Court Opinion

ID: 6837457
Source: CourtListenerOpinion
Date Created: 2022-07-23 20:08:36.592173+00
Date Added: 2024-06-11T16:04:44.804207
License: Public Domain

BINGHAM, Circuit Judge.
The plaintiff appellee is the trustee in bankruptcy of the firm of Barrionuevo, Zeno & Co., which filed a voluntary petition in bankruptcy on August 30, 1921, and was adjudicated a bankrupt the following day. This fan consisted of three members, the active partners being Mr. Barrionuevo and Mr. Zeno. They were merchants and, as a part of the firm’s business, furnished money and supplies to colonos (tobacco growers) to aid them in planting, cultivating, and harvesting their crops, receiving in return for the advances made notes in each of which it was agreed that the amount advanced should “be preferential as to legal effeets, because it is the expressed condition that the amount covered by this obligation will he used by me only and expressly in the expenses of refaction for my tobacco crops.”
The defendant appellant is a hank, which loaned money to the firm. In September, 1920, the firm had overdrawn its account at the bank by about $17,000, and gave the bank its note for $24,000 to cover the overdraft and additional credit then advanced. On April 16, 1921, the firm’s indebtedness to the bank was $29,516.83. On that date the two active partners executed an instrument, in which Mr. Barrionuevo and Mr. Zeno, each acting in his own right and with the consent *818of Ms wife, mortgaged to the-bank certain parcels of real estate owned by each individually, and in which Mr. Barrionuevo assigned to the bank certain mortgages or mortgage credits owned by him on real estate, to secure the indebtedness of the firm and a further advance of $2,000, then agreed to be made and which was made on April 19, 1921. By this instrument and by indorsement and delivery, these partners, acting in the right of the firm, also transferred to the bank 19 of the colonos’ notes amounting to $22,323,-the notes having been given the firm by the colonos for advances made by the firm to enable them to plant, cultivate, and harvest their tobacco crops. In this instrument of April 16, 1921, these active partners in behalf of the firm stipulated “that said notes represent amounts advanced to the debtors by the firm of Barrionuevo, Zeno & Co. for crop loans and they are guaranteed by contracts of agricultural loans.” This instrument was filed for record July 5, 1921, and was recorded July 15, 1921. Before this instrument was made and to induce the bank to enter into it, the active partners agreed in behalf of the firm to notify the bank when the tobacco was received from the colonos who signed the notes, and on July 2, 1921, they wrote the bank stating the names of the signers of the notes, and opposite each name gave the number of quintals of tobacco received from each up to that time by the firm; also stating that the weights given were gross weights and without discount for shrinkage. And on August 5, 1921, the firm again wrote the bank a letter'of the same tenor, stating the names of the signers of the notes, the amount of tobacco received from each, and that the total amount of tobacco then received on the notes transferred to the bank was 918 quintals and 39 pounds.
On August 24, 1921, the active partners, in behalf of the firm, made another instrument in favor of the bank, in which, after setting out the stipulations contained in the instrument of April 16, 1921, and restating the names and amounts of the colonos’ notes that were pledged to the bank in that instrument, .they acknowledged that, since the transfer of the notes to the bank, the firm “had received in payment of the amounts advanced and secured by the promissory notes, leaf tobacco given as security for the promissory notes and the agricultural loan contracts mentioned,” amounting to “nine hundred and forty-eight- quintals and thirty-nine pounds (948.39) of leaf tobacco of the present crop and of the foot, middle, and top grades, in good condition.” They also therein stated “that, since the promissory notes given to the -Crédito y Ahorro Ponceno have been, paid with this tobacco, -it is but proper that they be substituted by the tobacco, in so far as they have been paid, in order that they might reinforce the security of payment given in April of this year,” and pledged to the bank the 948 qmntals and -39 pounds of tobacco, stating “that this tobacco is delivered to-day to the depositary, * * * Mr. Aufiloquio Gandara, who appears in this act, by putting Mr. Gandara in possession of the tobacco and under Ms exclusive custody.” Later in the instrument Gandara acknowledges having received the tobacco “in the amount, class, and crop indicated,” and is warned by the notary that, having acknowledged the receipt of the tobacco and accepted the office, “he is bound to keep and take good care of the tobacco and have it at the exclusive disposal of the bank.”
