Chicago Title & Trust Co. v. Central Trust Co.

MACK, Circuit Judge. Appellant, assignee of a lessor, levied a distress warrant four days before a petition in bankruptcy was filed against the lessee which was insolvent at and after the levy. The lease contained the following provision: “Said party of tbe second part further covenants and agrees that said party of tbe first part, or tbe representatives or assigns of said party, shall have, at all times, tbe right to distrain for rent due, and shall have a first and valid lien upon all personal property of said party of tbe second part, which they now have or own or may hereafter acquire or have an interest in, whether exempt by law or not, as security for the payment of the rent herein reserved.” Subsequently by agreement the goods were sold and lien, if any, transferred to the proceeds. Thereupon appellant filed its petition for payment in full'out of the proceeds. The answer denied that appellant was entitled thereto. The matter was heard on a stipulation of facts; the order of the referee, denying payment in full and allowing only a general claim, was affirmed by the District Judge. [1] 1. In Re Robinson and Smith, 154 Fed. 343, 83 C. C. A. 121, this court held that the lien obtained within four months of bankruptcy under a distress warrant, levied pursuant to an express grant of such a right in and by the lease, was not obtained through legal proceedings, and, unlike the levy made solely by virtue of the statutory right to distrain, as in United Motors Chicago Company, 220 Fed. 772, 136 C. C. A. 378, was not to be dissolved under Bankruptcy Act, §§ 67d and 67f. We adhere to that decision for the reasons therein stated. [2, 3] 2. The nature of the right created by the distress and lien clauses of this lease is governed by Illinois law. In Illinois neither an administrator (Sumner v. McKee, 89 Ill. 127), nor an assignee in insolvency (Hooven v. Burdette, 153 Ill. 672, 39 N. E. 1107), stands in any better position than the decedent or assignor respectively, as against one holding a lien, legal or equitable, vested or inchoate; a mortgage or vendor’s reserved title, good as against the one, is held to be equally [265] valid as against the other. In re Sturtevant, 188 Fed. 196, 110 C. C. A. 68. [4] If, then, in such a lease, the distress or lien clause of itself created any lien or equity, vested or inchoate, it would be enforceable as-against the lessee’s administrator in possession of the property. But the decision in Borden v. Croak, 131 Ill. 68, 22 N. E. 793, 19 Am. St. Rep. 23, in favor of the administrator necessarily, determines that in Illinois, unlike Georgia (Henderson v. Mayer, 225 U. S. 631, 32 Sup. Ct. 699, 56 L. Ed. 1233), no such lien or equity is thereby created. The clauses in the Borden lease were similar to those involved in this case, except that here after-acquired property was expressly included. Under that decision, it is clear that, until possession was taken, the lease, as a chattel mortgage or equitable lien, was without efficacy because of the indefiniteness of the property sought to be covered thereby. [5, 6] 3. Furthermore, as such a lease, by including all property, covers stock in trade, which the lessee impliedly has the right to dispose of as it pleases, it must be deemed fraudulent and invalid. Read v. Wilson, 22 Ill. 377, 74 Am. Dec. 159. In Illinois, however, contrary to the great weight of authority, an express power to take possession of the property covered even by a fraudulent mortgage will protect the mortgagee who has actually seized the property. Read v. Wilson, supra. And in the instant case the express right to distrain confers such a power upon the lessor. His lien, however, is created, not by the lease, but by the levy; prior thereto, he has but a contractual right to take unspecified property. [7, 8] 4. Liens created within four months of the bankruptcy to secure pre-existing debts may be avoided by the trustee under section 60b, if the creditor had reasonable cause to believe that a preference was thereby effected. Whether or not the debt secured is pre-existing must be determined as of the date of the creation of the lien. Clearly here where even as between the parties the lease gave only a contractual right, and where the lien was not created until the distress warrant was levied, the rent for which the levy was made was then a preexisting debt. See, too, In re Caslon Press, 229 Fed. 133, 143 C. C. A. 409. [9] 5. At the time of levy, the debtor was admittedly insolvent;, inasmuch, however, as the record is devoid of any evidence tending to show that the landlord then had reasonable cause to believe that a preference was thereby given, and as the burden of proof is on the trustee, the order of the District Court must be reversed. [10] 6. Appellant urges, especially in view of the action of the District Court in denying appellee’s motion for leave to introduce evidence as to the lessor’s knowledge of the preference, that the proper order on the record before us is that the decree be reversed and the landlord’s claim to payment in full out of the proceeds of the sale be allowed. While the case was heard on a stipulation of facts, the trial judge was clearly empowered, in his discretion, to permit additional proof and amendment of the pleadings in conformity therewith. [11] Appellee’s motion was denied, evidently because the court, in view of the conclusions reached on other grounds, deemed this proof [266] unnecessary. Under these circumstances, justice requires that the cause be remanded to the District Court, with leave to the appellee to renew therein its motion to amend the answer and to offer the additional evidence and for further proceedings in conformity herewith. Essley Machinery Co. v. Belsley, 235 Fed. 285, - C. C. A. -. And it is so ordered. Footnotes [1] <§=»For otber eases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes [2] <@=s>For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes