SCANDINAVIAN-AMERICAN BANK v. SABIN. In re SONDHEIM, 227 F. 579

MORROW, Circuit Judge (after stating the facts as above). 1. We are of opinion that the question at issue presents a controversy arising in the course of bankruptcy proceedings, and is appealable under

section 24a of the Bankruptcy Act (Act July 1, 1898, 30 Stat. 553). Hewit v. Berlin Machine Works, 194 U. S. 296, 24 Sup. Ct. 690, 48 L. Ed. 986; In re First National Bank, 135 Fed. 62, 67 C. C. A. 536; In re Mueller, 135 Fed. 711, 68 C. C. A. 349. The petition for revision will therefore be dismissed. 2. To the contention of the appellant that the trustee is without authority to maintain the proceeding, for the reason that no creditor had secured a lieu upon the goods at the time the bank took possession of them, and hence the trustee secured no greater rights than the bankrupt himself had, it is only necessary to state that

section 8 of the act- or June 25, 1910, amending

section 47 of clause 2 of the act of 1898 (36 Stat. 840), provides that the trustee, “as to all property in the custody * * * of the bankruptcy court, shall be deemed vested with all rights, remedies, and powers of a creditor holding a lien by legal or equitable proceedings thereon.” Under this provision of the statute the trustee is not limited to such objections to a transaction between the bankrupt and a creditor as the bankrupt might have had, but he may make any objection that a creditor holding a lien might make.

An agreement, therefore, which prior to this amendment would have been valid between the parties, mav not be valid as against the trustee. Meier & Frank Co. v. Sabin, 214 Fed. 231, 233, 130 C. C. A. 605. 3.

Passing to the merits of the case, it is obvious that the determination of the issues involved depends upon the construction.to be placed upon the instrument of October 23, 1914, executed"by Sondheim and the bank, and its validity as against the creditors of the bankrupt estate., The instrument on its face purports to be a trust agreement, vesting in the bankrupt title to the goods in suit as trustee for the bank “in so far as the holding of said property is necessary to protect and pay back to the party of the second part [tire bank], the sums of money owing by the party of the first part to the party of tire second part.” And by the paragraph immediately following it sufficiently appears that the “sums of money .owing by the party of the first part to the party of the second part” include not only the $2,600 borrowed for the purchase of the goods and merchandise in suit, but also the indebtedness of $2,-600 owing by Sondheim toi the bank at the time of the execution of the document.

But we are of opinion that, regardless of tire phraseology employed, the instrument was intended to be and is a chattel mortgage. Indeed, as pointed out by the referee, it could-be nothing else under the laws of Oregon; for it must be remembered that title toi the goods was never in the bank. It vested directly and exclusively in Sondheim at the time, of the purchase of the goods and merchandise by him. That being true, it is obvious that the instrument, as between the bank and Sondheim, cannot be construed as a conditional sale, as claimed by the bank.

The construction of the instrument is not to. be found in any name which the parties may have given 'to it, and not alone in any particular provisions it may contain. Herryford v. Davis, 102 U. S. 235, 244, 26 L. Ed. 160. But regardless of the classification, if the instrument were executed with intent to hinder, delay, or defraud creditors of Sondheim, or if subsequent to its execution, by the conduct and acts of the parties, it became in their hands an instrument calculated to hinder, delay, or defraud creditors, it is void as against such creditors.

In determining the validity of chattel mortgages in bankruptcy proceedings, the federal court will follow the settled law of the state in which the transaction occurred. In re First National Bank, 135 Fed. 62, 67 C. C. A. 536.

The Supreme Court of Oregon has consistently held that when it appears either upon the face of the mortgage, or by parol evidence aliunde, that a mortgagee of personal property has given the mortgagor unlimited power and authority to dispose of the property in the usual course of trade, the mortgage is void as to attaching creditors, even though there was no actual fraudulent intent on the part of either of the. parties to the instrument. Orton v. Orton, 7 Or. 478, 33 Am. Rep. 717; Jacobs v. Ervin, 9 Or. 52; Bremer v. Fleckenstein, 9 Or. 266; Aiken v. Pascall, 19 Or. 493, 24 Pac. 1039; Fisher v.

