Arnold v. Eastin's Trustee

Opinion of ti-ie court by JUDGE O’REAR Affirming as to trustee, AND REVERSING AS TO OTHERS. Rankin Eastin operated a coal mine near Spottsville, Ky. His property consisted of a coal mine at the above .place, with a storehouse and mining equipments, with an office, coal ■dock, scales, etc., at Evansville, Ind., and a steamer, called the “Edgar,” formerly the “Russar,” and thirteen coal barges, plying between the mines and Evansville and elsewhere. There were various liens upon the property, some on the mines and other property at Spottsville, and some claimed on the boat and barges. A receiver was appointed in the Henderson Circuit Court at the instance of a lien creditor, ■ seeking the enforcement of a mortgage upon the mines and mining equipments. Thereafter certain creditors of Eastin filed petitions in involuntary bankruptcy against him, resulting in his being adjudged a bankrupt in May of 1901. On March 28, 1900, appellant, Lee Baskett, had become the surety of Eastin to the Planters’ State Bank of Henderson on a note — 697 — for $1,500. Eastin executed a mortgage to Baskett as indemnity for his suretyship upon the following described property : “My steamer Russar and six barges," all now in Green river, at Spottsville, Ky., warranted free from all incumbrances.” This mortgage was acknowledged and recorded! in the clerk’s office of the Henderson County Court on the* day of its execution March 28, 1900. Eastin then lived at Evansville, Ind. Spottsville is in Henderson county. The note was subsequently part paid, and the balance renewed to the amount of $1,000, which Baskett was compelled to pay. He brought this suit on August 1, 1901, to enforce his mortgage lien upon the boat and barges. By amendments, R. C. Arnold was made a party defendant, and the Farmers’ Bank & Trust Company the trustee in bankruptcy for Rankin Eastin, was- also made a party, defendant, under the allegation that they were claiming some interest in the steamboat and barges. ,- Arnold answered that he had sold the barges to Eastin upon the express condition that their title should remain in him until paid for; that Eastin had not paid for the barges on August 20, 1900, when he re-sold same to Arnold, and also sold him the steamer Edgar, and executed a bill of sale .of that date therefor. Arnold’s bill of sale was not lodged for record nor recorded in the customs office at Evansville until the 13th day of March, 1901. It was’executed and dated August 20, 1900. Baskett’s mortgage was recorded in the same office on the 1st day of April, 1901. The bankruptcy proceedings were instituted about the 6th day of April, 1901. The floating dock at Evansville, which Eastin owned, was also claimed to be in the lien to Arnold for some $735, because Arnold claimed that he had furnished some of the lumber and means with which to build the dock. — 698 — The trustee in bankruptcy intervened, and claimed that Eastin was indebted to Arnold at the time of the alleged and attempted transfer to him of the steamboat and barges in August, 1900, and that Eastin was then otherwise largely indebted, and was insolvent, and that, 'with the design to prefer" Arnold to the exclusion of his other creditors, Eastin had transferred and conveyed the property in question, and that Arnold received the title to it with knowledge of Eastin’s fraudulent purpose. The trustee claimed that on account of the above transactions, as well as of other acts of bankruptcy committed within four months of the filing of the petitions by the creditors, Eastin had become a bankrupt, had been so adjudged, and that the title to all of his property was vested in the trustee for the benefit of his creditors, and that the mortgage to Baskett and the bill of sale to Arnold, not having been lodged for record nor recorded within the time and the place prescribed by law, were void as to creditors. This suit, therefore, involves1 the title to the steamer Edgar and her barges, as well as the effect of appellant Baskett’s mortgage upon the steamer and six of her barges, and of' Arnold’s lien upon the dock. The circuit court adjudged Baskett’s mortgage invalid. It also adjudged the sale to1 Arnold to be invalid, and decreed that Arnold deliver the boat and barges to the trustee, which was done. It also adjudged rents against Arnold for the use of the boat during the time that he had the possession of her after the appointment of the trustee in bankruptcy. But the court gave to Arnold a lien upon the dock at Evansville for the $735, and permitted, by judgment of the court, an amended pleading to be filed by Arnold, setting up the fact he had discharged liens upon the boat to the extent of about $1,200, for which she had been libeled in the United States District Court at Evansville by various claimants, as — 699 — well as to set up certain expénses for repairs and insurance upon the boat while she was in his possession. Baskett appeals from the judgment disallowing his lien. Arnold appeals from the judgment denying his title. The trustee in bankruptcy has prosecuted a cross-appeal from so much of the judgment as allowed Arnold a lien upon the dock at Evansville as well as because it allowed him anything for the maritime liens, which it is alleged he has paid to procure the release of the boat. By the United States Constitution