Lockhart v. Garden City Bank & Trust Co.

• Decision Date: 30 December 1940
• Docket Number: No. 113.,113.
• Citation: 116 F.2d 658
• Parties: LOCKHART v. GARDEN CITY BANK & TRUST CO.
• Court: U.S. Court of Appeals — Second Circuit

116 F.2d 658 (1940)

LOCKHART v. GARDEN CITY BANK & TRUST CO.

No. 113.

Circuit Court of Appeals, Second Circuit.

December 30, 1940.

Harry H. Schutte, of Brooklyn, N. Y., for appellant.

George L. Hubbell, Jr., of New York City (Hurd, Hamlin & Hubbell and William B. Hurd, all of New York City, on the brief), for appellee.

Before SWAN, AUGUSTUS N. HAND, and CLARK, Circuit Judges.

CLARK, Circuit Judge.

The present controversy concerns the validity and effect of a chattel mortgage which was originally duly filed and recorded, but which had not been refiled within a year, as ordinarily required by state law, because the mortgagee had repossessed the chattels from the mortgagor during proceedings for an arrangement initiated by the latter under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq. The referee and the district court held the mortgagee's rights superior to those of a bankruptcy trustee later appointed, on the ground that in Chapter XI proceedings, unlike ordinary bankruptcy, the mortgagee could retake possession without securing permission of the bankruptcy court. Although we disagree with the reason assigned, we concur in the result reached below, because we think the rights of the parties became fixed at the date of the initiation of the proceedings, when the mortgage was admittedly valid.

The chattel mortgage, on certain automobiles and trucks, was given by A. & W. Refrigeration Service, Inc., to the Garden City Bank & Trust Company and was duly filed in the appropriate town clerk's office under N.Y.Lien Law, Consol.Laws N.Y. c. 33, §§ 230, 232, on December 27, 1938. On October 27, 1939, when the mortgagor filed its petition for an arrangement under Chapter XI, its indebtedness to the Trust Company stood at $873.67; this was later reduced to $823.67. The court continued the debtor in possession, and between November 29 and December 19, 1939, the mortgagee, without leave of the bankruptcy court, took possession of the vehicles still subject to the mortgage. Under N.Y.Lien Law, § 235, the original filing of the mortgage did not serve to continue its lien against creditors, subsequent purchasers, and mortgagees, unless it or a statement of it was refiled within a year. The mortgagee here failed to refile its mortgage by December 27, 1939. The debtor was adjudicated a bankrupt on January 10, 1940, and its trustee sought an order, refused below, declaring the mortgage void as against him for lack of refiling. The vehicles were sold by stipulation, and proceeds in the amount of $692.37 are held by the trustee subject to the outcome of this appeal.

It is settled, both in ordinary bankruptcy (Mueller v. Nugent, 184 U. S. 1, 22 S.Ct. 269, 46 L.Ed. 405; Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734, 51 S.Ct. 270, 75 L.Ed. 645) and in corporate reorganization proceedings under old Section 77B, 11 U.S.C.A. § 207 (In re Martin Custom Made Tires Corp., 2 Cir., 108 F.2d 172), that property in the actual or constructive possession of the bankrupt when the petition is filed vests in the trustee and becomes subject to the exclusive jurisdiction of the bankruptcy court. Except where inconsistent with other provisions of Chapter XI, all provisions of Chapters I to VII, 11 U. S.C.A. §§ 1-112, are applicable to an arrangement proceeding (Bankruptcy Act, § 302), the debtor in possession has the powers of a trustee (§ 342), and the court in which the petition for an arrangement is filed has "exclusive jurisdiction of the debtor and his property, wherever located." § 311. The indicated conclusion is, therefore, that leave of the court is necessary to the rightful removal of property from the possession of the trustee or debtor-in-possession under an arrangement proceeding.