The evidence also shows that at that time the 948 quintals and 39 pounds-of tobacco were measured, tagged with the name of the bank, and set apart by itself in the firm’s warehouse; that the depositary, Gandara, was given the key to the warehouse, took possession of the tobacco, and retained the control and possession of it until February, 1922, when the bank and the firm, by mutual arrangement, sold this tobacco and other tobacco of the firm then in the warehouse for $23,063.18; that the total amount of tobacco then sold was 1,396 quintals and 18 pounds (1,396.18), of which the tobacco in question, as measured at the time of the sale, amounted to 903 quintals and 46 pounds (903.46); and that the price received for this was $18,-9.72.66. The entire proceeds of the sale were delivered to the bank by the purchaser. A tender of $4,090.52, representing the difference between the price paid for all of the tobacco and the price paid for that claimed by the bank, the trustee declined to accept. The $18,972.66 received for the tobacco in question did not equal the face of the 19 colonos’ notes to within $3,350, and the evidence fairly shows that the tobacco crop of a colono in no case exceeded the face of his note, and in most cases was much less.
The District Court entered a decree setting aside the instruments of April 16, 1921, and August 24, 1921, as preferences; ordered all of the property mortgaged to th'e bank, all the mortgages or mortgage credits assigned to the bank, and all the colonos’ notes transferred to it turned over to the ■trustee;. ordered- the $18,972.66, the proceeds of the- tobacco in question, with interest, paid to the trustee; and that the records in. the public registries of the instruments of April 16 and August 24,1921, be canceled and the *819same recorded in the name of the trustee. It is from this decree that the present appeal is taken.
The principal questions raised by the assignments of error are: (1) Whether the transfers of the respective parcels of land and tho assignments of the mortgages or mortgage credits, properties of the individual partners, and the indorsement and the transfer of the notes (firm assets) constituted voidable preferences within tho meaning of section 60 or 67 of the Bankruptcy Act (11 USCA §§ 96, 107); and (2) whether the tobacco was security for the $22,323 of colonos’ notes, the right to which passed to the bank on April 16, 1921, when the notes were endorsed and transferred to it, or did not take effect as security for the notes until the execution of the instrument of August 24, 1921, which was within four months of the filing of the petition in bankruptcy, and was a voidable preference within the provisions of the Bankruptcy Act (11 USCA).
The District Court, in setting aside the instrument of April 16, 1921, apparently proceeded on the theory that the petition in bankruptcy seeking the adjudication of the firm was in effect a petition against the partners as individuals, and that an adjudication of the firm was also an adjudication of the individual partners, and, being of the opinion that tire instrument was one which by local law was required to be recorded, it was a voidable preference under section 60a (11 USCA § 96[a]), as it was not recorded until within four months of the filing of, the petition in bankruptcy.
So far as the instrument of April 16, 1921, purported to transfer the colonos’ notes (assets of the partnership), the District Court was plainly in error, for there is no provision of Porto Rican law requiring that their transfer he evidenced by an instrument subject to registration. As no record of their transfer was necessary, their transfer was not a voidable preference under section 60a, for it took place more than four months prior to the filing of the petition in bankruptcy.
Neither do we think that the instrument of April 16, 1921, so far as it was a mortgage of individual properties of the partners and an assignment of mortgages or mortgage credits, the individual property of one of the partners, was a preference voidable within the meaning of section 60 or 67. The petition in bankruptcy filed August 30, 1921, did not seek tho adjudication of the partners as individuals aud they have never been adjudicated bankrupts. Transfers of the individual property of a partner or liens imposed thereon by legal proceedings are not voidable as preferences or nullified as liens by the bankruptcy of the partnership.
