In re T. H. Bunch Commission Co.

TRIEBER, District Judge (after stating the facts as above). Section 60a of the Bankruptcy Act, as amended by the act of February 5, 1903, 32 Slat. p. 799,' reads as follows: “A person shall be deemed to have given a preference if, being insolvent, he has, within four months before .the 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 be to enable any one of 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 iur.il four moidhs after the date of the recording or registering of the transfer, if by law such recording or registering is required.” Section 60b, as amended by the act of June 25, 1910, is as follows: “If a. bankrupt shall have procured or suffered a judgment to be entered against. Mm in favor of any person or have made a transfer of any of his property, and if, at the time of the transfer, or of Ihe entry of the judgment, or of the recording or registering of the transfer if by law recording or registering i hereof is required, and being within four months before the filing of the petition in bankruptcy or after the filing thereof and before the adjudication, the bankrupt he insolvent and the judgment or transfer then operate as a preference, and the person receiving it or to be benefited thereby, or his agent acting ¡-herein, shall then have reasonable cause to believe that the enforcement of such judgment or transfer would effect a preference, It shall be voidable by the trustee, and lie may recover the property or its value from such person.” The amendment of 1910 to section'47 reads: “And such trustees, as to all property in the custody or coming into the custody of the bankruptcy court, shall be deemed. vested with all the rights, — 246 — remedies, and powers of a creditor bolding a lien by legal or equitable proceedings tbereon; and also, as to all property not in the custody of the bankruptcy court, shall be deemed vested with all the rights, remedies, and powers of a- judgment creditor holding an execution duly returned unsatisfied.” , As the act only applies so far as recording or registering of. the transfer is concerned, if recording or registering thereof is required by law, which means the law of the state where the transaction occurs, it is necessary to' ascertain and determine what the laws of that state require to be done.o In other words, the question to be determined is, What is the effect of a failure to> file for record a chattel mortgage as against a trustee in bankruptcy under the laws of Arkansas, where this transaction took place? To answer that we must look to the statutes of that state and the construction placed upon them by the highest court of that state. The statutes of Arkansas, as digested in Kirby’s Digest, applicable to the issues herein involved, are: “Sec. 5395. All mortgages whether for real or personal estate, shall be proven and acknowledged in the same manner that deeds for the conveyance of real estate are now required by law to be proven or acknowledged; and when so proven or acknowledged shall be recorded, if for lands in the county or counties, in which the lands lie,..and if for personal property, in the county in which the mortgagor resides. Provided, if the mortgagor is a nonresident of this state, the mortgage shall be recorded in the county in which the property is situated at the time the mortgage is executed. “See. 5396. Every mortgage, whether for real or personal property, shall be a lien on the mortgaged property from the time the same is filed in the recorder’s office for record, and not before; which filing shall be notice to all persons of the existence of such mortgage.” “Sec. 5407. Whenever any mortgage or conveyance intended to operate as a mortgage of personal property, or any deed of trust upon personal property, shall be filed with any recorder in this state, upon which is indorsed the following words, ‘This instrument is to be filed, but not recorded,’ and which indorsement is signed by the mortgagee, his agent or attorney, the said instrumeijt when so received shall be marked ‘Piled’ by the recorder, with the time of the filing upon the back of said instrument; and he shall file the same in his office, and it shall be a lien upon the property therein described from the time of filing, and the same shall be kept there for the inspection of all persons interested; and such instrument shall thenceforth be notice to all the world of the contents thereof without further record.” Tbe effect of an unrecorded mortgage under these laws, is well settled by the decisions of the highest court of that state, and has been ever since 1848, when the opinion in Main v. Alexander, 9 Ark. 112, 47 Am. Dec. 732, was delivered. A mortgage, although not