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In re Baumgartner

December 11, 1931


Appeals from the District Court of the United States for the Eastern District of Wisconsin; Ferdinand A. Geiger, Judge.

Author: Sparks

Before ALSCHULER and SPARKS, Circuit Judges, and WOODWARD, District Judge.

SPARKS, Circuit Judge.

Under the above statement of facts each appellant claims that it is entitled to receive from the trustee the proceeds now in his hands received from the sale of the automobiles in controversy. On the other hand, the trustee claims that the Company is not entitled to recover the proceeds of the Densky car because the purported mortgage assigned to the Company by bankrupt is a forgery, and the car covered by that mortgage has not been sufficiently identified as the same car which was sold, and the proceeds of which are now in the hands of the trustee. As to the other cars, the trustee claims that the purported bills of sale from bankrupt to the Company are not in fact bills of sale, but, under the laws of Wisconsin, are to be construed as chattel mortgages; and, on account of not having been filed with the city clerk of Milwaukee within the time prescribed by statute, they are invalid except as between bankrupt and the Company.

By reason of these facts, it is trustee's contention that the seizure of the automobiles by the Company constituted an unlawful preferential transfer of bankrupt's assets.

As to the Bank, the trustee contends: (1) That the Bank's mortgage constitutes an unlawful preference because of the fact that the mortgage was given for a pastdue debt within four months previous to the petition in bankruptcy; (2) that at the time of the execution of Bank's mortgage, and for a long time prior thereto, bankrupt was insolvent, of which fact the Bank had knowledge, or had reasonable cause to believe it; and (3) that Bank's mortgages were of the usual form, with no provision for sales thereunder, and that possession was in bankrupt, and cars were permitted by Bank to be sold in the usual course of business and the proceeds diverted into his bank account and checked out by him in the ordinary course of business.

Inasmuch as appellants' rights, if any, to the property in controversy are based upon contracts made in Wisconsin, and those rights are claimed to have matured prior to the adjudication in bankruptcy, the law of Wisconsin must therefore be applied in determining those rights at and prior to the adjudication in bankruptcy, for the adjudication added nothing to the rights of either appellant. In re Goorman (D.C.) 283 F. 119; In re Cohn (D.C.) 171 F. 568.

In 4 Remington on Bankruptcy (3d Ed.) 70, § 1405, it is said: "However, after the State law has once settled the nature of the transaction, once determined whether the facts are sufficient to constitute a transfer of title, and, if so, the time the transfer takes effect and the property affected thereby, then the Bankrupt Act may forthwith step in and declare whether it is a voidable preference or a nullified legal lien." When the bankrupt law deals with property rights which are regulated by the state law, the federal courts in bankruptcy will follow the state courts. Board of Trade of City of Chicago v. Johnson, 264 U.S. 1, 44 S. Ct. 232, 68 L. Ed. 533.

It is therefore necessary (1) to determine from the laws of Wisconsin what rights, if any, other than as a general creditor, either appellant had in the property in controversy at the time of the adjudication in bankruptcy; and (2) to apply the applicable provisions of the Bankruptcy Act (11 USCA) to the facts as fixed by that determination.

The Company's arguments on the matters presented are based quite largely upon its assumption that the instrument of transfer executed by bankrupt to Rothschild, and by him assigned to the Company, was a conditional sales contract, and the authorities cited by it in support of its right to recover are largely, if not entirely, those wherein the instruments in controversy were admittedly conditional sales contracts. We are, however, unable to accept that characterization of the instruments upon which the Company relies, and we think the District Court was right in holding that such instruments, in view of the surrounding circumstances, were chattel mortgages. The ruling seems to be unquestionably supported by Holak v. Southard, 182 Wis. 494, 196 N.W. 769, Salter v. Bank of Eau Claire, 97 Wis. 84, 72 N.W. 352, Blue v. Herkimer Nat. Bank (C.C.A.) 30 F.2d 256, Keystone Finance Corp. v. Krueger (C.C.A.) 17 F.2d 904, and In re Goorman, supra.

