April 12, 1923. Rehearing refused July 5, 1923.
The opinion of the Court was delivered by Action instituted in the Court of common pleas for Cherokee County on January 3, 1921, by certain stockholders of Cash Mills, a corporation, against the corporation and its directors, alleging its insolvency and praying for the appointment of a receiver and the liquidation of its affairs.
An order was passed by the Hon. Edward McIver, Circuit Judge, dated January 4, 1921, and filed January 5, 1921, in the office of the Clerk of Court, appointing W.C. Hamrick temporary receiver. On February 21, 1921, the temporary receivership was made permanent, by order of the Circuit Judge.
By a subsequent order dated July 6, 1921, special referees were appointed to take testimony and report upon claims presented against the corporation, their respective amounts and priorities if any. In accordance with said order, notice was published calling in creditors, and references upon the claims presented were held.
The appeal involves the questions of the validity of certain claims and the priorities claimed by others, with particular reference to the claims of Saco-Lowell Shops, Mason *Page 337 Machine Works, and Barber-Coleman Company, which will be designated and referred to as "machinery claims," and of Charles L. O'Neale Co., A.C. Walker, and Bean Brothers, "cotton claims."
The special referees reported September 30, 1921, in favor of the validity of the cotton claims as follows:
Chas. L. O'Neale Co. ...................... $47,201.55 A.C. Walker ................................. 12,295.00 Bean Bros. .................................. 83,430.00— and in favor of the validity, but against the priority of the machinery claims, which were:
Saco-Lowell Shops ........................... $30,815.31 Mason Machine Works ......................... 59,217.19 Barber-Colman Company ....................... 4,000.00— placing them all, machinery claims and cotton claims, upon the same plane of general unsecured creditors.
The matter came up before Hon. John S. Wilson, Circuit Judge, upon exceptions by the holders of the machinery claims to the report of the referees, on November 7, 1921; the case was argued and decision reserved. On November 10, 1921, Judge Wilson passed an order and decree, directing a sale of the property of the corporation by the receiver, on salesday in January, 1922, upon certain terms stated, and reserving for further consideration the issues made by the exceptions to the report of the referees. That order further provided that the property be sold free and discharged from all liens and incumbrances of creditors, which should be transferred to the proceeds of sale, held subject to the further orders of the Court. On November 26, 1921, Judge Wilson filed a decree in which he held: (1) That the claim of J.H. Curry, contractor, to whom the sum of $6,000 was due on contract, could not be allowed as a lien upon the property, upon the ground that he had failed to comply with the statute relating to mechanics' liens. (In passing we observe that there is nothing in the "case" *Page 338 referring to this claim, and no exceptions involving this portion of the decree; it therefore passes out of consideration.) (2) That all exceptions to the report of the referees be overruled, except the exception filed by the receiver, and that it be sustained, as having been adjudicated by the order of sale made November 10, 1921. (There is no reference to this exception in the "case," and it to passes out of consideration.) (3) That the report of the referees, including the supplemental report, be confirmed and made the judgment of the Court. (There is no statement in the "case" of a supplemental report, and it passes out of consideration.)
From this decree, the holders of machinery claims have appealed to this Court, upon exceptions which fully raise the questions herein decided. The receiver did not appeal from any portion of the decree.
We will proceed to the consideration and determination of the questions presented in reference to the several claims, taking up in order the machinery claims, Saco-Lowell Shops, Mason Machine Works, and Barber-Colman Company, and the cotton claims, Chas. L. O'Neale Co., A.C. Walker, and Bean Bros.
MACHINERY CLAIMS 1. Saco-Lowell Shops. This company claims priority over the general creditors to the extent of $30,815.31, that being the balance claimed to be due them under the following circumstances: A written contract was entered into by and between this company and the corporation, and provided for the furnishing of certain machinery to the mill, aggregating $46,506.10. The contract is dated at Charlotte, N.C., September 15, 1919, and at Gaffney, S.C. September 19, 1919, accepted at Boston Mass., by the company on September 29, 1919. It provides for "delivery f. o. b. cars shop spring of 1920;" terms of payment, one-third net cash 30 days from average date of invoices, balance covered by two equal 6 months' notes, dated average date of invoices. *Page 339 Machinery under the contract was delivered at various times, beginning the latter part of May, 1920, and continuing until January 7, 1921. The company in compliance with the contract, furnished mechanics to erect and install the machinery, who were thus engaged practically up to January 1, 1921. The last machinery was shipped January 7, 1921; it did not require skilled mechanics to adjust.
The contract contained the following provisions relating to reservation of title, and to the right to remove the machinery in the event of nonpayment:
"The title to the machinery delivered under this contract shall not pass from the Saco-Lowell Shops (hereinafter called the company), until all payments hereunder (including checks, drafts, deferred payments, and notes and renewals thereof, if any) shall have been fully made in cash. Until such full cash settlement is made, the purchaser agrees to keep the machinery in repair and fully insured for the benefit of the company as interests may appear.
"In case of breach of this contract, it is understood that the company or its agents may enter peaceably and remove the articles from the custody of the purchaser, wherever they may be, and that the purchaser herewith agrees to do all acts necessary to perfect and assure such retention of title in the company as above contemplated."
The contract was duly recorded, both in the real estate book, and in the chattel mortgage book, in the office of the Register of Mesne Conveyances of Cherokee County, where the mill was located, on January 4, 1921, the day the order appointing a receiver was signed, and the day before it was filed in the clerk's office.
The account was closed by certain payments and the execution of two notes for the balance, both dated July 19, 1920, and each for $15,011 due 6 months after date. The amount due the company as of the date of the report of the referees was conceded to be $30,815.31. It is not clear to *Page 340 the Court how this figure is arrived at; but the notes being in evidence any error may be corrected.
The contest is really between the holders of the machinery claims and the holders of the cotton claims; the receiver is only interested in behalf of such creditors as are not parties to this action, it being immaterial to the stockholders how the issue may turn. The point of attrition between the holders of the machinery claims and the holders of the cotton claims is this:
The Saco-Lowell people contend that they are the holders of what is practically (and which will be considered) a chattel mortgage upon the machinery installed by them, and which, although not recorded within the 10 days required by Section 3740, Vol. 1, Code of Laws, A.D. 1912, is valid against the cotton claims, the holders of which are not subsequent creditors of the corporation.
The holders of the cotton claims contend (in which contention the receiver joins) that they are subsequent creditors, and as such entitled to protection under such section.
A decision of this issue is therefore of prime importance. It appears that, while the contract was made in September, 1919, it contemplated deliveries in the "spring of 1920," and that the first deliveries were made in the latter part of May, 1920. It is clear that the lien of Saco-Lowell Shops was not consummated until such delivery and attached as each delivery was thereafter made. The claim of Charles L. O'Neale Co. (cotton claim) for $47,201.55 arose out of a contract for the purchase of 600 bales of cotton, dated March 8, 1920; the claim of A.C. Walker for $12,295, out of a contract for the purchase of 150 bales of cotton, dated March 20, 1920; and the claim of Bean Bros. for $83,430, dated March 12, 1920. None of them could therefore have contracted with the mill upon the faith and credit of machinery subsequently installed, which is the foundation of the statute. *Page 341
Both Section 3542, which is general and comprehensive in its scope and embraces "all instruments in writing now required by law to be recorded," and Section 3740, which particularly relates to agreements "between the vendor and vendee, bailor or bailee of personal property," are intended to protect subsequent creditors. Except as to subsequent creditors, these contracts are perfectly valid.
