Teshner v. Roome

McCOURT, J. Plaintiff commenced this snit August 29, 1921, to obtain a decree declaring certain written instruments, executed in his favor by Ossman-McDonald Motor Car Company, a partnership, to be chattel mortgages covering the motor vehicles described in each of said instruments, and directing that each of such chattel mortgages be foreclosed, and that the personal property described therein be sold to satisfy the several sums of money alleged to be secured by such chattel mortgages and alleged by plaintiff to be due from the partnership. Plaintiff at the same time commenced an action in replevin to obtain possession of the personal property covered by the several mortgages, as authorized by Section 10183, Or. L., and under and by virtue of the writ issued in that action, the sheriff on the twenty-ninth day of August 1921, levied upon and seized possession of all of the personal property described in the several instruments asserted by plain — 386 — tiff to be chattel mortgages, which was then in the possession of the partnership. The possession thus taken by the sheriff has since been retained by him. On September 9, 1921, the partnership, and Leslie H. Ossman and Wesley B. McDonald, the individuals composing it, were, by a decree of the District Court of the United States for the District of Oregon, adjudicated bankrupts, upon a petition showing liabilities of $30,140.15 and assets of $26,404.42, consisting of automobiles and accessories. At the first meeting of the creditors of the bankrupts, the defendant, Herbert Roome, was appointed trustee in bankruptcy of the bankrupt estates, and on September 27, 1921, the said trustee was, by order of the Circuit Court, substituted as defendant for those originally made defendants in the suit. The trustee, in an answer filed by him, attacked the validity of the instruments sought to be foreclosed, on the grounds that the cars and other property described in the several instruments were owned by, and were in the possession of, Ossman-McDonald Motor Car Company at all times; that the instruments were not witnessed or acknowledged so as to entitle them to record, and none of them, were ever filed and recorded, but were secretly given by the partnership, and secretly received and held by plaintiff, without any notice to, and without the knowledge of, any of the creditors of the partnership; that the partnership was allowed to retain the possession of the property named therein, and to sell the same in the regular course of business, without any accounting of the proceeds therefrom, and that the creditors of the partnership extended credit to the company without any knowledge of the existence of the instruments held by plaintiff, or of the indebted — 387 — ness represented thereby; the trustee further alleged that each of the instruments sued on by plaintiff, except those set forth in plaintiff’s cause of suit 2, 7 and 11, respectively, was given without any present consideration and for the purpose of creating a preference in favor of plaintiff. A trial was had upon the issues presented by the pleadings, and the court gave a decree declaring the instruments sued upon by plaintiff to be invalid and of no effect, as against the trustee in bankruptcy, and awarded possession of the personal property to the trustee for the purpose of liquidation in the regular course of bankruptcy. Plaintiff appeals. The complaint contains thirteen causes of suit. Omitting dates, amounts, rate of interest and description of motor vehicles, each of the first eight causes .of suit is based upon a written instrument substantially as follows: “- Eugene, Oregon, -, 19 — . “For value received, I promise to pay to the order of C. L. Teshner at their office in the City of Eugene, Oregon, the sum of —Dollars, in Gold coin of the United States of the present standard value, together - with interest thereon in like Gold coin at the rate of - per cent per annum, said interest to be paid at maturity. I promise to pay said sum in installments as follows: On demand until said principal sum and interest is fully paid. Upon failure to pay any installment when due, the whole amount of both principal and interest shall become at once due and collectible. And if suit or action be instituted to collect this note or any part thereof, I promise to pay such additional sum as the court may adjudge reasonable as attorney’s fees in such suit or action. “This note is given as the purchase price of one - Automobile bearing factory No. -- and the — 388 — express condition of the sale and purchase of the same is such that the title, ownership, possession and right of possession, does not pass from the