filed for record, is good between the parties or as against the administrator, of the mortgagor, or of a voluntary assignee or a receiver in insolvency, but is void as against subsequent purchasers or creditors who have obtained a lien on the mortgaged premises by a levy under execution or a seizure under attachment. The fact that they have actual notice of the mortgage is immaterial, if it is not filed for record in the proper office prescribed by law, and not then if so defectively executed or acknowledged, as not to entitle it to record. These rules have been consistently adhered to by the Supreme Court of the state ever since Main v. Alexander was decided. In Carnall v. Duval, 22 Ark. 136, a mortgage had been filed for — 247 — record with the clerk, who was ex officio recorder of deeds, and of which the clerk had actual notice, but the acknowledgment was defective so as not to entitle it to- record under the laws of the state. With full knowledge of these facts, the clerk purchased the property, and the court held that his title was superior to that of the mortgagee. The decisions of the Supreme Court of Arkansas are quite numerous and uniform on that subject. Among the many decisions, the following may he consulted: Watson v. Thompson Lumber Co., 49 Ark. 83, 4 S. W. 62; Smead v. Chandler, 71 Ark. 505, 76 S. W. 1066, 65 L. R. A. 353; Cumberland Building & Loan Ass’n v. Sparks, 111 Fed. 647, 49 C. C. A. 510, a case arising under the laws of Arkansas and determined by the Circuit Court of Appeals for the Eighth Circuit. The attempted filing and the later recording of the mortgage in Lonoke county were void for two reasons: First. A chattel mortgage must, under the provisions of section 5395, be filed or recorded in the county in which the mortgagor resides, otherwise it is no better than if not filed or recorded. Beaver v. Frick Co., 53 Ark. 18, 13 S. W. 134. Under a similar statute of the state of New York it was held, in Stewart v. Plait, 101 U. S. 731, 735, 737, 25 L. Ed. 816, that a chattel mortgage filed for record in a town other than that where the plaintiff resided, although the property was in the town where the mortgage was recorded, is void as against creditors. Second. Section 5407 requires a certain indorsement to be made when a chattel mortgage is to be merely filed, but not -recorded. Failure to make such an indorsement, or one practically to the same effect, is insufficient, and is no lien on the property, as against subsequent purchasers or creditors, although verbal directions were given to the recorder of deeds to file it, but not record it. Bowen v. Fassett, 37 Ark. 507; Dedman v. Earle, 52 Ark. 164, 12 S. W. 330; Davis v. Perry, 64 Ark. 369, 42 S. W. 768. A provision in the statutes of Colorado requires an affidavit by the mo’rtgagcb to be recorded annually on the records of the county wherein the mortgage is recorded that the mortgage was given in good faith, and the amount still unpaid. In Williams v. German-American Trust Company, 219 Fed. 507, — C. C. A. —, the Circuit Court of Appeals for the Eighth Circuit held that the failure to comply with these requirements of the statute made the mortgage void as against a trustee in bankruptcy, the court, quoting from Ferris v. Chambers, 51 Colo. 368, 117 Pac. 994, the following excerpt: “Provisions of a statute, rendering a chattel mortgage effective, even though the mortgagor retains possession of the property, are statutory, and if the statute prescribes that, in order to preserve the lien of a. mortgage with the property in the possession of the mortgagor, something shall he done, that thing must be done as prescribed by the statute.” The cases cited by the learned counsel for the intervener are not in point. In Martin v. Ogden, 41 Ark. 186, the mortgage was held good as against the administrator, the court holding that the administrator is not a purchaser nor a creditor. In Wolfe v. Perkins, 51 Ark. 46, 9 S. — 248 — W. 432, the issue involved was whether an unrecorded mortgage was a violation of a provision in a fire insurance policy against incumbrances, and it was‘held that, the mortgage being a valid lien on the property insured between the parties, it was such a violation. In Little v. Bank, 97 Ark. 61, 133 S. W. 166, and Arkansas Cypress Co. v. Meto Valley R. R. Co., 97 Ark. 534, 134 S. W. 1195, it was held that a receiver in an insolvency proceeding, not being a purchaser nor a creditor, occupied no better position than the mortgagor. There can be no doubt but that if, before the mortgage was filed in Pulaski county on October 7, 1914, a creditor wofild have caused the mortgaged property to be seized under an execution or attachment, the lien obtained thereby would