Coggin v. Hartford Accident & Indemnity Co.

• Decision Date: 14 January 1935
• Docket Number: No. 20.,20.
• Citation: 9 F. Supp. 785
• Court: U.S. District Court — Middle District of North Carolina
• Parties: COGGIN v. HARTFORD ACCIDENT & INDEMNITY CO.

9 F. Supp. 785

COGGIN v. HARTFORD ACCIDENT & INDEMNITY CO.

No. 20.

District Court, M. D. North Carolina.

January 14, 1935.

Lee Overman Gregory, of Salisbury, N. C., for plaintiff.

A. J. Fletcher and Ruark & Ruark, all of Raleigh, N. C., for defendant.

HAYES, District Judge.

W. E. Graham, the bankrupt, was a road contractor. In 1928, he was awarded certain contracts for road construction by the state highway commission of North Carolina and a like commission of South Carolina. He was required to give a surety bond for the faithful performance of his contracts. Upon his written applications, dated October 2, 1928, the defendant became surety. Graham became hopelessly insolvent, owing debts in excess of $100,000. On March 21, 1929, the defendant procured Graham to execute a deed of trust against all of his personal property to secure the defendant against any loss which it had sustained or might thereafter sustain by virtue of its suretyship on the various projects. The deed of trust was never recorded. On April 2, 1929, Graham defaulted, and on April 3, the highway commission called on the surety to complete the contracts.

The defendant went upon the three projects in North Carolina on March 29, 1929, and took possession of Graham's machinery, teams, equipment, and supplies under a written order from Graham to do so. The defendant then let the completion of the work to the contractors, and on or about April 22, 1929, executed to them a bill of sale for Graham's property. The property was never returned.

On May 17, 1929, an involuntary petition in bankruptcy was filed against Graham, and on June 19, 1929, he was adjudicated a bankrupt.

The defendant filed its claim for the full amount of its loss as an unsecured claim and made affidavit that it had no security, and received none, and thereafter participated in the creditor's meeting for the election of trustee. However, with the consent of plaintiff, the referee later permitted the claim to be amended and filed as a secured claim. C. L. Coggin was elected trustee, and brings this suit to compel an accounting, for the value of the property taken and for the cancellation of preference and fraudulent transfers.

The defendant contends that the applications are conveyances of the property executed during the solvency of the bankrupt, and that possession of the property was taken before bankruptcy and that the transfer is valid. It also contends that the state, under its contract, had the right to use the equipment for the completion of the job; that the surety was subrogated to the rights of the state. It further contends that the trustee was notified of the whereabouts of the equipment after the completion of the work and that it was his failure to take the property that caused the loss.

The applications, in so far as they profess to convey property, are chattel mortgages and are not valid as against the trustee without registration. Commercial Casualty Insurance Co. v. Williams, 37 F.(2d) 326 (C. C. A. 4th).

The deed of trust executed on the 21st day of March, 1929, and never recorded, is invalid as to the trustee. It was executed within four months of adjudication in bankruptcy, when the bankrupt was insolvent and when the defendant knew he was insolvent, and that the conveyance would effect a preference. Higdon v. Jones, 64 F. (2d) 296 (C. C. A. 4th).

When the defendant proved its total claim as an unsecured debt and participated in the creditor's meeting for the purpose of electing a trustee favorable to it and then shifted its status to that of a secured creditor, it thereby waived its security, if any it had. It could not be an unsecured creditor and then shift to the status of a secured creditor. Proving a secured debt as an unsecured claim constitutes a waiver of the security. In re O'Gara Coal Company (C. C. A.) 12 F.(2d) 426, 46 A. L. R. 916; 11 USCA § 93, subd. (e), note 9, page 256, where numerous authorities are cited.

In determining whether a transfer by bankrupt is a preference under sections 60a, 60b, of Bankruptcy Act (11 USCA § 96 (a, b), the time for testing the validity of the transaction is the date of the transfer, and not the date of recording. If the elements of a preference are not present at the date of transfer, the conveyance is valid against the trustee. Carey v. Donohue, 240 U. S. 430, 36 S. Ct. 386, 60 L. Ed. 726; Martin v. Commercial National Bank, 245 U. S. 513, 38 S. Ct. 176, 62 L. Ed. 441. The question has since been presented to various circuit courts. First National Bank of Lincoln v. Live Stock National Bank, 31 F.(2d) 416 (C. C. A. 8th); Hardwick Bank & Trust Company v. McFarland, 43 F.(2d) 807 (C. C. A. 5th); Hetherington v. Rudisill, 28 F. (2d) 713, 62 A. L. R. 377 (C. C. A. 4th); and In re Cunningham (Higdon v. Jones) 64 F.(2d) 296 (C. C. A. 4th), in which Brigman v. Covington, 219 F. 500 (C. C. A. 4th) is disapproved. The last two cases were construing the North Carolina registration act.

