In re Bennett

• Decision Date: 03 January 1920
• Parties: In re BENNETT.
• Court: U.S. District Court — Western District of Missouri

264 F. 533

In re BENNETT.

United States District Court, W.D. Missouri, Central Division.

January 3, 1920

Ellis &amp Yale, of Kansas City, Mo., and Lamm, Bohling & Lamm, of Sedalia, Mo., for petitioner.

G. W Barnett and Paul Barnett, both of Sedalia, Mo., for trustee.

VAN VALKENBURGH, District Judge.

Two subsidiary questions are presented, which may be briefly disposed of. The referee held that the reservation of title in the petitioner was void because the contracts of conditional sale were not acknowledged and recorded, as required by section 2889, R.S. Mo. 1909, but were merely filed for record, which the referee deemed not to be a compliance with that statute. In my memorandum, filed in this same case on review of the order of the referee denying the reclamation petition of the Acme Harvesting Machine Company I decided this contention, as here, in favor of the petitioner.

It is said that, although the referee does not specifically so state, he inferentially holds that, because the conditional sale contracts in controversy were filed within four months prior to bankruptcy and while bankrupt was insolvent, the surrender of the goods sought to be reclaimed would effect an unlawful preference. The decision of the Supreme Court in Bailey v. Baker Ice Machine Co., 239 U.S. 268, 36 Sup.Ct. 50, 60 L.Ed. 275, is conclusive upon this point which is resolved in favor of petitioner.

The main, and indeed the only substantial, point of controversy submitted, is thus stated in the brief of counsel for petitioner:

'The referee erred in holding that said contracts were void as to general creditors of said bankrupt, whose debts were incurred between the dates of the execution of said contracts and the date of their filing, to wit, January 11, 1919.'

It may be noted, in passing, that the petition in bankruptcy was filed January 24, 1919, just 13 days later. Counsel contends that this ruling is in conflict with the ruling case in Missouri on this subject, to wit, Thompson & Co. v. Massey, 76 Mo.App. 197, and with those of the Circuit Court of Appeals for this circuit, in T. L. Smith Co. v. Orr, 224 F. 71, 139 C.C.A. 517, and In re Terrell, 246 F. 743, 159 C.C.A. 45.

With respect to the latter case it will be sufficient to say that it was decided, not only upon the faith of the statute of Oklahoma, but also upon the decisions of the Oklahoma courts in construing that statute (246 Fed.loc.cit. 753, 159 C.C.A. 45), in which section 2894 is given controlling force and effect. This section reads thus:

'In the absence of fraud, every contract of a debtor is valid against all his creditors, existing or subsequent, who have not acquired a lien on the property affected by such contract.'

No such provision is found in the statutes of Missouri, nor is any such condition injected by judicial decision. Judge Reed, in his opinion, dismisses the cases of In re Martin (Petition of Bothe) 173 F. 597, 97 C.C.A. 547, and First National Bank v. Connett, 142 F. 33, 73 C.C.A. 219, 5 L.R.A. (N.S.) 148, with the remark that they were decided under the recording law of Missouri, which differs in this very vital particular from that of Oklahoma.

Counsel is correct in saying that Thompson & Co. v. Massey is, in fact, the ruling case, in so far as there is one, in Missouri, on the point in question, and the language of Judge Sanborn in T. L. Smith Co. v. Orr, supra, is expressly based upon that Missouri case. Neither of these cases, properly read, are decisive of the point, as counsel for petitioner claims. A moment's reflection will make this clear. It is conceded that the law requiring the recording of chattel mortgages would postpone this petitioner under the admitted facts in this case. Section 2861, R.S. Mo. 1909, provides:

'No mortgage or deed of trust of personal property hereafter made shall be valid against any other person than the parties thereto, unless' recorded, etc.

At the outset it was contended that 'any other person' did not include creditors, because creditors were not specifically named. The courts, however, decided that creditors were obviously included within those terms. This would ordinarily mean a creditor, as understood generally and specifically in many other jurisdictions, that is to say, a creditor, armed with process, who had fastened upon the property prior to recordation; but promptly and decisively the Missouri courts made an obvious distinction between antecedent creditors and subsequent creditors, those whose debts accrued between the giving of the mortgage and the filing of the same for record. Williams v. Kirk, 68 Mo.App. 457; Landis v. McDonald, 88 Mo.App. 335. In the latter case the following language from Crippen v. Fletcher, 56 Mich. 386, 23 N.W. 56, is quoted as an approved statement of the reasoning upon which this doctrine is predicated: 'When a chattel mortgage exists and is concealed, it is, under the statute, void for the reason that it produces a false appearance of entire solvency when in fact a person known to have mortgaged his stock would not be as likely to get credit as one who had given no such security; and those who deal with such a debtor are liable to be defrauded by appearances. One who gives credit under such circumstances is necessarily exposed to that mischief, and the law has removed all questions of suspicion or notice by making chattel mortgages void, at all events, against creditors who deal with a debtor so situated. Such creditors are directly within the policy of the statute.'

As against the antecedent creditor the mortgage may be validated by recordation, or by possession taken prior to the time when such creditor has fastened upon the property by legal process. The subsequent creditor need take no such step for the preservation of his right; as to him a superior right in equity is immediately created, which cannot later be divested by any act of the mortgagee; this right is affirmative and offensive, as well as defensive. For example, in Williams v. Kirk, supra, the mortgagee had already recorded its mortgage and taken possession of the property covered by it the day before the subsequent creditor levied an attachment thereon. It was held that the subsequent creditor had acquired a clear equitable right superior to the mortgagee, which entitled him to relief without the necessity of fixing a lien as a prerequisite. This holding, as many thus stated, was to effect the manifest object, purpose, and spirit of the law.

Counsel contends, however, that the rule in conditional sales is otherwise; but the Court of Appeals for this circuit, in two cases, McElvain v. Hardesty, 169 F. 31, loc. cit. 35, 94 C.C.A. 399, and L. A. Becker v. Gill, 206 F. 36, 37, 124 C.C.A. 170, has expressly held that in Missouri this rule is applicable to contracts of conditional sale. In the latter case Judge Hook says:

'We think the construction of the state statutes and decisions is sound, and, in addition, makes for the observance of the letter and spirit of the registry laws and business honesty.'

This would seem to settle the controversy, unless the later case of Smith Co. v. Orr, 224 F. 71, 72, 139 C.C.A. 517, as founded upon Thompson & Co. v. Massey, 76 Mo.App. 197-204, has announced a different conclusion. Counsel for petitioner thinks it has.

In Smith Co. v. Orr, Judge Sanborn was not dealing with the question here presented. He decides that a receiver appointed in a suit in equity instituted by a creditor against his insolvent debtor to administer and convert into money the property of the debtor, and distribute the proceeds thereof among his creditors, has the power of creditors armed...