In re Simpson

• Citation: 31 F.2d 317
• Decision Date: 27 February 1929
• Docket Number: No. 3918.,3918.
• Parties: In re SIMPSON.
• Court: United States District Courts. 9th Circuit. District of Idaho

31 F.2d 317 (1929)

In re SIMPSON.

No. 3918.

District Court, D. Idaho, S. D.

February 27, 1929.

Turner K. Hackman, of Twin Falls, Idaho, for petitioning creditors.

Harry Benoit, of Twin Falls, Idaho, for Simpson & Co.

CAVANAH, District Judge.

C. W. Simpson, the bankrupt, and wife, executed, on July 5, 1928, to Simpson & Co. a chattel mortgage, securing the payment of $4,000, evidenced by 12 promissory notes in the sum of $333.33 each, payable on demand, upon the stock of goods, merchandise, furniture, and fixtures used in connection with the business known as the "Liberty Market" in Twin Falls, Idaho. On the same day the mortgage was filed for record in the recorder's office of the county. Prior and subsequent to the execution of the mortgage Simpson purchased merchandise from time to time from Simpson & Co. Possession of the mortgaged property was retained by the mortgagor, and he was permitted to sell the same in the actual course of business, without being required by the terms thereof to pay any of the proceeds on the mortgage indebtedness. A portion of the stock of goods was renewed from time to time, and was included in the mortgage indebtedness. The mortgagor paid three of the notes, which amounted to $1,000, on the mortgage debt, and, failing to make further payments, the mortgagor demanded the key to the building where the business was being conducted, and, after consent of the mortgagor, took peaceful possession of it on January 17, 1929, and on the same day he proceeded under section 6382 of the Compiled Statutes of Idaho to foreclose its mortgage by notice and sale, which was set for January 23, 1929.

In the meantime petition in voluntary bankruptcy was, on January 21, 1929, filed in this court by the mortgagor, and application was made by one of his creditors to enjoin the foreclosure proceedings and the appointment of a receiver to take charge of the stock of goods. After a hearing the receiver was directed to sell all of the mortgaged property for not less than $4,000, being an amount sufficient to cover the balance claimed to be due on the notes, and to deposit whatever amount was obtained with the clerk of the court, to be held and applied as the court may direct; neither the objecting parties nor the mortgagee losing any rights or suffering any prejudice by reason of the conversion of the property into money. The money now in the hands of the clerk is claimed by Simpson & Co., the mortgagee, to be applied to its mortgage, while a creditor claims that it is part of the assets of the bankruptcy estate, and should be applied pro rata in payment of claims of creditors. The mortgagor was adjudged a bankrupt on January 21, 1929, and thereafter, on February 5, 1929, a trustee was duly appointed. It seems that the mortgage was executed in good faith and prior to the four-months period of the filing of the petition in bankruptcy. It is a valid and binding contract between the parties, and taking peaceful possession of the mortgaged property prior to the filing of the petition in bankruptcy is not a voidable preference or transfer within the meaning of section 60a of the Bankruptcy Act (11 USCA § 96(a).

Under the facts here presented, the prevailing view, as expressed by the Supreme Court of the state, recognizes the principle that a chattel mortgage on merchandise stock, under which the mortgagor is permitted to retain possession and sell without accounting to the mortgagor for the proceeds, is not void ab initio, but only becomes fraudulent as to creditors in the event the mortgage is not in possession of the mortgaged property prior to the filing of the petition in bankruptcy, and does not arise until the petition in bankruptcy is filed, or the property attached or levied upon by a creditor. Kettenbach v. Walker, 32 Idaho, 544, 186 P. 912. The question being a local one, the decisions of the state Supreme Court will govern, and the authorities from other states holding a contrary view are not in point. Humphrey v. Tatman, 198 U. S. 91, 25 S. Ct. 567, 49 L. Ed. 956; Bryant, Trustee, v. Swofford Bros. Dry Goods Co., 214 U. S. 279, 29 S. Ct. 614, 53 L. Ed. 997; Hiscock v. Varick Bank of New York, 206 U. S. 28, 27 S. Ct. 681, 51 L. Ed. 945; Thompson v. Fairbanks, 196 U. S. 516, 25 S. Ct. 306, 49 L. Ed. 577. Since the decision of the Supreme Court of Idaho in the case of Ryan v. Rogers, 14 Idaho, 309, 94 P. 427, that court has held, in the case of Kettenbach v. Walker, supra, that:

