Whether, and to what extent, a chattel mortgage, which includes
after-acquired property, is valid is a local, and not a federal,
question, and in such a case, this Court will follow the decisions
of the state court.
The enforcement of a lien by the mortgagee's taking possession,
with the consent of the mortgagor, of after-acquired property
covered by a valid mortgage made and recorded prior to the passage
of the act is not a conveyance or transfer under the Bankrupt Act,
and, where it does not appear that it was done to hinder, delay or
defraud creditors, it does not constitute a preference under the
act, although, at the time of the enforcement, the mortgagee may
have known that the mortgagor was insolvent and considering going
into bankruptcy and the petition was filed within four months
thereafter.
The plaintiff in error, by this writ, seeks to review a judgment
of the Supreme Court of the State of Vermont in favor of the
defendant in error. 75 Vt. 361. The facts upon
Page 196 U. S. 517
which the judgment rests are as follows: on the thirtieth day of
June, 1900, Herbert E. Moore, of St. Johnsbury, in the State of
Vermont, filed his voluntary petition in bankruptcy in the United
States District Court for the District of Vermont, and on the third
day of July, 1900, Moore was by the court duly adjudged a bankrupt,
and on the fifteenth of September, 1900, the plaintiff in error was
appointed a trustee in bankruptcy of Moore's estate, and duly
qualified. He commenced this action in the County Court of
Caledonia County, in the State of Vermont, on the first Tuesday of
June, 1901, against the defendant Fairbanks to recover from him the
value of certain personal property alleged to have belonged to the
bankrupt Moore on the sixteenth day of May, 1900, and which was, as
alleged, sold and converted by Fairbanks, on that day, to his own
use, the value of the property being $1,500, as averred in the
declaration. The defendant filed his plea and gave notice that,
upon the trial of the case he would give in evidence and rely upon,
in defense of the action, certain special matters set up in the
plea. The case was, by order of the county court, and by the
consent of the parties, referred to a referee to hear the cause and
report to the court. It was subsequently heard before the referee,
who filed his report, finding the facts upon which the decision of
the case must rest. He found that, before June, 1886, the bankrupt
Moore bought a livery stock and business in St. Johnsbury Village,
in the State of Vermont. At the time of this purchase, the
defendant was the lessor of the buildings in which the business was
conducted, and it continued to be carried on in those buildings.
Moore, in making the purchase, had assumed a mortgage then
outstanding on the property, and a short time before March 1, 1888,
the defendant assisted him to pay this mortgage by signing a note
with him for $1,425, payable to the Passumpsic Savings Bank of St.
Johnsbury. Subsequently defendant signed notes which, with accrued
interest, were merged in one, dated March 1, 1900, for $2,510.75,
due on demand to said savings bank, signed by the bankrupt
Page 196 U. S. 518
and by the defendant as his surety. This note had not been paid
when the case was referred to the referee. The defendant also
signed other notes payable to the First National Bank of St.
Johnsbury, which were merged into one, and, by various payments
made by Moore, it was reduced to $525, and on June 4, 1900, it was
paid by the defendant. All these notes had been signed by the
defendant to assist Moore in carrying on, building up, and
equipping his livery stable and livery business, and as between
them, the notes belonged to Moore to pay. On April 15, 1891, Moore
gave the defendant a chattel mortgage on the livery property to
secure him for these and other debts and liabilities. The property
was described in the mortgage as follows:
"All my livery property, consisting of horses, wagons, sleighs,
vehicles, harnesses, robes, blankets, etc., also all horses and
other livery property that I may purchase in my business or acquire
by exchange."
The condition contained in the mortgage was, that, if Moore
should
"well and truly pay, or cause to be paid, to the said Henry
Fairbanks all that I now owe him, or may owe him hereafter by note,
book account, or in any other manner, and shall well and truly save
the said Henry Fairbanks harmless, and indemnify him from paying
any commercial paper on which he has become or may hereafter become
holden in any manner for my benefit as surety, indorser, or
otherwise, then this deed shall be void; otherwise of force."
