Osco Motors Corp.. v. Martin

• Decision Date: 14 January 1946
• Docket Number: 148/255.
• Citation: 45 A.2d 454
• Parties: OSCO MOTORS CORPORATION v. MARTIN et al.
• Court: New Jersey Court of Chancery

45 A.2d 454

OSCO MOTORS CORPORATION

v.MARTIN et al.

148/255.

Court of Chancery of New Jersey.

Jan. 14, 1946.

Suit by Osco Motors Corporation against Edward H. Martin, constable and bailiff for Corn Exchange National Bank & Trust Company, and others, to enjoin a sale of property under chattel mortgages and for a determination that chattel mortgages are void.

Bill dismissed.

Syllabus by the Court.

1. A subsequent purchaser in ‘good faith’ under the Statute R.S. 46:28-5, N.J.S.A., regulating the execution and registration of chattel mortgages, is one who buys ‘without notice’; however, the words ‘good faith’ signify more than mere lack of notice; they indicate a legislative intent to protect only a subsequent purchaser who buys without knowledge of circumstances sufficient to put a prudent man upon inquiry regarding particular facts, which inquiry would have lead to the discovery that the chattels purchased had been mortgaged.

2. A ‘subsequent purchaser’ of mortgaged chattels, to be put in a position where he may take advantage of the failure of the mortgagee to comply with the terms of the statute, must have made his purchase without actual or constructive notice of such prior mortgage.

3. Under the authorities, there is grave doubt that a trustee in bankruptcy can sell and assign his right to set aside a fraudulent conveyance or attack the validity of chattel mortgages for failure to comply with a state statute regulating the execution and registration of such mortgages.

4. A trustee in bankruptcy, under the Act of June 22, 1938, Chap. 575, Sec. 70, sub. c, U.S.C.A. 11, § 110, sub. c, is deemed vested with all the rights, remedies and powers of a creditor holding a lien by legal or equitable proceedings thereon, as to all property in the custody or coming into the custody of the bankruptcy court, but state laws control as to what rights a lien or execution creditor has.

5. The New Jersey Statute, R.S. 46:28-5, N.J.S.A., makes a wide distinction between a creditor of the mortgagor and a subsequent purchaser of the mortgaged chattels; creditors are favored; a creditor may know, when his debt accrues, that his debtor's property is already subject to a mortgage, yet if such mortgage has not been executed and recorded in accordance with the requirements of the statute he may, as soon as his debt becomes fastened on his debtor's property, successfully insist that the mortgage, as to his debt, is, by force of the statute, absolutely void.

6. A creditor whose debt was subsisting at the time of the giving of a chattel mortgage, may, by subsequently obtaining a judgment and levying on the property mortgaged, place himself in a position to attack the chattel mortgage, and the debts of creditors at large are fastened on the property of an insolvent corporate debtor by an adjudication of insolvency and the appointment of a receiver.

7. The receiver of an insolvent corporation stands in the rights of the creditors of the corporation-martgagor, and he is consequently entitled, as their representative, to the same relief that would be given to them in a suit instituted by themselves in their own name.

8. Altho a right to contest the validity of chattel mortgages, conditional bills of sale and the like affecting property mortgaged, may pass to a purchaser at a sale by or on behalf of creditors, title to the chattels sold and the right to contest may be severed.

9. Complainant purchased at private sale many articles of personal property, some of which were subject to two chattel mortgage; complainant's bill of sale transferred to it specifically scheduled articles; when complainant made its purchase the chattel mortgages were of record in the proper public office. Held: That complainant did not have the status of a subsequent purchaser in good faith to quality it to successfully attack the chattel mortgages.

Wilfred B. Wolcott, of Camden, for complainant.

Howard R. Yocum and S. Thurman Lovitt, both of Camden, for defendants.

WOODRUFF, Vice Chancellor.

Complainant files its bill as a purchaser of mortgaged chattels ‘in good faith’ under the statute R. S. 46:28-5, N.J.S.A., regulating the execution and registry of chattel mortgages, and seeks to enjoin a sale thereof by the defendant Edward H. Martin, bailiff of the defendant mortgagee Corn Exchange National Bank and Trust Company. Complainant asserts that the two mortgages in question were not immediately recorded, that the jurats of the affidavits of consideration were incomplete, and that the affidavits did not define the authority of the affiant. Complainant prays a decree declaring that, as to it, the mortgages are void.

