice stated. it was clear that it was ‘not fol-

lowed and any statements in the opinion of the Court

of Appeals: as to what it should have pravided in or-

der to be valid were necessarily dictum. Finally, and_

most importantly, Section 3440.1 does “not require a

statement “in the notice describing the nature of the

consideration. for ‘the chattel: mortgage. All that is

required is that the notice shows “the date and place

where the. purchase price [in the case of a sale] or

consideration ‘is to be paid”. This clear language-alone——

would make-the statement in ‘the Bumb case completely ;

inconsistent with the governing state law. The Bumb

case was properly decidtd on its ofvn facts. which clear-,

ly indicate that the consideration for the loan secured

by the: chattel mortgage therein did not pass on the

day specified, but was delivered over a period Of time |

which commenced with that date. Also, in the Bumb

case the chattel. mortgagé was recorded. prematurely.

However, to extend the eftect of the decision therein:

far heyond the scope of the facts of the case would,

‘as we have previously urged. do violence to the govern-

ing state law.’

ay _ a

Calttorela Civil Code Section, 3440.1 should not be

construed so as to abrogate the Weherally accepted defi-

nition of “consideration”. Nor should the statute

be modif ied or supplemented by judicial decision adding

requirements to the notice which clearly are not con-

tained in the statute, Mortgagees and’ secured creditors

are as much entitled to the. protection of state law as

are general creditors of the bankrupt: Violence to es-

tablished state law should not be permitted for or against

cither group.’ , —

The growing tendeney of the Federal appellate courts

to limit or disapprove interpretation of state law such

as.California Civil Code Section 3440.1 giving trustees

in bankruptcy an opp: tunity to upset security transac-

tions such as those involved herein eyen when they

were carried out in conformity with accepted local prac “

tice is indicated in the recent. decision of, this Court

in. Lewis, Trustee tv 1 Baukruptéy @. 7. Manufacturers Nae

tional Bank of Detrcit; 364 U. S. 603. which dis: ipproves

~ the troublesome doctrine of Pistia ev. Harvey (C. A.

2, N. Y.). 215 F. 2d 57.

We earnestly submit that the interests not only of

the petitioner herein but of parties te finaneial trans-

actions ef this-type in Califorhig, and because of the

“In its opinion the Court of Apnetls, taade no reference to the”

erile of the case of Stewart ?. Teasurs i 12 Cal Arp 24 652,

which was citer and lise assed in the briefs presented to it. That

case. holds that where A chattel mertyare is giver! te secure a

loan already made the provisions of the California Bulk Sales

Law do net aply. (12 Cal. App. 24 652, 687-058 5. Therefore.

even i7th ere had heen ne fresh consideration for the new promiis-

sorv/nete secure! by the «hattel mortgage. so. that “the con-

sideration” did’not pass off the date apecified? in the Notice of

Intention, the transaction would still be a valid one and the

chattel mortgage should have been upheld.

| Ae gee

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7

nationwide pfevalence of bulk sales laws, in many

other states. jiistify the granting of a Writ of Cer-

tiorari. herein and a review of the decision of the Court

below, so that this critical question can be resolved.

Wherefore, petitioner prays that a Writ of Certiorari

directed to the United States Court of Appeals for the

Ninth Circuit: ‘be granted. ,

Respectfully submitted,

By J? Rovert Arkusn,

Basic Industries, lic., Petitioner,

*

Counsel for [’etitioner. __

i , enon

¥

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9

* appellant.

_» APPENDIX “A.”

— of the United States Court of Appeals for

-. the Ninth Circuit.

Basic Tous Industries, Inc., Appellant, vs. “C. Doug:

las Wikle, Trustee. Appellee. Ne. 17,204, Dec. 6, 1901.

Appeal from the United States District Court for the

Seuthern District. of = ‘alifornia, C ‘entral Division.

Before: Barnes and Hamilin, Circuit Judges, and

_ Solomon, District Judge.

Hamlin, C ircuit Judge:

Basi¢ Tool Industries. Inc. appellant herein, appeals

to this court from ‘an order of the United States District

Court for the Southern District of California, Central

Division, affirming an order of a referee in bankruptcy

which determined that appellgnt’s chattel mortgage was

void as against the trustee in bankruptcy. This court

has jurisdiction under the provisions of IL U.S.C...

§47 and 28 U.S.C.A. § 1291.

