the problems presented by this petition could have been presented if the petitioner had followed the provisions of the Code of Law for the District of Columbia, but it elected not to do so.
That the mortgage was given for a valuable consideration is likewise immaterial. National Bank of Athens v. Shackelford, Trustee in Bankruptcy for Webb, 239 U.S. 81, 36 S. Ct. 17, 60 L. Ed. 158.There a mortgage was given by the bankrupt for a valid consideration and as here, certainly effective as between the parties thereto but by an understanding, if not by agreement, was withheld from record so as not to affect the mortgagor's credit. The mortgage was actually recorded a few hours before the involuntary petition in bankruptcy was filed. It was found as a matter of fact that the mortgage in question was void as to creditors because executed and withheld from record for the purpose of hindering, delaying or defrauding them.
The effect of the failure to record a mortgage where the withholding from record is pursuant to an understanding or agreement was also considered in Holt v. Albert Pick & Company, 4 Cir., 25 F.2d 378. The court there said [page 379]:
"* * * Had the appellee recorded his chattel mortgage in accordance with the provisions of this statute, none of the questions here presented would have arisen, but this was not done. It seems clear from the evidence that the failure to record the mortgage resulted from the requests of J. F. Somers to the appellee's general manager not to do so, and was for the purpose of not injuring Somers' credit. An agreement to conceal the existence of a lien of this character, while giving possession of the property to the vendee, with its attendant inducement to the giving of credit to the vendee by innocent third parties, is repugnant to both law and equity.
"* * *
"As far as the third party creditors, without notice as to the conditions surrounding the purchase and transfer of the property and without notice as to the chattel mortgage are concerned, the Somers Hotel System, Incorporated, was in possession of the property, was apparently the owner of the property, and was entitled to credit on the strength of such ownership. Whatever equities may arise out of the mortgage transaction are confined in their effect to the immediate parties, and 'could not operate to estop the trustee in bankruptcy, representative of the interests of creditors for whose protection the recording act was passed.' Fairbanks Steam Shovel Co. v. Wills, 240 U.S. 642, 36 S. Ct. 466, 60 L. Ed. 841.
"J. F. Somers himself testified that the general manager of Albert Pick & Co. agreed not to record the mortgage as long as the notes given for the deferred payment were paid promptly. Several witnesses testified that the general manager of Albert Pick & Co. stated that he had agreed not to record the mortgage, and one witness testified positively that the general manager of Albert Pick & Co. stated that this was in order not to injure the credit of J. F. Somers. These statements were not denied. The general manager, who was charged with making them, was not put upon the stand, and the inevitable conclusion is that they were true, and for the purposes of this opinion they must be taken as true.That being the case, Albert Pick & Co. entered into an agreement with J. F. Somers that in effect permitted him or his assigns to hold himself out to the world as the owner and possessor, without lien or incumbrance, of the property in question. In entering upon such a course, and in permitting its lien to remain a secret one, the appellee took its chances, and should not be heard to complain, if it now suffers a loss, that is the natural and expected consequence of its own action. Secret liens have always been repugnant to the law. * * *"
See, also, In re Gill, 5 Cir., 92 F.2d 810, decided November 17, 1937. In that case a mortgage was given by the bankrupt but withheld from record pursuant to an agreement or understanding. The mortgage was dated April 18, 1930, filed for record January 4, 1936. The adjudication occurred in April, 1936.
The court there said [page 811]:
"* * * It is well settled that, where a mortgage is withheld from record under an agreement between the mortgagee and the bankrupt, in order that the bankrupt may obtain credit which otherwise would not be available, the mortgage is rendered fraudulent and void, not only as to subsequent creditors, but as to all those interested in the bankrupt's estate. In re Duggan (C.C.A.) 183 F. 405; Fourth National Bank of Macon v. Willingham (C.C.A.) 213 F. 219; Cooper Grocery Co. v. Penland (C.C.A.) 247 F. 480.
"Appellant cannot be heard to say that, since the agreement to withhold was not brought to the attention of the directors it was not its agreement. The mortgage was obtained by its president on the agreement, without which it would not have been given. Appellant is estopped to repudiate the agreement not to record and at the same time to claim the benefit of the mortgage obtained pursuant to that agreement. Actions speak louder than words, and, in ascertaining what the parties intended, it is permissible to look to what the parties did, as well as what they said. The giving of this mortgage, followed by withholding it from record, naturally and probably operated to hinder, delay, and defraud the bankrupt's creditors. Subsequent facts have proven that it actually had that effect. Parties are presumed to intend the natural and probable consequences of their own acts. The District Court found that the mortgage was given and withheld from record for the purpose of hindering, delaying, and defrauding creditors of the bankrupt. We see no reason to disturb this finding."
Since the mortgage, in view of the foregoing, therefore, is void as to the trustee in bankruptcy as constituting a transfer or incumbrance of the debtor's property with an intention of hindering, delaying or defrauding creditors, it naturally follows that the taking of possession of any of the property covered by the mortgage, actually or constructively by the petitioner, could not in any way improve the petitioner's claim of a lien on such property for the reason that the taking of such possession actually or constructively was pursuant to this alleged mortgage which is void as against the trustee in bankruptcy.
The fact that the mortgage and the supplement were actually recorded on November 12, 1936, ten days before the petition in bankruptcy was filed, could not for the same reason perfect the petitioner's claim of lien for the reason that the document thus recorded was invalid as against the trustee in bankruptcy in view of the circumstances surrounding its execution on June 11, 1936, and the amendment thereto executed on September 4, 1936.
The Code of Law for the District of Columbia regarding recordation of chattel mortgages does not require acknowledgment simultaneous with the execution thereof. However that may be, the fact still remains that as to third parties without notice of the mortgage the acknowledgment and the recordation are the final acts in the execution of the mortgage. The petitioner contends that its rights under the mortgage upon recording relate back to the time of the execution of the deed. That theory would destroy completely the very purpose of Section 177, supra, of the Code requiring recordation of mortgages to be effective as against third parties without notice thereof. If the view taken by the petitioner be correct an unacknowledged chattel mortgage could be secretly withheld from record for any length of time and intervening rights of creditors completely cut off by the simple expedient of having the mortgagor at some later date acknowledge the deed in order that it might then be recorded. If as the petitioner contends the lien of the mortgage would relate back to the date of the execution of the instrument all intervening rights of creditors could be cut off, creditors who have no notice whatsoever of the existence of such a secret lien and who have a right to rely upon the debtor's possession of its property as grounds for extending credit.
Under the circumstances therefore the referee is of the opinion that the petitioner is not entitled to any lien on the proceeds of the sale of the debtor's property in the hands of the trustee in bankruptcy and an order therefore will be entered denying the prayers of the petition of the Universal Dealers Corporation and decreeing that the funds in the hands of the trustee be distributed free and clear of any lien on behalf of the said Universal Dealers Corporation.
The parties hereto will settle order on two days' notice.
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