Lutz v. Kinney

The facts sufficiently appear in the opinion. On the 18th day of March, 1896, Archer Baker, who was at the time a retail grocer in failing circumstances, executed a mortgage on his stock of merchandise to the respondent to secure the payment of a loan of $700, a part of which sum was used in the discharge of an existing mortgage upon the same goods. The debt secured by the respondent's mortgage was evidenced by a promissory note, of the same date, payable on or before the 18th day of March, 1897. The mortgage expressly stipulated that until default in payment of the said sum, the mortgagor, his executors, administrators and assigns should "remain and continue in the quiet and peaceable possession of the said goods and chattels, and in the full and free use and enjoyment of the same." The mortgage was duly recorded, and the statutory affidavit was annexed thereto. At the time of the execution of the note and mortgage, an action was pending in favor of A. J. McGowan against' said Baker, and on the 3d day of April, 1896, judgment was rendered therein against said Baker for the sum of $405 24, with interest and costs. On the 6th day of April, 1896, writ of execution was issued therein and delivered to the appellant, sheriff of Ormsby county, who levied upon the goods covered by respondent's mortgage and sold the same to satisfy said writ. It appears that the said McGowan and sheriff had actual notice of respondent's mortgage before levy and sale as aforesaid, and that the goods were sold without regard to said mortgage and without payment thereof. It further appears that the mortgagor and mortgagee had a parol agreement, entered into at the time of the execution of the mortgage, whereby the mortgagor was to sell the goods in the course of business and pay off the mortgage as he *Page 47 "went along," but it does not appear that the appellant had notice of this agreement. After the execution of the mortgage and until the sheriff took possession of the property, Baker continued in possession thereof and sold thereof about $300 in value, no part of which sum was paid by said Baker to the respondent, but all of said sum was appropriated by him for his own use. The respondent testified that during this period he was sick. The value of the goods at the date of the mortgage was $1800, and at the date of the levy of the writ, on the 6th day of April, 1896, $1200. The judgment of the district court was in favor of the respondent, and from that judgment and an order refusing a new trial, this appeal has been taken. The important question herein presented for decision is the validity of the mortgage. Appellant contends that it is fraudulent and void as to the creditors of the mortgagor; that it is rendered so by the stipulation therein permitting the mortgagor to retain possession of the mortgaged property, authorizing him to sell the same and appropriate the proceeds to his own use and benefit, and from the further fact that he did make such appropriation. This question is for the first time presented to the court since the amendment to the law relating to chattel mortgages was passed in 1885. Prior to the 2d day of March, 1885, no mortgage of personal property, except a growing crop, was valid against any other persons than the parties thereto, unless the possession of the mortgaged property was delivered to and retained by the mortgagee. (Statutes of Nevada, 1869, p. 55.) This court, in the case of Wilson v. Hill, say that, under the above cited act, a `failure to deliver and retain possession of the mortgaged property is conclusive evidence of fraud in law; that in such a case the courts will not stop to inquire whether there is actual fraud or not; that the law imputes fraud under such conditions, and the statute does not permit this conclusive proof to be overcome by evidence of an honest purpose. (Wilson v.Hill, 17 Nev. 407.) By an act of the legislature, the above statute was so amended that a mortgage upon all kinds of personal property *Page 48 was made valid against all persons, without the possession of the mortgaged property being delivered to and retained by the mortgagee, by attaching the certain affidavit of the parties thereto and duly recording the same. (Statutes of Nevada, 1885, p. 53.) The statute was again amended, but the amendments in no manner affect the above provisions. (Statutes of Nevada, 1887, p. 66.) The amended acts of 1885 and 1887, above cited, changed the rule announced in Wilson v. Hill, supra, and since then the fact that the mortgagor retains and continues in possession of the property, and is so permitted by the express stipulation of the mortgage, does not render the mortgage void per se, where the conditions of the statute have been complied with. Counsel for respondent contends that the amendments above cited have so changed that rule, that under section 72, of the same act, the question of fraud is one of fact and not of law; in other words, that the courts have no right to declare a mortgage void, per se, when the same has annexed thereto the affidavit required and has been duly recorded. A large number of cases have been cited for and against this contention by respective counsel, but in no one of the cases cited has been found a mortgage with like