Matter of Hadad

• Decision Date: 09 March 1970
• Docket Number: No. 1888,1889.,1888
• Citation: 409 F. Supp. 106
• Parties: In the Matter of Johnnie HADAD and Marguerite Thomas Hadad.
• Court: U.S. District Court — Southern District of Mississippi

409 F. Supp. 106

In the Matter of Johnnie HADAD and Marguerite Thomas Hadad.

Nos. 1888, 1889.

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

March 9, 1970.

David W. Ellis, Vicksburg, Miss., for the bankrupts.

Frank M. Youngblood, N. Sidney Harper, Jackson, Miss., for trustee in bankruptcy.

Lucius B. Dabney, Jr., Vicksburg, Miss., for Federal Employees Mutual Credit Union.

NIXON, District Judge.

This case is before the Court to review an Order entered by the Referee in Bankruptcy on August 27, 1969 allowing Frank M. Youngblood, Trustee in Bankruptcy, to maintain possession of the subject property herein.

A petition for review was filed by Mutual Credit Union with the Referee on September 6, 1969, in accordance with Section 39c of the Bankruptcy Act and the Referee has transmitted to this Court all materials required by Section 39a(8) of the Bankruptcy Act. This Court has jurisdiction to "consider records, findings, and orders certified to the judges by referees, and confirm, modify, or reverse such findings and orders, or return such records with instructions for further proceedings." Section 2a(10) of the Bankruptcy Act. General Order 47 requires that "unless otherwise directed in the order of reference the report of a referee . . . shall set forth his findings of fact and conclusions of law, and the judge shall accept his findings of fact unless clearly erroneous."

Johnnie Hadad, the bankrupt herein filed an application for a loan of $3,907.50 with Mutual Credit Union on April 25, 1968. This loan was to be paid over a period of thirty-six months in equal monthly installments of $126.00 each. The loan application listed as collateral: automobile at $2,225.00; furniture at $183.00; real estate at -0-; shares on deposit at -0-; and other; designated as "sig. and wife's sig." at $1,500.00, showing a total of $3,907.50. The loan application further indicated that the total indebtedness and liabilities of the bankrupt did not exceed $4,000.00 and listed tangible assets at $2,408.00. This application was approved by the Credit Committee on April 26, 1968.

On April 26, 1968 Johnnie Hadad executed a promissory note in the amount of $3,907.50 payable to Mutual Credit Union, said note being payable in thirty-six equal monthly installments of $126.00 each, beginning June 5, 1968. On this same date, Mutual Credit Union issued a check in the amount of $250.00 payable to Johnnie Hadad and consolidated two prior loans reflecting balances of $2,943.80 and $713.70, thereby establishing a new balance of $3,907.50 for which the new note was written. The two prior loans were thus paid off by refinancing the note.

On April 26, 1968, Johnnie Hadad executed a Uniform Commercial Code Security Agreement and Uniform Commercial Code Financing Statement, UCC I-Form, covering a 1957 Chevrolet, 4-door Sedan, and a 1967 Chevrolet SS, 2-door hardtop, the subject automobile herein and purchased by Johnnie Hadad sometime in 1967. Mutual Credit Union had financed the subject automobile originally in 1967 as reflected by the $2,943.80 balance paid off by the new note executed on April 26, 1968.

Johnnie Hadad began making monthly installment payments of $126.00 and continued these payments until January 1969. By February 5, 1969, there had been no payments for two months and Rudolph Dill, Manager of Mutual Credit Union, reviewed the account of the bankrupts to determine the action to be taken on the delinquent account. In reviewing the account, Dill discovered that the UCC Financing Statement had not been recorded and immediately filed the same with the office of the Warren County Chancery Clerk on February 11, 1969.

On February 24, 1969, the voluntary debtors' petition in bankruptcy was filed herein. The possession of the subject automobile remained in the bankrupts until turned over to Frank M. Youngblood, Trustee in Bankruptcy, following the first meeting of creditors in this cause.

On August 27, 1969, the Referee in Bankruptcy entered an order declaring the recordation of the security instrument by Mutual Credit Union to have been a preferential transfer and voidable as against the Trustee in Bankruptcy. Before examining the elements necessary to constitute a preferential transfer under Section 60 of the Bankruptcy Act, this Court must look briefly to the Trustee's reliance on Section 70c of the Bankruptcy Act as support for his position that the delayed recordation did not perfect the creditor's lien as against the Trustee.

The construction of 70c urged by the Trustee is primarily the same as enunciated by the court in Constance v. Harvey, 215 F.2d 571 (C.A. 2, 1954) which held that the Trustee was entitled under 70c to assert the lien of a hypothetical creditor who had extended credit before the perfection of the security interest. Although this interpretation was subsequently adopted by numerous jurisdictions, the doctrine of Constance v. Harvey, supra, was specifically rejected by the Supreme Court in Lewis v. Manufacturers National Bank of Detroit, 364 U.S. 603, 81 S.Ct. 347, 5 L.Ed.2d 323 (1961), the Court stating:

"We think that one consistent theory underlies the several versions of § 70c which we have set forth, viz., that the rights of creditors—whether they are existing or hypothetical—to which the trustee succeeds are to be ascertained as of `the date of bankruptcy', not at an anterior point of time. That is to say, the trustee acquires the status of a creditor as of the time when the petition in bankruptcy is filed. We read the statutory words `the rights . . . of a creditor existing or hypothetical then holding a lien' to refer to that date. This construction seems to us to fit the scheme of the Act. Section 70e enables the trustee to set aside fraudulent transfers which creditors having provable claims could void. The construction of § 70c which petition urges would give the trustee power to set aside transactions, which no creditor could void and which injured no creditor. That construction would enrich unsecured creditors at the expense of secured creditors, creating a windfall merely by reason of the happenstance of bankruptcy."

Thus Mutual Credit Union is correct in its assertion that the hypothetical lien granted the Trustee under Section 70c arises on the date of bankruptcy. (Emphasis added)

The Uniform Commercial Code became effective in the State of Mississippi on March 31, 1968, prior to the April 26, 1968 execution of the UCC Security Agreement and Financing Statement covering the security under consideration herein. Thus, the following treatment in Colliers on Bankruptcy, Section 70.511, page 614, adequately sets forth the law in this area.

"Section 70c now specifies that the trustee's lien is deemed vested as of the date of bankruptcy with respect to all property within the scope of its terms . . .. Since the time when liens attach governs their relative priority in the absence of explicit enactment to the contrary, the date upon which the bankruptcy trustee's lien arises under § 70c is of crucial importance.

Generally speaking, liens properly perfected as against levying creditors prior to the date of bankruptcy (the filing of the petition) will be superior to that of the trustee under § 70c; those not so perfected or perfected subsequent to bankruptcy will be subordinate thereto. It must be constantly borne in mind, however, that this is a matter upon which § 70c normally defers to state law. Consequently, the trustee's lien will have whatever standing the local law would impart to a lien which had been perfected at the date of bankruptcy by a creditor of the bankrupt through legal or equitable proceedings; and in order to determine whether the trustee's

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