United States District Court, Eastern District of Illinois
August 16, 1956
MARTIN GARBE, TRUSTEE IN BANKRUPTCY OF THE MATTOON CITY DRUG, INC., A BANKRUPT, PLAINTIFF,
HUMISTON-KEELING AND COMPANY, INC., A CORPORATION, DEFENDANT.
The opinion of the court was delivered by: Platt, Chief Judge.
Martin Garbe, Trustee in Bankruptcy of the Mattoon City Drug,
Inc., brings this action under Section 60, sub. b, of the
Bankruptcy Act, 11 U.S.C.A. § 96, sub. b, to recover an
alleged preferential transfer of practically all of the assets of the
bankrupt to the defendant, Humiston-Keeling Company, Inc., a
The essential facts are undisputed. The bankrupt conducted a
drug store in the city of Mattoon, Coles County, Illinois. The
registered office of the corporation, as shown by its charter,
was in the city of Canton, Fulton County, Illinois. The office of
the corporation was maintained by the registered agent, Bernard
G. Maxwell, the president of the corporation. The books and
records of the bankrupt were kept under the supervision of
Bernard G. Maxwell, at the office in Canton, Illinois. The
defendant, a duly incorporated Illinois Corporation with its
office and warehouse in Chicago, Illinois, employed salesmen,
some of whom resided in the Eastern District of Illinois, who
called upon drug stores throughout the State of Illinois and
other states for the purpose of receiving orders for the sale of
its merchandise. The orders obtained were delivered personally,
by mail, or by telephone to the office of the defendant in
Chicago, Illinois, where they were approved and filled. Payment
for the merchandise was made to the Chicago office where the
books, records and accounts were kept. In November, 1955, when
this suit was filed, the total sales of defendant were
$1,200,000, of which $47,350, or 4%, were to drug stores in the
Eastern District of Illinois. On February 1, 1954, the bankrupt
was indebted to the defendant for merchandise on an open account
in the amount of $10,072.49 and balance due on a note in the
amount of $5,495.98. On March 1, 1954, Mr. Maxwell and his wife
were called to the Chicago office where they executed for the
corporation a note for $16,696.09 secured by chattel mortgage
covering all of the stock and fixtures in the drug store at
Mattoon, Illinois. The
note was also signed by the Maxwells individually. The defendant
paid $1,915.31 which was due on three fixtures sold to the
bankrupt on conditional sales contracts and this amount was
included in the mortgage note. After May 1, 1954, the defendant
sold merchandise to the bankrupt on a cash basis. The bankrupt
became delinquent on other accounts and did not pay promptly the
installments on the note secured by the chattel mortgage. The
June installment was not paid. May 27, 1954, the defendant
received the bankrupt's check for $1,731.06 which was returned by
the bank for insufficient funds. On July 6, 1954, the defendant
took possession of the bankrupt's drug store in Mattoon,
Illinois. July 9, 1954 the Mattoon City Drug Company filed a
voluntary petition in bankruptcy and was adjudged a bankrupt. The
schedules filed by the bankrupt disclosed assets in the amount of
$35,260.31 and liabilities in the amount of $39,060.15. The value
of the stock was scheduled at $19,850 and fixtures at $15,000.
The trustee in bankruptcy filed a petition in the bankruptcy
court requesting that an order be entered directing the defendant
to turn over to the trustee the personal property which it had in
its possession. The defendant objected to the summary
jurisdiction of the referee to allow the petition on its merits.
The petition was dismissed by the referee for want of
jurisdiction. However, the referee ordered the sale postponed to
permit a more complete advertisement of the sale. The sale was
widely advertised and the property was sold as a unit at public
sale, to the highest bidder for the amount of $14,000.
The defendant presents the following defenses to the claim of
the trustee in bankruptcy:
(1) That this court does not represent proper venue
for this action.
(2) That the mortgage was valid and properly
(3) That the consideration for the transfer was not
(4) There is no evidence that the Mattoon City
Drug, Inc. was insolvent at the time the defendant
took possession; and the defendant did not have
reasonable cause to believe debtor was insolvent.
(5) That the trustee is barred by the proceeding
before the referee in bankruptcy which is res
judicata of this action.
This court finds that it has proper venue under 28 U.S.C.A.
§ 1391(c), (1948 Revision), which provides:
"A corporation may be sued in any judicial district
in which it is incorporated or licensed to do
business or is doing business, and such judicial
district shall be regarded as the residence of such
corporation for venue purposes."