The whole purpose of the recording acts is to prevent secret liens, to protect bona fide purchasers for value and subsequent creditors, who have relied on the apparent possession of the vendee, to purchase from him or to extend credit to him. When the vendor has thus led the purchaser or subsequent creditor to rely on the apparent title of the vendee, he is estopped from setting up his title in derogation of their rights. He still has the title, but, as against these classes of persons who have been misled by his conduct, the Court says he should not be allowed to show title. In such retention of title agreement, the vendor retains the title to the goods until payment, and can only lose his right to set it up by his conduct in allowing others to think that the vendee has title. In the present case there is no ground for such an estoppel; the creditors extended credit to the vendee before he came into possession of the goods. They did not rely on this machinery in extending credit, for it had not been delivered at the time of the credit; the only way the creditors could have known of the intended delivery of the machinery was through a knowledge of the contract to deliver, and such contract would have given them knowledge of the retention of title by the vendor, thus making them creditors with notice and not within the terms of the statute.
Are the cotton creditors, who are the largest creditors in this case, such subsequent creditors as the recording statutes protect? The date of their contracts was March, 1920. The date of the conditional sale contract of Saco-Lowell Shops is September, 1919. But at that time this contract was no more than a chose in action, or executory *Page 342 contract, and, in its then state or condition, need not have been recorded.
Until the machinery had been delivered, it was in the power of either party to recall the order or stop performance. Of course, the party who broke the contract would be liable in damages for such breach. Oxweld Acetylene Co. v. Davis,115 S.C. 430; 106 S.E., 157.
The real date, with reference to which the relation of subsequent creditor is to be determined, is when the machinery was delivered under and in accordance with the contract; that is to say, when it was delivered at the mill and set up in the mill. Until that time there was no "agreement between the vendor and vendee, bailor or bailee of personal property," within the language or meaning of Section 3740 of the Code.
Schouler on Bailments and Carriers (2d Ed.) § 188, says:
"Until an actual transfer of possession has taken place, there is, to speak with precision, no pledge, no bailment; but instead, an executory pledge contract upon sufficient consideration, which each may hold the other bound to perform. Damages for non-performance will be awarded the aggrieved party who sues as for breach of contract; or perhaps equity would decree a specific performance."
And at Section 189:
"Delivery, in order to be effectual, should be followed by an acceptance of possession; and methods of delivery and acceptance differ according to the subject matter and the local situation of the thing."
The word "bailee" is only used with reference to one actually in possession of the goods. So, in order for the creditor to be subsequent as to a bailee, he would have to be subsequent to delivery. "Bailee" is never used in reference to an executory contract of bailment. The party is not a bailee until the goods are in his possession. It must follow that the only possible construction is to say "subsequent" means subsequent to delivery; there could be no subsequent creditors *Page 343 as to a bailee prior to possession, for there was no bailment and no bailee prior to delivery.
It would have been useless to have recorded this contract at the time it was entered into, for the machinery was not then manufactured. It was manufactured in a distant state and shipped to South Carolina. There could be no effect to be given to the conditional sale agreement, so far as protecting anybody in this State was concerned, until delivery of the machinery. No one could have extended credit on the faith of its possession unless: (1) They either saw the machinery itself, or (2) saw the contract for it. They could not see the machinery before it was delivered to the mill; the first shipment of it was in May, 1920, several months after the cotton contracts were made. The remainder followed from that day until January, 1921; and, in accordance with the conditional sale contract, the installation and erection of it commenced in October, 1920, and continued to the end of December.
A "subsequent creditor," within the protection of the recording statutes, necessarily means one who might reasonably have extended credit on the faith of ostensible ownership from possession, without notice of anything impairing or detracting from such ownership. Herring v. Cannon,21 S.C. 214, 215; 53 Am. Rep., 661, and cases. BeatriceCreamery Co. v. Sylvester, 65 Colo., 569; 179 Pac., 154; 13 A.L.R. 446, 447, and note at page 465, and cases.
In the case of Herring v. Cannon, 21 S.C. 214; 53 Am.Rep., 661, the Court says:
Conditional sales of personal property delivered, annexing a secret condition to a visible transaction appearing to the world unconditional, gave rise, for many years, to much discussion and some difference of opinion in our Courts. It may be safely stated that there was a general concurrence that such contracts might be enforced between the parties who made them; but, as possession is prima facie evidence of title in relation to personal property, there were obvious *Page 344 difficulties as soon as they touched the rights of subsequent creditors and bona fide purchasers, who dealt with the apparent owner on the faith of title, springing from his unexplained possession."
In the case of Holt v. Henley, 232 U.S. 640;34 Sup. Ct., 459; 58 L.Ed., 767, there was a contract between the mortgagee of the realty and the holder of a reservation-of-title contract, affecting a sprinkling system installed in the mill after the mortgage was executed. The Court says:
"But the foundation upon which all their rights depend is the Virginia statute giving priority to purchasers for value without notice over Holt's unrecorded reservation of title; and as the mortgage deed was executed before the sprinkler system was put in, and the mortgagees made no advance on the faith of it, they were not purchasers for value as against Holt."
The point of the matter is that the creditor who has extended credit to the debtor, upon the basis of his possession at the time, has suffered no prejudice by the subsequent acquisition of property subject to an undisclosed lien. As the Court declares in the Holt v. Henley Case, supra:
"The mortgagees have no equity and do not bring themselves within the statutory provision. We believe the better rule in a case like this, * * * is that 'the mortgagees take just such an interest in the property as the mortgagor [purchaser] acquired; no more, no less.'"
So in McFarland v. Farmer, 42 N.H. 386 it was held that creditors of a conditional vendee can get no greater right in the property sold than he himself has. To the same effect are: Thornton v. Cook, 97 Ala., 630; 12 South, 403. Strongv. Taylor, 2 Hill (N.Y.), 326. Piser v. Stearns, 1 Hilt. (N.Y.), 86. Goodell v. Fairbrother, 12 R.I. 233; 34 Am.Rep., 631. Steen v. Harris, 81 Ga. 206; 8 S.E., 206.Hughes v. Kelley, 40 Conn., 148. McIver v. Williamson,19 Okla. 454; 92 Pac., 170; 13 L.R.A. (N.S.), 696. Hawthorne v. Bowman, 3 Sneed (Tenn.), *Page 345 524. Cole v. Berry, 42 N.J. Law, 308; 36 Am.Rep., 511. Aultman v. Berry, 5 Neb. 178; 25 Am. Rep., 478. Bank v. Tufts, 63 Tex., 113. Leath v. Uttley,66 Tex., 82; 17 S.W. 401. Tufts v. Cleveland (Tex. Sup.), 3 S.W. 288.
It appears beyond question therefore that the holders of the cotton claims are not subsequent creditors within the protection of the statutes in reference to recording. If that be true, so far as Section 3740, which extends protection to subsequent creditors only, is concerned, it is a matter of no consequence whether the chattel mortgage was recorded in time or not, or whether it was recorded at all. It was perfectly valid as between mortgagor and mortgagee, and equally so as between prior creditors and mortgagee.
