Court Opinion

ID: 6837458
Source: CourtListenerOpinion
Date Created: 2022-07-23 20:08:36.595504+00
Date Added: 2024-06-11T16:04:44.807803
License: Public Domain

ANDERSON, Circuit Judge
(dissenting). In this sadly mismanaged bankruptcy ease, I can see no escape from the conclusions of my associates as to the validity of the transfer of the property of the unadjudicated individual partners. And if and in so far as the instrument of April 16, 1921, transferred notes (probably already discounted with the bank) I think the transfer good without record.
But I am unable to agree that these notes were secured notes, and that the sum of $18,-972.66, as alleged proceeds from the sale of applicable security, can bo held by the bank.
The majority rest their conclusion that the 19 notes were secured on two grounds. The first is that the recital in the notes that the amount advanced should “be preferential as to legal effects,” “created a right in the tobacco in the nature of a lien for the benefit of the owner of the notes.” What “a right in the nature of a lien” is 1 do not know. It is or it is not — a lien. But this amounts to saying that the notes were equivalent in law to mortgage .notes, though no mortgage was executed or recorded under the act “for contracts of advances for agricultural purposes,” etc., of March 10, 1910, now R. S. §§ 52-72. This act .seems to cover, at least in part, the same field as the Act of March 10, 1904, now R. S. §§ 36-50, for agricultural loans. Both acts require formal instruments duly recorded.
Agricultural loans are under a sort of supervision of the municipal court (R. S. §§ 37 — 42), which issues a “certificate enabling the agriculturist to procure the loan.” On maturity, the - holder of this certificate must within 20 days apply to the municipal court for sale at public auction duly notified; failing action for 20 days, the creditor forfeits his preference.
Under the act of 1910, supra, there is an express requirement that the creditor give the debtor an extension (section 55), and in case of suit the debtor may petition for such extension (section 60) a,nd the order therefor is to be duly recorded in the registries of contracts for agricultural purposes (section 63).
Under the ruling now made, compliance with these provisions, intended for the protection of the borrower, is held entirely unnecessary; the lender may get full security by requiring his borrower to sign notes containing this rhetorical recital — “preferential as to legal effects.” The statutory provisions intended to limit the greed and power of lenders and to invalidate secret liens are thus held nugatory. I cannot accept that doctrine.
The second stated basis for the ruling that the notes are secured is Civ. Code, tit. 17, c. 2, R. S. §§ 1822, 1823, 1827. This title is a local insolvency or bankruptcy law, and the provisions cited and relied upon have to do with priorities only if and when an insolvent debtor is proceeding under that law. It has not the slightest relation to rights accruing, as in this case, under the National Bankruptcy Act. The system of distribution *822provided in it is, as pointed out by Judge Dodge for this court in the Vidal Case, 233 F. 733, 737, “plainly inconsistent as a whole with that established by the National Bankruptcy Act.” Probably this insolvency law is suspended, as state insolvency acts are suspended, when the nation exercises its paramount power over bankruptcy. Gilbert’s Collier, Bankruptcy, p. 8, and cases cited. At any rate it cannot create lien rights under the Bankruptcy Act.
That this act is in effect a local bankruptcy law appears plainly enough from such sections as 1813 and 1814, reading: •
' “Sec. 1813. A debtor may judicially ask from his creditors a reduction in the amount and an extension of time in the payment of his debts, or either of the two things, but the exercise of this right shall not produce judicial effects, except in the eases and in the manner prescribed in the law of civil procedure.
“See. 1814. A debtor, whose liabilities are greater than his assets, and who may have failed to meet his current obligations, must file a petition in bankruptcy (concurso) in a competent court, as soon as he is aware of being in such condition.”
Of course “competent court” means a Porto Rican court. Porto Rico cannot dictate as to when our Bankruptcy Act shall be invoked. And if we turn to the Code of Commerce (Book 4, §§ 8429-8481) we find elaborate provisions for “Suspension of Payments and Bankruptcy in General.”
Among other things this Code' divides bankruptcy into (1) “accidental insolvency;” (2) “culpable insolvency;” and (3) “fraudulent insolvency” — with elaborate definitions of the three kinds. The provisions for discharge are in section 8480:
“(8480) Art. 921. The bankrupts not included in the foregoing article may obtain their discharge by proving that they have fully complied with the approved adjustment they may have made with their creditors.
“Should there have been no agreement, they shall be obliged to prove that all the obligations acknowledged in the bankruptcy proceedings were liquidated with the' assets of the same, or through subsequent payments.”
