Case Name: IN THE MATTER OF SOLÁ É HIJO, Bankrupts
Court: United States District Court for the District of Puerto Rico
Jurisdiction: United States
Decision Date: 1916-08-24
Citations: 9 P.R. Fed. 185
Docket Number: No. 61
Parties: IN THE MATTER OF SOLÁ É HIJO, Bankrupts.
Judges: 
Reporter: Porto Rico Federal Reports
Volume: 9
Pages: 185–193

Head Matter:
IN THE MATTER OF SOLÁ É HIJO, Bankrupts.
San Juan,
Bankruptcy,
No. 61.
Trustee’s Right to Mortgaged Property.
Bankruptcy — Preference.
1. The disposal of property during the four months preceding bankruptcy in accordance with a valid contract antedating the four months is not to be considered as a preference; where a mortgage given more than four months before the petition was not recorded, as it contained certain defects, but these defects were cured and the mortgage recorded four days before bankruptcy, this does not constitute a preference.
Bankruptcy — Liens—Unrecorded Mortgage.
2. A mortgage executed more than four months before the bank ruptcy, but not recorded until within the four months, does not create a valid lien against creditors of the bankrupt subsequent to the date of the mortgage, and such creditors take precedence over the mortgagee.
Note. — As to effect of mortgage given more than four months prior to bankruptcy, but recorded within that period, see note in 25 L.R.A. (N.S.) 149.
Upon the question of conditional sale contract executed prior to, but filed within, the four months period as a voidable preference, see note in 47 L.R.A. (N.S.) 1223.
Bankruptcy — Unrecorded Conditional Sale Agreements.
3. Where a mortgage contains a further agreement by the mortgagor that he will give a conditional sale deed to the property on demand, and the mortgage was not recorded until within the four months, the clause regarding the conditional sale agreement is not binding upon creditors subsequent to the date of the instrument.
Bankruptcy — Liens—Mortgage Recorded within the Pour Months.
4. Creditors having claims accruing since the date of the mortgage, which is not recorded until within the four months, are entitled to the proceeds of the mortgaged premises in preference to the mortgagee.
Opinion filed August 24, 1916.
Mr. J. B. F. Savage for Trustee.
Messrs. Francis & Soto for Marcelino A. Sola.

Opinion:
ITamiltoN, Judge,
delivered tbe following opinion:
Tbis court directed tbe trustee to convey to Celestino Sola certain property in accordance with tbe deed signed by Marcelino Sola, and now tbe trustee seeks to bave tbis action of tbe court set aside, and to convert tbe proceeds of tbe property to tbe debts of tbe estate. Tbe facts not being admitted, tbe court directed referee Molina to ascertain and report them, wbicb be bas done in a report filed July 21, 1916.
It seems that Celestino Sola, on withdrawing from certain business connections with bis brother Marcelino, received in full satisfaction of bis interests a mortgage made July 6, 1911, on certain property. Tbe instrument was not recordable at tbe time because of certain amendable defects, wbicb tbe mortgagee did not seek from tbe mortgagor until May 13, 1912. At that time these defects were cured, and tbe mortgage in question was recorded in favor of Celestino' Sola. On May 17th proceedings in bankruptcy were instituted against Sola é Hijo and Marcelino Sola, resulting in adjudication. Tbe question for consideration, leaving out tbe fact that tbe court has already directed tbe trustee to convey to tbe mortgagee, is tbe rights of tbe parties as developed by tbe report of referee Molina.