exclusive cognizance is conferred upon the courts of the United States in all cases of admiralty and maritime jurisdiction. U. S. Const., art. 3, section 2; The Moses Taylor v. Harmons, 4 Wall., 411, 18 L. Ed., 397; The Steamboat Ad. Hine v. Trevor, 4 Wall., 555, 18 L. Ed., 451; The Belfast, 7 Wall., 624, 19 L. Ed., 266; Glass v. The Sloop Betsey, 3 Dall. 6, 1 L. Ed., 485. This jurisdiction, though formerly questioned, has ever since the case of The Genesee Chief, 12 How., 443, 13 L. Ed., 1058, been uniformly held to include not only tide waters, but. to extend to all waters connecting with other States or countries, navigable by vessels used in commerce. As an incident of the federal control and jurisdiction, Congress has enacted statutes requiring the registration of United States vessels, as follows (see Rev. St. U. S., sections 4141, 4192 [U. S. Comp. St. 1901, pp. 2808, 2837]) : “Sec. 4141. Every vessel, except as hereinafter provided, sháll be registered by the collector of that collee-i tion district,., which includes the port to which such vessel | shall belong at the time of her registry; which port shall bejl deemed to be that or nearest to which the owner, if there j be but 'one, or if more than one, the husband or acting and managing owner of such vessel, usually resides.” “Sec. 4192. No bill of sale, mortgage, hypothecation, or — 700 — conveyance of any vessel, or part of any vessel, of the United States, shall be valid against any person other than the grant- or or mortgagor, his heirs and devisees, and persons having-actual notice thereof, unless such bill of sale, mortgage, hypothecation, or conveyance is recorded in- the office of the collector of the customs where such vessel is registered or enrolled. The lien by bottomry on any vessel, created during her voyage by a loan of money or materials necessary to repair or enable her to prosecute a voyage, shall not, however, lose its priority, or be in any way affected by the provisions of this section.” Under the facts admitted in this case, at the time of the various transfers affected by the decree herein the home port of the Edgar was at Evansville, Ind. Consequently any bill of sale transferring her title, or any mortgage creating a lien upon her, save by way of bottomry, was of necessity recordable in the office of the collector of customs at that port before it could affect others than the parties to such transfers and those having actual notice of it. The recording of the mortgage elsewhere was as ineffectual as if it had-not been recorded a-t all, so far as constituting it constructive notice to creditors or purchasers was concerned. Therefore the recording of Baskett’s mortgage in Henderson County Court clerk’s office of Kentucky did not create a lien upon the boat as against the creditors of her owner, Eastin; nor, for obvious reasons, .could the recording of the mortgage in the surveyor’s office on April 1, 1901, affect antecedent creditors. It is claimed for Eastin, however, that the barges were not such vessels as were within the maritime jurisdiction -of the United States courts, and, as at the time they were mortgaged to appellant Baskett, they were within Henderson county, the record of the mortgage in that county (the owner being a non-resident of this State) was effectual — 701 — to create a lien thereon. Section 495, Kentucky Statutes, 1899. It was decided in the case of the General Cass, Brown, Adm., 334, that the true criterion by which to determine intended, or is susceptible of being used, or in which it is actually engaged, rather than its size, form, capacity, or means of propulsion. whether any water craft or vessel is subject to admiralty jurisdiction is the business or employment for which it is Section 3 of the Revised Statutes of the United States (U. S. Comp. St., 1901, p. 4), in defining the word “vessel” as used in the statutes, says: “The word 'vessel includes every description of watercraft or other arti used, or capable of being used, as a means on water.” In the following cases it has been held that a barge was such craft, and was included within the jurisdiction of the Fed., 607; Wood v. The Two Barges (C. C.) 46 Fed., 204; The Dick Keyes, 1 Biss., 408, Fed. Cas. No. 3,898; The City of Pittsburg (D. C.) 45 Fed., 69.9. Statutes,requiring the registration of conveyances are for the purpose of giving notice to intending purchasers and creditors. The United States statute quoted supra has that purpose. Of such vessel moving from place to place, and through many jurisdictions, purchasers or creditors could have no other safe means of informing themselves upon these points. It could not be known with any certainty where they may have been in the course of their voyage, and, if it were competent to create a lien on them by mortgage at every point where they may have touched, inextricable confusion and opportunity for fraud would result. The federal statute is the only efficacious and practical method of dealing with the subject. The State courts can and will enforce liens upon property and rights admiralty courts: Disbrow v. The Walsh Bros. (D. C.) 36' — 702 — thereto created by federal statutes as they could if created by State statutes, unless the federal statutes confer exclusive jurisdiction therefor upon the United States courts. '/'What has just been said