In re Cunningham

• Decision Date: 04 April 1933
• Docket Number: No. 3403.,3403.
• Citation: 64 F.2d 296
• Parties: In re CUNNINGHAM. HIGDON et al. v. JONES et al.
• Court: U.S. Court of Appeals — Fourth Circuit

64 F.2d 296 (1933)

In re CUNNINGHAM HIGDON et al. v. JONES et al.

No. 3403.

Circuit Court of Appeals, Fourth Circuit.

April 4, 1933.

T. B. Higdon, of Atlanta, Ga., for appellant W. L. Higdon.

Wm. L. McCoy, of Franklin, N. C. (R. D. Sisk, of Franklin, N. C., on the brief), for certain creditors, appellees.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

SOPER, Circuit Judge.

Higdon and Franks filed a petition in the matter of W. C. Cunningham, a bankrupt, asking that a deed of trust on a stock of goods, executed by the bankrupt for their benefit, be enforced as a prior lien on the property described therein. The bankrupt bought the stock of goods from one J. T. Porter for $10,000 on January 27, 1930, paying $500 in cash and giving his promissory notes, payable in four months for the balance, indorsed as an accommodation by Higdon and Franks. In order to secure the indorsers from loss, he agreed to execute and record a deed of trust on the goods. A draft of the paper was prepared by the trustee named therein and delivered by him to the bankrupt on February 10, 1930, who signed the document, but instead of recording it, put it in his desk and left it there until December 12, 1930, when he probated it and filed it for record with the clerk of the superior court, the official designated for that purpose by the North Carolina statutes. Subsequently, the indorsers obtained the deed from the recording office.

The petition in bankruptcy was filed on March 28, 1931. In the meantime, the bankrupt had reduced the indebtedness to the sum of $5,000, represented by a four months' renewal note which had fallen due on March 27, 1931, and had not been paid. In the early part of 1930, when the original notes were given and the deed of trust was arranged for and signed, the bankrupt was thought to be solvent; but on December 12, 1930, when the deed was proved and left for record, he was insolvent and the indorsers had reasonable ground to believe that such was the case and that the enforcement of their claim against the goods would give them a preference over other creditors of the bankrupt. Although the indorsers had not paid the note when the bankruptcy proceeding was begun, they had provable claims against the estate of the bankrupt arising from their obligation to pay his debt. Williams v. U. S. Fidelity Co., 236 U. S. 549, 35 S. Ct. 289, 59 L. Ed. 713.

The District Judge held that the transaction involved a voidable preference, and dismissed the petition of the indorsers. They contend, on this appeal, that the burden of proof was on the trustee in bankruptcy to show, amongst other things, that the deed of trust was executed under such circumstances as would give them reasonable cause to believe that the enforcement of the lien created by the deed would effect a preference, and that the proof not only failed in this respect, but showed affirmatively to the contrary that Cunningham was solvent when the notes were indorsed and the deed was executed. Moreover, they contend that the deed of trust was executed for the indemnification of the indorsers through whose aid the stock of goods was acquired, and hence it was given for a present consideration and not in such a way as to constitute payment or security for a pre-existing debt.

The District Court agreed that no preference was created by the execution of the deed of trust in February, 1930, when the grantor was in a solvent condition, but based its decision on the circumstance that the deed was not recorded until December 12, 1930, within four months of the filing of the petition in bankruptcy. Section 60b¹ of the National Bankruptcy Act, 11 U. S. C. § 96 (b), 11 USCA § 96(b), provides in substance, amongst other things, that a transfer is voidable by the trustee in bankruptcy if it is required by law to be recorded and is not recorded prior to four months before the filing of the petition in bankruptcy; provided that the transferrer is then insolvent, the transfer then operates as a preference, and the transferee then has reasonable cause to believe that a preference will be effected.

