Holt v. Crucible Steel Company of America/Opinion of the Court

This appeal brings up for review a decree reversing an order of the district court for the western district of Kentucky in a proceeding in bankruptcy. The matter in dispute is the validity, under the recording law of that state, of an unrecorded chattel mortgage as against creditors who became such after the mortgage was given, and without knowledge of it, where none of them had secured a lien upon the mortgaged property by execution, attachment, or otherwise. The mortgagee, in making proof of its claim, asserted a lien under the mortgage, and sought priority of payment out of the proceeds of the property covered by it. The claim was allowed, but the district court, being of opinion that the mortgage was invalid as against the subsequent creditors without notice, held that it gave no right to priority of payment as against them. The mortgagee appealed to the circuit court of appeals, and that court, taking the view that the mortgage was valid as against those creditors, since none had secured any specific lien upon the mortgaged property, sustained the right to priority asserted by the mortgagee. 98 C. C. A. 101, 174 Fed. 127. The trustee prosecutes the present appeal.

Section 67a of the bankruptcy act declares:

'Claims which, for want of record, or for other reasons, would not have been valid liens as against the claims of the creditors of the bankrupt, shall not, be liens against his estate.' [30 Stat. at. L. 564, chap. 541, U.S.C.omp. Stat. 1901, p. 3449.]

And the applicable provision of the recording law of Kentucky (Stat. 1903, § 496) is as follows:

'No deed or deed of trust or mortgage conveying a legal or equitable title to real or personal estate shall be valid against a purchaser for a valuable consideration, without notice thereof, or against creditors, until such deeds shall be acknowledged or proved according to law, and lodged for record.'

It is apparent from the language of § 67a and from the decisions of this court in York Mfg. Co. v. Cassell, 201 U.S. 344, 50 L. ed. 782, 26 Sup. Ct. Rep. 481; Thomas v. Taggart, 209 U.S. 385, 52 L. ed. 845, 28 Sup. Ct. Rep. 519, and other like cases, that the effect to be given to the unrecorded chattel mortgage must be determined by the recording law of the state; and it is also apparent that the question arising under that law turns upon who are included in the term 'creditors' in § 496.

Upon that question the decisions of the court of appeals of the state have not been uniform, but it is conceded, and is evident upon an examination of the more recent decisions, that the term does not include antecedent creditors, or subsequent creditors whose claims are acquired with notice of the unrecorded mortgage, but does include subsequent creditors without notice, who, by their diligence, secure a specific lien upon the property, as by execution or attachment, before the mortgage is recorded. Baldwin v. Crow, 86 Ky. 679, 7 S. W. 146; Wicks Bros. v. McConnell, 102 Ky. 434, 43 S. W. 205; Clift v. Williams, 105 Ky. 559, 49 S. W. 328, 51 S. W. 821; Bowles v. Jones, 123 Ky. 395, 96 S. W. 1121; Swafford v. Asher, 31 Ky. L. Rep. 1338, 105 S. W. 164. And so, the question for decision is reduced to this: Does the term include subsequent creditors without notice, who have not secured such a lien?

No case in that court has been called to our attention, and none has been found by us, in which this question was presented for decision and decided; but in two of the later cases there are expressions bearing thereon which are respectively relied upon here. Thus, in Wicks Bros. v. McConnell, supra, where the prior cases were reviewed with the evident purpose of extracting a general and guiding rule, it was said: 'On the one hand, the unrecorded lien is upheld as against creditors who cannot be presumed to have given credit upon the faith of the property held in lien. On the other hand, creditors who may be presumed on such faith to have given credit are protected as against the secret lien in the rights which they secure by their diligence in the levy of their execution or attachment.' (Italics ours.) And in Swafford v. Asher, supra, it was said: 'As the mortgage was not recorded, it would, of course, not be valid as to creditors whose debts were subsequently created; but as to those whose debts were created prior to the purchase of the teams and the mortgage upon them the lien is valid, although not recorded as required by § 496 of the Kentucky Statutes [of 1903], and, as said before, there is nothing to show that any debt of the estate was created after the purchase of the teams, except that of appellant, who had actual notice.' As Wicks Bros. v. McConnell was cited as sustaining this statement, it is not probable that the court regarded it as overruling or departing from what had been said in that case; and this view receives added support from the fact that the opinion in Swafford v. Asher was marked by the court, 'Not to be officially reported.' These considerations, coupled with the further fact that in cases such as Bowles v. Jones, supra, where subsequent creditors prevailed over such a mortgagee, the court was careful to state, not only that the claims of the creditors arose after the date of the unrecorded mortgage, but also that the creditors had obtained attachment or other liens upon the mortgaged property before the mortgage was recorded, are persuasive that what was said in Wicks Bros. v. McConnell should be accepted as reflecting the true construction of § 496, in the absence of some more positive and direct ruling upon the subject by the court of appeals of the state. Such was the view of the circuit court of appeals, and we are at least unable to say that it was wrong. It follows that, as here the subsequent creditors had not fastened any lien upon the property covered by the mortgage prior to the proceedings in bankruptcy by which the title passed to the trustee, the mortgage, although unrecorded, was valid and effective against them.

Decree affirmed.