Claridge v. Evans

Tbe following opinion was filed October 20, 1908: WiNsnow, C. J. In tbe foreclosure action tbe question is whether tbe mortgage of December 16, 1904, is void as a — 223 — preference under tbe provisions of tbe bankrupt act. Tlie mortgage was given nearly two years before tbe petition in bankruptcy was filed, to one wbo was not at tbe time a creditor of tbe company, and for the purpose of securing advances which the mortgagee agreed to make to enable the company •to continue its business. The company was then in fact insolvent, as both parties knew, but the mortgage was made in good faith and both parties expected that the business would be successfully carried on. By innocent mistake the mort,gage was not recorded until a few. days before the bankruptcy proceedings, although the mortgagee supposed it was, and made his advances from time to time relying on his -.security. The last two advances were made before the beginning of the four-months period immediately preceding the bankruptcy proceedings, and for these advances foreclosure is claimed. There can be no doubt that, in the absence of fraud, actual ■or constructive, this mortgage, though unrecorded, gave to the mortgagee a lien upon .the mortgaged property for the ■sums thereafter advanced under it, good as between the parties and as to all the world except subsequent purchasers -or mortgagees in good faith and for a valuable consideration. Secs. 2203, 2209, 2241, 2242, Stats. (1898) ; Mathwig v. Mann, 96 Wis. 213, 71 N. W. 105; Wis. P. M. Co. v. Schuda, 72 Wis. 277, 39 N. W. 558. It is familiar law that the trustee in bankruptcy takes the bankrupt’s property subject to all the equities impressed upon it in the hands of the bankrupt, unless otherwise provided in the bankrupt act. In other words, he has no greater right to set aside convey-•anoes or transfers than the bankrupt himself had, except in so far as the bankrupt law empowers hini to avoid such transactions in cases of actual or constructive fraud or in cases -of preference inhibited by the act. Security W. Co. v. Hand, 206 U. S. 415, 27 Sup. Ct. 720; Eastman v. Parkinson, 133 Wis. 375, 113 N. W. 649. No actual or constructive fraud — 224 — is claimed in tbe present case, but tbe only claim is tbat the mortgage constituted a preference witbin tbe meaning of' subd. a and b of sec. 60 of tbe national bankruptcy act of’ 1898 (Act July 1, 1898, ch. 541, 30 U". S. Stats, at Large, 562, 1J. S’. Comp. Stats. .1901, p. 3445), as amended by the-act of February 5, 1903 (cb. 481, sec. 13, 32 TJ. S. Stats, at-Large, 199, 1J. S. Oomp. Stats. Supp. 1901, p. 1031). Sec. 60a provides tbat: “A person shall be deemed to have given a preference if, being insolvent, be bas, witbin four months before tbe filing-of the petition, or after the filing of the petition and before the adjudication, procured or suffered a judgment to be entered against himself in favor of any person, or made a transfer of any of his property, and the effect of the enforcement of such judgment or transfer will he to enable any one-cí his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class. Where-the preference consists in a transfer, such period of four months shall not expire until four months after the date of’ tbe recording or registering of the transfer, if by law such recording or registering is required.” Subd. b, sec. 60,' provides that: “If a bankrupt shall have given a preference, and the-person receiving it, or to be benefited thereby, or his agent acting therein, shall have had reasonable cause to believe-that it was intended thereby to give a preference, it shall be voidable by the trustee, and he may recover the property or its value from such person.” The mortgagee here knew that the company was insolvent, at the time the mortgage was given as well as at the time it. was recorded, and the trustee claims that, though it was given nearly two years before the bankruptcy proceedings were-commenced, still, because it was not recorded until.a few days before the petition was filed, it becomes a voidable preference by virtue of the last clause of subd. a, sec. 60. The-fundamental difficulty with the trustee’s contention is that-the sections deal with preferences alone, not with all business transactions, and the giving of a mortgage or other225 security to secure repayment of a present loan, or a loan to be made in the future, is not a preference. In order to constitute a preference there must be an existing antecedent debt upon wbicb a payment is made or for which security is given. A security given for a debt created at the time is a present security and not a preference created by the mortgage. This seems clear from the language of the sections as well as from consideration of the evil intended to be averted thereby. A preference, as defined by the statute, is a transfer which will enable any one of the insolvent’s creditors to obtain a greater percentage of his debt than other creditors of the same class. It contemplates a class of existing creditors, one of whom is singled out for preference. The evil which was to be averted was the diminution of the bankrupt’s estate by a transfer to a favored creditor to the detriment of other creditors of the same class. The idea of the bankrupt law is that the bankrupt’s whole estate should go to the benefit of all his creditors equally, except as priority of certain kinds of claims may be provided for by the act, and that hence the bankrupt should not be allowed to diminish the common fund within four months before his bankruptcy by giving a preference to one creditor who has reason to believe that insolvency exists. When, however, a mortgage is given for a present loan of money to go into the bankrupt’s business, there is no diminution of the estate. Indeed, that very act may amount to a practical enlargement of the estate and enable the- insolvent to rescue his business from threatened ruin, and thus save all his creditors from loss-Thus Judge DilloN well said in Darby's Trustees v. Boatman's Sav. Inst. 1 Dill. 141, Fed. Cas. No. 3,511, under the-old bankrupt law (which also contained provisions condemning preferences) : “An insolvent person may properly make efforts to extricate himself from his embarrassments, and therefore he may borrow money and give at the time security therefor, provided always the transaction be free from fraud in fact and — 226 — upon, the bankrupt act; and Pence it is a settled principle of bankrupt law, both in England and in tbis country, tbat advances, made in good faitb to a debtor to carry on business upon security taken at tbe time, do not violate either tbe terms or policy of tbe bankrupt act.” Tbis principle is definitely laid down and approved in tbe cases of In re Wolf, 98 Fed. 74; In re Clifford, 136 Fed. 415 ; First Nat. Bank v. Pa. T. Co. 124 Fed. 968, and In re Noel, 137 Fed. 694, and in effect in Rogers v. Page, 140 Fed. 596. In tbe Noel Case tbe court said: “As to tbe question of preference under tbe bankrupt act, it is clear tbat a present loan on security is not a preference” — citing sec. 67, subd. d (Act July 1, 1898, cb. 541, 30 U. S. Stats, at Large, 565, U. S. Comp. Stats. 