Fernhaber v. Cream City Cartage Co.

Doerfler, J. Did the execution of the chattel mortgages and the subsequent sale of the trucks in question constitute conveyances made with intent to hinder, delay, or defraud creditors of the bankrupt? Under sec. 2323, Stats. 1917, the question,of intent to defraud in a case like the instant case is made a question of fact, and therefore a question for the jury. In order to prove fraud in the instant case it is necessary not only that the bankrupt executed the chattel mortgages without adequate consideration or with intent to hinder, delay, or defraud his creditors, but that the mortgagees at the time either knew of such intent or had knowledge of such facts and circumstances as would put a prudent man on inquiry, which if prosecuted with ordinary diligence would lead to a knowledge of such intent. Kaufer v. Walsh, 88 Wis. 63, 70, 59 N. W. 460; Hopkins v. Langton, 30 Wis. 379; Hooser v. Hunt, 65 Wis. 71, 26 N. W. 442. Fraud is the product of greed and selfishness. 'It is generally designed in secret and operates in the dark. It results from the desire of cunning and designing persons to injure others and to benefit themselves. The plans pursued, as a rule, are carefully premeditated and executed. When a general scheme is concocted by persons closely tied by blood or marriage relationship, it is oftentimes impossible or difficult to unravel, and in a vast majority of cases the fraudulent intent and the participation of all parties therein can only be proven inferentially by circumstantial evidence. The fact that Werner Stein executed these mortgages to his father and to his mother-in-law did not of itself constitute a badge of fraud, but the execution of such mortgages constitutes circumstances proper to be shown, and, when shown, calls for closer scrutiny and clearer explanation of the transaction. Bleiler v. Moore, 88 Wis. 438, 60 N. W. 792, and Hoxie v. Price, 31 Wis. 82. Not only did Werner Stein execute these two chattel mortgages to very close relatives during periods of time while he was heavily indebted and threatened by .creditors, — 80 — but the foreclosures of these two mortgages followed each other closely in point of time, with similar results, all indicating a common design from which a jury could readily deduce concerted action to effectuate a common purpose. The foreclosures of the chattel mortgages were followed by the organization of the defendant company, the transfer of the mortgaged property to the company, and the issuance of stock as above stated, all with the result that in the end the valuable and available assets of the debtor came into the hands of the defendant corporation, with all of the stock held by his immediate and close relatives. The organization of the defendant corporation was followed by the defendant Stein’s voluntary assignment for the benefit of his creditors, and as a final result the defendant Werner Stein was declared a bankrupt. Now let us view the issues involved from the standpoint of other facts and circumstances adduced. When the mortgage for $1,500 was executed to A. W. Stein, it appears from the testimony of Hubert that Werner Stein told him that he, Werner, was not indebted to his father, but that his object in executing the blanket mortgage to his father was to protect the property from his creditors, and that in any event he could have implicit faith in his father, and that his father would not do anything harmful or detrimental to him. Werner Stein also testified that he kept no account of moneys advanced to him by his father, covering a long period of time, or of any indebtedness owing by him to his father for work performed, and that his father at no time had made prior demands of him for repayment of the sums owing. Nor does it appear from the evidence that the father had made prior demands for payment of the sums advanced or of other indebtedness, and it appears that the only memorandum kept of the alleged indebtedness was contained in a little pocketbook which had been destroyed by fire. The indebtedness to the Merchants & Manufacturers Bank was not even due, and the bank did not press the debtor — 81 — for payment. Mrs. Schattschneider, the mother-in-law, testified that she raised the $1,500 which she claimed to have given to her son-in-law on a mortgage on her real estate, and at the same time testified that at the time she had $1,400 in cash in her home which she was afraid to deposit or leave with a bank for fear of losing it by so doing. Under the clear outstanding facts and circumstances as above detailed a situation arose which required the submission to the jury of the question of fraudulent intent and the participation of all parties interested, under the provisions of sec. 2323, Stats. 