Friedland, Irvin J.

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Sales: Rights of Buyer\u27s Judgement Creditors Under Fraudulent Bulk Sale

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Marquette Law ReviewVolume 43Issue 4 Spring 1960 Article 8Sales: Rights of Buyer's Judgement Creditors UnderFraudulent Bulk SaleIrvin J. FriedlandFollow this and additional works at: http://scholarship.law.marquette.edu/mulrPart of the Law CommonsThis Article is brought to you for free and open access by the Journals at Marquette Law Scholarly Commons. It has been accepted for inclusion inMarquette Law Review by an authorized administrator of Marquette Law Scholarly Commons. For more information, please contactmegan.obrien@marquette.edu.Repository CitationIrvin J. Friedland, Sales: Rights of Buyer's Judgement Creditors Under Fraudulent Bulk Sale, 43 Marq. L. Rev. 537 (1960).Available at: http://scholarship.law.marquette.edu/mulr/vol43/iss4/8RECENT DECISIONSSales: Rights of buyer's judgment creditors under a fraudulentbulk sale-An Illinois Corporation, Central Metallic Casket Co.,physically transferred its assets to Wisconsin between May 20th andJune 1st of 1955. The directors of the Wisconsin Corporation, whowere the same as those of the Illinois Corporation, assumed all thedebts and obligations of the Illinois Corporation. There was no com-pliance with the Bulk Sales Act of Illinois. The Wisconsin Corpora-tion was forced into bankruptcy on April 3, 1956, following a petitionfiled against it by creditors of the Illinois Corporation. Plaintiffs, thecreditors of the Illinois Corporation, claimed that the transfer to theWisconsin Corporation was "void" as to them under the Bulk SalesAct. Therefore, the Wisconsin Corporation as transferee obtained notitle to the property, and the trustee could obtain no lien against theproperty to which the bankrupt had no title.The referee concluded that Illinois law governed, and that the BulkSales Act was not complied with. But this noncompliance made thetransfer "voidable" rather than "void," and as the plaintiffs filed theirclaims against the Wisconsin Corporation, they waived their rightsunder the Bulk Sales Act, and are now estopped to assert a lien onthe goods in the hands of the trustee, who is a hypothetical lien holder.The District Court affirmed the referee.1 It held that creditors ofthe fraudulent transferor do not have a lien, but a mere "inchoateright until asserted and ripened by appropriate judicial proceedings."12The Court then held that innocent creditors of a fraudulent grantee3who have levied on property before any action is taken by the creditorsof the fraudulent grantor, have a superior right over the latter.Even though the Bulk Sales Act uses the word "void" instead of"voidable," the Court following serevad New York decisions, held"void" in fraudulent conveyance statutes to mean "voidable," as anydifferent holding would cause "a material variation in the rights ofbona fide purchasers from a fraudulent grantee, under the FraudulentConveyance Act." Therefore, as the transfer was voidable, the plain-tiff's rights were cut off by the rights of the trustee in bankruptcyas attaching lienholder.5I In Re Central Metallic Casket Co., 170 F. Supp. 320 (E. D. Wis. 1959).2 Id. at 324.3 Under Section 70 (c) of the Bankruptcy Act, Title 11 U.S.C.A. §110 (c)(1952), the trustee has the status of an attaching creditor without noticeof an unrecorded prior lien.4 In Re Central Metallic Casket Co., supra note 1, at 326.5 The United States Court of Appeals, in affirming the decision of the DistrictCourt, did not deal with the issue presented in this article. The Court heldthat the physical transfer of the assets to Wisconsin was not the sale itself;the sale took place when the Wisconsin Corporation was formed, and there-fore since this was a Wisconsin sale, the Wisconsin Bulk Sales Act should beapplied. Under Wisconsin law, the Bulk Sales Act applies