In re PTG Grain Service

• Decision Date: 20 July 1960
• Citation: 185 F. Supp. 332
• Parties: In the Matter of P.T.G. GRAIN SERVICE, also known as Pearson Trucking Group Grain Service, a partnership consisting of Rex Pearson and Marvin L. Pearson, co-partners, and Rex Pearson, Bankrupts.
• Court: U.S. District Court — District of Minnesota

185 F. Supp. 332

In the Matter of P.T.G. GRAIN SERVICE, also known as Pearson Trucking Group Grain Service, a partnership consisting of Rex Pearson and Marvin L. Pearson, co-partners, and Rex Pearson, Bankrupts.

United States District Court D. Minnesota, Sixth Division.

July 20, 1960.

Maloney & Maloney, Aberdeen, S. D., and Field, Arvesen & Donoho, by Cyrus Field, Fergus Falls, Minn., for petitioner, First National Bank of Aberdeen.

Doherty, Rumble & Butler, by Eugene M. Warlich, St. Paul, Minn., for petitioner, Yellow Manufacturing Acceptance Corporation.

Thomas J. Murphy, St. Cloud, Minn., for Trustee in Bankruptcy, Charles G. Satterlee.

DEVITT, Chief Judge.

This proceeding to review the Order of one of the Referees in Bankruptcy raises the issue whether two conditional sales contracts, which were belatedly filed about three months after their execution and about five months prior to the filing of a petition in bankruptcy, are valid against the conditional vendee's trustee in bankruptcy. The holders of the vendor's interests, First National Bank of Aberdeen and the Yellow Manufacturing Acceptance Corporation, have filed petitions for review, pursuant to ch. 575, § 39, sub. c, 52 Stat. 858 (1938), 11 U.S.C. A. § 67, sub. c following an adverse Order by the Referee. The facts in each matter have been stipulated, and because of their similarity, are treated together.

On February 9, 1959 Rex Pearson, the bankrupt, purchased a truck on a conditional sales contract from Voight Buick, Inc. Voight assigned its vendor's interest to the petitioner, Yellow Manufacturing Acceptance Corporation. On May 8 and again on June 6, 1959, the contract was filed with the Register of Deeds for Wilkin County, Minnesota, where Rex Pearson resided and where P.T.G. Grain Service, the other bankrupt, had its place of business.

On April 13, 1959, the P.T.G. partnership purchased another truck under a conditional sales contract from Voight Buick, Inc., which immediately assigned its vendor's interest to the petitioner, First National Bank of Aberdeen. This contract was similarly filed in Wilkin County on June 17, 1959.

On November 4, 1959, both Rex Pearson and the partnership filed voluntary petitions in bankruptcy and were adjudicated bankrupt.

Between the execution date of the first contract, February 9, and its date of recording, May 8, and between the execution date of the second contract, April 13, and the date of its recording, June 17, a simple creditor extended credit to the bankrupts.

The creditor was not influenced by the non-filing of the conditional sales contracts, and no creditors seized the trucks under legal process or otherwise acquired a lien on them at any time prior to the bankruptcy. There was no agreement, fraudulent or otherwise, between the petitioners and the bankrupts to withhold the recording for the purpose of enhancing the bankrupts' credit standing.

The Referee in Bankruptcy found that petitioners had delayed an unreasonable length of time in recording their contracts and denied the petition for reclamation by concluding that even though there were no creditors in fact who could attack the contracts under Minnesota law, the mortgages were void against the trustee in bankruptcy under § 70, sub. c of the Bankruptcy Act, as amended, ch. 579, § 23(e), 66 Stat. 430 (1952), 11 U.S. C.A. § 110, sub. c, because a hypothetically perfect creditor existed, under Minnesota law, who could have attacked the mortgages.

Section 70, sub. c reads:

"(c) * * * The trustee, as to all property, whether or not coming into possession or control of the court, upon which a creditor of the bankrupt could have obtained a lien by legal or equitable proceedings at the date of bankruptcy, shall be deemed vested as of such date with all the rights, remedies, and powers of a creditor then holding a lien thereon by such proceedings, whether or not such a creditor actually exists."

The Referee relied on Constance v. Harvey, 2 Cir., 1954, 215 F.2d 571, 575, certiorari denied 1955, 348 U.S. 913, 75 S.Ct. 294, 99 L.Ed. 716, for his interpretation of Section 70, sub. c. That case involved a chattel mortgage filed ten months after execution and one year prior to the adjudication of bankruptcy. Under New York law, simple creditors who become such in the interim between the execution and belated recording of the mortgage, have priority over the mortgage. There was in fact no existing creditor who had granted credit during the ten-month interim. The Court nevertheless took a broad interpretation of the last clause in Section 70, sub. c and concluded:

"Since an existing creditor without notice of the chattel mortgage, could have obtained a lien at the time of the filing of the petition in bankruptcy, and since under § 70, sub. c of the Bankruptcy Act the Trustee was entitled to be put in the position of an `ideal' hypothetical creditor, we think his position must prevail over that of the mortgagee-appellant."

Constance v. Harvey has been criticized by law reviewers, see list, 4 Collier, Bankruptcy, Parag. 70.51 2 p. 1431 n. 30 (14th ed. 1959 supp.), has been rejected by the Sixth Circuit Court of Appeals, In re Alikasovich, 6 Cir., 1960, 275 F.2d 454, certiorari granted sub nom. Lewis v. Manufacturer's Nat. Bank, 80 S. Ct. 1613; by the United States District Court in Western Missouri, In re Billings, D.C.W.D.Mo.1959, 170 F.Supp. 253; and by the United States District Court in Maine, In re Di Pierro, D.C.D.Me.1958, 159 F.Supp. 497, 498, note 2 (dictum), has been followed and distinguished in its own Circuit, In re Gondola Associates, D. C.E.D.N.Y.1955, 132 F.Supp. 205, affirmed sub nom. Conti v. Volper, 2 Cir., 1956, 229 F.2d 317; In re American Textile Printers Co., D.C.D.N.J.1957, 152 F. Supp. 901, has been impliedly approved in the Ninth Circuit, Miller v. Sulmeyer, 9 Cir., 263 F.2d 513, certiorari denied 1959, 361 U.S. 838, 80 S.Ct. 55, 4 L.Ed. 2d 78, and has been criticized in the Fifth Circuit, Blackford v. Commercial Credit Corp., 5 Cir., 263 F.2d 97, 111, note 14, certiorari denied 1959, 361 U.S. 825, 80 S.Ct. 74, 4 L.Ed.2d 69.

The criticism generally levelled at Constance v. Harvey is that it creates a hypothetical creditor with rights assumed to have arisen before the bankruptcy and thus violates the basic concept of Section 70, sub. c that all rights of the trustee accrue on the date of the bankruptcy and not before. See In re Alikasovich, 6 Cir., 1960, 275 F.2d 454, 456. I subscribe to this criticism of Constance v. Harvey, and follow that which is, to me, the better reasoning and more logical result reached in Alikasovich.

The Referee seemed to be of the view that, because certiorari was denied by the Supreme Court in the Constance case, the principle of that decision had, by implication, received the blessing of the Supreme Court and required our following it. This is a...