The Company insists, however, that the transaction between Rothschild and bankrupt did not constitute a loan because there was no agreement on the part of bankrupt to repay the money. With this construction we cannot agree, for each time bankrupt received money from Rothschild he (bankrupt) accepted a ninety-day draft for the exact amount, which of course meant that he would pay that amount to Rothschild when due. But the Company says this was to be regarded not as payment of a debt, but as consideration for the repurchase of the cars by bankrupt. This position seems to us to be quite inconsistent. If the transaction was a simple purchase and sale, we are unable to understand why Rothschild or the Company required bankrupt to pay interest to him on the consideration which Rothschild had, as he said, paid to bankrupt, but which the resident manager of the Company said was paid by the Company. It will be noted that the drafts which were accepted by bankrupt at the times he received the respective amounts of money drew interest and collection charges from date of acceptance. It is unusual, to say the least, in cases of sales for the grantor to pay interest to the purchaser on the consideration which the grantor has received from the purchaser; but payment of interest is one of the strongest characteristics of a loan.

That the transaction was a mere loan, and intended as such by the parties, is to our minds conclusively proved by that part of the so-called "resale and repurchase" agreement which provides that in case bankrupt sells a car for cash (and under the agreement he was not permitted to sell it for less than the amount which Rothschild claims he had paid bankrupt for it), bankrupt was required immediately to transmit to Rothschild, not what Rothschild had paid for that car, but the entire proceeds of such sale, and this amount was to be applied upon all indebtedness then due from bankrupt to Rothschild. If the original transaction was a mere purchase and sale, what other indebtedness was there due, in case of a sale of a car by bankrupt before the due date of the draft for that car, except the price which it is claimed Rothschild paid for that particular car? In case of delinquency or insolvency the instruments provided that all drafts are to be considered as due without notice; but, regardless of these contingencies, the repurchase agreement provides that, in all events where bankrupt sells a car to a customer for cash, the entire proceeds of that sale, which of course includes dealer's profit, are to be remitted to Rothschild and applied upon all indebtedness then due Rothschild from bankrupt.

We think it is obvious from the language referred to that the Company and Rothschild in fact considered as a loan all the money which was advanced to bankrupt on the cars in controversy, and that they attempted to secure to the Company the right to apply the entire proceeds of any sale by bankrupt, if it so desired, to the reduction of the entire amount of such indebtedness. The use of the word "upon," in the phrase "upon all indebtedness," indicates clearly that the Company and Rothschild thought the purchase price paid by the customer for a car would not be sufficient to pay all indebtedness owing to it by bankrupt, although, according to the agreement, such price had to be at least equal to the amount of money which the Company or Rothschild had advanced on that particular car. Of course bankrupt was to pay interest on the draft, but it is fair to presume that bankrupt's profit would more than take care of that item, and in such event the remaining profit was to be applied upon all other indebtedness due the Company from bankrupt, which we think referred to the total amount advanced by Rothschild or the Company to bankrupt on all the cars so handled. We are convinced that the instrument in controversy, denominated as a bill of sale by the Company, was nothing more or less than a chattel mortgage, which, not having been recorded as required by the Wisconsin statute, is not valid as against the Bank, whose mortgage was recorded. Wisconsin Stat. 1929, §§ 241.08 and 241.10; First Nat. Bank v. Biederman, 149 Wis. 8, 134 N.W. 1132, Ann.Cas. 1913C, 837; Holak v. Southard, supra; Southern Wis. Acceptance Co. v. Paull, 192 Wis. 548, 213 N.W. 317.

It is contended by the Company, however, that inasmuch as it took possession of all the cars except the Densky car before the adjudication of bankruptcy, its title to those cars became complete as against all parties. This contention presupposes the fact that the instruments executed by bankrupt to Rothschild placed the title to the cars in the Company; but inasmuch as we hold that they constitute in fact chattel mortgages, and were never recorded, the contention of the Company in this respect must fail, because the Bank had subsequently taken a chattel mortgage from bankrupt and had filed it pursuant to Wisconsin Statutes 1929, § 241.08.*fn1 Where a subsequent chattel mortgage is given, whether the second mortgagee has notice or not, the second mortgage, if recorded, or if possession is taken thereunder, precedes the prior unrecorded mortgage. First Nat. Bank v. Biederman, supra; Holak v. Southard, supra; Southern Wis. Acceptance Co. v. Paull, supra. The Company therefore had no right to take possession of the cars, and its act in so ...

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