concerning the recording of Baskett’s mortgage applies with equal force to appellant Arnold’s bill of sale and to his contracts for liens upon the barges built by him for Eastin and not paid for. But there are other questions affecting this transaction that should be decided. The record does not state the grounds upon which the circuit court based its judgment in denying appellant Arnold’s title to the boat and barges, but the record does show the following facts: The debtor Eastin was hopelessly insolvent on August 20, 1900. For a long time prior thereto he had been indebted to Arnold for balances owing and past due upon barges built by Arnold and sold to Eastin. The steamer and the barges are shown "to have been worth at the time of their transfer as much as $9,000 or more. Arnold bought them, it is claimed, for $3,038.22, of which $2,500 was paid in cash when the bill of sale was executed, and the remainder by the satisfaction of an indebtedness from Arnold to Eastin of $538.22. Upon the whole record we conclude that this sale was not made bona fide; that Eastin intended to give to his creditor Arnold a preference over his other creditors, knowing at the time that he was insolvent; that at the most the $2,500 was regarded by the partiete as an advancement or loan, which was to be paid to Arnold if Eastin should weather his financial storm, or otherwise Arnold was to have the boat and barges at the inadequate price of $3,038.22. .The badges of fraud in law are that Arnold, the creditor, had constructive notice, if.not actual knowledge, of Eastin’s unlawful design to prefer Arnold to his other-creditors when both knew that Eastin was insolvent and failing. This is shown both by the grossly inadequate price — 703 — paid for the boat and barges, and by the conduct of the parties in making the transfer, as well as by their subsequent conduct. The failure of the transferee, Arnold, to take possession of the property, but leaving it in the possession and control of his vendor, with apparent title and ownership; the leaving the boats and bill of sale, with insurance payable to Eastin as owner, indorsed to Arnold as his interest might appear, all in the posséssion and control of the vendor — show no delivery of the property.. The purchase by a creditor from a failing debtor at a greatly inadequate price, which property the creditor did not need, and which he did not exercise any control over by way of using or hiring, as an ordinary business man would have done with his own, and his apparent indifference to the fact that the boats were for a time taken charge of by the State court receiver in proceedings against the debtor; that the putative purchaser failed to list the property for taxation when he gave his assessment list — all argue that the transaction was not a sale in good faith, and for a fair, adequate, consideration. His failure to testify fully and candidly, and his failure to remember most important facts material to his title, and of very recent occurrence, create a suspicion that justifies the solution of doubts against him. If we have been led into error in these conclusions, it was easily within the power of the parties most concerned to have prevented it by candidly stating all the facts connected with the transaction, which they did not ■do. So we find that the circuit court was justified in adjudging that toothing passed by the bill of sale to Eastin, .and that the title to the boat and,barges remained in him till the adjudication in. bankruptcy; whereupon the trustee was vested with title to the bankrupt’s property, including that transferred by him in.' fraud of his creditors. Section 70a of the bankrupt law (Act July 1, 1898, c. — 704 — 541, 80 Stat., 565 [U. S. Comp. St., 1901, p, 3451]) is as follows: “The trustee of the estate of a bankrupt, upon his appointment and qualification, and his successor or successors, if he shall have one or more, upon his or their appointment and qualification, shall in turn be vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt, except in so far as it is to property which is exempt from all , . . (4) Property transferred by him in fraud of his creditors.” Such conveyances may be attacked within four months, under section 67e of the bankrupt law (30 Stat., 564 [U. S. Comp. St., 1901, p. 3449]) : “That all conveyances, transfers, assignments, or incumbrances of his property, or any part thereof, made or given by a person adjudged a bankrupt under the provisions of this act subsequent to the passage, of this act and within four months prior to the filing of the petition, with the intent and purpose on his part to hinder, delay, or defraud his creditors, or any of them, shall be null and void as against the creditors of such debtor, except as to purchasers in good faith and for a present fair consideration; and all property of the debtor conveyed, transferred, assigned or incumbered as aforesaid shall, if he be adjudged a bankrupt, and the same is not exempt from execution and liability for debts by the law of his domicile, be and remain a part of the assets and estate of the bankrupt and shall pass to his said trustee, whose duty it shall be to recover1 and reclaim the same by legal proceedings or otherwise for the benefit of the creditors. And all conveyances, transfers, or incumbrances of his property made by