Wayne Oil, Tank & Pump Co. v. Auto Repair Co.

Cook, J., delivered the opinion of the court. This suit was an action of replevin in the circuit court of Covington county, wherein the appellant, Wayne Oil, Tank '& Pump Company, was plaintiff, and the appellee, Auto Repair Company, was the defendant. The suit was instituted to recover possession of two oil tanks and pumps, which were described and valued in the declaration and affidavit upon which the action was based. At the conclusion of the testimony both parties requested peremptory instructions, and, the court having granted the peremptory instruction requested by the defendant, this appeal was prosecuted from the judgment entered in accordance therewith. The. facts as developed by the record are substantially as follows: On January 20, 1920, the appellant, a corporation of the state of Indiana, conditionally sold the property sued for, retaining title as security for its value, to the Auto Sales Company, a partnership of which Fred A. Lowrey, W. N. Corley, and O. S. Biglane were at that time the partners. Afterwards Fred A. Lowrey — 537 — and one Westbrook became the sole partners, and on April 21, 1921, the Auto Sales Company, the partnership, on the petition of creditors, was adjudged a bankrupt. The appellant was not one of the petitioning creditors, and it was erroneously scheduled as an unsecured creditor of the bankrupt. The partners were not adjudged bankrupts, and the appellant did not prove its’ debt or otherwise enter its appearance or take notice of the bankruptcy proceeding, but relied upon its security. On June 18, 1921, the bankrupt, the Auto Sales Company, offered a compromise to its unsecured creditors, and on June 28,1923, the composition was accepted and approved, and the property was restored to the bankrupt. The two partners in the bankrupt partnership, Auto Sales Company, Lowrey and Westbrook, took possession of the property involved in this suit, formed a new partnership under the' copartnership name of Auto Repair Company, the appellee, and, at the beginning of this suit, had the possession of the property in controversy. In addition to the above-stated facts, the appellant offered in evidence its written contract showing the conditional sale of the personalty sued for, the promise to pay plaintiff the value of the same, and otherwise made out its case. There was also testimony to the effect that the bankrupt’s tentative offer of composition was reduced upon receiving advice from the referee in bankruptcy that the property would not be received by the bankrupt from the trustee in bankruptcy freed from appellant’s lien, and there is no pretense that appellant has been paid for the property, or that it received anything on its debts by virtue of the composition. In passing upon the correctness of the action of the court in granting a peremptory instruction in favor of defendant, it is important to consider the rights of a secured creditor in a proceeding in bankruptcy in ref- . erence to proving his claim. — 538 — Section 57, subsec. (e), of the Bankruptcy Act (U. S. Comp. St., section 9641), provides that the claims of secured creditors may be allowed to enable such creditors to participate in the proceedings at creditors ’ meetings held prior to the determination of the value of their securities, but shall be allowed for such sums only as to the courts seem to be owing over and above the value of their securities, and subsection (h), after providing how the value of securities held by secured creditors shall be determined, then provides that the amount of such ascertained value shall be credited upon' such claim, and a dividend shall be paid only on the unpaid balance. ■ In Collier on Bankruptcy (12 Ed. 1921), on pages 795 and 796, the author, in discussing section 57 of the .Bankruptcy Act, says: “Secured or priority creditors need not surrender their securities, but the value thereof may be determined and deducted, and dividends paid on the unpaid balances. . . . The act contemplates that secured creditors may and shall prove their claims, and they are to set forth the claim, the consideration therefor, and whether any, and, if so what securities are held therefor, etc. Claims of secured creditors and those having priority may also be allowed for certain purposes, thus, for the purpose of fixing the sum on which a dividend from the general estate is to be paid and also for limiting the voting power or voice of the secured creditor.” And also on pages 797 and 798 of the same volume, in discussing this question, Collier says: “A secured creditor may or may not surrender his security, as he chooses. If he does, it inures -to the benefit of all creditors, and his claim, if otherwise unobjectionable, is allowed at the full amount. If he does not, he can, it seems, have his claim allowed temporarily to enable him to participate in creditors’ meetings prior to the determination of the value of his security, but — 539 — ■ only for such sum as seems to he owing over the security. He may retain his security and prove for the amount of his claim after deducting/therefrom the value of his security. . . . If the security is equal in value to the claim, he cannot prove any part of his claim, although the creditor bids in the property at a foreclosure sale for less than his. claim. A creditor cannot prove both a debt and the security thereof, but he may proVe either one. He may rely on his security and enforce it according to his rights as they exist; in such a case it is optional with him to .make a formal proof of his claim. If he does not present his claim and rely on the administration of the bankrupt estate, he is relegated to the property retained as security for the debt, and, so far as the estate is concerned, the debt