said C. L. Teshner until this note and all the interest thereon is paid in full, and in case of default of the undersigned in the making of the payments hereinbefore mentioned, or any of them, time being of the essence thereof, or in ease of misuse or abuse of the said Automobile whereby the value of the same is in the opinion of said C. L. Teshner materially lessened, then the said C. L. Teshner, their agents or assigns, have full power to take possession of the said Automobile, to declare this note due, and in such case I authorize them to sell the said automobile at public or private sale for the best price that may be obtained for same, and to apply the proceeds, after deducting all necessary expense, to the payment of the sum due at such time upon this note and any balance then remaining unpaid I hereby acknowledge as a just debt which I promise and agree to pay. “I specifically agree that I will not sell, loan, pledge or otherwise dispose of said Automobile nor will I suffer any lien or attachment to be made or levied upon same and in event I do so, I agree that same shall constitute a waiver of all my right in and to the same and that the said C. L. Teshner, or their agents or assigns, may thereupon declare this note due, repossess themselves of the said Automobile and to proceed to sell the same and apply the funds received from such sale as in the foregoing paragraph mentioned. “(Sgd.) Ossman & McDonald. “By L. H. Ossman.” The tenth cause of suit is based upon an instrument designated as an executory contract of sale, different in form, but of the same legal effect as that set out above. — 389 — The dates, principal, rate of interest and motor vehicle named in each instrument follow in the order they appear in the complaint. Plaintiff’s rights under the foregoing instruments, as against the trustee in bankruptcy, depend upon the facts established by the evidence. The~Ossman-McDonald Motor Car Company, hereinafter referred to as the firm, was engaged in selling automobiles at retail; the firm maintained a salesroom, with repair-shop attached, in Eugene, Oregon, where it sold new cars purchased from the manufacturer, and also used cars taken in exchange upon the sale of new cars. About August 1, 1920, the firm entered into' an arrangement with plaintiff, whereby the latter agreed to advance and loan to the firm, funds for the purchase of new automobiles to be placed in stock and sold by the firm. In purchasing automobiles from the factory, the firm was required to pay for the cars upon arrival; — 390 — the automobiles were usually shipped in carload lots of four automobiles. The manufacturers attached to the bill of lading for each shipment, a draft for the purchase price of the cars. The firm was required to pay such draft before unloading the automobiles from the railway car. The agreement between plaintiff and the firm was that plaintiff should, upon the receipt of a shipment of automobiles, advance to the firm the amount of the draft attached to the bill of lading, and thus enable the firm to receive and unload the automobiles. It was agreed that thereupon the firm should place the automobiles covered by the bill of lading upon the floor of its salesroom, and dispose of them in the regular course of trade, and when a car was sold, the part of plaintiff’s loan or advancement represented by the factory price of the automobile sold, should be repaid to plaintiff, with interest at 8 per cent per annum from the date of that advancement; it was further agreed that plaintiff in the meantime should have a lien, in the nature of a chattel mortgage, upon the automobiles for which he had advanced the purchase price, with the right, upon default in payment, to take possession of the automobiles, with power of sale to satisfy plaintiff’s claim. Pursuant ta the agreement mentioned, plaintiff advanced to the firm, for the purchase of new automobiles, numerous sums of money, among which were the following: August 2, 1920, earload, of 4 new Nash cars, factory priee of each, $1525.00.....................$6,100.00 Sept. 2, 1920, carload of 4 new Nash, ears, factory priee of each, $1540.00.....................$6,160.00 April 13, 1921,1 new Nash-4 touring car.................$1,393.95 May 9, 1921, carload of 4 new Nash cars, factory priee of each, $1350.00.....................$5,400.00 August 13, 1921,1 new Nash roadster......................