_ The facts in “the case are aad ‘sulieenileih. On

August 22, 1938, a petition m bankruptcy” was tiled

against Jet Air-Age. Inc.. hereinafter. ¢ alled” ‘the bank-

rupt. Prior to that time the bankrupt was engaged in

the ‘machine shop business in Gardena, ¢ Californias

Among the bankrupt's assets: taken into. possession by

the trustee in bankruptey Were various items of, ma-

chinery, equipment. fixtures, ete., which were the sub-

ject of and described in a chattel mortgage in favor of

%>

a a.

During the period from Fekruary 19, 1958, to August

5, 1958, appellant made various loans to the bankrupt

‘at the times and in the amounts set out in the margin.’

Certain of the referee's findings of fact and cenclu-

“sions of law adopted by the district court were as fol-

lows:

Ne '

“Phe advanees made pri@ to March 28; 1958, ,

as above referred to, were originally evidenced by

demand notes executed: by: the bapkrupt: The chat-

tel mortgage transaction herein referred to was con- .

summated by: means of an escrow held at the office

of Harold Easton, 416 West Eighth Street, Los

Angeles, California. As part of ‘the escrow trans-

action, the bankrupt’s, new. note dated March 28,

1958, in the sum of $25,000.00, was substituted for

-its previous notes representing the advances of Feb-

ruary 19, 1958, February 20, 1958, March 7, 1958,

and March 14, 1958, which said advances also to-

taled $25,000.00. It was never the intention Of the

parties to have’ the chattel mortgage secure the ad-

vance of March 21, 1958. Except for said ad-

-vance of March-21, 1958, it was the intention of

the parties that said chattel niortgage was to secure

—_-—-_-_-ee

1Dates ~ Amounts

February 19, 1958 $ 500.00

February 20, 1958 500.00

March 7, 1958 500.00

March 14, 1958 23,500.00 - .

March 21, 1958 . 5,000.00

March 28, 1958 © 5,000.00

March 28, 1958 5,000.00

June 9, 1958 10,000.00

°° June 12, 1958 4700.00 -

“ea Jane DD See - 3,300.00 .

August 5, 1958 3,000.00

- all advances made by Basic Tool Industries, Ine.

to the bankrupt. but net to exceed the ma€xinnam in

debtedness as set forth in the said chattel me rte.

eg . “VE: | |

“A= notice of intended chattel mortgage, as re-

quired by Section 3440.1° of the California Civil

Cotle, was. published and recorded within the times

set -forth in-said section. Said notice recited that

the mortgage would be delivered ‘and the consid- _

eration therefdr. paid at 10:00 o'clock A.M..on the

28th day of March, 1958, at the office of Harold

Easton at 416 West Kighth Street in the City of

Los Angeles, County of Los Angeles, State! Cali-

fornia.” As above found. with the exception of a

total of $10,000.00 advanced to the bankrupt on

“March 28, 1958, all of the advances for which the

chattel mortgage was security were made pric rato

and after March 28, 1938, The total of $10,000.00

advanced on March 28, 1958, was delivered over

e 6b a

* £T he pertinent provisions of C alifornia Civil Code $3440.1 are :,

“:.. [The sale. ‘transfer, assignment or mortgage of the fix-

tures of store equipment of a... machinist . . . is conclusively

.

presumed fraudulent and void as agaist existing creditors of the

_.. mortgagor, unless before the consummation of the... mort.

gage, .. - the mortgagur .°. . or, mortgagee does all of the fol-

lowing : . Phen or , :

La) Records at Teast ten ‘lays before the consummation of

the .. . mortgage ... . a notice of the intended . . . mortgage

which states the name and address ob the. intended .. .

Inortgagor and the nanicland addres-e- of the imtended .. .

mortgagee. The notice shall contain a gefieral statement of

the character .of the merchandise or property intended to be

sold, assigned, tran-ferred or 9 wtgaged, and show the date :

and place: here the purchase price of consideration is to be

paid.”

‘

Q

the. on at ieee: JOA5 or 10:30

A.M. on. March 28, 1958, and not at 19:00 A. a.

as set forth | in the notice?

a

~ “Conclusions of Law

“The consideration uf the chattel mortgage. exe-,

cuted by the¢bankrupt in favor v1 Basic ‘Tool In-

dustries, Inc. was the advances Jr loans-made by

said Basic Tool Jndustries; Inc. over a period of’

” time commencing February 19, 1958 and ending

August 5, 1958., There was a failure, therefore, tu

comply with the notice requirements. vi Section -

3440.1 of the California -Civil Code. Accordingly,

said chattel mortgage is invalid as against creditors

of the bankrupt whose clainis arose prior to recor-

dation of the said, mortgage on March 28, 1958,

under said Section 3440.1." y

amy Section 70e of the Bankruptcy Act,’ 1 U.S.C.A.

