Opinion
No. 13298.
February 5, 1932.
Henry L. Shepard, of Philadelphia, Pa., for petitioner.
A. Jere Creskoff, of Philadelphia, Pa., for trustee.
In Bankruptcy. In the matter of Heintz-Merkle Company, Inc., bankrupt. Proceeding on the reclamation petition of the Brockway Motor Truck Corporation, opposed by Emanuel Friedman, receiver in bankruptcy. On petition to review an order of the referee, denying the reclamation petition.
Petition for review denied, findings of referee approved, and referee's order confirmed.
Affirmed in 61 F.2d 519.
The opinion and order of Henry W. Braude, referee in bankruptcy, is as follows:
This matter is submitted on the reclamation petition of the Brockway Motor Truck Corporation and the answer of the receiver thereto. Prior to the filing of the petition, claimant filed a formal demand for the property in question, which, however, serves no purpose in this proceeding. The pleadings raise the question of law as to whether the transaction between the claimant and the bankrupt was one of bailment or sale, and rests entirely upon the construction of their written agreement.
The claimant's petition recites that it is the owner and entitled to immediate possession of a certain motortruck of the value of $1,593, which was delivered to the bankrupt under a "lease" agreement which provided that the "lessor" has delivered and "leases" to the "lessee," upon certain terms and conditions and for the times specified, a motor vehicle for the use of which the "lessee" agrees to pay $1,593; of which amount $315 has been paid on account at the execution of the agreement; an allowance of $250 is credited for a used car, a discount of $180 is also given, and the balance provided for by payment in twelve monthly installments of $70 each (except the first installment, which was for $78); the installment payments to bear legal interest from date of maturity and to be evidenced by promissory notes. The writing further stipulates that the "lessee" accepts the lease of the truck without warranty or guaranty; that the term is from the date of the execution of the lease until the due date of the final installment; that the assignment, negotiation, or extension of the notes is not to be construed as payment or as a waiver of any of the conditions; that "lessee" agrees to maintain the chattel in good order and repair at a certain location, and agrees not to sell, sublet, assign, incumber, use for hire or dispose of the same without the written consent of the lessor; that any spare, extra, or substituted part or equipment becomes by acquisition a part of the chattel; that "lessee" takes the risk, and must provide for insurance against loss by fire, theft, and collision, the loss to be paid to "lessor" and "lessee" as their interests appear; that upon default of payment of the interest or notes, or if the chattel is destroyed or seriously damaged by fire or other cause, or upon breach of any condition named, or if the credit status of "lessee" should so change as to render "lessee's" continued possession unsafe for "lessor," then "lessor" has the option to accelerate the due dates of all the notes and make them immediately due; that "lessor" also has the option then to enforce payment of the notes by suit or otherwise, but no suit or action is to be deemed a waiver of "lessor's" right to repossess the chattel on default or breach; that, on default, "lessor," without "abatement of rent," shall have the right to take it, but the repossession shall not operate as a release of "lessee" until the full rent has been paid in cash; and "lessor" has the right to enter judgment by confession for the balance of unpaid rentals or the amount of the notes or for the amount of any loss.
No provision is made for the return of the truck at the end of the term.
The answer of the receiver admits the essential fact averments of the petition, and thereby raises the question of law involved.
The transaction having taken place in Pennsylvania, the law of that state will apply.
The language used in the document executed by the parties purports to make it a lease, and the agreement is so termed, but the mere use of the words "lease" and "rental" in an agreement that relates to personal property will not convert into a bailment what must otherwise be construed as a conditional sale. Our courts have held that the intention of the parties is controlling, and that intention is one of fact which must be determined from all the circumstances of the case. Schmidt v. Bader, 284 Pa. 41, 130 A. 259.
