Skilton v. Codington

• Decision Date: 24 April 1906
• Citation: 77 N.E. 790,185 N.Y. 80
• Parties: SKILTON v. CODINGTON.
• Court: New York Court of Appeals Court of Appeals

185 N.Y. 80

77 N.E. 790

SKILTON

v.CODINGTON.

Court of Appeals of New York.

April 24, 1906.

Appeal from Supreme Court, Appellate Division, Fourth Department.

Action by Raphael M. Skilton, as sole surviving partner of the firm of T. J. & R. M. Skilton, against Charles S. Codington, as trustee in bankruptcy of the estate of William J. Barron, bankrupt, impleaded, etc. From a judgment of the Appellate Division (93 N. Y. Supp. 460), affirming a judgment in favor of plaintiff, defendant Codington appeals. Reversed.

Myron D. Short, for appellant.

George L. Bachman, for respondent.

CULLEN, C. J.

This action was brought to enforce a chattel mortgage executed on October 4, 1897, by William J. Barron to the plaintiff and his deceased partner. On that day the plaintiff's firm sold to Barron all the stock and fixtures of a plumbing and roofing establishment, in the city of Geneva, for the sum of $6,000. Part of the purchase money was represented by a note executed by the vendee to the vendors for the sum of $2,500 to be paid five years from date, with interest payable semiannually. To secure that note it was provided that the vendors should have a lien upon all the goods, wares, merchandise, and chattels so sold, and upon all other personal property, goods, and merchandise which might be used or put on the premises by the vendee, such lien, in case of default in payment, to be enforced in the same manner as in the case of a chattel mortgage. It was agreed that the vendee, his executors, or assigns ‘may sell and dispose of said property and apply the proceeds of such sale to the payment of the debt hereby secured,’ and the vendee covenanted for himself and his assigns ‘that as said stock is sold and disposed of by him or them, he or they will apply the proceeds to the payment of such debt, excepting such portion thereof as is necessary for the expenses of the business, or as he or they may need to replenish or increase the said stock of goods, wares, and merchandise, it being understood and agreed that in such case the substituted stock shall take the place and be instead or the stock so sold, and it being also understood and agreed that no part of said stock or of the proceeds of such sales shall be used or disposed of by’ the vendee or his assigns, ‘except as hereinbefore set forth.’ The vendee further covenanted that he would keep the said stock ‘replenished, renewed, and of a value at least equal to its then value.’ This agreement was first filed on October 2, 1902, in the office of the clerk of the city of Geneva. On November 7th the plaintiff demanded the possession of the goods and chattels mentioned in said agreement or chattel mortgage, which was refused. On November 25, 1902, Barron, the vendee, was adjudicated a bankrupt. The defendant, as trustee in bankruptcy, under an order of the bankrupt court which directed that out of the proceeds of the sale the sum of $2,600 be reserved by the trustee for the benefit of any liens or claims that might be established on the property, sold the stock and fixtures of the bankrupt and out of the proceeds held on deposit the amount prescribed by the order. Thereupon the plaintiff brought this action in the Supreme Court to recover the amount due him on the note and mortgage. The foregoing facts appear in the findings of the learned trial court, which awarded judgment for the plaintiff. That judgment was affirmed by the Appellate Division, and from that affirmance an appeal is now taken to this court.

