Egan State Bank v. Rice

ROCHREN, District Judge, after stating the case as above, delivered the opinion of the court. This appeal questions the correctness of the decision of the learned' district judge that upon the evidence it appears that the chattel mortgage of November 2, 1900, made by Platts to the bank, was made-by him with intent to hinder and delay his creditors, and was therefore null and void as to his creditors, by the law of South Dakota in respect to such conveyances, as well as under the bankruptcy act of 1898 [U. S. Comp. St. 1901, p. 3418]. Section 67c of this act [U. S. Comp. St. 1901, p. 3449] provides as follows: “That all conveyances, transfers, assignments, or incumbrances of bis 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 encumbered as109 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 recover and reclaim the same by legal proceedings or otherwise for the benefit of the creditors.” See, also, section 70, subd. 4 [U. S. Comp. St. 1901, p. 3451]. The chattel mortgage under consideration was given by Piatts November 2, 1900, within four months of the filing of the petition, December 13, 1900, under which he was adjudged a bankrupt. The district court held that, even if it were valid upon its face, yet the evidence showed clearly that it was given by Platts with the intent and purpose on his part to hinder and delay his creditors, and was therefore null and void as against them, and the trustee who represents them. The law applicable to such case is stated very clearly in Horton v. Williams, 21 Minn. 187, 190, as follows: ‘‘A mortgage of chattels, coupled with an agreement that the mortgagor may retain possession of the mortgaged property, and sell or dispose of it as his own, without satisfaction of the mortgage debt, is of no effect as a security, and can only operate to hinder, delay, and defraud the creditors of the mortgagor and subsequent purchasers and mortgagees. In the early ease of Chophard v. Bayard, 4 Minn. 533 (Gil. 418), it was held by this court, in accordance with sound principle and the weight of authority, that such a mortgage was necessarily fraudulent as against the mortgagor’s creditors. And see Edgell v. Hart, 9 N. Y. 213, 59 Am. Dec. 532; Place v. Dangworthy, 13 Wis. 629, 80 Am. Dec. 758; Steinat v. Deuster, 23 Wis. 136; Collins v. Myers, 16 Ohio, 547; Freeman v. Rawson, 5 Ohio St. 1; Bank v. Hunt, 11 Wall. 391, 20 L. Ed. 190. If the intent that the mortgagor may retain possession of the goods, and dispose of them as owner, is apparent in the mortgage itself, the existence of such intent is to be determined by the court, otherwise the existence of the intent is a question for the jury upon the evidence; but in every case, if the intent is found to exist, the law declares the mortgage to be fraudulent. Gere v. Murphy, 6 Minn. 305 (Gil. 213); Gardner v. McEwen, 19 N. Y. 123; Russell v. Winne, 37 N. Y. 591, 97 Am. Dec. 755, and cases supra. The conduct of the parties in dealing with the mortgaged property 'may, however, furnish evidence, in some eases amounting to a moral certainty, that the mortgage was executed with a fraudulent intent. Thus, in the case of a mortgage on a stock of goods in a retail shop, when the mortgagor continues in possession, making sales from- day to day as owner, and dealing with the goods and the proceeds as his own, with the mortgagee’s knowledge and assent, it is extremely difficult to resist the conclusion that this course of conduct on the part of the mortgagor was contemplated and intended by the parties when the mortgage was made. See Griswold v. Sheldon, 4 N. Y. 581; Freeman v. Rawson, 5 Ohio St. 1; Russell v. Winne, 37 N. Y. 591, 97 Am. Dec. 755.” This is precisely what was done bv Platts after giving the chattel mortgage of November 2, 1900. He continued to sell the goods, making no account of the sales to the bank, and to use the proceeds of the sales for the payment of other debts, or otherwise as he pleased, with the full knowledge and assent of the bank; paying on the secured debt only $75 out of the $300 to $400 proceeds of sales realized by him from the mortgaged stock before he was stopped by the proceedings in bankruptcy. As the proceeds of the sales .were deposited by him in the same bank as an ordinary customer and depositor, and paid out again by the same bank upon his checks, it would be dear, if there was no other evidence in the case, that such was the intention and [110] understanding of the parties when the mortgage was given. And this presumption is strengthened by the unquestioned fact that the mortgage of December 8, 1899, which continued till replaced by the mortgage under consideration, was of the same fraudulent character as to creditors. That prior mortgage was given to secure a note of $600. While it existed, Platts deposited in the bank from the proceeds of his sales over $2,000, and still used all that money himself, without paying a cent of the mortgage debt, except six months’ interest. That the same course was continued under the subsequent mortgage is convincing evidence that such was the intention when the last mortgage was given. And the testimony of Mr. Struble, the cashier of the bank, was to the effect that, when the last mortgage was given, the agreement between the parties was that the money which Platts got from the sales of the mortgaged goods should go to pay the mortgage, and also to pay off his indebtedness, or, as Platts testified, he was to pay the notes to the bank as they became due, and apply the rest to the payment of debts he was owing for goods. In other words, so long as he should continue to pay the notes to the bank as they should successively mature, the goods and their proceeds were to be at his own disposal. Upon these facts, the legal effect of the last mortgage, as well as the earlier one, was to hinder and delay the creditors of Platts. The agreements which gave the mortgage this character and effect were made by Platts, and acted on by him, and were therefore intentional and of purpose on his part. The decisions of the supreme court of South Dakota are in entire accord with Horton v. Williams, 21 Minn. 187, which is cited with approval in the earliest of the cases. Greeley v. Winsor, 1 S. D. 117, 45 N. W. 325, 36 Am. St. Rep. 720; Id., 1 S. D. 618, 48 N. W. 214; Mercantile Co. v. Gardiner, 5 S. D. 246, 58 N. W. 557. There was no error in the findings and decision of the district court, and the decree and order appealed from are affirmed.