## Facts

- Pacific Metal Company (Pacific), an Oregon corporation, sold machinery to Edsco Manufacturing Company (Edsco), a Washington business, using a written form titled as a conditional sale contract.
- The machinery was delivered to and used by Edsco at Vancouver, Clark County, Washington.
- The contract provided that, upon default, Pacific could repossess the machinery and also hold Edsco liable for the unpaid balance (a deficiency), and stated that Pacific’s remedies were “cumulative and not alternative.”
- Before using the form in Washington, Pacific obtained an opinion from Washington counsel that the form would be valid as a conditional sale contract in Washington, and Pacific relied on that opinion.
- Pacific filed the contract in the Clark County Auditor’s office as a conditional sale contract within the time and in the office specified by Washington’s conditional sales filing statute.
- Edsco later filed for bankruptcy; Fairell D. Joslin was appointed trustee.
- The trustee contended that, under Washington law, the contract’s repossession-plus-deficiency and cumulative-remedies provisions prevented it from being a valid conditional sale, and that the filing as a conditional sale was ineffective.
- Pacific acknowledged Washington law treated such a contract as a chattel mortgage and sought equitable reformation to strike the offending language based on a mutual mistake of law, so the recorded instrument would operate as a valid conditional sale against the trustee.

## Issues

1. Whether a contract filed as a conditional sale in Washington, but treated by Washington law as a chattel mortgage because it permits repossession and a deficiency judgment, is enforceable against a bankruptcy trustee when chattel mortgage recording requirements were not satisfied.
2. Whether the contract may be reformed in equity (based on mutual mistake of law) to remove the deficiency/cumulative-remedies language so as to defeat the trustee’s rights on behalf of creditors.

## Decision

- The Ninth Circuit affirmed the district court’s ruling for the trustee.
- The court held the contract was not valid as a conditional sale in Washington because it allowed both repossession and a deficiency judgment and declared remedies cumulative; under Washington decisions, such an instrument is treated as a chattel mortgage.
- Because Pacific did not meet Washington’s chattel mortgage recording requirements—most notably, the statutory affidavit of good faith—the security interest was void against the bankruptcy trustee, who stands in the position of creditors.
- The court rejected Pacific’s request for reformation, concluding Washington law and the recording statutes did not permit rewriting the recorded instrument to the detriment of creditors represented by the trustee.

## Legal Principles

- Under Washington law, a purported conditional sale that allows the seller to repossess the goods and also recover a deficiency (and states remedies are cumulative) is not a conditional sale; it is treated as a chattel mortgage.
- Recording must satisfy the statute that applies to the instrument’s legal character; filing a chattel mortgage as a conditional sale does not protect the seller against creditors if chattel mortgage formalities are missing.
- Washington’s chattel mortgage statute requires specific recording formalities, including an affidavit of good faith; failure to meet those requirements makes the mortgage ineffective against creditors.
- A bankruptcy trustee may assert the rights of creditors against unperfected or improperly recorded security interests.
- Equity will not reform a recorded security instrument, based on the parties’ mistake of law, when reformation would cut off protections that Washington law grants to creditors.

## Conclusion

Because Washington law treated Pacific’s “conditional sale” contract as a chattel mortgage, and Pacific failed to record it as such with the required affidavit of good faith, the security interest was void against the bankruptcy trustee; equitable reformation could not be used to change the recorded contract in a way that would defeat creditor rights, so the judgment for the trustee was affirmed.


Pacific Metal Co. v. Joslin, 359 F.2d 396 (1966)