§110e, provides in part:

“(1) A transfer made or gi fered or obligation

incurred by a debtor adjudged a bankrupt under

this title which, under any Federal or State law

applicable theretd, is: fraudulent as- against or void-

able for any other reason by any creditor of the

debtor, having a claim) provable under this. title,

shall be null and void as against the, trustee of such

“debtor.” »

od

_Ttwas undisputed that there were a number of the bank- “

rupt’s creditors who had provable clainis w hich arose

‘We do-not hase our decision on the claimed variance (from

10 am. to 10:15 am.*er 10:30 a.m.) in tine of delivery of the

$10,000. sd

“day only. a. portion—S5. 850—of the considerate

paid. The balance was paid in-two installme nty 82.150

| inyalid under $70¢ df the I ankruptey Net. 1

i

before March 2x. 1958, the date of the filing of the pe-

tition’ inghankruptey-+ | ‘Furthermore. failare’ to comply

with the “bulk sales” notice provisions of section 3440.1

of the ¢ ‘alifornia Civil Code’ renders a chattel thortgage

invalid against creditors of the mx rigaffor whose claims

arose befure recordation, Bumb v. United States, 275

F. 2d 729 (9th Cir. 1900); Mitchell v. S&teler, 84 Cal.

App. 2d 716, 191 P. 2d 323 (1948). Cf. In re Sassard

& Kimball, 45 F. 2d 49 (Oth Cir.). rez’ ‘d sub, nom.

|“ Mooke 1 v. “Bay, 284 U:S. 4 (1931). ‘Thus, the referee:

on the basis of his findings. goneluded that the chattel

mortgage was invalid as against the trustee in bank-

ruptcy ander the provisions vf section 70¢ ot the Bank

ruptcy Act, 11 US.C2A, § 110¢."

In_ holding the chattel mortgage in question invalid.

the referee and the district court apparently relied ups

the decision of this court in Bysi , United States,

supra. The facts in that case established that there sae

a .note executed for $10,000.00 secured by a chattel

mortgage. The notice of intended ni im iaige under see

tion 3440.1 prov ided that the conside ration for the mort

gage would be Rid on November 21. 1956, On 1

—_—_—_— ; .

‘See note 2 supra. ai

mortenge Wie

OS. COARSE,

however, the appellee does not urge affirmat af this conelustan

in view of the Supreme Court's recent dechyn inet wis Mann

facturers National Bauk of Detroit, M4 JES. O83 VOLY,

SThe referee also concluded that, the chy itte

Wn.

. . e 5 Pia

° s F .

on December’ 28, ‘1956, and $2,000.on January 4, 1957.

In holding that the chattel mortgage’ was invalid be-

cause there was a substantial deviation in the manner of

payment of the consideration trom ‘the mode set torth in

the notice of intended chattel morgage, the court said:

“The object. of the statute is: (1) -to furnish

creditors ot ‘he intended avortgagor the period of

at least ten-days within which -to levy, attachment or

execution on the property to be mortgaged, and (2)

to garnish or lev on the proceeds of ‘the mortgage

in-the event provision is not made for the payment

ot the claims presented. | fi

‘ Appellee contends that the payment of t the con-

sider ation was substantially in accordance with the.

recorded: notice. We cannot agree with such con-

tention. The notice statgd that the consideration

for said chattel mortgage is to be paid ‘on the 21st

“day Of November, 1056. -’Fhe undisputed fact is

‘that only 38'3 per cent of the consideration. to

be paid was paid-on that date. 21's per cent of

the consideration was paid 37 days later by\ gov-

ermment warrant made payable jointly to. the fnort-

gagor and one of its creditors. 20 per cent. of

the consideration was paid +4 days late. . Appellge

argues that*the recorded notice did: not represent

that the entire $10,000 would be paid on November:

21, 1956, nor did it specify the kind or amount of

consideration to* be paid. It is undisputed that .

the ‘consideration to be paid for the chattel

mortgage was $10,000. The notice, stated that

the: consideration would be paid on the 21st day

of November. 1956. -The.only reasynable interpre-

- tation which can be placed‘on thé notice is that the |

«

ane {

entire consideration to be paid oak “be mre in law-

ful money of the U nited States on November 41;

1956. If the consideration to be paid was to. be

paid in inst: UIments the notice should Rave. so: sti ited,

cand if the ~ consideration was to be other than

lawful money of the United ‘States the tice should

likewise have so stated.’ "

¢.