Kelly, 30 Or. 1, 46 Pac. 146; Sabin v. Wilkin, 31 Or. 450, 48 Pac. 425, 37 L. R. A. 465; Greig v. Mueller, 66 Or. 27, 133 Pac. 94, 46 L. R. A. (N. S.) 722; Peterson v. Sabin, 214 Fed. 234, 130 C. C. A. 608. The only qualification placed upon this rule is that laid down in the case of Currie v. Bowman, 25 Or. 364, 35 Pac. 848.

It was there held that chattel mortgages on goods, although permitting the mortgagor to remain in possession and sell the same in the ordinary course of trade, may be upheld, where the mortgagee is required to keep a strict account of sales, and pay over the proceeds thereof to the mortgagor, and the conduct of the mortgagee indicates that he intends the terms of the mortgage to be observed. In the present case, by express terms of the agreement, Sondheim was permitted to sell the goods in the regular course of business. There can be no doubt that the rule laid down is directly applicable.

But the bank contends that the case falls within the qualification or exception stated in Currie v. Bowman, for the reason that the instrument provided for an accounting on the part of the bankrupt at the close of each day to the extent of one-half of the proceeds of the sales, and also provided for the installing of a cashier by the bank to keep track of the receipts and disbursements. But it is not denied that these terms and restrictions were abandoned by mutual consent.

One payment only, of $500, was made by Sondh.eim to the bank on account of the indebtedness during the three weeks in which he was in control of the stock. There is testimony to the effect that by a verbal agreement with Sondheim the bank had the privilege of charging his account with one-half of the proceeds of sales on certain dates, and in the exercise of that privilege his account was charged by the bank with the sum of $365 on November 12th and $195 on November 13th. These were the only credits made on the indebtedness covering the period of three weeks.

They cannot be said to have amounted to a “strict accounting,” or, indeed, to any accounting, within the meaning of the term as used in the agreement, or as construed by the Supreme Court of. Oregon in Currie v. Bowman, supra. The rule applicable to these' facts is ably stated by Mr. Justice Wolverton, for the Supreme Court of Oregon, in’ the case of Sabin v.

Wilkins, supra, as follows: “The intent and purpose of the parties in giving and receiving a chattel mortgage is the test of its validity at its inception; but, as it is a thing capable of modification by subsequent agreement, either express or implied, by co-operative and willful disregard of'its terms and conditions, it is a prerequisite to its continuing validity that good faith and fair dealing be maintained towards those whose interests may be affected by it. A chattel mortgage given primarily for the benefit of the mortgagor is void as against creditors from the beginning {Hill’s Ann.

Laws, § 3053); but, if given bona fide, and the parties, by their subsequent treatment of it and the property covered by it, convert it into an instrument calculated to effectuate the same purpose, It is none the less fraudulent and void from the time such purpose is promoted.” The rule is one calculated to promote fair dealing between a vendor of personal property and his creditors, or parties who are likely to become creditors.

In the present case there was nothing whatsoever, of record or otherwise, to indicate to any one with whom Sondheim might be contracting debts that the goods and merchandise on display in his store were incumbered in any manner whatever.

It appears from the record that Sondheim purchased merchandise on credit to the value of thousands of dollars, and it is but reasonable to suppose that to a great extent he was enabled to do this by reason of the fact that the parties from whom he purchased looked upon his stock of merchandise as an asset and a source of payment in the event of the failure of Sondheim to meet his obligations. Such, at least, was the inevitable tendency of the situation, without regard to any actual fraudulent intent on the part of either the bank or Sondheim.

It would indeed be a harsh rule which would permit the bank, under such circumstances, to retain and enjoy the fruits of a situation brought about by its own unjust and unfair acts and conduct, at the expense of the general creditors of tire bankrupt. The decree of the court below is affirmed. <&wkey;>For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes