International Canning Machinery, Ltd. v. Murrieta Hot Springs (In re Murrieta Hot Springs)

Citations: 6 B.R. 73; 1980 Bankr. LEXIS 4618Docket: Bankruptcy No. 78-01818-DN

Court: United States Bankruptcy Court, C.D. California; August 15, 1980; Us Bankruptcy; United States Bankruptcy Court

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On July 10, 1980, a trial was held involving International Canning Machinery, Ltd. as the plaintiff and Leonard A. Goldman, the Trustee in Bankruptcy of Murrieta Hot Springs, as the defendant. An involuntary bankruptcy petition was filed against Murrieta Hot Springs on March 3, 1978, leading to its adjudication as bankrupt on April 10, 1979. This case is governed by the pre-1978 Bankruptcy Act due to provisions in the Bankruptcy Reform Act of 1978. The parties agreed on a stipulation of facts, which established that International Canning Machinery, Ltd. is a California corporation engaged in selling processing machinery. 

Murrieta Hot Springs, a resort, had sold two large Dixon package-type fire tube boilers to the plaintiff for $10,000 on September 15, 1975, as part of a redesign of its hot water system. The boilers, which are oversized and weigh between 18 to 20 tons, cannot be removed without demolishing part of the building they are housed in. The estimated cost to move the boilers to the plaintiff's storage yard in Wilmington, California, is also $10,000, which includes expenses for transportation, crew, and equipment necessary for the relocation.

Boilers moved to Wilmington would remain exposed to the weather, risking approximately $5,000 in reconditioning costs if left outside for an extended period. Upon sale, the boilers needed to be reloaded onto flat-bed trucks using a crane. Consequently, the plaintiff opted to keep the boilers at MURRIETA HOT SPRINGS until sold, requesting permission for them to remain in the boiler building, which was granted under the condition that the space was not needed for other purposes. MURRIETA HOT SPRINGS assured the plaintiff that the boilers could stay. The plaintiff contracted to sell the boilers f.o.b. MURRIETA HOT SPRINGS but later learned that the boilers were in the possession of the defendant and could not be retrieved.

The boilers are currently located in the defendant's boiler building. MURRIETA HOT SPRINGS recorded the sale of the boilers to the plaintiff upon receiving a $10,000 payment, but neither party notified third parties of the transfer. On March 3, 1978, an involuntary bankruptcy petition was filed against MURRIETA HOT SPRINGS, which owned approximately 2,500 acres of property valued over one million dollars, excluding the sold boilers. 

The time taken to remove the boilers exceeded what is considered commercially reasonable, and there was no complete and unconditional delivery due to necessary structural alterations for their removal. The recorded sale did not effectuate an actual change of possession, and there was no visible change of possession to inform creditors of the transfer. The legal issues will be adjudicated under California law as applied in federal courts, following the principles established in Erie R. Co. v. Tompkins, which dictate that state law governs the substantive rights in diversity cases.

California Civil Code § 3440 establishes a conclusive presumption that transfers of personal property lacking immediate delivery and actual, continued change of possession are fraudulent and void against creditors while the transferor remains in possession. This statute applies to trustees under the Bankruptcy Act of 1898. Case law, including Sequeira v. Collins, indicates that physical removal of property is not necessary for a valid transfer, but possession must change immediately or within a reasonable time. Good faith and adequate consideration do not serve as defenses against claims under this code, though stricter application occurs in cases of questionable faith. The need for an open, visible, and unequivocal change of possession is emphasized, requiring substantial outward signs to demonstrate that control has shifted. Actual change of possession must be genuine and not merely theoretical.

Proof of actual change of possession is case-specific and relies on the facts and circumstances unique to each situation. Courts or juries determine possession based on evidence presented. Symbolic delivery or undetectable transfers do not suffice for establishing possession. Various California case precedents illustrate the necessity of observable actions or dominion to demonstrate ownership effectively. Instances like the prompt assembly and relocation of purchased items or minimal elapsed time between purchase and seizure support claims of possession. In this case, the purchaser failed to take actions indicating ownership before the filing of an involuntary petition, with a significant time lapse since the sale. Consequently, the vendor's book entry was inadequate for establishing delivery. The findings conclude that the Trustee is entitled to benefits under California Civil Code section 3440, making the transfer of certain boilers to the plaintiff void and affirming the Trustee's superior title to the boilers. Counsel for the Trustee is directed to prepare a proposed judgment.