118 F. 904 | W.D.N.Y. | 1902
This is a review of an order of Charles A. Hawley, referee, directing a sale of certain property of the bankrupt, free from the liens of two mortgages upon the same given to the First National Bank of Waterloo as trustee for the bondholders of the bankrupt. The mortgages were executed December I, 1894, and January 21, 1899, respectively. The bank, as mortgagee, after the petition in bankruptcy was filed, and before adjudication, took possession of certain personal property acquired subsequent to the execution of the second mortgage. Has the bank such an adverse claim of title as will preclude this court from asserting jurisdiction and making the order under review ? I have examined the cases to which my attention has been called, and conclude that the national bank has no such possession of the property as vested it with the title thereto, and need not be considered an adverse claimant. The case of Mueller v. Nugent, 184 U. S. 1, 22 Sup. Ct. 269, 46 L. Ed. 405, is authority for the power of the bankruptcy court to ascertain whether any basis for an adverse claim actually existed at the time of filing creditor’s petition. The referee proceeded on the assumption that the asserted adverse claim of the bank was not well founded. In this conclusion I fully concur. The bank cannot be considered to have a higher interest in the property than that of a lienor. Sexton v. Breese, 135 N. Y. 390, 32 N. E. 133. The proper construction to be given to the instruments executed and delivered by the bankrupt to the national bank in trust for the bondholders must be found in state authority. In New York Security & Trust Co. v. Saratoga Gas & Electric Light Co., 159 N. Y. 137, 53 N. E. 758, 45 L. R. A. 132, the court of appeals construed a mortgage like that under consideration as follows:
“Tbe right of the mortgagor to deal with the products and earnings is entirely inconsistent with the existence of any lien upon future products or earnings. That the true construction of the instrument is that although, in terms, it purports to include future earnings and products, it does not, as against general creditors, operate as a lien upon such earnings until actual entry and possession under the mortgage by the mortgagee, and cannot have*906 any retroactive operation, since it would then deprive the unsecured creditor of the fund upon the faith of which he may have given credit to the mortgagor during the time when the latter was permitted to deal with it as his wo.”
It follows that under the instrument in question the mortgagee acquired no higher interest than a lien. In the case at bar the possession of the property covered by both mortgages and the after-acquired property was surrendered by the bankrupt on the day of adjudication, and prior thereto in time. The surrender is deemed to be justified by a clause in the mortgages which allows the mortgagee to enter into possession in case of default in the payments of principal or interest for a period of 60 days. That period had not then expired. Doubtless other questions regarding the validity and invalidity of the provision allowing the mortgagee to enter, contained in the latter mortgage (which includes subsequently acquired personal property), will be raised when the matter finally comes before the referee for determination. It suffices to determine now that the exercise of such right of possession under the mortgage does not constitute the national bank, mortgagee, such an adverse claimant as to bar the jurisdiction of this court to determine the validity of its claims.
It is in the province of the referee to direct the manner of sale free and clear of incumbrances, and he may preserve and transfer bona fide liens to the fund arising from the same. Trust Co. v. Benbow, 3 Am. Bankr. R. 9, 96 Fed. 514; In re Cobb, 3 Am. Bankr. R. 129, 96 Fed. 821; In re Pittelkow, 1 Am. Bankr. R. 472, 92 Fed. 901; In re Matthews, 6 Am. Bankr. R. 96, 109 Fed. 603; In re Kellogg, 7 Am. Bankr. R. 623, 113 Fed. 120.
The referee directs that the liens of the two mortgages or deeds of trust shall attach to the proceeds to the extent of their respective liens. Fie has adjudged the value of the property concededly subject to' this lien of the mortgages, and acquired prior to their execution, to be two-fifths of the value of the entire property described therein. The value of the property purported to be embraced in the second mortgage, which was acquired after delivery of the mortgage to the bank, is adjudged to be three-fifths of the entire value of the properties described in both mortgages, and therefore it is directed by the referee that three-fifths of the proceeds shall stand in its place. The proportion of values as found by the referee is assented to by the bank. It is further directed by the order of sale that two-fifths of the proceeds of sale of the entire properties shall be distributed pro rata to the bondholders who are secured by the mortgages, which shall be established as valid liens. The referee then directs that the remaining three-fifths of the proceeds shall be specially deposited and kept until the extent of the lien created by the later mortgage, and the rights of the trustee in bankruptcy to such proceeds, shall be legally determined. The order finally provides that, if the national bank shall purchase the property as trustee for bondholders, it shall pay in cash three-fifths of the entire proceeds of the sale; as to the balance, the bank shall deliver to the trustee receipts, signed by the owners of bonds, for their pro rata share of two-fifths of the purchase price. In other words, the bank, in case it elects to purchase the bankrupt’s property to protect its liens, is not permitted to apply on the purchase price the value of the subsequently acquired personal property upon which it claims a fien,
’ The order of sale is accordingly modified to conform hereto. Counsel for the trustee may prepare an order, submitting it for approval to counsel for the national bank. If no agreement as to its form is reached, the court will settle the same.'