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In re American Metal Products Co.

decided: April 1, 1960.

IN THE MATTER OF AMERICAN METAL PRODUCTS CO., INC., BANKRUPT. ARTHUR B. WEISS, TRUSTEE-APPELLANT, WALTER E. HELLER CO., INC., APPELLEE.


Author: Herlands

Before MOORE, Circuit Judge, and SMITH and HERLANDS, District Judges.

HERLANDS, District Judge.

The validity of a certain chattel mortgage under Connecticut law is the question presented on this appeal. This issue arises out of the Chapter XI, 11 U.S.C.A. ยง 701 et seq., bankruptcy proceedings, commenced on April 22, 1958, involving American Metal Products Co., Inc. (hereinafter "American").

Walter E. Heller Co., Inc. (hereinafter "Heller"), a factor who is the creditor herein, claims that $5,674.27, the balance of principal indisputably owing by American to Heller, is secured by a chattel mortgage held by Heller. By reclamation petition dated June 20, 1958 (amended July 8, 1958), Heller sought immediate possession of the articles of personal property covered by the chattel mortgage, or in lieu thereof payment of the amount due to Heller.

The chattel mortgage was attacked by American's trustee in bankruptcy as void under the controlling Connecticut statute. 1949 Rev.S.Conn., section 7279.

By order dated October 21, 1958, the referee in bankruptcy, declaring the mortgage invalid, denied the amended Heller reclamation petition. The United States District Court for the District of Connecticut, by order filed December 17, 1958 (opinion reported at 169 F.Supp. 215), reversed the referee's order and granted Heller's petition. This appeal is from the District Court's order.

The chattel mortgage and promissory note were recorded. The debt described in the mortgage and in the note was an unconditional debt of $40,000, to be repaid in thirty-six monthly installments, with interest. The mortgage purported to secure not only "sums, liabilities and indebtedness which may be or become owing under said Note and under this mortgage" but also sums, liabilities and indebtedness "which otherwise may now or hereafter be or become owing by the Mortgagor to the Mortgagee, * * * however created, * * *"

At the same time (June 14, 1955) that the mortgage and note were executed, American and Heller also entered into a separate and collateral written agreement which, however, was not recorded. This separate agreement was not specifically or identifiably referred to in the mortgage. The separate agreement provided (1) that the initial advance would be $15,000; (2) that further advances would be made in installments upon request of American, provided American was not then in default under the mortgage or under any other agreement by and between American and Heller; but (3) that $2,500 of the additional $25,000 to be advanced would be withheld unless and until American obtained satisfactions of certain prior recorded mortgages. There is no suggestion that the separate unrecorded written agreement was entered with fraudulent motive.

Actually, a total of $40,000 was advanced by Heller to American over a period of time. Because of American's repayments, however, the largest amount of indebtedness outstanding at any one time was just under $37,000.

Such a debt is legal and, if accurately described therein, presumably could have been secured by a chattel mortgage under the statute. Cf. Lampson Lumber Co., Inc. v. Chiarelli, 1924, 100 Conn. 301, 123 A. 909, 912 [real estate mortgage].

But the recorded chattel mortgage herein did not accurately describe the debt. Cf. Andrews v. Connecticut Properties, Inc., 1950, 137 Conn. 170, 75 A.2d 402, 404 [real estate mortgage]. Both the Referee and the District Court in the case at bar agreed that the chattel mortgage record "did not give reasonable notice of the nature and amount of the debt" (169 F.Supp. at page 218).

The Referee held that the material variance between the mortgage debt as described in the mortgage and as actually agreed to invalidated the mortgage in its entirety, and left the creditor unsecured. Reversing, the District Court held that the mortgage was invalidated only with regard to the amount overstated, i. e., the amount over the $15,000 initially and unconditionally loaned. Since the debt had been reduced to $5,674.27, and, by the normal rule, prior payments are to be applied first to the unsecured portion of a debt, the District Court held that the creditor was fully secured for $5,674.27, the principal amount of the debt still outstanding.

1949 Rev.S.Conn., 7279, entitled "Certain chattel mortgages void. Penalty"*fn1 provides:

"Any person who shall loan money upon a note secured by mortgage upon personal property, in which the sum of money loaned is stated to be greater than the amount actually loaned, or in which the rate of interest to be charged is greater than the rate allowed by law to be charged by pawnbrokers, shall be fined not more than fifty dollars or imprisoned ...


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