"While it has been held that where a chattel mortgagor is permitted to retain possession of a stock of goods and dispose of it in the ordinary course of trade, without applying the proceeds to a payment of the mortgage debt, such mortgage is void as to attaching creditors of the mortgagor (Lewiston National Bank v. Martin, 2 Idaho, 734, 23 P. 920), it has also been held that where a mortgagee takes possession of the property with the consent of the mortgagor before rights of creditors attach, the mortgagee is exempt from the application of the above rule, and if the chattel mortgage is valid between the parties, the possession of such mortgagee is valid and may be maintained and the property sold under the provisions of such mortgage (First National Bank of St. Anthony v. Steers, 9 Idaho, 519, 108 Am. St. Rep. 174, 75 P. 225; Ryan v. Rogers, 14 Idaho, 309, 94 P. 427; Neustadter Bros. v. Doust, 13 Idaho, 617, 92 P. 978; Martin v. Holloway, 16 Idaho, 513, 102 P. 3, 25 L. R. A. N. S. 110), and this would be equally true as to after-acquired property covered by the terms of the mortgage (Dover Lumber Co. v. Case et al., 31 Idaho, 276, at 285, 170 P. 108; In re National Valve Co. D. C. 140 F. 679-681; 11 C. J. 436, note 32; Fisher v. Zollinger C. C. A. 149 F. 54, 79 C. C. A. 76, 17 A. B. R. 618; Akers v. Rowan, 33 S. C. 451, 12 S. E. 165, 10 L. R. A. 705)."

And again the court says:

"The rule is well established that where a chattel mortgagee takes possession of the mortgaged property within the four months' period prescribed by sec. 60a of the National Bankruptcy Act, under the terms of a mortgage valid between the parties and given in good faith prior to the four months' period, the act of taking possession is not a voidable preference or transfer within the meaning of said section. 2 Remington on Bankruptcy (2d Ed.) p. 1222, § 1370; Sexton v. Kessler & Co., 225 U. S. 90, 32 S. Ct. 657, 56 L. Ed. 995, 28 A. B. R. 85, affirming the same case 172 F. 535, 97 C. C. A. 161, 40 L. R. A. (N. S.) 639, 21 A. B. R. 807; Thompson v. Fairbanks, 196 U. S. 516, 517, 25 S. Ct. 306, 49 L. Ed. 577; Fisher v. Zollinger, supra; Collier on Bankruptcy (11th Ed.) 873; In re Automobile Livery Service Co. (D. C.) 176 F. 792, 23 A. B. R. 799; Bailey v. Baker Ice Machine Co., 239 U. S. 268, 36 S. Ct. 50, 60 L. Ed. 275; Anderson v. J. C. & N. B. Chenault, 208 F. 400, 125 C. C. A. 616. The rule is used upon the theory that such a mortgage, constituting a valid and binding contract between the parties, must be given effect according to their intention; that it is already obligatory upon them and continues to be so until fully executed, and that in taking possession in pursuance of its provisions the mortgagee exercises a right belonging to him thereunder. Fisher v. Zollinger, supra. Nor do the provisions of section 47a, as amended, of the National Bankruptcy Act, giving general creditors the status of creditors holding liens by legal or equitable process, militate against the rule, for the reason that, as stated by the Supreme Court of the United States, such status of the general creditors does not arise until the petition in bankruptcy is filed. Bailey v. Baker Ice Machine Co., supra; Anderson v. Chenault, supra; 2 Remington on Bankruptcy (2d Ed.) p. 1124, § 1270, 3/10. The contrary rule seems to prevail only in those jurisdictions which hold that a chattel mortgage of merchandise stock under which the mortgagor is permitted to retain possession and sell without accounting to the mortgagee for the proceeds is fraudulent in fact and void ab initio. Schaupp v. Miller (D. C.) 206 F. 575. As already observed, the rule is otherwise in this jurisdiction."

It is true that under the Bankruptcy Law, as amended by the...