It will be seen from the array of authorities cited by the writer of this opinion in the case of Ex parte AmericanSlicing Machine Co., In re Lipscomb-Russell Co. v. Hobbs-HendersonCo., 118 S.E., 303, at this moment in process of decision, that the appointment of a receiver works no metamorphosis in the title or interest to or in the assets of the insolvent; that the receiver takes possession of them as the arm of the Court, subject to all existing liens and incumbrances, to be administered under the direction of the Court, having due regard to the legal and equitable rights of the parties and those stockholders and creditors represented by the receiver.
The report of the referees, confirmed by the Circuit decree, contains a finding that the cotton claims were subsequent and not prior to the machinery claims; to which exception has been duly made by the holders of the machinery claims. This issue has already been disposed of. The holders of the machinery claims go further and say that, assuming for the argument's sake, the cotton claims were subsequent and not prior to the machinery claims, by force of the amendment of 1914 to Section 3542 (28 St. at Large, p. 482), which by implication amends also Section 3740; their *Page 346 mortgages, although recorded out of time, have precedence of the unsecured creditors whose claims may have arisen between the dates of the execution of the mortgages and their record.
The consideration of this position taken by the holders of the machinery claims involves a determination of two questions:
1. Does the amendment of 1914 to Section 3542 also amend Section 3740?
2. If so, what is the effect of Section 3740, as thus amended, upon the relative rights of the subsequent creditors and the holders of the mortgages recorded out of time?
As to the first question: Section 3740, commonly referred to as the Bailment Act, prior to an amendment in 1910, and at the time of the decisions in the case of Armour v. Ross,75 S.C. 201; 55 S.E., 315, and 78 S.C. 294;58 S.E., 941; 1135 (A.D. 1906, 1907), stood as follows (the blank space being left to locate the interpolation of the amendment of 1910):
"Every agreement between the vendor and vendee, bailor and bailee of personal property, whereof the vendor or bailor shall reserve to himself any interest in the same, shall be null and void as to subsequent creditors ( ) or purchasers for valuable consideration without notice, unless the same be reduced to writing and recorded in the manner now provided by law for the recording of mortgages." (An exception not relevant to this issue follows.)
In 1907 the second appeal in the Armour v. Ross Case was decided, and, by the judgment of this Court on that appeal, it was held that the Section (3740), as it then stood, had no reference to simple or unsecured creditors, but to those whose claims had been reduced to judgment or to those holding other liens on the property before receiving notice of the unrecorded incumbrance; in other words, only subsequent "lien creditors" were protected by the Statute. *Page 347
Thereafter, in 1910, 26 Stat. 747, the General Assembly passed an Act amending the Section (then 2655) by inserting, in the blank space above indicated, the words "whether lien creditors or simple contract creditors."
In 1911, 27 Stat., 137, the section was further amended by adding to the exceptions the words "or as a pledge or collateral to a loan "— a matter irrelevant to the present issue.
The General Recording Act, § 3542, as it now stands with the amendment of 1914, is as follows (omitting irrelevant portions):
"All deeds * * * or instruments in writing, conveying either real or personal estate * * * or charging or incumbering the same, all mortgages or instruments in writing in the nature of a mortgage of any property, real or personal * * * and, generally, all instruments in writing now required by law to be recorded * * * shall be valid, so as to affect from the time of such delivery or execution the rights of subsequent creditors (whether lien creditors or simple contract creditors) or purchasers for valuable consideration without notice, only when recorded within ten days from the time of such delivery or execution: * * * Provided, nevertheless, that the recording and record of the above named deeds and instruments of writing subsequent to the expiration of said ten days shall, from the date of such record, have the same effect as to the rights of all creditors and purchasers without notice as if the said deeds or instruments of writing had been executed and delivered on the date of the record thereof."
The proviso set forth at the end of the Section represents the amendment of 1914, which the holders of the cotton claims contend is not applicable to Section 3740. They contend that there is a material difference between the two Sections, and that, if the General Assembly intended the amendment to apply to both sections, they would have said so. The material difference suggested is that under 3740 an instrument of the kind there described is absolutely void *Page 348 as to subsequent lien or simple contract creditors, unless it be recorded "in the manner (not time) now provided by law for the recording of mortgages;" whilst under 3542, admittedly inclusive of the same kinds of instruments referred to in 3740, the instrument is not void if recorded beyond the time required, but from that date has the same effect as if executed on the day of record; a privilege not accorded by Section 3740 and denied practically by it.
It must be conceded that if such an instrument as described in Section 3740, should be recorded within the time fixed by Section 3542, to which reference must be made for the time, the effect would be that provided for in that section, namely, it would have reference to the date of execution and precede liens or debts created within that period, though there is no such provision in 3740.
Section 3542, in its description of the instruments required to be recorded, is as comprehensive as it possibly could be made: An instrument "charging or incumbering" personal property; "instruments in writing in the nature of a mortgage;" "instruments now required by law to be recorded;" and unquestionably includes the reservation of title contract in the present case. It is full and specific as to the privileges granted to the holders of such a paper; those privileges should not be denied by another section, which must be construed pari passu, in the absence of evidence of a specific purpose to that effect.
The real purpose of Section 3740 was to render it absolutely certain that agreements of the kind there described should come within the secret liens that must be recorded; and that reference should be had to the General Recording Act for the time, manner, and effect of such recording. This is clear from the exception or proviso, excluding certain classes of bailments from the operation of the Statute. It was not intended as a recording Statute, as plainly appears from the reference to recording "in the manner now provided by law for the recording of mortgages." Section 3542 *Page 349 provides for two modes of recording and their respective effects: Recording within 10 days, and recording thereafter. The "manner" of recording is referable to either.
There is no reason for making a distinction between the agreements described in 3740 and other instruments of like character; and the general provisions of 3542 indicate most strongly that no distinction was intended to be made. In the interest of harmonious regulations and the obligation to construe the two sections so that both may stand, the ruling of the Court is that the regulations of Section 3542 as to the time, manner, and effect of the recording Act, apply equally to Section 3740.
As to the second question: The conclusion of the Court is that, under Section 3542, applicable to Section 3740, a valid reservation of title contract (equivalent to a chattel mortgage), recorded after the 10-day limit, and prior to receivership, is valid as against all general unsecured creditors who become such between the time of the execution and the date of recording such instruments.
It would be a work of supererogation, after the very able and entirely satisfactory decree of Judge Connor, United States District Judge, in the case of In reSaunders Co., 272 Fed., 1003, to review the legislative history of Section 3542, or to reinforce his logic and conclusions. His decree is adopted as a part of this opinion.
DECREE OF JUDGE CONNOR On January 7, 1920, the Farmers' Merchants' Bank of Marion, S.C. filed its claim, or petition, in this Court, containing the following allegations which are found by the Special Master to be true:
That on July 15, 1919, the bank advanced and loaned to F.H. Saunders Co., at Marion, S.C. $10,000, for which amount the said Saunders Co. executed their promissory note, due and payable 60 days after date, and on the same day, and contemporaneous with the execution of said note, *Page 350 and as security for the payment thereof, executed and delivered to said bank a mortgage on "all leaf tobacco purchased, and to be purchased, by us during the season of 1919 on the Marion, S.C. market, and on all drafts drawn against shipments of same and on all the proceeds arising from the sale thereof."