This mortgage was acknowledged, and the affidavit, as provided
by the Vermont statute, was appended, showing the justice of the
debt and the liability contemplated to be secured by the mortgage,
and the mortgage was duly recorded on the eighteenth day of April,
1891, in the St. Johnsbury clerk's office, by the town clerk
thereof. On March 5, 1900, Moore gave the defendant another chattel
mortgage on this livery stock, which, on March 23, 1900, defendant
assigned to the Passumpsic Savings Bank, and that bank has ever
since been its holder and owner. This mortgage was given to secure
defendant against all his liabilities for Moore.
Page 196 U. S. 519
On the seventh of May, one John Ryan sued out a writ in
assumpsit against Moore to recover some $500, and an attachment on
the livery stock was levied in that suit by the deputy sheriff.
This attachment remained in force until dissolved by the bankruptcy
proceedings, and the suit is still pending in the state court of
Vermont.
Under the agreement contained in the chattel mortgage of April,
1891, Moore made sales, purchases, and exchanges of livery stock to
such an extent that, on March 5, 1900, there only remained of the
livery property on hand April 15, 1891, two horses. These sales,
exchanges, and purchases were sometimes made by Moore without
communication with or advice from the defendant, and frequently
after consultation with him. The livery stock, as it existed on May
16, 1900, was all acquired by exchange of the original stock, or
with the avails of the old stock, or from the money derived from
the business. Some years after the execution of the chattel
mortgage of April 15, 1891, Moore became embarrassed, and finally,
shortly prior to March 5, 1900, he became and continued wholly
insolvent. On May 16, 1900, the defendant, acting under the advice
of counsel and with the consent of Moore, took possession, under
the mortgage of April 15, 1891, of all the livery property then on
hand, and on June 11, 1900, caused the same to be sold at public
auction by the sheriff. If is for the net avails of this sale,
amounting to $922.08, which the sheriff paid over to the defendant,
that this suit is brought. The Passumpsic Savings Bank on September
15, 1900, proved its note of $2,510.75 as an unsecured claim
against the bankrupt estate of Moore, as the mortgage held by the
bank as security had been given by Moore in March, 1900, to
defendant, and by him assigned to the bank within four months of
the filing of the petition in bankruptcy.
For the purpose of defeating the effect of the defendant's
taking possession of the livery property under his chattel mortgage
of April, 1891, the trustee in bankruptcy presented a petition to
the United States District Court of Vermont for
Page 196 U. S. 520
leave to intervene as plaintiff in the Ryan attachment suit, and
to have the lien of Ryan's attachment preserved for the benefit of
the general creditors. This petition was dismissed by that court.
The referee found that the defendant and his counsel knew, when he
took possession of the livery property under his mortgage, that
Moore was insolvent, and was considering going into bankruptcy. The
referee also found that he did not intend to perpetrate any actual
fraud on the other creditors, or any of them, but he did intend
thereby to perfect his lien on the livery property and make it
available for the payment of his debt before other complications by
way of attachment or bankruptcy arose, and he understood at that
time that it was probable that the Ryan attachment would hold good
as against his mortgage. All the property of which defendant took
possession was acquired by Moore with the full understanding and
intent that it should be covered by the defendant's mortgage of
April 15, 1891.
MR. JUSTICE PECKHAM, after making the foregoing statement of
facts, delivered the opinion of the Court.
This is a contest between a trustee in bankruptcy representing
the creditors of the bankrupt, and the defendant, the mortgagee in
a chattel mortgage dated and executed April 15, 1891, and duly
recorded April 18 of that year. The defendant has paid some $500 of
the indebtedness of the bankrupt for which defendant was liable as
indorser on a note, and he remains liable to pay the note of
$2,510.75, held by the Passumpsic Savings Bank, which was signed by
him as surety.
The property taken possession of by the defendant under the
chattel mortgage was sold by a deputy sheriff on the
Page 196 U. S. 521
eleventh of June, 1900, and the net avails of the sale,
amounting to $922.08, have been paid over by the officer who made
the sale, to the defendant.
This suit is brought by the trustee to recover from the
defendant those net avails on the theory that the action of the
defendant in taking possession and making the sale of the property
was unlawful under the provisions of the Bankrupt Act.
