Summary
In Skilton v. Codington, 86 App. Div. 166, 83 N.Y.S. 351, it was said that subsequent creditors were not protected, and the declaration was scarcely a dictum.
Summary of this case from In re MyersOpinion
July Term, 1903.
F.B. Gill, for the appellant.
George L. Bachman, for the respondent.
This action was brought to establish a lien upon, and secure payment from a fund of $2,600 held by the defendant as the proceeds and in the place of certain personal property, and upon which personal property plaintiff claimed to have a lien by virtue of an instrument in the nature of a chattel mortgage.
The defendant served a demurrer to the complaint upon the grounds that the same did not state facts sufficient to constitute a cause of action and that the court had not jurisdiction of the subject-matter of the action. The latter ground seems to have been abandoned and at any rate requires no consideration. By the first ground defendant raised certain objections to the validity of the chattel mortgage, claiming that it appeared upon the face of the complaint that the latter was void.
We think that the learned justice at Special Term properly disposed of the demurrer and that the judgment should be affirmed.
The truth of the allegations of the complaint being admitted by the demurrer ( Coatsworth v. Lehigh Valley R. Co., 156 N.Y. 451), we may for the purposes of this appeal regard the following facts as established.
The plaintiff, as indicated by the title of the action, is the sole surviving partner of the former copartnership of T.J. R.M. Skilton, who were copartners in a general hardware business. On or about October 4, 1897, they sold to the bankrupt Barron certain stock and fixtures in their store for the sum of $6,000, of which at the time $3,500 was paid in cash or its equivalent, and Barron's note was given for the balance of $2,500. The transaction was evidenced by an instrument in writing executed by the parties, which, amongst other things, provided that the Skiltons should have a lien for the payment of said note upon all the goods, wares and merchandise, etc., covered by the sale and upon all other personal property, goods, etc., which might be put or used in said premises by Barron, and that such lien might be enforced upon non-payment of the note or upon depletion of the stock. There were various other clauses with reference to the foreclosure of the lien such as are ordinarily found in chattel mortgages and which are not material here.
Said instrument also contained a clause to the effect that Barron might sell and dispose of said property and apply the proceeds of such sale to the payment of the debt in question, except such portion thereof as might be necessary for the expenses of the business or for replenishing or increasing the stock of goods covered by the instrument, it being understood and agreed that in such case the substituted stock should take the place of the stock sold and be subject to the lien of the chattel mortgage clause, and that no part of said stock or the proceeds of the same should be used or disposed of by said Barron except as so provided. It was further provided that Barron should keep the stock replenished, renewed and of a value at least equal to its value at the time of the execution of the instrument. In other words, Barron had the right to sell goods covered by the instrument and apply the proceeds of such sales either to the payment of the debt or to purchasing new goods which should take the place of the ones sold in being covered by the lien of the mortgage, and the stock was always to be kept to its value at the time of the execution of the instrument. The right of the mortgagor to use for his own benefit any of the proceeds of sales was expressly negatived and prohibited.
The note secured by this instrument was payable in five years with interest payable semi-annually, and the latter was paid until about April 4, 1902, after which no further payments were made. Nothing was ever paid upon the principal.
The chattel mortgage was not filed until October 2, 1902, and upon November 7, 1902, plaintiff demanded possession of the property claimed to be covered by it, and which possession was refused.
January 9, 1903, Barron, having previously been adjudged a bankrupt, the defendant Codington was appointed trustee of his estate, and an order made allowing the sale of the stock of merchandise claimed to be covered by plaintiff's instrument upon the condition that out of the proceeds thereof $2,600 would be set apart and stand as a substitute for the property sold, and said sum is now in the hands of said trustee under and pursuant to said arrangement.
The defendant trustee urges that it appears upon the face of the complaint that as to him, representing Barron's creditors, said mortgage was, first, absolutely void, because of failure to file it; and, second, presumptively fraudulent, because it permitted the mortgagor to deal with the property covered thereby. Defendant's success upon this appeal is dependent upon his ability in his behalf as trustee in bankruptcy to maintain these propositions. We do not think that he can do this for various reasons.
There are no allegations in the complaint from which it can be held as matter of law that the parties to said instrument were guilty of intentional, actual fraud and design to cheat Barron's creditors. The original transaction, as disclosed by the allegations of the complaint, was a perfectly proper and legitimate one, and the debt which plaintiff is seeking to enforce is an absolutely meritorious, bona fide one, representing in part the purchase price of the goods which were transferred to Barron and the proceeds of which the defendant trustee is now seeking to hold against plaintiff and his unpaid purchase price. If there was any vice in the chattel mortgage it was by virtue of its being repugnant in its terms and conditions to statutory provisions.
The failure to file said chattel mortgage for a period succeeding its execution, as indicated by the evidence, did, under the statute (Laws of 1897, chap. 418, § 90, as amd. by Laws of 1900, chap. 248), render the same invalid and void as to certain creditors. Such creditors, however, were those whose debts existed before the chattel mortgage was finally put upon file. The instrument became valid from the date of its filing, even though belated as against those creditors whose debts subsequently accrued. ( Thompson v. Van Vechten, 27 N.Y. 568, 582; Karst v. Gane, 136 id. 316; Hicks v. Williams, 17 Barb. 523.)
