Porter v. Searle

• Decision Date: 19 December 1955
• Docket Number: No. 5135.,5135.
• Parties: D. K. PORTER, Trustee in Bankruptcy of Abe Greenband, Appellant, v. Woodey B. SEARLE and Edlean E. Searle, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

228 F.2d 748 (1955)

D. K. PORTER, Trustee in Bankruptcy of Abe Greenband, Appellant, v. Woodey B. SEARLE and Edlean E. Searle, Appellees.

No. 5135.

United States Court of Appeals Tenth Circuit.

December 19, 1955.

Harold R. Boyer, Salt Lake City, Utah (Romney, Boyer & Ronnow, Salt Lake City, Utah, on the brief), for appellant.

Dwight L. King, Salt Lake City, Utah, for appellees.

Before PHILLIPS, Chief Judge, and MURRAH and PICKETT, Circuit Judges.

PHILLIPS, Chief Judge.

Greenband was adjudged a bankrupt on July 23, 1953, on an involuntary petition filed on June 22, 1953. Porter is the duly appointed and acting trustee.

On August 13, 1952, Woodey B. Searle and Edlean E. Searle entered into a written contract of sale with Greenband, by which they sold to Greenband all the merchandise in a retail store known as Searle's Saving Center at Vernal, Utah. The total purchase price was $26,700.69. Greenband made a down payment of $5,000 and by the terms of the contract he agreed to pay $250 on the 20th day of September, 1952, and a like sum on the 20th day of each month thereafter, until the full purchase price had been paid; and he further agreed to pay interest at the rate of six per cent per annum on the unpaid balance, the first payment to be made on December 31, 1952, and subsequent interest payments semi-annually thereafter.

By the terms of the agreement Greenband further agreed "immediately to execute to" the Searles "a Chattel Mortgage" upon such merchandise and all merchandise thereafter brought into the Searle's Saving Center, to secure the balance of the purchase price. Greenband failed and refused to execute the chattel mortgage, either immediately or thereafter.

On March 2, 1953, and within the four-month period prior to the filing of a petition in bankruptcy, the Searles and Greenband entered into a release agreement by which Greenband surrendered to the Searles the merchandise in the Searle's Saving Center in satisfaction of the balance due on such contract and the Searles agreed to discharge their lien and release Greenband from any further obligation under the sale agreement. Such agreement further provided that Greenband might retain all accounts receivable and that he agreed to assume and pay all accounts payable. The Searles took possession of the stock of merchandise, pursuant to such release agreement. The valuation of the stock of merchandise taken over by the Searles was substantially less than the balance due on the sale contract.

Since March 2, 1953, the Searles have been in possession of the stock of merchandise and have operated the store.

On March 2, 1953, Greenband was insolvent.

The trustee instituted this action against the Searles to set aside the transfer of the stock of merchandise back to the Searles on the ground that it constituted a voidable transfer under § 60 of the Bankruptcy Act, 11 U.S.C.A. § 96. From an adverse judgment, the trustee has appealed.

The agreement to give immediately the chattel mortgage and the failure of Greenband to do so created an equitable lien in favor of the Searles on the stock of merchandise, for which the transfer of the stock of merchandise by the Searles to Greenband was a present consideration.¹

There is no provision of law in Utah, statutory or otherwise, which required any overt act on the part of the Searles to perfect such equitable lien. It became a perfected equitable lien immediately when Greenband failed and refused to give the chattel mortgage.

The trustee became vested with all the property of the bankrupt at the date of bankruptcy, with all the rights, remedies and powers of a creditor then holding a lien thereon by legal or equitable proceedings.

The trustee takes the property of the bankrupt, in cases unaffected by fraud, in the same condition that the bankrupt, himself, held it² and subject to all valid legal or equitable liens thereon not expressly rendered void by the terms of the Bankruptcy Act.³ Except insofar as controlled by express provisions of the Bankruptcy Act, the validity, nature and effect of a lien on the property of a bankrupt are governed by the law of the state where such property is situated.⁴

Under the laws of Utah, a lien acquired by legal or equitable proceedings on a simple contract is subject to prior and valid legal and equitable liens, except the lien of an unfiled chattel mortgage, where the personal property covered by the mortgage is not delivered to and retained by the mortgagee.⁵

Prior to the Chandler Act a pledge or transfer made within the four-month period was valid, when made pursuant to a promise to make a pledge theretofore given, under the doctrine of relation back.⁶

Section 60 of the Bankruptcy Act, as amended by the Chandler Act, overruled the cases applying the doctrine of relation back, but in so doing placed the trustee in the position of an artificial potential bona fide purchaser and unintentionally invalidated many types of liens acquired in good faith and for value in normal and accepted business and financial relationships.

