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IN RE ROOSEVELT LANES

October 8, 1964

In the Matter of ROOSEVELT LANES, INC., Debtor


The opinion of the court was delivered by: ZAVATT

This is a petition to review the order of Referee Rudin, dated May 15, 1964, denying the petition of Brunswick Corporation (formerly The Brunswick Automatic Pinsetter Corporation) for an order of reclamation of 40 pinsetters sold by the petitioner (hereinafter referred to as Brunswick) to the debtor under a conditional sales contract, dated June 29, 1959. The debtor operates a 40 lane bowling establishment in Roosevelt, Nassau County, New York. The conditional sales contract was duly and timely filed in the office of the Clerk of Nassau County on July 1, 1959, New York Personal Property Law, McKinney's Consol.Laws c. 41, §§ 65, 66 and was duly and timely refiled. New York Personal Property Law, § 71. The Referee denied the petition upon the ground that a written agreement between the debtor and Brunswick, dated May 9, 1963, which modified the amount of certain installment payments, extended the term for the payment of the unpaid time balance and added an 'extension charge' for the financing of the indebtedness over the extended period, rendered the conditional sales contract invalid as against the debtor-in-possession for failure of Brunswick to file the extension agreement; that this agreement 'created an entirely new agreement'; that the changes effected thereby were substantial; that Section 66-a of the New York Personal Property Law required that the extension agreement be filed.

The Facts The cash price of the pinsetters was $ 8,100 each, or a total of $ 324,000 for 40 such pinsetters. The debtor made a down payment of $ 20,000 and desired to finance the unpaid balance of $ 304,000 over a period of eight years. Accordingly, there was added to the unpaid balance of $ 304,000 a finance charge of $ 79,040 for the financing over the eight year period, thus bringing the debtor's total obligation to the sum of $ 383,040. The conditional sales contract does not state separately the unpaid balance of principal ($ 304,000) and the precalculated finance charge. Rather it lumps principal and finance charge as follows: Total purchase price $ 403,040 Heretofore paid $ 4,000 Paid on contract 16,000 20,000 Deferred time balance $ 383,040

 This deferred time balance was to be paid as follows, beginning July 20, 1959: Weekly payments equal to 12 cents per game bowled during the preceding week. Should the weekly payments during August 1959 and thereafter be less than the stated monthly minimum payments the debtor was required to pay the deficiency on the 10th day of the succeeding month. Monthly minimums: October through May $ 5,000 June through September 2,000

 On the basis of these monthly minimums, the final installment would have been paid in June 1967 and it would appear that the finance charge was computed accordingly. For the contract provides 'after full payment of the purchase price and the amounts due hereunder the Seller shall give the Buyer a finance charge credit for payments in excess of the monthly minimums at the rate of 6% Per annum.' It will be noted that the finance charge under the original contract amounts to 26% Of the unpaid balance of principal of $ 304,000. In the trade this is known as an 'add-on.' The 'add-on' per year (over an eight year period) is 3.25 applied to the original amount of principal. The actuarial rate of return on this amount based on the minimum monthly installments payable over an eight year period is slightly less than 6% Per annum. Financial Rate Translater and Guide to Legal Installment Sales Rates, prepared by Financial Publishing Company, 82 Brookline Avenue, Boston 15, Massachusetts. As of May 9, 1963, the debtor was in default. The unpaid 'deferred time balance,' exclusive of unearned finance charge, was $ 254,362.52. There was also due the further sum of $ 7,920 as interest, at the rate of 6% Per annum, on late payments of installments. In response to the debtor's pleas for more time, a written extension agreement was executed by the conditional vendor and the conditional vendee, dated May 9, 1963. When the extension agreement was executed, no new note was executed nor was the original conditional sales contract or the original conditional sales promissory note, each dated June 29, 1959, surrendered. The unpaid balance was recalculated as follows: Unpaid balance, excluding unearned finance charge $ 254,362.52 Interest due on late payments, at 6% 7,920.00 Finance charge on $ 262,282.52 for seven years 73,439.11 $ 335,721.63

 The provision of the original contract as to installment payments was modified. Whereas the original contract and promissory note required monthly minimum payments of $ 5,000 for the months of October through May of each year and of $ 2,000 for the months of June through September of each year (a total annual minimum of $ 48,000), the extension agreement required only eight monthly minimum installments of $ 5,995 each year or an annual total of $ 47,960, except that the final monthly minimum was fixed at $ 5,996.63, so that, over a period of seven years from March 15, 1963 (the due date of the first installment under the extension agreement), the total sum of $ 335,721.63 would have been paid. Although the original contract would have been paid in full according to its terms by June 1967, the extension agreement extended the date of final payment to March 15, 1970. In addition, the finance charge under the extension agreement was increased to an 'add-on' of 28% For the seven year period, the equivalent of simple interest at the rate of 7.3% Per year, whereas under the original contract the rate of interest was slightly less than 6% Per annum.

 The extension agreement refers to the conditional sales contract and promissory note, each dated June 29, 1959, and provides:

 '4. All of the terms and conditions of the aforesaid instruments shall remain in full force and effect except insofar as the terms of payment are modified and extended by this Agreement.

 '5. This Agreement shall remain in full force and effect until said indebtedness shall have been paid in full by the Purchaser to Brunswick. In the event that Purchase shall at any time hereafter fail to pay any of the installments as set forth herein, Brunswick may, at its option, declare this Agreement null and void and proceed in accordance with the terms of the aforesaid instruments as though this Agreement had never been executed.'

 The conditional sales contract provides:

 '4. Title to said property shall not pass to Buyer until the total amount payable as herein provided is actually paid in cash.