The mortgage was admitted to probate on the 29th day of July, 1919, and registered in Book 33, Page 487, in the office of the Clerk of the Court of Common Pleas of Marion County. On the 6th day of September, 1919, a petition for adjudication in bankruptcy was filed against said F.H. Saunders Co. in the District Court of the United States for the Eastern District of North Carolina, and on the 4th day of October, 1919, they were adjudged bankrupts, and the trustees duly elected and qualified.
On the 28th day of August, 1919, said F.H. Saunders Co. had to their credit in the bank the sum of $1,938.34, which was credited on said note and the account balanced. There remained due and unpaid on said note, after crediting same with said amount $8,061.66. The bank on the ____ day of August, 1919, seized and sold "certain leaf tobacco purchased by F.H. Saunders Co., at Marion, S.C. and located in the respective warehouses at Marion, S.C. and at the depot of the Atlantic Coast Line Railroad Company for the sum of $9,125, covered by said mortgage."
After paying the cost incurred in seizing and selling said tobacco, including an attorney's fee of $350, and applying the balance of the proceeds of the sale of said tobacco to the discharge of the balance due on said note, the sum of $559.78 remained in the possession of said bank. On January 10, 1920, the bank filed its claim setting forth the foregoing facts.
The trustees of F.H. Saunders Co., bankrupts, on April 20, 1920, in due time filed objections to the claim of said bank, insisting that the mortgage did not constitute a valid lien on said tobacco, and that the bank was not entitled *Page 351 to hold the proceeds thereof, or apply same to the payment of said note, for that: (1) The mortgage constituted a voidable preference under the provisions of Section 60b and Section 67e of the Bankruptcy Act. (Comp. St. §§ 9644, 9651); (2) that the said mortgage did not, at the date of the filing of the petition herein, September 6, 1919, or at the date of the adjudication, October 4, 1919, constitute a valid lien on said tobacco, because it was not registered within 10 days after the execution or delivery thereof, as required by the Statute of South Carolina relating to the registration of mortgages. The bank filed its answer to the objections of the trustees.
Pursuant to the request of the creditors of F.H. Saunders Co., the Court made an order of reference to F.H. Bryan, Esq., Special Master, to hear the objections to the claim of the bank and report his conclusions thereon to the Court. The Special Master, after hearing the testimony, filed his report September 29, 1920, whereupon the cause was heard upon the said report at Wilmington, N.C., on November 20, 1920
In addition to the foregoing facts the Special Master found: "That the loan was made by the bank to F.H. Saunders Co. in good faith and without knowledge or reason to believe the existence of the insolvency of the said F.H. Saunders Co." That on July 29, 1920, the date of the registration of the mortgage, the bank had no knowledge, or reasonable cause to believe, that said Saunders Co. were insolvent. That there was no fraud, nor collusion, connected with the transaction. That the proceeds of the note were actually advanced and placed to the credit of Saunders Co. and drawn out by checks for the purchase of tobacco.
The Special Master dealt with the questions presented upon the record in the following order:
(1) Is the said claim of the Merchants' Farmers' Bank a voidable preference, under the provisions of Section 60b. amendment of 1910? *Page 352
The Special Master found that, at the date of the execution and of the registration of the mortgage, July 29, 1919, the bank had no reasonable cause to believe that F.H. Saunders Co. were insolvent. This constitutes the test of a voidable preference under the provisions of the amendment of 1910 to Section 60b of the Bankruptcy Act. I find nothing in the evidence to show the existence of such reasonable ground to believe that the mortgagor was insolvent, or that the effect of the mortgage would be to give a preference.
(2) Is the mortgage a voidable preference under the provisions of Section 67d?
It is manifest that the execution of the mortgage was based upon a present consideration, was made in good faith and not in contemplation of, or in fraud of, the act, thus coming clearly within the protective provisions of the subdivision "d," § 67.
(3) The third question presented upon the record involves the construction of the registration laws of South Carolina. The question is not free from difficulty.
The Marion National Bank loaned money to, and thereby became a simple contract creditor of, F.H. Saunders Co., subsequent to the execution, and prior to the registration, of the mortgage to the Farmers' Merchants' Bank, and, at the date of the adjudication in bankruptcy of Saunders Co., said bankrupts were, and are now, indebted to said Marion National Bank on account of such loan. The bank had no knowledge or notice of the execution of the mortgage at the time of making said loan, nor until its registration.
C.M. Jones, of Marion, S.C. also made advances to Saunders Co., between the date of the execution and the date of the registration of said mortgage, without notice thereof. No lien was acquired by either of said simple contract creditors upon the property of Saunders Co., prior to the registration of the mortgage or their adjudication in bankruptcy. They have proven their debts as simple contract *Page 353 creditors. It does not appear that any other liens attached to the property of the bankrupts, covered by the mortgage, prior to the registration thereof, or to the adjudication of the bankrupts.
For the purpose of fixing the status of the Farmers' Merchants' Bank and the trustees, who represent and may enforce all of the rights of the creditors against the property of the bankrupts, reference must be made to the provisions of Section 70a of the Bankruptcy Act (Comp. St. § 9654). Collier on Bankruptcy (11th Ed.) 1106.
"The trustee of the estate of a bankrupt upon his appointment and qualification * * * shall * * * be vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt."
While not affecting the question presented here, it will be noted that in Everett v. Judson, 228 U.S. 474;33 Sup. Ct. 568; 57 L. Ed. 927; 46 L.R.A. (N.S.) 154, Mr. Justice Day says:
"There are other provisions of the Statute which, we think, evidence the intention to vest in the trustee the title to such property as it was at the time of the filing of the petition" — citing Acme Harvester Co. v. Beekman Lumber Co.,222 U.S. 300; 32 Sup. Ct., 96; 56 L.Ed., 208.
It is further said by Judge Day:
"Section 70a vests all the property in the trustee, which, prior to the filing of the petition, the bankrupt could by any means have transferred, or which might have been levied upon and sold under judicial process against him."
The Courts have uniformly held that the title to the property of the bankrupt vested, by operation of law, in the trustees, subject to all liens which had, prior to the date of filing the petition, attached thereto. The right of the creditors to attack such liens for fraud or other invalidating element vested in the trustee. Hewit v. Berlin Machine Co., 194 U.S. 296;24 Sup. Ct., 690; 48 L.Ed., 986. For that purpose Section 70e provides that "the trustee may avoid any transfer *Page 354 by the bankrupt of his property which any creditor of such bankrupt might have avoided." Section 67a provides that "claims which, for want of record, * * * would not have been valid liens as against the claims of the creditors of the bankrupt shall not be liens against his estate." and the trustee may maintain such action for the recovery of such property as a creditor holding a lien thereon could have maintained. The question to be solved, therefore, is whether the mortgage held by the bank, at the date of the filing of the petition or adjudication of Saunders Co., bankrupts, constituted a valid lien upon the tobacco seized by the bank as against the simple contract creditors of Saunders Co.
The answer to this question depends upon the construction to be given to the registration law of South Carolina, at the date of the execution and registration of the mortgage. No authoritative decision of the Supreme Court of South Carolina is cited, and it is conceded none may be found, rendered since the statute was amended by the act of 1914 (Laws 1914, p. 482), and as it existed at the date of the mortgage. I have examined the cases decided by the Court which have, or are supposed to have, any bearing upon the question.
