§ 18. Miscellaneous invalid transfers or encumbrances.Where prior to adjudication, the bankrupt in good faith purchased property subject to a chattel mortgage, which he assumed and agreed to pay, his trustee in bankruptcy is estopped from disputing the validity of the mortgage.26 The bankruptcy of the mortgagor does not affect the mortgagor's right to foreclose the chattel mortgage.27 But the dissolution of an insolvent partnership and the withdrawal of its assets by the respective partners to be held as individual property will be set aside as in violation of section 67e of the Bankrupt Act, and the assets of the firm in the hands of the partners treated as partnership property.2 Pledges to secure money loaned at the time and not an antecedent indebtedness are valid.29 The invalidity or validity of transfers or encumbrances as a rule turn on the facts of each particular case. The more important cases are classified in the succeeding sections. 28 § 19. Mortgages to secure antecedent debts.—Mortgages given by a bankrupt within the four months period to secure antecedent debts are invalid and void under section 67e of the Bankruptcy Act.30 If the consideration is in part a present consideration and the mortgage is made in good faith, it will be good to that extent.31 B. R. 499, 140 Fed. 984; Matter of 31. In re Dismal Swamp Contracting Co., 14 Am. B. R. 175, 135 Fed. 415, a chattel mortgage given to secure both an antecedent debt and a present loan is valid only as to the latter; In re Sawyer, 12 Am. B. R. 269, 130 Fed. 384, a chattel mortgage given in security for the payment of notes to a certain amount will be But where there is an entire absence of good faith, the first consideration does not save the mortgage; it is void even as to that.32 Where the mortgagor remains in possession with power to sell in the usual course of business, under a mortgage which contains no provision that the proceeds of sales shall be applied upon the debt secured, the legal effect of the mortgage is to hinder and delay creditors; and if given within the four months period, the mortgage is null and void.33 Although the mortgage is given to secure a present loan, if the money borrowed is to be used in part payment of antecedent debts, the mortgage is void.34 But a transfer or mortgage made by a person adjudged a bankrupt to secure a pre-existing debt within four months of the filing of the petition is not void, unless it was either made with the intent on his part to hinder, delay, or defraud his creditors, or some of them, or is held void as against his creditors by the laws of the state, territory, or district in which the property is situated.35 § 20. Chattel mortgages.-The validity of a chattel mortgage sustained as to the amount actually loaned at the time the mortgage was executed; Stedman v. Bank of Monroe, 9 Am. B. R. 4, 117 Fed. 237; City Nat. Bank v. Bruce, 6 Am. B. R. 311, 109 Fed. 69, aff'g In re Alverson, 5 Am. B. R. 855; In re Wolf, supra. Compare In re Durham, 8 Am. B. R. 115, 114 Fed. 750; In re Davidson, 5 Am. B. R. 528, 109 Fed. 882. 32. In re Hugill Mercantile Co., 3 Am. B. R. 686, 100 Fed. 616. See also In re Barrett, 6 Am. B. R. 48. Compare In re Soudans Mfg. Co., supra. 33. Zartman v. National Bank, 16 Am. B. R. 152, 109 App. Div. (N. Y.) 406, 96 N. Y. Supp. 633; Skilton v. Coddington, 15 Am. B. R. 810, 185 N. Y. 80; In re Mains Construction & Dry Dock Co., 14 Am. B. R. 466, 135 Fed. 921; Dodge v. Norlin, 13 Am. B. R. 177, 133 Fed. 363; Egan State Bank v. Rice, 9 Am. B. R. 437, 119 Fed. 107. 34. In re Pease, 12 Am. B. R. 66, 129 Fed. 446; In re Butler, 9 Am. B. R. 539, 120 Fed. 100; In re Soudan Mfg. Co., 8 Am. B. R. 45, 113 Fed. 804. 