Young, Raymond

English

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Notre Dame Law ReviewVolume 5 | Issue 1 Article 210-1-1929Principles Governing the Distinction betweenConditional Sales and Chattel MortgagesRaymond YoungFollow this and additional works at: http://scholarship.law.nd.edu/ndlrPart of the Law CommonsThis Article is brought to you for free and open access by NDLScholarship. It has been accepted for inclusion in Notre Dame Law Review by anauthorized administrator of NDLScholarship. For more information, please contact lawdr@nd.edu.Recommended CitationRaymond Young, Principles Governing the Distinction between Conditional Sales and Chattel Mortgages, 5 Notre Dame L. Rev. 16 (1929).Available at: http://scholarship.law.nd.edu/ndlr/vol5/iss1/2PRINCIPLES GOVERNING THEDISTINCTION BETWEEN CONDITIONALSALES AND CHATTEL MORTGAGESI By RAYMOND YOUNGIn the present era of vast and tremondous business enter-prise, when property is being transferred with a rapidity whichwould have caused a numbing confusion among merchants ofpast years, when credit is extended and indebtness securedlargely by property, when judgments are rife and executionlevied upon property to an extent quite unprecedented, it be-hooves one who sells property to know wherein protection ofhis interests in property sold may best be had.In general, limiting our field to the sale of personalty, thereare two .kinds of security: the conditional sale and the chattelmortgage. Though different in their nature, these two formsare often difficult to distinguish one from the other. The digestsand reporters fairly bristle with cases decided by the courts wherethe sole question presented was whether the instrument beforethem was a mortgage or a conditional sales contract. It isfrom the cases that certain general principles have been evolvedwhich have subsequently aided the other courts when presentedwith the delicate question of construing these instruments anddetermining in which class the instrument rightly belongs.To a complete understanding of this somewhat involved dis-tinction, it is not only advantageous but extremely necessary thatwe leave behind us a Daedalian cord so that as we proceed intothe labyrinth we may retrace our mental advance and determineits course. Nothing could serve better as such a "cord" than asimple workable definition of the two forms of security.A conditional sale is, as its name implies, one in whichthe buyer is to perform some condition, precedent or con-current, before the title becomes complete in him, the title mean-while remaining in the seller. For the purpose of this treatise,the condition of the sale will be limited to that of payment ofpurchase prise the definition then being a sale whereby the sellerTHE NOTRE DAME LAWYERdelivers possesion to the buyer but reserves to himself a title tothe goods, until the whole amount due therefor is paid.'A chattel mortgage in some states retains its common lawcharacter and is looked upon as a sale of the subject matter, oncondition subsequent, passing a legal title subject to be defeatedby the condition upon which it is given.2 But by the weight ofauthority a mortgage on chattels is regarded as constituting se-curity, and creating a lien upon the subject matter.From the above definitions it is apparent that a distinc-tion must be made, for the nature of the seller's right must beascertained before his remedy can be determined. The remedyin the case of a chattel mortgage is limited to foreclosure andsale, and in case they are insufficient to pay the amount due, a de-ficency judgment. In the case of a conditional sale, the remedyof the seller is not only an enforcement of the contract, but hemay sue in replevin to recover back the property.All courts agree on the general proposition that at somepoint the seller in a conditional sales agreement is bound tomake an election, either to admit title to be in the purchaser bysuing for the balance due, or to bring the action in replevinthereby voiding the contract. The confusion results when thevarious courts attempt to determine at jusf what point the elec-tion has been made: the commencement of the action, the re-covery of the judgment, or the execution of the judgment.That, however, is a question not embraced within the pur-pose of this paper, and so, interesfing as it is, a discussion of itmust belaid aside in favor of this article.At first blush it would seem that the distinction betweenthe chattel mortgage and the conditional sale is clear cut andwell defined, but unfortunately it is not so. It is natural that theseller in his zeal to protect his interests will attempt in the con-tract of sale to insert every conceivable provision designed, os-tensibly at least, to insure his protection. As a result we have-a hybrid instrument, partaking of the nature of a conditional saleand a mortgage. In such cases, and they are many, it becomesnecessary for the court, before which the instrument comes, asa prelude to the ascertainment of the rights of the parties claim-i Tiffany on Sales.2 II C. J. 398. Chattel Mortgages.THE NOTRE DAME LAWYERing under it, to exactly determine the nature of the instrument.As stated by the writer of an exhaustive note on the subject ofconditional sales in American Lawyers' Report, "It is sometimesa close question to determine whether the contract is one of ab-solute sale without reservation of title by way of a chattel mort-gage, or a conditional sale with absolute reservation of title inthe seller, with payment of the purchase price as a conditionprecedent to the passing title."In the construction of such instruments the courts haveevolved certain general rules of construction to be applied whenfuture cases arise, in order that the task of differentiation maybe facilitated.As we would expect to find it, the principle primarily adop-ted by the courts in such cases is that usually applied in contracts:the ascertainment of the intention of the parties as to whatthey agreed is to be drawn from the terms of the instrument andalso from the attendant circumstances. Even though the partiesset out in the contract that the instrument is a conditional sale,the court is not 'bound by its provisions, as it considers them inconnection with the attendant circumstances. "Form counts forvery little," as said by one court. On the other