In re Harpeth Motors

• Decision Date: 03 November 1955
• Docket Number: No. 22201.,22201.
• Citation: 135 F. Supp. 863
• Parties: In the Matter of HARPETH MOTORS, Inc., Bankrupt.
• Court: U.S. District Court — Middle District of Tennessee

135 F. Supp. 863

In the Matter of HARPETH MOTORS, Inc., Bankrupt.

No. 22201.

United States District Court M. D. Tennessee, Nashville Division.

November 3, 1955.

Dan E. McGugin, Jr., Nashville, Tenn., for petitioner C. I. T. Credit Corp.

Andrew M. Gant, Asst. U. S. Atty., Nashville, Tenn., for United States.

WILLIAM E. MILLER, District Judge.

Universal C. I. T. Credit Corporation, hereinafter called Credit Corporation, filed its petition before the Referee for an order adjudging its asserted priority and security rights against the assets of the bankrupt under the provisions of certain trust receipts held by it and under the provisions of the Uniform Trust Receipts Law of Tennessee, Code Supp. 1950, § 7792.1 et seq.

Following a hearing, the Referee entered his order on September 21, 1954, disallowing and dismissing the petition. The case is presently before the Court upon the petition of the Credit Corporation for a review of the Referee's order and his findings of fact and conclusions of law.

It is the insistence of the Credit Corporation that it possessed a security interest in seven motor vehicles which had been placed in the hands of the bankrupt for sale under duly executed trust receipts, and that although the vehicles had been sold before bankruptcy and the proceeds therefrom cannot be identified or traced, it is nevertheless entitled to a prior secured claim against the bankrupt's assets. It seeks to support the contention under the provisions of Section 10 of the Tennessee Uniform Trust Receipts Law, 1950 Code Supplement, Section 7792.11. That section vests in the "entruster" in a trust receipt transaction (in this case the Credit Corporation), the right to the value of the proceeds of goods covered by a trust receipt where the "trustee" in the transaction (in this case the bankrupt), has sold the goods and the proceeds therefrom cannot be traced or identified in the hands of the trustee.

The determinative question is whether Section 10 creates a lien upon the trustee's assets to secure payment of the entruster's claim for the value of unidentifiable proceeds, or whether it merely accords such value claim a priority in the distribution of the trustee's assets among his general creditors in insolvency or bankruptcy proceedings.

The Referee, having found that the proof was insufficient to trace the proceeds of the seven vehicles or to identify them in the hands of the bankrupt or in the hands of the trustee in bankruptcy, construed Section 10 of the Uniform Trust Receipts Law as vesting in the Credit Corporation as the entruster a right to the value of the proceeds protected merely by a priority in the distribution of assets among general creditors in insolvency, and not by a lien or charge in the nature of a lien against the assets of the trustee in the trust receipt transaction. He further held that such priority was not entitled to recognition in bankruptcy for the reason that Section 64 of the Bankruptcy Act, 11 U.S. C.A. § 104, accords priority only to certain classes of claims not including priorities created by state law.

It is undisputed from the evidence, and the Referee found, that the transactions between the Credit Corporation and the bankrupt with respect to the seven vehicles were "trust receipt transactions" within the meaning of the Uniform Trust Receipts Law of Tennessee; that the Credit Corporation as the entruster under the Act held duly executed trust receipts covering each of the motor vehicles; that the Credit Corporation, more than four months prior to the filing of the petition in bankruptcy, had duly filed with the Secretary of State of Tennessee, in conformity with the Act, a "Statement of Trust Receipt Financing" Code Supp.1950 Tenn. § 7792.14; that the seven vehicles were sold by the bankrupt in the ordinary course of trade either for cash or partly for cash and partly for traded-in vehicles; and that the proceeds from the sales were received by the bankrupt although they could not be identified among its assets.

Section 10 of the Tennessee Uniform Trust Receipts Law, upon which the Credit Corporation relies, reads as follows:

"Where, under the terms of the trust receipt transaction, the trustee has no liberty of sale or other disposition, or, having liberty of sale or other disposition, is to account to the entruster for the proceeds of any disposition of the goods, documents or instruments, the entruster shall be entitled, to the extent to which and as against all classes of persons as to whom his security interest was valid at the time of disposition by the trustee, as follows: (a) to the debts described in section 7792.10(3); and also (b) to any proceeds or the value of any proceeds (whether such proceeds are identifiable or not) of the goods, documents or instruments, if said proceeds were received by the trustee within ten days prior to either application for appointment of a receiver of the trustee, or the filing of a petition in bankruptcy or judicial insolvency proceedings by or against the trustee, or demand made by the entruster for prompt accounting, and to a priority to the amount of such proceeds or value; and also (c) to any other proceeds of the goods, documents or instruments which are identifiable, unless the provision for accounting has been waived by the entruster by words or conduct; and knowledge by the entruster of the existence of proceeds, without demand for accounting made within ten days from such knowledge, shall be deemed such a waiver."