It is conceded that, whatever the law may have been in regard to the registration of mortgages and its effect upon the rights of creditors, prior to the Act of 1843 (11 St. at Large, p., 256), it was at that time enacted in express terms:
"That a mortgage is invalid as against subsequent creditors for valuable consideration, unless the same shall be recorded in the office of the Register of Mesne Conveyances within sixty days after execution."
In Piester v. Piester, 22 S.C. 139; 53 Am. Rep., 711, it appeared that Piester executed a mortgage to secure a valid obligation, November, 1869, and a second mortgage December 21, 1869. The mortgages were not recorded until August, 1872. The mortgagor became indebted to one Wright, April 7, 1871, who had no notice of the existence of the mortgages. The mortgagor died and the question was presented *Page 355 in the settlement of his estate whether the mortgage was a valid lien as against Wright. For the present purpose it is sufficient to find that under the provisions of the Act of 1843, it was held that "if these mortgages had been recorded before Wright's note arose, though later than 60 days after execution, this would have constituted constructive notice. But this was not the case, and as the act declares them `invalid,' so as to affect the rights of one in Wright's position, it seems impossible to escape the conclusion that these mortgages cannot affect Wright's claim as to the estate of the debtor therein conveyed." Other questions were presented and discussed, none of which are material to the decision of the instant case.
The Legislature, at its session of 1876 (16 St. at Large, p., 92), re-enacted, so far as the Statute affects the rights of the parties in this case, the Act of 1843, fixing the time within which the mortgage was required to be registered at 40 days, and providing that mortgages registered within 40 days after execution and delivery `shall be valid, so as to affect from the time of such delivery or execution the rights of subsequent creditors. * * * Provided, nevertheless, that the above-mentioned deeds or instruments in writing, if recorded subsequent to the expiration of said period of forty days, shall be valid to affect the rights of subsequent creditors and purchasers for valuable consideration, without notice, only from the date of such registration."
At the April term, 1885, and while the Act of 1876 was in effect, the case of King v. Fraser was before the Court.23 S.C. 543. It appeared from the report of the Master that one Doar held a mortgage on certain property, executed in February, 1877, and recorded January 7, 1879. Between these dates the mortgagor became indebted to other persons, who were, at the date of the registration of the mortgage general creditors, without notice of Doar's mortgage until its registration. The controversy arose as to the rights of Doar under his mortgage, and the subsequent general creditors of the mortgagor, in respect to the distribution of *Page 356 the proceeds of the sale of the property mortgaged. The Master, to whom the cause was referred, filed an elaborate and able report. Referring to the Act of 1843 as a new departure in the registration laws of the state, he said: "It is evidently a well-considered effort to deal effectively with the whole subject of registration."
The Master was of the opinion that the mortgage held by Doar, not having been recorded within 40 days after its execution, as required by the Act, was not a valid lien as against creditors of the mortgagor whose debts were contracted between the date of its execution and its registration. Hudson, Circuit Judge, overruled the exceptions in this respect and confirmed the report of the Master. Upon appeal, Mr. Justice McGowan said the question was: "Whether the omission on the part of the executors of Doar to put their mortgage on record within 40 days after its execution, although recorded afterwards and before the commencement of this suit, made it absolutely invalid as to all debts of the mortgagor contracted between its execution and registry; that is to say, whether a mortgage recorded, after the time prescribed by law, has a lien, as of that date, with the ordinary incidents of a lien, as to all debts which at that time are unsecured or shorn of these incidents, as to that class of debts which were contracted between the execution and the delivery thereof. This is a new question in this State, the precise point, so far as we know, never having arisen before; and it is certainly one not free from difficulty, arising principally from the terms of the general registration Act of 1876."
The learned Justice entered upon the discussion of the subject by expressing his concurrence with the statement that "there is no subject upon which our law has been more confused and obscure than that of registry, both as to the effect of omission to record and of recording within, as well as after, the time prescribed by law."
He said: The Act of 1876, after prescribing that mortgages "`shall be valid so as to affect, from the date of such *Page 357 delivery or execution, the rights of subsequent creditors * * * without notice, only when recorded within 40 days from the time of such delivery or execution: * * * Provided, nevertheless, that the above-mentioned deeds or instruments in writing, if recorded subsequent to the expiration of said period of 40 days, shall be valid to affect the rights of subsequent creditors and purchasers for valuable consideration without notice, only from the date of such record.' If this section were to be considered without reference to the proviso there would be little difficulty. Ignoring the proviso, it is clear that the body of the section declares that, without recording, none of the instruments referred to would be valid as to any debts `without notice,' whether contracted before or after the date of the instrument in question; but it goes on to provide that, if recorded within the time prescribed, said instrument shall be valid even as to `all subsequent creditors, without notice' reaching back to the time of the delivery of the instrument. Without the proviso the section would be substantially the same as the Act of 1843 in reference to mortgages, which was several times before this Court. * * * But the addition of the proviso in the Act of 1876 makes a very material change in the law, applying to the registry of mortgages substantially the same rules which were declared" to be applicable "to the registry of absolute conveyances in Steelev. Mansell, 6 Rich., 438. * * * There cannot be the least doubt that this proviso was intended to give to a mortgage, though recorded out of time, some `effect' upon the class of creditors indicated; not, however, to reach back to the date of the mortgage, as in the case of one recorded within time, but only from the time of recording."
The learned Justice disposes of the question so far as it relates to liens acquired before the registration, after the expiration of the time limit, saying: "Of course the lien so acquired has priority over the mortgage. So far * * * there is no difficulty, but the matter is not so plain as *Page 358 to what is the effect of a mortgage recorded after the time upon general debts contracted after its execution without notice, and which are found in the condition of unsecured debts at the time the mortgage is recorded and its lien attaches. It is certainly the general rule that a bona fide lien, no matter when entered, from that time forth has priority over all debts which are then unsecured, without the least regard to their date."
After stating the contention made by the "subsequent creditors," whose debts were contracted after the date of the mortgage, and before its registration, Judge McGowan says: "For several reasons we hesitate to accept this view. In order to reach a satisfactory conclusion on the point, it is necessarry first to settle clearly who are the persons meant by `subsequent creditors and purchasers, without notice.'"
He concludes that the words "subsequent creditors" refer to those whose debts were contracted subsequent to the execution of the mortgage. The same phrase found in the proviso, he says, has reference to the same class of creditors, and not to those whose debts were contracted subsequent to the recording. "This being clearly settled, it would seem that the terms of the proviso itself negative the idea that a mortgage registered out of time is absolutely null and void as to all debts contracted between the execution and registry thereof, for it declares in express terms that such mortgage so registered `shall be valid so as to affect the rights of subsequent creditors,' etc. It seems to us that there could never have been a doubt upon the subject, but for the last clause in the proviso, which makes the ambiguous declaration that such effect shall be `only from the date of such record,' which, it is contended, limits the lien of the mortgage after registry to future debts, leaving the rights of the class of prior creditors before described entirely unaffected as they existed before registry."
