After reviewing cases on conditional sale of personal property,
and sale absolute with chattel mortgage back,
held that
the transaction involved in this case was one of conditional
sale.
Requiring a vendee to give notes for deferred installments of
purchase price is not inconsistent with retention of title in the
vendor pending payment of the notes.
Wm. W. Bierce, Ltd. v.
Hutchins, 205 U. S. 340.
While the exercise of a privilege to the vendor to file a
mechanic's lien for property delivered on conditional sale might be
inconsistent with retention of title in the vendor, the mere
reservation of such a privilege will not nullify express words to
the effect that title remains in the vendor until full payment be
made.
Under the recording law of Kansas, a contract of conditional
sale is valid between the parties, whether filed for record or not,
but is void as against a creditor of the vendee who fastens any
valid lien upon the property before the contract is filed for
record.
To be within the terms of the provisions of § 60 of the
Bankruptcy Act making preferential transfers voidable, the transfer
must be one made by the bankrupt of his own property and which
operates to prefer one creditor over another.
A contract of conditional sale, to the vendor on failure to pay
the stipulated price,
held, in this case, not be to a
preferential transfer by the conditional vendee under § 60 of the
Bankruptcy Act.
When not otherwise provided, the rights, remedies, and powers of
the trustee in bankruptcy are determined with reference to the
conditions existing when the petition is filed.
A trustee in bankruptcy cannot, under § 47a, cl. 2, of the
Bankruptcy Act, assail a contract of conditional sale filed prior
to, but within four months, of the petition on the ground that he
has the status of a creditor fastening a lien under the provisions
of state law on the property prior to the recording of the
contract, and this because the trustee acquires that status only
from the filing of the petition.
The determination of a proceeding in bankruptcy between the
trustee and the vendor of property sold under conditional sale
held to be without prejudice to the rights of a third
party to whom the vendee had mortgaged the property and who had not
been joined in the proceeding.
209 F. 603 affirmed.
Page 239 U. S. 269
By a contract in writing, made at Omaha, Nebraska, October 14,
1911, between the Baker Ice Machine Company and Grant Brothers, the
former agreed to deliver and install upon the premises of the
latter at Horton, Kansas, an ice-making and refrigerating machine
for the sum of $5,940, to be paid partly in cash and partly in
deferred installments evidenced by interest-bearing notes. It was
specially stipulated that the title to the machine should be and
remain in the Baker Company until full payment of the purchase
price; that the machine should not be deemed a fixture to the
realty prior to full payment; that, in the meantime, Grant Brothers
should keep the machine in good order and keep it insured for the
benefit of the Baker Company; that, if default was made in the
payment of the purchase price, the Baker Company should have the
right to resume possession and take the machine away, and that, in
the event this right was exercised, the company should be
reimbursed for all expenses incurred under the contract, should be
compensated for any damage done to the machine in the meantime, and
should be allowed a rental for its use equal to six percent per
annum upon the purchase price from the date of the installation to
that of the resumption of possession. And it was further stipulated
that the Baker Company should have the right to file a mechanics'
lien for the materials and labor furnished under the contract, and
that no notice of a purpose to file such a lien, other than that
afforded by this stipulation, would be required.
The machine was installed in February, 1912, the cash payment
was made, and notes were given for the balance of the purchase
price, all as contemplated by the contract. A partial payment upon
two of the notes brought the total payments up to $3,200.14, and
nothing more was paid. May 15, 1912, but not before, the contract
was filed for record in the county register's office. At that time,
Grant Brothers were insolvent, and if the contract
Page 239 U. S. 270
operated as a transfer of the machine from them to the Baker
Company, all the elements of a preferential transfer, in the sense
of the Bankruptcy Act, were present.