is released. As has already been explained,- the value of securities is often arrived at summarily at first meetings to per-' mit a creditor to vote the unsecured balance. A claimant may, of course, be fully secured. If so, he should not be allowed to file a proof, and does not become a party to the proceeding. A creditor by proving an unsecured claim is not barred from proving the amount of a secured claim less the sum realized on the security.” In Loveland on Bankruptcy, yol. 1, p. 697, it is said that a secured creditor mayyely upon his lien and neither prove his debt in bankruptcy nor release his security, and in such case the security is preserved, notwithstanding the bankruptcy of the debtor; or, the secured creditor may rely upon his security and prove for such sum as may be owing above the value of his security; or he may surrender his security and prove his debt as an unsecured creditor. From the foregoing it appears that the appellant was clearly within its rights in relying on its security and declining to prove its claim, and unless the rights of the trustee in bankruptcy are superior to its rights under its unrecorded conditional sale contract, it can enforce its security. Having failed, however, to prove — 540 — its claim or the unsecured balance thereof, the debtor would be discharged from all liability for his deficit, upon the approval of a composition in the bankruptcy proceedings. The next question that arises is, What were the rights of the trustee in bankruptcy in the property covered by appellants unrecorded contract of conditional sale? It is the contention of appellee that the bankrupt, Auto Sales Company, was a trader within the meaning of section 4784, Code of 1906 (section 3128, Hemingway’s Code), commonly known as the sign statute, and that, since it failed to comply with the requirements of this statute, ,this property, which was used in its business, would, as to the creditors of the bankrupt, be liable for its debts, and be in all respects treated in favor of its creditors as its property. For the purposes of this decision only it may be conceded that this statute applies since under the 1910 amendment of the Bankruptcy Act, clause 2, subsec. (a) of section 47 (U. S. Comp. St., section 9631), the “trustees, as to all the property in the custody or coming into the custody of the bankruptcy court, shall be deemed vested with all the rights, remedies, and powers of a creditor holding a lien by'legal or equitable proceedings thereon.” In Collier on Bankruptcy (12 Ed.), vol. 1, pp. 728 — 730, in discussing this amendment it is said: “The purpose of the amendment was to give to the trustee the lien of a judgment creditor, enabling him to protect general creditors from unrecorded liens, unlawful transfers, spurious claims and other dissipations of the assets of the estate, which a lien or judgment creditor might have prevented had bankruptcy not intervened. . . . Under the amendment the trustee may attack the validity of any lien, or other claim against the bankrupt’s property which a creditor holding a lien by legal or equitable proceedings might have attacked. Under this provision of the statute the trustee is not limited to such objections to a transaction between the — 541 — bankrupt and a creditor as tbe bankrupt might have had, but he may make any objection that a creditor holding a lien might make. . . . The amendment vests in the trustee, by operation of law, a lien equivalent in all respects to that acquired upon the property coming into the custody of the trustee, by virtue of legal or equitable proceedings instituted against the bankrupt by a creditor. This provision of the Bankruptcy Act puts the trustee, in so far as the assets of the estate are concerned, in the position of a lien creditor, but does not necessarily give him the statu-s of a purchaser without notice.” From the foregoing it appears that the trustee in bankruptcy was vested with a lien on the property here in controversy, which was equivalent to that of a judgment creditor and was superior to the lien of the unrecorded conditional contract of sale. The trustee was vested with all the potential rights of a creditor holding liens upon the property by legal or equitable proceedings, which rights he could assert for the protection and benefit of the general creditors, but when the liability of the bankrupt to these creditors was discharged by the composition, the lien so vested in the trustee was also discharged. Under section 70 of the Bankruptcy Act (U. S. Comp. St. section 9654) the trustee was vested by operation of law with the title of the bankrupt’s property as of the date he was adjudged a bankrupt, and under paragraph (f) of said section 70, the title to such property revested in the bankrupt upon the confirmation of the composition offered by him. Under the contract of conditional sale by which the title of the property here in controversy was reserved in the seller until the full payment of the purchase price thereof, the legal title of the property was not vested in the bankrupt at the date he was adjudged a bankrupt, and the title did not vest in the trustee. Upon the confirmation of the composition there was revested in the bankrupt — 542 — only such, title as he had, and as became vested in the trustee, at the date of the adjudication, and, since the legal title of this property was never vested in either the bankrupt or the trustee, by the discharge of the purchase-money lien to the extent of the value of such security, the title to the property did not revest in the bankrupt, freed from liability for the purchase price thereof. We conclude, therefore, that the peremptory instruction requested by the appellant should have been granted. Reversed, and judgment here for appellant.