In re Reynolds

• Decision Date: 27 April 1907
• Citation: 153 F. 295
• Parties: In re REYNOLDS.
• Court: U.S. District Court — Western District of Arkansas

153 F. 295

In re REYNOLDS.

United States District Court, W.D. Arkansas, Harrison Division.

April 27, 1907

Alleyn Smith, for claimant.

Crump Mitchell & Trimble, for opposing creditors.

ROGERS District Judge.

This case was tried before the referee on an agreed statement of facts. It appears from the agreed statement of facts, and other records before me: That on the 1st day of May, 1906 Mrs. Z. T. Poynter loaned to the bankrupt, John W. Reynolds $1,200 in money, and at the same time Reynolds executed and delivered to her, as security for the money, the following paper:

'Bill of Sale.

'Know all men by these presents: That I, J. W. Reynolds, of Gassville, Baxter county, Arkansas, for and in consideration of the sum of twelve hundred dollars, to me in hand paid by Z. T. Poynter, of Gassville, Baxter county, Ark., at and before the delivery of these presents, the receipt whereof is hereby acknowledged, do hereby bargain, sell, grant, convey, and deliver unto the said Z. T. Poynter the following property, goods and chattels, to wit: All of my entire stock of general merchandise, said stock located in the town of Gassville, Baxter county, Arkansas, said stock consists of hats, caps, shoes, dry goods, and notions, farming implements, hardware of all kinds, clothing, groceries, and the fixtures belonging to said stock 1 safe one store house and lot, located in the town of Gassville, Baxter county, Ark., owned by J. W. Reynolds. To have and to hold the same unto the said Z. T. Poynter her executors, administrators, and assigns forever. And the said J. W. Reynolds for myself and for my heirs executors and administrators do hereby covenant with the said Z. T. Poynter and with her executors, administrators, and assigns that I am the true and lawful owner of the said described property, goods, and chattels hereby sold, and have full power to sell and convey the same; that the title so conveyed is clear, free, and unincumbered; and, further, that I will warrant and defend the same against the claims of all persons whomsoever.

'Executed this the 1st day of May, A.D. 1906.

J. W. Reynolds.'

That no part of said debt has been paid. That between May 1, 1906, and March 19, 1907, Reynolds, the bankrupt, remained in possession of all the property described in the bill of sale, and continued to sell, and had the right to sell, in the usual course of business, whatever goods out of said stock of merchandise he wished, and bought and added to the same as he did before the bill of sale was executed, and all of these facts were known to Mrs. Poynter, and she gave no notice to any one of the existence of said bill of sale, which was never acknowledged or recorded at any time. That the bankrupt was insolvent on the 19th of March, 1907, and such fact was known to Mrs. Poynter at that time. That on the 19th of March, 1907, the bankrupt delivered to Mrs. Poynter possession of all the property described in the bill of sale, and she retained possession thereof until dispossessed by the sheriff of the county in which the property was situate under an attachment against the bankrupt, which occurred about three hours after Mrs. Poynter came into possession thereof. On March 23, 1907, the bankrupt made a deed, conveying to Mrs. Poynter the real property mentioned in the bill of sale, which was subsequently reconveyed, and all the property at the time the petition in bankruptcy was filed is in the possession of the trustee; and Mrs. Poynter now asks to have her claim allowed as a secured claim, to have priority over the general creditors. It is agreed that the sole question presented by this record is whether or not the failure to acknowledge and record the bill of sale more than four months before the filing of the petition in bankruptcy was cured by Mrs. Poynter taking possession of the mortgaged property before the proceedings in bankruptcy were instituted, and whether such possession related back to and had the effect of making valid the mortgage from the date of its execution.

It is conceded that the bill of sale was, in fact, a mortgage, and under the decisions of the Supreme Court of Arkansas that concession is correct. Bryan v. Hobbs, 72 Ark. 635, 83 S.W. 341; Land v. May, 73 Ark. 415, 84 S.W. 489; Sharp v. Fleming, 75 Ark. 557, 88 S.W. 305; James v. Mallory, 76 Ark. 514, 89 S.W. 472.

Section 5396, Kirby's Dig. St. Ark., is as follows: 'Every mortgage, whether for real or personal property, shall be a lien on the mortgaged property from the time the same is filed in the recorder's office for record, and not before; which filing shall be notice to all persons of the existence of such mortgage.'

