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(a) Have they an equitable lien upon the fund of $225 derived from the sale of the remnants of the property ?
The case shows that in October and December, 1901, the bankrupt made certain contracts with Blake & Co. for the purchase of machinery described in the contracts. He gave Holmes notes, reciting severally that they were given for the property described, and that the title was to remain the property of Blake & Co. until the several notes were fully paid. These notes were recorded in the office of the town clerk of Vånceboro; but were never recorded in the town of Calais, where Hicks lived. Section 5 of chapter 113 of the Revised Statutes of Maine provides :
“No agreement that personal property bargained and delivered to another, shall remain the property of the seller till paid for, is valid unless the same is in writing and signed by the person to be bound thereby. And when so made and signed, whether said agreement is, or is called a note, lease, conditional sale, purchase on instalments, or by any other name, and in whatever form it may be, it shall not be valid, except as between the original parties thereto, unless it is recorded in the office of the clerk of the town in which the purchaser resides at the time of the purchase.”
I have already quoted the provisions (sections 67a and 70a) of the bankrupt act. In deciding whether the claimant can enforce an equitable lien upon the fund derived from the sale of the remnants of the mill, it becomes material to inquire whether the property covered by the Holmes notes and the property sold are the same. I find that each note was for a different property. The first was for a boiler, engine, steam pump, smokestack, shafting. The second was for corrugated roofing, piping, and similar supplies. The property from which the fund is derived was the remnant after the destruction of the mill and contents by fire. The chattels covered by the Holmes notes are, then, but a part of the property, the remnant of which has been sold and has become the basis of the fund in question. There being different claimants making claims upon this fund, and there being no identity of property, it is impossible to impress the whole fund with the equities arising from these two Holmes notes. Inasmuch as the case, however, may go beyond this court, it is not wise to dismiss the case by passing upon this mere question of fact, but it is wise to consider what effect the nonrecording of the Holmes notes has upon this subject-matter. Much that I have said relating to the first claim applies to the claim which I am now considering. Notwithstanding the apparently sweeping phraseology of sections 67a and 70a of the bankrupt act, I have already observed that the courts in this circuit have lately shown at least a tendency to hold that these sections of the bankrupt act are not applicable to conditional sales, even though expressly declared by state statutes to be void for lack of record, and that the whole subject is to be treated with reference to the federal decisions and without reference to local statutes or local decisions of the states. Loveland Case, supra; James v. Gray, supra; Tucker v. Curtin, supra; Hewit v. Berlin Machine Works, supra.
A similar question was before Judge Webb in this district in 1899, in the proceedings of George D. Robinson, individually and as a member of the firm of Robinson & Hodgdon. In that case the Abram French Company proceeded against Wilford G. Chapman, as trustee
in bankruptcy of Robinson & Hodgdon, to recover personal property which the company had delivered to the bankrupts. În an unpublished opinion, Judge Webb said:
“The Abram French Company did not sell the articles so specified, but contracted to lease them to Robinson & Hodgdon, upon terins agreed to, by which the lessees would finally become vested with the title to the property upon performing all the conditions agreed to be contained in the lease.
The Abram French Company never parted with the title and property in the articles in controversy. Without considering what might have been the rights of attaching creditors of Robinson & Hodgdon or bona fide purchasers for value, since no such question is presented in the case, I hold that the special agreement was valid as between the French Company and Robinson & Hodgdon, that they might at any time have taken possession of the articles, that the title of the trustee is no greater than that of the copartnership and the partners."
He refers to Donaldson v. Farwell, 93 U. S. 631, 23 L. Ed. 993, Stewart v. Platt, 101 U. S. 731, 25 L. Ed. 816, Dudley v. Easton, 104 U. S. 99, 26 L. Ed. 668, and also adopts the language of the court in Yeatman v. Savings Institution, 95 U. S. 764, 766 (24 L. Ed. 589), in which it was held :
"The established rule is that except in cases of attachments against the property of the bankrupt within a prescribed time preceding the commencement of proceedings in bankruptcy, and except in cases where the disposition of property by the bankrupt is declared by law to be fraudulent and void, the assignee takes the title subject to all equities, liens, or incumbrances, whether created by operation of law or by act of the bankrupt, which existed against the property in the hands of the bankrupt. He takes the property in the same 'plight and condition' that the bankrupt held it.”