a debtor at any time within four months prior to the filing of the petition against him, and while insolvent, which are held null and void as against the creditors of such debtor by the laws of the State, territory or district in which such property is situate,. — 705 — shall be deemed null and void under this act against the creditors of such debtor, if he be adjudged a bankrupt, and such property shall pass to the assignee and be by him reclaimed and recovered for the benefit of the creditors of the bankrupt.” Section 67e pertains to fraudulent transfers, without reience to a preference of creditors. Section 60a, 30 Stat., 562 (U. S. Comp. St., 1901, p. 3445) defines a preference, and section 60b gives to a trustee the right to recover a preference when the person receiving it, or to be benefited thereby, shall have had reasonable cause to believe the transfer was intended as a preference. Those sections read as follows: “Sec. 60a. A person shall be deemed to have given a ■preference if, being insolvent, he has procured or suffered a judgment to be entered against himself in favor of any person, or made a transfer of any of his property, and the effect of the enforcement of such judgment or transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class. “(b) If a bankrupt shall have given a preference within four months before the filing of a petition, or after the filing of the petition or before the adjudication, and the person receiving it, or to be benefited thereby, or his agent acting therein, shall have had reasonable cause to believe that it was intended thereby to give a preference, it shall be voidable by the trustee, and. he may recover the property or its value from such person.” Section 57g, 30 Stat., 560 (U. S. Comp. St., 1901, p. 3443) provides that “the claims, of creditors who have received preferences, shall not be allowed unless such creditors shall surrender their preferences.” — 706 — Sections 67a, 67d, 30 Stat, 564 (U. S. Comp. St., 1901, p. 3449) are directed to liens bad for want of record, fraud, or other reasons, and are as follows: “(a) Claims which for want of record or for other reasons would not have been valid liens as against the claims of the creditors of the bankrupt shall not be liens against his estate.” “(d) Liens given or accepted in good faith and not in contemplation of or in fraud upon this act, and for a present consideration, which have been recorded according to law, if record thereof was necessary in order to impart notice, shall not be affected by this act.” Although the bill of sale was executed more than four months before the filing of the petitions in bankruptcy, the facts that it had not been recorded in the- office required by statute to constitute it notice as against creditors, 'and that the vendor continued in the possession of the property, render the sale void as to creditors; and the registering of the bill within the four months brings the whole transaction within the purview of the legislation against acts of bankruptcy. The facts show, as before stated, that the transfer was not only not in good faith, but that' the consideration was so inadequate as to raise the presumption that the purchaser must have known of Eastin’s purpose to defraud his creditors. The trustee in bankruptcy had come into the State court, and invoked its equitable jurisdiction to enable it to regain the possession of the bankrupt’s property from one claimed to be not entitled to the possession. In our opinion, it would have been competent for the State court to have required the trustee, as a condition to its granting the relief sought, that the person in possession should be restored the money which he had paid out on the property to preserve it, or impose such other equitable terms as the court might have — 707 — required from any other suitor under similar circumstances. And the court might have, done this, although it was within the jurisdiction of the federal court to have allowed such relief in finally reckoning the liens and claims of creditors in the bankruptcy proceedings. For a court of chancery ought to do complete justice, or it should require it to be done by a litigant claiming its aid before acting on his behalf. In this case it is claimed that appellant Arnold paid about $1,200 that were liens against the boat, for which she had been libeled. These liens were superior to those of Eastin’s general creditors. Their discharge by Arnold was a benefit to the bankrupt’s estate to that extent. They must have been paid by the creditors, or by the assets, to-wit, the boat, before general creditors would have been entitled to anything. It is but just that Arnold should be reimbursed that sum, notwithstanding that he may not have acted in good faith towards the creditors in other particulars, and, as he had possession of the boat, the circuit court might have required that he be repaid this sum before it would compel him to deliver the boat to the trustees for the creditors. However, Arnold, upon the announcement of the court’s judgment finding that he had hot title to the boat, voluntarily surrendered her to the trustee in bankruptcy. It was not competent thereafter for the State court to undertake to audit claims against the bankrupt estate or any of its assets, and to adjudge their priorities. What it might have