Martin v. Commercial National Bank of Macon/Opinion of the Court

As security for money presently loaned to him in good faith by the Commercial National Bank, one Virgin executed and delivered a mortgage upon his stock of merchandise at Macon, Ga., February 16, 1914. It was recorded August 20, 1914, when the bank knew of his insolvency. The next day involuntary bankruptcy proceedings were instituted and in due time he was adjudged bankrupt and a trustee appointed. Recordation of the mortgage was not fraudulently delayed and prior thereto no other liens were fixed upon the property. Both trustee and other creditors objected to the bank's claim as one entitled to priority 'on the ground that the mortgage was recorded within the four months period preceding bankruptcy, at a time when the mortgagor was insolvent, and when the mortgagee knew that he was insolvent, and the recording of the mortgage would effect a preference, and that the transfer arising from the recording of the instrument was nonoperative, and that the instrument must be held as not recorded.' Their contention here is thus stated:

'The trustee does not say in this case that his lien is older     than the bank's and therefore he comes ahead of the bank, but      he says that the bank's lien is invalid and inoperative,      because recorded while the bankrupt was insolvent, etc., and      that, being a subsequent lienholder, the trustee is in the      proper position to attack the bank's lien. The bank's lien is     invalid only by the positive inhibition of the statute,      section 60b. It is for this reason invalid just as a transfer     made (instead of recorded) within this four months' period is      invalid by reason of the inhibition of the Bankruptcy Law.'      'The record of an instrument is required as to any particular      person if the instrument must be recorded to be good against      him. If the subsequent lienor is entitled to priority unless     the antecedent mortgage is recorded, such mortgage is      required to be recorded as to him. The trustee is a     subsequent lienor. Unless the mortgage is recorded he, the     trustee, is entitled to priority. It is therefore 'required'     to be recorded as to him.'

The referee allowed the claim as preferred and the Circuit Court of Appeals approved his action. 228 Fed. 651, 143 C. C. A. 173.

It is provided by section 60b, Bankruptcy Act, as amended June 25, 1910, c. 412, 36 Stat. 838, 842 (Comp. St. 1916, § 9644):

'If a bankrupt shall * *  * have made a transfer of any of his      property, and if, at the time of the transfer, *  *  * or of *      *  * the recording or registering of the transfer if by law      recording or registering thereof 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 be 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      therein, 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 he may      recover the property or its value from such person.'

Section 47a of the Bankruptcy Act (Comp. St. 1916, § 9631) provides:

'Trustees shall respectively: * *  * (2) Collect and reduce to      money the property of the estates for which they are      trustees, under the direction of the court, and close up the      estate as expeditiously as is compatible with the best      interests of the parties in interest; 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, remedies, and powers of a creditor holding a lien by      legal or equitable proceedings thereon; 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. * *  * '

Section 3260, Georgia Code of 1910, declares that:

'Mortgages not recorded within the time required remain valid     as against the mortgagor, but are postponed to all other      liens created or obtained, or purchases made prior to the      actual record of the mortgage. If, however, the younger lien is created by contract, and the party     receiving it has notice of the prior unrecorded mortgage, or      the purchaser has the like notice, then the lien of the older      mortgage shall be held good against them.'

Construing this section, in Hawes v. Glover, 126 Ga. 305, 317, 55 S. E. 62, 67, the Supreme Court held:

'A mortgage is perfectly valid as between the parties     thereto, though never recorded. Hardaway v. Semmes, 24 Ga. 305; Gardiner v. Moore, 51 Ga. 268; Myers v. Picquet, 61 Ga. 260; Civil Code, § 2727 (Park's Ann. Code, § 3260). If it is     not recorded, or, as in this case, is illegally recorded, the      only effect is to postpone it to purchases made, or liens      procured by contract, without notice of its existence or to      liens obtained by operation of law.'