Tbe record of tbe mortgage being bad only four days before tbe bankruptcy, it is contended that tbe mortgage amounted * to a preference forbidden by § 60-a and b, wbicb are as follows:
"a. A person shall be deemed to have given a preference if, being insolvent, be has, within four months before tbe filing of tbe petition, or after tbe filing of tbe petition and before tbe adjudication, procured or suffered a judgment to be entered against himself in favor of any person, or made a transfer of any of bis property, and tbe effect of tbe enforcement of such judgment or transfer will be to enable any one of bis creditors to obtain a greater percentage of bis debt than any other of such creditors of tbe same class. Where tbe preference consists in a transfer, such period of four months shall not expire until four months after tbe date of tbe recording or registering of tbe transfer, if by law such recording or registering is required." [32 Stat. at L. 799, chap. 487, Comp. Stat. 1913, § 9644.] •
"b. If a bankrupt shall have procured or suffered a judgment to be entered against him in favor of any person or have made a transfer of any of bis property, and if, at tbe time of tbe transfer, or of tbe entry of tbe judgment, or of tbe recording or registering of tbe transfer if by law recording or registering thereof is required, and being witbin four months before tbe filing of tbe petition in bankruptcy or after tbe filing thereof and before tbe adjudication, tbe bankrupt be insolvent and tbe judgment or transfer then operate as a preference, and tbe person receiving it or to be benefited thereby, or bis agent acting therein, shall then have reasonable cause to believe that tbe enforcement of such judgment or transfer would effect a preference, it shall be voidable by tbe trustee and be may recover tbe property or its value from such person. And for tbe purpose of such recovery any court of bankruptcy, as hereinbefore defined, and any state court which would have bad jurisdiction if bankruptcy bad not intervened, shall have concurrent jurisdiction." [36 Stat. at L. 842, chap. 412, Comp. Stat. 1913, § 9644.]
What is prohibited by tbe sections of tbe Bankruptcy Act in question is a preference. It usually arises in tbe shape of actual fraud, but actual fraud is by tbe report of tbe referee, which is not excepted to, put out of tbe case. Legal fraud, however, would be sufficient if "the effect . . . will be to enable any one of bis creditors to obtain a greater percentage of bis debt than any other of such creditors of tbe same class." An unrecorded mortgage is not void under tbe Porto Pican law. It cannot be said to be nonexistent. There are cases in which it will be upheld against general creditors. Hidalgo v. Garcia, 4 P. R. R. 121. Tbe trustee, however, under the Bankruptcy Act, § 60-b, as amended in 1910, is a lien creditor, and be insists that the record being tbe constitution or creation of the mortgage, and there being at the time of the recording no new consideration, tbe mortgage must be considered as a preference. This, however, is not clear. The transaction (unlike Re Caslon Press, 143 C. C. A. 409, 229 Red. 133) was complete as between the parties when the mortgage was given July 8, 1911, by means of a solemn public instrument. The only thing left to be done was a matter dehors the mortgage itself, the execution of certain other papers which would show that the mortgagor had the right to execute the conveyance, and to this the mortgagee had a right to compel him at any time. There was no need of any new consideration. The right was a continuing one from the beginning, and was a part of the original consideration. The receipt or disposal of property during the four months in accordance with a valid contract antedating the four months is not to be considered as a preference under the Bankruptcy Act, § 60-a. Collier, Bankr. 10th ed. p. 795. It is true that the necessary result is to diminish the assets, but it is a diminution of the assets by a valid subsisting transaction which supplied assets which went -or should go to the creditors.
It remains to consider, however, what is the effect of the late record of the mortgage. Section 1176 of the Civil Code of Porto Rico provides: "Besides the requisites mentioned in § 1758, it is indispensable, in order that the mortgage may be validly constituted, that the instrument in which it is created be entered in the registry of property."
Art. 146 of the Mortgage Law is to the same effect. It says: "In order that voluntary mortgages may be validly constituted it shall be necessary: 1. That they have been agreed to or ordered constituted by a public instrument. 2. That the deed shall have been recorded in tbe registry established by this law."
The contention of the trustee, therefore, is that, the record of the mortgage being essential, the mortgage itself cannot be said to exist as against third parties, such as the Bankruptcy Law makes a trustee, except from the date of that record. The record being within the four months before the bankruptcy, the argument is that the mortgage is to be considered as given within four months before the bankruptcy, and therefore void as against creditors.