only to transfersMARQUETTE LAW REVIEWThe rule layed down in the principal case is the rule applied gen-erally to fraudulent conveyances., This rule was first enunciated inIn Re Mullen7 and a simple statement of the rule is found in Brill v.Forshay:Innocent creditors of a fraudulent grantee, who have acquireda lien and levied on property before any steps have been takenby the creditors of the fraudulent grantor will hold the propertyas against such other creditors though not as against prior liencreditors."The reasoning upon which this rule was based is that, as betweenthe creditors of the fraudulent grantor and the innocent creditors ofthe grantee, the equities with resepect to the fraudulently conveyedproperty are equal; therefore, the first to perfect his lien should takeprecedence. Of course, where the creditors of the grantee had knowl-edge of the fraud, actual or constructive, they could not recover."Also, some distinction appears to be made on whether or not thecreditor had given fresh consideration in reliance on the grantee'sapparent ownership of the property or is merely endeavoring to subjectthe property to a debt against him antedating the conveyance or other-wise not incurred in reliance on the apparent ownership of the prop-erty.10 However, with these exceptions, the majority opinion seems tofollow the rule stated above. 1The first application of the general rule of fraudulent conveyancesto bulk sales transactions is found in City of New York v. Johnson, 2upon which the District Court in the principal case relied so heavily.This case specifically applied the fraudulent conveyance doctrine to thegrantee's attaching creditors under the Bulk Sales Act, in holding:We are referred to no authority and can see no reason for hold-ing that the word "void" means more than "voidable" where theof property held for sale at retail, and therefore the case could easily be dis-posed of. In Re Central Metallic Casket Co., 273 F. 2d 506 (7th Cir. 1960).G In Re Central Metallic Casket Co., supra note 1, at 324.7In Re Mullen, 101 Fed. 413, 416, 417 (D.C. Cir. 1900).8Brill v. Forshay, 65 F. 2d 420 (8th Cir. 1933).9 Wilkinson v. Livingston, 45 F. 2d 465 (8th Cir. 1930) ; Goldberg, B. and Co.v. Demick, 77 Cal. App. 535, 247 Pac. 261 (1926); Powell v. Ivey, 88 N.C.256 (1883).30 Applegate v. Applegate, 107 Iowa 312, 78 N.V. 34 (1899) ; Hull v. Angster,107 N.J. 454, 153 Atl. 93 (1931); Lowenthal v. Standard Oil Co., 114 N.J.375, 168 Atl. 857 (1933). But see Manhattan Co. v. Evertson, 6 Paige (N.Y.)457 (1837)) for case upholding grantee's creditor even though the claimagainst the property was based on an antecedent debt."1 148 A.L.R. 521 (1944). For cases following majority rule, see: In Re Mullen,supra note 7, at 413; Brill v. Forshay, supra note 8, at 420; Standard NationalBank v. Garfield National Bank, 67 N.Y.S. 472, 56 App. Div. 43 (1900) ; Boothv. Bunce, 24 N.Y. 592 (1862); Parker v. Freeman, 2 Tenn. Ch. 612 (1876).However, for cases contra the majority rule, see: Westervelt v. Hagge, 61Neb. 647, 85 N.W. 852 (1901); Manhattan Co. v. Evertson, supra note 10,at 457.12 City of New York v. Johnson, 137 F. 2d 163 (2d Cir. 1943).[Vol. 43RECENT DECISIONSremedies given by the Act are invoked, or that the consequencesto a bona fide purchaser from a fraudulent grantee are materi-ally different under the Bulk Sales Act from such consequencesunder the Fraudulent Conveyance Act."This language was relied on by a subsequent New York case,14 andthe principal case' 5 in coming to their conclusion. The reason given inthe Johnson case for applying the "fraudulent conveyance" rule tobulk sales transactions, as shown above, was that no "authority" or"reason" could be given for holding otherwise.It appears to this writer, however, that there is both "authority"and "reason" for holding otherwise. In an early Texas case, MidlandShoe Co. v. A. L. and K. Dry Goods Case.," the plaintiffs were credit-ors of the