have been superior to that of the mortgagee under the laws of the state of Arkansas as uniformly construed by the Supreme Court of that state ever since 1.848. Is the trustee in bankruptcy entitled to the same rights that such a creditor would have in view of the fact that the agreed statement of facts admits that the Commission Company was, at the time the mortgage was filed for record in Pulaski county, insolvent; that T. H. Bunch, its president, who acted as the representative and agent for the intervener, and the attorney who was employed by Mr. Bunch for Mrs. Bunch and acted for her in filing the mortgage for record, actually knew, or beyond question had reasonable cause to know, at the time the mortgage was filed by him for record in Pulaski county that the Commission Company was insolvent, and that the effect of the mortgage would be to enable Mrs. Bunch to obtain a preference over other creditors, who had unsecured claims ? Prior to the amendments of 1903 and 1910 of the Bankruptcy Act it has been determined in York Mfg. Co. v. Cassell, 201 U. S. 344, 26 Sup. Ct. 481, 50 L. Ed. 782, that the trustee in bankruptcy occupied no better position than the mo'rtgagpr, and if the mortgage was good against the mortgagor, it was good against the trustee. By the amendment of 1903 the period of four months within which a preference could be subject to attack by the trustee in bankruptcy was to. be computed from the date of the recording or registering of the transfer, “if by law such recording or registering is required.” There has been some conflict among the courts inferior to the Supreme Court (that court never having passed upon that question) what the effect of the amendment of. 1903 was; but the Circuit Court of Appeals for the Eighth Circuit, in First National Bank v. Connett, 142 Fed. 33, 73 C. C. A. 219, 5 L. R. A. (N. S.) 148, held that where the statutes of a state required liens to be recorded, the question of insolvency and knowledge thereof is to be determined as of the date when the mortgage was filed for record, and this date is to be adopted as the date for the purpose of determining the four-month period for the purpose of determining the legality of a preference. This decision has been followed ever since by that court. McElvain v. Hardesty, 169 Fed. 31, 94 C. C. A. 399; People’s State Bank v. Gleason, 178 Fed. 1004, 101 C. C. A. 663, affirmed without an opinion, on the authority of the Connett Case; Mattley v. Giesler, 187 Fed. 970, 110 C. C. A. 90; Lathrop Bank v. Holland, 205 Fed. 143, 123 C. C. A. 375; Williams v. German-American Trust Co., supra; The T. L. Smith — 249 — Co. v. Orr, 224 Fed. 71, -C. C. A. —, filed May 12, 1915. Other appellate courts have followed this rule: Remington on Bankruptcy (2d Ed.) § 1379½; Brigman v. Covington, 219 Fed. 500, -C. C. A. - (4th Ct). The language of the statute, especially as amended by the act of 1910, is so clear that there is nothing left to construction. But if there were room for doubt as to the intention of Congress on that subject, it is removed by the reports of the judiciary committees of the two houses of Congress when the amendment of 1910 was pending. Senate Report No. 691, Sixty-First Congress, Second Session, which accompanied the bill for these amendments, after it had passed the House and was reported to the Senate, concurs in -the report of the House judiciary Committee, which reads as follows: “The object of this amendment is further to protect against the evil of secret lions, against which evils this same section was amended in 1903, but in such an unfortunate way as not effectually to prevent such liens. As the present law stands, even as amended in 1903, secret liens are still being held good in many jurisdictions, notably in Wisconsin, where the Supreme Court of that state has held in effect, in the case of Claridge v. Evans [337 Wis. 218] 118 N. W. 198 [803, 25 L. R. A. (N. S.) 144], that a mortgage withheld for years from record is not a preference, even if finally filed within a few days before bankruptcy, provided the debtor was not insolvent at the time it was given, years beforehand, or provided it were given for money then passing. “Thus as the law stands, even by the amendment of 1903 as construed in many jurisdictions, a debtor may, if solvent at the time or if presently passing consideration be then received, give a chattel mortgage or other lien upon Iris property requiring recording by the state law, and the creditor receiving it may keep this lien off the record for months or even years (if not so done by collusive agreement) and filed It within a few days of bankruptcy, and yet the hen be held perfectly good. This is so held because the courts rule