Westheimer v. Goodkind

MR. JUSTICE PIGOTT, after stating the case, delivered the opinion of the Court. 1. At the time the mortgage was made to Goodkind to secure the payment of the $600 note, the real indebtedness of Reeves & Powell to Wise & Goodkind was $374.14, and the mortgage was given to secure the debt then existing, as well as future advances. The plaintiffs asked the court to instruct the jury that the effect of the mortgage in the particular mentioned, was to hinder, delay, and defraud persons who were the creditors of Reeves & Powell at the time the mortgage was executed, and that if the plaintiffs were creditors at that time, and afterwards received a conveyance of the property in satisfaction of the indebtedness owing to them by Reeves & Powell, then their verdict must be for the plaintiffs. The refusal so to charge is assigned as error. Counsel insist that where a chattel mortgage is given to secure an amount then owing, and also future advances, it is necessary that the mortgage itself shall show the amount of the intended advances. The law is, however, very well settled that a mortgage need not itself disclose that it was given to secure the payment of future advances, and that it may be, as the one under consideration is, in the shape of a security for the payment of a sum certain, leaving the true nature and condition of the debt or obligation to be shown by evidence dehors the mortgage. (Jones on Chattel Mortgages, 4th Ed., Sec. 96, and cases cited in the notes.) The question whether such a mortgage was given with an honest purpose and intent is ordinarily one of — 99 — fact for the jury to determine under proper instructions from the court. (Wood v. Franks, 67 Cal. 32, 7 Pac. 50; Davis v. Schwarts, 155 U. S. 631, 15 Sup. Ct. 237, 39 L. Ed. 289.) In the case at bar there was evidence tending to show that, in making the mortgage to secure the payment of a sum in excess of the debt then owing, the purpose of the parties was without intent to hinder, delay, or defraud any creditor of the mortgagors, and the findings of the jury are in accord with such evidence. 2. The chattel mortgage was executed while Section 1538 of the Fifth Division of the Compiled Statutes of 1887 was in force, and prior to the 1st day of July, 1895, when Section 3861 of the Ci.vil Code took the place of the former section. The defendants assert that the rights of the plaintiffs are to be determined by the statute as it stood when they purchased the property from Peeves, on December 12, 1895; and, if this position be correct, the provision of Section 3861, that a chattel mortgage is void against creditors of the mortgagor, and subsequent purchasers and incumbrances of the property in good faith for value, unless possession be delivered to and retained by the mortgagee, or the mortgage provide that the possession may remain with the mortgagor, and be duly verified, acknowledged, and filed as therein required, is applicable to the plaintiffs, who were purchasers for value, but not in good faith. They had notice of the Goodkind mortgage, and this would in itself prevent them from being purchasers in good faith, within the meaning of Section 3861. One buying with notice of a mortgage, or with intent to delay or defraud creditors, is not a purchaser in good faith. The presence of such notice or of such intent will constitute him a purchaser mala fide, against whom the mortgage is valid under the present statute. The position is untenable. Section 3861 has to do exclusively with mortgages given after 12 o’clock noon of July 1, 1895; it does not in any manner affect mortgages theretofore executed. When the mortgage to Goodkind was made and filed in May, 1895, it was, for the want of an affidavit and — 100 — acknowledgment such as Section 1538, supra, requires to accompany the instrument, invalid as against the rights and interests of any other persons than the parties thereto. That Section 3861 of the Civil Code did not vitalize the mortgage, or make it valid as to third persons acquiring rights and interests in the property after July 1, 1895, is apparent. The validity and effect of the mortgage must be tested and determined by the application to it of the law in force when it was made, and not by the application of Section 3861, which became the law subsequently, but which has no retroactive effect. (Sections 1625, 4651, of the Civil Code; Chicago Title & Trust Co. v. O'Marr, 18 Mont. 568, 46 Pac. 809, 47 Pac. 4.) 3. Section 1538 of the Fifth Division of the Compiled Statutes of 1887, supra, which was the law at the time the mortgage to Goodkind was executed and filed, provided that “no mortgage of goods, chattels or personal property shall be valid as against the rights and interests of any other person than the parties thereto, unless the possession of such goods, chattels or .personal property be delivered to and retained by the mortgagee, or the mortgage provide that the property may remain in the possession of the mortgagor, and be accompanied by an affidavit of all the parties thereto, or, in case any party is absent, an affidavit of those present and of the agent or attorney of such absent party, that the same is made in good faith to secure the amount named therein and without any design to hinder or delay the creditors of the mortgagor, and be acknowledged and filed as hereinafter provided. ’ ’ The possession of the chattels was not delivered to the mortgagee, but was retained by the mortgagors; nor was the mortgage accompanied by an affidavit of Peeves, one of the parties to it. The mortgage was therefore