In re Trahan

• Decision Date: 12 April 1968
• Docket Number: No. 16702.,16702.
• Citation: 283 F. Supp. 620
• Parties: In the Matter of Caldwell Joseph TRAHAN.
• Court: U.S. District Court — Western District of Louisiana

283 F. Supp. 620

In the Matter of Caldwell Joseph TRAHAN.

No. 16702.

United States District Court W. D. Louisiana, Lafayette Division.

April 12, 1968.

Bean & Rush, Warren D. Rush, Lafayette, La., for bankrupt.

Mouton, Champagne, & Colomb, George J. Champagne, Jr., Lafayette, La., for Beneficial Finance Co.

Archie M. Simon, Shreveport, La., amicus curiae.

Rodney Bernard, Jr., Lafayette, La., trustee.

PUTNAM, District Judge.

This case presents for review the question of whether or not the vendor's privilege afforded to the seller of merchandise under the law of Louisiana (LSA-C.C. art. 3227) is a statutory lien valid against the trustee in bankruptcy under the Bankruptcy Act, Sections 1(29a), 67(b) and (c), and 70(c), as amended July 5, 1966, P.L. 89-495, 11 U.S.C.A. §§ 1(29a), 107(b) and (c), and 110(c). The Referee held that it was not and allowed the trustee's claim for costs to be satisfied in preference to that of the creditor, Beneficial Finance Company (hereinafter referred to as Beneficial).

Beneficial is the assignee of the note of a furniture store dealer who sold the bankrupt certain items of furniture on credit, with reservation of the vendor's privilege, on which there is a balance due of $299.10. The property was in the possession of the bankrupt at the time his petition was filed. See, Bankruptcy Act, Section 1(13); 11 U.S.C.A. § 1(13). Resolution of this case involves a consideration of the method of distribution of the assets of the bankrupt, provided for by the Bankruptcy Act, and of the nature of the Louisiana "vendor's privilege".

It is the policy of the Act to allow secured creditors, those having liens upon the assets of the bankrupt, to have their claims recognized first; and the Act does not seek to jeopardize this secured status except where that intent is clear. Section 67(b) and (c), as amended; 11 U.S.C.A. § 107(b) and (c). See, Commercial Credit Co. v. Davidson, 112 F.2d 54 (5 Cir. 1940); In Re Brannon, 62 F.2d 959 (5 Cir. 1933); In Re Polumbo, 271 F.Supp. 640 (W.D.Va. 1967); In Re Empire Granite Co., 42 F.Supp. 450 (M.D.Ga.1942); Tatum v. Acadian Production Corp., 35 F.Supp. 40, 48 (E.D.La.1940); Collier on Bankruptcy, Vol. 4, § 67.02 at p. 34, § 67.201 at p. 211, and § 67.251 (14 ed. 1967); Senate Rep. No. 1159, U.S.Code Cong. & Admin.News, Vol. 2, p. 2467 (1966). However, there is also a policy against allowing those creditors whose only security is a state-created priority which is not a "lien" to assert their "priority" claims as secured claims against the assets. Elliott v. Bumb, 356 F.2d 749 (9 Cir. 1966); Strom v. Peikes, 123 F.2d 1003, 138 A.L.R. 937 (2 Cir. 1941). This policy was strengthened by the 1966 amendments to the Act. Collier, supra, Vol. 4, § 67.202 at p. 219 and n. 16d, § 67.203 at pp. 227-228; Senate Rep. No. 1159, U.S.Code Cong. & Admin.News, supra, pp. 2457, 2461, 2467. If the petitioner has a lien recognized in bankruptcy, then his claim primes that of the trustee; a claim based upon a priority would not.

Decision of the case at bar depends in part upon federal law and in part on the law of Louisiana. It is the state law that determines the nature of the vendor's privilege; but it is the Bankruptcy Act which determines whether or not a right of that nature is a secured claim in bankruptcy. Halpert v. Industrial Commissioner of State of New York, 147 F.2d 375 (2 Cir. 1945); Commercial Credit Co. v. Davidson, supra, p. 55; In Re Brannon, supra. Collier, supra, Vol. 4, § 67.202 at pp. 219-220, § 67.251 at pp. 347-348. The courts apply this principle in City of New Orleans v. Harrell, 134 F.2d 399 (5 Cir. 1943); Strom v. Peikes, supra; Brown Shoe Co. v. Wynne, 281 F. 807 (5 Cir. 1922) (Mississippi vendor's lien); Norris v. Trenholm, 209 F. 827 (5 Cir. 1913) (Mississippi vendor's lien).

This case hinges upon an interpretation and application of Sections 67(b) and (c) (1) (A) and (B), and 70(c) of the Bankruptcy Act.¹ Section 67(b) of the Act provides that "statutory liens" will be recognized as secured claims in bankruptcy, so long as they are not excluded by the provisions of Section 67(c). Statutory liens are defined for the first time by Section 1 (29a), 11 U.S.C.A. § 1(29a), added by the 1966 amendment, as follows:

"`Statutory lien' shall mean a lien arising solely by force of statute upon specified circumstances or conditions, but shall not include any lien provided by or dependent upon an agreement to give security, whether or not such lien is also provided by or is also dependent upon statute and whether or not the agreement or lien is made fully effective by statute." (As amended July 5, 1966.)