The facts in the instant case are strikingly similar to

~ .

‘those in the Buimb case. Here the chattel mortgage.

provided, that it was security. for‘a promissory note of

$25,000 and future advances of up to $50,000. The

notice of intended mortgage stated that the consideration |

would be paid on March 28, 1958. However, in fact

the $25,000 was fot transferred on the specified date.

The bankrupt did not receive’ $25,000 in cash on that

day; rather. it received: only $10,000 in cash and the re-

turn of four unsecured notes totaling $25,000. Thus.

the consideration was not paid in the manner and mode

set out in the notice of intended chattel mortgage.

Appellant further contends that the chattel mortgage,

was ‘valid as to the $10,000 transferred to the bankrupt

on the date specitied for the transfer of the considera-

tion of the mortgage in the notice of intended chattel

mortgage. This contention is also disposed of. by the’

Bumb case. In Bumb 38'3" of the $10,000 consider-

ation was transferred in accordance with: the notice of

¥ intended chattel mortgage; yet the mortgage-was -held

wholly void-rather. than valid as to $5.8502 , Similarly

6276 V2 at 734-735.

a . “

in this case we’ hold the mortgage Ww holly void rather

than valid as to. the $10,000.

The purpose of section 3440.1 is to protect creditors.

Bumb.v. United States, supra; Jeffery v. Volberg, 159

‘Cal. App. 2d 815, 324 P. 2d 964 (1958). In accordance

with the holding in Buaab v. United States, supra, We |

hold that there was not a proper compliance . with the

provisions of ‘section 3440. a

“an

The judgment of the district court is affirmed. -

(Endorsed) Opinion Filed Dee. 6, 1961, +. -

Frank H. Schmid, Clerk.

APPENDIX. “B.”

Judgment.

Basic Tool Industries, Inc., Appellant. vs. C. Douglas

Wikle, Trustee. Appellee. ‘No. 17264.

Appeal from the United States District Court for the’

Southern District of California, Central Division.

This Cause came on to be heard gn the Transcript of

the Record from the United States District Court for

the Southern District of California, Central Division

and Was duly submitted.

On Consideration Whereoi, It is now here ordered

and adjudged by this Cr .t, that the ..0000..... Glgadcincunasbiaanel

judgmignt of the said District Court Cause be. and here-

by is Picci. < |

i . J : .

. Filed and entered Dec. 6, 1961.

WK

9 i

APPENDIX —

Notice of Intended Mortgage Under bition. 3440

Civil Code of the State of California.

Notice is Hereby Given:

Tht Jet Air-Age, Inc., Mortgagur, whose address

is 15340 West 133th Street, in the City of Gardena,

County of Los Angeles, State California, intends to

mortgage to Basic Toul ose Se Inc., _Mortgagee,

whose address is 14439 South Avalon Bivd., in the City

' of Gardena, County of Los Angeles, State of Calitor-

Ima, the following described personal property, to-wit:

All, machinery and equipment of mivrtgagor located

at 1559 West 135th Street, Gardena, Caliternia of a cere

taim machine ‘shop business known as Jet Air-Age, Inc.,

and located at 1559 West .135fh Street, in the City of

Gardena, County of Los Angeles, State of California,

and that an executed mortgage of the sameewill be de-

livered and the-consideration thérefor paid at 10 o'clock

A.M., on the 28th day of March, 1958, at the office ot

Harold Easton at 416 West Sth Street inthe City of |

Los Angeles, County « | Los. Angeles, State of Calli-

fornia. ;

Dated March 15, 1958.

Jet Air-Age, Inc.

By Lee C. Smith, Pres.

Mortgagor.

Basic Tool Industries; Inc.

By Robert Gene-Lucas, Secy. | ~—*

Mortgagee, ie

1I—O/S-5688 : ¢

Pub. Mar. 21, “58—1 Fri. piety 2

[Endorsed]: Filed Oct. 26, 1960.

.

APPENDIX “D.”