Judge Webb then proceeds: "There was delay on the part of Robinson & Hodgdon in executing this lease, among other reasons, because Hodgdon made objection to engaging in a copartnership. Correspondence followed, in which the Abram French Company called attention to the failure to sign and return the lease, and were informed that the draft which was sent had in some way become lost. By the lease a payment of $300 was to be made in cash at once, but it was never made. One hundred and twenty-five dollars was sent with suggestion of other changes in the terms of the lease, especially as to its times and amount of payments. These changes were never assented to by the French Company, who constantly insisted upon a performance by Robinson & Hodgdon of the contract of lease."
In that case it appears that there was no completed contract which could have been recorded; and therefore it could not have been within the provisions of section 5, c. 113, Rev. St. Me. The case is discussed precisely as if the bankruptcy law of 1898 had been the same as the bankruptcy law of 1867, and did not contain the provisions 67a and 70a. But, as I have said, in that case there was nothing to be recorded. There was no agreement calling for any record. While the goods had been forwarded to Portland, the terms under which they had been retained had not been definitely fixed and reduced to writing. And in that case Judge Webb did not discuss the principles laid down in the late cases in this circuit to which I have referred. In another branch of the case at bar I have already commented upon Humphrey v. Tatman, supra, and other cases in which the federal courts have followed the decisions of the state courts, relating to the effect of unrecorded conditional sales. In the Garcewich Case, supra, Judge Wallace shows the general attitude of the federal courts upon this subject, and especially upon fraudulent conditional sales. He says:
"It is the settled law of this state that personal property may be sold and delivered under an agreement for the payment of the price at a future day, and the title by express agreement remain in the vendor until the payment of the purchase price. In such a case the payment is strictly a condition precedent, and until the performance the title does not vest in the buyer. It is one of the exceptional cases in which the law tolerates the separation of the apparent from the real ownership of chattels when the honesty of the transaction is made to appear; but, when the purpose for which the possession of the property is delivered is inconsistent with the continued ownership of the vendor, the transaction will be presumed fraudulent as against purchasers and creditors. The transaction will be deemed merely colorable, and the title to have been vested absolutely in the buyer. Ludden v. Hazen, 31 Barb. (N. Y.) 650 ; Frank v. Batten, 49 Hun, 91, 1 N. Y. Supp. 705; Bonesteel v. Flack, 41 Barb. (N. Y.) 435. When the property is delivered to the vendee for consumption or sale, or to be dealt with in any way inconsistent with the ownership of the seller, or so as to destroy his lien or right of property, the transaction cannot be upheld as a conditional sale, and is a fraud upon the creditors of the vendee. Even in the case of a chattel mortgage, when it is understood between the mortgagor and the mortgagee that the mortgagor may sell the chattels in his business, and use the proceeds, the transaction is fraudulent in law as against the creditors of the mortgagor. Such an arrangement, if expressed in the instrument, defeats its essential nature and qualities as a mortgage, so that, in a legal sense, it is not a security, but merely the expression of a confidence by the mortgagee in the montgagor, and, if made, but not expressed in the instrument, is equally vicious, if not more suggestive of a fraudulent purpose.”