that the insolvency of the debtor, the existence of a pre-existing debt, and all the other elements of the preference are to be determined as of the date of the transfer between the parties. The amendment of 1903, by declaring the four-month period should not begin to run until the date of the recording where the recording is ‘required’ by state law, evidently attempted to make the date of the recording in such instances the date at which the existence of insolvency of a pre-existing consideration and of all the other elements of the preference should be taken. “jNevertlieless, the amendment of 1903 did not effectually accomplish this object. As the law now is construed, even if the recording be not done until within the four-month period, on the very eve of bankruptcy, yet if at the time of the original transfer, which might have occurred years beforehand, the debtor was solvent or the lien had been, given upon a then presently passing consideration, the transfer will not be set aside as a preference, the date of the ‘transfer’ under any theory always being necessarily the date at which ail the elements of the preference inust be proved to have existed. •‘The real trouble it seems, is this: There are two times of ‘transfer’ in such cases; as between the transferror and the transferee obviously the time of transfer is the time of the original execution and delivery of the instrument to the grantee or transferee, regardless of its registration, but as to other creditors and the rest of the outer world, the ‘transfer’ is, by the statute, not a complete ‘transfer’ at all until recording, until delivery to the public recorder, then and not until then the debtor signifying to outside parties, to all others that might become interested in his assets, the effectual separation of the licned property from the rest of his assets. This, it must be conceded, is the bottom principle upon which rest the recording statutes of all our states. It is also the bottein principle of the right to legislate against secret liens. Thus, in our bankruptcy preference statute, the great object likewise should be to make clear that the ‘transfer’, so far as outside parties becoming interested — 250 — in the estate are concerned, is not complete or perhaps is not even to be considered a ‘transfer’ at all (in cases where state law requires recording as against creditors) until delivery of the instrument to the recorder for registration. “Creditors, then, by these state Supreme Court decisions construing the preference provisions of the present Bankruptcy Act, must be able to prove that at the time of the ‘transfer,’ perhaps several years beforehand, the debtor was then insolvent, the debt was then a past, a pre-existing, debt, etc., a practical impossibility; indeed, an unreasonable requirement, since it is the present insolvent fund of the debtor that is rightly involved, and not some ancient fund existing years beforehand. “The proposed amendment squarely and clearly makes the date of the recording (where recording is required under state law to make the lien valid as against levying creditors) the date at which the creditor is to prove the existence of all the elements of a preference—truly the right date, for, as above noted, it is the present insolvent fund with which creditors are concerned, not the debtor’s estate in the condition which might have existed two or three years beforehand. “Further, the amendment of 1903, making the existence of ‘reasonable cause to believe’ on the creditor’s part a prerequisite to the trustee’s right to recover the preference from him, required that this reasonable cause of belief should be that a ‘preference was intended to be given,’ rather than that a ‘preference would be effected.’' Logically it is the creditor’s knowledge or belief that a preference would be effected that should be the test, rather than his knowledge or belief of the debtor’s intention to prefer. “This amendment, viewed in the light of the previous discussion, would seem to speak clearly. It brings forward to the date of the recording the proof of the insolvency and of all other operative facts of the preference, and makes the section conform to the real and actual intentions of the framers of the amendment of 1903. “Indeed, it is perhaps merely declaratory of the law as it exists to-day, as laid down in the following cases, to wit: “Bank v. Connett, 142 Fed. 33 [73 C. C. A. 219, 5 L. R. A. (N. S.) 148), Circuit Court of Appeals: ‘The mortgages constituted a transfer of his property, and their effect was to enable the bank to obtain a greater percentage of its claims than other creditors. They were recorded within four months of the filing of the petition in