As the exchange of a valid security for one of equal value
within four months prior to the filing of a petition in bankruptcy,
even when the creditor and debtor know of the insolvency of the
latter, takes nothing away from the other creditors, and is
therefore not in conflict with the thirty-fifth section of the
Bankrupt Act,
held that a chattel mortgage, taken within
that period of time by a creditor in exchange for a prior valid
bill of sale of the same property and recorded pursuant to the laws
of the state where the transaction took place before any rights of
the assignees in bankruptcy accrued, cannot be impeached by them as
a fraudulent preference within the meaning of that act.
Page 91 U. S. 115
On the fifteenth day of May, 1869, J. C. Bacheller, in order to
secure a debt due by him to Novelli & Co., executed a bill of
sale conveying his chattel interest in certain property to Turpin,
one of the defendants below.
This conveyance was not recorded, nor was possession had
thereunder.
On the 31st of July, 1869, Turpin having surrendered the bill of
sale, Bacheller, in exchange therefor, executed to him a mortgage
upon the same property. This mortgage was recorded on the 17th of
the following September.
Bacheller filed his petition in bankruptcy the twenty-second day
of October then next ensuing, and the appellants, his assignees,
filed their bill in the district court to set aside the mortgage as
a fraudulent preference of a creditor, alleging that Bacheller was
insolvent when the mortgage was given, and that Turpin, and Novelli
& Co., the other defendants, knew of the fact.
The district court passed a decree dismissing the bill, which
was affirmed by the circuit court. The assignees appealed to this
Court.
The recording statutes of Massachusetts which apply to the case
are set forth in the opinion of the Court.
Page 91 U. S. 118
MR. JUSTICE STRONG delivered the opinion of the Court.
The only question presented by this appeal is whether the
mortgage given by the bankrupt on the thirty-first day of July,
1869, to Edward Turpin, the agent of Novelli & Co., was a
fraudulent preference of creditors within the prohibition of the
Bankrupt Act and therefore void as against the assignees in
bankruptcy. That it was a security given for the protection of a
preexisting debt and that it was given within four months
immediately preceding the filing of the petition in bankruptcy are
conceded facts. It may also be admitted that the bankrupt was
insolvent when the mortgage was made, and that the creditors had
then reason to believe he was insolvent.
The petition in bankruptcy was filed on the 22d of October,
1869. On the 15th of May next preceding that date, Bacheller, the
bankrupt, who was indebted to Novelli & Co. in the large sum of
$27,839 in gold, conveyed to Turpin, who was their agent, as a
security for the debt, the building described in the subsequent
mortgage of July 31. It was a frame building, erected upon leased
ground, and Bacheller had, therefore, only a chattel interest in
it. The conveyance was by a bill of sale absolute in its terms,
having no condition or defeasance expressed; but it was understood
by the parties to be a security for the debt due. It was in
substantial legal effect, though not in form, a mortgage. Having
been executed more than four months before the petition in
bankruptcy was filed, there is nothing in the case to show that it
was invalid. True, it was not recorded, and it may be doubted
whether it was admissible to record. True, no possession was taken
under it by the vendee, but for neither of these reasons was it the
less operative between the parties. It might not have been a
protection against attaching creditors, if there had been any, but
there were none. It was in the power of Turpin to put it on record
any day if the recording acts apply to such an instrument, and
equally within his power to take possession of the property at any
time before other rights against it had accrued. These powers were
conferred by the instrument itself immediately on
Page 91 U. S. 119
its execution. In regard to chattel mortgages, the recording
statutes of Massachusetts, enacted in 1836, provide as follows:
"No mortgage of personal property hereafter made shall be valid
against any other person than the parties thereto unless possession
of the mortgaged property be delivered to and retained by the
mortgagee or unless the mortgage be recorded by the clerk of the
town where the mortgagor resides."
Rev.Stat. 473, ch. 74. The statute contains a clear recognition
of the validity of an unrecorded chattel mortgage as between the
parties to it, though no possession be taken under it. And the
general statutes of the state, enacted in 1860, Gen.Stat. 769, ch.
151, contain the same recognition. Their language is the
following:
"Mortgages of personal property shall be recorded on the records
of the town where the mortgagor resides when the mortgage is made,
and on the records of the city or town in which he then principally
transacts his business, or follows his trade or calling. If the
mortgagor resides without the state, his mortgage of personal
property within the state, when the mortgage is made, shall be
recorded on the records of the city or town where the property then
is. Unless a mortgage is so recorded or the property mortgaged is
delivered to and retained by the mortgagee, it shall not be valid
against any person
other than the parties thereto except
as provided in the following section."