A reading of the cases reveals that in Pennsylvania the courts, in determining whether a transaction was a bailment or a sale, have been guided by two considerations, although no hard and fast rule has been laid down. The courts have sought to ascertain, first, whether a definite term exists; and, secondly, whether there was a duty on the party in possession to return the chattel. In the absence of any other considerations, where these two factors existed, there was said to be a bailment. Where one or the other was lacking, the weight of authority appears to be that the transaction is a sale and void as to creditors.
In the case of Stern Co. v. Paul, 96 Pa. Super. page 112, the plaintiff delivered a ring to one Paul. The agreement provided for a definite term and rental; the duty of said Paul to return the ring at the end of the term; and the option of said Paul to purchase during the term or at the end thereof. The case turned upon the question of law, whether the written agreement in the case was a bailment or a conditional sale. The court said (pages 115, 116 of the opinion): "The exact line of demarcation between these two transactions is not easy to draw. The mere use of the words `bailment' and `lease' will not prevent a court from looking at the real nature of the transaction and declaring that an agreement purporting to be a bailment is really a conditional sale. * * * Perhaps no entirely satisfactory and accurate definition of a bailment lease, as distinguished from a conditional sale, can be given. It may, however, be said that, generally, where a person receives possession of a chattel under an agreement which contains apt words of lease, fixes a definite term and a certain rental, and includes an undertaking to return the same property at the termination of the lease, the mere fact that the bailee has an option to purchase the property during or at the expiration of the period of the lease does not transform the transaction into a conditional sale."
In the last-cited case the court held the agreement to be a lease because in its opinion the vital factors were the existence of a definite term and rental and the duty to return the property at the end of the term, though in the cited case, as in this case, there were the usual provisions in the event of default, including a warrant of attorney to confess judgment. The same ruling is made in the case of Werley v. Dunn, 56 Pa. Super. 254.
The courts constantly refer to the case of Farquhar v. McAlevy, 142 Pa. 233, 21 A. 811, 24 Am. St. Rep. 497, which appears to be a leading case on the question here involved. In that case the contract was termed a "lease," the lessee promising to pay a sum certain in installments, "as hire in advance for the use of said machinery so long as I shall retain it"; in case the installments were unpaid when due, the lessor might take the machinery, without trespass, the hire then unpaid to be forfeited. It was also provided: "When I have fully complied with the conditions, * * * I am to have the privilege of buying said machinery * * * upon my paying the sum of $1," on a day certain, "otherwise the title to said machinery to remain in the said" lessor "as aforesaid." One-half the "hire" being paid, the property was levied upon as belonging to the lessee.
The court, in a per curiam opinion (page 240 of 142 Pa., 21 A. 811, 812), said: "The construction of this paper was a question of law for the court, and the learned judge ruled it correctly. It is true it was claimed to be a lease, and the transaction a bailment, but it was not even so in form. It lacked the essential feature of a bailment, viz., a stipulation for a return of the property at the end of the term, in which respect the case differs from Rowe v. Sharp, 51 Pa. 26, where there was an express stipulation for the return to the bailor of the property at the termination of the bailment. It is of the essence of a contract of bailment that the article bailed be returned, in its own or some altered form, to the bailor, so that he may have his own again" — citing Benjamin on Sales, 6; Stephens v. Gifford, 137 Pa. 219, 20 A. 542, 21 Am. St. Rep. 868.
The court in this case stressed the fact that the case of Enlow v. Klein, 79 Pa. 488, which held that a provision for a return was not necessary, must stand upon its own peculiar facts.
In the case of Kelly Springfield Road Roller Co. v. Spyker, 64 A. 546, 215 Pa. 332, the court stated at page 333, of its opinion: "Although fixing a term and providing for a return at the end thereof may not be essential to a bailment, they are important, and often controlling evidence of the intention of the parties."
