Exchange National Bank of Colorado Springs v. Hough, 5828.

• Decision Date: 11 August 1958
• Docket Number: No. 5828.,5828.
• Citation: 258 F.2d 785
• Parties: The EXCHANGE NATIONAL BANK OF COLORADO SPRINGS, Appellant, v. Raymond HOUGH, As Trustee, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

258 F.2d 785 (1958)

The EXCHANGE NATIONAL BANK OF COLORADO SPRINGS, Appellant, v. Raymond HOUGH, As Trustee, Appellee.

No. 5828.

United States Court of Appeals Tenth Circuit.

August 11, 1958.

Karl Ross and J. Hartley Murray, Colorado Springs, Colo. (Murray, Baker & Wendelken, Colorado Springs, Colo., on the brief), for appellant.

L. James Arthur, Denver, Colo. (Frederick P. Cranston, Denver, Colo., on the brief), for appellee.

Before BRATTON, Chief Judge, and MURRAH and BREITENSTEIN, Circuit Judges.

BREITENSTEIN, Circuit Judge.

In this bankruptcy proceeding the decision depends upon the validity, as against the appellee trustee, of a chattel mortgage given by the bankrupt, Atomic Research Corporation, to the appellant bank. The bankrupt was in business at Colorado Springs, Colorado, where it made and sold Geiger counters and other electronic devices for the detection of radiation. It borrowed $30,000 from the bank on the security of a chattel mortgage and certain stock assignments. Prior to the expiration of the mortgage term, the mortgagor filed a voluntary petition in bankruptcy in the United States District Court for the District of Colorado and was adjudged a bankrupt.

The bank filed with the Referee in Bankruptcy its proof of secured claim in the amount of $22,176.64. The trustee objected to the allowance of the claim and sought to have the purported lien of the chattel mortgage declared null and void. A hearing was held before the referee on issues relating to the validity of the mortgage, to the trustee's assertion of voidable preference, and to the amount of the bank's claim in the event it was determined to be an unsecured creditor. The referee held that the mortgage was void as to the trustee and that the trustee was entitled to the possession of the mortgaged property free from any claim of the bank. The referee deferred determination of the other issues. On petition for review the district court affirmed.

The mortgaged articles were electronic devices manufactured and then held for sale by the bankrupt. The chattel mortgage described the property covered as follows:

"Radiation Detection Instruments All Carrying Atomic Research Corporation Identification and allied equipment described as follows: * * *."

The list which followed covered a total of 1452 items listed under 11 identifying designations.

The mortgage provided:

"* * * that it the mortgagor will not remove, sell, transfer, encumber, or in any manner dispose of the same or any part thereof, or attempt so to do, during the existence of the Lien created hereby without the written consent of the party of the second part the mortgagee, its successors or assigns; * * *."

Under an oral agreement between the bank and the mortgagor, the property covered by the mortgage was segregated from the remainder of the stock in trade of the mortgagor and kept in a separate location under the control of the mortgagor with the understanding that none of the articles would be sold without the prior consent of the bank, and that the proceeds of all sales would be remitted to the bank and applied on the notes secured by the mortgage.

On two occasions, with the oral but not written consent of the bank, mortgaged articles were sold and less than the sale price credited on the notes. The first instance occurred on April 17, 1956, when out of a sale aggregating $6,722.80, $700 was applied to the payment of back rent owed by the mortgagor on the premises where it conducted its business and where the mortgaged property was stored. The balance of $6,022.80 was applied on the notes. The second instance was on September 21, 1956, when there was an accounting between the mortgagor and the bank for certain sales, the total amount of which is not disclosed by the record now before us. The proceeds of those sales were credited on the notes except for $154.79. This sum was made up of two items, one of $44.85 and the other of $109.94. The $44.85 item covered the expense of advertising material used in mail solicitation of sales of the mortgaged property. The item of $109.94 related to a claim of a purchaser of electronic equipment that the merchandise was defective and required the replacement of electric batteries.

The validity of the chattel mortgage is to be determined by the law of Colorado.¹ The trustee contends that the mortgage is void because of noncompliance with the 1951 Colorado Inventory Mortgage Act.²

Under the general chattel mortgage law of Colorado,³ the courts were reluctant to permit the imposition of any effective lien on a stock of goods held by a dealer for sale or by a manufacturer for processing.⁴ The 1951 act broadly validates a chattel mortgage on inventory. It attains this objective, and at the same time protects the rights of third parties, by requiring the filing of a statement containing a general description of the nature and type of property to be covered by a chattel mortgage. When such a statement is filed, a chattel mortgage, executed within one year thereafter and covering property within the general description appearing in the statement, need not be filed or recorded but the mortgagee, upon demand of a person falling within a class defined by the statute, is required to furnish information as to whether any personal property specified by the demanding person is subject to a chattel mortgage and the amount due thereon.

The instant case presents a situation wherein there is a chattel mortgage on personal property held for sale but no statement of the type required by the 1951 act has been filed. The trustee asserts that the failure to file such statement invalidates the mortgage. We do not agree. While the 1951 act is a later and a specific statute, it did not repeal the earlier general statute. This is shown by its § 20-2-12 which provides that existing chattel mortgage statutes are not applicable to mortgages taken under it. Also, the 1951 act does not in any way invalidate a mortgage on an inventory taken under the earlier law. While it is true that, as pointed out by Storke and Sears and by Hellerstein in their texts heretofore mentioned, there was confusion and uncertainty in the Colorado decisions under the earlier general law as to the validity of chattel mortgages on personal property held for sale, nevertheless, the 1951 act left parties free to proceed under the earlier law. But if they did, they were deprived of the advantages given by the later act.

We are aided by no Colorado decision construing or applying the 1951 act. There is no claim that the mortgage in question fails to comply with the earlier general chattel mortgage act in any way. There is no effort by the mortgagee to assert any right or advantage under the 1951 act. Under the circumstances the lack of the statement required by the 1951 act is entirely immaterial. The mortgagee has the greater burden of sustaining its mortgage under the severe limitations imposed by the Colorado decisions construing and applying the earlier act and the trustee has a corresponding advantage.

Under the Colorado decisions the "creditors and third persons" who are protected by the general chattel mortgage statute are not general creditors but only such creditors or persons as have acquired enforceable liens by execution or writ of attachment, or by contract, during the period of time that the mortgaged property remains in possession of the mortgagor.⁵ The trustee comes within the protected class by virtue of § 70, sub. c of the Bankruptcy Act.⁶ His rights attach as of the date of bankruptcy. Date of bankruptcy is defined as the date when the petition was filed.⁷ In the case at bar the petition was filed on October 11, 1956. The chattels were then in possession of the mortgagor.

A determination of the applicable Colorado law is not free of difficulty. It has been held in Colorado that when a mortgagee gives to the mortgagor general authority to sell the mortgaged property for the mortgagor's own benefit or account, the lien is waived.⁸ On the other hand if the mortgaged property is...