But the mortgagee argues that the jurisdiction of the court and the title of the trustee under Chapter XI, unlike the situation in ordinary bankruptcy or in Chapter X, 11 U.S.C.A. § 501 et seq., proceedings do not extend to property on which a lien is held, because an arrangement may not alter the rights of secured creditors, §§ 306(1), 307(1, 2), 357; nor did the arrangement actually proposed in this case purport to do so. This, however, is not inconsistent with the exclusive jurisdiction of the court over mortgaged property. Under ordinary bankruptcy, too, the rights of secured creditors may not be curtailed (former Act, § 67, sub. d, 11 U.S.C.A. § 107, sub. d; present Act; § 57, sub. h, 11 U.S.C.A. § 193, sub. h; In re American Motor Products Corp., 2 Cir., 98 F.2d 774); and the object of the court's control is not necessarily the curtailment of rights, but the supervision of their enforcement in order to protect the interests of other creditors, interests which would be substantial if the property proved to be more than sufficient to satisfy the secured debts. Isaacs v. Hobbs Tie & Timber Co., supra, 282 U.S. at page 738, 51 S.Ct. 270, 75 L.Ed. 645. The mortgagee also argues that, since under § 314 the court "may, upon notice and for cause shown, enjoin or stay until final decree any act or the commencement or continuation of any proceeding to enforce any lien upon the property of a debtor," retaking possession is permissible where no stay has been entered. But this section also grants the court explicit power to enjoin or stay suits generally, and further provides that the relief it gives is in addition to that afforded by § 11, 11 U.S.C.A. § 29 — granting extensive judicial power over suits by and against ordinary bankrupts — as well as that afforded elsewhere under Chapter XI. This section thus in part overlaps other grants and restates powers otherwise inherent in the court. In view of the outstanding importance to a Chapter XI court of unquestionable authority to deal with all conflicting proceedings, even in courts of co-ordinate jurisdiction, such overlapping is explicable; certainly the other grants of power are not inconsistent with this section and, therefore, should not be held limited by it. See Mueller v. Nugent, supra, 184 U.S. at page 14, 22 S.Ct. 269, 46 L.Ed. 405.

This conclusion does not determine the controversy, however, unless the mortgagee's lien, valid at the time the Chapter XI proceeding was begun, was lost thereafter. But under the statute the rights of all claimants to this property are the same — where not inconsistent with other provisions of the chapter — as if a petition in bankruptcy had been brought and adjudication rendered on October 27, 1939, when the petition for an arrangement was filed (§ 352), and are unaffected by the fact that the debtor itself was continued in possession without the appointment of a receiver or trustee. § 342; In re Martin Custom Made Tires Corp., supra. Yet a bankruptcy trustee, as to all property in possession of the bankrupt at the time of adjudication, is vested "as of the date of bankruptcy with all the rights, remedies, and powers of a creditor then holding a lien thereon by legal or equitable proceedings." § 70, sub. c, 11 U.S.C.A. § 110, sub. c. Thus the critical time at which the trustee's rights are to be determined is the date of bankruptcy. Hence in general no creditors' liens acquire validity after the filing of the petition; this is emphasized by the exceptional cases otherwise — liens for property transferred in good faith for a present consideration actually paid to the amount thereof, § 70, sub. d(1), and statutory liens for employees, contractors, mechanics, landlords and others, and for taxes, though not perfected until after bankruptcy. § 67, sub. b, 11 U.S.C.A. § 107, sub. b; New York-Brooklyn Fuel Corp. v. Fuller, 2 Cir., 11 F.2d 802. (Expenses of carrying on the business where authorized by the court, like expenses of administration, stand on a different footing; they must be paid out of the estate. Ingels v. Boteler, 9 Cir., 100 F.2d 915, 919, affirmed 308 U.S. 57, 60 S.Ct. 29, 84 L.Ed. 78.) It should equally follow, we believe, that liens good at this time do not lose their validity as against the trustee, unless the statute so expressly provides.

The sections of the bankruptcy act which confer on the trustee the rights of the debtor — in property, § 70, sub. a, and to defenses available to the debtor against third persons, § 70, sub. c. — are of no avail here, because the validity against the mortgagor of a New York chattel mortgage does not depend on recordation. N.Y.Lien Law, §§ 230, 235; Gandy v. Collins, 214 N.Y. 293, 108 N. E. 415. And the trustee takes the bankrupt's property "subject to all valid claims, liens and equities enforceable against the bankrupt, except in cases where there has been a conveyance or encumbrance which is void or voidable as to the trustee by some positive provision of the bankruptcy act." In re Toms, 6 Cir., 101 F.2d 617, 619; cf. Commercial Credit Co. v. Davidson, 5 Cir., 112 F.2d 54, 56; Zartman v. First National Bank, 216 U.S. 134, 30 S.Ct. 368, 54 L.Ed. 418.

No express grant of power to invalidate liens which expire after the date of filing of the petition can be found. To the negative implication of § 70, sub. c, which, as we have seen, grants powers, rights, and remedies to the trustee as of the date of bankruptcy, may be added that of § 70, sub. a, which specifies certain rights accruing later, as by bequest or inheritance, as vesting in the trustee, but fails to mention the right to attack liens subsequently lapsing. Nor could a necessary refiling of a mortgage after bankruptcy be considered a fraudulent...