35. Coder v. Arts (C. C. A.), 18 Am. B. R. 513, 152 Fed. 943, modfg. In re Armstrong, 16 Am. B. R. 583, 145 Fed. 202, such a transfer for the purpose of securing or paying a preexisting debt, without any intent or purpose to affect other creditors injuriously beyond the necessary effect of the security, is lawful, if not violative of other provisions of the law, and it does not evidence any intent to hinder, delay or defraud creditors within the meaning of Bankruptcy Act, 1898, § 67e. given to secure a present loan of money within four months of bankruptcy does not depend upon the solvency of the borrower, or upon notice, actual or constructive, of his financial condition, but the sole test is whether the security was accepted in good faith and in contemplation of or in fraud upon the Bankrupt Act, and in the absence of notice which impeaches the good faith of the transaction as so defined, the mortgagee is entitled to the benefit of his lien, notwithstanding the fraud, if any there was, on the part of the mortgagor.36 The validity of the mortgage in each. instance turns upon the requirements of the State law.37 In New York a failure to file a chattel mortgage where there is no change of possession of the mortgaged property, renders it void as to then existing creditors of the mortgagor, and the mortgagee cannot thereafter acquire title to property by taking possession and selling the same under the mortgage and bidding it off on the sale, and this, although the mortgage was given in good faith to secure an actual indebtedness.38 Under the Bankruptcy Act the failure to record a chattel mortgage or to take possession there 36. In re Soudans Mfg. Co., 8 Am. B. R. 45, 113 Fed. 804. 37. Dodge v. Norlin, 13 Am. B. R. 177, 133 Fed. 363, a chattel mortgage is voidable by creditors, according to the decisions of the court of Colorado, if it covers merchandise and other property, and the mortgagee consents to the sale of the merchandise in the usual course of business, without requiring the application of the proceeds to the payment of the debt; and where such a mortgage is voidable as to part of the mortgaged property it is voidable as to all of it; In re Soudans Mfg. Co., supra, in Indiana a verbal agreement that a mortgagor may sell part of the property covered by a chattel mortgage, in the usual course of trade, for his own benefit, invalidates the mortgage only to the extent of the property to which such agreement applies; In re Pekin Plow Co., 7 Am. B. R. 369, 112 Fed. 308, chattel mortgage not filed invalid as against the trustee in bankruptcy of the mortgagor under the Nebraska statute; In re Platts, 6 Am. B. R. 568, 110 Fed. 126, under South Dakota statute; In re Ronk, 7 Am. B. R. 31, 111 Fed. 154, chattel mortgage for antecedent loan given pursuant to a verbal promise to give at the time the loan was agreed upon is invalid under the Indiana statute; In re Shirley, 7 Am. B. R. 299, unfiled chattel mortgage invalid under Ohio statute; Stroud v. McDaniel, 5 Am. B. R. 695, 106 Fed. 493, insufficient description and failure to register renders mortgage invalid under South Carolina statute; In re Adams, 2 Am. B. R. 415, under Michigan statute. 38. Stephens v. Perrine, 143 N. Y. 476. under renders the same invalid as to the trustee in bankruptcy representing the general creditors, if by the law of the State where the mortgage is made it is invalid as to creditors.39 It has been held that the decision of the United States Supreme Court that a chattel mortgage under which the mortgagor has the right to sell and replace goods, to be included in the mortgage, is fraudulent as matter of law and void as to other creditors, must be followed by the bankruptcy court, although the highest State court has determined that such a mortgage is good and valid.40 But the better rule seems to be that the decision of the highest court of a State, as, for example, that recording is not essential to the validity of a chattel mortgage executed therein, when the State law does not so require, must be followed by the bankrupt court,41 since it