The defendant Corn Exchange National Bank and Trust Company insists that its mortgages, notwithstanding complainant's challenge, are valid and enforceable liens. It also stresses the fact that complainant prosecutes this suit as a ‘subsequent purchaser’ of the mortgaged chattels, and charges that it is not such ‘in good faith’ because the mortgages were of record in the proper public office when the complainant made its purchase. Therefore, before consideration is given to the question of compliance or noncompliance by the mortgagee with the statute in the drafting, execution and recording of its mortgages, the status of the complainant to contest their validity should be examined and determined.

Certain important facts were established by the evidence and stand unquestioned by the complainant: The challenged mortgages were given to secure cash loans aggregating $4300; payments were made by the mortgagor on account of these loans and the principal sum due had been reduced to $2772.04 at the time this suit was instituted; the mortgages were of record in the proper public office when complainant purchased the mortgaged chattels; complainant was a complete stranger to the series of occurrences which began with the making of the loans and eventuated in the sale of the mortgaged chattels to Leonard L. Zeidman by the trustee in bankruptcy of the mortgagor, their resale to The Credit Corporation of America, and their transfer to Aeronautical Tools Corporation; neither the purchaser of the mortgaged goods from the trustee nor the complainant was a creditor of the mortgagor, and the two intermediate purchasers were not creditors; the chattels mortgaged were in the manufacturing plant of the mortgagor when the mortgages were executed and they remained at the same location until they were seized and advertized for sale by the defendant bailiff; and, when the mortgaged chattels were sold by the trustee they were transferred subject to the two chattel mortgages of the defendant bank.

The mortgagor was Aeronautical Manufacturing Company, Inc., a company engaged in war work. The chattels mortgaged consisted of four motor-driven lathes, a drilling machine, a diamond-surfaced power grinder, two shaping saws, and their motors and accessories. The two mortgages were dated May 11, 1943 and May 28, 1943 and were recorded June 2, 1943 and June 10, 1943, respectively. The mortgaged machines and equipment were but eight items out of many hundred sold by the trustee in bankruptcy to Mr. Zeidman. That sale and the three subsequent sales included all of the furniture and furnishings in the executive and administrative offices and the payroll and drafting rooms of the bankrupt company, and a great number of machines, dies, tools, stock and equipment in its plant. For all these articles, many of them almost impossible to obtain in a war-time market, Mr. Zeidman paid $20,000.

Subsequent to the execution of the two challenged mortgages, the mortgagor became financially involved and ultimately insolvent. Certain of its creditors applied to this court and a pendente lite receiver was appointed. Other creditors then instituted bankruptcy proceedings and the scene shifted to the United States District Court for the District of New Jersey. There, Frederick Cohen was appointed Trustee.

The trustee in bankruptcy sold and transferred the mortgaged machinery and equipment and the other chattels to Leonard L. Zeidman January 26, 1944. On the same day Mr. Zeidman transferred them to The Credit Corporation of America and it transferred them to Aeronautical Tools Corporation. October 20, 1944 Aeronautical Tools Corporation sold and transferred the mortgaged chattels and the other personalty to Osco Motors Corporation, the complainant.

Was the complainant, when it purchased the mortgaged chattels, a ‘subsequent purchaser’ ‘in good faith’ within the intendment of the cited act? The words ‘good faith’, as employed in the statute, have been construed by this court as synonymous with the words ‘without notice’. It is quite evident, nevertheless, that in choosing and employing those words the legislature intended to express more than mere lack of notice. The words were undoubtedly chosen and employed with intent to protect only the subsequent purchaser who bought without knowledge of circumstances sufficient to put a prudent man upon inquity regarding particular facts, which inquiry would have lead to the discovery that the chattels had been mortgaged. Hoag v. Sayre, Err. & App., 33 N.J.Eq. 552.

When purchased by the complainant, the mortgaged machinery and equipment still stood in the manufacturing plant of the defunct mortgagor and the plant was being operated by or was in the control of the trustee in bankruptcy. Mr. Zeidman, who purchased the mortgaged chattels from the trustee subject to the two mortgages, was the vice president of Aeronautical Tools Corporation, complainant's assignor, and the officer who signed the bill of sale to complainant. Assuredly, complainant did not purchase this machinery and equipment in the plant of a bankrupt concern without inquiring of Mr. Zeidman as to whether it was free from lien or encumbrance. Surely, complainant knew that Aeronautical Manufacturing Company, Inc. was in bankruptcy. If complainant was not informed of the situation by Mr....