fraudulent grantee, who sold stock in trade in violation ofthe Bulk Sales Act, and the defendants were judgment creditors of thegrantee. The court held that "the statute expressly provides that abulk sale shall be 'void' as to creditors unless its provisions are com-plied with."' 7 It was said that there can be no bona fide purchasersbecause the original transaction was void. Several other cases, decidedbefore New York v. Johnson, agree with the Midland Shoe- Co. case.'"One of these,' 9 in holding that a sale to a subsequent vendee was in-valid as against attaching creditors of the bulk seller, stated, "Thegeneral policy and purpose of the Act [Bulk Sales Act], is to renderthe alleged sale null and void ab initio as against creditors of theseller." 20 Thus it can be seen that there was no lack of authority asstated in the Johnson case.The Johnson case, and the cases which relied on it, held that atrustee in bankruptcy not only had the rights of an attaching creditor,but also that an attaching creditor had the rights of a "bona fide pur-chaser for value.'21 It has long been established that, even under theBulk Sales Act, a "bona fide purchaser for value" takes as againstcreditors of the fraudulent grantor.22 But the problem is that most3 Id. at 166, 167.14In Re Vanity Fair Shoe Co., 84 F. Supp. 533 (S.D.N.Y. 1949), affirmed,Schwartz v. A. J. Armstrong Co., Inc., 179 F. 2d 766 (2d Cir. 1950).15 The identical language was used in In Re Central Metallic Casket Co., supranote 1, at 325-326.16 Midland Shoe Co. v. A. L. and K. Dry Goods Co., 281, S.W. 344 (Tex. Civ.App. 1926).:7 Id at 345.'sKett v. Masker, 86 N.J.L. 97, 90 Atl. 243 (1914) ; Sampsell v. Imperial PaperCo., 313 U.S. 215, (1941); Owosso Carriage and Sleigh Co. v. McIntosh &Warren, 107 Tex. 307, 179 S.W. 257 (1915).19 Kett v. Masker, supra note 18, at 245.20 Id. at 246.21 City of N.Y. v. Johnson, supra note 12, at 165. The Court did not hold a trusteein bankruptcy had the rights of a bona fide purchaser, but held a judgmentcreditor did.22 Prokopovitz v. Kurkowski, 170 Wis. 190, 174 N.W. 448 (1919) ; McKelvey v.Schapp, etc. Drug Co., 143 Ark. 477, 220 S.W. 827 (1920); Grove Mfg. Co.v. Salter, 26 Ga. App. 369. 106 S.E. 208 (1921) ; Kelley Buckley Co. v. Cohen,19601MARQUETTE LAW REVIEWVcourts hold that judgment creditors do not have the rights of "bonafide purchasers for value."23At the present time, there appears to be a lack of agreement as tothe legal status of bulk transfers made without compliance with statu-tory provisions.24 The Uniform Fraudulent Conveyance Act nowherecontains the word "void,' 25 and therefore the transfer of the construc-tion of this statute to bulk sales legislation is certainly not obvious.Even if the "fraudulent conveyance" rule were applied, not all of thetransferor's judgment creditors would be protected. 26 And, as the trendof cases has been generally, to liberally construe bulk sales acts toprotect creditors of the seller from illegal transfers,27 it would alsoseem logical for the courts to construe the meaning of the Acts inthis situation in favor of the transferor's creditor's.The language and purpose of the Bulk Sales Act seem to be thepersuasive factors in arguing that the general rule of fraudulent con-veyances does not apply. The purpose of the Act is to protect therights of creditors of vendors of property in the sale and transfer ofpersonal property.28 And it is certainly a possibility that by using theword "void," the lawmakers meant just that and not "voidable."It seems to this author, that if the purpose of the Bulk Sales Actis to be carried out, the defrauded creditors of the seller should begiven the fullest possible protection. This purpose, plus the strictwording of the Act itself, seems to require that innocent creditors ofthe bulk seller take precedence over innocent creditors of the bulkbuyer, at least where the latter creditors did not give up fresh con-sideration in reliance on the apparent ownership of the property.The Uniform Commercial Code deals more explicitly with the issue.Section 6-104 (1) states that ". . . a bulk transfer is ineffective againstany creditor of the transferor unless . . .