In re Truscott Boat & Dock Co.

• Decision Date: 28 July 1950
• Docket Number: No. 10146.,10146.
• Citation: 92 F. Supp. 430
• Parties: In re TRUSCOTT BOAT & DOCK CO.
• Court: U.S. District Court — Western District of Michigan

92 F. Supp. 430

In re TRUSCOTT BOAT & DOCK CO.

No. 10146.

United States District Court W. D. Michigan, S. D.

July 28, 1950.

Warner, Norcross & Judd and Leonard D. Verdier, Jr., all of Grand Rapids, Mich., Kamfner & Halligan and Joseph Kamfner, all of Chicago, Ill., for bankrupt.

Bidwell, Schmidt & Martin and Walter K. Schmidt, all of Grand Rapids, Mich., for trustee.

Uhl, Bryant, Slawson & Wheeler and Gordon B. Wheeler, all of Grand Rapids, Mich., for General Factors Corporation.

Elden W. Butzbaugh, of Benton Harbor, Mich., for Midwest Credit Corporation.

Paul L. Conlan, of Minneapolis, Minn., for Mariner. Co.

Joseph F. Deeb, U. S. Atty., and Theodore H. Elferdink, Asst. U. S. Atty., of Grand Rapids, Mich., for the United States.

STARR, District Judge.

The United States of America, a tax creditor of said bankrupt, filed petition for review of an order of the referee in bankruptcy confirming a compromise settlement of the chattel-mortgage claim of General Factors Corporation.

The Truscott Boat & Dock Company, a Michigan corporation, was adjudged a bankrupt October 11, 1948, and a trustee was duly appointed. The United States filed proof of claim for employment and withholding taxes for 1948, including interest to the date of bankruptcy, in the amount of $32,453.36. On November 2, 1948, the General Factors Corporation of Chicago, Illinois, filed a petition for reclamation of certain chattels in the possession of the bankrupt, which were covered by a chattel mortgage executed by the bankrupt in favor of General Factors on December 6, 1947. Although this mortgage was executed on December 6th, it was not filed in the office of the register of deeds of Berrien county, Michigan, until December 10th. The mortgage as originally executed was in the amount of $40,250, but the balance due thereon at the time of filing the reclamation petition was $22,600. The trustee filed an answer to the petition, alleging in substance that the chattel mortgage was void as against the trustee and all creditors of the bankrupt estate, because, in the interim between its execution on December 6th and its filing on December 10th, certain creditors had extended credit to the bankrupt in good faith and without knowledge of the existence of the mortgage.

Section 13424, Comp.Laws Mich.1929, as amended by Act No. 129, Pub.Acts 1935, Comp.Laws 1948, § 566.140, Stat.Ann. 1948 Cum.Supp. § 26.929, provides: "Every mortgage or conveyance intended to operate as a mortgage of goods and chattels which shall hereafter be made which shall not be accompanied by an immediate delivery and followed by an actual and continued change of possession of the things mortgaged, shall be absolutely void as against the creditors of the mortgagor, and as against subsequent purchasers or mortgagees in good faith, unless the mortgage or a true copy thereof shall be filed in the office of the register of deeds of the county where the goods or chattels are located, and also where the mortgagor resides, except when the mortgagor is a non-resident of the state, when the mortgage or a true copy thereof shall be filed in the office of the register of deeds of the county in which the property is located."

In pursuance of a stipulation between the trustee and General Factors, and with the approval of the referee, the property covered by the chattel mortgage in question was sold at public auction, and $25,000 of the proceeds of the sale were impounded by the trustee, pending final determination on the reclamation petition. Thereafter hearings were held by the referee, and evidence was presented as to the validity of the chattel mortgage upon which the petition was based. Upon completion of the hearings, but prior to any decision by the referee as to the validity of the mortgage, General Factors offered to accept $9,500 in compromise settlement of its chattel-mortgage claim and its claim as a general creditor. The trustee filed a report and petition recommending that this offer be accepted for the following reasons:

"1. Your petitioner is satisfied that extensive and protracted litigation will result if the determination of this court is that said chattel mortgage is invalid as to the bankrupt estate.

"2. That such litigation will be expensive to the bankrupt estate and will delay the closing of said estate.

"3. That in the circumstances the offer of settlement is reasonable and fair."