$1,201.25 — 391 — To evidence the transaction, both as to the obligation of .the firm and the agreement to give plaintiff security for the money advanced by him, the firm in each instance of the two advances first above mentioned, executed and delivered to plaintiff a promissory note, which included terms providing for a pledge to plaintiff of the automobiles included in the purchase, as security for the payment of the note. In connection with the subsequent advances mentioned, the firm executed and delivered to plaintiff a combined note and conditional sales contract in the form above set out. Plaintiff’s causes of suit 2, 3 and 7, each relate to a new car and represent money advanced by plaintiff to purchase the same. In making sales of automobiles upon which plaintiff claimed a lien, the firm frequently was required to take a used car in exchange as part payment for the car sold, in which case the firm was unable to pay to plaintiff, in full, the sum of money required to secure a release of the car sold from plaintiff’s claim of lien; to enable the firm to make the sale, plaintiff accepted the cash received from the buyer in part payment of his claim, and accepted as security for the balance remaining unpaid, the used car taken in exchange by the firm; and thereupon plaintiff released from his lien the car which had been sold. In each instance the substituted security, and the indebtedness secured thereby, was covered by a promissory note and ‘ conditional sales contract, as in the case of loans made by plaintiff for the purchase of new cars. A transaction such as that last described is embraced in each of plaintiff’s causes of suit relating to a used car. — 392 — The firm remained in possession of all of the cars covered by the several instruments, and offered all of the cars for sale in the ordinary course of trade. Plaintiff appeared at the firm’s place of business almost daily and required the firm to, and it did, account promptly for sales made, whether for cash, or for cash and used cars in exchange. The evidence clearly establishes that the foregoing transactions between plaintiff and the firm were made in good faith, upon sufficient consideration and without intent to defraud creditors or purchasers. In no instance did the transfer have the effect of diminishing the assets of the firm. The several instruments were intended as chattel mortgages by the parties, and are claimed by the plaintiff, and conceded by defendant, to be chattel mortgages; each was given to secure plaintiff, either for a present loan or for the release of automobiles upon which he had a valid lien. “A surrender of a valid lien is of itself a present consideration to the extent of the security released.” Bank v. Jones, 242 Fed. 821, 826 (155 C. C. A. 409). The chattel mortgages given by the firm to plaintiff were valid between the parties, notwithstanding the oral understanding, whereby plaintiff allowed the firm to sell and dispose of the mortgaged property, upon condition that the firm should keep a .strict account of sales, and promptly pay the same over to plaintiff, that condition having been observed by the parties: Currie v. Bowman, 25 Or. 364 (35 Pac. 848); Sabin v. Wilkins, 31 Or. 450 (48 Pac. 425, 37 L. R. A. 465); Kenney v. Hurlburt, 88 Or. 688 (172 Pac. 490, 173 Pac. 158, Ann. Cas. 1918E, 737, L. R. A. 1918E, 652). — 393 — A chattel mortgage given as security for money advanced to enable the debtor to purchase the property covered by the chattel mortgage does not constitute a preference under the Bankruptcy Act: Collier on Bankruptcy (12 ed.), p. 886. Nor does the substitution of securities create a preference where the estate of the debtor is not diminished by the exchange: Collier on Bankruptcy (12 ed.), p. 887; Black on Bankruptcy (3 ed.), § 586; Sawyer v. Turpin, 91 U. S. 114, 120 (23 L. Ed. 235, see, also, Rose’s U. S. Notes); Matter of Star Spring Bed Co., 257 Fed. 176; Ernst v. Mechanics’ & Metals National Bank, 201 Fed. 664, (120 C. C. A. 92); Lakeview State Bank v. Jones, 242 Fed. 821 (155 C. C. A. 409); In re Reese-Hammond Fire Brick Co., 181 Fed. 641 (104 C. C. A. 371); Bailey v. Baker Ice Machine Co., 239 U. S. 268 (60 L. Ed. 275, 36 Sup. Ct. Rep. 50). As against a chattel mortgagee not in possession of the mortgaged property, and whose mortgage is not recorded, the trustee in bankruptcy stands in the position of an attaching creditor having obtained a lien by levy of an attachment or execution as and of the date the petition in bankruptcy was filed: First Nat. Bank of Union v. Wegener, 94 Or. 318, 334 (181 Pac. 990, 186 Pac. 41); Bank v. Jones, 40 Am. Bankr. Rep. 148 (242 Fed. 821, 155 C. C. A. 409). The priority of right as between such chattel mortgagee and the trustee in bankruptcy is regulated by the law of the state in which the bankruptcy proceedings are instituted: In re Floyd-Scott Co., 224 Fed. 987 (35 Am. Bankr. Rep. 463). Under the state statutes, a chattel mortgage not