Oklahoma Law Review
The northeastern states passed chattel mortgage statues in the 1830s to replace the rebuttable rule acknowledging third party rights to the collateral, which created litigation to enforce a nonpossessory secured transaction. The rebuttable rule presumed that debtor possession of the collateral was fraud, but also allowed the secured party to present rebuttal evidence of his good faith in the transaction. The rebuttable rule negatively affected the textile machinery industry, allowing third parties to collect over the original creditor. In an effort to maneuver around the rebuttable rule, machinery manufacturers turned to a host of legal remedies, but eventually decided on the filing system of the chattel mortgage as a more reliable and open form of business transactions which protected their interests.
Manufacturing corporations flexed their political power in the northeastern states with varying degrees of success. The Embargo of 1807 and the War of 1812 created instability in commercial overseas markets, and many businesses turned to manufacturing across the northeast. The states representing manufacturing corporations’ interests were the first to adopt the mortgage chattel statutes. Previous historical theories hypothesized that courts found chattel mortgages to be fraudulent until the chattel mortgage statutes were passed. However, courts accepted chattel mortgages as legitimate transactions prior to the chattel mortgage statues of the 1830s. The development of a multistep product distribution system allowed a credit granting portion that did not hold title possession and the credit receiving portion which held title. This allowed textile machinery manufactures to offer their goods to textile manufacturers by extending a line of credit and the ability to collect their machines upon default. The legislatures in New York and Pennsylvania, which did not represent the same manufacturing interests, prefered the per se fraud rule and did not adopt the chattel mortgage until much later.
George Lee Flint, Jr., Secured Transactions History: The Impact of Textile Machinery on the Chattel Mortgage Acts of the Northeast, 52 Okla. L. Rev. 303 (1999).