Wethered v. Alban Tractor Co.

• Decision Date: 09 March 1961
• Docket Number: No. 140,140
• Citation: 168 A.2d 358,224 Md. 408
• Parties: Lewin WETHERED, Trustee of the Estate of John B. Gaither, Jr., Inc., Bankrupt, v. ALBAN TRACTOR CO., Inc., Herbert L. Wynne, Trustee, and Plaza Corporation.
• Court: Maryland Court of Appeals

Page 408

224 Md. 408

168 A.2d 358

Lewin WETHERED, Trustee of the Estate of John B. Gaither Jr., Inc., Bankrupt, v. ALBAN TRACTOR CO., Inc., Herbert L. Wynne, Trustee, and Plaza Corporation.

No. 140.

Court of Appeals of Maryland.

March 9, 1961.

Harrison M. Robertson, Jr., Baltimore, and Francis N. Iglehart, Jr., Towson, for appellant.

Nathan Patz and Lawrence A. Kaufman, Baltimore, for appellee Alban Tractor Co., Inc. and Herbert L. Wynne, Trustee.

Arnold Fleischmann, Towson (Lawrence I. Weisman, Baltimore, on the brief), for appellee Plaza Corporation.

Before HENDERSON, HAMMOND, PRESCOTT, HORNEY, and SYBERT, JJ.

HAMMOND, Judge.

A bankruptcy trustee, seeking to capture for the estate the proceeds of sale on foreclosure of an unrecorded chattel mortgage given by the bankrupt, contends on appeal from a decree rejecting his claim that he stands in the shoes of lien creditors who could have set aside the chattel mortgage and, therefore, that the mortgage and its foreclosure were ineffective as to him.

The problems the case presents arise out of the financing procedures of the bankrupt, a corporation known as John B. Gaither, Jr., Inc., and are not entirely new to this Court. Two aspects of them have been before us on prior appeals. In O'Toole Tire Company v. John B. Gaither, Jr., Inc., 216 Md. 54, 139 A.2d 252, it was held that Gaither's legal corporate residence was Baltimore County, not Baltimore City as was claimed. In Plaza Corporation v. Alban Tractor Co., Inc., 219 Md. 570, 151 A.2d 170 (hereinafter referred to as 'the Plaza-Alban case'), the holding was that as between Plaza's and Alban's respective mortgages, neither of which was recorded in Baltimore County, Plaza's was superior as having been first executed.

In October 1954 Gaither purchased from Alban various construction and contracting machines on a conditional contract of sale in the amount of some $200,000. On December 1, 1954, Gaither gave Plaza a mortgage covering some of the chattels covered by Alban's conditional contract, other chattels and real estate. The mortgage was sent to the clerk of the Circuit Court for Baltimore County, who recorded and indexed it in the Land Records but did not list it in the chattel index. In May 1955 Alban sold Gaither $119,000 worth of additional machinery, paid off the bank to which it had assigned the conditional sales contract of 1954 and took a mortgage from Gaither which covered the newly purchased machinery and that which had been in the conditional contract. This mortgage was promptly recorded in Baltimore City but also has never been recorded in Baltimore County.

Gaither defaulted in the payment of the 1955 mortgage to Alban, which filed a petition seeking foreclosure in the Circuit Court No. 2 of Baltimore City on November 5, 1956. That same day a decree was passed, appointing the attorney named in the mortgage as Alban's agent, the trustee to make sale. On the two following days Alban repossessed the various pieces of machinery and equipment covered by its mortgage, all of which apparently were then in Baltimore City, and stored them in its yard in the City, open to inspection prior to the sale which was duly and widely advertised to take place there on December 1, 1956. At the sale $67,200 was realized on the chattels named in both the Alban and Plaza mortgages, and $81,300 on those covered only by the Alban mortgage from purchasers who paid cash in full and took away their purchases. Plaza filed exceptions to ratification, and on June 6, 1957, the sale was ratified under a stipulation that the respective rights of Plaza and Alban in the chattels would carry over to the proceeds of sale. Later, the chancellor dismissed the exceptions, holding that Gaither's principal office was in Baltimore City and, therefore, Alban's mortgage had been properly recorded there, and Plaza's mortgage was unrecorded.

On Plaza's appeal in the Plaza-Alban case, we reaffirmed the O'Toole holding that Gaither's legal residence was Baltimore County and held that both mortgages were unrecorded in that jurisdiction, the rights of the holders of unrecorded mortgages is determined by priority of execution and Alban did not come under the protection given a subsequent mortgagee against a prior unrecorded mortgage by Code (1957), Art. 21, Sec. 41, because that section contemplates that a subsequent mortgage must be recorded if it is to prevail. Thus Plaza's mortgage, executed in 1954, was held to come ahead of Alban's, executed in 1955.

