U.S. Supreme Court Rock Island Plow Co. v. Reardon, 222 U.S. 354 (1912)
Rock Island Plow Company v. Reardon
Submitted December 11, 1911
Decided January 9, 1912
222 U.S. 354
APPEAL FROM THE CIRCUIT COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
A bankrupt, in Illinois, within a few days of filing a petition in voluntary bankruptcy, confessed judgments upon which executions were issued and returned unsatisfied but no actual levy was made; thereafter, and before filing the petition, he transferred goods in his possession to the vendor thereof, who claimed they had been delivered on conditional sales; the trustee began subrogation proceedings to preserve the liens of the judgments for the benefit of the estate, to which the judgment creditors assented, and also commenced proceedings to compel redelivery of the goods transferred on ground that lien of judgments inured to estate; the trustee had also claimed a right to recover the goods on the ground of unlawful preference; held that
Under the law of Illinois, delivery to the sheriff of the executions on the judgments operated without levy to create liens upon the property of the judgment debtor within the county.
Such liens were paramount to rights in the property possessed by the vendor under contracts of conditional sale.
The effect of the subrogation order was to render inoperative as a preference in favor of the judgment creditors the liens obtained through the executions and to preserve such liens as of the date of filing the petition for the benefit of the estate. First National Bank v. Staake, 202 U. S. 141 .
Liens of execution creditors, as they exist when a petition of involuntary bankruptcy is filed, cannot be subsequently destroyed by acts of the creditors to the prejudice of the estate.
As the holder of the goods had not been prejudiced by the proceedings to recover for unlawful preference, the trustee was not barred from asserting the lien of the judgments on the same goods for the benefit of the estate.
168 F. 654 affirmed.
Whether the plow company or Reardon, as trustee of the bankrupt estate of Frank Brown, have the better right to certain personal property delivered by Brown to the plow company is the question to be decided on this record.
The facts pertinent to the controversy are these: Brown was a merchant and engaged in business at Pekin, Tazewell County, Illinois. On November 13, 1907, he confessed judgment for $247.15 and $400 and costs in favor of a creditor, the Peoria Cordage Company, a corporation, and on the same day an execution was issued, which was received and indorsed by the sheriff of Tazewell County on the following day. On November 23, 1907, Brown confessed judgment in favor of another creditor, the D. M. Sechler Carriage Company, a corporation, for the sum of $282.25 and $400, with costs, and on the same day execution issued, and on the next day was received and indorsed by the sheriff of Tazewell County. While these executions were outstanding and unsatisfied, Brown, on November 25, 1907, delivered merchandise, consisting of gang plows, cultivators, and other farm implements of the value of $500, to the Rock Island Company, appellant, and as the result of the transaction an indebtedness of Brown to the plow company of $406 was extinguished. When the goods were delivered to the plow company, Brown was insolvent, and the plow company had reason to believe that such was the fact. Two days after the delivery of the property to the plow company, Brown filed a petition in voluntary bankruptcy, and Reardon was subsequently qualified as trustee of the bankrupt estate.
Seeking to avail of the provisions of § 67, paragraphs c and f of the Bankruptcy Act,1 the trustee, on January 21, 1908, filed with the referee a petition setting forth the obtaining of the judgments by the Sechler and cordage companies heretofore referred to, that the executions issued on those judgments were liens from the date of receipt by the sheriff on all the real and personal property
of the bankrupt located in Tazewell County, Illinois, and continued to be liens down to the date of the filing of the petition in bankruptcy, and prayed that the liens of said executions might be declared null and void as to the Sechler and cordage companies, but might be preserved served for the benefit of the estate in bankruptcy. The creditors just named entered their appearance and consented that the prayer of the petition be granted, and an order was entered on the date when the petition was filed, granting the relief sought.
Three days after the entry of the subrogation order, the trustee commenced this litigation by filing a bill of complaint on the chancery side of the District Court of the United States, Southern District of Illinois, Northern Division, the same court in which the bankruptcy proceedings were pending. The petition assailed the transfer and delivery of property by Brown to the plow company on November 25, 1907, heretofore referred to, as an unlawful preference. The court was asked to decree a surrender of the property to the trustee, or payment of its value. On March 27, 1908, the plow company filed its plea, and therein in substance contended that the assailed transaction was not an unlawful preference. It averred that it had previously delivered the property to Brown, under and by virtue of the terms of certain written contracts, annexed as exhibits to the plea; that the title of such property "always was and remained in" the plow company; and, that it "lawfully took and repossessed itself" of the property by reason of the failure of Brown to pay for the same according to the contracts. Shortly after, the trustee, by leave, filed an amendment to his bill of complaint. The amendment consisted in detailing the facts as to the obtaining of the judgments of the Sechler and cordage companies heretofore referred to, and an issue of executions on the judgments prior to the transfer of Brown to the plow company, and that the executions
were outstanding at the time of the filing of the petition in bankruptcy. The proceedings before the referee culminating in the order preserving the liens of the judgments for the benefit of the bankrupt estate were next set forth, and it was claimed that the liens thereby preserved were superior to any claim which the plow company had to the goods in controversy. In a plea to the amended bill, the plow company reiterated the facts upon which it based the claim that, in receiving the goods from Brown, it merely took possession of its own property, and had not obtained an unlawful preference. It further sets forth that, when it received the goods, no levy had been made under either of the executions issued upon the judgments obtained by the Sechler and cordage companies, and that, in consequence, it had the superior right to the goods. Want of notice of the subrogation proceedings and the consequent invalidity of the order of subrogation was also averred. It was in addition averred that the judgment in favor of the cordage company was not a valid lien on January 21, 1908, the date when the order of subrogation was made, because, prior thereto, the execution had been returned by the sheriff and filed and docketed in the court which had issued the same. Furthermore, it was averred that the execution on the Sechler judgment had been returned by the sheriff with an indorsement, "no property found," and was filed on February 22, 1908, in the court from which it had issued, and that rights based upon the issue of such execution could not be originated thereafter, viz., on April 16, 1908, when the amended bill was filed.