has been held by the United States Supreme Court that each State has a right to determine for itself the validity of chattel mortgages executed therein and that the Supreme Court will accept the settled law of each State as decisive on that subject.42 Any chattel mortgage which was ineffectual as against creditors under the law of the State of the transaction is ineffectual as against the bankrupt's trustee.43 Cases where the validity of conditional sales has been attacked, and where 39. In re Leigh Bros., 2 Am. B. R. 606, under Colorado statute. Compare In re Yukon Woolen Co., 2 Am. B. R. 805; In re Geo. W. McKay, 1 Am. B. R. 292. 40. In re Hull, 8 Am. B. R. 302, 115 Fed. 858. 41. In re Josephson, 8 Am. B. R. 423, 111 Fed. 404. 42. Etherbridge v. Sperry, 139 U. S. 266. See also Parker v. Moore, 115 Fed. 799. 43. In re Shaw, 17 Am. B. R. 196; In re Birck & Co. (C. C. A.), 15 Am. B. R. 694, 142 Fed. 438, under the Illinois statute a chattel mortgage is void as against the mortgagor's trus 44 tee, where such mortgage was given to secure notes containing no mention upon their face that they were secured by an instrument in the form of a chattel mortgage; In re Chadwick, 15 Am. B. R. 528, 140 Fed. 674; In re First Nat. Bank of Canton (C. C. A.), 14 Am. B. R. 180, 135 Fed. 62. 44. In re Garcewich, 8 Am. B. R. 119, 115 Fed. 87; In re Sewell, 7 Am. B. R. 133, 111 Fed. 791; In re Tatem, 6 Am. B. R. 426, 110 Fed. 519; In re Howland, 6 Am. B. R. 495, 109 Fed. 869; In re Klingaman, 4 Am. B. R. 254, 101 Fed. 691. a pledge of collateral has been called in question,45 are cited in the notes below. 21. Voluntary transfers.-A voluntary transfer of property founded upon the consideration of blood or marriage is presumptively valid; but, where the only consideration for a voluntary transfer is goodwill or friendship, it is prima facie fraudulent,47 If the grantor is indebted at the time the transfer is made, the burden is upon the grantee to show that the grantor had abundant means, exclusive of the property transferred, to pay all his debts.48 If at the time the transfer is made the grantor is indebted to such an extent that the transfer will embarrass him in the payment of his debts, the transfer will be fraudulent, although the debts due may be subsequently paid in the course of business. If the transfer is made by an insolvent husband to his wife it will be held to be void.50 Where an insolvent husband transfers property to his wife without consideration, intent to defraud creditors will be presumed and the transfer set aside.51 Transfers to other relatives are suspicious and require strict proof. A conveyance by a father to his sons, in consideration of his sup 49 45. Chattanooga Nat. Bank V. Rome Iron Co., 4 Am. B. R. 441, 102 Fed. 755; In re Cobb, 3 Am. B. R. 129, 96 Fed. 821; Casey v. Cavaroc, 96 U. S. 467; Clark v. Iselin, 21 Wall. (U. S.) 360; Adams v. Nat. Bank, 2 Fed. 174; Davis v. R. R. Co., Fed. Cas. No. 3,648; In re Grinnell, Fed. Cas. No. 5,829. 46. Sedgwick v. Place, 5 Ben. (U. S.) 184, 21 Fed. Cas. No. 12,620. 47. Babcock v. Eckler, 24 N. Y. 623; Van Wyck v. Seward, 18 Wend. (N. Y.) 375. 48. Pratt v. Curtis, 2 Lowell (U. S.), 87, 19 Fed. Cas. No. 11,375. 49. Antrim v. Kelly, 1 Fed. Cas. No. 494. See also Smith v. Kehr, Dill. (U. S.) 50, 22 Fed. Cas. No. 13,071; Fisher v. Henderson, 9 Fed. Cas. No. 4,820; In re Antisdel, 1 Fed. Where one engaged in business made a settlement upon his wife to protect his family in case he became insolvent, and at the time, though not actually insolvent, he was weak and unsteady in his pecuniary matters, the conveyance was fraudulent. Sedgwick v. Place, 12 Blatchf. (U. S.) 163, 21 Fed. Cas. No. 12,621. 50. In re Skinner, 3 Am. B. R. 163, 97 Fed. 190; In re Grahs, 1 Am. B. R. 465; Kehr v. Smith, 20 Wall. (U. S.) 31. 51. In re Smith, 3 Am. B. R. 95, 100 Fed. 795; In re Eldred, Fed. Cas. No. 4,328. |