The defendant had assisted the bankrupt in the purchase of the
property and had indorsed notes for him in order to enable him to
carry on the business of conducting a livery stable. This mortgage,
to secure him for these payments and liabilities, was given some
seven years before the passage of the Bankrupt Act, and at the time
it was given it was agreed by the parties to it that the bankrupt
might sell or exchange any of the livery stock covered by it as he
might desire, and should, by purchase or exchange, keep the stock
good, so that the defendant's security should not be impaired, and
it was also agreed that all after-acquired livery property should
be covered by the mortgage as security for the debts specified
therein.
Under this agreement, the bankrupt made sales, purchases, and
exchanges of livery stock to such an extent that, on May 16, 1900,
there remained but two horses of the property originally on hand.
The stock as it existed on the above date was all acquired by
exchange of the original stock, or with the avails of the old stock
sold, or the money derived from the business.
There is no pretense of any actual fraud's being committed or
contemplated by either party to the mortgage. Instead of taking
possession at the time of the execution of the mortgage, the
defendant had it recorded in the proper clerk's office, and the
record stood as notice to all the world of the existence of the
lien as it stood when the mortgage was executed, and that the
defendant would have the right to take possession of property
subsequently acquired, as provided for in the mortgage. The
bankrupt was therefore not holding himself out
Page 196 U. S. 522
as unconditional owner of the property, and there was no
securing of credit by reason of his apparent unconditional
ownership. The record gave notice that he was not such
unconditional owner. There was no secret lien, and if defendant
cannot secure the benefit of this mortgage, which he obtained in
1891, as a lien upon the after-acquired property, yet prior to the
title of the trustee for the benefit to creditors, it must be
because of some provision of the bankruptcy law, which we think the
court ought not to construe or endeavor to enforce beyond its fair
meaning.
In Vermont it is held that a mortgage such as the one in
question is good. The supreme court of that state has so held in
this case, and the authorities to that effect are also cited in the
opinion of that court. And it is also there held that, when the
mortgagee takes possession of after-acquired property, as provided
for in this mortgage, the lien is good and valid as against
everyone but attaching or judgment creditors prior to the taking of
such possession.
At the time when the defendant took possession of this
after-acquired property covered by the mortgage, there had been a
breach of the condition specified therein, and the title to the
property was thereby vested in the mortgagee, subject to the
mortgagor's right in equity to redeem. This has been held to be the
law in Vermont (aside from any question as to the effect of the
bankrupt law) both in this case and in the cases also cited in the
opinion of the Supreme Court of Vermont. The taking of possession
of the after-acquired property under a mortgage such as this is
held good, and to relate back to the date of the mortgage, even as
against an assignee in insolvency.
Peabody v. Landon, 61
Vt. 318, and other cases cited in the opinion of the supreme
court.
Whether and to what extent a mortgage of this kind is valid is a
local question, and the decisions of the state court will be
followed by this Court in such case.
Dooley v. Pease,
180 U. S. 126.
The question that remains is whether the taking of
possession,
Page 196 U. S. 523
after condition broken, of these mortgaged chattels before
although within four months of filing the petition in bankruptcy,
was a violation of any of the provisions of the Bankrupt Act.
The trustee insists that such taking possession of the
after-acquired property under the mortgage of 1891 constituted a
preference under that act. He contends that the defendant did not
have a valid lien against creditors under that act; that his lien
might, under other circumstances, have been consummated by the
taking of possession, but, as that was done within four months of
the filing of the petition in bankruptcy, the lien was not
valid.
Did this taking of possession constitute a preference within the
meaning of the act?
It was found by the referee that, when the defendant took
possession of the property, he knew that the mortgagor was
insolvent and was considering going into bankruptcy, but that he
did not intend to perpetrate any actual fraud on the other
creditors, or any of them, but did intend thereby to perfect his
lien on the property, and make it available for the payment of his
debts before other complications, by way of attachment or
bankruptcy, arose. He then understood that Ryan's attachment would
probably hold good against his mortgage. The question whether any
conveyance, etc., was in fact made with intent to defraud
creditors, when passed upon in the state court, is not one of a
federal nature.
McKenna v. Simpson, 129 U.
S. 506;
Cramer v. Wilson, 195 U.