 '8. It is agreed that the Brunswick Automatic Pinsetters shall at all times be considered personal property and that they shall not be deemed to be attached or affixed permanently to the premises or to the bowling lanes on which the said property is to be installed. The Seller shall have the right to remove said property in the event of a default in this contract by the Buyer.

 '10. If the Buyer shall default in the payment of any amount for which the Buyer is liable hereunder, it being agreed that time is of the essence of this contract, or shall fail to comply with any of the conditions hereof, or if any proceeding in bankruptcy, receivership or insolvency is instituted by or against the Buyer, * * * then in any such event the full amount remaining unpaid by the Buyer may, at the Seller's election, become immediately due and payable. The Seller's acceptance thereafter of any payment, or any agreement for the extension of the time of payment between the Seller and the Buyer, or other indulgence granted the Buyer, shall not be deemed to alter or affect the Buyer's obligations or the Seller's rights hereunder with respect to any subsequent payments, default, or any other rights under this contract.

 '11. If the Buyer defaults in complying with any of the terms hereof or upon the happening of any of the events which under the provisions of paragraph 10 above give the Seller the right to declare the balance immediately due and payable, the Seller, to the extent not prohibited by law, may take immediate possession of said property and for this purpose the Seller may enter the premises where said property may be and remove the same, without notice or demand, and with or without legal process; thereupon all the rights and interests of the Buyer to and in said property shall terminate * * *.'

 The debtor failed to pay in full the first installment due under the extension agreement on March 15, 1963, and failed to pay any part of the subsequent installments due April 15, May 15, October 15, November 15, December 15, 1963 and January 15, 1964. Rather, on January 14, 1964, it filed a petition for an arrangement under Chapter XI, Section 322 of the Bankruptcy Act, 11 U.S.C. § 722. The matter was referred to Honorable William J. Rudin, Referee in Bankruptcy and an order of this court was made and entered authorizing the debtor to continue the operation of its business as debtor-in-possession. Thereupon, Brunswick made a demand upon the debtor for the surrender of the 40 pinsetters and, upon the debtor's refusal to comply, filed its petition for an order directing the debtor to surrender the same to Brunswick.

 In its answer to the petition the debtor admitted the basic facts hereinabove stated. However, it alleged that 'when new and different arrangements were made to pay * * * in fifty-six (56) installments, the parties intended to and did alter and make radical changes in the terms and conditions of the conditional contract of sale, dated June 29, 1959, in so far as it was inconsistent with the new agreement, and it was likewise their intention that the new agreement, dated May 9, 1963, would take the place of the old agreement.' It claimed that the new agreement came within the purview of Section 66-a of the New York Personal Property Law so as to require 'the making and filing of a new conditional sales contract'; that, for failure to so file, 'such title as the reclaimant may have had in the forty (40) Brunswick Automatic Pinsetters is void and the reclaimant lost its lien and security, and the debtor-in-possession is the absolute owner of the * * * Pinsetters * * *.'

 By virtue of Section 70, sub. c of the Bankruptcy Act, 11 U.S.C. § 110, sub. c, the trustee of the estate of a bankrupt is vested as of the date of bankruptcy with all the rights, remedies and powers of a lien creditor, whether or not such a creditor actually exists. He can take advantage of an improper filing of or the failure to file a conditional sales contract. Empire State Chair Co. v. Beldock, 140 F.2d 587 (2d Cir.), cert. denied, 322 U.S. 760, 64 S. Ct. 1278, 88 L. Ed. 1587 (1944). By virtue of Section 342 of the Bankruptcy Act, 11 U.S.C. § 742, a debtor-in-possession has all the title and shall exercise all the powers of a trustee appointed under the Act, subject only to the orders of the court. The debtor-in-possession in the instant case, therefore, may oppose Brunswick's reclamation petition and may take any other appropriate steps to have the conditional sales contract declared invalid as to creditors and to have Brunswick treated as an unsecured creditor. Whiteford Plastics Co. v. Chase Nat'l Bank, 179 F.2d 582 (2d Cir. 1950); Empire State Chair Co. v. Beldock, supra; In re Martin Custom Made Tires Corp., 108 F.2d 172 (2d Cir. 1939).

 At the hearing before the Referee, the debtor rested upon the documents received in evidence and the concession of Brunswick that the extension agreement had not been filed. It offered no evidence to support the allegation of its answer that it was the intention of the parties that the extension agreement would take the place of the original conditional sales contract. Rather, it rested on its contention that Section 66-a of the New York Personal Property Law required the filing of a new conditional sales contract. The Referee concluded, as a matter of law, that the conditional sales contract dated June 29, 1959, was invalid as against the debtor-in-possession because of the failure of Brunswick to file the extension agreement pursuant to section 66-a.

 Section 66-a of the New York Personal Property Law was added by L. 1933, ch. 572, effective April 28, 1933. It provides:

 ' § 66-a. Additions to conditional sales contract.

 'No conditional sales contract once filed can have any additions made to it so as to include other purchases or transactions between the same parties. A new contract must be made and filed.'

 The legislative history of section 66-a is found in the Governor's Bill Jacket, *fn1" in which are preserved a telegram from Charles Poletti, counsel to Governor Lehman, to Assemblyman Anthony J. Canney, author of the Bill (Int. 1616. Pr. 1793); the Assemblyman's reply and a memorandum of Henry Epstein, Solicitor General to the Governor. In response to the telegram requesting a memorandum setting forth the need and purpose of the Bill, Assemblyman Canney made it clear that the Bill was intended to apply to new purchases by a conditional vendee from a conditional vendor which were being added to the original contract without the filing of a new conditional sales contract:

 'ASSEMBLY CHAMBER

 STATE OF NEW ...


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