Babbitt v. Kelley

GOODE, J. Edward H. "Weiler formerly conducted a saloon in the city of St. Louis, on the stock and fixtures of which he executed a mortgage May 16, 1900, to secure notes for five hundred dollars, to the defendant Kelly from whom he had borrowed that sum of money. Said mortgage was not filed for record until April 27,1901, Weiler in the meantime remaining in possession of the saloon and property and continuing the "business, but making payments from time to time on the notes, until by April 19, 1901, he had reduced the balance due to one hundred and seventy-five dollars. In the latter month his license was revoked and he sold the saloon stock and fixtures to one Marshall, making an agreement at the time with the latter that ho (Marshall) should pay the balance on the mortgage notes. The mortgage was kept from record at the request of Weiler for fear it would injure his credit, Kelly granting him that indulgence, as he swears, without any knowledge that Weiler was either insolvent or in debt. But when he learned his license had been revoked he put it to record and placed his notes in the hands of an attorney to be collected; but swears that even then he knew nothing about Weiler’s insolvency or that he was threatened with bankruptcy proceedings. [532] On May 9, 1901, creditors of Weiler filed a petition in bankruptcy against him and on June 10 be was adjudged a bankrupt. Marshall conducted tbe saloon until June á when be bad tbe stock and fixtures auctioned off and tbe balance due Kelly on the notes was paid out of tbe proceeds. Byron T. Babbitt,. tbe plaintiff, was appointed trustee of tbe bankrupt estate, and as such brought this action to recover from Kelly tbe said balance of one hundred and seventy-five dollars, on tbe ground that Kelly bad knowingly benefited by an act of preference on tbe part of Weiler the bankrupt, within four months of the initiation of proceedings against him. In defense it is maintained: First. That tbe four months’ limit ran from the date of tbe mortgage in May, 1900, and not from tbe date of its filing or tbe payment of tbe balance of one hundred and seventy-five dollars due on it. Second. That there was no proof of credit being extended to Weiler after tbe execution of tbe mortgage and while it was unrecorded. Third. That Kelly bad no knowledge of Weiler’s insolvency, either at the date of tbe mortgage or of its filing, nor any reasonable cause to believe be intended to give a preference while insolvent. Fourth. That Kelly was not paid out of tbe bankrupt estate, nor in fact by Weiler, but by Marshall. At tbe conclusion of tbe testimony tbe court gave two declarations of law at tbe instance of tbe plaintiff which are said, to be erroneous: “1. Tbe court declares tbe law to be that if tbe chattel mortgage given by Weiler to Kelly was withheld from record in order that it might not injure tbe credit of Weiler, then as to all creditors subsequent to tbe date of execution of tbe said mortgage, said mortgage is void, and tbe proceeds received by said Kelly under said mortgage can be recovered by tbe plaintiff herein. “2. If tbe court, sitting as a jury, finds and be [533] lieves from the evidence that Edward H. Weiler was, on the twenty-seventh day of April, 1901, insolvent within the meaning of the Bankruptcy Act; and if the court further finds that the defendant, Martin Kelly, or his agent Vette, at the time the chattel mortgage made to him by Weiler was recorded, i. e., April 27, 1901, had knowledge of said Weiler’s insolvency or had such information concerning Weiler’s financial condition as would have put a man of ordinary prudence on inquiry concerning said Weiler’s solvency; and if the court, further finds that thereafter and within four months from the date of the filing of the petition in bankruptcy, said Kelly received $175 in satisfaction of the said mortgage, then the verdict and judgment of the court must be for the plaintiff.” It should be stated that the loan transaction between Kelly and Weiler was conducted by one Vette, who also attended to the collection of whatever payments were made and repeatedly dunned Weiler for the balance due on the notes, but was told by the latter several times that he was short of cash and could not make payments as demanded. Subsequent to the execution of Kelly’s mortgage and before it was recorded, two or three other mortgages were put on the saloon property by Weiler, and the latter’s assets were scheduled at two hundred and fifty dollars, while he owed six thousand dollars. 