Mortgage of Chattels. sce

This Mortgage, made this 28th day of March, 1958

by Jet Air-Age, Inc., a California corporatidén of Gar-

dena County of Los- Angeles, State of Caliiornia, Mort-

gagor, to Basic Tool Industries, Inc., a California cor-

poration of Courtty of Los. Angeles, State of California,

Mortgageé, Witnesseth:. That the Mortgagor mort-

“‘gage¢ to the Mortgagee al! that certain personal prop-

erty situated and described as foilows, to-wit:

All machinery and equipment’ of mortgagor currently

located at 1559 West 135th Street, Gardena, California,

and-more particularly described in the inventory at-

‘tached ‘hereto; marked Exhibit “A” and made a part

hereof. — ae

Document No. ...2... recorded at Request of: Record--

ing requested by Mortgagees Mar. 28, 2:31 P.M. [38.°

Official Records Ray E. Lee, Recorder, Los Angeles

County, Calif.

as security ior the payment of Mertgagee of the sum

of Twenty-five thousand dojlars $23.000.00 Dollars ac-

_cording to the terms and conditions of a certain Prom-

issory Note? of even date herewith substantially in ferm

ot ‘Exhibit “B" attached hereto and made a part hereot

[Paragraph Omitted. |

This mortgage also -secures: (a) any and all -re-

newdls of said promissory note: (b) repayment of

all sums and amounts that may be necessarily advanced

or.expended by Mortgagee for the maintenance or pres-

ervation of the mortgaged property, or any part. there-

of: (@) te the maximum extent and amount of Fifty

Thousand Dollars ($50,000.00), any and all other sums.

—i—.

. that may. hereafter be advanced by Mertgagee to on Te "

the benefit of Mortgagor, any and all other expenditures

that may hereatter be made by Mort agee pursuant to

the pryvisions hereo! or for the benesit of or at the in-

stance of Mortgagor. and any and all other jndebted-

nesses and obligations of Mortgagor to Mortgagee that

may hereafter be incurred. / \

Said mortgagor. promises - that he will, during the

contin: aance hereof, keep the mortgaged property In gohd

condition and repair; and further that he will not re-

move, nor permit to be removed, any part of said: ‘prop

erty: irom the above premises w ithout the written con-

sent, of the Mortgagee first had ‘and obtained: and fur

ther that he will provide, maintain and deliver to. Mort-

_gagee satisfactory fire and other insurance policies cov-

ering said property in amounts and companies satistac-

tory to. Mortgagee and with loss, if big payable to the

Mortgagee, as his interest may appe

The said mortgagor hereby declares and warrants to

theemortgagee that he is the absolute and sole owner,

-and is in possession, of all said mortgaged property.

and that.the same is free and clear of all lines, encum-

brances and adverse claims.

le °

It is further agreed that.’ if said mortgagor shall

fail to make payment-of any part of the principal or

interest as provided in said promissory note at the time

and in the manner therein specified, or if any breach be

made of ‘any obligation or promise of the said © mort-

gagor -herein €ontained or sécured herchy, then the

whole principal sum unpaid on said promissory note, with

interest acerued thereon. shall immediately become. due

and payable, at ‘the option of mortgagée: and the said

-

— 12-4 :

mortgage may at once: pre ceed hs ) foreclosure this méort-

gage according to law; or the said mortgagee may, at

his option, and he is hereby empowered sv to do, enter

upon the premises where the said mortgaged property

may be and take possession therest, and remove, sell

and dispose of the same, and from the proceeds of -sale

_Tetain all costs and-charges incurred by Him in the tak-"

ing or sale of sfid property, [illegible] Attorney's fees

thereby incurred, also, he may take all sums due him on

said promissory [illegible] hereof, including reasonable

attorney’s fees; and any surplus of such proceeds re-

_ main- [illegible] mortgagor. :

In this Mortgage. whenever the context so requires,

the masculine gender includes the feminine and/or neu-

ter, and the singular number the plural. ° .

“In Witness W hereof, the Mortgagor has, executed

this instrument. :

[ seal ]

. JET AIR-AGE, INC.

By LEE‘C. SMITH. Pres.

MRs. LEE C. SMITH, S¢e,

— On March 14, 1938 the undersigned. a Ni tary Public

in and tor said Goenty and personally appeared Lee C.

Smith known to me to be the President. and Mrs. Lee

C. Smith. known to me to be Secretary of a corperation

that executed the within Anstrinent. knewn te me to

he a pers aywhy_executed the within Instrument on be-

* half cof the Corporation [illegible] and acknowledged

_to me that such Corporation executed the within Instru-

ment prirsuant to its bylaws or a resolution of its [ eg.

ible |. directors. |

a

é ‘

Witness my hand and ot ticial seal,

[ Seal | fens ae

SANFORD? AN COMIN,

uae Notary Public in and fer said County

aud Styte. 2 , F

My Commission Expires Feb. 28, 1939.

Ti Nir Revered.

When Recorded, Please Marl te Hargld Jeasten, 41t

West Sth Street. feos Angeles 1400 iiornia.

7

“se P. Ore...

“

-