Case Name: La Roy S. Gove, as Trustee in Bankruptcy of Franklin Typewriter Company, a Corporation, Appellant, v. Morton Trust Company and Others, Respondents
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1904-07
Citations: 96 A.D. 177
Docket Number: 
Parties: La Roy S. Gove, as Trustee in Bankruptcy of Franklin Typewriter Company, a Corporation, Appellant, v. Morton Trust Company and Others, Respondents.
Judges: 
Reporter: Appellate Division Reports
Volume: 96
Pages: 177–182

Head Matter:
La Roy S. Gove, as Trustee in Bankruptcy of Franklin Typewriter Company, a Corporation, Appellant, v. Morton Trust Company and Others, Respondents.
Chattel mortgage—illegal as against a trustee in bankruptcy of the mortgagor because of a failure to file it promptly — as to what creditors it is void — the mortgagee cannot, in such a case, enforce an equitable lien.
September 15, 1899, the Franklin Typewriter Company and Levi L. Tower entered into an agreement in which it was recited that the Franklin Typewriter Company by due authority and in proper form had provided for the issue of mortgage bonds to the amount of $50,000, and that being in present need of money it desired to borrow such amounts as it might require, not exceeding at any one time §10,000; that it was ready and willing, for the purpose of obtaining such loans as should not exceed at any one time $10,000, to deposit with the Cutter-Tower Company of New York, as trustee, §30,000 worth of its mortgage bonds as collateral security, that being the entire issue of such bonds.
At or about the-time the agreement was made Levi L. Tower loaned §10,000 to the Franklin Typewriter Company. When the money was paid over it was agreed that there should be deposited with David A. Tower, a nephew of Levi L. Tower, thirty bonds fully executed on the part of the Franklin Typewriter Company purporting to be secured by a chattel mortgage; in each of the bonds this recital was contained: “ This bond is one of a series of 50 bonds of like amount, tenor and date, * * * amounting in the aggregate to §50,000, and secured by a first mortgage or deed of trust of even date herewith, duly executed and delivered by said Franklin Typewriter Company to the said The State Trust Company, as Trustee, conveying to the said Trustee all the property, patents, rights, royalties, incomes and franchises now owned by said Franklin Typewriter Company or that may hereafter be acquired by it during the continuance of said mortgage or trust deed.”
The chattel mortgage was duly executed and the trustee named therein having failed to accept it, it was delivered with thirty bonds to David A. Tower, who was to hold such bonds until the secretary of the Franklin Typewriter Company gave notice that the mortgage should be placed on record. Levi L. Tower was a party, to the deposit of the bonds and mortgage, and to the agreement to refrain from placing the mortgage on file.
December 18, 1901, the Morton Trust Company, which was the successor of the I trustee named in the mortgage, accepted the trust, and the mortgage was filed I on the same day.
March 11, 1903, a petition in bankruptcy was filed against the Franklin Type-I writer Company, and on June 6, 1903, it was adjudged bankrupt.
Eeld, that owing to the failure to file it promptly, the chattel mortgage, while I valid as against the Franklin Typewriter Company, was invalid as to its I trustee in bankruptcy, particularly as the latter represented judgment creditors whose judgments had been, filed prior to the filing of the mortgage, as well as simple -creditors;
That having accepted the chattel mortgage as a valid legal lien, Levi L. Tower could not, after such lien had proved to be invalid, go back to the initiation of the transaction and claim an equitable lien which would be valid against the trustee in bankruptcy.
Appeal by the plaintiff, La Roy S. Gove, as trustee in bankruptcy of Franklin Typewriter Company, a corporation, from a judgment of the Supreme Court in favor of the defendants, entered in the office of the clerk of the county of New York on the 10th day of December, 1903, upon the decision of the court, rendered after a trial at the New York Special Term, dismissing the complaint upon- the merits.
John R. Abney, for the appellant.
Charles Howard Williams, for the respondents.