The defendant, being an Illinois Corporation, although its office
and warehouse are in Chicago, in the Northern District of
Illinois, is certainly licensed to do business in the Eastern
District of Illinois. Barron and Holtzoff, Federal Practice and
Procedure, Rules Ed., vol. 1, sec. 80, p. 154, express it:
"Congress took the next long step by enacting into
law the provision that `a corporation may be sued in
any judicial district in which it is incorporated or
licensed to do business * * *.' Presumably, if the
state of incorporation has more than one district a
corporation may be sued in any district thereof, on
the theory that it is `licensed to do business'
throughout the whole state. Previously the rule in
such cases was that the corporation would be deemed a
resident only of the district wherein it kept its
principal office and transacted its general corporate
If the defendant corporation was a nonresident, it could be sued
in the Eastern District of Illinois had it been licensed to do
business in Illinois. Ronson Art Metal Works v. Brown & Bigelow,
Inc., D.C., 104 F. Supp. 716, 724, affirmed 2 Cir., 199 F.2d 760;
Hadden v. Barrow,
Wade, Guthrie & Co., D.C., 105 F. Supp. 530; Wagner Mfg. v.
Cutler-Hammer, Inc., D.C., 84 F. Supp. 211. There is no reason why
a different rule on venue should apply to an Illinois Corporation
which is qualified to do business any place in Illinois than to
a foreign corporation which is licensed to do business in
Illinois. The defendant corporation solicited a substantial
amount of its business in the Eastern District of Illinois, and
again it would come within the venue section 1391(c). Riverbank
Laboratories v. Hardwood Products Corp., 350 U.S. 1003
, 76 S.Ct.
648, reversing 7 Cir., 220 F.2d 465. The logical conclusion is
that this court has jurisdiction of the parties.
The defendant's chattel mortgage in the first place was
obviously invalid as to the stock in trade. The stock was left in
the possession of the bankrupt to be used in the usual course of
business, and the mortgage cannot be valid against the trustee in
bankruptcy, who represents the creditors. Deering & Co. v.
Washburn, 141 Ill. 153, 29 N.E. 558; Huschle v. Morris, 131 Ill. 587,
23 N.E. 643; Dunning v. Mead, 90 Ill. 376. The defendant in
its answer to the complaint practically admits this in the fifth
defense wherein it stated:
"Defendant alleges that the chattel mortgage if
invalid was invalid only as to stock in trade * * *."
Furthermore, the chattel mortgage was unenforceable against
creditors for the reason that it was not properly recorded. The
validity of the chattel mortgage must be determined in accordance
with the Illinois Statute. Ch. 95, Mortgages, sec. 4, 1953 (Which
is applicable here) provides in part:
"No mortgage * * * of personal property * * * shall
be valid as against the creditors of the
mortgagor * * * unless it shall be deposited for
filing or recording in the office of the recorder of
deeds of the proper county or counties within 15 days
of its execution * * *. Such mortgage * * * shall be
filed or recorded with the recorder of the county in
which the mortgagor shall reside at the time when the
instrument is executed and * * * a certified copy
thereof shall be filed with the recorder of the
county where the personal property is then
situated, * * * and shall thereupon if bona fide, be
good and valid from the time it is received for
filing or recording * * *."
The defendant recorded the chattel mortgage in Coles County,
Illinois, where the personal property was situated in the
possession of the bankrupt, but failed to record it in Fulton
County, Illinois, where the registered office of the bankrupt
corporation was located and the books and records of the
corporation were kept.
"The right given by a chattel mortgage, where
possession is not taken by the mortgagee, is in
derogation of the common law, and the person claiming
under it must show that it has the necessary elements
to establish the right. (Citing cases.)
"Recording in the proper county * * * is as
essential to the validity of such a mortgage as any
other element entering into its making. Blatchford v.
Boyden, 122 Ill. 657, 13 N.E. 801." Second National
Bank v. Thuet, 124 Ill. App. 501, 504, 505.