Dealing with this subject, the following decisions of the federal courts are important, although many of them have taken a different view of the law relating to unrecorded mortgages and conditional sales from that taken by the leading cases in this circuit: Re Chesapeake Shoe Co. v. Seldner, 122 Fed. 593, 58 C. C. A. 261; Re Josephson (D. C.) 116 Fed. 404; Re Tatem & Ano. (D. C.) 110 Fed. 519; Re Shirley, 112 Fed. 301, 50 C. C. A. 252; Re Pekin Plow Co., 112 Fed. 308, 50 C. C. A. 257; Re Builders' Lumber Co. (D. C.) 148 Fed. 244; Re Foundry & Machine Co., 17 Am. Bankr. Rep. (August, 1906) 291, 147 Fed. 828; Re Bradley, Alderson & Co., 17 Am. Bankr. Rep. 495, 149 Fed. 254; Re Smith & Schuck, 13 Am. Bankr. Rep. 103, 132 Fed. 301; Re Nathan Lukens, 14 Am. Bankr. Rep. 683, 138 Fed. 188; Fisher v. Cushman, 103 Fed. 860, 43 C. C. A. 381, 51 L. R. A. 292.
I have referred to these cases, and especially to the recent cases in this circuit, in order to show the present condition of the federal law relating to this subject. I do not base my decision, on this branch of the case, upon the fact of the lack of record of the Holmes notes, but I come to my conclusion, because the facts shown in the record are not sufficient to impress the fund with the equitable claims arising under these conditional sales.
(b) What are the equitable rights of these claimants under their insurance policies?
Upon this point, the record shows an agreement between the bankrupt and Blake & Co. that the bankrupt should insure the property received from Blake & Co.; that the bankrupt took out a policy in the
Liverpool & London & Globe Insurance Company payable to Blake & Co. in accordance with the agreement. This agreement relating to insurance was an oral agreement. Neither the conditional contracts, nor any of the mortgages in the case, contain any agreement relating to insurance. The record further shows that Hicks carried out his agreement to insure. The letters contained in the record show that he did as he agreed, and that the policy was, in fact, taken out and delivered to Blake & Co. in the Hamburg-Bremen Insurance Company, and later in the Liverpool & London & Globe. The claim of Blake & Co. differs from that of Mrs. Young, however, in this: that in her case she was named as beneficiary in the policy. Blake & Co. were not named as beneficiaries in policies which existed at the time of the fire; but, on the other hand, notwithstanding the policy in the Liverpool & London & Globe was originally payable to Blake & Co., at the time of its renewal the bankrupt requested the agent of the company to make it payable to his wife, instead of to Blake & Co., and it was so made in consequence of this request. Blake & Co. knew nothing of this change until after the loss by fire. In consequence of the agreement to insure which the case shows, did an equitable lien exist upon the insurance policies and upon the moneys which have been received from them?
I have already cited and considered Wheeler v. Insurance Company, supra.
In Farmers' Loan & Trust Co. v. Penn Plate-Glass Co. et al., 103 Fed. 132, 43 C. C. A. 114, 56 L. R. A. 710, it was held that:
“The rule that, where a mortgagor has covenanted to insure the mortgaged property for the benefit of the mortgagee, a court of equity may impress an equitable lien in favor of the mortgagee upon a fund arising from insurance taken by the mortgagor in his own name, is based upon the existence of an express contract by which the owner agreed to give a lien upon that particular fund, and upon the maxim that equity regards as done that which ought to be done; but, as equity cannot create the lien independently of contract, such rule cannot be applied to the proceeds of insurance taken for his own benefit by a grantee of the equity of redemption in the property subject to the mortgage, between whom and the mortgagee there is no contract with respect to such fund.”
