Smith v. Commercial Credit Corp.

• Decision Date: 13 April 1933
• Citation: 165 A. 637
• Parties: SMITH v. COMMERCIAL CREDIT CORPORATION.
• Court: New Jersey Court of Chancery

165 A. 637

SMITH

v. COMMERCIAL CREDIT CORPORATION.

Court of Chancery of New Jersey.

April 13, 1933.

Circumstances disclosed that the dealer had possession by consent of the lender, and, when the dealer sold any of the automobiles, it and not the lender executed a bill of sale in its own name to the buyer, and that this was done with knowledge of the lender; therefore persons dealing with the dealer were entitled to assume Syllabus by the Court.

1. Objection to the jurisdiction of this court on the ground that there is an adequate remedy at law comes too late when made for the first time during argument and after final hearing, providing the court is otherwise competent to grant the relief prayed, and has jurisdiction of the subject-matter.

2. The unsecured debts of a corporation are fastened upon all its personal property by a decree of insolvency and for the appointment of a receiver.

3. A creditor of an insolvent corporation who has proved his claim before the receiver may maintain a suit to set aside a chattel mortgage of the corporation because of defects in its execution or failure to record.

4. Whenever the creditors of a corporation can challenge the chattel mortgage of their debtor, the insolvency receiver of such corporation may do so for them.

5. Whenever a transaction resolves itself into a security for a debt, it is a mortgage.

6. Equity disregards the form of a transaction and looks to its substance. Therefore, where a finance company loans the purchaser of automobiles the purchase price thereof, and takes a conveyance of them as security for such loan, it matters not that title is transferred directly to the lender by the vendor, or that the money loaned is paid directly to the vendor by the lender instead of to the borrowing purchaser. Such a transaction creates a chattel mortgage, and, if possession of the mortgaged chattels is delivered to the vendee borrower, the mortgage is void as to creditors, unless recorded as required by the Chattel Mortgage Act.

7. State policy is dictated by the Legislature, not by the courts.

8. The object of the Chattel Mortgage Act (1 Comp. St. 1910, p. 463, § 1 et seq.) was to give publicity to all liens upon personal property, possession of which is retained by the mortgagor, and to sweep away secret arrangements of whatever kind by which creditors were embarrassed and defeated.

9. That act applies to all chattel mortgages. There are no special types recognized by, or exempted from, its provisions.

10. Trust receipts are common-law chattel mortgages, and are not excepted from the act.

Suit by Joseph L. Smith, receiver of the Premo Motors, Inc., against the Commercial Credit Corporation. On plaintiff's exceptions to the master's report.

Exceptions sustained.

Joseph L. Smith, of Newark, for the exceptions.

Clarence A. Ward, of Rahway, opposed.

BERRY, Vice Chancellor.

The petitioner was appointed insolvency receiver of Premo Motors, Inc., which was engaged in the business of buying and selling automobiles at retail, on January 7, 1931. Eleven days prior to that appointment, and in contemplation thereof, the defendant Commercial Credit Corporation took fifteen automobiles from the possession of the insolvent company under a claim of ownership, and refused to deliver them to the receiver on his demand. Thereupon this petition was filed for an order directing defendants to deliver the automobiles to the receiver. The defendants answered, and the matter was referred to a master to take testimony and other evidence and report as to the rights of the parties. Pending disposition of the issues raised by the pleadings, and by consent of the parties, the automobiles were ordered sold and the moneys deposited in court, which was done. The amount on deposit with the clerk is $8,790.68. The controversy arises out of the following state of facts:

Between February and July, 1930, Premo, Inc., ordered in writing from the manufacturers, through Newark Motors, Inc., distributors of Chrysler and Gardiner automobiles, fifteen cars, which were shipped and consigned by the manufacturers to Newark Motors, Inc.

For the sake of brevity, Premo Motors, Inc. will be hereinafter referred to as Premo; Newark Motors, Inc., as Newark, and Commercial Credit Corporation as Commercial.