—and sections 1818, 1819, and 1820:
“(4924) Sec. 1818. Settlements, which the debtor and his creditors may judicially agree to, with the formalities of law with regard to the reduction of the amount and extension of time, or in bankruptcy, shall be binding on all the concurrent parties and on those- who, having been cited and notified in ■ due foim, should not have protested in time. The creditors who, having the right to abstain, should have duly made use of such right, are excepted. The creditors included in sections 1823,1824 and 1825 have the right to abstain.
“(4925) Sec. 1819. If the settlement for reduction of amount and extension of time is agreed to with creditors of the same class, the legal decision of the majority shall be binding on all, without prejudice to the respective preference of the creditors.
' “(4926) See. 1820. If the debtor should comply with the settlement, his obligations shall be extinguished in the terms stipulated in the same; but, should he fail to comply with the whole or a part of said settlement, the rights of the creditors shall revive for the sums of their original credits which they may not have received, and any of them may demand' a declaration in or continuance of bankruptcy.”
The parts of this insolvency law cited by my associates have no relation to our present problem. Chapter 2 of title 17 is, entitled “Classification of Credits,” and, with subdivisions, creates 26 classes, several of which refer to existing Iieng, as by pledge “mortgage and agricultural credits,” “recorded in the registry.” Section 1825 (f) reads:
“(4931) Sec. 1825 (f). For income for support during proceedings in bankruptcy, unless they are based on mere beneficence.”
This shows clearly, as do also other sections, that the whole title has merely to do ■with distribution under this local bankruptcy system.
Section 1823, 6, quoted in the majority opinion does not purport to create a lien; it is merely a priority provision in distribution under this local bankruptcy system. To make it avail, the bank must have proved its claim and applied for a priority order section 64b (5) of our act (11 USCA § 104[b] [5]). The bank proved no claim; it took this money under its claim of a pledge on August 24.
It is an utter misconstruction of Judge Dodge’s opinion in the Vidal Case, supra, to say that these provisions were regarded as creating a lien. In that ease the creditor had proved his notes and sought an order under section 64b (5) for priority under local law, relying on R. S. § 1825 (4), as the notes had been “unauthentieated and acknowledged”, in a public notarial instrument. It was conceded that Porto Rican priorities have the samé' standing under the Bankruptcy Act as have state priorities. But the decision was against this plausible claim. Judge. Dodge says (233 *823F. 737) that “the system of distribution which title 17 purports to establish as above is plainly inconsistent as a whole with that established by the National Bankruptcy Act.” And (page 738) he refers to title 17 as being “suspended in operation” by the National Bankruptcy Act. He observes (page 738) that “several sections of title 17 * * * are direetly opposed to provisions of, the Bankruptcy Act, and could have no force whatever in the face of that act, in any event. * * * But since all the sections of «title 17 appear to form together a consistent whole, and the provisions of eaeh to depend upon those contained in all the others, it is doubtful how far the provisions of any one section can remain effective, detached from the others, for any purpose.”
So far as this ease has any bearing at all on our problem, it is strongly against the view of the majority.
In Bunch v. Maloney, 233 F. 967 (C. C. A. 8th) Hook, J., points out, pages 969, 970, that Congress has repeatedly sought to amend the act so as to prevent secret liens from cutting down the rights of general creditors. In that case it was held (affirming Trieber, D. J., below) that a chattel mortgage given more than four months before bankruptcy, but recorded within four months, was a voidable preference under section 60b (11 USCA § 96 [b]), though under Arkansas law an unrecorded mortgage was good between the parties, etc. He cites Carey v. Donohue, 240 U. S. 430, 36 S. Ct. 386, 60 L. Ed. 726, and distinguishes it. Cf. Gilbert’s Collier, p. 691a, and eases cited, on the effect of amendment of 1910 giving to the trustee the title of lien creditor. See, also, Fuller v. Atlanta Nat. Bank, 254 F. 278 (C. C. A. 5th); Bank v. Bell, 275 F. 835 (C. C. A. 5th).
I do not overlook Martin v. Bank, 245 U. S. 513, 38 S. Ct. 176, 62 L. Ed. 441, and Bailey v. Baker Ice Mach. Co., 239 U. S. 268, 36 S. Ct. 50, 60 L. Ed. 275; but I do not think the facts in this ease bring it within the doctrine of those cases.
Nothing could be more inconsistent with the dominant purpose of the Bankruptcy Act to provide equality among creditors than this loose doctrine of transmuting any sort of recital of preferential treatment into a lien, the equivalent of duly recorded mortgages. Compare Mass. Tr. Co. v. MacPherson, where I dissented (C. C. A.) 1 F.(2d) 769, and Bunch v. Maloney, supra. The wholesome provisions of the applicable agricultural loan act were intentionally disregarded by these parties. This decision offers rewards for such methods of quasi fraud on the local law as well as on the Bankruptcy Act.