The cause was heard upon the sufficiency of the plea just reviewed, and the plea was held sufficient. The trustee elected not to file a reply to the plea, and a decree was thereupon entered dismissing the bill. On appeal, the decree of dismissal was reversed by the circuit court of appeals (168 Fed. 654), and this appeal was then taken.
MR. CHIEF JUSTICE WHITE, after making the foregoing statement, delivered the opinion of the Court:
The only question arising for decision is whether the facts set up in the plea of the plow company are sufficient to exempt that company from accountability to the trustee for receiving a preference within the terms of the Bankrupt Act. The consideration which this question received in the opinion delivered by the circuit court of appeals makes unnecessary and elaborate review of the subject.
We assume, for the sake of argument, as did the circuit court of appeals, that the contracts by virtue of which the plow company claimed it retook possession of the property in question were conditional sale contracts, whereby the plow company retained in itself the title and right of possession of its goods until paid for by Brown, and that, by virtue of such contracts, the taking or retaking of the property in question was valid as between the plow company and the bankrupt. The inquiry, then, is whether the contracts and the possession taken thereunder of the property in controversy by the plow company are operative to bar the rights asserted by the trustee in and by force of the subrogation proceedings. The claim of the trustee was in substance (1) that delivery to the sheriff of executions upon the Sechler and cordage judgments operated without levy to create liens upon the real and personal property of Brown, the judgment debtor, within the county; (2) that such liens were paramount to rights in the property possessed by a vendor under a contract of conditional sale; and (3) that the effect of the subrogation order was to render inoperative as a preference the liens obtained by the judgment creditors through their executions, and to preserve such liens as of the date of the filing of the proceedings in voluntary bankruptcy for the benefit of the estate in bankruptcy.
That the circuit court of appeals rightly held the affirmative of these three propositions we entertain no doubt. Upon the first two propositions, that court said:
"As the law of Illinois must govern the answer to both questions, and the rule there is well settled, as we believe, for an affirmative answer to each, no difficulty appears in the solution. Paragraph 9 of chapter 77, Rev.St.Ill. 1874 (2 Starr & C. Ann.St. 1896, p. 2336) provides:"
"No execution shall bind the goods and chattels of the person against whom it is issued until it is delivered to the sheriff or other proper officer to be executed."
"This is a modification of the rule at common law which created a lien from the issuance of the writ, and its effect to create a lien in favor of the execution creditor is recognized in numerous decisions noted in Starr & C. Ann.St., supra. See Frink v. Pratt, 130 Ill. 327, one of the citations in appellee's brief. The cases cited contra, declaratory of the rule that an officer receiving the execution has 'no interest in the property itself' to maintain an action therefor 'until after a levy,' do not touch the present inquiry of lien in favor of the execution creditor, and are plainly inapplicable. Upon the second question, it is stated in Gilbert v. National Cash Register Co., 176 Ill. 288, 296, that 'whatever may be the rule in other jurisdictions,' this rule is established in Illinois:"
"If a person agrees to sell to another a chattel on condition that the price shall be paid within a certain time, retaining the title in himself in the meantime, and delivers the chattel to the vendee so as to clothe him with an apparent ownership, a bona fide purchaser or execution creditor of the latter is entitled to protection as against the claim of the original vendor."
The authorities there cited for such rule are deemed sufficient reference, and we remark that no departure appears from the doctrine thus stated in any of the Illinois cases called to our attention.
It is significant that, in the argument at bar, counsel for the plow company make no attempt to point out wherein the authorities cited by the court are not applicable and authoritative on the propositions which they were cited as supporting, and, indeed, entirely omit any reference to them.
The decision in First National Bank v. Staake, 202 U. S. 141 , 202 U. S. 146 , is authoritative upon the last proposition. As the executions issued upon the judgments, which executions were held by the sheriffs for levy, operated to create liens upon the property in question, then in the possession of Brown, although held under conditional sale contracts, and such liens were paramount to the rights of the vendor, the plow company, it is manifest that the right of the judgment creditors to resort to such property in satisfaction of their liens could not be destroyed by a mere transfer of possession from one party to the contract to the other party thereto. It also follows in reason, we think, that the liens of the execution creditors in the property as they existed when the petition in involuntary bankruptcy was filed could not be subsequently destroyed by the acts of the creditors, the third parties, to the prejudice of the estate, and that if the rights of the bankrupt estate could be lost by the laches of the trustee, the record presents no evidence of such laches. The circumstance that the trustee, in ignorance, perhaps, of the existence of the conditional sale contracts, first based the right to relief solely upon the claim that an unlawful preference was created through the payment by means of the transfer made by Brown, when insolvent, of an indebtedness to the plow company, did not operate to the prejudice of the plow company, and was plainly insufficient to bar the trustee from asserting an additional right to the relief prayed, viz., the right growing out of the subrogation order made prior to the commencement of the litigation.