Bussert v. Quinlan

• Decision Date: 18 May 1959
• Docket Number: No. 6058.,6058.
• Citation: 267 F.2d 219
• Parties: Clarence E. BUSSERT, Appellant, v. John P. QUINLAN, Trustee, Appellee. In the Matter of WESTERN GLASS, INC., a Corporation, Bankrupt.
• Court: U.S. Court of Appeals — Tenth Circuit

267 F.2d 219 (1959)

Clarence E. BUSSERT, Appellant, v. John P. QUINLAN, Trustee, Appellee In the Matter of WESTERN GLASS, INC., a Corporation, Bankrupt.

No. 6058.

United States Court of Appeals Tenth Circuit.

May 18, 1959.

COPYRIGHT MATERIAL OMITTED

Jay W. Scovel, Thomas R. Scovel, and Robert K. Scovel, Independence, Kan., for appellant.

John F. O'Brien and John P. Quinlan, Independence, Kan., for appellee.

Before BRATTON, Chief Judge, PICKETT, Circuit Judge, and KNOUS, District Judge.

KNOUS, District Judge.

The appellant herein filed his claim against the bankrupt based upon a promissory note upon which there was due the sum of $15,425.63 allegedly secured by a chattel mortgage. The trustee in bankruptcy objected to its allowance as a secured claim. The matter was submitted to the referee in bankruptcy on an agreed statement of facts. The referee sustained the objection of the trustee and held the chattel mortgage void but allowed the amount due as an unsecured claim. Thereafter, appellant filed a petition for review of the order entered by the referee, which petition for review was denied by the District Court. The matter stands here on an appeal from the judgment of the District Court.

On August 17, 1955, the appellant in his individual capacity, loaned to the bankrupt the sum of $15,000. The loan was secured by the chattel mortgage here in question, executed by the appellant in his capacity as President of the bankrupt. The chattel mortgage described the property covered as follows:

"All the raw materials, supplies, cartons and other materials of every kind and description owned by said Western Glass, Inc. located in its glass plant in Caney, Kansas or elsewhere, now or hereafter."

The mortgage contains the usual covenants and also the following:

"That the Mortgagor hereby covenants that it will not sell, assign, loan, deliver, pledge, lease, or otherwise dispose of said Goods and Chattels to the extent that the aggregate value of all such mortgaged Goods and Chattels shall be less than Twenty-Thousand and no/100 Dollars ($20,000.00), except that such Goods and Chattels may be sold, delivered, or otherwise disposed of in the normal course of the operations of its glass plant in Caney, Kansas, provided the aggregate value shall not be less than the amount stated herein."

The mortgage was filed for record in Montgomery County, Kansas, on August 31, 1956.

Prior to bankruptcy the property described in the mortgage was all used in the manufacture of the manufactured products and sold. Other property of like character to that described in the mortgage had been purchased and at the date of bankruptcy there was on hand property of that nature of the approximate value of $12,558.27.

The validity of the chattel mortgage is to be determined by the law of Kansas. Etheridge v. Sperry, 139 U.S. 266, 11 S.Ct. 565, 35 L.Ed. 171; Exchange National Bank of Colorado Springs v. Hough, 10 Cir., 258 F.2d 785.

Section 70, sub. c, of the Bankruptcy Act, 11 U.S.C.A. § 110, sub. c, puts the trustee in the position occupied under federal or state law by a creditor holding a lien through legal or equitable proceedings or a judgment creditor holding an execution duly returned unsatisfied.

Section 70, sub. e, gives the trustee whatever rights any creditor of the bankrupt with a provable claim has under state or federal law to attack a transaction which is fraudulent and voidable for any other reason by such creditor. Thus, if the chattel mortgage here in question is void under the laws of Kansas as to creditors in the categories above mentioned, it is void as against the trustee in bankruptcy.

It will be observed from the foregoing recital of facts that the mortgage expressly provided that the goods and chattels covered thereby might be sold, delivered, or otherwise disposed of in the normal course of business by the mortgagor. No provision of the mortgage nor any collateral agreement required that proceeds from such sales should be applied on the mortgage indebtedness. It was stipulated as a matter of fact that the proceeds from the sale of the finished products made from the stock of materials listed in the mortgage were used to pay the ordinary expenses of operation of the bankrupt. Concerning the effect of such an arrangement the Supreme Court of Kansas, in First National Bank of Smith Center v. Hardman, 89 Kan. 212, 131 P. 602, at page 604, said:

"Where a chattel mortgage is executed upon a stock of merchandise, and the mortgagor by consent of the mortgagee, whether expressed in writing or not, makes sales in the ordinary course of business, without applying any of the proceeds to the payment of the mortgage debt, the transaction amounts to a legal fraud upon creditors, and the instrument is void as to them. While a different view is taken in some jurisdictions, this is the settled doctrine in Kansas. Implement Co. v. Schultz, 45 Kan. 52, 25 P. 625; Smith v. Epley, 55 Kan. 71, 39 P. 1016. See, also, other cases cited in 6 Cyc. 1108, and Brooks v. Bank of Beaver City, 82 Kan. 597, 109 P. 409. Whether the mortgage is recorded or not can make no difference with the application of this rule."

The appellant contends that the decisions of the Supreme Court of Kansas in the cases of Atchison Saddlery Co. v. Gray, 63 Kan. 79, 64 P. 987; Standard Implement Co. v. Parlin and Orendorff Co., 51 Kan. 632, 33 P. 362; Whitson v. Griffis, 39 Kan. 211, 17 P. 801; Frankhouser v. Ellett, 22 Kan. 127, 31 Am.Rep. 171, create an exception to the foregoing rule available to him. In effect,...