In considering the question here presented, it is unnecessary to determine whether the instrument of April 16, 1921 (by which tho individual properties of the partners were mortgaged and tho mortgage credits of one of them transferred) was required by the law of Porto Rico to be recorded to render it valid as between the parties, for it was filed for record on July 5 and recorded July 15, 1921, and was not avoided by the filing of the petition in bankruptcy against the firm, even though its record took place within four months of the filing of that petition. The legal effect of the filing of tho petition against the firm was to avoid preferential transfers of firm property made within four months, and not transfers of the individual properties of the partners. In order to have avoided such transfers as preferential, petitions in bankruptcy should have been filed by or against each of the active partners, within four months of the time tho transfers were made, if recording was not required, or within four months of tho recording of the transfers, if recording was required. No petitions in bankruptcy by or against these partners as individuals have ever been filed.
This subject has recently been under consideration by the Supreme Court in the ease of Liberty National Bank of Roanoke v. Bear, Trustee (U. S. Sup. Va.) 48 S. Ct. 252, 72 L. Ed. -, decided February 20, 1928. There an involuntary petition was filed against a partnership in August, 1920, upon which it was adjudicated a bankrupt. In the preceding July the bank had brought a suit against the firm and tho individuals composing it, and during that month obtained judgment liens upon tho real esta,to of tho individuals. In a suit brought by the bank against the trustee in bankruptcy of the firm and of the individual partners, to assert its lions upon the individual properties of the partners, the trustee contended that these liens were voidable preferences under section 67f (11 USCA § 107[f]), as they were obtained within four-months of the filing of the petition against the firm. It was held, however, that the liens were .not avoided by the filing of the petition against the firm; that the firm as an entity could be adjudicated a bankrupt independently of tho members composing it; that, to have avoided these liens, petitions should have been seasonably filed against the individual members upon whose properties the liens were imposed; and that, as no such po*820tition was filed until eight or nine months after the liens attached, the liens were not avoided.
The remaining question relates to the 948 quintals and 39 pounds (948.39) of tobacco, which at the time of the sale • was found to contain only 903 quintals and 46 pounds (903.46), and the $18,972.66 derived from its sale.
The contention of the defendant bank is that this tobacco was security for the $22,323 of colonos’ notes, which on April 16, 1921, the firm of Barrionuevo, Zeno & Co. indorsed and transferred to the bank as security for its indebtedness'to the bank; that this tobacco was subject to a lien, equitable or statutory, for the benefit of the owner of the colonos’ notes; and that, on the transfer of these notes to the bank, this right in the tobacco passed to it by operation of law, as an incident of the notes.
It must be conceded that, if the colonos’ notes were secured by the 948 quintals and 39 pounds (948.39) of tobaeeo by way of a lien thereon, the right to the possession of the tobaeeo passed to the bank upon the transfer to it of the notes on April 16, 1921; for under the Code of Porto Rico “The sale or assignment of a credit includes that of all the accessory rights, such as the security, mortgage, pledge, or privilege.” Civil Code of Porto Rico, § 1431; Rev. Stats. and Codes of Porto Rico 1911, p. 760; 10 Manresa, pp. 350, 351. This is also the principle of the common law. Hilton v. Woodman’s Estate, 124 Mich. 326, 82 N. W. 1056; McDonald v. Kelly, 14 R. I. 335; Lyon v. Summers, 7 Conn. 399; Batchelder v. Jenness, 59 Vt. 104, 7 A. 279; Hurt v. Wilson, 38 Cal. 263; Perot v. Levasseur, 21 La. Ann. 529.