invalid as against the rights and interests of any other person than the parties thereto. Such is the denunciation of the statute, as interpreted in Butte Hardware Co. v. Sullivan, 7 Mont. 307, 16 Pac. 588; Baker v. Power, 7 Mont. 326, 16 Pac. 589, and in Cope v. Minnesota Type Foundry Co., 20 Mont. 67, 49 Pac. — 101 — 387. That the mortgage was made in good faith, and that the plaintiffs, when they purchased, had actual knowledge of its existence, did not serve to validate the mortgage as against their rights and interests, is apparent from the decision in Milburn Mfg. Co. v. Johnson, 9 Mont. 537, 24 Pac. 17, which has been cited with approval in John Caplice Co. v. Beauchamp, 22 Mont. 261, 56 Pac. 278; and the same doctrine is announced in McGowen v. Hoy, 5 Litt. 239 — 245; Long v. Cockern, 128 Ill. 29; Bingham v. Jordan, 1 Allen, 373; Travis v. Bishop, 13 Metc. (Mass.) 304; Rich v. Roberts, 48 Me. 548; Kennedy v. Shaw, 38 Ind. 474; Ross v. Menefee, 125 Ind. 438, 25 N. E. 545; Collins v. Wilhoit, 108 Mo. 451, 18 S. W. 839. Other cases are to the like effect. The jury found that the plaintiffs took the bill of sale and transfer of the chattels mortgaged to Goodkind for the purpose” of satisfying the debt owing to them by Reeves & Powell; this finding is amply justified by the evidence. They found, also, that the bill of sale was given and received (a) for the purpose of hindering the collection by Goodkind of the indebtedness owing to him, and (b) with intent to defraud him out of the benefit of his mortgage. From these facts, what is the conclusion of law? A simple or general, sometimes called a prowling, creditor, is not in a position to question the validity of a sale or transfer made by his debtor; that is to say, he has no right to attack it upon the ground that it was either actually or constructively fraudulent as to creditors, — for example: A., an insolvent debtor, sells all of his property to B. for a grossly inadequate consideration, each having the actual intent thereby to defraud A.’s creditors; A. remains in possession as theretofore. Here we have actual as well as constructive fraud; but C., who is a general creditor merely, cannot, at law or in equity, assail the transaction. As soon, however, as he acquires a lien upon the specific property which was the subject of the sale, his status is that of one who has brought himself, if the expression may be used, into privity with the property, and courts of law will then afford relief; after the — 102 — exhaustion of legal remedies, the extraordinary jurisdiction of chancery may be invoked-, either to reach assets which cannot be seized under a writ of execution, or to remove a cloud upon the title to, or an obstruction standing in the way of legal process against, the property, which, if not removed, may prevent a sale at a fair price. But in any case, and in all cases, whether the relief sought be legal or equitable, the creditor or other person who, as plaintiff or defendant, would avoid a sale or transfer for the reason that it was made with intent to defraud him of his demands, must have a lien or charge upon, or an interest in, the- particular property which he desires to have subjected to the payment of his claim- As to the general creditor, such a sale is voidable, in the sense that when he shall have acquired a lien upon the property affected, but not before, the sale becomes inoperative as (to him, not only from the date when the lien was imposed, but ab initio. • So that, when it is said that a transfer made with •intent to defraud creditors is void as to all creditors, nothing more is meant than that it is inoperative as to lien creditors who assail it, and that, when successfully so attacked, the nullity relates back to the time when the debts or obligations were unsecured. The general creditor may choose to disregard the fraudulent sale or transfer, by taking -proceedings against the chattels as if it had not been made; by levying his writ of attachment or of execution, he acquires a lien, and elects to treat the transaction as void. . A creditor or other person may hold a mortgage upon chattels, with right to their possession. If it be a lien or charge which is valid as against a purchaser or incumbrancer, this fact will enable him to question the good faith of the transaction under which the purchaser or incumbrancer claims, and this he may do by taking the property in right of his lien, either with or without legal process,- from the wrongful possessor, or he may bring and maintain an action to enforce the observance of his rights. Void though it be at the instance of any person having a specific lien or charge upon or an- interest in the property which is valid as against the-purchaser, .until the acquisition of such — 103 — lien the transfer with intent to defraud creditors or other persons of their demands is unassailable, and vests in the purchaser a title good not only between the parties, but as to all the world. Of an act performed with intent to defraud creditors or other persons of their demands the law refuses to take cognizance in a civil action unless and until the act is sought to be annulled, or is treated as void, by some person who is clothed with the right to attack it; and hence the mere fact that the sale may be avoided db initio by a creditor after he has obtained a lien does not confer upon him, before he acquires it, the privilege of dispossessing'the purchaser; he must at the time he seizes or interferes with the property have some special interest in or lien upon it, or acquire some lien or interest