Section 60b, Bankruptcy Act, has been specially considered by us in two recent cases-Bailey v. Baker Ice Machine Co., 239 U.S. 268, 36 Sup. Ct. 50, 60 L. Ed. 275, and Carey v. Donohue, 240 U.S. 430, 36 Sup. Ct. 386, 60 L. Ed. 726, L. R. A. 1917A, 295. In the first the company installed an ice machine for Grant Bros. at Horton, Kan., during February, under a conditional sale contract of earlier date and recorded May 15th following, when the purchasers were known to be insolvent; July 11th they became bankrupt. Such a contract is valid under the laws of Kansas as between the parties whether recorded or not, but void as against a creditor of the vendee who fastens a lien upon the property by execution, attachment or like process prior to recording. The vendors demanded the machine. The trustee maintained section 47a, Bankruptcy Act, gave him the status of a lienholder prior to recordation and that the contract, having been put to record within four months, operated as a preference voidable under section 60b. We held the trustee occupied the status of a creditor with a lien fixed as of the date when the bankruptcy proceedings commenced and that he could not assail the contract under the state law; further, that section 60b refers to an act whereby the bankrupt surrenders or incumbers his property for the benefit of a particular creditor, thereby diminishing the estate which should be applied to all; the contract in question did not operate as a preferential transfer; the property was not the bankrupts', but the vendor's; the former were not to become owners until the condition was performed; and there was no diminution of the estate.

In Carey v. Donohue the trustee sought to set aside a real estate transfer executed more than four months before bankruptcy, but recorded within that time. Under the Ohio Statute conveyances of land until filed for record are deemed fraudulent as to subsequent bona fide purchasers without knowledge, but recording is not essential to their validity as against any creditor, whether general creditor, lien creditor, or judgment creditor with execution returned unsatisfied, that is, as against any class of persons represented by a trustee in bankruptcy or with whose rights, remedies, and powers he is deemed to be vested. We denied the trustee's contention and, among other things, declared:

'Required' has regard to persons in whose favor the     requirement is imposed. 'Congress did not undertake in     section 60 to hit all preferential transfers, otherwise      valid, merely because they were not disclosed, either by      record or possession, more than four months before the      bankruptcy proceedings.' 'It is plain that the words are not      limited to cases where recording is required for the purpose      of giving validity to the transaction as between the parties. For that purpose, no amendment of the original act was     needed, as in such a case there could be no giving of a      preference without recording.' 'In dealing with a transfer,      as defined, which, though valid as between the parties, was      one which was 'required' to be recorded, the reference was      necessarily to a requirement in the interest of others who      were in the contemplation of Congress in enacting the      provision.' 'The intended meaning was to embrace those cases in which recording was necessary in order to make      the transfer valid as against those concerned in the      distribution of the insolvent estate; that  s, as against      creditors, including those whose position the trustee was      entitled to take.'

The word 'required' in section 60b refers directly to statutes in many states relating to recording which through various forms of expression seek to protect creditors by providing that their rights shall be superior to transfers while off the record. Recognizing the beneficial results of these enactments and intending that rights based thereon might be utilized for the advantage of bankrupt estates, Congress inserted (amendment of 1910) the clause 'or of the recording or registering of the transfer if by law recording or registering thereof is required.' In Carey v. Donohue we pointed out that purchasers are not of those in whose favor registration is 'required,' but that the reference is to persons concerned in the distribution of the estate, i. e., 'creditors including those whose position the trustee was entitled to take.' And we think it properly follows that before a trustee may avoid a transfer because of the provision in question he must in fact represent or be entitled to take the place of some creditor whose claim actually stood in a superior position to the challenged transfer while unrecorded and within the specified period.

The Georgia statute imposes the requirement of registration only in favor of a creditor who fixes a lien on the property before recording takes place. Here there is no such person; the trustee occupies the status of one who acquired a lien after that event. No one concerned in the distribution of the estate actually held rights superior to the mortgage while off the record.

The judgment of the court below is correct, and must be

Affirmed.