July 11, 1912, within four months after such filing, Grant
Brothers presented to the District Court for the District of Kansas
their voluntary petition in bankruptcy, and on the next day were
adjudged bankrupts. Possession of the machine, which had remained
with them up to that time, was then passed to the trustee in
bankruptcy. Shortly thereafter, the balance of the purchase price
being due and unpaid, the Baker Company intervened in the
bankruptcy proceeding, asserted that it owned the machine and was
entitled to the possession in virtue of the contract, and applied
for an order directing that the possession be surrendered to it.
Upon a hearing before the referee, the application was denied, and
upon a petition for review, his action was sustained by the
district court. An appeal to the circuit court of appeals resulted
in a reversal of the decree, with a direction that the machine be
delivered to the Baker Company unless, within a time to be named,
the trustee pay the balance of the purchase price. 209 F. 603,
844.
During the pendency of the controversy, as now appears, the
machine was sold for $2,800, pursuant to an order of the referee,
requested by the parties, whereby the proceeds were to take the
place of the machine and be disposed of according to the final
decision.
Page 239 U. S. 271
MR. JUSTICE VAN DEVANTER, after making the foregoing statement,
delivered the opinion of the Court.
The referee and the courts below held the contract to be one of
conditional sale -- that is, one making full payment of the
purchase price a condition precedent to the passing of title, and
this is criticized by the trustee, who insists that the contract
was one of absolute sale with a chattel mortgage back, securing the
deferred installments.
In harmony with the prevailing view, the statutes of Kansas and
the decisions of the supreme court of the state recognize that
there is a real distinction between a conditional sale and an
absolute sale with a mortgage back, in that, under the former, the
vendor remains the owner, subject to the vendee's right to acquire
the title by complying with the stipulated condition, while under
the latter, the vendee immediately becomes the owner, subject to
the lien created by the mortgage. Gen.Stat. 1909, §§ 5224-5226,
5232-5234, 5237;
Sumner v. McFarlan, 15 Kan. 600;
Hallowell v. Milne, 16 Kan. 65;
Hall v. Draper,
20 Kan. 137;
Standard Implement Co. v. Parlin & Orendorff
Co., 51 Kan. 544;
Moline Plow Co. v. Witham, 52 Kan.
185;
Big Four Implement Co. v. Wright, 207 F. 535. In
Hall v. Draper, the true effect of a contract of
conditional sale was drawn in question, and the court said,
speaking through Justice Brewer, afterwards a member of this
Court:
"The title, and all the rights of control and possession flowing
from title, were theirs [the vendors'], except as in terms
restricted by the contract. The only limitations upon their full
control of the organ were those created by this instrument, and the
only rights Leveridge [the vendee] had were those obtained by it.
In this respect, such a conditional sale differs from an absolute
sale with a mortgage back. In such case, the vendee has everything
except as limited by the terms of the mortgage. Here. he has
nothing except as expressed
Page 239 U. S. 272
in his contract."
True, in
Christie v. Scott, 77 Kan. 257, there is
general language which, if taken broadly, makes against this
distinction. But, according to a familiar rule (
Cohens v.
Virginia, 6 Wheat. 264,
19 U. S. 399;
Pacific Express Co. v. Foley, 46 Kan. 457, 464), this
language should be regarded as restrained by the circumstances in
which it was used. The case did not present a controversy over
property conditionally sold, but only the question whether the
contract there shown entitled the vendor, after reclaiming the
property and crediting the proceeds upon the purchase price, to
enforce payment of the balance by the vendee. Without criticizing
or referring to cases like
Hall v. Draper, the court
concluded its discussion of the question by saying:
"Under the contract attached to these notes, we hold that the
plaintiff was authorized to take the property and sell it and apply
the proceeds toward the payment of the notes, and that, by so
doing, the law does not imply a revocation of the contract of sale,
nor does the law imply that there remains no consideration for the
payment of the balance due on the notes."
It therefore is plain that we ought not to treat the decision as
overruling or qualifying those before mentioned.