-29 certain requirements arecomplied with. The word "ineffective," in itself, seems more ambiguousthan the term "void" as used in most Bulk Sales Acts. However, twoother sections seem to solve the problem. Section 6-111 requires actionby the transferor's creditors within six months of the transfer unlessthere has been concealment,"0 and Section 6-110 (2) allows a good195 Mass. 585, 81 N.E. 297 (1907); Markarian v. Whitmarsh, 78 N.H. 1, 95Atl. 788 (1915) ; WILLISTON, SALES, §643, at 1117 (1924).23 148 A.L.R. 533-535 (1944). Couse v. Columbia Powder M'fg. Co., 33 Atl.297 (N.J.Eq. 1895) ; Richardson v. Gerle 54 Atl. 438 (N.J. Eq. 1903) ; In ReMullen, supra note 7, at 417.24 65 HARV. L. REV. 418, at 432 (1952).25 UNIFORM FRAUDULENT CONVEYANCE ACT, Wis. Stat. Ch. 242 (1959).26 See footnote 10.'728 TEXAS L. REV. 989, at 991 (1959).28 Hanson v. Knutson, 182 Wis. 459, 196 N.W. 831 (1924).29 UNIFORM COMMERCIAL CODE, §6-104 (1).30 UNIFORM COM ERCIAL CODE, §6-111.[Vol. 43RECENT DECISIONSfaith purchaser for value to take free of the defect.31 The broad defini-tion given to "purchasers" would probably include any type of credit-ors.32 Therefore, under the Uniform Commercial Code, the principalcase would probably have been decided the same way.IRviN J. FRIEDLANDSales: Liability of a manufacturer of ingredient to another foodprocessor based on breach of warranty of fitness for human con-sumption-Plaintiff biscuit company used snow ice to reduce thetemperature of the dough in its preparation of frozen biscuits to besold to the public. Shipments of ice were delivered each day by adistributor, Crossland Ice Service, from defendant ice company. Thedefendant placed the shipping tags on the bags of ice and knew thedestination and that the ice would be used by the biscuit company forpreparing food for human consumption. Glass was discovered in sev-eral of the bags of ice after some frozen biscuits had already beenprepared with part of the ice shipment. Plaintiff destroyed all doughthat had been prepared with that shipment of ice and, being uncertainas to which day's shipment of ice contained the glass, recalled anddestroyed those biscuits already distributed that may have been con-taminated by the glass.At the trial in district court' the jury made several findings: thatthe ice contained glass when sold and delivered; that the defendantknew it was to be used in the preparation of food for human con-sumption; and that the plaintiff had been injured as a result of thecontamination of the ice with glass. The jury determined damagesusing as a basis the cost of biscuit materials destroyed, and the costof distribution and recall of the biscuits. Nevertheless, the court deniedrecovery n.o.v. holding that the remedy for breach of implied war-ranty of fitness for human consumption was available only to a con-sumer.Held, reversed on appeal.2 It was determined that a food processorwho discovers that his product has been adulterated by a deleterioussubstance in one of the ingredients supplied by another manufacturermay recover from that manufacturer (although there is no privity orallegation of negligence) on the ground that there has been a breachof warranty of fitness for human consumption.The court found that the ice, if not a food in the nutritive sense,32 UNIFORM COMMERCIAL CODE, §1-201 (33), and §1-201 (34).31 UNIFORM COMMERCIAL CODE, §6-110 (2).' Gladiola Biscuit Company v. Southern Ice Company, 163 F. Supp. 570 (E.D.Tex. 1958).2 Gladiola Biscuit Company v. Southern Ice Company, 267 F. 2d 138 (5th Cir.1959).19601

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Sales: Rights of Buyer\u27s Judgement Creditors Under Fraudulent Bulk Sale

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