After stating his reasons for rejecting this construction of the proviso, Judge McGowan says: "Considering the *Page 359 subject-matter and the context, we cannot doubt that the phrase `from the date of such record' was intended, not to fix that as the point from which the lien of the mortgage was to operate forwards, but simply to indicate the time at which it received vitality, or, in other words, that the registry fixed the time at which the mortgage becomes a lien, but not the date of the debts which, as such, it might affect, according to the condition, as to being secured or unsecured, in which they were found at the time. * * * To say that a mortgage shall be valid means, of course, valid as a mortgage; that is to say, a lien upon specific property, with the ordinary incidents of such lien, one of which is priority as to that particular property over all other debts of the mortgagor which have not prior to that time ripened into a lien."
In conclusion he says: "We can conceive of no effect of recording other than the putting an end to the exemption which arose from want of notice, and continued until notice was given by that recording, that the registry giving them notice at the same moment gives vitality to the mortgage as a lien with priority, as if the old mortgage had never existed and a new one had been executed and recorded on that day, the exemption arising from want of notice ceasing to exist as soon as notice is given" — quoting with approval the language of Judge Wardlaw in Steele v. Mansell: "Being without registration good as to the party who made it, the deed might, as to all other persons, be considered as if it had been executed on the day it was registered; in other words, as if it had been executed and acknowledged on that day. By delaying beyond a prescribed time, the grantee in a deed (or a mortgagee) has lost the right to insist that the tardy registration shall have relation to the date of the deed so as to provide against intervening claims; but why should he lose the benefit of registration from the day it was made?" *Page 360
Judge McGowan reached the conclusion that "the Doar mortgage, although recorded out of time, from that date became valid as a lien, and as such had priority over all the general debts of the mortgagor which had not then become liens, regardless of the time they were contracted as prior or subsequent." Mr. Justice McIver dissented from this conclusion. A petition to rehear was denied.
There would seem to be no room for doubt that, unless this decision has been reversed, or the statute so amended as to work a change in the law, the mortgage held by the Farmers' Merchants' Bank, although recorded out of time, is a valid lien from the date of its registration, as against general creditors of the mortgagor whose debts were contracted between the date of its execution and registration, and in respect to which no liens had attached prior to the registration of the mortgage.
At the Session of 1898 (Laws 1898, p. 746) the Legislature re-enacted the Act of 1876, whereby all mortgages are declared to "be valid, so as to affect from the time of their delivery or execution the rights of subsequent creditors (whether lien creditors or simple contract creditors) * * * without notice, only when recorded within forty days from the time of such delivery or execution." etc. "Provided, nevertheless, that the recording or record of the above mentioned deeds or instruments of writing subsequent to the expiration of said forty days shall from the date of such record operate as notice to all who may subsequently thereto become creditors or purchasers."
By the Act of 1909 (Laws 1909, p. 189) the time within which mortgages were required to be recorded was changed from 40 to 10 days. It will be noted that the words "whether lien creditors or simple contract creditors" are inserted in the amended act, and the record of the mortgage out of time is made by the proviso of 1898 "from the date of such record" to "operate as notice to all who may subsequently thereto become creditors." This *Page 361 change in the language of the proviso becomes of interest, in view of the decision of the Court in Brown v. Sartor (1910) 87 S.C. 116; 69 S.E., 88.
In that case the plaintiff brought suit to foreclose a mortgage executed by defendant on May 1, 1905, and recorded May 2, 1905. The defendants, other than the mortgagor, held liens on the property subordinate to plaintiff's mortgage, as follows: Thomas Barrett and others, trustees, mortgage executed October 6, 1905, and recorded January 6, 1908. Gist and other, receivers, mortgage April 18, 1907, and recorded November 27, 1907. Merchants' National Bank of Richmond held a judgment rendered May 28, 1909, subsequent to the registration of both mortgages, upon debts contracted subsequent to the execution of both mortgages. The Union Building Loan Association held a judgment of September 19, 1908. T.W. Norwood held notes against the common debtor contracted subsequent to the execution of the two mortgages held by Barrett and Gist, which were not reduced to judgment. He had no notice of the mortgage at the time his debts were contracted Plaintiff's mortgage was paid from the proceeds of the sale of the property. Mr. Justice Woods thus states the contention of the parties:
"All agree that neither the mortgage held by Barrett and others, as trustees, nor the mortgage held by Gist and others, as receivers, can have any preference over the Merchant's Bank of Richmond or J.W. Norwood, for the reason that the mortgages were not recorded within the time required by the statute, and the Merchants' Bank and Norwood became creditors * * * without notice of these mortgages. This being so, Norwood claims, as between him and the other creditors, that his right is to have the entire proceeds of sale remaining after payment of the plaintiff's mortgage applied pro rata to the payment of his debt, along with the two mortgage debts and the debt of the Merchants' Bank now in judgment. In opposition to this *Page 362 claim of Norwood, the Merchants' Bank insists that, by obtaining judgment on its claim, it acquired a lien on the property by reason of which it is entitled to have the entire proceeds of sale applied to the satisfaction of its debt to the exclusion of the mortgage debts and the debt of Norwood, which is not in judgment debts and the debt of Norwood, which is not in judgment. Laying aside for the moment the claim of the mortgagees against each other, we consider first whether the Merchants' Bank, has, by virtue of its judgment, any preference over the mortgages. The precise point here involved has not been decided under our statute, but from a consideration of the scope and object of the statute on the subject (Civil Code 1902, § 2456) it seems perfectly clear that the judgment has no such preference over the mortgages. The statute makes the mortgages of no effect against the Merchants' Bank and Norwood, as subsequent creditors without notice, because of the lack of record within 40 days. But the statute also provides that the recording, `subsequent to the expiration of said 40 days, shall from the date of such record operate as notice to all who may subsequently there to become creditors or purchasers.' The right of subsequent creditors to assert mortgages not recorded within the statutory time to be void against them is fixed by the statute, and cannot be changed by the recording out of time. If the subsequent creditor has no lien at the time of the recording beyond the 40 days, then he stands on an equal footing with the mortgage creditor. If he has acquired a lien, then he must be satisfied first."
While the learned justice makes no reference to the proviso in the Act of 1876 and the construction placed upon it in King v. Fraser, it would seem clear that this conclusion is based upon the view that the proviso in the Act of 1898 worked a radical change in the statutes of a mortgage recorded out of time with reference to the rights of subsequent creditors, who had not acquired a lien at the date of recording the mortgage. It would seem that, under the decision *Page 363 in King v. Fraser, both mortgages, having been recorded out of time, would have taken priority over the Merchants' Bank, because its judgment was rendered after the record, and Norwood had never acquired any lien. Judge Woods proceeds to say: "But for all other purposes, after the mortgage has been recorded, though after the statutory limit, it is to be regarded as if a mortgage had been made as of the day of record, having a lien from the date of the recording which cannot be displaced by any lien subsequently acquired by record or otherwise. This is the principle laid down in Steele v. Mansell, 6 Rich., 442. King v. Frazier, 23 S.C. 543, and Carraway v. Carraway, 27 S.C. 576. * * * The rule which the Statute was intended to establish, and we think its plain meaning, is that mortgages not recorded within the time fixed are invalid as to subsequent creditors whose debts were contracted before actual record, but that after actual record no superior lien can be acquired by judgment or otherwise."
