Ranney-Alton Mercantile Co. v. Watson

Opinion of the court by Hainer, J.: The chattel mortgage referred to in the findings of fact of the trial court contains the following provisions: “In case said mortgagee shall at any time hereafter feel unsafe or insecure, he shall be entitled to and may take and hold possession of said mortgaged property at the expense of said mortgagor, until payment of said note, or performance of the act for the performance of which this mortgage is security. “If, however, said mortgagee shall not take possession of said property for the reason aforesaid, then said mortgagor shall retain possession and control, and have the ordinary use and benefit of said mortgaged property at his own expense as the owner thereof, until default, or until a breach of one or more conditions of this mortgage, which are agreed upon by the parties hereto, as follows: “First. Said mortgagor shall keep the actual possession and control of said property.” It will thus be seen that by the terms of said mortgage the mortgagor was to “retain possession and control and have the ordinary use and benefit of said mortgaged property;” and it appears from the findings of the court that the defendant did retain possession and control of the entire stock of goods mortgaged to McCubbins, which was sold to him in the usual course of retail trade, and *681 during that period the defendant purchased on credit other goods from the plaintiff in error which were intermingled with the stock of goods on hand, and sold in like manner, without notice or knowledge to the plaintiff in error that the entire stock of goods had been mortgaged by the defendant to McCubbins. A mortgage given on a stock of goods which, by its terms, contains a provision that the mortgagor shall retain possession and control, and have the ordinary use and benefit of the mortgaged property, and permits him to sell the same in the usual course of trade without restriction, and contains no requirement that the proceeds thereof shall be applied to the payment of the mortgaged debt, or that any accounting shall be made arising from the proceeds thereof, operates as a fraud upon the other creditors of the mortgagor, and is a sufficient ground to sustain an attachment. In Bank of Perry v. Cook, 3 Okla. 534, this court has laid down the following rule: “Where at the time of the execution of a chattel mortgage, it is understood and agreed between the parties that the mortgagor shall be allowed to remain in possession of the mortgaged property and sell and dispose of the same in the ordinary course of trade, and apply the proceeds to his own use, the mortgage is absolutely void as to the creditors of the mortgagor.” And, “It does not matter whether such agreement is oral or in writing, contained within the mortgage or without, if such an agreement was liad, the mortgage is fraudulent and void as to creditors.” In Robinson v. Elliott, 22 Wallace 513, the supreme court of the United States held that a mortgage of a stock of *682 goods, containing a provision authorizing the mortgagor to retain possession for the purpose of selling in the usual course of trade, and to use the money thus obtained to replenish his stock; is invalid, and the court can, as a matter of law, pronounce it void. And where the mortgage on its face shows the legal effect of it is to delay creditors, the law imputes to it a fraudulent purpose. Mr. Justice Davis, in deliveriug the opinion of the court in this case used the following language:' “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. If he goes beyond this, and puts into the contract stipulations which have the effect to shield the property of his debtor, so that creditors are delayed in the collection of their debts, a court of equity will not lend its aid to enforce the contract.” And again the learned justice in the course of his opinion upon this subject said: “Whatever may have been the motive which actuated the parties to this instrument, it is manifest that the necessary result of what they did do was to allow the mortgagors, under cover of the mortgage, to sell the goods as their own, and appropriate the proceeds to their own purposes; and this, too, for an indefinite length of time. A. mortgage which, in its very terms, contemplates such results, besides being no security to the mortgagees, operates in the most effectual manner to ward off other creditors; and where the instrument on its face shows that the legal effect of it is to delay creditors, the law imputes to it a fraudulent purpose.” In Chapin v. Jenkins, 50 Kan. 385, 31 Pac. 1084, it was held that: *683 “A mortgage of a stock of merchandise, not recorded, which by its terms permits th'e mortgagor to retain possession of and sell the stock without restriction, and which contains no requirements that the proceeds shall be used in the payment of the mortgage debt, or that any accounting shall be made for the proceeds, operates as a fraud upon the creditors of the mortgagor, and is void.” In Loser v. Glasor, 32 Kan. 546, 4 Pac. 1026, Mr. Justice Valentine in delivering the opinion of the court said: “Where the mortgagor is permitted to retain the possession of the mortgaged property, and to sell the same he should be permitted to do so only as the agent or trustee of the mortgagee. To permit the mortgagor to act in any other capacity would tend to show bad faith and fraud, and just such bad faith and fraud as will sustain an attachment.” In Anderson v. Patterson, 64 Wis. 557, it was declared that a chattel mortgage given with the understanding, express or implied, that the mortgagor shall go on selling the property in the usual course of trade and applying the proceeds to his own use, is fraudulent as to his other creditors, and is ground for an attachment. Mr. Justice Lyon, in delivering the opinion of the court said: “That the inevitable tendency and effect of a mortgage, fair and valid on its face, but void because of some extrinsic or secret infirmity, must be to hinder and delay the creditors of the mortgagor in the collection of their debts, is perfectly obivious, and the parties thereto cannot be heard to say that they did not intend that such effect should result from their actions. (Butts v. Peacock, 23 Wis. 359.) In Place v. Langworthy, 13 Wis. 629, the present chief justice said that such an agreement in a mortgage is directly calculated to hinder, delay and defraud the creditors of the mortgagor, and is therefore neces *684 sarily injurious to them, and strictly within the statute of frauds. This is also, because the mortgage apparently places the property beyond the reach of such creditors, and drives them to a contest with the fraudulent mortgagee if they seek to enforce payment of their demands out of the property thus fraudulently disposed of or incumbered. When property is mortgaged to one creditor to secure his demand, good faith to other creditors of the mortgagor requires that if the same is sold, the proceeds shall be applied to the payment of the mortgage debt.” Applying the doctrine announced by these authorities to the case under consideration, we hold that the chattel mortgage in question was fraudulent and void,- and that it operated to hinder and delay the plaintiff in error in the collection of his just claims and was therefore, a sufficient ground for the issuance of an attachment in this action. The judgment of the probate court in sustaining the motion to dissolve the attachment is, therefore, reversed and the cause remanded with directions to overrule said motion and to sustain the attachment issued herein. All of the Justices concurring