In re Ducker

• Decision Date: 11 January 1905
• Docket Number: 1,344.
• Citation: 134 F. 43
• Parties: In re DUCKER. In re F. B. SHUSTER CO.
• Court: U.S. Court of Appeals — Sixth Circuit

134 F. 43

In re DUCKER. In re F. B. SHUSTER CO.

No. 1,344.

United States Court of Appeals, Sixth Circuit.

January 11, 1905

W. M Smith, for bankrupt.

Benj. F. Washer, for trustee and creditors.

Before LURTON, SEVERENS, and RICHARDS, Circuit Judges.

SEVERENS Circuit Judge.

This case comes here on appeal from an order of the District Court, sitting in bankruptcy, which denied the priority of a lien claimed by the F. B. Shuster Company on certain goods which came to the trustee from the bankrupt. As the question involved is one of law, the facts being undisputed, and counsel for the appellee raising no objection to this mode of review, this court is disposed to exercise its appellate jurisdiction, treating the appeal as equivalent to a petition for review.

The facts, as stated in the brief of counsel for the appellant which statement is conceded by counsel for the appellee to be correct, are as follows:

'On the 29th day of February, 1904, Alexander L. Ducker trading and doing business in the city of Louisville, Ky., under the name of the Kentucky Wire Works, filed his voluntary petition in bankruptcy in the District Court of the United States for the Western District of Kentucky, sitting at Louisville. Fred Breyfogle was afterwards duly appointed trustee under said proceedings, and there was listed in the schedule of said bankrupt, among other things, certain property claimed by the F. B. Shuster Company, or, in the event that the specific property was not delivered it by the court, then it claimed a prior lien thereon. Said property claimed by the F. B. Shuster Company consisted of machinery, which is fully described in Exhibit G, filed with the petition of the F. B. Shuster Company in said case, which is found on pages 18 and 19 of the printed record. Said exhibit reads as follows:

"New Haven, Conn., Jan. 11, 1904.

"Kentucky Wire Works,

"Louisville, Ky.

"Borrowed and received of the F. B. Shuster Company the following named articles, the same to remain the property of said The F. B. Shuster Company until such time as the price set against them shall be paid, as per memorandum in the margin, when they are to become the property of the borrower, Kentucky Wire Works, Louisville, Ky.

"Notes and drafts, if given, are not to be considered as payment until they have been paid in cash.

"The said borrower agrees to pay the price named, and in such manner as shall be stated in the margin, and, in the meantime, to keep the property in repair and sufficiently insured for the benefit of the said F. B. Shuster Company, and to permit them to enter and remove the same, if the payment is not made as herein agreed. In those States where the law requires it, this agreement shall be duly recorded.

"Payments to be made: 2-months note, dated Jan. 15, 1904, with interest, renewable every two months, provided one-sixth of amount of price of machine within and interest be paid at each and every maturity of note. $387.15.

One 1/4 inch 11-feet cut auto W.S. & C. machine, with countershaft, 'Shuster' model .......................................	$347 50
Extra 11-foot guide bar .................................................	22 00
Extra 1/8 inch arbor and bracket ........................................	22 00
Two extra sets of tools, making machine capable of handling down to 1.16 inch wire .......................................	12 00
	---------------------
	$403 50
Less 5 per cent .........................................................	20 18
	---------------------
	$383 32
Interest for 2 months at 6 per cent. per annum ...........................	3 83
	---------------------
	$387 15

"(Signed)............................................... Kentucky Wire Works,

"A. L. Ducker,

Prop.'

'Said exhibit shows, as the trial court determined, an absolute sale, with a mortgage back to secure the purchase money; that is, the contract entered into between the parties stipulated that the title to the merchandise should remain in the seller until the purchase price was paid, and power was given to the seller to retake possession of the property and remove it if it was not paid.

'In its original petition of interpleader, the Shuster Company claimed the specific property. This petition was filed on March 30, 1904. On April 16, 1904, it filed an amended petition, asking therein that if, in the opinion of the court, it is not thought that this petitioner retains the title to said property, then it states and charges that it does, in law, create a mortgage, and that thereunder it is entitled to a prior lien upon said property, and it prays that it be so adjudged.

