GUARANTY SECURITY CORPORATION V. GEORGE W. REED* (TWO CASES).

U. S. Circuit Court of Appeals, First Circuit, June, 1924.

Nos. 1750, 1751.

(Rev'g 2 Am. B. R. [N. S.] 345.)

PREFERENCES--ConstituENT ELEMENTS OF VOIDABLE PREFERENCE-Creditor's KNOWLEDGE OR REASONABLE CAUSE FOR BELIEF-KNOWLEDGE OF CRIMINAL ACTS OF DEBTOR CONNECTED WITH INABILITY TO PAY DEBT SUFFICIENT TO REQUIRE INVESTIGATION.

Knowledge by a creditor of the sale by a debtor of automobiles covered by a loan agreement reserving title to the creditor until payment of loan, together with the fact that the debtor was unable to pay only about half of the amount of the loan secured by said automobiles when pressed for payment, was sufficient to put the creditor on inquiry as to the solvency of the debtor. (Lower court affirmed on this point.)

SAME

(See Collier, 13th Ed., p. 1308; Am. B. R. Digest, § 512.)

MANNER OF CREATING PREFERENCE-CONDITIONAL SALE.

A conditional sale of automobiles to a retail dealer by a bank as a method of giving security for a loan is valid under the laws of Massachusetts where the evidence shows that the bank had title at the time of the sale and therefore a seizure and sale of the automobiles by the bank within four months of the dealer's adjudication does not amount to a preference. (Lower court reversed on this point.)

(See Collier, 13th Ed., pp. 1548, 1714; Am. B. R. Digest, §§ 442, 444, 540.)

LIENS-PARTICULAR

LIENS-CONDITIONAL SALE-EVIDENCE SUFFICIENT ΤΟ

SHOW TITLE IN VENDOR UNDER CONDITIONAL SALE CONTRACT.

Testimony that the conditional vendor of automobiles, a bank loaning money to a retail dealer, paid for the cars and put them in a storage warehouse in its own name and later took them out and delivered them to the dealer under instruments of lease or conditional sale containing the usual provisions for retention of title, is sufficient to warrant a finding that the vendor had title to the automobiles.

(See Collier, 13th Ed., p. 1526; Am. B. R. Digest, §. 444.)

Appeal by defendant from decrees for plaintiffs in action to recover alleged preferences. Decree affirmed in one case and reversed and remanded in other.

Before BINGHAM, JOHNSON and ANDERSON, Circuit Judges.

* 299 Fed. 265.

J. C. Johnston, for appellant.

George W. Reed, for appellee.

ANDERSON, Circuit Judge:

In these two preference suits the trustees in bankruptcy of the Massachusetts Motors Company prevailed; in No. 1750, the decree was for $10,000; in No. 1751, for $8,318. The salient facts are stated by the District Court as follows:

"The defendant lent money to the bankrupt and took as security instruments covering certain motor cars, one of the terms of the instrument being that title to the cars should not pass till the loans were paid. By the arrangement between the parties, as soon as a car was sold the loan on that car was to be paid at once. This arrangement was carried out at first, but late in July the defendant learned that the bankrupt had sold cars without paying the loans on them. The amount of indebtedness on this account was about $21,000. The defendant threatened the officers of the bankrupt with arrest if this amount was not paid. Finally, on August 10, $10,000 was paid to the defendant, and this payment is alleged to be a preference. After this, on the 25th of August, the defendant took possession of all cars on which it had loaned money. Three days afterwards an involuntary petition in bankruptcy was filed against the bankrupt."

Adjudication followed on September 11, 1920.

The court below also found that the bankrupt was insolvent as early as July, 1920, and that, when the defendant received the payment of $10,000 on August 10, it received a greater percentage of its debt than other creditors of the same class, and that it had reasonable cause to believe that a preference would. be effected.

The evidence fully warranted these findings. The decree in No. 1750 must be affirmed.

But in the other case a different problem is presented. On August 25, 1920, the defendant seized and afterwards sold for $8,318 ten cars which the bankrupt then held under conditional. bills of sale, or leases, running from the defendant. If these instruments were invalid as against trustee in bankruptcy, there was a preference; otherwise, not. As to this point, the District Court said:

"The defendant contends, however, that as it retained title to the motor cars it could take possession of them at any time. This contention is un

sound. The cars them to be sold.

were given into the possession of the bankrupt to enable Persons dealing with the bankrupt had no means of knowing that the cars did not belong to it; the defendant thus enabled the bankrupt to obtain a false credit. Under such circumstances a conditional sale is void as against a trustee in bankruptcy."