1. Appellant makes the point that there was no evidence of credit being extended to Weiler while, his mortgage was unrecorded and therefore no basis for the first declaration; and the absence of evidence is in a measure conceded by respondent’s counsel, who affirms, however, that the declaration was harmless, which is true as the judgment is secure on another ground; but we must dissent from the position of counsel as to the total lack of evidence on that issue, for we find, as above stated, that two or three chattel mortgages of a later date than Kelly’s were filed, against the property during the period his mortgage was un [534] recorded, though those lien creditors may not have been injured by that circumstance. Weiler’s indebtedness was enormous in comparison with his assets, but as a list of his debts is not in the bill of exceptions, there is no showing as to when all of them were contracted. But enough appears to convince us the first declaration of law was not inappropriate, since by the statute as construed in the Missouri decisions, the unrecorded mortgage was void as to subsequent creditors. R. S. 1899, sec. 3404; Dry Goods Co. v. Brown, 73 Mo. App. (K. C.) 245; Williams v. Kirk, 68 Mo. App. (K. C.) 457; Bank v. Buck, 123 Mo. 141. A trustee in bankruptcy may sue to set aside a conveyance made by a bankrupt in actual fraud of creditors earlier than four months prior to the institution of the proceedings in bankruptcy and in fact is only barred by the limitation period which would bar the creditors whom he represents. In re Mullen, 101 Fed. Rep. 413. 2. Unquestionably there was evidence to prove Vette, who was acting as Kelly’s agent in the transactions with Weiler, knew the latter was insolvent before the mortgage was put to record or the balance due on it collected, which balance was really paid by Marshall for Weiler, by the latter’s direction, and' diminished the assets available to other creditors. Under the Bankrupt Act of 1898, an agent’s knowledge that a preference is intended affects Ms principal. U. S. Bankrupt Law, sec. 60b; Rogers v. Palmer, 102 U. S. 263; Sage v. Wyncoop, 104 U. S. 319. To invalidate a preference the party benefited or Ms agent must have-reasonable cause to believe, not that the debtor is insolvent, but that a preference is intended, the act says ;• but this involves knowledge by the preferred creditor or his agent, or- reasonable cause to believe, that the' debtor is insolvent at the time of the alleged preferential act; for the essence of a preference denounced by the bankrupt law is that it is given by an insolvent debtor. Collier on Bankruptcy, 343; In re Eggert, 98 Fed. Rep. 843, 102 Fed. Rep. 735. 3. There was evidence to show Kelly himself pos [535] sessed knowledge or had reasonable canse to believe Weiler wás insolvent when he pqt his mortgage to record, and if placing it for record constituted a preferential act within the meaning of the bankrupt law, instead of the execution of the instrument, the judg« ment by which the proceeds of the preference were, recovered by the respondent as trustee for Weiler’s creditors was right. The crucial question in the case is, when was the preference given? Was it when, the mortgage, was executed and therefore more than four months before the filing of the petition in bankruptcy against Weiler or when the mortgage was put to record and therefore within four months of the filing of the petition? If we had any doubt about this question we should feel bound to accept the answer the Federal courts have made. Their decisions settle the construction to be given to the bankrupt law and there has been a direct adjudication of the point, holding that, the filing for record of a chattel mortgage, or other instrument which is a subject of record, is the date from which runs the four months’ limitation of the right of a trustee to proceed for an annulment of a preference (In re Klingman, 101 Fed. Rep. 691), and this ruling was followed by the Kansas City Court of Appeals in Landis v. McDonald, 88 Mo. App. 335. The reasons which induced the adoption of that construction of the Bankrupt Act of 1898 are clearly explained in the opinions in those cases, to which we will simply refer instead of treating the subject at length. It follows that the second declaration of law given by the court was sound doctrine, and as we think there was evidence on which to base both declarations, the judgment is affirmed. Bland, P. J., and Barclay, J., concur.