If the statute merely confers a right of priority to the extent of the claim of value in the general distribution of the assets of the trustee in the security transaction, such right of priority, as the Referee correctly held, would be unenforceable in the trustee's bankruptcy proceedings. This is true because the classes of claims given priority in distribution of assets in bankruptcy prescribed by Section 64 of the Bankruptcy Act are exclusive, and by the Chandler Amendment of 1938, state created priorities, with one exception not pertinent in this case, were eliminated from the Act. Halpert v. Industrial Commissioner of the State of New York, 2 Cir., 147 F.2d 375; Strom v. Peikes, 2 Cir., 123 F.2d 1003, 138 A.L.R. 937.

But Section 67, sub. b of the Bankruptcy Act preserves state created liens or security interests, although some legal proceedings or further steps may be necessary to effectuate them after bankruptcy has intervened. 4 Moore's Collier on Bankruptcy, 14th Ed., Section 67.20(2), p. 181.

A clear statement of the distinction between a lien and a right to priority of payment from unencumbered assets is set forth in 3 Moore's Collier on Bankruptcy, 14th Ed., Section 64.02, pp. 2055, 2056:

"Considerable confusion exists in bankruptcy administration because of a failure to distinguish clearly between a valid lien and a right to prior payment from unincumbered assets. The former entails a right to enforcement independent of bankruptcy; it may be created by agreement or statute, or by judgment of a court. The latter is a narrow right to payment at a certain relative point in the distribution of a bankrupt debtor's property, naked of any power of levy or attachment; it is a creature of the Bankruptcy Act. Quite different consequences in bankruptcy are appended to each. A valid lien, subject to the qualifications and restrictions previously stated, is a charge against assets which must be met before distribution to unsecured creditors begins.

A right to priority accords an unsecured claim a particular precedence over other claims in the distribution of the bankrupt's remaining assets. A particular debt may be secured by a lien arising from a statute or agreement, and yet be entitled to priority, too."

The Uniform Trust Receipts Law has as its general purpose the regulation of transactions involving the use of trust receipts. Apparently the trust receipt was first used almost exclusively in the importing business, but for many years has been used in this country in connection with the financing by lending companies of the purchase of automobiles by automobile dealers. Annotation 168 A.L.R. 359, 360. The wide use of the trust receipt in this field of financing led to the formulation of the Uniform Act and its adoption by many of the states. Its underlying policy and general purpose are summarized in the Annotation in 168 A.L.R., (p. 360), as follows:

"The Trust Receipts Act is evidently the result of an effort to meet the needs of the business of financing the purchase and sale of goods on credit without the use of chattel mortgages, and without recording each lien transaction. The apparent purpose in permitting the filing of a statement by such financer and dealer is to have some method of giving notice to other prospective creditors that the former are doing business by the trust-receipt financing method. The purpose seems to have been to retain the advantages of a security interest in goods by use of the trust receipt and yet to eliminate, as far as possible, both secret liens and the necessity of recording each transaction. Donn v. Auto Dealers Invest. Co., 1944, 385 Ill. 211, 52 N.E.2d 695. See also Commercial Discount Co. v. Los Angeles County, 1940, 16 Cal.2d 158, 105 P.2d 115, infra, V b.

"The principal purpose of the Uniform Trust Receipts Act was to facilitate the financing of sales and other transactions and to afford the `lender every conceivable protection in handling trust receipt and pledge transactions, so that the use of these security devices may be increased.' Commercial Credit Corp. v. Horan, 1945, 325 Ill.App. 625, 60 N.E.2d 763."

The Tennessee Act, 1950 Code Supplement, Sections 7792.1-7792.19, defines the term "security interest" as follows:

"`Security interest' means a property interest in goods, documents, or instruments, limited in extent to securing performance of some obligation of the trustee or of some third person to the entruster, and includes the interest

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