bankruptcy. Therefore, assuming that a recording is required by the law' of Missouri, it follows that a preference arose under section 60a. And, in our opinion, it also follows that the preference arose when the mortgages were recorded, and not as of the date they were given. In other words, the amendment of 1903 was intended to remedy the evil resulting from secret instruments of transfer of the bankrupt’s property, the withholding of them from record until shortly before the institution of bankruptcy proceedings, and the then assertion of them as of the prior date of their execution and delivery. And this was accomplished by making the rights of a creditor thus favored determinable by the conditions existing when he caused the transfer to him to be recorded as required by the state law rather than by those existing at the time he secured it.’ “McIlvain v. Hardesty, 169 Fed. 31 [94 C. C. A. 399] 22 Am. Bankr. Rep. 320 (U. S. C. C. A. from Mo.): ‘ * * * The effect of the transfer to Mcllvain is to be judged as if made on the 7th day of. July, 1905, when it was filed for record. If O. & O. were then insolvent, and if the effect of the enforcement of the transfer was to enable Mcllvain to obtain a greater percentage of his debt than any other of their simple contract creditors, the transfer constituted a preference within the meaning of the bankruptcy law. * * * As, for the purpose of this case, the transfer is to be treated as made on the date the agreement was recorded, so "the transferee’s belief or cause for belief concerning it must relate to that time.’ “Also see In re Hickerson (U. S. D. C.) 20 Am. Bankr. Rep. 682 [162 Fed. 345). “But there are contrary holdings. The question is continually arising, and is a frequent source of litigation. It. is of such importance that it should be set at rest.” — 251 — This shows beyond question' that the Congress was of the opinion that the rule laid down in First National Bank v. Connett correctly interpreted its intention, when it enacted the amendment of 1903. But as the courts were not harmonious in the construction of this amendment, the act of 1910 was passed in order that there may be no room for doubt that the opinion in the Connett Case correctly interpreted the congressional intention. The mortgage must therefore be treated as executed on October 7, 1914, when it was first filed for record in accordance with the laws of the state and became a valid lien against creditors who had secured a lien by seizure under execution or attachment, or the trustee in bankruptcy, who occupies such a position; his right as such dating back four months prior to the institution of the proceedings. First Nat. Bank v. Connett, 142 Fed. 33, 40, 73 C. C. A. 219, 5 L. R. A. (N. S.) 148. The indebtedness secured thereby was then pre-existing, and, the Commission Company being then insolvent, of which fact the agent and attorney^ of the intervener had notice and reasonable cause to believe that the enforcement of the mortgage would effect a preference, and being within four months preceding the filing of the petition in bankruptcy against the Commission Company, it is clearly voidable under the provisions of sections 60a and 60b. As the trustee could have recovered the property, or its value, if in the possession of the intervener, he can, of course, defeat an action against him for the recovery of the property by one claiming under such a voidable instrument. The conclusions of law reached by the spécial master are correct, and the exceptions thereto are overruled. The result, no doubt, works a great hardship on the intervener, who acted in good faith and parted with her money in the belief that it was to be secured by the mortgage. There is no act of hers which savors in the least of fraud. But courts are bound to enforce the law as it has been made by the proper legislative department of the government and cannot make shipwreck of it to avoid hardships. It is a well-known fact that several efforts have been made by the State Bar Association of Arkansas to' have these statutes as construed by the Supreme Court of the state amended so as to conform to the more liberal view prevailing in many other states, as to notice of unrecorded or improperly recorded mortgages, but these efforts have failed of success, the Legislature declining to act on these suggestions, and the Supreme Court holding that the principle laid down in Main v. Alexander has become a rule of property, which can only be changed by legislative action. The order will be that the intervention be dismissed at the cost of the intervener, but without prejudice to her right to prove the claim against the estate as an unsecured claim, if found to be a valid claim.