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In re Dennis Mitchell Industries Inc.

decided: December 18, 1969.


Reargued November 5, 1969

Kalodner, Forman and Stahl, Circuit Judges. On Reargument: Hastie, Chief Judge, and Kalodner, Forman, Freedman, Seitz, Aldisert, Stahl and Adams, Circuit Judges.

Author: Stahl


STAHL, Circuit Judge.

This is an appeal from a decision of the district court*fn1 which affirmed an order of the referee in bankruptcy granting seller's reclamation petition for equipment sold to the bankrupt, Dennis Mitchell Industries, Inc. The facts relevant to this controversy are as follows.

Factual Background

The bankrupt, a manufacturer and distributor of metal and plastic products, had its principal place of business in Philadelphia. It also had plants in Woodbury, New Jersey, and Millsboro, Delaware. Pursuant to a conditional sales agreement dated May 20, 1965, Mitchell purchased two hydraulic cutting machines from Herman Schwabe, Inc., appellee. Schwabe's plant is in Brooklyn, New York, and the contract was entered into there. The contract provided that the machines were to be kept in Mitchell's Philadelphia plant until they had been fully paid for and that they could not be placed elsewhere without Schwabe's prior consent.

On May 21, 1965, Schwabe filed a financing statement in the Philadelphia Prothonotary's Office, and on May 24, 1965, in Harrisburg, Pennsylvania, in the office of the Secretary of the Commonwealth.

At or about the time of the purchase, Mitchell had the machines picked up by its truck at Schwabe's Brooklyn location and, despite the contract provisions,*fn2 took them to its plant in Woodbury, New Jersey. The machinery was used exclusively in that plant and was never physically in Pennsylvania. Appellee Schwabe never recorded its security interest in New Jersey.

On August 3, 1966, Mitchell filed a voluntary petition for an arrangement under Chapter XI of the Bankruptcy Act and co-receivers were appointed to take charge of its property. On April 5, 1967, Mitchell was adjudicated a bankrupt with the same receivers continuing to serve. At a meeting of the creditors on August 9, 1967, one of the co-receivers was appointed trustee.

In the meantime, appellee Schwabe had filed a reclamation petition*fn3 for the machinery on April 18, 1967. The receivers, in compliance with an order from the referee directing them to file an answer to the petition,*fn4 averred that Schwabe had failed to comply with the recording provisions of the Uniform Commercial Code of New Jersey, where the property was located. A hearing was held before the referee on September 12, 1967, and on October 25, 1967, the referee granted Schwabe's reclamation petition.*fn5

On June 9, 1967, while Schwabe's petition was pending, a special meeting of the creditors was held at which time the receivers' petition to sell their right, title and interest in all the bankrupt's assets, except cash, subject to liens and claims, to appellant Armstrong, a secured creditor of the bankrupt,*fn6 was granted by an order entered by the referee. The hydraulic cutting machines were included in the sale.

The dispute, then, is actually between the seller, Schwabe, and appellant, Armstrong, with the latter contending that Schwabe's security interest was unperfected and hence subordinate to the rights of the trustee under § 70(c) of the Bankruptcy Act, 11 U.S.C.A. § 110(c) (Supp.1969).*fn7 Armstrong contends, therefore, that it succeeds to the rights of the trustee and takes the property free of Schwabe's lien.

Appellant Armstrong argued before the referee that since the equipment had remained continuously in the bankrupt Mitchell's Woodbury plant, New Jersey law governed the perfection of Schwabe's security interest, and Schwabe should have filed a financing statement in that state in order to perfect its security interest. Schwabe having failed to do so within four months*fn8 after the property was installed in the debtor's New Jersey plant, Armstrong contended that Schwabe's security interest, even assuming it had originally been perfected in Pennsylvania,*fn9 was unperfected and hence invalid against the trustee.

Decision of Referee

The referee's decision was based primarily on § 9-103(3) of the Uniform Commercial Code.*fn10 He ruled that under this section of the Uniform Commercial Code (seemingly New Jersey's) Schwabe had a "valid perfected security interest as against the Trustee and his assignee." (App. 29a). In reaching this result the referee held, in light of the debtor's improper removal of the equipment to New Jersey and Schwabe's filing in Pennsylvania, that "the only proper construction" of the four-month rule of § 9-103(3) was that the time period does not begin to run until "the secured party has been notified of the removal and has failed to re-record the financing statement." ...

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