In that case, in speaking for the Circuit Court of Appeals for the Third Circuit, Judge Gray quoted the language of the court in Wheeler v. Insurance Company, supra, and said:
“The equitable lien in such case arises from the unperformed contract between mortgagor and mortgagee. Equity regards as done that which ought to be done. And, therefore, if the mortgagor, having so covenanted, fails to make the policy of insurance payable to the mortgagee, or to assign the same, before or after loss, the fund arising therefrom is clearly within the operation of the fundamental maxim just quoted, because the mortgagor was bound to so fulfill his promise to the mortgagee as that funds arising from insurance effected by the mortgagor should belong to the mortgagee, at least to the extent of his (the mortgagee's) interest in the property insured. This promise or executory contract equity will enforce by impressing such funds with a lien in favor of the mortgagee, whether in the hands of the mortgagor, his heirs, executors, or administrators, the insurance company, or voluntary assignees of said funds, or purchasers or incumbrancers thereof with notice. Walker v. Brown, 165 U. S. 654, 664, 17 Sup. Ct. 453, 41 L. Ed. 865; 3 Pom. Eq. Jur. § 1235. But, apart from cases of fraud, it is only when there is such a contract or promise, which can be so enforced, that courts of equity will recognize for that purpose the existence of an equitable llen. In such case the lien is impressed upon funds or property, which, belonging to the promisor, were the very funds or property which constituted the subject-matter of the contract, or to which the contract or promise related. It is essential, therefore, that the funds or other property which are to be charged with the lien should have, either at the time of the contract or afterwards and while it was still unperformed, belonged to the party against whom the contract is to be so enforced, and be so identified, even though at the time of suit the said funds or property have come into the hands of volunteers, or of others who may be affected with notice. There must, therefore, exist a contract by the party owning, either in præsenti or in expectancy, the property sought to be charged, which directly or by necessary implication expresses the intention to charge such property with the lien, in favor of the other party, to the contract. These requisites to the establishment of an equitable lien are clearly recognized by the Supreme Court in the late case of Walker v. Brown, 165 U. S. 654, 664, 17 Sup. Ct. 453, 41 L. Ed. 865. The court in that case quote and adopt the language of the Supreme Judicial Court of Massachusetts in Pinch v. Anthony, 8 Allen (Mass.) 536.
* * Equity will, under some circumstances, enforce the performance of a contract, or of a duty growing out of a contract, through the indirect methods of the recognition of an equitable lien or assignment, but it will not, in the absence of fraud, create the duty or obligation independently of a contract, expressed intent, or will, at some time entered into or declared by the party sought to be charged.”
This case was affirmed, on appeal, by the United States Supreme Court in Farmers' Loan & Trust Co. v. Penn Plate-Glass Co., 186 U. S. 434, 22 Sup. Ct. 842, 46 L. Ed. 1234. In speaking for the Supreme Court, Mr. Justice Peckham said:
“The case of Wheeler v. Insurance Company is founded upon the existence of the obligation of the mortgagor to insure, and it is said that, under such circumstances, the mortgagee will have an equitable lien upon the money due upon a policy of insurance taken out by the mortgagor to the extent of the mortgagee's interest in the property destroyed, and that such equitable lien exists, although the contract provided that in case of the mortgagor's failure to procure and assign that insurance the mortgagee might procure it at the mortgagor's expense. If the insurance had been taken out by this mortgagor company, even in its own name, we would have the same principle as decided in the last cited case, and the complainant herein might, as its counsel claim, have had an equitable lien upon the moneys arising from such insurance to the extent of the loss under the mortgage.”
In Walker v. Brown, 165 U. S. 654, 664, 17 Sup. Ct. 453 (41 L. Ed. 865), in speaking for the Supreme Court, Mr. Justice White said:
“The questions which first require solution are: Did the agreement embodied in the letter create an equitable lien, in favor of Walker & Co., upon the bonds of Brown pledged to the Union National Bank? And, if so, were they returned to Brown under such circumstances as to cause the lien, if any existed, to be operative against the bonds in the hands of Mrs. Brown, who holds them under a gift from Brown, and, therefore, subject to such lien, if any, attached to them in the hands of Brown? Before considering the contract itself and the issue of fact which arises, it is necessary to fix the legal principles by which the question of equitable lien is to be determined. It is clear that if the express intention of the parties was to create an equitable lien upon the bonds or the value thereof, or if such intention arises by a necessary implication from the terms of the agreement construed with reference to the situation of the parties at the time of the contract, and by the attendant circumstances, such equitable lien will be enforced by a court of equity against the bonds in the hands of Brown or against third persons who are volunteers or have notice."