required as a condition to granting its equitable relief upon the petition of the trustee it did not do, nor does Arnold complain on this appeal of such failure. These claims are furthermore maritime liens, jurisdiction to enforce which is exclusively given to the federal courts, and while, as we have stated, the State court might have withheld its action in favor of the trustee unless he should make Arnold whole in — 708 — this matter, it can not, after it lias acted and adjudged the title to the trustee, and after Arnold has delivered the possession of the property to the trustee, and he has received it, proceed to adjudge independently upon matters that are beyond its jurisdiction. As to the lien upon the dock at Evansville, whether or not it is a vessel, within the contemplation of the United States Statutes (The Old Natchez [D. C.] 9 Fed., 476; Cope v. Vallette Dry Dock [D. C.] 10 Fed., 142) the alleged contract for building material and means furnished to construct the dock are not matters within the maritime jurisdiction. People’s Ferry Co. v. Beers, 20 How., 393, 15 L. Ed., 961; Edwards v. Elliott, 21 Wall., 532, 22 L. Ed., 487; Young v. The Ship Orpheus 2 Cliff., 29, Fed. Cas. No. 18,169. At that time the dock was but a chattel within the State of Indiana ^(Stinson v. Minor, 34 Ind., 89), though it appears now to be in the Ohio river, and within the jurisdiction of the courts ■of this State upon a proper case. The right of Arnold, under the alleged agreement for a lien upon the dock, must, however, be based upon the laws of Indiana, and not of this State, as his contract was made there while .the property was within that jurisdiction. Bums’ Rev. St. Ind., 1901, section 6638, provides: “No assignment of goods by way of mortgage shall be valid against any other person than the parties thereto, where such goods are not delivered to the mortgagee or assignee and retained by him, unless such assignment or mortgage shall be acknowledged as provided in case of deeds of conveyance and recorded in the recorder’s office of the county where the mortgagor resides within ten days after the execution thereof.” The Indiana Supreme Court, in considering similar contracts as affecting the rights of subsequent creditors, holds that, unless a mortgage is executed and recorded in strict — 709 — accordance with the statute, it is not valid as against creditors. Granger v. Adams, 90 Ind., 87; Sidener v. Bible, 43 Ind., 230; Ames v. Warren, 76 Ind., 512, 40 Am. Rep., 258; Lockwood v. Slevin, 26 Ind., 124. In State v. Griffin, 16 Ind. App., 558, 45 N. E., 936, the court said: “The Supreme Court of this State has many times had occasion to apply the provisions of this section, and has uniformly held that a chattel mortgage, to be invalid as to persons not parties thereto, must be recorded in the county in which the mortgagor resides, and within ten days after its execution.” In Seavey v. Walker, 108 Ind., 78, 9 N. E., 347, it was said: “The controlling question made at the trial was upon the nature, good faith, and validity of the alleged sale and transfer of the mortgaged property to Seavey and Morgan & Beach. ... If the bill of sale in evidence in this'case was in legal effect only a mortgage, as the circuit court may have concluded it was, then it was void for not having been recorded within ten days after its execution.” The trustee in bankruptcy peculiarly represents the creditors of the bankrupt, the alleged mortgagor. His claim is essentially on their behalf, and is an 'attack for them upon the claim of the specific creditor that he has a mortgage lien upon the property. ' The validity of the alleged mortgage as to such creditors does not depend alone upon its existence and due execution and a fair consideration. By the express terms of the statute, doubtless passed out of consideration of the necessity for the protection of commercial transactions made upon the faith of the debtor’s apparent state of solvency, it must be recorded in the proper office of registry, where such creditors may be apprised of all claims or liens upon the debtor’s property, so that they may, before they part with their goods, protect themselves, or advisedly take the risk of the credit. While, as between the debtor Eastin — 710 — and the creditor Arnold, the transaction regarding the dock at Evansville and the barges sold by him might be enforceable, to aUow the lien as against Eastin’s other creditors, especially those who gave him credit without knowledge or notice of its existence, would be at war not only with the letter, but the purpose, of the statutes. The circuit court should not, under the statutes quoted, and under the decisions of the Supreme Court of Indiana, have imposed the condition of "the payment of the $735 alleged lien before adjudging the possession of the'dock to the trustee v We conclude that the judgment of the circuit court denying the lien to appellant Baskett must be affirmed, and the ■judgment upon the cross-appeal of the trustee, in so far as barges named in the judgment must be affirmed. But the judgment denying the title of Arnold to the steamer and it allows or directs the allowance of claims to Arnold, must be reversed. To the extent that it is reversed the cause is remanded for proceedings consistent herewith. Petition for rehearing by appellant Arnold overruled.