This definition is broad in its scope, and it has been said that a statutory lien is "one arising `primarily from an economic relationship defined by the legislature'." Lawrence v. United States, 378 F.2d 452, 467 (5 Cir. 1967). In Re New Haven Clock & Watch Co., 253 F.2d 577 (2 Cir. 1958); Collier, supra, Vol. 4, § 67.202, p. 217. See, Collier, supra, Vol. 1, § 1.00, p. 47 (1967 cumulative supplement).

Adhering to concepts of "mortgage" and "privilege", the Louisiana Civil Law system provides security devices to certain classes of persons which, in the common law, might be called liens. The vendor's privilege cannot be excluded from definitional coverage under Section 1(29a) merely because Article 3227 uses the word "privilege" instead of "lien"; the nature of privilege, though different from that of the common law lien, is close to that of a statutory lien; the concepts being similar, the words are often used interchangeably. Daggett, Louisiana Privileges and Chattel Mortgages, § 1 at p. 1, § 2 at pp. 4-5 (1942); Dainow, "Vicious Circles in the Louisiana Law of Privileges," 25 La.Law Rev. 1, n. 1 (1964); Slovenko, "Of Pledge," 33 Tul.Law Rev. 59, 60 (1958); 53 C.J.S. Liens § 1 d, p. 833; Black's Law Dictionery, "LIEN: Roman or Civil Law" (4 ed. 1951).

There have been cases in which the bankruptcy courts have recognized the vendor's privilege as a secured claim or "lien" in bankruptcy. Clyde Iron Works v. Frerichs, 203 F. 637 (5 Cir. 1913); In Re Bentz, 267 F. 606 (E.D.La.1920) (reversed on other grounds, Sherer-Gillett Co. v. Pilsbury, 269 F. 595 (5 Cir. 1921)); In Re New Orleans Milling Co., Inc., 263 F. 254 (E.D.La.1920). See, Sessler v. Paducah Distilleries Co., 168 F. 44 (5 Cir. 1909); In Re Smith, 51 F.2d 290 (S.D.Miss.1931); Globe Automatic Sprinkler Co. v. Bell, 183 La. 937, 165 So. 150 (1936); Lehman, Stern & Co. v. E. Martin & Co., 132 La. 231, 61 So. 212 (1913) (affirmed, 236 U.S. 448, 35 S.Ct. 307, 59 L.Ed. 666 (1914)); Alphonse Brenner Co. v. Owens, 17 La. App. 294, 136 So. 122 (1931). Compare, Marshall v. Knox, 16 Wall. 551, 21 L.Ed. 481 (1872) (which involved a Louisiana lessor's privilege); Arkansas Fuel Oil Co. v. Leisk, 133 F.2d 79 (5 Cir. 1943) (which involved the Louisiana privilege in favor of carriers).

We conclude that a vendor's privilege meets the definitional requirements of Section 1(29a), because it is a "statutory lien" which arises by operation of law upon the happening of a specified circumstance. LSA-C.C. arts. 3186, 3227.² It would not fall under the exclusionary provision of Section 1(29a), because it can not be created by agreement of the parties. It results from the nature of the debt and arises only by operation of law. LSA-C.C. art. 3185. Daggett, supra, § 37, p. 96; Planiol, Traité Élémentaire De Droit Civil, No. 2544, pp. 425-426 (11 ed. 1939, trans. Louisiana State Law Institute, 1959); Bonomo, Saunder's Lectures on the Civil Code, p. 503 (1925); Dainow, "Ranking Problems of Chattel Mortgages and Civil Code Privileges in Louisiana Law," 13 La.Law Rev. 537, 545 (1953).

Having concluded that the vendor's privilege is a "statutory lien", as that term is defined by the Bankruptcy Act, we now turn to Sections 67 and 70(c) for resolution of the remaining issue before us. We have found no case law interpreting this recently amended section and applying it to the Louisiana vendor's privilege. The problem is res nova and requires our considered attention.

Because of circuity of liens resulting from the application of State law to determine the rank of statutory liens created by State legislatures in many fields, Congress felt a need to protect the order of distribution of proceeds of the bankrupt's estate as provided for in the Act; the 1966 amendments are the consequence. Statutory liens which do not meet the requirements of 67(c) are not given secured status; for the purposes of the Act, they are state-created priorities, not recognized in bankruptcy.³ Senate Rep. No. 1159, U.S.Code Cong. & Admin.News, supra, p. 2456 et seq. See, Collier, supra, Vol. 4, § 67.02 at p. 34, § 67.201 at p. 211, § 67.202 and n. 16d at pp. 219-220, § 67.203.1 at p. 228. A statutory lien will be viewed as such a priority when (1) it does not become effective until the debtor is insolvent or his property is being distributed or liquidated, or (2) it does not become effective until another creditor seeks execution of a claim against the property (Section 67(c) (1) (A)), or (3) it would not be enforceable against a bona fide purchaser (Bankruptcy Act, Section 1 (5); 11 U.S.C.A. § 1(5)) on the date of bankruptcy, provided that if the lien is not invalid under Section 70(c), then the lienor may constructively seize the property (by filing notice with the court) or otherwise perfect the lien against the fictitious bona fide purchaser (Section 67(c) (1) (B)).⁴

The tests provided for by Section 67 (c) (1) (A) are self-explanatory. The "bona fide purchaser test" of 67(c) (1) (B) with its reference to Section 70(c), has been explained as follows:

"It is clear * * * that the enforceability of the statutory lien depends upon its state of perfection as of the date the petition is filed. Have the necessary steps been taken, by that date, to make the lien enforceable against a bona fide purchaser? That is the question to determine its

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