In re Williamsburg Knitting Mill

• Decision Date: 30 June 1911
• Citation: 190 F. 871
• Parties: In re WILLIAMSBURG KNITTING MILL.
• Court: U.S. Court of Appeals — Fourth Circuit

190 F. 871

In re WILLIAMSBURG KNITTING MILL.

United States District Court, E.D. Virginia.

June 30, 1911

[Copyrighted Material Omitted]

O. D Batchelor and Henley & Henley, for trustees in bankruptcy.

R. T Armistead and S. O. Bland, for petitioners George H. Holt & Co.

WADDILL District Judge (after stating the facts as above).

Two questions are presented on the record for consideration by the court: (a) Whether the after-acquired clause in the mortgage of the 23d of November, 1909, to Henly, trustee, constituted a lien upon the sprinkler system, made a part of the premises, after the execution and recordation of the trust deed. (b) Whether the referee correctly ruled that under the bankruptcy act as amended on the 25th of June, 1910 (Act June 25, 1910, c. 412, 36 Stat. 838), it was necessary for the vendors, Holt & Co., to record their contract, in order to secure a lien as against the bankrupt's estate, in the hands of its trustee. These two positions will be taken up in the order mentioned.

First. Considering the validity of the lien in favor of the Peninsula Bank by reason of the after-acquired clause in the mortgage, a preliminary point was raised, namely, that the bank took the deed with actual notice of the existence of the contract in favor of Holt & Co., and hence should not be entitled to a lien. The determination of this question depended largely upon the facts of the case. The referee saw and heard the witnesses testify, and reported in favor of the bank; that is to say, that it was not so circumstanced as to be charged with notice of the right of the vendors to the lien asserted by them.

Actual or constructive notice to the bank, or its trustee in the deed of trust, of the rights of Holt & Co., would have been as effective from a legal standpoint as if the contract containing the reservation of title had been duly admitted to record. But the referee found that neither the bank nor the trustee had actual or constructive notice, and with this finding the court concurs.

Under the after-acquired clause in the mortgage, as in this case, any property acquired by the mortgagor subsequent to the date of the execution and delivery of the mortgage, which was within the general description of property contained therein, became as fully subject to the lien of the mortgage, in equity, as if such property had been owned by the mortgagor on the date of the execution and delivery of the mortgage. The authorities to sustain this position are clear, and within comparatively recent date the entire subject has been reviewed by the Circuit Court of Appeals of this circuit in two cases, namely, Union Trust Co. v. Southern Sawmills Co., 166 F. 193, 197, 199, 200, 92 C.C.A. 101, and Tippett & Wood v. Barham, 180 F. 76, 80, 103 C.C.A. 430, to which cases, with the authorities cited in each, special reference is made as containing a full review of the authorities governing and controlling this subject.

In order for the after-acquired property clause in the mortgage in question to constitute a valid lien, of course, the property in controversy must come fairly within the terms of such after-acquired property clause; and such after-acquired lien must be subordinate to any pre-existing valid lien upon the property at the time it was placed upon the premises.

This case, however, is comparatively free from difficulties in this respect, as it is clear that the sprinkler system in question, when installed, became a fixture and such part of the bankrupt's estate as to form and become a portion thereof, notwithstanding the provision in the contract of sale that it should remain the property of the vendors, and retain its character of personalty; and was hence subject to the after-acquired property clause in a deed theretofore executed, fairly embracing the same, and whatever may have been the rights of the vendors in the property thus put upon, and which forms part of the real estate, or the correct method of legally securing and prosecuting such rights, had the same been timely and appropriately taken under the law of the state of Virginia, it is immaterial to determine here, for the reason that the vendors in this instance recorded no lien, and took no steps whatever to save their rights, if any they had, against those of the existing mortgagee, and hence, as between the two claimants of liens, the mortgage takes precedence.

