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IN RE NOLAN MOTOR CO.

June 28, 1938

In re NOLAN MOTOR CO., Inc.


The opinion of the court was delivered by: EDEN

The petition of the Universal Dealers Company filed herein seeks to have the fund realized by the trustee in bankruptcy impressed with a lien in its favor. The pertinent facts as disclosed by the petition, the answer of the trustee thereto and the testimony of witnesses reveal that the bankrupt on May 12, 1936, made application to the Universal Dealers Company, the petitioner herein, for a loan of $25,000. After an investigation concerning the credit responsibility of the applicant the loan was made on June 11, 1936, secured by what purports to be a chattel mortgage on all of the tangible assets of the Nolan Motor Company, the bankrupt herein.

The mortgage deed was not at this time acknowledged and hence could not have been recorded. As to the absence of acknowledgment the testimony of petitioner's witness Kirsch, and the documents identified by him, reveal that the mortgage was not to be recorded -- that the dealer (Nolan Motor Company) had "stipulated that the documents are not to be filed because of the unfavorable publicity which would result and it is agreed with dealer that we will not record unless extenuating circumstances arise which would justify such action." It also appears from the notations on the documents introduced by petitioner that the petitioner was advised at the time that the mortgage was "invalid unless filed" and that "dealer objects to filing."

 Nevertheless the loan was made and the so-called mortgage executed, signed by the Nolan Motor Company by its secretary, J. F. Gallagher, and its president, W. J. Nolan, and delivered to the petitioner, without acknowledgment.

 Thereafter the Nolan Motor Company repaid to the petitioner the sum of $10,000 on account of this loan, reducing the indebtedness to the petitioner to $15,000.

 On August 28, 1936, the Nolan Motor Company again applied to the petitioner for an additional loan of $10,000, which after investigation by the petitioner was granted. The Nolan Motor Company thereupon executed and delivered to the petitioner a supplement to the said mortgage of June 11, 1936, covering and purporting to secure the advance of the additional sum of $10,000. This supplement is dated September 4, 1936, signed by Nolan Motor Company, Inc., per William J. Nolan, president, attested J. F. Gallagher, secretary, but not acknowledged, and hence could not have been recorded.

 As to the absence of acknowledgment the testimony of petitioner's witness Kirsch, and the documents produced and identified by him, reveal that the "dealer (Nolan Motor Company) stipulates that documents are not be to filed as unfavorable publicity would result. It is not suggested that we record unless extenuating circumstances arise which justify such action." It also appears that the petitioner was advised at the time the supplement was executed that the mortgage was "invalid unless filed," and that "dealer objects to filing."

 Being apprehensive concerning the nature of its security the petitioner on November 12, 1936, procured an acknowledgment of the aforesaid chattel mortgage and also procured an acknowledgment of the supplement thereto, the said acknowledgments being made by W. J. Nolan, president. The mortgage dated June 11, 1936, acknowledged November 12, 1936, and the supplement to the mortgage dated September 4, 1936, and acknowledged November 12, 1936, were thereupon recorded in the office of the Recorder of Deeds for the District of Columbia on November 12, 1936.

 It also appears that on November 12, 1936, default having occurred on behalf of the Nolan Motor Company with respect to the terms and provisions of the chattel mortgage referred to, the Nolan Motor Company, by letter of said date, authorized the petitioner, Universal Dealers Company, to take possession of all of the automobiles described in Schedule A as attached to said chattel mortgage and any other automobiles covered by the terms of said mortgage. It also appears that pursuant to this authorization the petitioner did take possession of a certain number of automobiles in possession of the bankrupt and purporting to be covered by the chattel mortgage, and it further appears that on November 18, 1936, the petitioner attempted to take possession of the stock in trade of the debtor consisting of accessories, used automobiles, office furniture and equipment, all said to be covered by the alleged chattel mortgage, but was prevented from doing so by the bankrupt. The petitioner did, however, succeed in annexing "stickers" to some of this property claiming the same as the property of the petitioner.

 During the period June 11, 1936, the date of the execution of the mortgage, and November 12, 1936, on which date the deed and the supplement thereto were recorded, the Nolan Motor Company contracted substantial additional new debts and obligations. The Nolan Motor Company was also heavily indebted prior to and on June 11, 1936.

 On the 21st day of November, 1936, ten days after the recording of the mortgage and the supplement thereto, an involuntary petition in bankruptcy was filed against the Nolan Motor Company resulting in an adjudication in bankruptcy on November 23, 1936, whereupon the proceedings were referred to the undersigned referee in bankruptcy.

 Thereafter, the trustee in bankruptcy, Bolitha J. Laws, Esq., sold at public auction all the assets of the bankrupt company under a stipulation that whatever right of lien asserted by the petitioner would attach to the proceeds in the hands of the trustee in bankruptcy.

 The Universal Dealers Company has now filed its petition claiming that by reason of the aforesaid chattel mortgage and the supplement thereto it is entitled to have the proceeds in the hand of the trustee impressed with a lien in its favor, upon the theory that it possesses a lien which was not dissolved by any provision of the Bankruptcy Act, 11 U.S.C.A. § 1 et seq.; that the mortgage and the supplement were given for a valid consideration, and that the said deed was recorded within ten days of acknowledgment as required by Sec. 177, Title 25 -- Property, of the District of Columbia Code (1929), and that the said section does not protect ordinary unsecured creditors against an unrecorded chattel mortgage unless such creditors be judgment creditors having a lien paramount and superior to the lien of the chattel mortgagee.

 This view assumes the validity as against the trustee of the deed executed by the mortgagor on June 11, 1936, as well as the validity as against the trustee of the supplement thereto executed on September 4, 1936, which were executed with the distinct understanding, if not agreement, that the deed and supplement were not to be recorded because of the unfavorable ...


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