First National Bank of White River Jct. v. Reed

• Decision Date: 16 July 1962
• Docket Number: No. 341,Docket 27362.,341
• Citation: First National Bank of White River Jct. v. Reed, 306 F.2d 481 (2nd Cir. 1962)
• Parties: FIRST NATIONAL BANK OF WHITE RIVER JCT., VERMONT, and Valley Land Corporation, Intervenors-Appellants, v. Norman E. REED, Receiver in Bankruptcy of Hathorn's Transportation Co., Inc., Rene Deforge, et al., and United States of America, Appellees.
• Court: U.S. Court of Appeals — Second Circuit

306 F.2d 481 (1962)

FIRST NATIONAL BANK OF WHITE RIVER JCT., VERMONT, and Valley Land Corporation, Intervenors-Appellants, v. Norman E. REED, Receiver in Bankruptcy of Hathorn's Transportation Co., Inc., Rene Deforge, et al., and United States of America, Appellees.

No. 341, Docket 27362.

United States Court of Appeals Second Circuit.

Argued June 11, 1962.

Decided July 16, 1962.

John D. Carbine, Rutland, Vt., for appellant Valley Land Corporation (Christopher A. Webber, Rutland, Vt., for appellant First National Bank of White River Jct., Vermont, on brief).

John S. Burgess, Brattleboro, Vt., for receiver (Robert M. Rosenberg, Jr., Burlington, Vt., for Rene Deforge and others, on brief).

Stephen B. Wolfberg (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Joseph Kovner, Joseph F. Radigan, Attys., Dept. of Justice, Washington, D. C.), for the United States.

Before FRIENDLY, KAUFMAN and HAYS, Circuit Judges.

FRIENDLY, Circuit Judge.

First National Bank of White River Junction and Valley Land Corporation, hereafter Valley, appeal, 11 U.S.C.A. § 47, from an order of the District Court for Vermont which decreed that certain mortgages on property of a bankrupt held by appellants were invalid for lack of approval by the Vermont Public Service Commission as required by 30 V.S.A. § 107. The propriety of the order is supported by the receiver in bankruptcy, by general creditors, and by the United States. The latter has tax claims against the bankrupt, some of which became liens after recordation of the mortgages but before bankruptcy, and others of which, under § 64, sub. a(4) of the Bankruptcy Act, 11 U.S.C.A. § 104, sub. a(4) will also prevail over appellants if the mortgages are held to be void.

The parties have agreed as to the facts: The bankrupt, Hathorn's Transportation Co., Inc., a Vermont corporation, was a small motor carrier, holding certificates from the Vermont Public Service Commission and the Interstate Commerce Commission. In January, 1956, it bought land and a terminal building owned by Valley in Hartford, Vermont. To finance the purchase, Hathorn's borrowed $30,000 from First National Bank of White River Junction, for which it issued its promissory note, payable over a 12 year period, secured by a first mortgage on the terminal, and gave Valley a $15,000 note, payable over 15 years, secured by a second mortgage. In the mortgages Hathorn's warranted that it had "good right and title to convey" the premises. In February, 1958, Hathorn's was adjudicated a bankrupt and a receiver was appointed. At that time it owed $26,494.76 to First National Bank and $13,831.32 to Valley, together with interest from mid-November, 1957. Later, the District Court approved a sale of Hathorn's assets for $75,200 free and clear of liens, which, however, were to attach to the proceeds. An appraisal indicated the value of the mortgaged premises to be $45,500.

At the time of the issuance of the notes and mortgages Hathorn's was subject to the jurisdiction of the Vermont Public Service Commission under 30 V.S.A. § 107, then providing, so far as material, as follows:

"§ 107. Issue of bonds or other securities

"A domestic corporation subject to the jurisdiction of the public service commission shall not mortgage nor pledge any of its corporate property nor issue any stocks, bonds, notes or other evidences of indebtedness or change its shares as provided in section 270 of Title 11 without the consent of the public service commission given on petition and after hearing of the corporation or its incorporators. Notice of the hearing shall be given as the commission directs.

* * * * * *

"Nothing in this section shall retrict the right of a common carrier by motor vehicle to issue evidences of indebtedness payable within one year from the date of issue without prior notice to or consent by the commission."

No consent of the Commission to the notes and mortgages issued to First National Bank and Valley was obtained.¹ The receiver claimed that on that account the mortgages were void; he made no such contention with respect to the notes. The referee overruled him; the District Judge reversed the referee.

