Action commenced September 7, 1943, by Henry Charnesky, plaintiff, against James Gottlieb Urban and Charlotte Urban, defendants, to recover under a chattel-mortgage lien on defendants' automobile. On motion for summary judgment by both plaintiff and defendants, judgment was entered on December 27, 1943, giving plaintiff possession of the automobile, or in the alternative a judgment in the sum of $400, together with $1 damages and costs. From this judgment defendants appeal.
June 7, 1941, defendant James Gottlieb Urban, a resident of Menominee, Michigan, purchased a 1941 Buick automobile from plaintiff, Henry Charnesky, an automobile dealer at peshtigo, Wisconsin. To secure the unpaid balance of the purchase money the purchaser and his wife, Charlotte Urban, executed a note and chattel mortgage on the automobile. The chattel mortgage was filed with the register of deeds of the proper county in the state of Michigan, but no affidavit ofbona fides was filed as required by sec. 13424, Mason Supplement of the Michigan Statutes. Defendants later moved to the state of Wisconsin, where they continued to reside. *Page 270
Defendants filed separate petitions in bankruptcy in the district court of the United States for the Eastern district of Wisconsin, and on June 13, 1942, were adjudicated bankrupts. The unpaid balance of $761.37 due plaintiff was scheduled in both petitions. July 31, 1942, plaintiff petitioned the referee in bankruptcy for an order establishing his right to the automobile under the chattel mortgage. The request was denied by the referee in bankruptcy, which order was affirmed by the district court of the United States for the Eastern district of Wisconsin and the United States circuit court of appeals for the Seventh circuit because the laws of the state of Michigan had not been complied with in filing the chattel mortgage there. The decision of the circuit court of appeals was handed down on June 10, 1943. Following the decision of the circuit court of appeals, the referee in bankruptcy ordered the automobile sold free and clear of incumbrance and called for sealed bids. Defendant Urban bid $900, which was the highest bid received, and on June 30, 1943, the referee entered an order authorizing and directing sale of the automobile to the defendant Urban. Pursuant to the order the trustee immediately executed and delivered a bill of sale. On the same day an order was entered by the referee in bankruptcy finding that the automobile was used by Urban in carrying on his trade or business and setting aside $400 as an exemption to be paid to Urban from the proceeds of the sale of the automobile by the trustee pursuant to the provisions of sec. 272.18 (6), Stats. Defendants were discharged in bankruptcy December 15, 1942. When the defendants, James Gottlieb Urban and Charlotte Urban, his wife, executed the chattel mortgage to the plaintiff, Henry Charnesky, on June 7, 1941, this established a lien in favor of the plaintiff on the automobile described in the mortgage. The failure to properly record the mortgage in Michigan, where defendants resided, and failure to file it in Wisconsin when they moved to Wisconsin did not affect the validity of the mortgage between the parties. Manson v.Phoenix Ins. Co. (1885) 64 Wis. 26, 24 N.W. 407. This mortgage continued in full force and effect and could have been enforced by the plaintiff at any time prior to the filing of the petitions in bankruptcy by the defendants. When the defendants were adjudicated bankrupts the right to the nonexempt property passed to the trustee. The automobile having a value in excess of $400 was partially exempt and partially nonexempt under sec. 272.19 (2), Stats., which reads as follows:
"If the property seized is an automobile used in carrying on the debtor's trade or business but is appraised and can be sold for more than four hundred dollars, the officer may sell such automobile and out of the proceeds of such sale he shall pay to the debtor of his wife the sum of four hundred dollars. The balance of the proceeds of such sale shall be applied on the execution or attachment."
In administering the estate of a bankrupt it is the policy of the Bankruptcy Act to respect state exemption laws. Bankruptcy Act, sec. 6; 11 USCA, sec. 24: White v. Stump, 266 U.S. 310,45 Sup. Ct. 103, 69 L. Ed. 301.
