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In re Consorto Const. Co.

decided.: May 3, 1954.


Author: Hastie

Before GOODRICH, McLAUGHLIN and HASTIE, Circuit Judges.

HASTIE, Circuit Judge.

In February 1951 Consorto Construction Company, the bankrupt, borrowed money from Equity, the appellant in this action. On March 9, 1951, as security for the loan, Consorto executed and delivered to Equity its bond, warrant, and chattel mortgage covering specified personal property. All of this happened in Pennsylvania. The chattel mortgage was executed in accordance with the 1945 Pennsylvania Chattel Mortgage Act,*fn1 but it was not recorded until August 3, 1951. More than four months after the recording Consorto was adjudicated bankrupt.

Averring title to the mortgaged chattels, appellant filed a reclamation petition demanding that the receiver surrender possession of them. The receiver resisted the petition. It was agreed, however, that the property be sold and the proceeds held by the receivers subject to final determination of appellant's right under the reclamation petition. Upon hearing before the referee counsel stipulated all the above facts and, in addition, that between the date of execution and date of recording of the mortgage certain persons had become unsecured creditors of the bankrupt, and a United States tax lien and a Pennsylvania lien for unpaid corporation taxes had been entered of record against the bankrupt.

The trustee opposed the reclamation petition on the ground that the delay in recordation made the mortgage void against him. The referee dismissed the petition on that ground. The district court sustained the referee. Equity, the chattel mortgagee, appealed.

In order for the trustee to prevail, he must invoke either Section 70, sub. c or 70, sub. e of the Bankruptcy Act, 11 U.S.C.A. § 110, sub. c or 11 U.S.C.A. § 110, sub. e. Neither Section 60 nor Section 67 is applicable because bankruptcy occurred more than four months after the filing of the instrument.

Section 70, sub. c provides in relevant part:

"* * * The trustee, as to all property of the bankrupt at the date of bankruptcy * * * shall be deemed vested as of the date of bankruptcy with all the rights, remedies, and powers of a creditor then holding a lien thereon by legal or equitable proceedings, whether or not such a creditor actually exists."

The trustee's rights under this Section are not derivative. They are not rights of any existing creditor to which the trustee is subrogated but are independent rights, of such character as a described hypothetical creditor would have enjoyed, created by the Bankruptcy Act itself. In this case the trustee's rights against the mortgagee under Section 70, sub. c are those which Pennsylvania law would give such a creditor as Section 70, sub. c describes, with a lien created as of the date of bankruptcy.

The mortgagee bases its claim on the following provision of the Pennsylvania Chattel Mortgage Act:

"Any chattel mortgage executed pursuant to this act shall be a lien upon the property therein described, which lien shall be good and valid against and superior to all rights of subsequent purchasers, subsequent mortgagees and other subsequent lienors and encumbrancers, and all persons subsequently dealing with the mortgaged property or subsequently acquiring an interest therein from the time of filing of the mortgage * * *." 21 P.S. § 940.5.

If the mortgagee here proceeded in such a way as to obtain the full protection of the quoted provision, the subsequent lien of the trustee under Section 70, sub. c is the subordinate lien. This is not disputed. But it is argued that the chattel mortgagee's claim is not protected by the Pennsylvania Chattel Mortgage Act solely*fn2 because of the tardy recordation of the instrument.

The Pennsylvania Act states no time within which recordation must be effected. Here nearly five months elapsed between the execution and the filing of the mortgage. No Pennsylvania case has considered the effect of such delayed recording. Therefore, without guidance from Pennsylvania courts, we construe the statute in a manner we believe reasonable and consistent with the best considered judicial construction of other similar chattel mortgage statutes.

Before 1931, the Illinois chattel mortgage statute made no provision as to time within which recordation was required. This was judicially construed to mean that a chattel mortgage could be recorded at any time after execution and still be a valid lien as against rights thereafter acquired by third persons. The only risk of tardy filing was that some third person might acquire a lien on the chattel prior to the time the mortgagee perfected his lien by recordation. See Collateral Finance Co. v. Braud, 1939, 298 Ill.App. 130, 18 N.E.2d 392, 394. A similar construction was given to an early Rhode Island statute which provided no time for recording. ...

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