S. 408. It can scarcely be said that the enforcement of
a lien by the taking possession, with the consent of the mortgagor,
of after-acquired property covered by a valid mortgage, is a
conveyance or transfer within the Bankrupt Act. There is no finding
that, in parting with the possession of the property, the mortgagor
had any purpose of hindering, delaying, or defrauding his
creditors, or any of them. Without a finding to the effect that
there was an intent to defraud, there was no invalid transfer of
the property within the provisions of section
Page 196 U. S. 524
67
e of the Bankruptcy Law.
Sabin v. Camp, 98
F. 974.
In the case last cited the court, upon the subject of a
preference, held that, though the transaction was consummated
within the four months, yet it originated in October, 1897, and
there was no preference under the facts of that case.
"What was done was in pursuance of the preexisting contract, to
which no objection is made. Camp furnished the money out of which
the property, which is the subject of the sale to him, was created.
He had good right, in equity and in law, to make provisions for the
security of the money so advanced, and the property purchased by
his money is a legitimate security, and one frequently employed.
There is always a strong equity in favor of a lien by one who
advances money upon the property which is the product of the money
so advanced. This was what the parties intended at the time, and to
this, as already stated, there is, and can be, no objection in law
or in morals. And so when, at a later date, but still prior to the
filing of the petition in bankruptcy, Camp exercised his rights
under this valid and equitable arrangement to possess himself of
the property and make sale of it in pursuance of his contract, he
was not guilty of securing a preference under the bankruptcy
law."
The principle that the taking possession may sometimes be held
to relate back to the time when the right so to do was created is
recognized in the above case. So in this case, although there was
no actual existing lien upon this after-acquired property until the
taking of possession, yet there was a positive agreement, as
contained in the mortgage and existing of record, under which the
inchoate lien might be asserted and enforced, and when enforced by
the taking of possession, that possession under the facts of this
case, related back to the time of the execution of the mortgage of
April, 1891, as it was only by virtue of that mortgage that
possession could be taken. The Supreme Court of Vermont has held
that such a mortgage gives an existing lien by contract, which
may
Page 196 U. S. 525
be enforced by the actual taking of possession, and such lien
can only be avoided by an execution or attachment creditor whose
lien actually attaches before the taking of possession by the
mortgagee. Although this after-acquired property was subject to the
lien of an attaching or an execution creditor, if perfected before
the mortgagee took possession under his mortgage, yet, if there
were no such creditor, the enforcement of the lien by taking
possession would be legal even if within the four months provided
in the act. There is a distinction between the bald creation of a
lien within the four months and the enforcement of one provided for
in a mortgage executed years before the passage of the act by
virtue of which mortgage, and because of the condition broken, the
title to the property becomes vested in the mortgagee, and the
subsequent taking possession becomes valid, except as above stated.
A trustee in bankruptcy does not in such circumstances occupy the
same position as a creditor levying under an execution, or by
attachment, and his rights, in this exceptional case, and for the
reasons just indicated, are somewhat different from what they are
generally stated.
Mueller v. Nugent, 184 U. S.
1.
It is admitted on the part of the counsel for the plaintiff in
error that the rule in Vermont, in cases of chattel mortgages of
after-acquired property (where possession by the mortgagee is
necessary to perfect his title as against attaching or execution
creditors) is that, although such possession be not taken until
long after the execution of the mortgage, yet the possession, when
taken (if it be before the lien of the attaching or execution
creditor), brings the property under the cover and operation of the
mortgage as of its date -- the time when the right of possession
was first acquired. It was also admitted that the Supreme Court of
Vermont has held that, when a chattel mortgage requiring possession
of the mortgaged property to perfect it as to third persons was
executed more than four months before the commencement of
insolvency proceedings, the taking of actual possession of the
mortgaged property within the four months' period brought that
property
Page 196 U. S. 526
under the mortgage as of its date, and so did not constitute a
preference voidable by the trustee, although the other elements
constituting a preference were present. Many decisions of the
Supreme Court of Vermont are cited to this effect. It will be
observed also that the provisions of the state insolvency law in
regard to void and voidable preferences and transfers were
identical with similar provisions of the Bankruptcy Act of 1867.
Gilbert v. Vail, 60 Vt. 261.
Under that law, it was held that the assignee in bankruptcy
stood in the shoes of the bankrupt, and that,
"except where, within a prescribed period before the
commencement of proceedings in bankruptcy, an attachment has been
sued out against the property of the bankrupt, or where his
disposition of his property was, under the statute, fraudulent and
void, his assignees take his real and personal estate, subject to
all equities, liens, and encumbrances thereon, whether created by
act or by operation of law."