When the trustee took possession of the automobile he did so subject to the rights of the owner under sec. 272.19 (2), Stats., and his possession in no way affected the rights of this plaintiff against defendants' exempt interest in the property. The lien of the mortgagee was still valid as between the *Page 272 mortgagor and mortgagee. If the value of the automobile had not exceeded $400 and it had been set off to the defendants as exempt property no one would question the right of this plaintiff to enforce his lien under the mortgage. Defendants contend that when plaintiff attempted to establish his lien and right of possession in bankruptcy court and the court held in In re Urban (7th Cir.), 136 F.2d 296, 298, that the plaintiff had no lien or right of possession as against the trustee and creditors in bankruptcy, the lien rights of this plaintiff were fully determined and are now res judicata. We do not consider that the court so held. The only question passed upon by the court was the effect of the chattel mortgage on nonexempt property. This is shown by the following language in the decision:
"If creditors have claims against the exempt property, the bankruptcy court is not open to litigate such rights. The bankruptcy court has only jurisdiction to set off the exemption to which a claim is made and to which the bankrupt is entitled. No interest in that property passes to the trustee, and the exempt property is no part of the assets of the bankrupt's estate subject to administration in the bankruptcy court. If the creditor has any rights against such property claimed and set off to the bankrupt as exempt, the courts of the state are the proper forum to litigate such claims. Lockwood v. ExchangeBank, 190 U.S. 294, 23 S. Ct. 751, 47 L. Ed. 1061;Stein v. Bostian (8th Cir.), 133 F.2d 586, 589."
The court simply said that the question of the lien rights as to exempt property between these parties was a matter for the state courts.
This leaves the automobile in the possession of the trustee with the bankrupts' creditors, bankrupts, and mortgagee all having an interest in it. Under the state statute the trustee has authority to sell the property free and clear of incumbrance, which he did. Sec. 272.19 (2), Stats., provides the procedure to be followed, which is by sale of the automobile and from the proceeds pay to the debtor or his wife the *Page 273 sum of $400 and the balance in this instance would be retained by the trustee in bankruptcy. The mortgagee had an interest in the bankrupts' exemption. Defendants contend that if plaintiff had any right he should have objected to defendants' discharge in bankruptcy and then established his right by proceeding in the state courts, citing Lockwood v.Exchange Bank (Ga. 1903), 190 U.S. 294, 23 Sup. Ct. 751,47 L. Ed. 1061, and In re Nixon (D.C. 1929), 34 F.2d 667. This rule applies particularly where the lien, such as a purchase-money lien on exempt property, does not exist until it is established in a state court. Plaintiff could well have followed this procedure, but his failure to do so does not defeat his right. At all times he had an established lien on bankrupts' exempt interest in the automobile. The referee in bankruptcy had authority to sell the automobile for the purpose of obtaining the value of the nonexempt interest. In making the sale he could convey all rights of the bankrupts and the mortgagee in their exempt interest in the property and place in lieu thereof the sum of $400. Neither the trustee nor the bankruptcy court had any title or interest in this exempt fund, but this does not mean that the mortgagee does not have a lien on the fund which by law is determined to be in lieu of the exempt interest in the automobile. Defendants contend that by their discharge in bankruptcy they are discharged from any debt to the plaintiff. This is true where plaintiff is seeking a personal judgment, but it does not prevent enforcement of a lien which the statute permits where it does not involve a judgment in personam. Bank of Commerce v.Elliott (1901), 109 Wis. 648, 85 N.W. 417, and cases therein cited. This must necessarily be true or the mortgagee could not foreclose wholly exempt property of the bankrupt after debtor was discharged in bankruptcy.
This is an action in equity to enforce a lien. Under the chattel mortgage there was a valid lien against the defendants' exempt interest in the automobile. By lawful process $400 in cash was substituted for this exemption, to which in *Page 274 equity the lien would apply. The exemption of $400 was set aside and awarded to the defendants by the referee in bankruptcy on the same day he approved the order of sale of the automobile. Under these facts it is considered that the court had a right to conclude that the $400 exemption was left in the automobile, and if so that the lien applied.
By the Court. — Judgment affirmed.