In jurisdictions where regard is had for the distinction here
indicated between a conditional sale and an absolute sale with a
mortgage back, the question whether a particular contract shows one
or the other turns upon the ruling intention of the parties as
disclosed by the entire contract, and not upon any single provision
separately considered. Invoking this test, the trustee contends
that this contract was one of absolute sale with a mortgage back,
notwithstanding the stipulation that the title should be and remain
in the vendor until full payment. The contention does not appear to
have support in any decision of the Supreme Court of Kansas, and,
in our opinion, is not tenable. Requiring the vendee to give notes
for the deferred installments of the purchase price was not
inconsistent
Page 239 U. S. 273
with the retention of title in the vendor pending payment of the
notes.
Bierce v. Hutchins, 205 U.
S. 340,
205 U. S. 348.
Nor did any inconsistency result from the provisions relating to
rent, damage, and insurance. Instead of making against the
retention of ownership by the vendor, they were in harmony with it,
and doubtless were adopted upon the theory that the vendee, who was
to have the possession and use of the property, should bear the
burden of preserving and insuring it, and, if the purchase price
was not paid, should not only return the property, but compensate
the vendor for its use and any damage to it. In
Harkness v.
Russell, 118 U. S. 663, a
contract was held to be one of conditional sale, although entitling
the vendor to rental and damages if the price was not paid, and in
Bryant v. Swofford Bros. Dry Goods Co. 214 U.
S. 279, there was a like holding, notwithstanding the
vendee was required to keep the property insured for the benefit of
the vendor, and, if it was destroyed by fire, was to remain liable
for the purchase price. In neither case was the retention of
ownership by the vendor deemed inconsistent with the other features
of the contract. Coming to the provision relating to a mechanics'
lien, we think it did no more than reserve to the vendor a
privilege or option to file and enforce such a lien. It well may be
that the exercise of this privilege would have been inconsistent
with a continued assertion of title by the vendor.
Bierce v.
Hutchins, supra. But the privilege was not exercised, and it
hardly can be said that its mere reservation nullified the express
words of the stipulation concerning the title. That it was not
intended to do so seems manifest when the entire contract is
considered.
We therefore are of opinion that the contract was rightly held
to be one of conditional sale.
The question next to be considered is whether the contract
operated as a preferential transfer by Grant Brothers within the
meaning of § 60b of the Bankruptcy Act, as
Page 239 U. S. 274
amended in 1910, c. 412, 36 Stat. 838, 842, which declares that
"a transfer" by a bankrupt "of any of his property" shall be
voidable by the trustee, if it be made or recorded (when recording
is required) within four months before the petition in bankruptcy
is filed, and "the bankrupt be insolvent and the . . . transfer
then operate as a preference," etc. The section leaves no doubt
that, to be within its terms, the transfer must be one which a
bankrupt makes of his own property and which operates to prefer one
creditor over others, and if further light be needed, there is a
declaration in the Bankruptcy Act, § 1, clause 25, that the word
"transfer" shall be taken to include every mode
"of disposing of or parting with property, or the possession of
property, absolutely or conditionally, as a payment, pledge,
mortgage, gift, or security."
It therefore is plain that § 60b refers to an act on the part of
a bankrupt whereby he surrenders or encumbers his property or some
part of it for the benefit of a particular creditor, and thereby
diminishes the estate which the Bankruptcy Act seeks to apply for
the benefit of all the creditors.
New York County National Bank
v. Massey, 192 U. S. 138,
192 U. S. 147.
Applying this test to the contract in question, we think it did not
operate as a preferential transfer by Grant Brothers, the
bankrupts. The property to which it related was not theirs, but the
Baker Company's. The ownership was not transferred, but only the
possession, and it was transferred to the bankrupts, not from them.
Being only conditional purchasers, they were not to become the
owners until the condition was performed. No doubt the right to
perform it and thereby to acquire the ownership was a property
right. But this right was not surrendered or encumbered. On the
contrary, it remained with the bankrupts and ultimately passed to
the trustee, who was free to exercise it for the benefit of the
creditors. So there was no diminution of the bankrupts' estate.