by the seizure or interference; the lienor interest must exist when he takes "possession, or must arise from possession, —in default of which he is a trespasser, for he is not in connection or privity with the property owned by the purchaser. Section 1190 of the Civil Code does not conflict with the views here expressed. It provides that ‘ ‘every transfer of property * * * with intent to delay or defraud any creditor, or other person, of his demands, is void against all creditors of the debtor. * * *” To the extent that this section is applicable to the facts of the case at bar, it is but declaratory of the common law. The transfer therein denounced as void is so only as to, and at the instance of, creditors having liens or charges upon, or special interests in, the property transferred. Goodkind’s status as a creditor, merely, is easily defined. He had no lien by attachment or execution; he did not assert any lien except that which he alleged was created by the mortgage. He and his co-defendant took and sold the chattels under the authority conferred by the mortgage, and not otherwise. He was therefore a simple creditor, unless the lien of his mortgage was valid as to the plaintiffs. If it was, then, upon the findings of fact, the defendants were entitled to the judgment in their favor which was entered; if it was not, the plaintiffs, upon such findings, should have prevailed, — 104 — and the judgment and order must be reversed. The finding that the transfer to the plaintiffs was made and received with the intent to hinder the collection by Goodkind of the debt owing to him by Reeves & Powell is therefore immaterial, unless it may be considered as the equivalent of, or perhaps as supplementing, the further finding that the transfer was with the intent to defraud Goodkind out of the benefit of his mortgage, and the latter finding be material. Omission to comply with the provisions of Section 1538, supra, rendered the mortgage invalid as against the rights and interests of all persons other than the parties thereto. Did the plaintiffs have any rights or interests against which the lien of the mortgage was- void ? It seems clear that a naked trespasser — for example, a thief or an embezzler, or one without title of any kind as against the mortgagor — would have no such right or interest. The mortgage, being valid as to the mortgagor, is a lien upon his property, as against those who have no right thereto or interest therein. The rights and interestá of third persons, acquired from the owner or mortgagor of the chattels, which are protected by Section 1538, are those which might have been acquired had the mortgage not been made. The plaintiffs took the bill of sale and transfer in satisfaction of the debt then owing to them by Reeves & Powell, and entered into the possession of the chattels sold to them; although made with intent to defraud Good-kind out of the benefit of his mortgage, the sale was perfectly good between the parties, and as to all persons except those who had upon or in the chattels some lien or specific interest which was valid as against the title of the plaintiffs. Section 1538, which provided a method whereby a creditor or other person was enabled to acquire and retain- a special lien upon chattels while the owner remained in possession, .was in derogation of the common-law rights of third persons, and must be strictly construed. As was said in Milburn Mfg. Co. v. Johnson, 9 Mont. 537, 24 Pac. 17, and reaffirmed in Wilson v. Harris, 21 Mont. 392, 54 Pac. 51: “All bona fide creditors stand on an equality before the law in respect to enforcing — 105 — payment of debts, unless this equality is varied by a provision of law giving a special lien, or enabling one to acquire a special lien by complying with the provisions of law. If one attempting to create a special lien in his favor, or to take advantage of one provided by law, fails to comply with the provisions, of the law governing, then such creditor falls back into the common line occupied by the general creditors, and cannot invoke the rules or doctrines of equity to avoid this result. * * * It is an arbitrary provision of law which enables one creditor, in preference to another, to take and hold a special'lien on the personal property of his debtor, leaving the possession with the debtor; and that law demands a compliance with its terms.” Nor does Section 4652 of the Civil Code of 1895, which is similar to Section 3453 of the Code of Civil Procedure, touching the construction of statutes in derogation of the common law, apply to Section 1538 of the Fifth Division of the Compiled Statutes of 1887, supra. (Forrester et al. v. Mining Co., 21 Mont., at page 556, 55 Pac., at page 234.) The statute then in force declared such a mortgage as the one in this case to be void as against the rights and interests of any person other than the parties to the instrument. It did not provide that the interests or rights of such persons must have been acquired in good faith, and we find nothing in the law which discloses the design of the legislature that the language of Section 1538 should, by construction, be so enlarged or expanded for the benefit of the mortgagee. For the purposes of this case, a subsequent purchaser in good faith may be defined as one who buys without notice of the mortgage, and without intent to defraud creditors or other persons of their demands. These two conditions must co-exist. The absence of the one is as fatal.as the lack of the other. When the purchaser is shown to have had notice, bad faith is established; further