Pursuant to notice to all creditors, as required by § 58, sub. a of the Bankruptcy Act, 11 U.S.C.A. § 94, sub. a, a hearing on the proposed compromise was held by the referee on November 28, 1949. At this hearing the United States objected to confirmation of the proposed compromise with General Factors, on the ground that its chattel mortgage was void. Other creditors also objected to the compromise. At the conclusion of the hearing the referee overruled all objections and entered an order dated November 28, 1949, confirming the compromise and authorizing the trustee to carry out the terms thereof by paying to General Factors Corporation the sum of $9,500. As hereinbefore stated, the United States has filed petition to review this order of the referee.

On this review the government contends that the referee abused his discretion in confirming the compromise over its objection, because the evidence adduced at the hearings on the reclamation petition established that the chattel mortgage to General Factors was void as against the trustee and creditors of the bankrupt, for the reason that in the interim between the execution of the mortgage on December 6, 1947, and its recording on December 10th, certain creditors had extended credit to the bankrupt in good faith and without knowledge of the existence of the mortgage. The government further contends that, because of the priority of its tax claim and because of the limited funds in the hands of the trustee, any payment made to effect the compromise with General Factors would materially reduce the amount which would otherwise be available for payment of its tax claim.

Section 27 of the Bankruptcy Act, 11 U.S.C.A. § 50, provides: "The receiver or trustee may, with the approval of the court, compromise any controversy arising in the administration of the estate upon such terms as he may deem for the best interest of the estate." It is well established that the approval or disapproval of a compromise agreement rests within the sound discretion of the referee, and that his decision will not be set aside except for clear error or abuse of discretion. Scott v. Jones, 10 Cir., 118 F.2d 30; In re Prudence Co., 2 Cir., 98 F.2d 559; Drexel v. Loomis, 8 Cir., 35 F.2d 800; In re Paley, D.C., 26 F. Supp. 952; 2 Collier on Bankruptcy, 14th Ed., § 27.05.

In determining whether the referee abused his discretion in approving the proposed compromise with General Factors Corporation, the court must examine the evidence adduced and the facts and circumstances under which the compromise was approved. From the record of the hearing before the referee on the proposed compromise, it appears that after payment of the premiums for insurance on the buildings of the bankrupt, the wages of watchmen and other operating expenses, and the payment of administrative expenses, there will remain a balance of $36,000 to $38,000 in the hands of the trustee. This balance would be only approximately sufficient to pay the tax claims of the United States and other taxing authorities.¹ A further reduction of this fund by payment to General Factors Corporation of $9,500 to effect the proposed compromise would leave a balance of between $26,500 and $28,500 to pay tax claims of about $37,500. The government's tax claim is entitled to priority in payment, § 64, sub. a of the Bankruptcy Act, 11 U.S.C. A. § 104, sub. a, and in view of the limited amount of funds in the hands of the trustee, it is apparent that any payment made to effect the proposed compromise with General Factors would, for the most part, come from funds which, if the General Factors chattel mortgage was held void, would otherwise be paid to the government on its tax claim.

Prior to the referee's order of confirmation on November 28, 1949, the hearings on the reclamation petition of General Factors had been concluded and initial briefs had been submitted. At those hearings and in his brief, the trustee contended that the chattel mortgage to General Factors was void, on the ground that certain creditors had, in good faith and without knowledge of the existence of the chattel mortgage, extended credit to the bankrupt in the interim between its execution and filing. The law is well established that if creditors had so extended credit to the bankrupt during this interim, the chattel mortgage is void as against the trustee and all creditors of the bankrupt. Evidence bearing on this issue was submitted by both parties at the hearings before the referee, and the court has carefully reviewed the transcript. The testimony presented and the exhibits admitted in evidence clearly indicated: (1) That the bankrupt executed the chattel mortgage in question to General Factors on December 6, 1947; (2) that four days later, on December 10th, General Factors filed the mortgage for record in the office of the register of deeds of Berrien county; and (3) that in the interim between the execution and filing of the mortgage, certain creditors had, in good faith and without knowledge of the existence of the mortgage, extended credit to the bankrupt. Although there was some dispute as to the amount of credit extended, the testimony and exhibits conclusively established that certain specific items of credit had been extended to the bankrupt during the interim.

In view of the evidence presented at the hearings on the reclamation petition, it is clear that if the referee had undertaken to decide the issue as to the validity of the General Factors...