The conduct of the bank shows that it and its counsel recognized that the notes were not legally secured. In the instrument of April 16, the bank had these notes described as “guaranteed by contracts of agricultural loans”; it abandoned this theory in the instrument of August 24, entitled “Reinforcement of Securities Given on April 16, 1921,” and containing this explicit statement:
“Second. That said tobacco is the exclusive property of the partnership that pledge it, not existing on same any incumbrance or right which might affect in any form or manner the right of absolute ownership of the debtor partnership.”
Here is an absolute negative of the theory now adopted by this eourb. The instrument provides for enforcement as follows:
“Eighth. In ease of execution of this pledge the creditor bank is authorized to follow the proceeding of public auction before a notary, set forth in the Civil Code in force, and this proceeding may take place at Cayey or Ponce, at the option of the creditor bank, and in the same conditions as to place, may bo followed the proceeding which the bank may elect for the execution or judicial claim, the debtor firm represented by the parties appearing, expressly submit themselves to courts of the judicial district of Ponce or of Guayama, as the bank may elect; it being agreed as notary or attorney’s fees in the execution or judicial claim, the sum of three hundred dollars, which will be paid by those debtors and may be collected from the pledge.
“Ninth. All the expenses of the record of this pledge, for the constitution or cancellation in due time, or of prorogations, or extensions, those .of the pledge itself, and any others which may arise by virtue of this contract, as th.ose of policies, and any others, will be for account of these debtors, which may be paid by the bapk and charged to the pledge.
“Mr. Anfiloquio Gandara accepts this ’ deed in his capacity as depositary for which ho has been duly appointed, which he will fulfill gratis, and he confesses to have received the mortgaged tobacco, in the amount, quality and harvest as aforesaid.
“Mr. Miguel Melendez Munoz, in the capacity in which he appears in this act, accepts this deed.
“Warnings.
“I, the notary, caution Messrs. Barrionuevo and Zeno for themselves and as repre* *824sentatives of the partnership1, Barrio nuevo Zeno & Co., that by the mortgage or pledge they have just made they release themselves of the possession of said tobacco and they will not be able to dispose of same without the written consent of the bank. And to the depositary, Mr. Gandara, I caution him that by the confession of having received the tobacco and accepting the appointment of depositary in this pledge, he is obliged to take care and keep the tobacco in good'condition at the exclusive disposition of the bank (creditors bank) he being responsible for same to the bank.”
■ Here is another unmistakable recognition of the transaction as a present pledge, only a week before bankruptcy. It was nothing else. The notes were not agricultural loans, crop notes, or mortgage notes. The bank had prior to August 24 no lien whatever.
, But, even if wrong in my view that the deed and alleged seizure of August 24 were not acts perfecting lien rights already existing, the record shows clearly that the tobacco then seized was a hotchpot derived in part from colonos whose notes (of the same tenor as those of the appellant) had gone to the National City Bank, a creditor for over $10,-000, and in part tobacco raised by the bankrupts themselves. If the notes were secured notes, the appellant is now given security belonging in part to the National City Bank. Intermingling, even if wrongful, as stated in the majority opinion, would not give the bank title to tobacco raised by colonos whose notes went to the National City Bank. The appellant can hold this money only by proving (as it has utterly failed to do) that the money is the proceeds of identified tobacco, subject to a valid lien, -and duly enforced before bankruptcy. The bank had no lien until August 24; the tobacco claimed was not identified; the alleged lien was not legally enforced. Three fatal defects are enough.
Another insuperable difficulty is that the court below found, on evidence plainly warranting the conclusion, “that the said tobacco claimed to have been pledged hever left the actual possession of the bankrupt until i.t was sold and the proceeds delivered to the defendant bank.”
One reason for leaving the bankrupts in possession was that negotiations for a settlement with creditors were then pending. In fact, an offer of composition was later approved, but it failed because the tobacco, when sold, produced much less than was expected, and because the bank had forced from the bankrupts a secret fraudulent agreement for full payment — not, as stated in the majority opinion, a release of a portion to help out the composition. On the sale in February, 1923, of the whole mass of tobacco without complying with section 57h of the Bankruptcy Act (11 USCA § 93[h]), the bank took and kept the entire proceeds until March, 1926, when, under stipulation and order of the court below, it turned over $4,-090.52.
Of some significance is the fact that counsel for the bank, familiar with the local law, pleads the pledge of August 24 as “merely a substitution of one security by another that was of less value.” He does not allege the notes to be agricultural loans or secured under the statutes cited by my associates.
The bank’s title to the skm of $18,972.66 is, I think, plainly voidable as a preference.