Prior to the 1953 amendment a chattel mortgage was required to be
recorded in the county "in which the mortgagor shall reside at
the time when the instrument is executed and recorded, * *." In
1953 said section 4 chapter 95, Ill.Rev.Stat. was amended by the
legislature adding the requirement that a certified copy be
recorded in the "county where the personal property is then
situated". In Fairbanks Steam Shovel Co. v. Wills, 240 U.S. 642
36 S.Ct. 466, 60 L.Ed. 841, the Supreme Court held that the
principal office of a corporation, as shown by its charter,
determined the county of residence where the chattel mortgage is
to be recorded. In 1933 the Illinois Legislature
amended the Corporation Act to require that the Articles of
Incorporation set forth the location of the registered office of
the corporation instead of the principal office. S.H.A., ch. 32,
§ 157.47 and the Historical Note. Sec. 157.2(n) provides
"`Registered office' means that office maintained by the
corporation in this State, the address of which is on file in the
office of the Secretary of State." Sec. 157.11 provides "Each
corporation shall have and continuously maintain in this State:
(a) A registered office which may be, but need not be, the same
as its place of business." Thus the legislature made a
requirement that a corporation maintain a registered office which
would be continuously a public record with the Secretary of
State. In the instant case, as pointed out by the defendant, the
question presented is whether the recording of the mortgage in
Coles County, Illinois, where the property was situated was
sufficient in itself, and did not require the recording in Fulton
County, Illinois, where the registered office was located. In
Fairbanks Steam Shovel Co. v. Wills, supra, the court reviewed
the Illinois cases including Chicago, D. & V.R. Co. v. Bank of
North America, 82 Ill. 493, cited by the defendant in its brief,
and approved Ex parte Schollenberger, 96 U.S. 369, 377, 24 L.Ed.
"`A corporation cannot change its residence or its
citizenship. It can have its legal home only at the
place where it is located by or under the authority
of its charter; but it may by its agents transact
business anywhere, unless prohibited by its charter
or excluded by local laws.'" 240 U.S. 642, 647, 36
S.Ct. 466, 468.
Although the Corporation Act was amended to require the Articles
of Incorporation to state the registered office instead of the
principal office it did not thereby change the residence of the
corporation. A corporation might do business in several locations
in various counties. Our seventh circuit stated In re National
Mills, 133 F.2d 604
"There is also a dearth of Illinois authorities as
to what constitutes the residence of a corporation
within the meaning of this Section, but it was held
in Fairbanks Steam Shovel Co. v. Wills, * * * as
being the place designated as its principal place of
business in its Articles of Incorporation. While the
court was construing the former Corporation Act of
Illinois, there appears no reason why the Chattel
Mortgage Act in this respect should be construed
differently since the enactment of the present
Corporation Act. * * * For the purpose of the instant
case, we shall so assume."
Illinois Law and Practice, vol. 13, ch. 4, sec. 68, p. 313 sets
"Although under prior law a business corporation
was considered a resident of the county in which it
had its principal office, under S.H.A. ch. 32, sec.
157.11, a business corporation is considered a
resident of the county in which it maintains a
When the legislature amended ch. 95, sec. 4, in 1953, it provided
that the chattel mortgage should be recorded in the county where
the personal property was located in addition to the county in
which the mortgagor resides. The legislature evidently recognized
that the residence of a corporation or an individual might be in
a county other than where the property was located, and to
protect creditors and give notice it should be recorded in such
an instance in two places. It must be assumed that the
legislature had knowledge of the Corporation Act providing for a
"registered office". It must be concluded that the creditors of
the bankrupt, other than the defendant, would only be put on
notice if the chattel mortgage was recorded in accordance with
the statute. The defendant failed to record the mortgage in
Fulton County, Illinois, the residence of the bankrupt
corporation and it is therefore invalid as against the trustee in
bankruptcy. See Barnes v. Lynn, 2 Cir., 221 F.2d 955.
The defendant attempts to take advantage of the representation
of the bankrupt's residence set forth in the mortgage,
"Mattoon City Drug, Inc. of the city of Mattoon, in
the county of Coles, State of Illinois, hereinafter
called the mortgagor * * *."
The defendant was dealing with the bankrupt for a period of time.
It had the opportunity to determine where the registered office
of the bankrupt was located. It had communicated with Mr.
Maxwell, the president, at its office in Canton, Illinois, to
obtain the mortgage. The defendant prepared the chattel mortgage
and should not be permitted to take advantage of its own mistake.
A preferential transfer occurred July 6, 1954 when the
defendant took possession of all of the stock and fixtures of the
bankrupt. The court finds that all of the elements of a voidable
preference appear as specified in sec. 60 of the Bankruptcy Act,
11 U.S.C.A. § 96: (1) It was for an antecedent debt; (2) made
by an insolvent debtor; (3) within four months of bankruptcy; (4)
resulted in an advantage to the creditor, the defendant; and (5)
the defendant had reasonable cause to believe that the bankrupt
was insolvent when it took possession.
The defendant contends that the transfer was not wholly for an
antecedent debt. Its theory is because it paid off $1,915.31 on
conditional sales contracts in March, 1954 that this should be
considered a present consideration. This would have been
applicable had the chattel mortgage been properly recorded and
the bankruptcy had occurred within four months. But where the
preferential transfer occurred July 6, 1954 and the bankruptcy
petition was filed July 9, 1954, the advancing of the money to
pay off the conditional sales contract is an antecedent debt.