The exception extends only to mortgage contracts of bottomry, or
respondentia, to transfers, assignments, or hypothecations
of ships or vessels, and to transfers in mortgage of goods at sea
or abroad. Neither of these acts prescribes when the record must be
made or the possession be taken, but, when made, the instrument
takes effect, as against third persons as well as between the
parties, from the time of its execution, unless intervening rights
have been obtained. In
Mitchell v. Black, 6 Gray 100, it
was ruled by the Supreme Court of Massachusetts that one who had
taken bills of sale of merchandise from his debtor as a security
for money advanced, and who had allowed the debtor to sell portions
of the merchandise in the usual course of his business as if he
were the owner thereof, might take possession of it at any time in
order to secure his debt, and that such taking of possession,
though at a time when the
Page 91 U. S. 120
debtor was known by himself and the creditor to be insolvent,
was effectual notwithstanding the state insolvent law, which
contained provisions very like those of the Bankrupt Act. The court
held unqualifiedly that the bills of sale, absolute as they were in
terms, though in fact intended only as a security, and though
unattended by possession of the property, and though not placed
upon record, vested a complete title in the creditor, subject only
to be defeated by the discharge of the debt, or by some intervening
right acquired before the possession was taken. This was a case of
bills of sale, like the present, not a case of a technical
mortgage. In speaking of the registration of mortgages, the court
said,
"The time when the record shall be made is not specifically
prescribed by the statute, though it must undoubtedly precede the
possession by others subsequently acquiring an interest in the
mortgaged property. To prevent it from passing to them, it will be
sufficient that the record is made at any time before such
possession is taken, though it be long after the execution of the
mortgage."
It should not be doubted, then, that the bill of sale of May 15,
1869, conveyed to Turpin all Bacheller's interest in the frame
building; that it was effective for the purposes for which it was
made; and, no other rights having intervened, that it was a valid
security, to the extent of the value of the property, for the debt
due Novelli & Co. on the 31st of July, 1869, when the mortgage
impeached by the bill was made. The mortgage covered the same
property. It embraced nothing more. It withdrew nothing from the
control of the bankrupt or from the reach of the bankrupt's
creditors that had not been withdrawn by the bill of sale. Giving
the mortgage in lieu of the bill of sale, as was done, was
therefore a mere exchange in the form of the security. In no sense
can it be regarded as a new preference. The preference, if any, was
obtained on the 15th of May, when the bill of sale was given, more
than four months before the petition in bankruptcy was filed. It is
too well settled to require discussion that an exchange of
securities within the four months is not a fraudulent preference
within the meaning of the Bankrupt Law, even when the creditor and
the debtor know that the latter is insolvent, if the security given
up is a valid one when the exchange is made and
Page 91 U. S. 121
if it be undoubtedly of equal value with the security
substituted for it. This was early decided with reference to the
Massachusetts insolvent laws,
Stevens v. Blanchard, 3
Cush. 169, and the same thing has been determined with reference to
the Bankrupt Act.
Cook v.
Tullis, 18 Wall. 340;
Clark v.
Iselin, 21 Wall. 360;
Watson v.
Taylor 21 Wall. 378; and
Burnhisel
v. Firman, 22 Wall. 170. The reason is that the
exchange takes nothing away from the other creditors. It is
therefore not in conflict with the thirty-fifth section of the act,
the purpose of which is to secure a ratable distribution of the
property of a bankrupt owned by him at the time of his becoming
bankrupt, and undiminished by any fraudulent preferences given
within four months prior thereto.
It follows that the mortgage of July 31 was not prohibited by
the Bankrupt Act when it was given, and that it was valid. Hence,
as it was recorded on the seventeenth day of September, 1869,
pursuant to the requisitions of the state law, before any rights of
the assignees in bankruptcy accrued, it cannot be impeached by
them.
It has been argued, however, on behalf of the assignees that the
bill of sale of May 15 was an insufficient consideration for the
mortgage because, as alleged, there was an agreement between
Bacheller and Turpin that it should not be recorded, and should be
kept secret. If the fact were as alleged, it is not perceived that
it would be of any importance, for it is undeniable that the bill
of sale rested on a valuable consideration -- to-wit, the debt of
$27,839 in gold, due to Novelli & Co., and it is not denied
that it gave to Turpin the right to take possession of the property
described in it. It was therefore a valuable security even if there
was an agreement not to record it. If it be said failure to put it
on record enabled the debtor to maintain a credit which he ought
not to have enjoyed, the answer is that the Bankrupt Act was not
intended to prevent false credits. Its purpose is ratable
distribution. But the evidence does not justify the assertion that
there was in fact any agreement that the bill of sale should not be
recorded or that possession should not be taken under it.
Upon all points, therefore, the case is with the appellees
and the decree of the circuit court must be affirmed.