Duffy v. Charak

Background

A person handling the bankrupt estate sought the proceeds of goods that a lender had sold under an agreement with him. The lender held a mortgage dated March 2, 1909, and admitted only $1,500 was newly lent under that mortgage. The mortgage was not recorded. On May 24 the goods were attached by a third party and a sheriff took custody. That same day the lender put in a keeper subject to the sheriff’s possession and on May 25 notified the deputy sheriff and the bankrupt of his claim; the notice was recorded on May 26, the day the bankruptcy petition was filed.

Reasoning

The key question was whether the lender’s acts before the bankruptcy met Massachusetts law, which makes an unrecorded mortgage effective against others only if the property is delivered to and kept by the mortgagee. The Court acknowledged the sheriff’s possession was exclusive but explained that change of possession can occur even when a third person holds the goods. The Court held the lender’s entry, custody through a keeper, and timely notice had the same effect as a formal delivery and as if the owner had assented. For that reason the mortgage could be enforced despite the attachment, so the lower courts’ rulings voiding the mortgage were reversed.

Real world impact

The decision lets a lender’s practical custody and prompt notice make an unrecorded mortgage effective against attached goods. The Court reversed without deciding whether the attachment’s lien must be preserved for the bankrupt estate, leaving that question open for further proceedings.