accompanied with immediate delivery and actual — 394 — and continued change of possession of the property mortgaged, or which shall not be recorded, is void as against subsequent purchasers in good faith and for a valuable consideration of the same personal property (Section 10178, Or. L.), and an attaching creditor, from the date of the attachment, is deemed such a purchaser: Section 10180, Or. L. Notwithstanding the statutory declaration last referred to, it is firmly established in this state that the title and all rights of an attaching creditor are subordinate to prior valid liens upon the attached property, of which he had actual knowledge or sufficient notice to put him upon inquiry: Boehreinger v. Creighton, 10 Or. 42; Riddle v. Miller, 19 Or. 468 (23 Pac. 807); Dimmick v. Rosenfeld, 34 Or. 101 (55 Pac. 100); Flegel v. Koss, 47 Or. 366 (83 Pac. 847); Saling v. First Nat. Bank of Tillamook, 93 Or. 237, 242 (182 Pac. 140). Also Bailey v. Hickey, 99 Or. 251 (195 Pac. 372), in which the earlier cases to the same effect are collected. In Riddle v. Miller, 19 Or. 468 (23 Pac. 807), the court said: “The statute has materially enlarged the creditor’s right under the proceedings, in the manner indicated; but the legislature did not intend. thereby to give to a creditor, by virtué of such levy or the docketing of a judgment, any right as against an outstanding equity known to him at the time his lien attached. Acts of that character have always, been construed as giving to a creditor, under such circumstances, ■such rights only as he would acquire under a voluntary sale of the property to him by the debtor for a valuable consideration. * * where a creditor resorts to such a proceeding who is informed of the outstanding equity, or of facts sufficient to put him, on an inquiry by which he could ascertain the existence — 395 — of such equity, the lien he secured thereby will be subject to it.” At the date the petition in bankruptcy was filed, and for ten days prior thereto, the motor vehicles in question were in the possession of the sheriff, held by the latter under and by virtue of a writ of replevin, the issuance of which was obtained by plaintiff in aid of his claims under the chattel mortgage held by him, and to enable him to foreclose the same. This suit was pending at and during the same period, and had for its declared purpose the foreclosure of those chattel mortgages and the sale of the identical motor vehicles held by the sheriff, to satisfy the several debts secured by .said chattel mortgages. It is manifest that no purchaser of the property from the bankrupts on the date the petition in bankruptcy was filed could successfully assert the rights of a purchaser in good faith for a valuable consideration, as against the claims of plaintiff. This court, in the case of Bank v. Wegener, 94 Or. 318, 337 (181 Pac. 990, 186 Pac. 41), held that where a suit to foreclose an unrecorded chattel mortgage, valid between the parties, had been commenced before, and was pending, at the time the petition in bankruptcy was filed, the trustee in bankruptcy acquired title to the mortgaged property, with notice of the lien of such chattel mortgage, and subject thereto, provided the mortgage was not voidable as a preference. That case is decisive of the question under consideration. Each of eight of the instruments sued upon by plaintiff, the first of which was given May 6, 1921, originally provided for interest at the rate of 12 per cent per' annum. Defendant complains that all — 396 — of the instruments mentioned were, and are, nsurious, and that “plaintiff has forfeited all right to relief thereunder. ’ ’ Plaintiff testified, in which testimony he was corroborated by both Ossman and McDonald: “The first time that the 12 per cent appeared was in my absence when I was out of town. When I returned I found the note bearing 12 per cent, and I said to Mr. Ossman, ‘I don’t see how you can pay that amo'unt. That is more than it should be. ’ ‘ 0, ’ he said, ‘That’s all right. It is worth that to us.’ * * it must have been along in the early summer some time. No, I suppose it was along in the spring some time. I don’t know just when it was. * * I was out of town at the time. “Q. Had you had any talk with him about it before that? A. No; that was the first time that I had received a renewed note, and this renewed note bore 12 per cent. This note was given to my wife in my absence, and when I returned I brought the matter up with Mr. Ossman. “Q. He just voluntarily agreed to give you 12 per cent? A. Absolutely. Q. Ton never had any talk with either one of them before that? A. No, sir. Q. You accepted the 12 per cent? A. Yes. Q. And these additional notes at 12 per cent? A. Yes, he said it was worth that much to him. * * “Q. This' instrument 0 bears date August 18th. A. At that time I found it was unlawful to collect 12 per cent interest and I immediately had this fixed up.” Exhibit “0” is as follows: “Certain notes outstanding between the parties hereto bearing a rate of interest in excess of 10 per cent, now it is agreed between the parties hereto, no interest having as yet been paid on any of said notes, that said interest on all such notes shall be reduced to 10 per cent per annum from date, and said notes are hereby purged from all claim for — 397 — interest in excess of 10 per cent per annum from date of said several notes. “August 18, 1921. “(Sgd.) Ossman-McDonald Motor Oar Oo. “By L. H. Ossman. “By W. B. McDonald. “(Sgd.) O. L. Teshner.” After signing Exhibit “0,” the parties changed the interest rate in the notes from 12 to 10 per cent by interlineation and erasure. It is claimed by plaintiff that the instruments were purged of the taint of usury by the agreement contained in the above writing and by the allegation of the instruments by mutual consent to conform to that agreement. In 27 R. C. L. 251 we read: “Though the security given for a debt is tainted with usury it may be purged by the abandonment of the usurious contract and the execution of a new obligation for the amount of the actual debt free from the usury of the old and bearing only legal interest. If the lender will expunge the usury, and the borrower voluntarily assents to repay the sum loaned with lawful interest, it is an act of justice forbidden by no principle of public policy, which constitutes a good consideration for a new contract.” To the same effect see 39 Cyc. 1002. It appears from the evidence that no interest had been paid upon any of the ■ obligations which provided for an unlawful rate of interest, and that no part of the principal upon the same had been paid, and that therefore the plaintiff did not retain, nor had he received, any benefits under the prohibited agreement. Under- the circumstances we think the act of the parties was sufficient to purge the contracts of the taint of usury. — 398 — To have that effect, however, the several obligations must be regarded and treated as new contracts. In that view, they were executed and given when plaintiff knew the firm was insolvent, and to secure past indebtedness. On that account, the transactions amounted to unlawful preferences under the Bankruptcy Act, and were void as against the claims of the trustee. Plaintiff by his eighth cause of suit, and also by .causes of suit, 9 to 13. inclusive, attempts to establish a chattel mortgage upon the stock of automobile parts- and accessories belonging to the firm; he alleges that the firm promised and agreed to execute and deliver to plaintiff a chattel mortgage upon its said stock as a substitute for security either released by plaintiff, as set forth in some of the causes, of suit mentioned, or as additional security upon indebtedness of the firm to plaintiff, for which plaintiff held some security, as set forth in some of said causes of suit. In furtherance of the agreement last mentioned the firm, on August 3, 1921, • delivered to plaintiff a paper describing in general terms the stock of parts and accessories, and later delivered to plaintiff a detailed list of the items making up said stock of parts and accessories. This latter transaction did not amount to a chattel mortgage. At most, it was an unexecuted agreement to give a chattel mortgage, and plaintiff did not thereby, or by this suit, acquire any claim or lien upon the stock of parts and accessories, as against the trustee in bankruptcy. Plaintiff is entitled to prevail in this suit upon his second and seventh causes of suit. No evidence of the reasonable value of attorney’s fees was given, and none will be allowed. As the automobiles — 399 — covered by tbe chattel mortgages of tbe plaintiff, described in the causes of suit mentioned, have been sold, and the proceeds are in the custody of the sheriff of Lane County, pursuant to a stipulation of the parties, so much of the proceeds of the sale of each of the machines shall be applied upon the particular mortgage secured thereby, as shall be necessary to satisfy the same, and the balance, if any, paid to the trustee in bankruptcy. For appellant there was a brief and oral argument by Mr. H. E. Slattery. For respondent there was a brief over the name of Messrs. Yoimg & Ray, with an oral argument by Mr. L. L. Ray. Except as indicated, the decree of the Circuit Court is affirmed. A decree will be entered in this court in accordance with this opinion. Affirmed.