John Hetherington & Sons v. Rudisill

• Decision Date: 16 October 1928
• Docket Number: No. 2727.,2727.
• Citation: 62 ALR 377,28 F.2d 713
• Parties: JOHN HETHERINGTON & SONS, Limited, v. RUDISILL.
• Court: U.S. Court of Appeals — Fourth Circuit

62 ALR 377, 28 F.2d 713 (1928)

JOHN HETHERINGTON & SONS, Limited, v. RUDISILL.

No. 2727.

Circuit Court of Appeals, Fourth Circuit.

October 16, 1928.

John S. Cansler, of Charlotte, N. C. (E. T. Cansler, of Charlotte, N. C., on the brief), for appellant.

John A. Hendricks, of Marshall, N. C., for appellee.

Before PARKER and NORTHCOTT, Circuit Judges, and SOPER, District Judge.

PARKER, Circuit Judge.

This is an appeal from a decree denying the claim of John Hetherington & Sons, Limited, to certain machinery in the possession of the trustee in bankruptcy of the Capitola Manufacturing Company. The machinery was sold and delivered by claimant to bankrupt in October, 1925, under a written contract, which provided that payment therefor should be made in four equal installments, 3, 6, 12, and 18 months respectively from date of shipment, with interest at 6 per cent. on deferred payments, and that title to the machinery should not pass from claimant until all sums due under the contract should have been fully paid in cash. On May 14, 1926, upon the petition of the creditors of bankrupt, a receiver was appointed for its affairs by a court of the state of North Carolina, and this receiver at once took possession of all of its property and effects including the machinery in question. At that time the conditional sale contract held by claimant had not been recorded, and it was not recorded until the 16th of June following.

On July 10, 1926, claimant filed a petition in the receivership proceeding in the state court claiming the machinery under the conditional sale contract. Upon the hearing of this petition the state court ruled that, as the contract was not recorded until after the appointment of the receiver, it was not valid against him and that the machinery was held by him for the benefit of creditors generally free of the lien of the contract. Thereupon claimant, on September 11, 1926, commenced the bankruptcy proceedings by filing an involuntary petition against bankrupt, in which other creditors joined. After the adjudication of bankruptcy was had, claimant filed with the referee in bankruptcy a proof of secured debt in which the machinery in controversy was again claimed under the conditional sale contract. This claim was resisted by the trustee upon the ground that the contract, having been recorded within less than four months of the filing of the petition in bankruptcy and when the bankrupt was known to be insolvent, constituted a preference within the meaning of the Bankruptcy Act, and upon the further ground that the action of the state court in denying the same claim constituted an estoppel upon claimant. These contentions were sustained by the court below, and from its action thereon claimant has appealed.

The case has been very fully and ably presented on both sides, and we have given careful consideration to the briefs and arguments of counsel as well as to the authorities upon which they rely. After duly weighing all that has been said in behalf of appellant, however, we think that the decree of the District Judge was correct, on the ground that the registration of the contract was void as an attempt to create a preference within the inhibition of the act, and also because the right acquired by creditors upon the appointment of the receiver, to have the machinery in question applied to their claims free of the lien of the contract, passed to the trustee in bankruptcy.

In the first place, we think there can be no question that the conditional sale contract, withheld from record and recorded within four months of bankruptcy, and when the bankrupt was known by claimant to be insolvent, was void as an attempt to create a preference within the meaning of the Bankruptcy Act (11 USCA). The bankrupt obtained property which entered into his visible assets and served as a basis of credit. Under the law of North Carolina merely the naked legal title to this property was retained in the vendor as security for the purchase price, and for this retention of title to be valid against creditors of bankrupt it was required to be registered. Where it was withheld from record until within four months of bankruptcy, and then recorded when bankrupt was not only notoriously insolvent, but actually in the hands of a receiver, the situation presented is not to be distinguished from the recording within four months of a chattel mortgage given prior to that time and withheld from record until insolvency became known. So far as the transactions affect the rights of creditors, they are the same, and in view of the status of such a conditional sale contract under the law of North Carolina we think that their legal effect is the same.

By section 3312 of the Consolidated Statutes of North Carolina it is provided:

"All conditional sales of personal property in which the title is retained by the bargainor shall be reduced to writing and registered in the same manner, for the same fees and with the same legal effect as is provided for chattel mortgages, in the county where the purchaser resides. * * *"

And the "legal effect" of failure to register such a conditional sale contract, being the same as that of failure to register a chattel mortgage, is set forth in section 3311 of the Consolidated Statutes as follows:

"No deed of trust or mortgage for real or personal estate shall be valid at law to pass any property as against creditors or purchasers for a valuable consideration from the donor, bargainor or mortgagor, but from the registration of such deed of trust or mortgage in the county where the land lies; or in case of personal estate, where the donor, bargainor or mortgagor resides. * * *"

The effect of the language of these two sections considered together would seem to be clear; i. e., that the retention of title as security in a conditional sale contract is put upon the same footing as the conveyance of title as security in the case of a chattel mortgage, and that, unless such conditional sale contract is reduced to writing and recorded, such retention of title is void as against creditors and purchasers for value from the vendee. In other words, the property which is the subject of the conditional sale contract vests in the vendee in any event; but, if the contract be not recorded as required by the statute, the retention of title in the vendor as security for the purchase money is void as against creditors of the vendee and purchasers for value from him. And this interpretation, we think, is not only the reasonable interpretation of the language of the statutes, but is settled by repeated decisions of the Supreme Court of North Carolina.

In the first case which arose under the statute, Brem v. Lockhart, 93 N. C. 191, the court pointed out that it was intended to relieve against the mischiefs arising from the unknown separation of title from possession which conditional sale contracts were apt to produce in deceiving creditors, and held that "the effect produced by this legislation upon conditional sales of personal goods is to render inoperative so much of the contract as undertakes to reserve property in the vendor as a security for the purchase money, unless and until the contract is registered, and so far as creditors and purchasers for value are concerned, the transfer must be absolute and unconditional." (Italics ours.)

This case has been uniformly followed and approved. In Singer Mfg. Co. v. Gray, 121 N. C. 168, 28 S. E. 257, the court said:

"A conditional sale is a sale, but upon condition, in which the purchaser sustains the relation of a mortgagor, and the seller that of the mortgagee. And a discharge of the debt — the condition — by the purchaser is a discharge of the lien of the seller."

In Observer Co. v. Little, 175 N. C. 42, 94 S. E. 526, the court said:

"By the express terms of the law, therefore, and under various decisions construing the same, these conditional sales are to be regarded in this jurisdiction as chattel mortgages and void as to creditors and purchasers except from registration."

In Coble v. Wharton, 177 N. C. 323, 98 S. E. 818, it was said:

"Since 1883 it has been the law of this state that, in order to be available against creditors or purchasers for value, a conditional sale must be reduced to writing and registered as in case of chattel mortgages."

And in the very recent case of Harris v. Seaboard Air Line R. Co., 190 N. C. 480, 130 S. E. 319, 49 A. L. R. 1452, the court, speaking through Mr. Justice Connor, said:

"The relationship between plaintiff and W. M. Richards, with respect to said automobile, by virtue of the contract which provides that the title to the automobile sold by plaintiff to W. M. Richards is retained by plaintiff until the note given in part payment of the purchase price has been paid in full, is that of mortgagee and mortgagor. The title-retaining contract is to all intents and purposes a chattel mortgage."

In line with what has been said by the court in these cases, it has been held in North Carolina that the retention of title as security in an unrecorded conditional sale contract is void as against an assignment for the benefit of creditors....