The leading case in the federal courts appears to be In re Tice (D.C.) 139 F. 52, 15 A.B.R. 97 (Middle District of Pennsylvania). This case provided for the delivery of machines, and payment of rent for their use, for a specified term. There was no provision for a return at the end of the term. The court held the transaction to be a sale, saying at page 53 of 139 F. and pages 98 and 99 of 15 A.B.R.: "The essential character of the transaction will be regarded, rather than the particular form which it assumes. * * * It has been held [citing Farquhar v. McAlevy and Stephens v. Gifford, supra] * * * to be of the essence of a bailment that there shall be a return of the property. * * * And that this must therefore be stipulated for. * * * It is true that rent, so called, is to be paid up to a certain time * * * but the question is, what is to happen after that, and why, if a return was contemplated, was it not provided for? On the basis that the payments to be made are rent, * * * it is somewhat peculiar that no rate per month or year is given by which to continue the arrangement in force; and it is thus brought to an end without any provision for its extension, or for a return of the property, other than the general right which the owner would have to get it back. No doubt, under the contract, if the installments * * * remain unpaid for 60 days after they severally become due, the machinery company may take the property. But, as was said in Morgan Elec. Co. v. Brown, 193 Pa. 351, 44 A. 459, this is evidently for the purpose of enforcing payment, rather than securing the property at the end, and is entirely consistent with the idea of a conditional sale."
In Liquid Carbonic Co. v. Quick (C.C.A.) 182 F. 603, 25 A.B.R. 395 (Pa.), there were two contracts; one contract expressed no term, and no time for the surrender of the chattel; the second provided for a surrender at the end of the term, or, at the option of the bailee, to purchase for $1. The court held the first to be a sale, the latter to be a bailment, saying of the latter agreement, at page 605 of 182 F., and 397 of 25 A.B.R.: "The provisions * * * for a specified term and a specified rental, and that at the expiration of the term it should be surrendered to the company, are the indicia of a bailment. The cases of Farquhar v. McAlevy, supra, Kelly Road Roller Co. v. Spyker, supra, [and] In re Tice, supra * * * differ from the present case in that in none of them was surrender by the party in possession required, nor in some of them was any term of bailment expressed."
The only provision for the return of the truck in the instant case is in the event of default, and it is apparent that this provision is intended to secure the payment of the amount due by causing the person in possession either to pay or to lose the benefit of what he has already paid. The purpose of this provision is not one to retain title.
In Morgan Electric Co. v. Brown, 193 Pa. 351, 44 A. 459, it was provided under an agreement purporting to be a lease that upon default the property could be recovered. The court said at page 357 of 193 Pa., 44 A. 459, 461: "This provision was not put in the contract to insure the return of the property to the electric company, `so that it might have its own again,' but to insure the payment of the notes, so that the property might remain in the possession of the coal company as its own. It was a contract remedy to enforce payment, not of hire, but of purchase money."
The agreement in the case under consideration provides for the right of the claimant to declare the notes due "if the credit status of the lessee" should so change as to render the lessee's continued possession of the chattel unsafe for the lessor. It is much more difficult to reconcile this provision with the theory of a bailment than with the theory of a sale.
It is to be remembered that the entire "rental" in this transaction is fixed at $1,593, of which amount $315 was paid on account, at the execution of the agreement, an allowance of $250 was given for a used car, a discount of $180 was also given, and the balance provided for by payment in twelve monthly installments, bearing legal interest from the date of maturity and evidenced by promissory notes.
As was stated in Bank of Secured Savings v. Rudolph, 83 Pa. Super. 439, at page 444, under a similar state of facts, and where the agreement contained also the stipulation for a return of the property at the end of the term with an option in the lessor to purchase the property upon the further payment of $1: "The first installment of $1,250 was referred to as rental while the entire balance is to be paid in rentals of so much per month. How this amount, which was taken in trade as part payment, would subsequently be turned into rental is hard to say. The whole thing on its face is a device to secure the balance of the purchase money by a pledge of the truck. The words employed evincing an intention of making it a bailment do not overcome these facts which show that this was a sale. What is in the minds of the parties can be sometimes ascertained by the undersigned utterances that are contained in the paper. The reference to the right of the seller to declare the note immediately due and payable when he shall deem the debt `insecure' is very significant. We think the contract between the parties was one of buyer and seller and not a bailment."