Upon the arrival of these cars at the Lehigh Valley Railroad Company freight yards in Newark, the original and copy of the invoices were sent to Premo by Newark with notices of such arrival. Premo, not having sufficient capital to pay for the cars, arranged with Commercial to finance the purchase, some to the extent of 100 per cent. and others 90 per cent., Premo to pay the balance, together with delivery, freight, advertising, and unloading charges. Before removal of the cars from the freight yard, Commercial issued its check to the order of Newark, and received from Newark bills of sale for all of the cars. At the same time Premo accepted and signed drafts in favor of Commercial for $13,456.49, the amount paid Newark by Commercial, and executed to Commercial certain trust receipts, under the terms of which it agreed to hold said cars in trust for Commercial and return them on demand, not to mortgage or incumber them, and to hold in trust, separate and apart from its own funds, the moneys received from any sale thereof, which moneys were to be delivered to Commercial on demand. Commercial's checks were given to the president of Premo, who delivered them to Newark. Newark then drew its own check to the order of the bank, delivered it to Premo, who took it to the bank and obtained the bills of lading drawn to the order of "Newark notify Premo," which, with draft attached, had been sent to the bank by the manufacturers, and which Premo presented to the railroad company and obtained delivery of the automobiles and removed them to its salesrooms. No documentary transfer of title to the cars was ever made to Newark by the manufacturers or to Premo by Newark, except by the invoices and bills of lading, but Newark gave Commercial bills of sale as above mentioned. It is clear that at that time there was no title in Newark, as it had not then taken up the bills of lading from the bank. In addition to the sum of $13,456.49 paid to Newark by Commercial, Premo paid Newark $1,387.85 for balance of purchase price and extra items over and above the amount loaned to Premo. At the time of the appointment of the receiver, Premo had paid to Commercial on account of its drafts $5,5.36.65. Because of default in the payment of the balance, Premo was notified by Commercial to pay or deliver the cars by December 6, 1930, and the cars were taken by Commercial on December 27, 1930, at which time Premo executed bills of sale to Commercial, and Commercial then agreed with Premo to sell the cars, apply the proceeds to the amount duo on Premo's acceptances, and remit the balance, if any, to Premo. None of the trust receipts were ever recorded by Commercial until January 30, 1931, and after the receiver's demand for delivery of the cars, when six of them were recorded as conditional bills of sale. General claims filed with the receiver are in excess of $17,000, and he is without sufficient funds for their payment. The receiver contends that the trust receipts are, in effect, chattel mortgages, and, not having been recorded as required by the Chattel Mortgage Act, are void as against the creditors represented by him in this action. This contention is denied by the defendant, who contends that, as there are no judgment or other lien creditors, and as the receiver stands in the shoes of the insolvent company (Depew v. C. W. Depew & Co., 98 N. J. Eq. 461, 131 A. 76), his rights rise no higher than those of the company, and he cannot, therefore, attack defendant's title. Defendant also denies, arguendo, the jurisdiction of this court on the ground that petitioner has an adequate remedy at law; but this objection was not made until after the completion of the hearings before the master, and is of no avail now. Lehigh Zinc & Iron Company v. Trotter, 43 N. J. Eq. 185, 201, 7 A. 650, 10 A. 607; Coast Company v. Spring Lake, 56 N. J. Eq. 615, 36 A. 21; Mertens v. Schlemme, 68 N. J. Eq. 544, 59 A. 808.

The master found that Premo had possession of the cars as agent or bailee of Commercial, and that Commercial held legal title; that the trust receipts merely conferred upon Premo a power of sale with liability to account as trustee for the proceeds; also that, conceding the trust receipts to be in fact chattel mortgages and void because not recorded, that objection could not be maintained by the receiver, but only by a subsequent purchaser or moitgagee without notice, or by a judgment creditor of Premo with execution levied and returned unsatisfied. To these findings the receiver has filed exceptions.

As to the right of the receiver to attack the validity of the trust receipts as against creditors of the insolvent company, I entertain no doubt, and exceptions to this portion of the master's report will be sustained. This question was settled more than forty years ago by a decision of this court in Graham Button Company v. Spielmann, 50 N. J. Eq. 120, 24 A. 571, 574, affirmed Spielmann v. Knowles, 50 N. J. Eq. 796, 27 A. 1033, where Vice Chancellor Van Fleet expressly held "that the debts of creditors at large of an insolvent corporation are fastened on the property of the corporation by the adjudication of insolvency and the appointment of a receiver;" that a creditor, after having proved his claim, might maintain a suit to set aside a chattel mortgage, and that, as a receiver represents all creditors, he might also maintain such suit. That was an original bill by the receiver against a chattel mortgagee seeking a decree that the mortgage was void because of defects in the affidavit of consideration, and the mortgage was held void. See, also, Roe v. Meding, 53 N. J. Eq. 350, 30 A. 587, 33 A. 394; Wimpfheimer v. Perrine, 67 N. J....