It does not appear upon the face of the complaint that any other indebtedness against Barron outside of that held by plaintiff was in existence at the time said chattel mortgage was put upon file.
The provisions allowing the mortgagor to sell goods covered by the mortgage, using the proceeds of such sale to pay the indebtedness and to purchase other goods to take the place of those sold, did not as matter of law render the mortgage fraudulent and void as to creditors. ( Brackett v. Harvey, 91 N.Y. 214.)
Passing by these obstacles to defendant's successful maintenance of his position upon this appeal, we think there are still others in his way which are insuperable.
It is thoroughly settled by authoritative and binding decisions in this State that a chattel mortgage which violates the provisions requiring its filing, and which is not accompanied by any change in possession of the goods covered thereby, is still good and valid as between the parties and as against creditors at large, and the same rules are applicable to an instrument improperly allowing the mortgagor to deal with the property covered by the mortgage. In order to attack or successfully resist an instrument affected by these vices, a creditor must by judgment and execution or other process have obtained a specific lien and claim against the property involved. ( Button v. Rathbone, Sard Co., 126 N.Y. 187; Stephens v. Meriden Britannia Co., 160 id. 178; Hardin v. Dolge, 46 App. Div. 416, 419.)
There is nothing in the complaint to indicate that the defendant trustee represents any creditor who had at the time of the adjudication in bankruptcy and the appointment of the trustee obtained a judgment or other specific lien by virtue of his indebtedness. Unless, therefore, the trustee possesses some greater rights than the creditors whom he represents, he is not in position to attack the chattel mortgage upon the grounds alleged.
His learned counsel has attempted to convince us that he does possess such rights by virtue of the provisions of the Bankruptcy Act, but we find ourselves unable to agree with the contentions thus made.
Our attention has specially been called to certain sections of said act. It is provided, in part, by section 67, subdivision a, of said act (30 U.S. Stat. at Large, 564) that "claims which for want of record or for other reasons would not have been valid liens as against the claims of the creditors of the bankrupt shall not be liens against his estate," and by subdivision b that whenever a creditor is "prevented from enforcing his rights as against a lien created, or attempted to be created, by his debtor, who afterwards becomes a bankrupt," the trustee of the estate of such bankrupt is subrogated to and may enforce the rights of such creditor for the benefit of the estate. Section 70 (Id. 565) provides: "The trustee of the estate of a bankrupt upon his appointment and qualification, * * * shall * * * be vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt, except in so far as it is to property which is exempt, to all * * * (4) property transferred by him in fraud of his creditors; (5) property which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him."
We do not think that a fair construction of these provisions gives to the trustee any such right as is claimed for him in this case. The general purpose of the Bankruptcy Act was to turn over all of the property of the bankrupt, subject to certain exemptions, to his trustee for the purpose of distribution amongst the creditors. In the absence of express provision to the contrary, we think it must be assumed that it was the intention to effect such transfer of the bankrupt's property, subject to the conditions and rights of the various creditors as they existed at the time when the bankruptcy proceedings became effective, and that it was not the intention to invest the trustee in behalf of one class of creditors with greater rights than they then possessed against any other class of creditors. At the time the proceedings in bankruptcy in question were instituted plaintiff's instrument had not been questioned by the bankrupt, or by any of his creditors if any existed. In fact, so far as the evidence discloses, there was nobody who could successfully attack the mortgage upon the ground now urged. If there were creditors who had claims upon which they might have laid the foundation by judgment or otherwise for such attack they had refrained from so doing. The plaintiff had a lien which he was at perfect liberty to enforce successfully. If the appellant, by virtue of his appointment as trustee, has now acquired the right to attack the instrument upon the grounds urged, he has not only become, as claimed by the appellant, the representative of the creditors, but in addition to that, without any adequate consideration, he has acquired in their behalf greater rights than they possessed at the time when he was appointed. We think this is beyond the contemplation of the act in question. We think it is more just to construe the provisions of said act already specially referred to as meaning, so far as such an action as this is concerned, creditors who had secured some specific claim against, or lien upon, the property involved by the bankruptcy. The word "creditor" as used in said provisions is certainly not decisive against this view, and it seems to us proper, in accordance with the decisions of the highest court of the State, to construe it for such purposes as are here under consideration as meaning such a creditor as we have indicated.
In addition to this the case of Matter of Economical Printing Co. (6 Am. Bank. Rep. 615) very distinctly and emphatically sustains this view, and the principle of such case was reaffirmed. ( Matter of Garcewich, 115 Fed. Rep. 87.)
It is true that in the case of Matter of Alexander Rodgers, decided in the northern district of Illinois, and not reported, expressions are found which perhaps are somewhat in conflict with the views expressed by us and those sustained by the cases last cited. If the authorities, however, are to be regarded as in conflict upon this point, in the absence of a decision by the Supreme Court of the United States, we prefer to adopt those conclusions which are in accordance with the spirit of the decisions of our own State.
The judgment should be affirmed, with costs.
All concurred, except McLENNAN and WILLIAMS, JJ., dissenting.
Judgment affirmed, with costs.