The practical result of the conclusion reached by Judge Woods, so far as it relates to the question presented here, is that the mortgages held by Barrett and Gist were entitled, as against the Merchants' Bank and Norwood, to share prorata in the entire surplus proceeds of sale, neither having any prior lien as against the Merchants' Bank and Norwood. There were other phases of the controversy disposed of by the opinion, not material to the question presented here. It is not suggested in the arguments or briefs of counsel that the decision in Brown v. Sartor overrules, or is inconsistent with, King v. Fraser. The last case is based upon the proviso contained in the Act of 1898, and, I assume, is to be taken as the law of South Carolina upon the subject unless changed by later legislation.
We are thus brought to a consideration of the question in the light of the Act of 1914. The only change made in the Act of 1898, by this Act, was to strike out the proviso and insert in lieu thereof the following: "Provided, nevertheless, *Page 364 that the recording and record of the above-mentioned deeds and instruments * * * subsequent to the expiration of said ten days shall, from the date of such record, have the same effect as to the rights of all creditors and purchasers without notice as if the said deed or instruments of writing had been executed and delivered on the date of the record thereof."
While counsel for the trustees earnestly contend for a contrary construction of this proviso, I venture to think that the Legislature intended what it said — that the mortgage, recorded out of time, was deprived of its validity by relation to the date of its execution, as to debts contracted subsequent to its execution and before registration, but was a valid lien as against all debts in respect to which no lien had attached, from the date of its registration — as if the mortgage had been executed on the date of its registration; in other words, the Legislature crystallized into a statute the construction put upon the Act of 1876 by the Supreme Court in King v. Fraser, supra. While not of controlling force, it is significant that the proviso of 1914 is in substantially the same language as the second headnote to Kingv. Fraser.
It is of interest to note that, while the words "whether lien creditors or simple contract creditors" are for the first time found in the Act of 1898, and re-enacted in 1914, the proviso of 1914 gives to the registration of the mortgage "subsequent to the expiration of ten days * * * the same effect as to the rights of all creditors and purchasers without notice as if * * * executed and delivered on the date of the record thereof." It would seem that the words "whether lien creditors or simple contract creditors" were inserted in the Act of 1898 to remove any doubt as to the extent of the retroactive effect of registration within the 10-day limit, and to exclude all doubt as to the intention to give to the registration, out of time, the same effect as a mortgage executed *Page 365 on the day of its registration, the comprehensive words "all creditors" were used.
It may be that the construction put upon the proviso of 1898 in Brown v. Sartor was not in accordance with the legislative mind, and the amendment of 1914 was intended to restore, in unmistakable terms, the proviso of 1876 as constructed in King v. Fraser. It is worthy of note that, so far as the industry of counsel discovers, the Act of 1914 has not been construed by the Supreme Court of South Carolina, although it has been in effect 7 years.
Counsel call attention to a decree rendered by Circuit Judge Peurifoy, presiding in the Court of Common Pleas of Hampton County in Nellwood Lumber Company v. Vincent, from which no appeal was taken. Upon an agreed state of facts the question was presented respecting the effect of the registration of a lease "out of time," as against simple contract creditors without notice, whose debts were contracted subsequent to the execution but prior to the registration of the lease. The learned Judge, quoting the language of the proviso to the Act of 1914, says: "I am of the opinion that this amendment means exactly what it says, and consequently from the above statement of facts the lease of Nellwood Lumber Company to Starr and Patrick would be considered as executed as of the date it was recorded, and therefore valid as to all simple contract creditors whose claims arose between the date of the execution and the date of the record."
It is difficult to understand why, if, as provided by the statute, within the time limit within which the mortgage should be recorded to give to it a lien as against both lien and simple contract debts by relation to the date of its execution, it should not, as provided by the proviso, be given a lien from the date of its registration as to "all creditors," as if it had been executed on the day upon which it was recorded. Whatever doubt lurked in the language of the proviso to the Act of 1876 was so resolved in King v. Fraser, *Page 366 supra. The Act of 1898 and proviso thereto was so construed in Brown v. Sartor, supra, as to nullify this construction of the proviso to the Act of 1876. It was manifestly the intention of the Legislature to remove all doubt as to the purpose and effect of the statute law of the State regarding this question, of so much importance to the security of title to property and the extent of incumbrances thereon. By so construing, as the language clearly denotes, the proviso of 1914 as to make mortgages recorded, after the time limit, operate as against "all creditors" as though they had been executed and delivered on the day of their registration, relieves the rights of the mortgagees and subsequent creditors of the uncertainty which, it is conceded, previously existed. This uncertainty rendered titles to property insecure because of the difficulty and frequent impossibility of ascertaining what debts had been contracted during the 10 days' interim between the execution and registration of the mortgage, and whether such creditors had notice of the mortgage. This construction harmonizes with that usually placed upon registration acts in other states.
I concur in the conclusion of the Special Master that the mortgage held by the Merchants' Farmers' Bank of Marion on the tobacco seized by it is a valid lien to the extent of the unpaid balance of the note of $10,000, executed by F.H. Saunders Co. February 15, 1919. I am further of the opinion that the mortgage, by its express terms, is limited to securing the note of $10,000, due and payable to the Merchants' Farmers' Bank of Marion, S.C. and cannot, as against the trustees of F.H. Saunders Co., be extended to secure a separate indebtedness due the Bank of Latta, S.C.
The Merchants' Farmers' Bank of Marion, S.C. will deduct from the proceeds of the sale of the tobacco $9,125, the balance due on said note, $8,061.66, together with $404 cost, insurance, and attorney's fees, and pay the balance to the trustees in bankruptcy of F.H. Saunders Co. *Page 367
The suggestion is argued that the Saco-Lowell contract was not recorded prior to the appointment of a receiver. It appears that the receiver was appointed on January 4, 1921, but the order was not filed until the 5th, and the contract was recorded on the 4th. The order was not effective until it had been filed, and, on the day before, the contract was recorded, which we hold to be sufficient to antedate the appointment.
"While the written instrument purporting to be the judgment in a cause, remains in the possession of the judge who is to pronounce it, it is of no effect, and, like a deed, not delivered. The moment, however, it is filed by the Clerk of the Court, it becomes the judgment of the Court and fixes the rights of the parties." Arcker v. Long, 46 S.C. 295;24 S.E., 83. Genobles v. West, 23 S.C. 160. King v. RailroadCo., 86 S.C. 512; 68 S.E., 769. Dunton v. Harper,64 S.C. 343; 42 S.E., 153.
It hardly needs authority for the proposition that the receiver is in no sense a subsequent purchaser or creditor, but stands in the shoes of the debtor, with no greater title or interest than he possessed. Grube v.Lilienthal, 51 S.C. 443; 29 S.E., 230. Mairs v. Smith, 3 McCord, 52. Plunkett v. Carew, 1 Hill, Eq., 172. Tibbettsv. Weaver, 5 Strob., 144. Big Four Co. v. Wright, 207 Fed., 535; 125 C.C.A., 577; 47 L.R.A. (N.S.), 1223. Note 32 L.R.A., 44; Ann. Cas. 1916A, 1261. Holtv. Henley, 232 U.S. 639; 34 Sup. Ct., 459; 58 L.Ed., 767. Note L.R.A. 1917C, 444.