A valid mortgage executed and delivered before, but registered within, four months of the filing of petition in bankruptcy is not a voidable preference, although at the time of recording the grantor is insolvent, and known by the mortgagee to be insolvent, and that a preference would be effected. Higdon v. Jones, supra; Bank of Wadesboro v. Little, 4th Circuit, June 11, 1934, 71 F.(2d) 513.

Under C. S. § 3311 of North Carolina, a chattel mortgage is good against bona fide purchasers for value and against creditors only from registration. The mortgage, however, is good between the parties without registration, Leggett v. Bullock, 44 N. C. 283; McBrayer v. Harrill, 152 N. C. 712, 68 S. E. 204; Gosney v. McCullers, 202 N. C. 326, 162 S. E. 746, and, when registered, is good against creditors. A general creditor must yield to the lien of the mortgage from the moment of its registration, unless the lien can be successfully assailed as a fraudulent conveyance. I find no authority in this state which divests the lien of a registered mortgage in favor of a general creditor. Before a creditor can defeat the lien of the mortgage, he must acquire a prior lien by way of judgment, as against land, and by levying an execution against personal property. Under the law of North Carolina a judgment is not a lien on personal property except from levy of execution.

The registration act, C. S. § 3311, is a substitute for possession by the mortgagee. If the mortgagee as such takes possession of the mortgaged property, it renders registration unnecessary. Possession, in such circumstances, will render the mortgage as good as it would be if registered. Cowan v. Dale, 189 N. C. 684, 128 S. E. 155.

If possession is to be substituted for registration under C. S. § 3311, it seems that the possession should be by virtue of the mortgage. Every possession may not be in that capacity. In the instant case, the record shows very clearly that possession of the property was not taken in the capacity of mortgagee. The defendant obtained possession by promising the contractor a preference when letting the contract for completion. The motive of the bankrupt, to the knowledge of surety, was to perpetrate a fraud on his creditors. The transaction is void and cannot supply the place of registration. In three days after he surrendered possession under this agreement, the surety stopped all work on the projects, and in less than three weeks executed to finishing contractor bills of sale for the entire property of Graham on the three projects. These events happened in April, 1929. In May the petition in bankruptcy was filed. In August the defendant filed its claim as unsecured and made oath that it had not received any security, nor was its claim then secured. In September it furnished trustee a list of the property supposed to remain on the projects, saying it claimed possession thereof no longer. Moreover, in order to get possession, it promised him that he should have preference when the contract was reawarded and could have the property back, and it constantly urged Graham to assign the property before a receiver was appointed, or bankruptcy proceeding intervened and got possession, with full knowledge that he owed over $100,000; that his assets consisted of the personal property and amounts due on these projects; that insolvency proceedings were inevitable — numerous judgments having been taken and executions outstanding — and having accepted a chattel mortgage on all this property on March 21, 1929, which it did not record, and claiming it expended over $40,000 as surety for Graham, it is utterly unreasonable to conclude that defendant went into possession as mortgagee, or that it retained possession in that capacity. I cannot hold that such possession thus obtained and retained supplied the place of registration under C. S. § 3311.

Bearing in mind that the surety was financially interested in the successful completion of the various contracts by the bankrupt; that the bankrupt would be unable to obtain credit if he had executed a mortgage on all that he had, and the mortgage was on record so that creditors would become aware of its existence; that the evidence in the record shows that he did obtain credit in the performance of these contracts in an amount in excess of $100,000; that many judgments had been taken against him on those accounts and execution thereon issued — the surety, realizing his insolvency, and that insolvency proceedings were inevitable, withheld from record its application agreements in order to afford the bankrupt an opportunity to obtain this credit, which inured to the benefit of the surety, and committed a fraud in law, as to such creditors to whose rights the trustee in bankruptcy succeeds. It would be unconscionable to permit any unrecorded applications under such circumstances to have priority over general creditors.

The manner in which the surety obtained possession of the property is wholly inconsistent with any theory of...