1901, p. 3449), of tbe bankrupt act, wbicb reads as follows: “Liens given or accepted in good faitb, and not in contemplation of or in fraud upon tbis act, and for a present consideration, wbicb bave been recorded according to law, if record thereof was necessary in order to impart notice, shall not be affected by tbis act.” Tbe very word “preference” means tbat one person is favored above others who before tbe favor was shown stood on equal footing. Bouvier defines it as “the paying or securing, to one or more of bis creditors, by an insolvent, the whole or part of their claim to tbe exclusion of tbe rest.” Tbis seems entirely clear, and probably there would bave been no attack on tbe mortgage were it not for tbe concluding-clause of subd. a, sec. 60, wbicb in effect declares tbat if the local law requires recording of tbe transfer, tbe four-months period during wbicb preferences are inhibited shall not expire until four months after tbe date of tbe recording. But this clause does not define a preference, nor purport to malee a preference out of a transaction wbicb was not a preference before. It only applies where the transfer itself constitutes a preference. In order to ascertain what a preference in — 227 — fact is, we must go to the first part of the section, which, as we have seen, defines it in accordance with the natural meaning, namely, a transfer to one creditor out of a class. So we are not concerned here with the last clause, because it only refers to preferences, and there has been no preference to which it can apply. The construction of this last clause, especially with regard to the scope of the words “if by law such recording or registering is required,” has occupied the attention of several of the inferior federal courts with varying results. In the Northern District of New York it was held, under registry laws practically identical with our own, that a real-estate mortgage was not required to be recorded within the meaning of the clause in question, and hence that such a mortgage, given in good faith more than four months before the bankruptcy proceedings, but not recorded until just before the petition was filed, could not be invalidated as a preference. In re Hunt, 139 Fed. 283., A contrary result was reached, under substantially different registry laws, in English, v. Ross (M. D. Pa.) 140 Fed. 630. In a number of cases in the inferior federal courts it has been held, in reference to chattel mortgages, that where the state law-requires them to be recorded in order to validate them as against creditors or purchasers in good faith, although valid between the parties, they are required to be recorded within the meaning of the bankrupt act. First Nat. Bank v. Connett, 142 Fed. 33; Loeser v. Sav. D. Bank, 148 Fed. 975; In re Reynolds, 153 Fed. 295. In these cases the clause in question was held * applicable. In the first two the mortgages were given to secure existing debts. In the last case, however, the mortgage was given to secure a present loan, and so the case may rightly be said to be in some sense an authority in support of the trustee’s contention here. It is to be noted, however, that the point that the transaction was not a preference of a creditor at all was neither suggested nor considered in the case, and that the law of Arkansas, which governed the — 228 — mortgage, provided that no mortgage should be a lien on the mortgaged1 property until actually filed in the proper office, while in Wisconsin a chattel mortgage is a valid lien as between the parties though never filed, and_ a real-estate-mortgage given in good faith is valid as to all the world, except subsequent purchasers in good faith, though never recorded. But we should not feel inclined to follow these authorities, even if they were exactly in point. When the supreme court of the United States decides that the preference section in the bankrupt law applies to such a transaction as the giving of the mortgage in the present case, we shall of course bow to that decision. Until that time we shall follow what seems to us the correct principle as laid down in this opinion. The result is that Glaridge was entitled to a judgment of foreclosure against the fund in court. Passing to the action to recover the preferential payments, made within the four-months period, we find a different question. These were payments made upon an antecedent debt. True it was a secured debt, but only to the amount of the security. On June 25, 1906, when the four-months’period began, the company owed Glañdge $5,000 and his security was only of the value of $1,125. Thus, as to the sum of $3,215, Glaridge was an unsecured creditor, and he could not, with knowledge of his debtor’s insolvency, obtain a valid preferential payment on his unsecured debt within the four-months period, because this would give him" a greater percentage than any other unsecured creditors, of whom there were a considerable number. After exhausting his security his debt is of the same class as all other unsecured contract-debts which are not given priority by the terms of the bankrupt act. The judgment in the second action was therefore correct. It follows that in the foreclosure action the judgment must be reversed, with costs, and the action remanded with directions to enter judgment of foreclosure against the fund — 229 — in court, while in tbe trustee’s action to recover tbe preferential payments tbe judgment must be affirmed, with costs. By the- Court. — It is so ordered.