2. Mason Machine Works. This company claims priority over the general creditors to the extent of $59,217.19, that being the amount claimed to be due them under the following circumstances: A written contract was entered into by and between the company and the corporation, and provided for the furnishing of certain machinery to the mill aggregating $59,217.19. The contract is dated August 25, 1919, and signed by Cash Mills September 1, 1919. The machinery *Page 368 was delivered and installed in the mill after April, 1920. The contract contained the following provision relating to reservation of title:
"It is expressly understood and hereby agreed that the title to the machinery named in this contract shall remain with and in Mason Machine Works until all payments of both cash, notes and interest shall have been made in full, and proper receipt for same acknowledged by the seller. The sale of the machinery enumerated is made solely to Cash Mills for a mill at Gaffney, S.C. and is to be put in operation on their premises, and must not be removed therefrom, resold, or transferred to another party until all claims of the Mason Machine Works have been settled in full; or by the written consent of the Mason Machine Works."
The contract was recorded in the chattel mortgage book in the office of the register of mense conveyances of Cherokee County on January 5, 1921, the day after the order appointing a receiver was signed, and the day it was filed in the Clerk's office. Counsel for the holders of the cotton claims objected to the introduction of the Mason contract and to their claim for preference upon the following grounds: (1) That the probate is defective, in that it bears no seal of the person who purported to sign as notary public; (2) that the contract was dated August 25, 1919, and not recorded, or attempted to be recorded, until January 5, 1921, after the appointment of a receiver; (3) that the claims represented by them arose subsequently to the Mason claim.
The affidavit attached to the contract, in proof of its execution, was signed by the witness before a person who signed his name "Roy Macomson, Notary for S.C." without a seal.
The conclusions announced in reference to the Saco-Lowell Shops claim are applicable to this claim, and the questions raised in reference to it, with the exception of the contentions that the contract was improperly recorded, owing to a defect in the probate, and that it was not recorded until January *Page 369 5, 1921, the day the receiver's appointment was filed in the Clerk's office. It is claimed that the absence of a seal, to the proof of execution before a Notary Public, rendered the contract incapable of being recorded. Section 735, Vol. 1, Code of Laws, A.D. 1912, provides:
"He [notary public] shall have a seal of office, which shall be affixed to his instruments of publication and to his protestations; but the absence of such seal shall not render his acts invalid, provided his official title be affixed."
The Notary Public affixed his official title, and the Probate was therefore valid.
As to the objection that the contract was lodged for record upon the same day the order appointing the receiver was filed: The general rule is that fractions of a day will not be considered, and that acts done on the same day are done at the same time. 38 Cyc., 314. There are, however, exceptions to this rule, as where it is necessary to determine the conflicting rights of rival claimants, when they depend upon priority in fact. Assuming that this is a case within such exceptions, the opposition has failed to offer any evidence to support their contention that the order was filed prior to the recording.
The question next arises as to the mode in which these two claimants, who are accorded priority over the general unsecured creditors, shall be allowed the benefit of that priority. Prior to the appointment of a receiver, they each had a specific lien upon certain machinery. They consented to a sale of the entire plant as a whole, including such machinery, and that whatever rights, legal or equitable, which they had, should be transferred to the proceeds of the sale. It is highly probable that the sale did not realize the full value of the entire plant; at least that is a question to be determined. If it did not, and these claimants are allowed priority to the full extent of their claims, it is clear that they bear no part of the loss, all of which will be borne by the general creditors. It is fair, *Page 370 therefore, that these claimants be limited to such proportion of the value of the incumbered machinery as the net proceeds of sale bear to the value of the entire plant.
3.Barber-Colman Co. This company claims priority over general creditors to the extent of $4,000, that being the amount claimed to be due them under the following circumstances: A written contract was entered into by and between the company and the corporation and provided for the sale of a certain Warp Tying Machine to the corporation for the sum of $10,000. The contract was dated September 20, 1919. The machine was delivered and installed in the mill soon thereafter, long before the claim of the holders of the cotton claims arose.
The attorney for this claimant states in his argument:
"This is a contract by which Barber-Colman Company agrees to sell, and the mill agrees to buy and pay for, a Warp Tying machine. The contract contains also an express license to use the machine under numerous patents, and the further provision that if any part of the purchase price or interest shall remain unpaid the license to use the machine shall immediately be determined."
These claimants appeal upon two grounds: (1) That the Court refused to allow them any priority by reason of their contract; (2) that the Court erred in dismissing their attachment.
As to the first ground: It appears so clearly that holders of the cotton claims were subsequent creditors, so far as these claimants are concerned; that the contract falls within the provisions of Section 3740, and that it was not recorded until long after the receiver was appointed; that further comment in support of the denial of priority is unnecessary.
As to the second ground: The attachment was not levied until after the report of the referees was filed, long after the receiver took possession of the assets.
"The possession of property by a receiver is, in the eye of the law, regarded as the possession of the Court, which *Page 371 appointed the receiver, and hence such property being incustodia legis cannot be seized by attachment." 23 R.C.L., 69. The Circuit Judge was clearly right in vacating the attachment.
THE COTTON CLAIMS It would appear at first blush that this Court having established the right of Saco-Lowell Shops and Mason Machine Works to priority over the unsecured general creditors, and that these two claimants are the only ones contesting the validity of the cotton claims (not even the receiver joining them in the attack), the question of the validity of these claims has become academic. But when it is considered that the priority accorded the above two claimants does not extend to the full amounts of their respective claims, but only to such proportion of the value of the incumbered property as the net proceeds of the sale bear to the value of the entire plant including the incumbered machinery, and that, for the unpaid balances upon their claims, they take rank with all other unsecured general creditors, these claimants have a direct interest in the reduction of the claim of any general creditor. The evidence in support of these claims in unsatisfactory to a degree. It is confused and contradictory; books and documents were called for and not produced upon the flimsiest excuses; the receiver whose duty it was to rigidly require the proof of the validity of all claims took no part in the contest, rather co-operated with the claimants and submitted to the establishment of the claims without appeal. The question whether the losses of these claimants were based upon the legitimate standard of the difference between the contract price and the market price at the time of agreed delivery, or upon their losses upon contracts supervening the breaches, is nebulous.
We announce the following conclusions:
1. That the Saco-Lowell Shops are entitled to priority over the general creditors, upon their claim, out of the net proceeds of sale, to the extent of such proportion of the *Page 372 value of the incumbered machinery as the net proceeds of sale bear to the value of the entire plant at the time of the sale, including the said machinery; and that for the unpaid portion of their claim they rank as general unsecured creditors.
That the Mason Machine Works are entitled to he same rights as are accorded the Saco-Lowell Shops.
3. That the claim of Barber-Colman Company to priority is denied.
4. That the validity of the cotton claims be referred by the Circuit Court to a special referee, other than those heretofore appointed, to take testimony de novo and report his conclusions of law and fact to the Court; and in that proceeding the receiver and his attorneys are directed to take active participation in requiring the establishment of said claims; and that there be also referred to said special Master the question of the amounts to which the two preferred claimants are entitled under the principle hereinbefore declared.
The judgment of this Court is that the decree of the Circuit Court be reversed and that the case be remanded to that Court for further proceedings consistent with the foregoing conclusions.
MESSRS. JUSTICE WATTS and MARION concur.