L. A. Becker Co. v. Gill

HOOK, Circuit Judge. This is an appeal from an order denying the petition of T. A. Becker Company, the appellant, for the proceeds of a soda fountain and appurtenances in the hands of the trustee in bankruptcy and postponing its general claim against the bankrupt’s estate to the claims of subsequent creditors. [1] The property was sold by the appellant to the bankrupt about five months before the proceedings in bankruptcy were begun upon a contract reserving title in the vendor. The transaction occurred in the state of Missouri. The contract of sale was never recorded. Three days before the proceedings were begun the bankrupt gave the appellant a chattel mortgage upon the same property to secure the price then fixed somewhat in excess of the amount specified in the prior contract, and the mortgage was promptly recorded. In the interval between the contract and mortgage the bankrupt incurred other debts in its business aggregating more than the value of the property in question. The mortgage is said to have been substituted for the contract, but the appellant claims under each independently, and also that, aside from any rights under those instruments, the property was originally obtained from it by fraud of the bankrupt. In First National Bank v. Connett, 73 C. C. A. 219, 142 Fed. 33, 5 L. R. A. (N. S.) 148, we held that in Missouri the lien of a chattel mortgage does not come into existence until the instrument is recorded or possession is taken under it; and, while neither is done, it is void as to subsequent general creditors or a trustee in bankruptcy. In McElvain v. Hardesty, 94 C. C. A. 399, 169 Fed. 31, the above rule was held applicable to contracts of conditional sale in that state. We are satisfied with those decisions, and therefore will not reconsider them. We think the construction of the state statutes and decisions is sound, and, in addition, makes for the observance of the letter and spirit of the registry laws and business honesty. [2] But it is urged that, even if appellant fails on the contract, it has a valid lien by the chattel mortgage. As already observed, the mortgage was taken and promptly recorded three days before the proceedings in bankruptcy were commenced. But a thorough consideration of the evidence convinces us that at that time the bankrupt was hopelessly insolvent, and that the representatives of appellant had reasonable grounds for believing a preference was intended and would result. Counsel rely too greatly upon the representations of the president of the bankrupt in the face of the fact which must have clearly appeared when the mortgage was taken that his statements and his promises were altogether unreliable. Of course, too much of observation and inquiry suggested by it should not be required of a creditor seeking security, but he ought to do what a creditor would naturally and ordinarily do when not fearful of the bankrupt act; he should not carefully pick his way to avoid information. As to the claim that the original sale to the bankrupt was induced by false and fraudulent representations, it is sufficient to say that no rescission or effort at reclamation on that ground occurred before the proceedings in bankruptcy were commenced. [3] One other question remains: The trial court, having held the unrecorded contract of conditional sale void as to creditors who be [38] came such after it was executed, then ruled that, while appellant might prove its claim as a general creditor, it could not participate equally with them because they, the subsequent creditors, had an equitable lien on the property in question superior to the prior general creditors, and were first entitled to the proceeds. The court followed In re Wade (D. C.) 185 Fed. 664, and Simmons v. Greer, 98 C. C. A. 408, 174 Fed. 654. We think the right of the subsequent creditors is merely a defensive one against the holder of the contract of conditional sale who has failed to comply with the registry statute, and that it is not a lien giving them a preference upon distribution in bankruptcy. It prevents the successful assertion against them of an unrecorded instrument, but does not in addition confer an affirmative right against others.' In such cases the defense against the unrecorded instrument is generally due directly or primarily to the provisions of the statute. In a broad sense the statute is founded upon considerations of justice and equity which are recognized and frequently referred to by the courts in construing and applying it, but it was not intended by such references to give the parties so protected a substantive lien superior to others. If the holder of the unrecorded instrument made no claim on it, but was content to be a general creditor, it would hardly be contended that subsequent creditors upon discovering its existence could bring it up themselves as ground for a lien or preference over creditors otherwise of the same class. It does not seem admissible that the existence of such a lien should depend upon the assertion of the unrecorded instrument by the holder and his failure. Equity has a large place in the administration of the bankruptcy law, but so far as may be without disturbing positive rights the dominant note is that “equality is equity.” An assignment for the benefit of creditors which is vacated by proceedings in bankruptcy may yet be used to defeat, for the benefit of the estate, an intervening execution levy. Reed v. McIntyre, 98 U. S. 507, 25 L. Ed. 171. Section 67f of the present act (Act July 1, 1898, c. 541, 30 Stat. 565 [U. S. Comp. St. 1901, p. 3450]) provides that liens obtained by legal proceedings within four months prior to the filing of the petition in bankruptcy shall be void unless the court preserves them for the benefit of the estate. In First National Bank v. Staake, 202 U. S. 141, 26 Sup. Ct. 580, 50 L. Ed. 967, liens of attaching creditors void under the section cited were nevertheless preserved for the trustee against a prior unrecorded conveyance by the bankrupt which solely regarded was valid between the parties and as to the trustees. And the property so saved was for the general estate, not for a special class of creditors. If in the case at bar liens had been obtained by the subsequent creditors by judicial proceedings within the four months, they would, in the discretion of the court, have been set aside or retained for the benefit of the general estate in bankruptcy. Yet, it is urged that by an equitable lien, purely by construction, the subsequent creditors regardless of proximity in time to the bankruptcy proceedings secure a preference they might not have been able to get by industrious resort to the courts. In equity it would appear that when appellant’s contract is out of the way its right of participation is equal to that of subsequent creditors. Its property enriched the estate of the'bankrupt as well as theirs, and to deny it a [39] ratable participation would be an undue punishment for an ineffectual attempt to secure or protect itself. It is suggested that In re Bothe, 97 C. C. A. 547, 173 Fed. 597, is authority for the ruling of the court, but it was made clear in the opinion in that case that the subsequent creditors alone sought the proceeds of the mortgaged chattels, and, being successful, no one objected when the trial court classed the mortgagee with them for distribution. In re Abell, 117 C. C. A. 243, 198 Fed. 484, is a nearer approach. In that case all the creditors who proved claims, except the mortgagee, became such while the mortgage was unrecorded. The court denied them a preference over the mortgagee who, having abandoned the mortgage, obtained an allowance as an unsecured creditor. We think the proceeds of the property in question are assets of the general estate and that appellant is entitled to participate ratably with all unsecured creditors. As so modified the order is affirmed.