1917, and under the decisions in Kaufer v. Walsh, 88 Wis. 63, 59 N. W. 460, and Rindskopf v. Myers, 87 Wis. 80, 57 N. W. 967. We therefore conclude that the civil court erred in directing a verdict for the defendants, and that the circuit court was fully justified in setting aside the judgment of the civil court and in ordering a new trial. During the course of the trial in the civil court numerous questions were asked of the defendant Werner Stein and of other witnesses on cross-examination, with the object and purpose, evidently, of testing the credibility of the witnesses and of disclosing circumstances which might properly have been considered in determining whether, or not the transfers above referred to were made with fraudulent intent. Upon objections being interposed the cross-examination was greatly restricted, and in many instances proper inquiry was frustrated. While the learned circuit judge, in his order setting aside the judgment of the civil court and in granting a new trial, did not specifically give his reasons for his action, névertheless it can readily be presumed that such rulings on the part of the trial court did not accord, but on the contrary prevented, a thorough investigation, as is contemplated in fraud cases; of the issue of fraudulent intent involved in the trial. The object of all examinations, direct and cross, is to elicit the truth. The rules pertaining to direct examination. — 82 — which prohibit leading questions and require the best evidence, etc., are designed solely for the purpose of eliciting the truth. On cross-examination, however, particularly where the question of fraudulent intent is involved in the issues, these rules must be greatly relaxed and in many instances ignored. The latter deviation is also -based upon the general object and purpose in the law pertaining to trials for the purpose of ascertaining and eliciting the truth. It is therefore said in Jones, Evidence (2d ed.) § 842, that “Where the issue is whether fraud has been committed, it is error for the court not to permit an exhaustive and searching cross-examination of the party against whom the imputation is made.” See, also, Kalk v. Fielding, 50 Wis. 339, 7 N. W. 296; Anderson v. Walter, 34 Mich. 113. Of course the limitation of cross-examination is to a large extent within the discretion of the trial court. However, in the instant case we are convinced that in unnecessarily restricting the cross-examination the court committed error, and as the result thereof plaintiff was unable to pursue his inquiry adequately in an effort to establish the necessary facts and circumstances which were the proper subject of inquiry. Defendants on this appeal argue that inasmuch as the plaintiff failed to prove the condition of the bankrupt’s estate and that claims were filed'in such bankrupt estate, no necessity was shown for the bringing of this action. In Mueller v. Bruss, 112 Wrs. 406, 412, 413, 88 N. W. 229, this court held: “Unless it is made to appear that the property so conveyed is needed to pay the claims filed against the debtor, the trustee has no right to set such conveyances aside.” The trustee represents the creditors, and with all the rights of the creditors to avoid fraudulent transfers. In short, the creditors are prevented, by the paramount act of Congress, from obtaining judgment upon which to base the right to attack the conveyance of their debtor. But this does not — 83 — obviate the necessity of the trustee alleging and proving that claims of creditors have been filed and allowed as contemplated by law. He may question the bona fides of the transfer of the debtor’s property in the interests of those creditors only to whom he may distribute the estate which shall come into his hands. That outstanding obligations exist is not enough. Unless these are established and allowed, as authorized by statute or the act of Congress, he has no authority to pay them from moneys that may come into his hands, to say nothing of the property the debtor has transferred to others. And unless it appears -that the representative of the creditors may appropriate the proceeds of property in the hands of third parties to the satisfaction of. the debtor’s obligations, setting aside transfers to them as fraudulent would be. of no practical advantage. Sec. 57 of the Bankruptcy Act (30 U. S. Stats, at Large, 544, ch. 541) provides for the proof, adjudication, and allowance of the claims of creditors, and sec. 65 directs the declaration of dividends on all allowed claims. Where no claims are allowed there are no dividends to be paid by the trustee, and therefore no occasion to interfere with the property in the hands of third persons. To entitle the trustee to relief the assets must appear insufficient to satisfy the claims of creditors. Crary v. Kurtz, 132 Iowa, 105, 105 N. W. 590, 593; Deland v. Miller & Cheney Bank, 119 Iowa, 371, 93 N. W. 304. In 17 L. R. A. N. s. 351, an exhaustive collection of cases on the subject will be found. At the close of the testimony in the civil court the defendants moved for the direction of a verdict. The court in its oral opinion based its direction solely upon the ground that the plaintiff had failed to prove a fraudulent intent and a failure on the part of the mortgagees and of the defendant corporation to participate in such fraudulent intent. There is nothing in the record in the civil court to indicate that the point made in this branch of the case by defendants’ counsel was called to the attention of the trial — 84 — court. Nor does the record in the circuit court disclose that such point was brought to the attention of that court. Had the trial court’s attention been called to this point, an opportunity would have been afforded the plaintiff to prove the necessary requirements, which the trial court would have readily granted in the interests of truth and justice. The question having been raised, however, for the first time on this appeal, appellants’ counsel cannot take advantage thereof. Cappon v. O’Day, 165 Wis. 486, 162 N. W. 655. The order of the circuit court setting aside the judgment of the civil court and ordering a new trial is therefore affirmed. By the Court. — Order of the circuit court affirmed.