The burden of proving that the transaction is a bailment is on the one who asserts it. "* * * The contract is to be construed most strongly against him, which in case of doubt would be sufficient to turn the scale. * * *" In re Tice, supra.
What appears the undoubted viewpoint of our state and federal courts is expressed in Re Morris (D.C.) 156 F. 597, at page 598, where the court said: "While, therefore, it is easy enough to make an agreement speak as a lease or a bailment, where that was what was actually in the mind of the parties, where the fact is that the one desires to sell and the other to buy; the attempt to have the arrangement masquerade in writing as something else is very likely to fail. * * * As experience teaches, such instruments are prompted by the desire * * * of the owner * * * to have the benefit of a sale while escaping its responsibilities, retaining a hold on them so as to be secure of the price, without subjecting them to the claims of creditors by reason of having parted with the possession, although giving credit to the one obtaining them, in their eyes, as the apparent owner thereby. This is not the policy of the law, and there is no occasion for the courts to be astute in helping to get around it."
Summarizing, therefore, the facts which point to the true character of the transaction, in the instant case, we have, first, the failure to provide for the return of the truck at the end of the term, and this omission appears to have been deliberate, in view of the extreme care with which the agreement provides for the return of the truck in the event of default. Furthermore, no provision is made for purchase at the end of the term, even if all rental payments are made, for the purpose of avoiding any appearance of a sale, which in itself is an indication of the real character of the transaction.
Secondly, as in Secured Savings Bank v. Rudolph, supra, there is the provision that, if the credit status of the "lessee" was such as to make it unsafe for the claimant, all the rentals should become due, and claimant is to have the right to recover the truck, which points to a sale, for if the transaction were a lease, the claimant would have a right to recover its truck on default, regardless of the financial situation of the "lessee."
The third is the provision as to insurance. The fact that the "lessee's" interest is provided for raises the suggestion of reimbursement to "lessee," in the event of loss or damage, of whatever portion of the purchase price was paid by "lessee."
And, fourth, as in Bank of Secured Savings v. Rudolph, supra, we have the significant items of payment of cash on account, a credit for a used car, and a discount allowance, which are difficult to construe as rental payments.
Finally, we have the provision in the agreement that the lease was to be used in Pennsylvania, which raises the obvious implication that it was intended to avoid possible objections to the provisions of our Conditional Sales Law.
Since, as it has been held, no fixed rule can be laid down for the interpretation of a written agreement such as we have in this case, and since the burden of proving the agreement to be a lease is upon the claimant, and the agreement is to be construed most strongly against the claimant, it would seem logical and indeed compelling to hold that this was a sale and not a bailment.
And now, September 19, 1930, in accordance with the foregoing opinion, it is ordered that the reclamation petition of the Brockway Motor Truck Corporation for the possession of a certain Brockway motortruck and body bearing serial No. 65-C-1220, engine No. 16-C-12650, of the value of $1,593, be, and same is hereby, dismissed.