On May 12, 1958, Gaither was adjudicated an involuntary bankrupt. The trustee in bankruptcy sought to intervene in Plaza-Alban's appeal to this Court and was denied leave, but granted the right to file a brief as amicus curiae. His brief challenged the jurisdiction of the Baltimore City equity court to foreclose the Alban mortgage.

After the reversal in the Plaza-Alban case, the trustee in bankruptcy filed pleadings in the foreclosure proceedings claiming (a) the court lacked jurisdiction to foreclose Alban's mortgage; (b) its mortgage was void and did not pass or transfer any property as against the trustee because it was not recorded in the proper place; (c) the United States has claims against Gaither 'provable under the Bankruptcy Act,' underlying a tax lien on all of Gaither's property and property rights, which had been assessed on August 22, 1956, several months before the mortgage foreclosure (and on which notice of tax lien had been filed in Baltimore City on December 27, 1956, and in Baltimore County the next day) and four other similar assessments made in 1957 and 1958 (as to which notices of lien also were duly filed soon after assessment); ¹ (d) the State of Maryland and Baltimore County have claims for various kinds of taxes provable in bankruptcy which were 'quasi-liens;' (e) the Federal and State and local liens were superior to the mortgage; and (f) under various sections of the Bankruptcy Act the mortgage was null and void as against the trustee, the chattels therein described remained Gaither's property and the trustee is entitled to be paid the proceeds of sale for the benefit of unsecured creditors.

The trustee's main reliance is on section 70, sub. e of the Bankruptcy Act (11 U.S.C.A. § 110, sub. e(1, 2). His argument is that liens on all Gaither's property and rights in property were created by Sections 6321, 6322 and 6323 of the Internal Revenue Code of 1954 (26 U.S.C.A. §§ 6321, 6322 and 6323), as to the $305.06 Federal assessment of August 22, 1956, and as to the State and County tax claims, by virtue of which the Federal Government or the State or County could have set aside the unrecorded mortgage, and he, under the express provisions of Sec. 70, sub. e is put in the shoes of the lienors.

Section 70, sub. e provides: '(1) A transfer made or suffered or obligation incurred by a debtor adjudged a bankrupt under this title which, under any Federal or State law applicable thereto, is fraudulent as against or voidable for any other reason by any creditor of the debtor, having a claim provable under this title, shall be null and void as against the trustee of such debtor.' '(2) * * * The trustee shall reclaim and recover such property or collect its value from and avoid such transfer or obligation against whoever may hold or have received it, except a person as to whom the transfer or obligation specified in paragraph (1) of this subdivision is valid under applicable Federal or State laws.'

Code (1957), Art. 21, Sec. 41, as amended in 1949, provides that 'No personal property * * * whereof the vendor, mortgagor, or donor shall remain in possession, shall pass, alter or change, or any property therein be transferred to any purchaser, mortgagee or donee, as against subsequent purchasers, mortgagees, incumbrancers, landlords with liens, pledgees, receivers, and creditors who acquired a lien by judicial proceedings on such personal property, unless by bill of sale or mortgage acknowledged and recorded as herein provided * * *.'

It becomes apparent that the correctness of the trustee's contention turns on whether the Federal Government or the State or Baltimore County came within one of the categories entitled to prevail over an unrecorded mortgage by Sec. 41 of Art. 21. Tatelbaum v. National Store Fixtures Sales Co., 196 Md. 599, 604, 78 A.2d 228; the Plaza-Alban case. If it does apply, the effect of Section 70, sub. e is far-reaching and startling. For example, if the Federal Government had a lien for $305.06 which became superior to that created by Alban's mortgage, in actuality Alban would have paid the $305.06 so as to protect its lien for several hundred thousand dollars. However, if the bankruptcy trustee is entitled to step into the shoes of a superior lienor or encumbrancer, he can nullify the mortgage entirely, obtain $148,000 because the bankrupt owed $305.06, and relegate the mortgagees to the status of unsecured creditors. ² This result was approved in Moore v. Bay, 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133, and the holding of that case was incorporated into Sec. 70, sub. e by the Chandler Act. If the trustee is right, unsecured creditors of Gaither, as to whom the mortgage would be valid and superior under Maryland law, would share in bankruptcy in the proceeds of sale of the mortgaged chattels. See MacLachlan, The Impact of Bankruptcy on Secured Transactions, 60 Col.L.Rev. 593, 599, 604, 606.

We think neither the State, Baltimore County nor the United States had a lien on any chattel of Gaither covered by the mortgage before it was sold to a bona fide purchaser and that the date of the sale marked the close of the period in which any creditor could acquire a lien upon Gaither's property or right of property in the mortgaged chattels. There was no State or local lien because the Maryland statutes neither create a lien for unpaid taxes other than those on real estate nor purport to do so, and this Court has held that no such lien arises short...