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Commercial Inv. Trust Co. v. Minon

June 13, 1939


Appeal from the District Court of the United States for the Eastern District of Pennsylvania; Oliver B. Dickinson, Judge.

Author: Maris

Before BIGGS, MARIS, and CLARK, Circuit Judges.

MARIS, Circuit Judge.

On April 28, 1932, receivers in equity were appointed for Marcus-Mayer Company by the District Court for the Eastern District of Pennsylvania. Thereafter Commercial Investment Trust Company, the appellant, filed a petition seeking to reclaim twelve high speed automatic printing presses in the possession of the receivers. It alleged that the Miller Printing Machinery Company, its assignor, had delivered these machines to Marcus-Mayer Company under bailment lease agreements and that it was entitled to repossess them because of a default in payment of the rental due under the agreements. The receivers denied that the contracts under which delivery of the presses was made were bailment leases and contended that they were conditional sales in which the reservations of title were void as against the receivers.

The first machine, printing press No. 621, was delivered in May 1925 under an oral arrangement for a trial of it. After a trial, Miller Saw-Trimmer Company, subsequently named Miller Printing Machinery Company, and Marcus-Mayer Company on May 26, 1925, executed a bailment lease covering this press in which provision was made for total rental payments of $3500. Between November 30, 1925 and January 27, 1930, eleven additional presses were acquired by Marcus-Mayer Company from the Miller Printing Machinery Company. Negotiations for their acquisition in each instance culminated in a written order signed by Marcus-Mayer Company. These orders were in form agreements of sale. They each provided, inter alia, for a selling price payable in installments and stipulated that the vendor should guarantee performance of the machine and that the vendee should execute a chattel mortgage or a bailment lease as collateral security for the deferred installments of the selling price. In each case a bailment lease, regular in form, including the machine in question was subsequently executed. Press No. 621 was included with five others in the lease dated April 1, 1927; with seven others in the lease dated August 2, 1928, and with nine others in the lease dated July 24, 1929.

The total amounts payable under all the leases was $60,000. Marcus-Mayer Company paid $45,000 of this amount and the receivers paid $2,800 additional. The non-payment of the balance is the default relied on by the appellant. The district court referred the petition to a special master who concluded that Marcus-Mayer Company was insolvent when the receivers were appointed, that all the agreements were conditional sales and that the attempted reservation of title in the appellant was void as against the receivers because the agreements were not filed in the prothonotary's office as required by the Uniform Conditional Sales Act (69 P.S. Pa. ยงยง 402, 403). The district court approved the report of the special master and denied the reclamation petition. Mayer v. Marcus Mayer Co., D.C., 25 F.Supp. 58.

The present appeal followed. It presents for our consideration a controversy arising out of a peculiar doctrine of Pennsylvania law which has been much before the federal courts sitting in that state.*fn1 That doctrine, which was first announced more than a century ago, briefly stated, is this. When possession of a chattel is delivered under a contract which is in form a bailment lease, the title of the bailor will be upheld as against the execution creditors of the bailee, even though the contract contains an agreement to pass title to the bailee upon payment of the full amount of hire or rental stipulated therein.*fn2

It will be seen that this doctrine permits parties desiring to enter into a deferred payment sale of a chattel to protect the vendor's title pending the payment of the price by delivering possession of the chattel to the vendee under a bailment lease, the vendor receiving the deferred portion of the sale price in the form of hire or rental under the lease. This as we shall see, is exactly what the doctrine was intended to permit. Its adoption by the Supreme Court of Pennsylvania followed shortly after that court had laid down the rule in the case of Martin v. Mathiot, 14 Serg. & R., Pa., 214, 16 Am. Dec. 491, that a conditional sale of a chattel reserving title in the vendor until payment of the purchase price must be deemed fraudulent and void as against the execution creditors of the vendee in possession. The doctrine was undoubtedly adopted because of the rigor of this rule with its consequent obstruction to normal business transactions.*fn3

