In re Jules & Frederic Co.

DODGE, District Judge. Adjudication in this case was on July 13, 1909, under a creditor’s petition filed May 26, 1909. The chattel mortgage here in question was given March 2, 1909. It purported to secure the payment of $5,675 in all, $4,175 of which is now conceded to have been pre-existing indebtedness of the bankrupt to the mortgage. That the remaining $1,500 represents an actual loan of that amount by the mortgagee to the bankrupt, made when the mortgage was given or afterward, and as part of the consideration for it, is not in dispute under this petition for review. |1] The mortgage was never recorded. Whether it can be held good for $1,500 as against the trustee, or not, depends upon the question whether the mortgaged property had been delivered to and retained by the mortgagee before the trustee’s rights in the bankrupt’s property accrued. Unless the property was delivered to an'd retained by the mortgagee, the mortgage has no validity against a person other than the parties to it. Rev. Laws Mass. c. 198, § 1. The trustee cannot be regarded as a “party” to it. Re Hurley (D. C., Mass.) 26 Am. Bankr. Rep. 434, 185 Fed. 851, 854; Clark v. Williams, 190 Mass. 219, 223, 76 N. E. 723. [2] The mortgage purported to cover all the bankrupt’s fixtures and stock in trade, consisting of millinery, millinery supplies, hair goods, shell goods, in its store No. 380-382 Boylston street, Boston. It also recited an agreement between the parties that the bankrupt might dispose of the stock in trade in'due'and ordinary course of trade, provided that what should be so disposed of was to be replaced by goods of equal value, the mortgage to apply to such after-acquired goods. The mortgagee was at the store when the mortgage was given. He contends that the mortgaged property was then delivered to him and since retained by him. The trustee denies that there was any such delivery or retention. A fuller and more specific finding of the facts bearing on this question than appears in the referee’s certificate seems to me desirable. The entire evidence before the referee has been transmitted with his certificate. It relates in great part to questions not raised by the petition for review, but from it I find the facts now material as follows: (1) The bankrupt held a lease of the premises which had some eight years to run. This it assigned to -the mortgagee, also on March 2, 1909. The mortgagee on the same date executed a written agreement, which, after reciting the loan of $5,675 and the assignment of the lease as partial security therefor, provided for a reassignment of the lease by him upon repayment of the loan. It does not appear that he ever had or claimed possession and control of the leased premises under the lease thus assigned, except as below stated, and, as the referee has found, he never paid any rent. (2) On March 2, 1909, when the mortgage, assignment of lease, and agreement were executed, the mortgagee, then present in the store, walked through it with the bankrupt’s representatives. The fixtures and other property mortgaged were indicated, and he stated that he took possession of them. [537] (3) It was at the same time agreed between him and the bankrupt's representatives that Minnie Mazur, Ihen employed in the store by the bankrupt as stenographer, should be appointed as the mortgagee’s agent and keeper. He was told that she had the keys, and opened and closed the store at morning and night. He asked her if she would act as agent. The bankrupt’s representatives told her it was all right, and she agreed. He gave her some keys, telling her “she was supposed to hold the keys.” She put them in her pocketbook and thereafter retained them. The mortgagee claims that he explained to her that a mortgage on the property had been given and she was to act as agent for the mortgagee. This she denies, and I, do not think it proved that she fully understood at the time that there was a mortgage or that she was so to act as keeper. (4) On March 13th the mortgagee came to the store with a paper previously prepared by him and got Miss Mazur to sign it. The paper, marked “Exhibit 7,” is in evidence. It purports to acknowledge her receipt from him of the fixtures and stock in trade described in the mortgage, and to be an agreement on her part to hold them for the mortgagee and to surrender them to him or his agents, on demand, without expense or charge to him for storage or keeping. This she signed without reading it, but with the knowledge and consent of the bankrupt's representatives. I do not think it proved that she knew when she signed it that the mortgage had been given and that she was to be regarded as in possession of the store or its contents. She was in the store daily from and after March 2d. The keys given her she kept but did not use. (5) Between March 2d and May 24th the store remained open to the public for business as before March 2d. The bankrupt continued to conduct its business there as before, without ostensible change. It was a retail business, in the course of which goods from the stock in trade referred to were sold from day to day and new goods of a like kind added to them, without separation, as had been done before March 2d. The bankrupt’s employés, through whom the business was done, remained the same and continued in the bankrupt’s employ as be I ore. 1 No more actual control over the business, the fixtures, and stock in trade, or the proceeds of sale therefrom, or the payment for new goods added, was