The opinion of the court was delivered by: BARD
This case is before the Court on a petition to review an order of a Referee in Bankruptcy entering an order of adjudication.
The question certified by the Referee to this Court for decision is "Whether the alleged bankrupt company while insolvent made an intentional preferential transfer of its property, thus committing an Act of Bankruptcy." Chapter 575, Sec. 3, sub. a (2), 52 Stat. 840, 844, 11 U.S.C.A. § 21, sub. a (2).
On or about June 28, 1935, Joseph H. Ritchie and Robert Ritchie borrowed the sum of $5,000 in cash from the Frankford Trust Company of Philadelphia, for which they gave their promissory note. From this sum, the sum of $1,500 was used to purchase certain machinery and equipment from the bankrupt estate of Robert and J. H. Ritchie, Inc., and, under date of July 3, 1935, the said Joseph H. Ritchie and Robert Ritchie, as co-partners trading as Richenell Fabrics Manufacturing Company, transferred, by written bill of sale, title to the machinery to the Frankford Trust Company as collateral security for the repayment of the note. On the same day, July 3, 1935, Joseph H. Ritchie and Robert Ritchie transferred the machinery and equipment to Richenell Fabrica Manufacturing Company, Inc., the alleged bankrupt, subject however, to the rights of the Frankford Trust Company under said bill of sale and delivered possession of the machinery and equipment to the alleged bankrupt. On and prior to July 15, 1938, the alleged bankrupt was in default on account of the said note, whereupon the Frankford Trust Company seized and took physical possession of said machinery and equipment on the premises of the alleged bankrupt under and by virtue of the bill of sale and arranged for immediate public sale thereof. These facts are undisputed.
The petition in involuntary bankruptcy was filed on August 10, 1938, less than four months
after the seizure and sale took place.
These findings of fact are not seriously contested. The only objection thereto by the alleged bankrupt is that there was no evidence of any sale on July 15, 1938. Counsel for the alleged bankrupt admits that the seizure of the assets by the Trust Company was a "transfer" as defined by the Act,
and that the effect of the transfer amounted to a preference in favor of the creditor bank within the meaning of the law.
He earnestly contends, however, that the necessary element of "intent to prefer" is lacking, because the alleged bankrupt remained inactive and did nothing on July 15, 1938, when the Frankford Trust Company took possession of all its assets.
He advances the theory that a transfer which creates a preference, made pursuant to a long standing agreement permitting the creditor to seize the debtor's assets and not pursuant to any voluntary act on the part of the debtor at the time of the seizure, is not a transfer made with the intent to prefer this creditor over its other creditors.
I can not agree with this view.
In the case of judgments, judgment creditors obtain no lien against personal property until execution and levy. In Adler v. Greenfield, 2 Cir., 83 F.2d 955, 31 A.B.R., N.S., 439, a brother had obtained a default judgment against a bankrupt about one year before the filing of the petition in bankruptcy. About two months before bankruptcy, an execution was issued on the judgment and the sale held. The Court said, 83 F.2d at page 956, 31 A.B.R., N.S., 439: "The bankrupt's inaction from the time of levy of execution to the time of the sale indicates sufficiently his participation, so that he 'made the transfer.' It makes no difference that the judgment was obtained more than four months prior to the filing of the petition in bankruptcy. The judgment alone gives no lien against the debtor's personal property until the execution against it is delivered to the proper officer to be executed."
In Nogi v. Greenwood, D.C., 1 F.Supp. 60, a case arising in the Middle District of Pennsylvania, the bankrupt gave his judgment note on February 21, 1930, payable April 1, 1930, and the note was entered in Court as a judgment on March 31, 1930. Execution was issued January 16, 1931. In the opinion Judge Watson said, 1 F.Supp. at page 62: "The law deals with transfers of property as well as with judgments. A judgment is not a lien on personal property of the debtor; it is only the enforcement of such judgment that can possibly create a preference. The mere entry of judgment cannot." The Court held that although the judgment had been given more than four months prior to the execution, nevertheless the transfer constituted a preference. The opinion continued: "For to hold otherwise would be to hold that a judgment could be procured at a time when the creditor has no reason to believe the debtor to be insolvent and then when the creditor learns of the insolvency of his debtor and threatened bankruptcy proceedings he could issue execution and collect his claim without fear of an action to recover the amount of the preference so obtained. It is not possible to believe that this result was intended by the Bankruptcy Act. Galbraith v. Whitaker, 119 Minn. 447, 138 N.W. 772, 43 L.R.A. (N.S.) 427."
In the instant case, instead of a judgment, a bill of sale was given more than four months prior to the seizure. A pledge of a chattel without transfer of possession is void as to bona fide purchasers, pledgees and execution creditors acquiring rights in the chattels without notice of the pledge. Taplinger v. Northwestern Bank, 3 Cir., 101 F.2d 274, 39 Am.B.R., N.S., 127.
Title to the machinery and equipment in the instant matter did not vest in the Frankford Trust Company until July 15, 1938, the date it acquired possession. During the interval between the date of the bill of sale and the seizure of the machinery the bill of sale was a fraud on the rights of other creditors who dealt with the alleged bankrupt, and the ...