In support of this contention reference is made to the case of Brigman v. Covington, 135 C. C. A. 250, 219 Fed. 500, a circuit court of appeals case from North Carolina. It was there held that a chattel mortgage in North Carolina must be recorded in order to be effectual against creditors, and a chattel mortgage on a drug store recorded within four months of the bankruptcy of the grantors was accordingly declared to be invalid as against the trustee for creditors. This may throw some light upon the principle involved, but cannot be considered as conclusive, because it relates to a chattel mortgage, which is not recognized in Porto Bieo', and which even in the states is governed by special rules for special purposes. The case of Re Lukens, 138 Fed. 188, from the district court for the eastern district of Pennsylvania, relates to realty, and construes § 67-a of the Bankruptcy Act. This section is as follows: "Claims which for want of record or for other reasons would not have been valid liens as against the claims of the creditors of the bankrupt shall not be liens against his estate." [30 Stat. at L. 564, chap. 564, Comp. Stat. 1913, § 9651.]
In the Lukens Case the mortgagee of land failed to record his mortgage for the purchase price of real estate until after the mortgagor became bankrupt, and under the principle of the Pennsylvania law that a mortgage on real estate creates a mere lien to secure the debt and does not convey an estate, it was held that the mortgagee was not entitled to payment in full from the proceeds of the mortgage property as against the general creditors. The ground of the decision is that creditors of a bankrupt are entitled in fairness to know the bankrupt's financial standing, and therefore a creditor who fails to record his mortgage and thereby gives the mortgagor a fictitious credit has no reason to complain if subsequent creditors attack the property on which he held a mortgage which he had failed to record until within the four months. Whether there are any creditors in this case subsequent to the mortgage in question does not appear, but if there are any such, they come within the principle of the Lukens decision. In other words, the law is that the trustee takes the property of the bankrupt in case unaffected by fraud, as in the ease at bar, in the same light and condition that the bankrupt himself held it, except where the encumbrance is void against the trustee by some positive provision of the act. Re Garcewich, 53 C. C. A. 510, 115 Fed. 87. The statutory exception declared in the Lukens Case is that subsequent creditors, represented by the trustee, have a superior equity, but this is a very different thing from declaring that § 67-a voids the mortgage as against all creditors.
It is alleged, however, that the mortgage in question, executed by Marcelino' Sola July 8, 1911, to his brother Celes-tino Sola, provides also in paragraph eight that in case the debtor does not satisfy the principal, there shall be substituted for this mortgage a deed of conditional sale, to be executed upon de- maud, and that this amounts to an equitable lien in favor of Celestino, or, more properly speaking, a contract whose specific performance can be compelled by Celestino Sola. It was upon this ground that the court ordered the execution of the deed for the property, the proceeds of the sale of which are sought to be subjected by this new proceeding. The validity of this as between Marcelino and Celestino cannot be questioned, but upon! reconsideration it does not seem that this contract can be enforced as against subsequent creditors, who must be held to have extended credit upon the faith of the record. Clause eight was no more recorded than was the rest of the mortgage, and is therefore also invalid as against subsequent creditors. This is true upon a proper construction of the Bankruptcy Law quite apart from any question under § 1763 of the Civil Code of Porto Pico, which provides that a promise to malee a mortgage gives rise only to a personal action.
The result is that the previous orders and decrees of this court must be modified so' as to protect the rights of creditors subsequent in time to the execution of the mortgage in question, that is to say, since duly 8, 1911. A petition by the trustee as at bar is a proper method of procedure. He is not relegated under the Bankruptcy Law, § 23-b, to a suit in any other court or a formal action in this court. There are no terms on the bankruptcy side of this court, and decrees may be modified any time prior to the closing of the estate by distribution or otherwise as may seem best to meet the ends of justice under new circumstances. The right to modify, however, is sparingly exercised.
A decree will be entered therefore modifying the former orders and decrees of this court to the extent of directing the marshal of the local court of Humaeao and the said Celestino Sola é Bodriguez to pay over to the trustee herein so much of the proceeds of the property in question as will cover the proportionate shares of creditors herein since July 8, 1911, if any. Otherwise former orders and decrees are not disturbed hereby.
It is so ordered.