Section 60 of the Bankruptcy Act, 11 U.S.C.A. § 96; See Corn
Exchange Nat. Bank & Trust Co., Philadelphia v. Klauder,
318 U.S. 434, 437, 63 S.Ct. 679, 87 L.Ed. 884.
The possession was obtained by the defendant from an insolvent
debtor. The schedules filed by the bankrupt on July 9, 1954
disclose that it did not have sufficient assets to pay its debts.
Included in the assets were the stock and fixtures valued at
$34,850. The stock and fixtures were sold at public sale for
$14,000 on August 2, 1954 after being widely advertised. The
bankrupt came within the definition of insolvency on July 6,
"A person shall be deemed insolvent within the
provisions of this Act whenever the aggregate of his
property, * * * shall not at a fair valuation be
sufficient in amount to pay his debts". 11 U.S.C.A.
ch. 1, § 1(19).
Adler v. Greenfield, 2 Cir., 83 F.2d 955; Irving Trust Co. v.
Roth, D.C., 48 F.2d 345; In re Studebaker Corporation, D.C.,
9 F. Supp. 426.
The third and fourth elements of a preference need no
discussion. The transfer occurred on July 6, 1954 which was
within four days of the bankruptcy. The defendant, as against
creditors, obtained no rights under the chattel mortgage executed
and recorded improperly in March, 1954. If the defendant is
permitted to retain the $14,000 it would clearly enjoy a decided
advantage over other creditors. Canright v. General Finance
Corporation, 7 Cir., 123 F.2d 98.
The defendant insists that it did not have reasonable cause to
believe that the debtor was insolvent when it took possession.
Plaintiff was paying cash for all deliveries of stock and the
defendant had knowledge. The defendant's credit manager demanded
but did not receive the payments as required by the note secured
by the chattel mortgage. On May 27, 1954, the defendant received
a check from the bankrupt which was returned by the bank for
insufficient funds. The defendant's officers had financial
reports on the bankrupt but did not remember what these reports
stated. Although financial reports were available they were
"A creditor who obtains security for a previously
unsecured indebtedness must surrender the same at the
suit of the trustee, if procured within four months
prior to bankruptcy, under such facts and
circumstances as would cause a reasonably prudent man
to believe the bankrupt insolvent when it was made.
He may not close his eyes to known or obvious facts
or to anything which he would ascertain by making the
inquiry of a reasonably prudent business man. [Citing
cases.]" In Re Cox, 7 Cir., 132 F.2d 881, 882.
Also Irving Trust Co. v. Roth, D.C., 48 F.2d 345; Boston Nat.
Bank v. Early, 1 Cir., 17 F.2d 691. Furthermore, the defendant
took possession of the entire stock and fixtures of the bankrupt
and such a transaction cast upon the defendant the burden of
acquainting itself with the fact as to whether or not the debtor
was insolvent. McElvain v. Hardesty, 8 Cir., 169 F. 31; Rockmore
v. Weiner, 2 Cir., 131 F.2d 595; Bronner v. Safinna, D.C.,
25 F. Supp. 791.
The last contention of the defendant is that the referee in
bankruptcy by extending the time for the sale of the property
covered by the chattel mortgage entered an order which is res
judicata in this suit. The parties stipulated that the relevant
records of the bankruptcy court were to be considered in
evidence. The trustee in bankruptcy filed a petition before the
referee in bankruptcy to compel the defendant to turn over to the
trustee the stock and fixtures. The defendant objected to the
jurisdiction of the referee in bankruptcy on this petition. In
view of the order of July 23, 1954, wherein the referee in
bankruptcy found that he did not have jurisdiction to dispose of
the petition for turnover order on its merits, it is conclusive
that the stay order on the sale was not res judicata. Cline v.
Kaplan, 323 U.S. 97, 65 S.Ct. 155, 89 L.Ed. 97; B.F. Avery & Sons
Co. v. Davis, 5 Cir., 192 F.2d 255, certiorari denied
342 U.S. 945, 72 S.Ct. 559, 96 L.Ed. 703; In re Feynman, 2 Cir.,
77 F.2d 320.
The plaintiff may set aside the preference obtained by the
defendant and recover the $14,000 received by the sale. The sale
was properly advertised and the property was sold at public
auction. The trustee is therefore limited to that amount, plus
interest from November 2, 1955 the date of the filing of the
suit. Larkin v. Welch, 7 Cir., 86 F.2d 442, certiorari denied
300 U.S. 680, 57 S.Ct. 671, 81 L.Ed. 884.
This opinion may be considered as findings of fact and
conclusions of law. Final order may be submitted.
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