We think this ruling cannot be sustained. The point is covered by the decision of this court in Federal Finance Co. v. Reed, 4 Am. B. R. (N. S.) 762, 296 Fed. 1, decided February 26, 1924. This is apparently recognized by the plaintiffs, and they seek to distinguish the instant case by contending that the defendant had never acquired title to these cars, and that therefore the instruments of conditional sale were void. Possibly, from the conflicting evidence as to the loose course of business carried on between the defendant and the bankrupt, the court below might have been warranted in finding that title to these cars passed directly from the manufacturer to the bankrupt. But the District Court did not so find. On the contrary, the necessary implication from the above quotation is that the court found that the defendant obtained title and lost it-under the doctrine of constructive fraud arising from ostensible ownership a doctrine which this court was, in the Federal Finance Case, supra, constrained to hold not to be the law in Massachusetts.

There was evidence warranting the finding that the defendant obtained title to these cars; for there was testimony to the effect that the cars were paid for by the defendant, put in a storage warehouse in the name of the defendant, and that later they were taken out of the warehouse and delivered to the bankrupt under the instrument of lease or conditional sale containing the usual provision as to the retention of title until the cars should be paid for.

On such a record we cannot sustain plaintiff's contention that defendant never in fact got title to these cars; nor can we sustain the ruling of the court below-that the defendant, having title, lost it by turning the cars over to the plaintiff under conditional bills of sale.

Perhaps we should add that there are no findings to bring this case within the doctrine laid down in Guaranty Security Corporation v. Eastern Steamship Co., 241 Mass. 120, 134 N. E. 364. Compare In re Harrington (D. C., Wash.), 32 Am.

B. R. 828, 212 Fed. 542; Flanders Motor Co. v. Reed (C. C. A., 1st Cir.), 33 Am. B. R. 842, 220 Fed. 642, 136 C. C. A. 250. It follows that in No. 1751 the decree must be reversed and the bill dismissed.

As the two cases are here on a consolidated record, and as each party prevails in one case no costs should be awarded either party in this court.

In No. 1750, the decree of the District Court is affirmed.

In No. 1751, the decree of the District Court is reversed, and the case is remanded to that court for further proceedings not inconsistent with this opinion.

IN THE MATTER OF FEENEY TOOL COMPANY, BANKRUPT.*

U. S. District Court, District of Connecticut, June, 1924.

No. 6387.

ADMINISTRATION, SETTLEMENT

OF

AND DISTRIBUTION IN GENERAL-SALE PROPERTY-TERMS OF SALE-SALE FREE FROM LIENS NOT ORDERED UNLESS PROSPECT OF BENEFIT TO ESTATE.

A petition for leave to sell property free from liens will not be granted unless there is a fair prospect that the sale will be beneficial to the estate. (See Collier, 13th Ed., p. 1759; Am. B. R. Digest, § 602.)

Petition to review referee's order directing sale of certain chattels free from liens. Reversed, and petition for leave to sell dismissed.

Spafford & Mallette, for petitioner.

Shapiro, Shapiro, Goldstein & Brody, for trustee.

THOMAS, District Judge:

This matter is here on the petition of the American Bank & Trust Company, for a review of the order of the referee directing the sale of certain chattels free and clear from liens with provision for the lien of the bank attaching to the proceeds.

300 Fed. 379.

On the hearings before the referee no minutes were taken and the facts have been found from the comparison of statements of facts contained in the briefs filed with the referee on behalf of the trustee, and on behalf of the American Bank & Trust Company, respectively.

The trustee of the bankrupt filed his petition with the referee for authority to sell certain chattels consisting of the contents of a two-room machine shop on the premises formerly occupied by the bankrupt in Bridgeport. The contents are described as eertain machines, tools, instruments, and safes, with a general clause covering all and sundry the small tools, equipment, and appurtenances thereof. The petition was opposed by the American Bank & Trust Company of Bridgeport, which held a chattel mortgage on all the chattels described in the petition. This chattel mortgage was dated and filed for record April 6, 1922, and it was made to secure the payment of pre-existing indebtedness in the sum of $13,000 then due from the bankrupt to the American Bank & Trust Company. The indebtedness arose as to $10,000 thereof on August 4, 1920, when the bank loaned to the bankrupt $10,000, for which the bankrupt made and delivered to the bank its promissory note for $10,000, payable on demand-payment of the note having been guaranteed by two indorsers, and as security for the payment of this note the bankrupt executed and delivered to the bank a mortgage deed covering two certain parcels of real estate, which mortgage deed was duly recorded. At that time the real estate thus mortgaged by the bankrupt to the bank was subject to two prior mortgages appearing of record-one for $11,000, held by the Mechanics' & Farmers' Savings Bank and the other for $5,000, held by one Karl Auth. On December 10, 1921, the bankrupt borrowed $3,000 from the American Bank & Trust Company, and at that time executed and delivered to the bank its promissory note for $3,000, payable three months after its date, which note was indorsed by four individual indorsers. None of the indebtedness of $13,000 has been paid to the bank.

On March 8, 1923, an involuntary petition in bankruptcy was filed against the bankrupt and adjudication followed on May 17, 1923. In May, 1922, Karl Auth, the holder of the