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October 31, 1949


The opinion of the court was delivered by: SMITH

This matter is before the Court on two petitions for review filed herein pursuant to Section 39, sub. c. of the Bankruptcy Act as amended, 11 U.S.C.A. ยง 67, sub. c- the one by Shirley Droutman, a creditor, and the other by James R. Digney, the trustee in bankruptcy. The ultimate questions raised are identical, although presented differently in the respective petitions.


 The bankrupt, a New Jersey corporation, was organized in January of 1946, and upon its organization issued 90 shares of no par value stock, 40 shares to Josephine Popovich, 5 shares to Nicholas Popovich, her husband, 40 shares to Shirley Droutman, and 5 shares to Ben Droutman, her husband. Thereafter a disagreement among the officers led to negotiations for the repurchase by the bankrupt of the stock held by Shirley and Ben Droutman. This stock was repurchased on January 16, 1947 for $ 19,500, the full amount invested by these stockholders. It would appear that the stock was thereafter held by the bankrupt as treasury stock.

 It was further agreed first, that Shirley Droutman would pay to the Ridgefield National Bank a corporate debt in the amount of $ 3000; second, that Ben Droutman would cancel a debt in the amount of $ 5350, due from the corporation, representing advances previously made by him to the bankrupt; and third, that the total indebtedness of the bankrupt in the amount of $ 8350, would be paid to Shirley Droutman. The total sum due Shirley Droutman was then $ 27,850, which the bankrupt agreed to pay, with interest, in installments.

 The bankrupt executed and delivered to Shirley Droutman two mortgages, the one covering the real property therein described, and the other covering the personal property therein described. It is conceded that these mortgages were given by the bankrupt to secure payment of the total indebtedness in the amount of $ 27,850. This further appears from the express terms and conditions embodied in the mortgages.

 The bankrupt was not insolvent in January 1947 when these transactions were consummated, but it appears that it was in a precarious financial condition. The capital was impaired by an operating deficit of $ 1800, for the year 1946, and the bankrupt lacked sufficient cash to pay its only outstanding debt in the amount of $ 231. It is clear that under these circumstances the repurchase by the bankrupt of its own stock and the creation of an additional debt for the purchase price further impaired the capital.

 The bankrupt sold 30 shares of no par value stock on July 3, 1947: 5 shares to Albert Simon, 12 1/2 shares to Charles Shenier, and 12 1/2 shares to Frank Vita. The consideration was $ 4800. The bankrupt issued 50 shares of no par value stock to Donald Gabor in August 1948, 20 shares of which was new stock for which no consideration was paid, and 30 shares of which represented the shares previously sold to Simon, Shenier and Vita, and which were apparently purchased by Gabor.

 A voluntary petition in bankruptcy was filed herein on February 14, 1949, and an order of adjudication was entered thereon on the same date. Thereafter, on April 19, 1949, the Referee in Bankruptcy entered an order in which he directed the trustee to sell the real and personal property covered by the mortgages free and clear of all liens. Pursuant to the said order these assets were sold at public auction for $ 16,024.60, $ 13,000.00 for the real property and $ 3024.60 for the personal property.

 The confirmation of the sales was opposed by Shirley Droutman, who apparently asserted a right to the property, although it does not appear that she ever applied to the Referee for leave to foreclose the mortgages. The validity of the mortgages was attacked by the trustee in a petition filed on April 18, 1949.


 The validity of the chattel mortgage is challenged by the trustee, who urges that the said mortgage is void as against creditors because of the insufficiency of the affidavit of consideration. It must be conceded that a chattel mortgage is void as against creditors, within the meaning of the statute, unless there is 'annexed thereto an affidavit or affirmation, made and subscribed by the holder of such mortgage, his agent or attorney, stating the consideration of such mortgage and, as nearly as possible, the amount due and to become due thereon.' R.S. 46:28-5, N.J.S.A. 46:28-5. The question presented is whether or not the affidavit of consideration meets the requirements of the statute. The answer to this question, however, is not determinative of the issues raised by the arguments of counsel.

 The affidavit of consideration is lacking in meticulous detail and is probably subject to criticism, but is is our opinion that it meets the statutory requirements. A substantial compliance with the statute is essential to the validity of a chattel mortgage, but the statute should not be so construed and applied as to invalidate a chattel mortgage given in good faith to secure a debt honestly incurred. It has been held by the courts of this state that a substantial compliance with, rather than a technical adherence to the statutory provisions, is all that is required. American Soda Fountain Co. v. Stolzenbach, 75 N.J.L. 721, 68 A. 1078; Howell v. Stone & Downey, 75 N.J.Eq. 289, 71 A. 914; Shupe v. Taggart, 93 N.J.Law. 123, 107 A. 50; Hunt v. Ludwig, 93 N.J.Eq. 314, 116 A. 699; Fitzpatrick v. Barnard Phillips & Co. Inc., 95 N.J.Eq. 363, 123 A. 245; Abeles v. Guelick, 101 N.J.Eq. 180, 137 A. 853; Fidelity Union Trust Co. v. Augelli, 125 N.J.Eq. 246, 4 A.2d 495. There are many other cases, but we see no reason to cite them.

 A more difficult question is presented by the claim of Shirley Droutman, to whom there is still due and owing $ 24,021.54. There are two separate and distinct debts included in this claim: the debt created by the purchase by the bankrupt of its own stock, and the debt created by the advance of funds to pay the debts of the bankrupt. There are actually two severable claims, each of which must be regarded as separate and distinct for the purposes of this proceeding. The claim for the purchase price of the stock is enforceable only after claims of general creditors have been satisfied; the claim for monies advanced on behalf of and to the bankrupt is enforceable ...

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