Page 239 U. S. 275
Under the recording law of Kansas, a contract of conditional
sale is valid between the parties whether filed for record or not,
but is void as against a creditor of the vendee who fastens a lien
upon the property by execution, attachment, or like legal process
before the contract is filed for record. Gen.Stat. 1909, § 5237;
McVay v. English, 30 Kan. 368, 371;
American Lead
Pencil Co. v. Champion, 57 Kan. 352, 357;
Youngberg v.
Walsh, 72 Kan. 220, 227;
Geiser Mfg. Co. v. Murray,
84 Kan. 450;
Paul v. Lingenfelter, 89 Kan. 871;
Geppelt v. Middle West Stone Co., 90 Kan. 539, 544;
Dixon v. Tyree, 92 Kan. 137, 139;
Big Four Implement
Co. v. Wright, 207 F. 535. Here, the contract was made October
14, 1911, and filed for record May 15, 1912. In the meantime, no
creditor fastened a lien upon the property by execution,
attachment, or other legal process. But it is contended that § 47a,
clause 2, of the Bankruptcy Act, as amended in 1910, c. 412, 36
Stat. 838, 840, gave the trustee the status of a creditor having
such a lien. That section provides that a trustee in
bankruptcy,
"as to all property in the custody or coming into the custody of
the bankruptcy court, shall be deemed vested with all the rights,
remedies, and powers of a creditor holding a lien by legal or
equitable proceedings."
Although otherwise explicit, this provision does not designate
the time as of which the trustee is to be regarded as having
acquired the status indicated, and yet some point of time must be
intended. Is it the date of the trustee's appointment, the filing
of the petition in bankruptcy, or some time anterior to both? When
not otherwise specially provided, the rights, remedies, and powers
of the trustee are determined with reference to the conditions
existing when the petition is filed. It is then that the bankruptcy
proceeding is initiated, that the hands of the bankrupt and of his
creditors are stayed, and that his estate passes actually or
potentially into the control of the bankruptcy court. We have
said:
"The filing of the petition is an
Page 239 U. S. 276
assertion of jurisdiction with a view to the determination of
the status of the bankrupt and a settlement and distribution of his
estate. The exclusive jurisdiction of the bankruptcy court is so
far
in rem that the estate is regarded as
in custodia
legis from the filing of the petition."
Acme Harvester Co. v. Beekman Lumber Co., 222 U.
S. 300,
222 U. S. 307.
And again:
"We think that the purpose of the law was to fix the line of
cleavage with reference to the condition of the bankrupt estate as
of the time at which the petition was filed, and that the property
which vests in the trustee at the time of adjudication is that
which the bankrupt owned at the time of the filing of the
petition."
Everett v. Judson, 228 U. S. 474,
228 U. S. 479.
And see Zavelo v. Reeves, 227 U.
S. 625,
227 U. S. 631.
Had it been intended that the trustee should take the status of a
creditor holding a lien by legal or equitable process as of a time
anterior to the initiation of the bankruptcy proceeding, it seems
reasonable to believe that some expression of that intention would
have been embodied in § 47a as amended. As this was not done, we
think the better view, and one which accords with other provisions
of the act, is that the trustee takes the status of such a creditor
as of the time when the petition in bankruptcy is filed. Here, the
petition was filed almost two months after the contract was filed
for record, and therefore the trustee was not entitled to assail it
under the recording law of the state.
The record shows that, between the date of the contract and the
time it was filed for record, the bankrupts mortgaged the machine
to the First National Bank of Horton, and that the bank, although
apparently asserting some right under the mortgage, was not brought
into the present proceeding. In this situation, our decision and
that of the circuit court of appeals must be understood to be
without prejudice to further proceedings respecting the rights, if
any, existing under that mortgage.
Decree affirmed.