exercised by the mortgagee or by Miss Mazur after March 2d than before. (6) On May 24tb, in a suit brought against the bankrupt in the Massachusetts courts, stock in trade and fixtures then in the store were attached, and a keeper put in charge of them by the deputy sheriff making the attachment. The mortgagee thereupon, on the same day, went to the, store with a man having no connection with the bankrupt or its business, informed Miss Mazur that he was to replace her as agent and keeper, and left him in the store. On the following day the mortgagee notified the deputy sheriff in writing that all the fixtures and chattels in the store were mortgaged to him, that he had taken possession of them before the attachment, and that his possession had since continued uninterrupted. After the attachment the store wras closed and no further business done. The per [538] son substituted as above for Miss Mazur by the mortgagee and the sheriff’s keeper remained together in the store until May 26th. (7) On May 25th the mortgagee served notice on the bankrupt that he intended to foreclose his mortgage for breach of condition. The notice recited that the mortgaged property was in his possession. This notice was recorded on May 26th, at 11 minutes past 11 a. m. (8) On May 26th, at 9:20 a. m., the creditors’ petition in this case was filed. The deputy sheriff thereupon withdrew his keeper. The mortgagee’s representative above mentioned remained in the store until the mortgaged property was sold as stated below. (9) On May 27, 1909, on application by the petitioning creditors, this court enjoined the mortgagee from disposing of any of the property belonging to the estate until a further order of the court. On June 9, 1909, the petitioning creditors and the mortgagee filed a stipulation in the case whereby, after reciting that the mortgagee, claiming possession as such, had custody of the property, and that i all parties interested Would be benefited by its conversion into cash because of its perishable nature, they agreed that the above injunction should be vacated, the property converted into cash forthwith, without prejudice to the rights of either party, and that the proceeds, less the expenses of selling and protecting the property, should be deposited by the mortgagee, in his name as trustee, subject to the court’s final order upon the rights of the respective parties therein. The property was thereafter sold and the proceeds deposited accordingfy. From the facts as above found, I am unable to conclude that there was such delivery and retention by the mortgagee as is necessary, under the Massachusetts statute above cited, to make such a mortgage valid without record, as against others than the parties. The parties went through the form of making a delivery of so much of the stock in trade as was in the store on March 2d; but, as in Moors v. Reading, 167 Mass. 322, 45 N. E. 760, 57 Am. St. Rep. 460, the arrangements they made on that day regarding its custody were with the obvious purpose, or at any rate with the effect, of enabling the mortgagor to carry on its business in the usual manner, without exciting suspicion that its-goods had been transferred. None of the goods were articles of great bulk and weight, nor were they in a place access to which could be supposed under the control of that employé of the mortgagor whom the mortgagee undertook to make his agent for the purpose of retaining possession, as in Wright v. Tetlow, 99 Mass. 397, even if it be assumed that Miss Mazur distinctly understood that she was to hold possession of them under the mortgage and agreed to do so. There was no attempt to keep the goods originally mortgaged distinct from those acqiiired after March 2d, and no subsequent delivery of any of those after acquired, which were mingled indiscriminately with those in the store on March 2d. To hold such possession as Miss Mazur can at best be held to have exercised a retention of possession by the mortgagee would be, as was said in Moors v. Reading, above cited (167 Mass. 326, 45 N. E. [539] 760, 57 Am. St. Rep. 460), to enable parties to practice the very fraud which the statute as to unrecorded mortgages of personal property was intended to prevent. [3] The mortgagee could take no possession of the goods while the deputy sheriff had possession of them under the attachment made March 24th, whether or not the suit in which the attachment was made was really for the benefit of Aylies, treasurer of the bankrupt company, and whatever his relations to or previous dealings with the mortgagee and the president of the bankrupt company. [4] The deputy sheriff’s possession while it lasted was exclusive, and it continued until the filing of the petition in bankruptcy under which there has been adjudication. I must hold that no possession taken after the filing of the petition can avail the mortgagee. State Bank v. Cox (C. C. A., 7th Cir.) 16 Am. Bankr. Rep. 32, 143 Fed. 91, 93, 74 C. C. A. 285; Cruchet v. Red Rover Co. (C. C., Mass.) 18 Am. Bankr. Rep. 814, 155 Fed. 486; Clay v. Waters (C. C. A., 8th Cir.) 24 Am. Bankr. Rep. 293, 178 Fed. 388, 394, 101 C. C. A. 645. The referee was of opinion that the mortgage was void under the “sales in bulk” act of Massachusetts. Acts 1903, c. 415. I am not prepared to agree with this opinion, in view of Wassennan v. McDonnell, 190 Mass. 326, 76 N. E. 959. But for the other reasons above stated 1 must hold the mortgage invalid as against the trustee. The referee’s order is therefore approved and affirmed.