The first contention of the appellant is that the state court had no jurisdiction of the cause of action, because the fund was in the possession of the bankrupt court. We think it had jurisdiction of an action to determine and establish the plaintiff's lien. It is settled by the decision of the Supreme Court of the United States in Bardes v. Hawarden Bank, 178 U. S. 524, 20 Sup. Ct. 1000, 44 L. Ed. 1175, that the bankrupt court, except by the consent of the parties, has not jurisdiction to try and determine a suit brought by a trustee in bankruptcy to recover property alleged to be part of the bankrupt's estate, or to have been transferred by him in fraud of the act, but that such suits must be prosecuted either in the state courts or in the Circuit Court of the United States, if the citizenship of the parties authorizes the action to be maintained in the latter tribunal. See, also, First Nat. Bank of Chicago v. Chicago Title & Trust Co., 198 U. S. 280, 25 Sup. Ct. 693, 49 L. Ed. 1051. While it is not so certain that that rule obtains in its full integrity as to a suit brought against trustees in bankruptcy, we think it was the intention of the Bankrupt Act to allow adverse claimants to property or parties claiming liens to establish their rights by suits in courts of plenary jurisdiction and not to subject such claims to summary disposition in the bankrupt court, unless it may be when the claims are frivolous or made in bad faith. In Eyster v. Gaff, 91 U. S. 521, 23 L. Ed. 403, it was said: ‘The opinion seems to have been quite prevalent in many quarters at one time, that, the moment a man is declared a bankrupt, the District Court which has so adjudged draws to itself by that act not only all control of the bankrupt's property and credits, but that no one can litigate with the assignee contested rights in any other court, except in so far as the circuit courts have concurrent jurisdiction, and that other courts can proceed no further in suits of which they had at that time full cognizance, and it was a prevalent practice to bring any person, who contested with the assignee any matter growing out of disputed rights of property or of contracts, into the bankrupt court by the service of a rule to show cause, and dispose of their rights in a summary way. This court has steadily set its face against this view. The debtor of a bankrupt, or the man who contests the right to real or personal property with him, loses none of those rights by the bankruptcy of his adversary. The same courts remain open to him in such contests, and the statute has not divested those courts of jurisdiction in such actions.’ This statement is quoted with approval by Judge Gray, in Bardes v. Hawarden Bank, supra. Of course, we do not mean to assert that, under the judgment of the state court, the fund or property could be taken from the possession of the bankruptcy court; the contrary is the law. It may also be that the bankrupt court could have enjoined the prosecution of this action, but it has not done so. Apparently, it has permitted the plaintiff to assert his claim by a plenary suit in a court of general jurisdiction, and we may assume that the bankrupt court will give effect to any judgment recovered therein.

On the merits of the controversy, however, we are of opinion that the judgments below were erroneous. By reason of the failure to file the chattel mortgage for five years, that mortgage was void as against creditors whose claims accrued prior to such filing. Lien Law, section 90, c. 418, p. 536, Laws 1897; Thompson v. Van Vechten, 27 N. Y. 568. ‘A creditor by simple contract is within the protection of the statute as much as a creditor by judgment, but until he has a judgment and a lien, or a right to a lien upon the specific property, he is not in a condition to assert his rights by action as a creditor.’ Southard v. Benner, 72 N. Y. 424;Karst v. Gane, 136 N. Y. 316, 32 N. E. 1073. In Stephens v. Perrine, 143 N. Y. 476, 39 N. E. 11, the mortgagee had obtained possession of the mortgaged property and sold the some prior to the recovery of a judgment by the creditor. Nevertheless, the mortgagee was held liable to account to the creditor for the amount realized from the sale of the property. It was there said by Judge Peckham: ‘The mortgage, as to the creditors of the mortgagor, was always void. * * * The action is against the mortgagee, and I cannot see the force of the reasoning which, while admitting that the mortgage is void as to creditors, nevertheless asserts that a title to the property covered by it may be obtained by the mortgagee by proceedings taken under it, and which asserts the validity of such instrument, provided they are taken before the creditors are armed with a judgment and execution so as to enforce their rights which rest upon the invalidity of the mortgage.’ This decision seems to me controlling on the point we are now considering. It is true there is to be found in some cases a statement that the mortgage is void only as to judgment creditors. This statement, if construedin the light of the circumstances of the case before the court, and with reference to the context of the opinion, is substantially correct, though not strictly accurate as a general proposition. The question is quite similar to that of the right of an attaching creditor to seize goods fraudulently transferred by his debtor. That he has such right is settled by authority. Rinchey v. Stryker, 28 N. Y. 45, 84 Am. Dec. 324;Frost v. Mott, 34 N. Y. 253;Hess v. Hess, 117 N. Y. 306, 22 N. E. 956. In the first of these cases the same argument was made as is now presented, that the transfer was void only as to judgment creditors, and numerous dicta of eminent judges were quoted in support of that position. This court held that all that was meant by the expression was that a creditor could not attack the fraudulent transfer until he had obtained some process which authorized the seizure of the debtor's property. That is the true interpretation of the dicta relating to unfiled chattel mortgages. The rule that a creditor must first recover a judgment is simply one of procedure and does not affect the right. Therefore, where the recovery of a judgment becomes impracticable, it is not an indispensable requisite to enforcing the rights of the creditor. So it was held that an assignee in bankruptcy could, for the benefit of creditors, attack a fraudulent mortgage, though if a creditor had sought that...