In 1819 the Supreme Court of Pennsylvania had decided in Clow and another v. Woods, 5 Serg. & R., Pa., 275, 9 Am.Dec. 346, that because of the Statute of 13 Elizabeth c. V., which was in force in Pennsylvania, (see Opinion of the Justices, 3 Bin., Pa., 595), an unrecorded mortgage of chattels with retention of possession was fraudulent and void as to creditors of the mortgagor. This was followed by a similar ruling in 1823 in Babb v. Clemson, 10 Serg. & R., Pa., 419, 13 Am.Dec. 684, which involved an absolute sale of goods with retention of possession by the vendor. Then in 1826 came the decision in Martin v. Mathiot, supra. A conditional sale contract, therefore, gave no protection to the vendor if his claim of title was opposed by that of an execution creditor of the vendee in possession. The basis for the decision in each of the three cases mentioned was that the one in possession was thereby clothed with such indicia of ownership as to enable him to perpetrate a fraud on innocent third persons.

It was at this time that the Pennsylvania courts began to seek for reasons for avoiding the effect of the ruling in Martin v. Mathiot, supra. In 1831 in Myers v. Harvey, 2 Pen. & W., Pa., 478, 23 Am.Dec. 60, we find the Supreme Court of that state shifting its emphasis from the fact of possession to a query as to whether the parties had arranged for a present or future transfer of title. In that case Chief Justice Gibson referred to the contract involved as providing for a bailment for hire with an additional agreement of sale to take effect upon payment of a sum certain. The terms of the contract are not set out in the opinion. He found from the evidence that the parties entered into a bailment with a superadded agreement to vest the title in the bailee when he should pay a sum certain. The bailment appears to have been a true bailment for use. By a natural transition later cases applied this procedure of splitting the contract into bailment and future sale to contracts which in fact were not true bailments. With the decision in Rowe v. Sharp, 51 Pa. 26, the peculiar Pennsylvania doctrine of bailment leases came into full force.

The use of the bailment relation was approved upon a baisi which was in most cases fictional. One who desired to make a deferred payment sale might preserve his title by insisting upon delivering the chattel under a bailment lease for a rental equal to the deferred payments, to be followed by a bill of sale. On the other hand one who did not resort to the fiction of a bailment but delivered the article to the vendee under an ordinary conditional sale contract found his attempted reservation of title to be ineffective. In this situation we may well expect to find that the fine line between fact and fiction has not always been easy to draw. In this we are not disappointed. The Pennsylvania reports disclose a long series of cases in which the pendulum has swung back and forth, first the fiction being upheld*fn4 and then the evident fact.*fn5 From first to last, however, the Pennsylvania courts have upheld the policy of that state to permit the use of bailment leases to preserve the vendor's title in transactions intended, ultimately, at least, to be sales. Indeed this policy appears to have the sanction of the state legislature, which, when it passed the Uniform Conditional Sales Act in 1925 struck out that part of the definition of the phrase "conditional sale" as adopted in the other states which would include "any contract for the bailment or leasing of goods by which the bailee or lessee contracts to pay as compensation a sum substantially equivalent to the value of the goods, and by which it is agreed that the bailee or lessee is bound to become, or has the option of becoming the owner of such goods upon full compliance with the terms of the contract". The legislature evidently intended to assure non-interference with the peculiar Pennsylvania doctrine respecting the use of bailment leases in such transactions.

Although the Pennsylvania courts have not formulated a rule so comprehensive as to reconcile all of the decided cases the task has been partially accomplished in General Motors Acceptance Corp. v. Hartman, 114 Pa.Super. 544, 174 A. 795, where Judge Keller in a most lucid opinion classified the cases in which documents purporting to be bailment leases have not been sustained as such. In that case a creditor of Hartman levied upon an automobile in the debtor's possession. General Motors Acceptance Corporation intervened and successfully maintained its claim to title and ownership of the automobile upon proof that Hartman had possession by reason of a contract which the court construed to be a bailment lease. In distinguishing the Pennsylvania decisions cited by the judgment creditor in support of his contention that he had the right to levy upon the automobile as the property of Hartman the court stated that they fell into the following classifications:

(1) Where the written instrument is, on its face and by its terms, a conditional sale rather than a bailment lease.*fn6

(2) Where a sale has been made and completed, and a lease is entered into only as collateral security for the protection ...

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