It must also be conceded that, if the firm acquired a right in the nature of a lien in the respective colonos’ tobacco crops as security for their notes, such right not only passed to the bank at the time when the firm indorsed and transferred the notes to the bank, but that thereupon the firm ceased to have any right or title to the tobaeeo of which it could avail itself or which would pass to its trustee in bankruptcy, and that the possession which the firm subsequently obtained from the respective colonos was acquired, not as owner of the tobaeeo, but as agent or bailee for the bank. .The evidence shows that the firm understood and represented that the tobacco was security for the notes (see notes and instrument of April 16,1921), and after receiving the tobaeeo recognized that it so held it, for under the dates of July 2 and August 5, 1921, and in compliance with its previous agreement so to do, it notified the bank of the amounts of tobaeeo which it had received at its warehouse from each one of the colonos, whose notes had been transferred to the bank, stating their names and the amount of tobacco received from each.’ The evidence also shows that on August 24, 1921, the tobaeeo securing these notes was set apart by itself, tagged with the name of the bank, and turned over to the possession and control of a depositary for the bank, who continued in possession and control of it until some time in February, 1922, when by joint arrangement between the bank and the firm the tobacco in question and other tobacco of the firm was sold to a single purchaser for $23,063.18, of which sum the tobaeeo in question brought $18,972.66.
The real question, then, is whether the firm, when it furnished the cash and supplies to the 19 colonos to be used in planting, raiding, and curing their tobacco crops, and received in return their 19 individual notes, acquired as an incident of the notes a security in the nature of a lien on the respective crops for the raising and curing of which the cash and supplies were advanced ?
Most of the colonos’ notes were given in October, November, and December, 1920, and became due May 30 and June 30, 1921. In each note it was expressly declared that the amount advanced should ‘he preferential as to legal effects [that is, that the erop to be raised should be security for the amount advanced], because'it is the expressed condition that the amount covered by this obligation will be used by-me only and expressly in the expenses of refaction for my tobaeeo crop.” The colonos, in compliance with the agreement in the notes, in May and June, and prior to August 5, 1921, turned overdo the firm their crops, to secure and pay their respective notes, and the firm in recognition of its agreement with the bank notified the bank of the receipt of the tobaeeo. The firm had no title to the tobaeeo when it received it, for it did not then own the notes for which the tobaeeo was agreed to be security, and to perfect which it was delivered to the firm. It received the tobaeeo as agent for the bank, and because of this notified the bank of its receipt. As the firm had no title to the tobaeeo when it filed its petition in bankruptcy, or at any time within four months prior thereto, the trustee in bankruptcy acquired none, and there is no basis upon which he can maintain this suit to recover the $18,972.-66, the proceeds of the tobacco.
Then again the Civil Code (title 17, c. 2) provides:
*821“See. 1822. Credits shall be classified for their graduation and payment in the order and manner specified in this chapter.
“Sec. 1823. With regard to specified personal property of the debtor, the following are preferred:
******
“6. Credits for seeds and expenses of cultivation and harvesting, advanced to the debtor, with regard to the fruits of the crops to which they were applied.”
“Sec. 1827. Credits which enjoy preference with regard to certain personal property exclude all the others to the extent of the value of the personal property to which the preference refers.
“When two or more creditors claim preference with regard to certain personal property, the following rules shall be observed as to priority of payment:
* * * A * *
“3. Credits for advances for seeds, expenses of cultivation, and harvesting, shall be preferred over those for rents and leases, with regard to the fruits of the crop for which they were incurred.”
There can be no doubt but that section 1823, subd. 6, of the Civil Code recognizes the crop, in the production of which a credit is to be used, as a security for the credit advanced. This was the view taken by this court of In re Vidal, 233 F. 733, 736, 737.
 It was not fraudulent, as seems to be suggested, for the bank to offer or agree to release a portion of its security in the tobacco to aid the bankrupt firm to meet its composition agreement with its general creditors. And if the firm caused tobacco, which it owned or in which it had an interest, to be intermingled with the tobacco in its possession belonging to the bank (which we do not find to be the fact), such wrongful intermingling would not defeat the bank’s title to its tobacco, or confer title to it upon the firm or its trustee in bankruptcy.
The decree of the District Court is reversed, and the ease is remanded to that court with directions to dismiss the suit, with costs to the appellant.