stipulation as is contained in the mortgage herein. A number of decisions by the Supreme Court of Indiana, under statutes similar to ours, are relied on by the respondent to support his contention, but it will be noticed that in all the cases cited it appeared that the mortgage contained either an express stipulation that the mortgagor should retain the possession of the property, sell the same and apply the proceeds arising from such sale to the discharge of the mortgage debt, or in the absence of such stipulation in the mortgage, such agreement was shown aliunde. (Fletcher et al. v. Martin et al.,126 Ind. 57, and cases therein cited; Fisher et al. v.Syfers et al., 109 Ind. 514; Muncie Nat. Bank etal. v. Brown, 112 Ind. 474.) That court, in the case of New et al. v. Sailors,114 Ind. 412, discussing the same question, for which respondent contends, say that "the question of fraudulent intent is a question of *Page 49 fact, and not of law. Therefore, until the contrary appears, it will be presumed that a mortgagor who is permitted to retain possession of and sell the mortgaged chattels does so under an agreement to account as the agent of the mortgagee, and the proceeds will be regarded as applied to the liquidation of mortgage debt, whether they have been actually paid over or not. * * * If, however, it affirmatively appears that there was no agreement to account, and the mortgagor is permitted, either by an express or implied agreement with the mortgagee, to continue in possession, with the right to sell the property, and appropriate the proceeds to his own use, the transaction will be regarded as a fraud upon creditors and void." (New et al. v. Sailors,114 Ind. 412; Southard v. Benner, 72 N. Y. 424.) Notwithstanding the decisions of the Supreme Court of Indiana in many respects support this contention of respondent, yet that court concedes that cases may arise wherein a mortgage should be declared void, on its face, without regard to extrinsic facts. (Lockwood et al. v. Harding, 79 Ind. 133.) The decision of that court in the case of Davenport etal. v. Foulke, furnishes the example of the rule laid down in Lock-wood et al. v. Harding, supra, and is a case analogous to the case at bar. The court there holds that where it is provided in a chattel mortgage that the mortgagor shall retain possession of the mortgage property and use and enjoy the same until default be made in payment of the mortgage debt, where it is apparent from the nature of the property that the only reasonable use the mortgagor can make of it will be to expose it for sale and sell it, thus impliedly authorizing him to apply the proceeds to his own use, such mortgage is void. (Davenport et al. v. Foulke, 68 Ind. 382;Mobley v. Letts, 61, Ind. 11; Voorhis v.Langsdorf, 31 Mo. 451; Paxton v. Smith, 59 N. W. 690; Roberts v. Johnson, 39 Pac. 596; Herman on Chattel Mortgages, sec. 101; Jones on Chattel Mortgages, sec. 420.) Applying the rule laid down in Davenport v. Foulke,supra, to the case at bar, we must hold the mortgage made by Baker to the respondent void. It expressly stipulated that Baker, his executors, administrators and assigns should remain and continue in the quiet and peaceable possession of the property, *Page 50 and in the free and full use and enjoyment of the same,until default. This language is broad, clear and explicit. Considered with the nature and character of the goods mortgaged, it confers upon the mortgagor the right to sell the property and appropriate the proceeds to his own use and benefit. It was authority to sell the mortgaged goods divested of all the rights of both the mortgagor and mortgagee, without being required to satisfy the mortgage debt from the proceeds thereof, the exercise of which authority was a fraud upon creditors and of no benefit to the mortgagee. Baker remained openly in possession and continued to sell the property after the execution and recordation of the mortgage, and in less than one month had disposed of one-sixth in value thereof and had appropriated the proceeds to his own use. True it is that both Baker and the respondent testified, over the objection of appellant, that they had a parol agreement, whereby Baker was to sell the property, in the course of business, and pay off the debt as "he went along." This agreement, at best, is very uncertain in terms, and conflicts with the express agreement of the mortgage. It is not made to appear that the appellant ever had notice of this parol agreement, before levy and sale under the writ. It does appear that he had actual notice of the mortgage and its contents. In the language of Mr. Justice Davis, in Robinson v.Elliot, 89 U. S. 523: "The creditor must take care in making his contract that it does not contain provisions of no advantage to him, but which benefit the debtor, and were designed to do so, and are injurious to other creditors. The law will not sanction a proceeding of this kind. It will not allow the creditor to make use of his debt for any other purpose than his own indemnity." This mortgage was a cover and shield to the property of one in failing circumstances, protecting it from creditors, and, under its terms, was no indemnity to the mortgagee. Baker was given a year in which to sell the property and apply the