The opinion of the court was delivered by: GALSTON
The Lawrence-Cedarhurst Bank seeks a review of the order of the Referee in which he held a chattel mortgage, executed by the bankrupt to the bank, as mortgagee, was void, and that the payment received by the bank under the mortgage of November 30, 1951 was preferential.
The petition recites that the bank is a creditor and owner and holder of a promissory demand note, bearing date of October 29, 1951, in the sum of $ 6,000, made by the bankrupt and secured by a chattel mortgage dated October 29, 1951. It appears that on or about December 12, 1951, and prior to the appointment of the trustee in bankruptcy, the receiver applied to the referee for an order authorizing the sale of the chattels covered by the mortgage free and clear of the lien, the proceeds to be held in a separate fund to await further order of the court. The bank filed a counter-petition for an order directing the receiver to deliver to the bank the articles described in the chattel mortgage, to enable the bank to sell such merchandise as provided in the chattel mortgage, and to apply the proceeds to the indebtedness of the bankrupt to the bank. The receiver filed an answer seeking denial of the bank's motion, and an order adjudging the chattel mortgage null and void.
Thereafter a stipulation was entered into by the receiver and the bank permitting the sale of the mortgaged articles, free and clear of the lien, reserving for determination the validity of the chattel mortgage. The trustee in bankruptcy, appointed thereafter, continued the proceedings which had been instituted by the receiver.
The matter came on for hearing before the Referee, on the conclusion of which the Referee held the mortgage to be null and void as against the trustee in bankruptcy, and further adjudged that the sum of $ 230 received by the bank on November 30, 1951 was preferential in violation of Sections 60 and 70 of the Bankruptcy Act, 11 U.S.C.A. 96, 110, and Section 15 of the Stock Corporation Law of the State of New York, McKinney's Consol. Laws, c 59.
The bank contends that the order is erroneous on the ground that the Referee's conclusion of law was based on the single ground that the chattel mortgage was void under Section 230-a of the Lien Law of the State of New York, McKinney's Consol. Laws, c. 33, and that in so holding, the Referee misconstrued that section and gave no weight to the fact that the chattel mortgage was not a mortgage upon a stock of merchandise in bulk, or any part thereof, but specifically enumerated each and every article covered by the mortgage. The bank's petition also contends that the order is erroneous in adjudging that the $ 230 received by the bank on November 30, 1951 was a preferential payment.
The pivotal issue, therefore, concerns Section 230-a of the Lien Law of the State of New York. That section of the Act provides:
'Every mortgage or conveyance intended to operate as a mortgage upon a stock of merchandise in bulk or any part thereof, or upon merchandise and fixtures pertaining to the conduct of the business of the mortgagor, shall be void as against the creditors of the mortgagor, unless the mortgagor shall at least five days before the execution of such mortgage make a full and detailed inventory, showing the quantity and, so far as possible with the exercise of reasonable diligence, the cost price of the mortgagor of each article to be included in the mortgage; and unless the mortgagee demand and receive from the mortgagor a written list of names and addresses of the creditors of the mortgagor specifying the amount due or owing to each and certified by the mortgagor under oath to be a full, accurate and complete list of his creditors and of his indebtedness; and unless the mortgagee shall at least five days before the execution of such mortgage notify personally or by registered mail every creditor whose name and address is stated in such list, or of which he has knowledge, of the proposed mortgage and the terms and conditions thereof. Added L. 1921, c. 462; amended L. 1922, c. 137, eff. March 22, 1922.'
Concededly if the chattel mortgage fell within the framework of Section 230-a, the provisions therein recited have to be complied with to effect validity. It is conceded that the mortgagor did not, five days before the execution of the chattel mortgage on October 29, 1951, make a full inventory of the cost price to the mortgagor of each article included in the mortgage. It likewise appears that the mortgagee did not demand nor receive from the mortgagor a written list of names and addresses of the creditors, specifying the amount due or owing to each, nor did the mortgagee, before the execution of the mortgage, notify such creditors of the proposed mortgage and its terms and conditions.
The bank argues that neither the Lien Law nor even the Personal Property Law, McKinney's Consol. Laws, c. 41, Section 44, defines what was meant by 'sale, transfer or assignment in bulk of any part or the whole of a stock of merchandise', or 'a mortgage upon a stock of merchandise in bulk or any part thereof'. The purposes of the enactments have been construed by the courts and held in effect, as was stated by Judge Moscowitz in In re Rosom Utilities, Inc., D.C. 25 F.Supp. 626, 627:
'What the Legislature, undoubtedly, had in mind was to protect creditors against fraud and to prevent the mortgaging and disposition of the property of a debtor without appropriate notice to the creditors. This notice would enable the creditors of a debtor, in the event of fraud, to apply to the Court for relief. Certainly, in a case of this character where a mortgagor buys a few radios and refrigerators and executes a purchase money mortgage thereon, it was not the intention of the Legislature of the State of New York to place an undue burden upon the mortgagee to notify all the creditors of the mortgagor. If such were the intention of the Legislature it could have said so in clear language.'
In the same case the Circuit Court of Appeals 2 Cir., 105 F.2d 132, 134, said:
'The evil at which the section was aimed was the perpetration of a fraud on creditors by putting a bulk mortgage on a stock of goods or part of it and making off with the proceeds.'
In construing Section 44 of the Personal Property Law, Judge Hasbrouck, in Feldstein v. Fusco, 205 App.Div. 806, 201 N.Y.S. 4, 6, Reversed on other grounds 238 N.Y. 58, 143 N.E. 790, said:
'A sale in bulk is made where separating, counting, measuring, weighing, or dividing in parcels, packages, or barrels does not take place, but where ...