hand eventhough the parties may treat the instrument as a mortgage andrecord it as required by the statute governing chattel mort-gages, the court may entirely disregard their actions and de-clare the instrument to be a conditional sale.This general principle of determination of the intention ofthe parties is of course not peculiar to the law of sales or mort-gages It is a creature of the law of contracts and ramifies intoall subdivisions of that subject.There are however a few principles which grew out of thisattempt by the courts to distiguish between these two classesof contracts:1. If the transfer is intended to secure an existing indebt-tedness it is a mortgage; but if it is given upon an agreement tosell and delivery of property, the title being retained by the seller,subject to a condition subsequent, the transaction is a conditionalsale.4s P iebert v Nat]. Cash Register Co. 52 N. E. 22.4Plumber v Shirley 16.380. Also Lumber v Woodward 144 Ind. 335 wherea reservation by a seller of a vendor's lien in an instrument of sale washeld to create a chattel mortgage.THE NOTRE DAME LAWYERThis rule appears to be questionable in view of the fact thatthe transfer in the case of a mortgage might also be coificidentwith the sale, in a case for example, where there is an absolutesale with a mortgage back. The test however has been appliedin a great many jurisdictions. 52. The test or principle most frequently adopted is thatwhere the instrument is ambiguous or doubtful, the presumptionis in favor of the mortgage and against the conditional sale. Thereason for this presumption was stated very lucidly and clearlyby the New York Court of Appeals, to be that "in case of a mort-gage the mortgagor although he has complied strictly with theterms of the mortgage, still has his right of redemption, while inthe case of a conditional sale, without strict compliance therights of the conditional purchaser are forfeited.6  This test hasfrequently been applied.7These two princ.iples, together with the general principleof ascertainment of intention, seem to be the only rules whichhave anything of a unanimity in their application by the courts.Other rules have been evolved by judicial decisions which havebeen applied by the courts. One such rule has been applied by thecourt of Colorado. The. rule is easy of application and appearsto the writer to be one which might well be universally adopted.It is that "optional payment is essential to .constitute the tran-saction a conditional sale; a contract that imposes an uncondi-tional liability upon the vendee to pay the purchase price is anabsolute and not a conditional sale."s Where for example, thevendee has given notes for a balance due which import an abso-lute promise to pay the amount due, the courts which haveadopted this rule would regard the contract as an absolute salewith mortgage back rather than a conditional sale, the reserva-tion of title being merely a security for the payment of the debt.9However, if the notes are in the form o chattel notes, that is,the notes on their face contain a statement of the transaction,it would seem that this would make the contract conditional.This question is an interesting one and the affirmative and the5 Ill., N. Y., U. S., Ind. and others.e Matthews v Sheehan 69 N. Y. 585.7 43 So. 409 (Alab.), 19 Ia. 335, 55N. W. 711 (Wis.), 52 N. E. 22 (I1.),24 N. W. 369 (Minn.), 98 N: E: 322 (Ind:) 54 Miss: 90:a Andrews v Bank 20 Col. 313.9 Tufts v Beach 44 Pac. 771.THE NOTRE DAME LAWYERnegative of .the proposition are upheld by two distinct linesof cases.'0These in general are the principles and rules, the resultsof numerous decisions of the courts which are applied in determ-ining whether an instrument is a conditional sale or chattel mort-gage.In some jurisdictions the distinctions bttween these twodevices have been abolished and any attempt to reserve title inthe seller is construed to be a chattel mortgage.In Texas the distinction has been abolished by a statutewhich declares that a contract of sale with reservation of titleis a chattel mortgage."In Kentucky a similar result was arrived at by judicial de-cision. The rule has prevailed there since 1886 that where thereis a clause in a contract reserving title in the seller until payment,title passes to the buyer, the effect being an absolute sale witha mortgage back:12 and this rule has prevailed in that statewhenever the question. arose in the courts.A number of states have adopted what is known as theUniform Conditional Sales Act, the purpose of which is to makeuniform the laws governing the subject of conditional sales. Inthese states the distinction remains inviolate, and the rules andcanons of costruction must be applied as before.' 3In other states rules, statutory and judicial, have beenfixed governing {he subject, most of the states providing fora filing for record of such contracts. A few states, notablyIndiana, do not require recording of conditional sales althoughrecording of chattel mortgages is required.A rather unique provision is made in the statute of Mainewhich provides for the forclosure of a conditional sale giving tothe'purchaser the right of redemption after sale.The nature of the subject here treated does not admit ofdbgmatic rules applicable in all cases. Every contract must,to a greater or less degree, be governed by its terms and thesurrounding circumstances attending the- transaction. To at-io That the contract is conditional 139 N. W. 101. that the contract Ismerely for security 175 Pac. 746.ii Decisions under statute: 173 S. W-. 184, 199 S. W. 843.12 I. S. W. 414.is This act has been adopted In Alaska, Arizona, Deleware, New Jersey,New York, and Wisconsin.THE NOTRE DAME LAWYER 21tempt to apply without qualification some general rule of lawwould be a violation of the intention of the parties and make forthem a new contract. It has been for this reason the writer'saim to do no more than state the rules which the courts have rec-ognized and applied in their attempts to administer justice to theparties before them.

Principles Governing the Distinction between Conditional Sales and Chattel Mortgages

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Principles Governing the Distinction between Conditional Sales and Chattel Mortgages

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