Waters v. B. F. Ellington Co.

The parties to the case agree that the only questions involved in the appeal are (1) whether or not the plaintiff, B. F. Ellington Co., had a valid and subsisting lien on the crops produced in 1925 by the defendant, Virgil J. Waters; and (2) whether or not the lien could be legally forclosed in a suit instituted after Virgil J. Waters had been adjudged a bankrupt and had been granted a discharge in bankruptcy.

First. The trial court correctly decided that B. F. Ellington Co. had a valid and enforceable chattel mortgage lien on the crops produced during the year 1924 as well as during the year 1925 by the mortgagor, Virgil J. Waters. The mortgage being valid, it was effectual against the mortgagor's trustee in bankruptcy to the amount of the debt. The instrument was executed on February 23, 1924, and for a present consideration, and was duly recorded according to law. The lien was not dissolved by adjudication or avoided as preferential, but, on the contrary, was expressly recognized as valid by the court of bankruptcy in the order made and appearing in the facts. And the chattel mortgage in suit, although purporting to cover property to be acquired, was valid within the rule recognized in this state. Federal courts follow decisions of state courts on such local questions. Thompson v. Fairbanks,196 U.S. 516, 25 S. Ct. 306, 49 L. Ed. 577. A chattel mortgage on crops not in existence, and to be grown on land owned or leased by the mortgagor, will be enforced as a lien on the crops when they come into existence. Richardson v. Washington, 88 Tex. 339, 31 S.W. 614; Caldwell et al. v. Yarbrough (Tex.Civ.App.) 186 S.W. 350; Perkins v. Alexander (Tex.Civ.App.) 209 S.W. 789; and other cases. Even though the chattel mortgage was, as the parties call it "a lap-over mortgage," it was not on that account ineffectual, not being void for indefiniteness. The lien attached when the crops of 1925 were actually produced. The mortgage lien expressly covered certain designated crops to be produced in 1924 and in 1925 on the mortgagor's farm. The mortgagor was the owner of the farm, and it was contemplated that he would grow the crops mentioned. And he did grow the crops mentioned. The parties intended to have the proceeds of the crops of 1924, according to the value thereof, applied on the note that was owing, and, after crediting the proceeds of the 1924 crops, to have "the balance which shall remain unpaid on my said indebtedness" become payable out of the proceeds of the crops produced in 1925, according to their value. Its terms are quite different from the terms of the chattel mortgage set out in McDavid v. Phillips, 100 Tex. 73,94 S.W. 1131. The mortgage being valid, it became effectual against the mortgagor's trustee in bankruptcy, although the 1925 crop was produced after the filing of the petition in bankruptcy and before discharge. It did not fail of the continued security, because the Bankrupt Act expressly preserves all valid liens.

Second. A judgment in personam not being involved, the chattel mortgage lien on the specially described crops produced in 1925 was properly foreclosed in the present suit, although the mortgagor had been granted a discharge in bankruptcy. The lien of a mortgage continues, as between the parties, until it is discharged or released. The court in bankruptcy did not discharge or release the lien; there being no fraudulent preference or priority given by the mortgagor debtor. And the discharge granted the debtor or bankrupt does not release, discharge, or invalidate unpaid valid and unsatisfied liens acquired more than four months before filing of the petition in bankruptcy. In no wise do the provisions for a full discharge of the debtor prevent the enforcement of a lien, which the statute admits as valid, by any requisite proceeding which does not involve a judgment in personam. The present Bankrupt Act expressly preserves all liens given in good faith, and without contemplation of fraud, more than four months before the bankruptcy proceedings are instituted, in case the lien is for a present consideration and has been recorded according to law. 3 U.S. Compiled Stat. 1901, p. 3449, § 67d (U.S. Comp.St. § 9651). It is only the proceeds or value of the securities over and above the indebtedness or claim secured by liens that become and remain a part of the assets and estate of the bankrupt and pass to the trustee. It is only the sum owing by the debtor over and above the value of the securities that becomes a provable or allowable claim or debt in favor of such secured creditor against the general assets and estate of the bankrupt. The preservation of such liens and the bankrupt being discharged or released only from any personal liability for the sum owing above the proceeds or values of the securities necessarily leaves the mortgagee free to pursue the necessary legal or equitable remedies to render the liens effective, in case, as here, the value of the mortgaged property is less than the mortgage debt. In such case the mortgaged property by strict foreclosure is secured to the creditor in absolute property; or he may, as he did in this instance, resort to foreclosure and sale to enforce his rights. 3 Page on Contracts (1905) sec. 1562.

The appellant submits the following in support of the second question:

"Our courts have uniformly held that, where a debt is barred by limitation the mortgage is also barred. A chattel mortgage being but an incident of the debt, the payment of the debt or the extinguishment thereof for any reason extinguishes the mortgage. See Blackwell v. Barnett, 52 Tex. 326; Perkins v. Sterne, 23 Tex. 561, 76 Am.Dec. 72. Reasoning by analogy, it is certainly logical to say that a discharge in bankruptcy wipes out, pays, or extinguishes the debt; that therefore, the debt being thus wiped out, there is nothing left upon which to base the mortgage, and any property mortgaged which comes into existence after the discharge of the debt comes into existence without the mortgage lien attached to it."

The above rule, as to remedy invoked by appellant, is in no wise applicable to the present question, for the reasons given above, that (1) valid liens are expressly preserved to the secured creditor to the amount of the indebtedness at the time of the filing of the petition in bankruptcy; (2) only the proceeds or value of the securities over and above the indebtedness or claim secured by liens becomes and remains a part of the assets and estate of the bankrupt; and (3) the bankrupt is discharged only from any personal liability for any part of the secured indebtedness unpaid or deficient over and above the proceeds or value of the securities. With the operation of the statute of limitations the claim barred thereafter ceases in its entirety to be an enforceable, legal obligation for any purpose, although the debt was secured by a mortgage lien. Thus a well-defined difference exists in the effect of the two remedies of discharge and limitation in furtherance of their object.

The judgment is affirmed.

On Rehearing. As stated in the original opinion, the suit was filed August 22, 1025, the discharge in bankruptcy was granted on June 6, 1925, the crop of 1925 was in existence before the discharge and the closing of the bankruptcy proceedings. The mortgagee had the right to hold the property, being greatly less than the debt secured, against the trustee in bankruptcy, as recognized by him in the order mentioned. And the discharge of the debtor did not prevent the enforcement of the lien in the present suit; no judgment in personam being involved.

The motion is overruled.