Opinion:
Patterson, J.:
The plaintiff is the trustee in bankruptcy of the Franklin Typewriter Company. He brought this action against the Morton Trust Company, Levi L. Tower and the Cutter-Tower Company to procure a determination of the right, as between himself and the defendants, to a fund now in his posséssion under a stipulation which appears in the record. That fund results from a sale of certain personal property which belonged to' the Franklin Typewriter I Company. There is not much dispute as to the facts. The plain- i tiff asks the court to adjudge that a chattel mortgage held by the defendant the Morton Trust Company is void and not a lien upon the fund now in his hands, such fund consisting of the proceeds of I sale of the mortgaged chattels. Prior to September 15, 1899, the I Franklin Typewriter Company borrowed from Levi L. Tower, one of the defendants, the sum of $10,000. On that day the Franklin I Company and Tower entered into an agreement in which it was! recited that the Franklin Typewriter Company by due authority and I in proper form had provided for the issue of mortgage bonds tol the amount of $50,000, and that being in present need of m@ney| it desired tomorrow such amounts as it might require, not exceedingl at any one time $10,000; "that it was ready and willing, for the pur-| pose of obtaining such loans as should not exceed at any one time $10,000, to deposit with the Cutter-Tower Company of New York, as trustee, $30,000 worth of its mortgage bonds as collateral security, that being the entire issue of such bonds. That seems to be the first important step in the transaction which the defendant Tower had with the Franklin Typewriter Company. It is shown that he loaned that company the sum of $10,000 at or about the time that agreement was made.
We will assume for all the purposes of this case that Mr. Tower actually advanced the $10,000, and that he intended to advance it only upon the security of bonds to be issued by the Franklin Company, which bonds were to be secured by a chattel mortgage. Much has been said in argument respecting the unconscionable character of the agreement made between the lender and the borrower, but it is unnecessary to refer particularly to the terms of the loan. The company could not plead usury, and that particular topic may be dismissed. But when the money was paid over by Mr. • Tower it was agreed that there should be deposited with David A. Tower, a nephew of the defendant Tower, thirty bonds fully executed on the part of the Franklin Typewriter Company purporting to be secured by a chattel mortgage, and in each of the bonds this recital was contained: ££ This bond is one of a series of 50 bonds of like amount, tenor and date, amounting in the aggregate to $50,000, and secured by a first mortgage or deed of trust of even date herewith, duly executed and delivered by said Franklin Typewriter Company 'to the said The State Trust Company as Trustee, conveying to the said Trustee all the property, patents, rights, royalties, incomes and franchises now owned by said Franklin Typewriter Company or that may hereafter be acquired by it during the continuance of said mortgage or trust deed."
It sufficiently appears that the chattel mortgage or deed of trust was fully executed by the Franklin Typewriter Company in pursuance of a resolution of the board of directors of that company and assented to by its stockholders. When that deed of trust or mortgage, whatever it may bé called, was executed by the Franklin Company it was not delivered to the trustee named therein. Such named trustee did not accept it, but it was delivered with thirty bonds to David A. Tower, who was to hold the same until the secretary of the Franklin Company gave notice that the mortgage should be put upon record. The evidence clearly establishes the fact that. Levi L. Tower, who advanced the money on the faith of receiving as collateral bonds to be secured by a chattel mortgage, was a party to the deposit of the mortgage and the bonds and to the agreement that the chattel mortgage was not to be put on the file until the secretary of the Franklin Company indicated that it would be proper to do so, in order,to secure Levi L. Tower's debt. Here it becomes important to notice dates. The moneys were loaned by the plaintiff in 1899 ; the mortgage security was not filed and the State Trust Company never accepted the trust; but on December 18, 1901,, the Morton Trust Company, successor to. the State Trust Company, did- accept the trust and the mortgage was filed on the same day. A petition in bankruptcy against the Franklin Typewriter Company was filed March 11, 1902, and it was adjudged a bankrupt June 6, 1902.
Under this state of facts, the plaintiff, as trustee in bankruptcy of the Franklin Company, insists that lie is entitled to the fund and to foreclose the defendants from making any claim thereto. The plaintiff's contention is based upon sections 67a and 67b of the Bankruptcy Law (30 U. S. Stat. at Large, 564), which provide as follows: " a. Claims which for want of record or for qther reasons would not have been valid liens as against the claims of the creditors of the bankrupt, shall not be liens against his estate, b. Whenever a creditor is prevented from enforcing his rights as against a lien created or attempted to be created by his debtor who afterwards becomes a bankrupt, the trustee of the estate of such bankrupt shall be subrogated to and may enforce such rights of such creditor for the benefit of the estate."