In the case of Corn Exchange National Bank & Trust Co. v. Klauder, 318 U.S. 434, 63 S.Ct. 679, 87 L.Ed. 884, the bankrupt had made an assignment of accounts receivable to secure present advancement of funds. No second assignee was involved. Notice was not given to the debtors owing such accounts receivable. Under Pennsylvania law, the assignment was not perfected until such notice had been given. The Supreme Court held that the assignments were preferences under § 60, sub. a of the Bankruptcy Act, as amended by the Chandler Act, and were voidable by the trustee under § 60, sub. b of the Bankruptcy Act, on the ground that the trustee's rights were to be measured by those of a good faith purchaser, under the Chandler Act, as amended. See also, In re Quaker City Sheet Metal Co. (Appeal of Klauder), 3 Cir., 129 F.2d 894.

In re Vardaman Shoe Co., D.C.E.D. Mo., 52 F.Supp. 562, the bankrupt, prior to adjudication, obtained advances by assigning accounts receivable to the City National Bank of Centralia, Illinois, and the National Stock Yards National Bank of National City, Illinois. In that case, the court held that whether the law of Illinois and Missouri required notice of the assignment to the debtor under the assigned account or not, the right of the trustee was to be measured by that of a bona fide purchaser, and that the trustee, therefore, took the property of the bankrupt under rights superior to that of the assignees, thus extending the effect of the Chandler Act amendment even beyond that held by the Supreme Court in the Klauder case, supra.

Following those decisions, Congress, by the Act of March 18, 1950, 64 Stat. 24, amended § 60 of the Bankruptcy Act. The provisions of the 1950 amendment, insofar as they are here material, read:

"That subdivision a of section 60 of the Act entitled `An Act to establish a uniform system of bankruptcy throughout the United States\', approved July 1, 1898, as amended, is amended to read as follows:

"`a. (1) A preference is a transfer, as defined in this Act, of any of the property of a debtor to or for the benefit of a creditor for or on account of an antecedent debt, made or suffered by such debtor while insolvent and within four months before the filing by or against him of the petition initiating a proceeding under this Act, the effect of which transfer will be to enable such creditor to obtain a greater percentage of his debt than some other creditor of the same class.

"`(2) For the purposes of subdivisions a and b of this section, a transfer of property other than real property shall be deemed to have been made or suffered at the time when it became so far perfected that no subsequent lien upon such property obtainable by legal or equitable proceedings on a simple contract could become superior to the rights of the transferee. * * * if any transfer of other property is not so perfected against such liens by legal or equitable proceedings prior to the filing of a petition initiating a proceeding under this Act, it shall be deemed to have been made immediately before the filing of the petition.

* * * * * *

"`(4) A lien obtainable by legal or equitable proceedings upon a simple contract within the meaning of paragraph (2) is a lien arising in ordinary course of such proceedings upon the entry or docketing of a judgment or decree, or upon attachment, garnishment, execution, or like process, whether before, upon, or after judgment or decree and whether before or upon levy. It does not include liens which under applicable law are given a special priority over other liens which are prior in time.

* * * * * *

"`(6) The recognition of equitable liens where available means of perfecting legal liens have not been employed is hereby declared to be contrary to the policy of this section. If a transfer is for security and if (A) applicable law requires a signed and delivered writing, or a delivery of possession, or a filing or recording, or other like overt action as a condition to its full validity against third persons other than a buyer in the ordinary course of trade claiming through or under the transferor and (B) such overt action has not been taken, and (C) such transfer results in the acquisition of only an equitable lien, then such transfer is not perfected within the meaning of paragraph (2). * * *.

"`(7) Any provision in this subdivision a to the contrary notwithstanding if the applicable law requires a transfer of property other than real property for or on account of a new and contemporaneous consideration to be perfected by recording, delivery, or otherwise, in order that no lien described in paragraph (2) could become superior to the rights of the transferee therein, * * *, the time of transfer shall be determined by the following rules:

"`I. Where (A) the applicable law specifies a stated period of time of not more than twenty-one days after the transfer within which recording, delivery, or some

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