proceeds to his own use, while the creditors and respondent were compelled to stand helplessly by. *Page 51 For these reasons the judgment of the lower court must be reversed. We do not deem it necessary to pass upon the other questions presented by the record. ON PETITION FOR REHEARING. By the Court, MASSEY, J.: The petition for rehearing contains much that was fully considered by the court on the hearing of the action. Counsel has evidently a misconception of the scope of the original opinion, hence very little that is urged in support of the application is pertinent. We held, in effect, that a mortgage that expressly stipulated that the mortgagor, his executors, administrators and assigns, should remain and continue in the quiet and peaceable possession of the mortgaged property and in the free and full use and enjoyment of the same until default, conferred upon the mortgagor the right and authority to sell and dispose of the mortgaged property for his own benefit, and that such mortgage was therefore void perse. The reasons for such holding are fully set out in the opinion. Counsel assumes in his argument that no matter what stipulation may be contained in the mortgage, that the court can not declare a mortgage void of itself. Herein the court and counsel must differ. Ordinarily under our statute a question of fraud is one of fact and not of law, but there are cases where the question is so mixed that it becomes difficult to distinguish between law and fact. Such is the case at bar. We are of the opinion that the court is warranted in holding a mortgage void per se as a matter of law, without regard to extrinsic facts, where the facts of fraud are affirmatively shown in the stipulations of the mortgage. It is not necessary to seek for facts outside of the stipulation of the mortgage. The mortgage is proof of the facts, and the fact being established by the mortgage that it operates to defraud creditors, the reasonable conclusion is that it was intended to defraud creditors, and is therefore void. Counsel cites McFadden, Administrator v. Fritz etal., 90 Ind. 590, as overruling the doctrine laid down inDavenport v. Foulks, 68 Ind. 382, yet that case is entirely different from *Page 52 the case last cited, and approves Lockwood v.Harding, 79 Ind. 129, as an authority, wherein it is held that cases may arise in which a mortgage should be declared void per se without regard to extrinsic facts. Mobley et al. v. Letts, 61 Ind. 11, is overruled in so far as it held that a mortgage was void because it contained no stipulation that the mortgagor should apply the proceeds arising from the sale of the mortgaged stock to the discharge of the mortgage debt. The same ruling was made by that court in New et al. v. Sailors,114 Ind. 412, cited in the opinion of this court, and it was therein held that when the mortgagor is permitted to retain possession and sell the mortgaged goods, it will be presumed that he does so under an agreement to account for such sales as the agent of the mortgagee, and the proceeds will be regarded as applied to the discharge of the mortgage debt whether they have been actually paid over or not, unless it affirmatively appears to the contrary. We are of the opinion that the mortgage in the case at bar affirmatively shows that the money arising from the sale of the mortgaged goods should be appropriated by the mortgagor for his own benefit, without regard to extrinsic facts, and that any showing of a private arrangement of which the appellant had no notice or knowledge is not sufficient to overcome the affirmative statement shown by the stipulations in the mortgage. Counsel is equally unfortunate in citingJaffary v. Greenbaum, 64 Iowa, 492, as analogous to the case at bar. It appears in that case that the mortgage stipulated that the mortgagor should have the right to retain possession of the mortgaged goods and carry on the business in the usual retail way for one year, paying cost and expense of running the business and keeping the stock to what it was when the mortgage was given. The mere statement of this stipulation is sufficient to distinguish that case from the case at bar, and the Supreme Court of Iowa in the above case, in discussing the question as to whether a mortgage should be declared void on its face, say: "That a mortgage upon a stock of goods which should provide for sales that would exhaust the stock without any provision for an application of the proceeds on the mortgage debt might well be declared fraudulent." *Page 53 We are somewhat surprised that counsel should contend that this mortgage was an indemnity to the mortgagee for whatever of the goods should be left at the end of the year for the payment of whatever should be due, and if there were none of the goods left which were originally mortgaged, it would be Lutz's loss and nobody's business. We are of the opinion that it is the business of the law to see that debtors pay their debts, and in the enforcement of the rights to collect debts it is the business of the law to see that debtors do not encumber their property in such a manner as to defraud bona fide creditors, without giving indemnity to the holder of the encumbrance. We see no reason for granting a rehearing herein, and the same is therefore denied.