The application of this section to the facts of this case turns upon the question as to whether, under the law of North Carolina, the deed of trust was required to be recorded. Section 3311 of the Consolidated Statutes of North Carolina, provides that no deed of trust or mortgage for real or personal property shall be valid at law to pass any property as against creditors or purchasers for a valuable consideration except from the registration of the document where the grantor or mortgagor resides. The decisions of the Supreme Court of North Carolina interpreting this statute, which are binding upon federal courts in this respect, Firestone Tire & Rubber Company v. Cross (C. C. A.) 17 F.(2d) 417, clearly hold that an unrecorded mortgage or deed of trust is valid under this section as between the parties and as against general creditors, unless the claims of the general creditors have become fastened upon the property, as by insolvency or bankruptcy proceedings, before the recording takes place. Leggett v. Bullock, 44 N. C. 283; South Georgia Motor Company v. Jackson, 184 N. C. 328, 331, 114 S. E. 478; McBrayer v. Harrill, 152 N. C. 712, 68 S. E. 204; Observer Company v. Little, 175 N. C. 42, 94 S. E. 526, 527; Hinton v. Williams, 170 N. C. 115, 86 S. E. 994; National Bank of Goldsboro v. Hill (D. C.) 226 F. 102, 105, 115.

In McBrayer v. Harrill, the plaintiff's mortgage was not recorded until after the death of the mortgagor, and the defendant administrator of the mortgagor paid unsecured creditors out of the proceeds of the sale of the property without regard to the lien of the mortgage. He was held liable for the full amount of the debt on the ground that the unrecorded mortgage was a valid lien upon the estate as against other simple debts.

In Observer Company v. Little, speaking of the statutes in regard to the registration of deeds and mortgages, the court said: "In order for a creditor to avail himself of these registration statutes, it is very generally understood that he must by some judicial process or method, take steps to fasten his claim upon the property. In one or more of the decisions on the subject, it is said that he should be `armed with legal process' for the purpose."

In National Bank of Goldsboro v. Hill (D. C.) 226 F. 102, 115, Judge Connor said: "It is well settled by the decisions in this state that, unless a general creditor has secured a specific lien on the property of the mortgagor or grantor, before the registration of the deed or mortgage, it is valid as against general creditors from its registration."

We have to do in the pending case only with general creditors, for the rights of purchasers for a valuable consideration and of creditors armed with a lien or with legal process are not involved, and the mortgage was recorded before the institution of the bankruptcy proceedings.

It follows, having reference to the rights of the general creditors of the bankrupt, that the recording of the transfer was not required by the North Carolina law in the sense in which that word is used in section 60b. The Supreme Court of the United States has held that Congress did not undertake in section 60 to hit all preferential transfers (otherwise valid) merely because they are not disclosed either by record or possession more than four months before the bankruptcy proceeding. The provision that transfers recorded within four months of the bankruptcy proceeding may be avoided, if the elements of a preferential transfer then exist to the knowledge of the transferee, and if recording is required, has reference not to cases where recording is required in order to give validity to the transaction as between the parties, but only to those cases where recording is necessary to make the transfer valid as against those concerned in the distribution of the insolvent estate. Carey v. Donohue, 240 U. S. 430, 437, 36 S. Ct. 386, 60 L. Ed. 726, L. R. A. 1917A, 295; Martin v. Commercial National Bank, 245 U. S. 513, 38 S. Ct. 176, 62 L. Ed. 441. The earlier decision in Covington v. Brigman (D. C.) 210 F. 499, affirmed (C. C. A.) 219 F. 500, where the facts were similar to those in the pending case, cannot now be regarded as authoritative; but the decision of this court in Hetherington v. Rudisill, 28 F.(2d) 713, 716, 62 A. L. R. 377, is in harmony with the rule announced by the Supreme Court, for there the rights of general creditors had been fastened upon the property by the judicial process of a receivership to the exclusion of the subsequently-recorded lien of a conditional sales contract. Hence it was correct to say, under the facts disclosed, that the registration of the contract was "required" by the North Carolina statutes. These authorities make it clear that the decision of the District Court cannot be sustained under section 60b on the ground that the deed of trust was a document "required" by the state law to be recorded.

Since the above decisions of the Supreme Court were delivered, section 60a of the Bankruptcy Act has been...