'A demurrer was entered to this petition and amended petition of the Shuster Company, and the referee allowed the claim as a general claim, but sustained said demurrer to the petition and amended petition, and refused to allow said claim as a lien claim.

'Upon a petition for review, the District Court approved and confirmed said ruling of the referee, and directed that the funds arising from the sale of said merchandise claimed by the Shuster Company be administered, and that, in so doing, to see that the priority of the Shuster Company in the proceeds of said merchandise is subordinated to the payment of those creditors of the bankrupt whose debts were created subsequent to the delivery of that merchandise to the bankrupt, provided, however, that if, as to any such subsequent debts, the Shuster Company shall, in due season and in proper form, allege and prove that, at the time said debt or debts were so created, the creditors had notice to the Shuster Company, and the referee is further directed, in the administration of said assets, to give to the Shuster Company a priority out of the proceeds arising from the sale of the mortgaged property claimed, over the creditors whose debts were created prior to the delivery of said mortgaged merchandise by the Shuster Company to the bankrupt, to all of which the said Shuster Company at the time objected and excepted.'

To this statement the further facts should be added that the foregoing contract of sale was never recorded as required by the law of Kentucky applicable to chattel mortgages, and that there are creditors who became such after the vendee acquired the goods, and who are not shown to have had notice of the reservation of the title by the vendor.

The resultant question in the controversy depends upon the solution of two subordinates: First, what were the relative rights, in respect to these goods, of the petitioner and of the creditors of the bankrupt, who became such after he acquired the goods, and before he was adjudged bankrupt? And, second, what were the rights of the trustee, as the representative of all the creditors, and of the petitioner, respectively, in the property sold by the petitioner to the bankrupt? The first question is to be determined by the law of Kentucky; the second, by the bankrupt act.

Section 496 of the Kentucky Statutes of 1903 declares that:

'No deed of trust or mortgage conveying a legal or equitable title to real or personal estate shall be valid against a purchaser for a valuable consideration, without notice thereof, or against creditors, until such deeds shall be acknowledged or proven according to law, and lodged for record.'

It appears that, by the settled construction of this statute, such a contract as that between the petitioner and the bankrupt is the equivalent of a sale, and a mortgage back to the seller, and that, in its character of a mortgage, it is subject to the provisions of the statute just recited. Greer v. Church, 13 Bush, 430; Baldwin v. Crow, 86 Ky. 679, 7 S.W. 146; Manufacturing Co. v. Hart, 1 S.W. 414, 8 Ky.Law Rep. 223. And it further established that the 'creditor' against whom the conveyance shall not be valid is one who becomes a creditor at a time when the appearance of ownership arising from the debtor's possession may have misled him into the giving of credit upon the faith of such ownership, and not one who became a creditor prior to the acquisition of the property by the debtor.

From these propositions it clearly follows that, before the adjudication of bankruptcy, the creditors, in whose favor the statute declared the mortgage void, had acquired a priority of right to have recourse against this property, not only as against the mortgagee, but also against those creditors as to whom the mortgage was not void. In these conditions the property passed under the dominion of the bankruptcy act, and the question now is whether, by the operation of that act, the creditors who had priority of right for the satisfaction of their debts out of the mortgaged property under the state law have lost it by the intervention of the bankruptcy proceedings. The court below held that they had not, and we concur in that conclusion.

In certain instances, which are distinctly specified in the act what might otherwise be rights or privileges are suppressed in order to give way to the operation of the general purpose of a just and equal distribution of the bankrupt's assets. They are suppressed because they give unfair and inequitable advantages. But in other respects, and generally, it is foreign to the purpose of the act that it should operate to destroy rights or privileges lawfully acquired, whether of a legal or an equitable nature. On the other hand, the manifest intention is that they shall be recognized and protected. The estate of the bankrupt is devolved upon the trustee, subject to the rights of other persons therein. The substance in which those rights inhere is impounded. But except as before stated, it is the same substance, with the...