Second. In passing upon the correctness of the referee's ruling that it was essential under the amended bankruptcy act of the 25th of June, 1910, for the petitioners Holt & Co., the vendors of the sprinkler system in question, to record their contract, in order to make effective their lien as against the bankrupt's estate in the hands of its trustee, it becomes necessary to determine the effect of the amendment and just what title and estate the bankrupt's trustee in the light of the bankrupt law as amended takes; or, to state the question differently, to ascertain just what effect the bankruptcy proceeding has as respects those who hold liens or incumbrances upon, or have an adverse interest to that of the bankrupt in such estate. This subject cannot be said to have been free from doubt under either the present act or that of 1867 (Act March 2, 1867, c. 176, 14 Stat. 517); that is, the authorities have not always been harmonious, though it may be fairly stated that under both acts, the consensus of opinion, and certainly the better doctrine is, that, except in cases of attachment sued out or other lien or incumbrance had and secured within the prescribed time preceding the commencement of proceedings in bankruptcy, and except in cases where the procurement of such lien or disposition of property by the bankrupt is declared to be fraudulent and void, the bankrupt's trustee takes the property in the same condition that the bankrupt himself held it, and subject to all equities impressed upon the property in the hands of the bankrupt, and subject, also, to all such valid liens or incumbrances, whether created by operation of law or by act of the bankrupt, which existed against the property in the hands of the bankrupt. Cook v. Tullis, 18 Wall. 332, 21 L.Ed. 933; Yeatman v. Savings Institution, 95 U.S. 764, 24 L.Ed. 589; Stewart v. Platt, 101 U.S. 731, 25 L.Ed. 816; Hauselt v. Harrison, 105 U.S. 401, 26 L.Ed. 1075; Hewit v. Berlin Machine Works, 194 U.S. 296, 24 Sup.Ct. 690, 48 L.Ed. 986; Thompson v. Fairbanks, 196 U.S. 516, 526, 25 Sup.Ct. 306, 49 L.Ed. 577.

The cases cited (and others might be given) firmly maintain the doctrine that a trustee in bankruptcy gets no better title than that which the bankrupt had at the initiation of the bankruptcy proceedings; that he is not a purchaser for value within the meaning of the recordation acts; and that, as the vendor's title under the conditional sales agreement as between himself and the bankrupt is good, it is also good against the bankrupt's estate, and the same may be said of liens generally upon the bankrupt's estate, or claims to such estate, good as between such claimants or the holders of such liens and the bankrupt. In such cases the liens upon or claims to property belonging to the bankrupt are unaffected by the bankruptcy.

The contrary doctrine is that it is the policy of the bankruptcy act to clothe the trustee with title as against secret claims, liens, and equities, and compels every one to comply with the state statutes respecting recordation; and in consequence of failure to do so to lose their claim upon, or right to, lien or equity. Under the bankruptcy law of 1867 (Act March 2, 1867, c. 176, 14 Stat. 517), the case of Bank v. Sherman, 101 U.S. 403, 405, 25 L.Ed. 866, gives strong color to this view of the law. In that case the court said:

'The filing of the petition was a caveat to all the world. It was in effect an attachment and injunction. Thereafter all the property rights of the debtor were ipso facto in abeyance until the final adjudication. If that were in his favor, they revived and were again in full force. If it were against him, they were extinguished as to him and vested in the assignee for the purposes of the trust with which he was charged. The bankrupt became, as it were, for many purposes civiliter mortuus. Those who dealt with his property in the interval between the filing of the petition and the final adjudication did so at their peril. They could limit neither the power of the court, nor the effect of the final exercise of its jurisdiction. With the intermediate steps they had nothing to do. The time of the filing of the petition and the final result alone concerned them.'

Under the present bankruptcy act, the case of Mueller v. Nugent, 184 U.S. 1, 14, 22 Sup.Ct. 269, 46 L.Ed. 405, likewise apparently maintains the same view; the Chief Justice, at page 14, saying:

'It is true of the present law, as it was of that of 1867, that the filing of a petition is a caveat to all the world, and, in effect, an attachment and injunction (Bank v. Sherman, 101 U.S. 403, 25 L.Ed. 866) and on adjudication title to the bankrupt's property became vested in the trustee (sections 70, 21e), with actual or constructive possession, and placed in the custody of the bankruptcy court.'

At first blush, the last two cases would appear to be in direct conflict with those next hereinbefore recited; but a careful analysis of the same will tend to relieve this apparent difference. The first-named cases grew out of transactions incident to the assertion of adverse claims by those claiming title to the property against the bankrupt or his trustee, or liens upon the same in the hands of the bankrupt's trustee; whereas the two last-named cases apply...