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In re Lord's Inc.

December 17, 1965

IN THE MATTER OF LORD'S, INC., BANKRUPT. CHICAGO CUTTER-KARCHER, INC., PETITIONER-APPELLANT,
v.
CHARLES D. MALEY, TRUSTEE, RESPONDENT-APPELLEE



Hastings, Chief Judge, and Knoch and Swygert, Circuit Judges. Swygert, Circuit Judge (dissenting).

Author: Knoch

KNOCH, Circuit Judge.

Petitioner-appellant, Chicago Cutter-Karcher, Inc., hereinafter sometimes called "Cutter-Karcher," filed a reclamation petition to recover $17,300.47 claimed as trust funds. These funds resulted from the sale of Cutter-Karcher's shoes and accessories by Cutter-Karcher's employees in the department store of the bankrupt, Lord's, Inc.

The petition was denied by the Referee in Bankruptcy, whose order was affirmed by the District Court on petition for review, and this appeal followed.

On February 1, 1956, Cutter-Karcher entered into a lease with Lord's for space in Lord's store in Evanston, Illinois, where Cutter-Karcher would sell its shoes and related accessories for cash or on credit.

It was agreed that sales would be made in the name of Lord's and recorded by Lord's at its expense, and that all moneys received by Cutter-Karcher's employees would be turned over immediately to Lord's. The agreement provided, however, in Article Sixteenth of the agreement that all the moneys and accounts so received by Lord's on account of sales in Cutter-Karcher's department would be considered to be held by Lord's:

On June 16, 1964, an involuntary petition in bankruptcy was filed against Lord's. Lord's petitioned for an arrangement under Chapter XI of the Bankruptcy Act. Until September 2, 1964, Lord's operated as debtor in possession under court order. On September 2, 1964, Lord's was adjudicated a bankrupt with its consent, and Charles D. Maley, defendant-appellee in this case, was appointed Trustee in Bankruptcy.

On June 16, 1964, Lord's had in its possession $9,553.16 net proceeds of sales in the leased department during May, 1964.

The Trustee subsequently adopted Lord's answer to the reclamation petition for the $9,553.16 plus proceeds of sales after June 16, 1964. Lord's contended that it held no sums in trust.

After hearing, the Referee in Bankruptcy found that the lease agreement and the conduct of the parties showed a relationship of debtor and creditor and not the creation of a trust. He accordingly denied the reclamation petition.

Cutter-Karcher contends that the lease agreement contained an express trust obligation which Lord's (and the Trustee, in turn) was estopped to deny. In the face of the explicit wording of Article Sixteenth, quoted above, Cutter-Karcher considers that no other conclusion may be drawn despite certain terms of the agreement and actions of the parties which Lord's points to as inconsistent with an express trust, such as failure to provide for creation of a separate fund for deposit of proceeds of sales; failure to denominate the lease a "trust agreement"; and failure to use the terms "trustee" or "beneficiary."

The Trustee appellee asks why did the parties not provide for a separate bank account with the protective features commonly associated therewith; that the parties contemplated these funds would be commingled as they were over a period of years, and that merely denominating them "trust funds" was insufficient to create a trust.

Cutter-Karcher argues that the obligation assumed in the agreement by Lord's to repay by the 15th of each month the proceeds of Cutter-Karcher's sales of the previous month (less certain authorized deductions) even though such sales were made in Lord's name and recorded at Lord's expense, with Lord's guarantee of credit or charge sales, did not operate to create a mere debtor-creditor relationship, nor to destroy the trust character of the sales proceeds in Lord's hands. Cutter-Karcher asserts that in none of the cases on which the Referee and the District Court rely were there any agreements with an express provision for a trust. That is correct.

In In Matter of Yeager Company (Mendel et al. v. Whitmer), 6 Cir., 1963, 315 F.2d 864, the facts were very much like those here except that there was no reference to a "trust" in the lease. The court refused to infer one. Reclamation of the fund resulting from sales of Mendel and Marshall merchandise commingled with Yeager funds was denied. Another generally similar factual set-up existed in In re Martin's, District Court, New York, 1935, 11 F. Supp. 99, and in Isaac McLean Sons Co. v. William S. Butler & Co., District Court, Mass., 1913, 208 F. 730, except that ...


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