First Nat. Bank v. Connett

Decision Date17 November 1905
Docket Number51.,2,153
Citation142 F. 33
PartiesFIRST NAT. BANK OF BUCHANAN COUNTY, ST. JOSEPH, v. CONNETT. In re FIRST NAT. BANK OF BUCHANAN COUNTY, ST. JOSEPH.
CourtU.S. Court of Appeals — Eighth Circuit

Culver Philip & Spencer, for appellant and petitioner.

Julian B. Shackelford, for appellee and respondent.

The First National Bank of Buchanan County, St. Joseph, Mo presented four promissory notes for allowance against the estate of James B. Matney, bankrupt. Two of them were unsecured; the others were secured by chattel mortgages. One of the mortgages was given October 31, 1902, and the other June 26, 1903. When they were given the bankrupt was in fact insolvent, but at that time the bank did not know and had no reason to believe that such condition existed or that Matney intended to give it a preference over other creditors. The bank withheld the mortgages from record until August 21 1903, at which time, however, it knew that Matney was insolvent and was about to execute a deed of trust upon all of his property to secure certain of his creditors. A few days after the mortgages were recorded the bank took possession of the mortgaged property and converted it into money. The transactions occurred in the state of Missouri. The petition in bankruptcy, upon which adjudication followed, was filed September 24, 1903. Certain debts of the bankrupt aggregating $1,424.80 were incurred by him between the time of the execution and the time of the recording of the first mortgage, and it is conceded by the bank that as to the creditors to whom such debts were owing the mortgage was invalid, and that it should be required to surrender the amount thereof as a condition to the allowance of its own claims. The referee mortgaged property, upon the ground that a voidable preference was created within the four months' period, and he was upheld in so doing by the District Court. The bank prosecuted an appeal from the order of disallowance and also, as the facts were not in dispute, a petition to revise in matter of law. The appeal will be considered, and the petition to revise will be dismissed as unnecessary, although we have heretofore held that it is a proper remedy when no disputed questions of fact are involved.

Before SANBORN, HOOK, and ADAMS, Circuit Judges.

HOOK Circuit Judge, after stating the case as above, .

When the mortgages were executed the mortgagor was insolvent, but the bank to whom they were given did not know it and had no reason to believe he intended to give it a preference. One of them was withheld from the record about ten months, and the other about two months. When they were recorded, which was a month before the petition in bankruptcy was filed, the bank knew the mortgagor was insolvent and contemplated a disposition of his property to secure certain of his creditors. It also knew that the inevitable effect of the enforcement of the mortgages would be to give it a greater percentage of its claims than other creditors.

The question for determination is whether under the foregoing facts there arose a voidable preference as defined by the national bankruptcy act of 1898, as amended in 1903. This involves also a consideration of the registry laws of the state of Missouri, where the transaction occurred.

Section 57g of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 560, 561 (U.S. Comp. St. 1901, p. 3443)) provides that the claims of creditors who have received preferences voidable under section 60b shall not be allowed unless such preferences are surrendered. For the definition of a preference we must look to subdivision 'a' of section 60, and to subdivision 'b' for the element which makes it voidable. Section 60a provides, among other things, that a person shall be deemed to have given a preference if, being insolvent, he has within four months before the filing of the petition made a transfer of any of his property, the effect of which will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class. Also:

'Where the preference consists in a transfer, such period of four months shall not expire until four months after the date of recording or registering of the transfer, if by law such recording or registering is required.'

By the amendatory act of 1903 the first of the italicized provisions was transposed from section 60b of the original act, while the latter is an entirely new feature. Subdivision 'b' of this section, to which reference is made in 57g, provides that, if a bankrupt shall have given a preference and the person receiving it shall have had reasonable cause to believe that it was intended thereby to give a preference, it shall be voidable by the trustee. The bankrupt was insolvent when he executed the mortgages and when they were recorded. The mortgages constituted a transfer of his property, and their effect was to enable the bank to obtain a greater percentage of its claims than other creditors. They were recorded within four months of the filing of the petition in bankruptcy. Therefore, assuming that a recording is required by the law of Missouri, it follows that a preference arose under section 60a. And, in our opinion, it also follows that the preference arose when the mortgages were recorded and not as of the date they were given. In other words, the amendment of 1903 was intended to remedy the evil resulting from secret instruments of transfer of the bankrupt's property, the withholding of them from record until shortly before the institution of bankruptcy proceedings, and the then assertion of them as of the prior date of their execution and delivery. And this was accomplished by making the rights of a creditor thus favored determinable by the conditions existing when he caused the transfer to him to be recorded as required by the state law rather than by those existing at the time he secured it. Under the act of 1867 not only the question of requirement to record a chattel mortgage, but also the effect of noncompliance therewith, were exclusively controlled by the law of the state. The same construction has been applied to the original act of 1898. Unless there has been some departure from this construction in its relation to voidable preferences, the amendment of 1903 of section 60a, upon which subdivision 'b' thereof depends, is wholly without significance. Contrary to a presumed intent in legislative amendments it serves no purpose and performs no office whatever. Such result can be reasonably avoided by this construction of the amendment: It affects only those instruments of transfer which the state law requires to be registered or recorded; and, as to those, where there is delay, it provides that upon the question of voidable preference they shall speak as of the day of compliance with the local law and not as of the day they were given. This would preclude the application of the doctrine of relation, and it would entail a consequence upon a failure to record that might not be imposed by the law of the state; but we deem it to be not only within the letter of the amendment, but also within the intention to correct an evil which flourished under the construction of the original act. Within the meaning of amended section 60a of the bankruptcy act, the Missouri law (Rev. St. 1899, Sec. 3404) required the recording of chattel mortgages. To be sure an unrecorded mortgage is not pronounced void absolutely and under all circumstances, but it 'is required to be recorded' in the sense in which that phrase is customarily used, and the language of requirement is similar to that employed in the registry laws of most of the states. The word 'required,' found in the phrase 'the recording or registering of the transfer, if by law such recording or registering is required,' of the amendment of section 60a, has reference to the character of the instrument of transfer required to be recorded by the state law rather than to the particular individuals who by reason of adventitious circumstances may or may not be affected by an unrecorded instrument. Thus an affirmative answer would unhesitatingly be given to the inquiry: 'Does the law of Missouri require the recording of chattel mortgages?'

The Circuit Court of Appeals of the Fifth Circuit, in a case involving the registry statute of Texas, held that, as an unrecorded chattel mortgage was good between the parties thereto and against ordinary creditors, and as there were no intervening lien holders or purchasers, it could not be said that a registry or recording was required, and upon the facts of that case it accordingly concluded that a chattel mortgage given before but placed on record within the four months before the institution of bankruptcy proceedings could not be considered as a voidable preference. Meyer Bros. Drug Co. v. Pipkin Drug Co. (C.C.A.) 136 F. 396. In effect this is the adoption, without exception or qualification, of the old rule that whether and to what extent a chattel mortgage given before but recorded within the four months period is valid against a trustee in bankruptcy should be determined exclusively by the state law. In our opinion, the amendment of 1903 has qualified this rule in respect of the question whether such a mortgage may constitute a voidable preference under subdivisions 'a' and 'b' of section 60. If this has not resulted, we fail to see that Congress has accomplished anything by the amendment.

The mortgages of the bank, required by law to be recorded, having been recorded within four months of the filing of the petition in bankruptcy and at a time when the mortgagor was insolvent, the effect thereof being to enable the bank to obtain a greater percentage of its claims than other creditors of the same class, a preference...

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