Schatt-Ajax Industries v. Churchill

Citations: 411 P.2d 457; 3 Ariz. App. 34; 1966 Ariz. App. LEXIS 537Docket: 1 CA-CIV 98

Court: Court of Appeals of Arizona; March 2, 1966; Arizona; State Appellate Court

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Schatt-Ajax Industries appealed a judgment favoring Ed and Effie Churchill, who owned a restaurant in Phoenix. The Churchills sold their business, including furniture and equipment, to Gary Wright while retaining the lease and subletting to the Wrights. The Wrights secured the purchase price of $23,250 through a chattel mortgage with the Churchills, which lacked an "after-acquired property" clause and was recorded on February 29, 1960. The Wrights hired Schatt-Ajax to redesign the restaurant, which involved removing and replacing certain booths and installing new equipment. Schatt-Ajax executed a conditional sales contract with the Wrights on April 9, 1960, reserving title to the items until payment of $4,959.36 was completed and stipulating that the items would not become fixtures until then. The Wrights defaulted, prompting Schatt-Ajax to pursue replevin and conversion actions against both the Wrights and the Churchills, claiming value for the converted property.

In their defense, the Churchills asserted they had a prior judgment against the Wrights that granted them title to the property through a landlord's lien, argued that the chattels had become fixtures, and contended that their chattel mortgage took precedence over Schatt-Ajax's conditional sales contract. They also counterclaimed for damages alleging wrongful conversion by Schatt-Ajax. The court ruled against Schatt-Ajax on its claims and in favor of the Churchills’ counterclaim. A key legal question was whether a landlord's lien for rent applies to personal property covered by a conditional sales contract, necessitating an evaluation of the tenant's interest in the property upon lease commencement.

Jurisdictions have established that the interest remaining after a conditional seller's interest is paramount, as seen in cases like Stern Co. of Washington v. Rosenberg and others. Arizona is advised to adopt this principle. In the current case, the landlord's lien asserted by the defendants is subordinate to the conditional sales contract and can be disregarded. If a property owner mortgages personal property without including a clause for after-acquired property, the mortgagee cannot claim a superior right over such property against a conditional seller's reservation of title. A chattel mortgage does not extend to property subsequently acquired under a conditional sales contract. However, the chattel mortgage retains superiority over items covered by it, even if they have been upholstered or refinished, as the mortgage is recorded and implies notice. The plaintiff's failure to inquire about the mortgagee's title puts him at risk.

Regarding booths sold under a conditional sales contract that replaced those under the defendants' chattel mortgage, the court does not need to determine if the booths have become fixtures, as the defendant has treated them as personalty in the mortgage. The defendant cannot argue that the new booths are fixtures while simultaneously claiming them under the mortgage. The court concludes that the value of the old booths should be assessed, considering their value in place, and this value will be a prior lien on the new booths. Alternatively, the new booths may be sold, with the value of the replaced booths serving as a prior claim on the sale proceeds, ensuring that the chattel mortgagee's rights are protected without allowing a wrongdoer to benefit from their actions. The oven and showcase are deemed the only items superior to the chattel mortgage.

Defendants contended that the plaintiff failed to prove the status of certain items during trial, but the court disagreed. The plaintiff provided clear testimony that it supplied the items in question, which were included in the conditional sales contract but not in the chattel mortgage. These items were also part of a counterclaim that resulted in an adverse judgment against the defendants. The court erred in ruling against the plaintiff regarding these items because the evidence was undisputed. 

After the plaintiff replevied the items, the defendants took them back under a redelivery bond and disposed of them, necessitating proof of their value. Although the record lacked evidence of the items' value at the time of the action, this was due to the court's ruling that barred relevant testimony from Mr. Schatt, who was qualified to testify as an expert and as the owner of the items. His experience in equipping restaurants and familiarity with the value of the items justified his testimony. 

The court found no error in admitting evidence related to the defendants' counterclaim, which had not been withdrawn or stricken and was acknowledged by both parties throughout the proceedings. Consequently, the defendants did not waive their counterclaim. Lastly, the court could not grant the plaintiff's request to reinstate the exonerated redelivery bond, as the trial court's exoneration had only prospective effect. The judgment was reversed in part, affirmed in part, and remanded for further proceedings consistent with this opinion.