Yeatman v. Savings Institution, 95 U. S.
764.
See also Stewart v. Platt, 101 U.
S. 731;
Hauselt v. Harrison, 105 U.
S. 401. Under the present Bankrupt Act, the trustee
takes the property of the bankrupt, in cases unaffected by fraud,
in the same plight and condition that the bankrupt himself held it,
and subject to all the equities impressed upon it in the hands of
the bankrupt, except in cases where there has been a conveyance or
encumbrance of the property which is void as against the trustee by
some positive provision of the act.
In re Garcewich, 115
F. 87, 89, and cases cited.
It is true that, in the case in
95 U. S. 95 U.S.
764, the savings institution had a special property in the
certificates which were the subject of dispute, and had possession
of them at the time of the bankruptcy proceedings, and it was held
that the institution was not bound to return them, either to the
bankrupt, the receiver, or the assignee in bankruptcy, prior to the
time of the payment of the debt for which the certificate was held.
So the state court held in this case, where the defendant took
possession under the circumstances detailed, by virtue of his
mortgage,
Page 196 U. S. 527
and where he had the legal title to the property mortgaged,
after condition broken, that the possession thus taken related back
to the date of the giving of the mortgage, and in thus enforcing
his lien there was not a violation of any of the provisions of the
Bankruptcy Act.
In
Wilson v. Nelson, 183 U. S. 191, it
was held that the bankrupt had committed an act of bankruptcy
within the meaning of the Bankrupt Law by failing, for at least
five days before a sale on the execution issued upon the judgment
recovered, to vacate or discharge the judgment, or to file a
voluntary petition in bankruptcy. The judgment and execution were
held to have been such a preference, "suffered or permitted" by the
bankrupt, as to amount to a violation of the Bankrupt Act. Although
the judgment was entered upon the power of attorney given years
before the passage of the Bankrupt Act, it was nevertheless
regarded as "suffering or permitting" a preference, within that
act. This is not such a case. As we have said, there is no finding
that the defendant had reasonable cause to believe that, by the
change of possession, it was intended to give a preference. As the
state court has said, it was rather a recognition of what was
regarded as a right under the previous agreement contained in the
mortgage.
Nor does the existence of the Ryan attachment, or the chattel
mortgage of March 5, 1900, executed by the bankrupt, and delivered
to the defendant, and by him assigned, on the twenty-third of
March, 1900, to the bank, create any greater right or title in the
trustee than he otherwise would have. The trustee moved under
§ 67
f, on notice to the defendant, for an order that
the right or lien under the Ryan attachment should be preserved, so
that the same might pass to the trustee for the benefit of the
estate, as provided for in that section. This was denied. And
unless such permission had been granted, the lien of the attachment
was not preserved by the act, but, on the contrary, it was
dissolved under § 67
c.
The mortgage assigned to the bank, and the attachment
Page 196 U. S. 528
obtained by Ryan, having been dissolved by the bankrupt
proceedings, the defendant's rights under his mortgage of April 15,
1891, stood the same as though there had been no subsequent
mortgage given, or attachment levied. This is the view taken by the
state court of the effect of the dissolution of the mortgage and
attachment liens under the Bankrupt Act, and we think it is the
correct one. It is stated in the opinion of the state court as
follows:
"It is urged that, with the annulment of the attachment, the
property affected by it passed to the trustee as a part of the
estate of the bankrupt under the express provisions of §
67
f. There would be more force in this contention were it
not for the provision that, by order of the court, an attachment
lien may be preserved for the benefit of the estate. If there is no
other lien on the property, there can be no occasion for such
order, for, on the dissolution of the attachment, the property,
unless exempt, would pass to the trustee anyway. It is only when
the property for some reason may not otherwise pass to the trustee
as a part of the estate that such order is necessary. We think such
is the purpose of that provision, and that, unless the lien is
preserved, the property, as in the case at bar, may be held upon
some other lien, and not pass to the trustee.
In re Sentenne
& Green Co., 120 F. 436."
We think the judgment of the Supreme Court of Vermont was right,
and it is
Affirmed.