proof of bad faith can add nothing to the consequence flowing from the fact of notice. A purchaser must act in good faith or in bad faith; there can be no intermediate ground upon which he may stand. Now, this — 106 — Court held in the Milburn Case, cited supra, that a chattel mortgage which did not comply with the requirements of Section 1538 was void as against a subsequent mortgagee with knowledge of the first mortgage. The decision was necessarily based upon the premise that the rights and interests of subsequent purchasers and incumbrancers, although acquired in bad faith, within the foregoing definition, exist and must be enforced as against such prior mortgage; and its inevitable conclusion is that inquiry touching the good faith of the purchaser or incumbrancer with respect to the mortgagee is an effort to elicit immaterial evidence. The general rule being that the purchaser of .property with actual notice of the rights thereto of third persons is a purchaser in bad. faith, it follows that he must be deemed.to have committed.or attempted fraud, against which such rights will prevail. But the Milburn Case has declared an exception to the rule,-or-rather, has established the contrary doctrine with respect to the rights and interests of purchasers of chattels who have bought with intent to defraud the mortgagee, whose mortgage did not meet the requirements of Section 1538. Evidence of such intent should not be confounded with the intent; for instance, proof that a purchase was with knowledge and in disregard of. an existing mortgage made since July 1, 1895, to secure the payment of a just debt, -which was void only as to subsequent purchasers in good faith' for value, in the eye of the law as effectively establishes the intent to defraud the mortgagee of his lien, as could proof of any other or different facts showing ,the like intent. Under the present statute, the fraudulent intent, howsoever proved, is fatal to the purchaser’s title, when it meets the lien of the mortgage. Under • the provisions of Section 1538, however, as interpreted in the Milburn Case, the purchaser’s fraudulent intent, by whatsoever evidence it has been proved, is without legal significance; he acquired rights to and ■interests in the property which are declared to be superior to those of the prior mortgagee.- Section 1538 must be strictly construed, as against the mortgagee. Goodkind, as mortgagee, had a demand, name — 107 — ly, his mortgage, which was valid between him and the mortgagors. It was void, and consequently wholly inoperative, as against the rights and interests of the plaintiffs, who, as purchasers from the mortgagors, owned the property, and whose title could be avoided only by some person with a lien upon or interest in the property which was valid as against such title. So far as the plaintiffs were concerned, there was no mortgage upon the property; hence there was no lien by mortgage valid as against their title. Their interest in the property was the same as it would have been had the mortgage to Goodkind never been made. We have already said that the only lien Goodkind asserted was in virtue of the mortgage, and that his lien must have been valid as against the title of the plaintiffs, in order to afford justification for his seizure of the chattels. There was no such lien, ' and therefore plaintiffs could not, in contemplation of law, have taken the bill of sale with the intent to defraud Goodkind of the benefit of his mortgage. We are of the opinion that the section did not exclude from its protection rights and interests acquired from the mortgagors by purchasers for a valuable consideration, but with intent to defraud the mortgagee, who had failed to comply with the requirements of Section 1538. In such case there is no lien as against the title of the purchaser, and therefore his intent to defraud the mortgagee of his lien is, as a matter of law, necessarily futile. The plaintiffs could not defraud the defendants of that which the latter did not have as against the former. We are aware that in Fuller v. Paige, 26 Ill. 358, 79 Am. Dec. 379, upon a somewhat different state of facts, the supreme court of Illinois seems to have reached a conclusion at variance with the one announced in the present case; but, entertaining the views we do in respect of the proper construction of Section 1538, we are unable to follow it, even if it be conceded that the reasoning therein may be applied to the facts, here presented. The special findings aré inconsistent with the general verdict, and hence the former control. They do not support the judgment. The conclusion of law to be drawn from them is — 108 — that the plaintiffs should recover. We shall not, however, order the entry of judgment, for the reason that we have no means of knowing what, if any, exceptions were taken by the defendants in the court below. The only exceptions properly included in a transcript on appeal are those of the appellant. [O'Rourke v. Schultz, 23 Mont. 293, 58 Pac. 712.) In a given case (this is but an illustration) the trial court may have excluded admissible evidence tendered by the respondent, or erred in other ways to his prejudice; the findings of fact or the general verdict may, if allowed to stand, require a judgment for the appellant, although the facts might have been found otherwise had error not intervened. To order judgment for the appellant under such circumstances would work manifest injustice to the respondent. The order denying a new trial and the judgment are reversed, and the cause is remanded. Reversed and remanded.