It is agreed that, as stated by the District Judge, the statute which is now 30 V.S.A. § 107 "has never been construed by the Supreme Court of Vermont." Appellants stress that § 107 contains no provision that securities issued without the Commission's approval shall be void, a provision frequently encountered in statutes of this sort, of which § 20a(11) of the Interstate Commerce Act, added by Transportation Act, 1920, 41 Stat. 496, 49 U.S.C.A. § 20a(11), will serve for the moment as an example. They might well have buttressed this argument by seeking to invoke the statement in Kerfoot v. Farmers' & Merchants' Bank, 218 U.S. 281, 286-287, 31 S.Ct. 14, 54 L.Ed. 1042 (1910), that "although the statute by clear implication forbids a national bank from making a loan upon real estate, the security is not void and it cannot be successfully assailed by the debtor or by subsequent mortgages because the bank was without authority to take it; and the disregard of the provisions of the act of Congress upon that subject only lays the bank open to proceedings by the Government for exercising powers not conferred by law," — even though the situations are not completely parallel. See also National Bank v. Matthews, 98 U.S. 621, 627, 25 L.Ed. 188 (1879), and Bruce's Juices, Inc. v. American Can Co., 330 U.S. 743, 750-752, 67 S.Ct. 1015, 91 L.Ed. 1219 (1947). Appellants say that Vermont imposes other sanctions quite sufficient to promote compliance with § 107, without need for the courts to imply the ultimate one of utter invalidity. They point to 30 V.S.A. § 245, providing that "A person or the officers of an association or corporation who violates * * * any provision of this chapter shall be fined not more than $100.00 or imprisoned not more than sixty days, or both." They cite also 30 V.S.A. § 30, empowering the Commission, now called the Board, to bring an action in a county court or a court of chancery for mandamus or injunction whenever it "is of the opinion that a company subject to its supervision is failing or omitting or about to fail or omit to do anything required of it by law * * *."² Since injunction is an equitable remedy and mandamus also is governed by equitable principles, Duncan Townsite Co. v. Lane, 245 U.S. 308, 312, 38 S.Ct. 99, 62 L.Ed. 309 (1917); United States ex rel. Greathouse v. Dern, 289 U.S. 352, 359, 53 S.Ct. 614, 77 L.Ed. 1250 (1933); Whitehouse v. Illinois Cent. R.R. Co., 349 U.S. 366, 373, 75 S.Ct. 845, 99 L.Ed. 1155 (1955), it is quite possible that in such a proceeding a court would grant appellants something in the nature of restitution if they had acted in good faith, as seems not to be questioned, especially in the absence of a showing that anyone had been prejudiced, see 6A Corbin, Contracts (1962) §§ 1534, 1535, 1540; American Law Institute, Restatement of Contracts, § 599, Restatement of Restitution, § 140. Indeed, the court might simply require the utility, (or permit the mortgagees) to apply for approval by the Commission nunc pro tunc, cf. Otter Tail Power Co. v. Clark, 59 N.D. 320, 229 N.W. 915 (1930), and withhold further action until the Commission had ruled thereon.³ Appellants further argue that their mortgages are entitled to protection as a vendor's lien, 27 V.S.A. § 307, and that even if the mortgages are void because of failure to obtain Commission approval, a bankruptcy court, which likewise applies equitable principles, Bardes v. Hawarden First Nat. Bank, 178 U.S. 524, 535, 20 S.Ct. 1000, 44 L.Ed. 1175 (1900), should permit appellants to rescind the transaction and receive back the land and terminal or, since that is not possible, what the purchaser paid for it on the sale.

The District Judge concluded that the Referee had been "clearly erroneous" in sustaining the mortgages. His view was based in part upon Krulee v. F. C. Huyck & Sons, 121 Vt. 299, 156 A.2d 74 (1959), and in part upon his feeling that "the purpose behind the statute here involved was to prevent a public service corporation from giving certain creditors preference without approval being given by the now Public Service Board." We find difficulty with the latter concept. No preference is given, either in the technical bankruptcy sense or in any other, when a corporation purchasing property issues mortgages not greater than the property's worth. Moreover, the Vermont statute is no more directed against mortgages than against stocks or notes, yet the decision below, while striking down appellants' mortgages, allows their notes to be proved as general claims, a view which, if also applied to debentures, would approximate the very result for which appellants contend.

Neither do we consider the Krulee decision to have more than superficial relevance. That case arose under § 108 of the Vermont statute, which prohibits, inter alia, a corporation subject to the Commission's jurisdiction from making "a sale or lease or series of sales or leases in any one calendar year constituting ten per cent or more of the company's property located within this state and actually used in or required for public service operations * * * except after hearing by the public service commission and a finding by such commission that the same will promote the general good of the state." A purchaser under a contract to acquire such property, which had not been approved by the Commission, sued to recover a down payment on account of the purchase price. The contract required the seller to furnish "good and clear record and marketable title." The Supreme Court of Vermont sustained a plaintiff's verdict on the ground that "Without the consent of the Public Service Commission the defendant could not convey a clear and marketable title as it was required to do."

This was a long way from the Court's saying that if a deed had been delivered, no title...