In Etheridge v. Sperry, 139 U.S. 276, 11 Sup.Ct. 569, 35 L.Ed. 171, the United States Supreme Court said:

'While chattel mortgages are instruments of general use, each state has a right to determine for itself under what circumstances they may be executed, the extent of the rights conferred thereby, and the conditions of their validity. They are instruments for the transfer of property, and the rules concerning the transfer of property are, primarily, at least, a matter of state regulation. We are aware that there is a great diversity of rulings on this question by the courts of the several states, but, whatever may be our individual views as to what the law ought to be in respect thereto, there is so much of a local nature entering into chattel mortgages that this court will accept the settled law of each state as decisive in respect to any case arising therein.'

To the same effect see In re H. G. Andrae & Co., 9 Am.Bankr.Rep. 135, 117 F. 561, decided by the United States District Court for the Eastern District of Wisconsin. For the correct determination of the question here presented, we must, therefore, look to the decisions of the Supreme Court of Arkansas construing the statute above quoted. Before doing so, it may be noted that the United States Circuit Court of Appeals for this (the Eighth) circuit, held in Eagan State Bank v. Rice, 9 Am.Bankr.Rep. 437, 119 F. 107, 56 C.C.A. 157, that:

'The legal effect of a mortgage upon a stock in trade where the mortgagor remains in possession with power to sell in the usual course of business, and he makes no attempt to comply with a provision therein that he shall make daily deposits of all sales to apply upon the debt secured, is to hinder and delay his creditors, and, if given within four months prior to the filing of his petition in bankruptcy is null and void under section 67e of the bankruptcy act, Act July 1, 1898, c. 541, 30 Stat. 564 (U.S. Comp. St. 1901, p. 3449).'

In Lund v. Fletcher et al., 39 Ark. 325, 43 Am.Rep. 270, the court said:

'A mortgage of articles of merchandise left in the possession of the mortgagor, with power to sell in the ordinary course of business, is void, except between the parties to it; but, as to the other property not to be sold by the mortgagor, it is good.'

See, also, Fink v. Ehrman, 44 Ark. 310.

These decisions strike down the mortgage in controversy, in so far as it applies to chattels left in the hands of the bankrupt with the right to sell in the usual course of business. The mortgage on the stock of merchandise left in the possession of the bankrupt with the right to sell in the usual course of business, and to buy and add new stock in the same manner, was void as to creditors ab initio, and continued void even after the possession was taken, for the reason that it was a fraud upon creditors under the Arkansas decisions. But the mortgage covered, in addition to the stock of merchandise, an iron safe and a house and lot, and fixtures. Under the Arkansas decisions the mortgage on the house and lot, fixtures, and safe, in the absence of fraud, is valid, and the lien fixed as between the parties from the date of its execution, although not acknowledged and recorded (Martin et al. v. Ogden, 41 Ark. 191), but it was invalid as to creditors until possession was taken by the mortgagee, even though the creditors might have had actual notice of its existence from the date of its execution. Id.; Main v. Alexander, 9 Ark. 112, 47 Am.Dec. 732; Jacoway v. Gault, 20 Ark. 190, 73 Am.Dec. 494; Hannah v. Carrington, 18 Ark. 105; Carnall v. Duvall, 22 Ark. 136; Dodd v. Parker, 40 Ark. 536; Ringo v. Wing, 49 Ark. 457, 5 S.W. 787; Leonhard v. Flood, 63 Ark. 168, 56 S.W. 781; Smead v. Chandler, 71 Ark. 517, 76 S.W. 1066, 65 L.R.A. 353.

Under the agreed facts Mrs. Poynter gave no notice to anyone of the existence of the mortgage, and it must be found that no one had notice until possession was delivered to her by the bankrupt on the 19th of March, 1907. On that day, but three hours after she took possession of the property covered by the mortgage, the sheriff of the county dispossessed her under a writ of attachment; but she had then acquired, by the act of taking possession, a lien against all parties who subsequently acquired rights in the property. Apple White v. Harrell Mill Company, 49 Ark. 279, 5 S.W. 292. Did this right, so acquired, relate back to the execution of the mortgage so as to be valid against the creditors under the bankruptcy law? Under the laws of Arkansas, as we have seen the lien does not attach as against creditors until the mortgage is filed for record, and in Birnie et al. v. Main, 29 Ark. 595, the court said, 'The effect of recording a mortgage or other conveyance is not retrospective. ' Nor, in the opinion of the court, does the taking possession by the mortgagee of mortgaged property operate retrospectively. This conclusion is in harmony...