It is evident in the case at bar that Levi L. Tower intended to look to a chattel mortgage as security for the money he loaned the Franklin Typewriter Company. It is also apparent that the security was given and was accepted, not at the time originally contemplated, but on December 18, 1901. Whatever may be said with reference to the relations of' lender and borrower before December 18, 1901, it is plain that, at that time, the Morton Trust Company accepted .the trust, put the chattel mortgage on record, had possession of the bonds to be delivered to Levi L. Tower, and that he, according to. his own testimony, had the mortgage put on record. That consti tuted a legal security of .a chattel mortgage, perfectly good as against the debtor, and which we must regard as being void only because it was not duly recorded. In that view no question can be raised by Levi L. Tower of a right to rely upon an equitable lien. He had his legal lien, which might be lost for non-compliance with the requirement of the statute relating to filing it, but nevertheless it was accepted by him as a legal lien ; and if, through his own neglect or from any other cause, that lien becomes unavailable, he cannot go .back to the initiation of the transaction and claim an equitable lien which would be valid as against the trustee in- bankruptcy or the creditors he represents.
But it is said that the chattel mortgage or trust deed under the law of the State of Few York is void only as against the creditors of the mortgagor and as against subsequent purchasers and mortgagees in good faith, because it was not filed in accordance with the requirement of the law, and there was no change of possession of the property mortgaged. (See Lien Law [Laws of 1897, chap. 418], § 90, 92, 95, as amd. by Laws of 1900, chap. 248, and Laws of 1901, chap. 219). We suppose it will not be disputed that the trustee in bankruptcy takes the property of the bankrupt subject to all liens and charges against it which might be enforced, except for the provisions of the Bankruptcy Law. There is an apparent conflict in the decisions of the courts of this State respecting the effect of the non-filing of a chattel mortgage in accordance with the provisions of law on that subject. In Karst v. Gane (136 N. Y. 316) construction was given to the word " creditors ' in that provision of the former statute (See Laws of 1833, chap. 279, § 1) which declares that unless filed the chattel mortgage shall be absolutely void as against the creditors of the mortgagor, and it was held that a simple contract creditor was as much within the protection of the statute as a creditor whose debt had been merged in a judgment. In Stephens v. Perrine (143 N. Y. 476) what was held in the case last cited seems to have been approved on that proposition. In Stephens v. Meriden Britannia Co. (160 N. Y. 180), however, it seems to have been held that where the chattel mortgage is not filed as required by daw and not accompanied by an immediate delivery followed by an actual and continued change of possession of the property mortgaged, although it is void as against judgment creditors of the mortgagor, it is good as between the parties thereto and creditors' at large. On carefully reading that case we are inclined to the view that what was involved there was only a question of the right to maintain a suit by a receiver, under peculiar circumstances relating to the situation of the property. But even if we assume that the mortgage would be void as against judgment creditors alone, then there were judgment creditors of the Franklin Typewriter Compapy at the time the mortgage was filed. At that time judgments had been entered in favor of Mr. Edwards, one of them on February 11, 1901, arid the other on December 16, 1901, two days before the filing of the mortgage.
The present Bankruptcy Law differs in some respects from preceding enactments of that character, in that it gives to the trustee in bankruptcy, in addition to the rights of the bankrupt, and the authority to set aside transfers made in fraud of creditors, the right which-creditors would have to take advantage of the failure to file or record a mortgage or other instrument. (See 30 U. S. Stat. at Large, 564, § 67, subd. e; Id. 565, § 70.) Here the right of a judgment creditor to resort to the property covered by the mortgage, and hence to its proceeds, has passed to the plaintiff, and we are of opinion that as a consequence he was entitled to the judgment, he prayed for.
- The judgment must be reversed and a new trial ordered, with costs to appellant to abide the event.
O'Brien, McLaughlin and Hatch, JJ., concurred; Van Brunt, P. J., concurred in result.
Judgment reversed, new trial ordered, costs to appellant to-abide event.