This was a reclamation proceeding in which the referee made an order dismissing the claim. The basis of the claim to the property, made the subject of reclamation, is the familiar type of contract entered into for the purpose of making a contract of sale on credit take the form of a bailment for use on hire. The real purpose is to enable the vendor to have and to enforce a lien for unpaid purchase money. We have been favored with an elaborate and forceful argument by counsel for the claimant and petitioner, which we can highly commend for the industry and ability displayed, yet which puts in a strong light the true character of all such agreements. He advances as accepted propositions "that the controlling factor, whether the contract in question is a lease or conditional sale, is determined by what the parties intended it to be," but, "in arriving at a conclusion as to what the parties intended the nature of the contract to be, the sole basis of judgment is the language which the parties themselves used in the contract itself." If the sole test of the nature of the contract is its language, everyone of these sales is a so-called lease, because such is the language of every one of them. As between the parties themselves, they may agree to anything, but as between a real vendor and execution creditors the latter are not concluded by what the vendor or the vendee or both may have said. The principles of law upon which the owner of any property takes his stand are that as owner he has full dominion over his property which he may hire out or sell as he wills. If he parts with the possession to another, and the sole and full agreement between them is in writing, he may invoke another principle of law that the writing is the sole witness to the agreement. The law then determines the meaning in legal effect of the writing. Seldom, however, does a vendor do this. He sells the property to a buyer, and then, if the buyer cannot pay the purchase price in full, he attempts to conceal the sale by the pretense of something else. The fable of the ass and the lion's skin illustrates the results of such subterfuges. Possession is evidence of ownership. A trustee in bankruptcy, therefore, starts with the prima facie ownership. A claimant assumes the burden of proving his ownership. He does not meet this burden by producing a so-called lease agreement.
This claim was heard on petition and answer. The petition avers ownership in the claimant; the answer denies this ownership. The burden is upon the petitioner to prove that the property belongs to him. The only evidence this claimant offered in support of his title was this so-called "lease." This proves nothing but the fact that the claimant and the bankrupt signed the paper writing to which their names are subscribed. If A is in possession of a horse, as owner, to which B claims title, which title A denies, and an issue of ownership is raised in replevin or other form of action, B has not advanced his claim one iota by producing a writing signed by C. Such a paper would not even be evidence. It would become evidence only after B had shown that A derived his title through C, so that, if C had no title, A had none. He might reach the same result by proving that he had owned the horse and had parted with possession by letting him out to hire to C. If so, A must have become possessed of the horse immediately or mediately through C. We may, we suppose, assume in this case that possession came to the trustee in bankruptcy through the bankrupt. It is only because of this that the agreement between the claimant and the bankrupt comes into the case. What then is the real fact issue? As before stated, possession is evidence of ownership. The claimant must overcome this, and he essays to do so by saying that he let the bankrupt have the property on a bailment for hire. This the trustee denies, averring that the claimant had sold the property to the bankrupt. The claimant takes the stand to testify that he had given possession to the bankrupt under a contract which was reduced to writing and is produced. The fact of ownership must still be found in favor of the claimant, and here it has been found against it. This settles the question, unless the referee erred in this fact finding.
It may be said that, as all the evidence was in writing, the fact finding may be reviewed and refound in an appellate proceeding. How then should the fact be found? A cynical philosopher has defined faith to be "that which enables one to believe in what he knows ain't so." It would take more than faith to enable any one to believe that this truck was not sold to the bankrupt. The referee has stated a number of reasons which persuaded him to make the finding he has made. Some of these have encountered the criticism of counsel for the claimant. We have no concern, however, with anything other than the finding made that the truck was the property of the trustee. A few of the reasons for his finding, which the referee has given us, would be convincing without more. This truck had a sale price value. If it is permissible to refer to the reclamation bond given by the claimant, this value was $1,593. We may, at least, infer that it had some value. The claimant avers that it gave up the possession of this truck only on a bailment for hire agreement. The total hire footed up $1,593. That was all the bailee was to pay. After payment, in whom was the title to the truck? Not in the bailor, because the bailor was to get it back only if the bailee failed to pay the "rent." The bailee was to keep the truck insured. The insurance moneys were made "payable first to the lessor and then to the lessee as their respective interests may appear." This can only mean that the "interest" of the claimant in the truck was limited to the $1,593 which the bankrupt was to pay. Without further extending the discussion, it may be summed up in the observation already made that no one could make the required fact finding in favor of the claimant without believing and knowing that this was an untruth.
The petition for a review is denied, the findings of the referee approved, and the order made affirmed and confirmed.