Gustlin v. Whitham

SCOTT, District Judge (after stating the facts as above). The foregoing statement of issues and proceedings are I think sufficient ás a basis for the disposition of all disputed questions of fact and law raised on the submission. Analysis of the bill discloses that five general contentions or propositions are put forward as grounds for relief by the plaintiff. I will state these, not in the order pleaded in the bill, as I think they may be considered chronologically to better advantage: (1) Were the conveyances of May 2, 1921, and the conveyances of July 18, 1921, all executed in pursuance of a general scheme and conspiracy for the purpose of defrauding creditors? (2) Did the conveyances of May 2, 1921, merge in the conveyances of July 18, 1921 ? (3) Do the conveyances of July 18, 1921, constitute a general assignment with preferences, in contravention of section 3071 of the 1897 Code of Iowa? (4) Are the conveyances of July 18, 1921, invalid, because executed with intent to hinder, delay, and defraud creditors, within the meaning of section 67e, or section 70a, or section 7Oe, of the Bankruptcy Act of 1898 as amended ? (5) Would the conveyances of July 18, 1921, if enforced, effect a preference, within the meaning of section 60 of the Bankruptcy Act? Other subsidiary questions are involved both within the issues and the proof, but they are all put forward as a basis for some one of the above general propositions. They will therefore be discussed in connection with the five propositions above set forth. The first proposition, “Were the conveyances of May 2, 1921, and the conveyances of July 18, 1921, all executed in pursuance of a general scheme and conspiracy for the purpose of defrauding creditors?” brings one to a consideration of the only challenge made in the bill to the validity of these mortgages when executed. The second proposition, relative to merger, from its very nature assumes the original va — 788 — lidity of the mortgages of May 2d. The special master returns no finding directly involving the first proposition, and no exception is taken to his failure so to do. Indeed, the findings, taken as a whole preclude the inference that the instruments of May 2d were executed in pursuance of any general scheme to defraud. They were executed to secure valid and subsisting indebtedness. The special master finds that at the time of their execution the mortgagees and beneficiaries did not know of the bankrupt’s insolvency, and this finding is not challenged by exception. The only finding excepted to. which relates to this transaction, is finding 29: “That the increase in the amount of the indebtedness owing by Carl Sparboe to the Hamilton County State Bank, from the sum of $7,900 to $11,300, was not a present advance of $3,400 to Carl Sparboe, but was a mere shifting of indebtedness from the Kandall Savings Bank to the Hamilton County State Bank, such that it would not appear that the Randall Savings Bank had loaned Carl Sparboe an amount in excess of the legal limit imposed by the laws of the state of Iowa.” It appears that when the mortgages of May 2d were about to be prepared the Randall Savings Bank was carrying'the bankrupt for $12,-620.65. This was trader the statute of Iowa an excessive loan. The Randall Savings Bank insisted on its reduction, and the Hamilton County «State Bank which was carrying' the bankrupt for $7,900, and accrued interest was willing to carry the bankrupt for an additional amount to relieve the Randall Savings Bank in this respect. Accrued interest on all of the indebtedness was computed and the Hamilton County State Bank advanced the bankrupt for the purpose of taking up and shifting a part of his indebtedness to the Randall Savings Bank, $3,000, or approximately that sum, and in drawing the new notes one for $11,300, was drawn to the .Hamilton County State Bank to evidence its previous debt, accrued interest and the advance in behalf of the bankrupt to the Randall State Bank. This was not a mere shifting of book entries or of indebtedness for a colorable purpose, as implied in the twenty-ninth finding of the special master, but was equivalent to a direct, loan to the bankrupt. I think, therefore, the exception to finding 29 of the master is well taken and should be sustained, and that finding set aside; and it is so ordered. I think there is no substantial evidence tending to show that either of the mortgages of May 2d were tainted with fraud. These mortgages were evidence of valid and subsisting security. Something is said in the last section of paragraph 9 of the bill as to these mortgages being void and of no effect as against plaintiff, fop the reason that their record did not give constructive notice to the trustee or subsequent creditors on account of the acknowledgments having been taken before officers of the defendant banks. This contention is not well taken. But one of the instruments was executed before an officer of any of the banks, and such officer was not a stockholder or personally interested in the transaction. The acknowledgment of an instrument running to a corporation before an officer of such corporation does not invalidate the acknowledgment, unless such officer is a stockholder or otherwise personally interested in the transaction. Bardsley v. German American Bank, 113 Iowa, 216, 84 N. W. 1041; Bartlett v. — 789 — Bolte, 193 Iowa, 1063, 188 N. W. 814. I therefore find these instruments legally acknowledged and their record sufficient under the recording act of Iowa. The pleadings raise the further question indirectly of the mental competency of the bankrupt’s wife to execute the instruments of May 2d, but no evidence is offered tending to support such contention, nor is there any finding of the special master thereon or exception to the absence of such finding. For the purposes of further discussion I therefore assume the entire validity of the mortgages of May 2d. The second proposition, and the only other question involving the mortgages of May 2d, is: Were they merged in .the instruments of July 18th? The plaintiff contends for such merger, for the apparent purpose of annihilating these instruments and thus leaving the security carried therein to be supported only by the instruments of July 18th. As to whether these instruments merge with the instruments of July 18th is a question of the intent of the parties concerned, as disclosed both by the subsequent instruments, the interests of the parties, their acts, and other surrounding circumstances. It appears very clearly, from the master’s findings and from the testimony, that the transaction of July 18th was not one of the defendants’ seeking. The bankrupt and his wife having mortgaged their homestead, upon subsequent consideration and consultation with their attorney, determined to undo that part of the transaction of May 2d if possible. They approached the defendants, and after much controversy proposed a substitution of security for the homestead. The proposition did not appeal to the defendants. The bankrupt, through his attorney, resorted to so-called "'‘argument,” which involved threats and pressure little short of absolute duress. It was clearly intimated that bankrupt would raise the question of his wife’s mental and physical capacity to execute the instruments of May 2d. There were, apparently, threats of immediate resort to bankruptcy, and there at least confronted the defendants the prospect of protracted and expensive litigation. Considerations of sympathy and humanity were not overlooked, and finally the arrangement of July 18th was agreed to. The 40 acres composing the bankrupt’s homestead was agreed to be released from the mortgage of May 2d running to the Hamilton County State Bank, and it was subsequently released from such mortgage, and the homestead only was released, leaving the mortgage intact upon the remaining 200 acres in section 16. This was one circumstance strongly indicating an intention not to merge the earlier mortgages. The mortgages and notes of May 2d were retained by the release uncanceled, and when the deed of conveyance of July 18th was drawn by its terms it was expressly made subject to mortgages of record aggregating $100,000. Now, there were mortgages prior to May 2d of record aggregating $52,000, and the mortgages of May 2d aggregated slightly more than $48,000. It is without question that it requires the mortgages of May 2d, taken with the previous mortgages, to aggregate the $100,000 of mortgages recited in the mortgages of July 18th. When we stop to consider the fact that the bankrupt was insolvent on July 18, 1921, and that the defendants had acquired knowledge of that fact — 790 — hy that time, and that the bankrupt was at liberty to take advantage of the Bankruptcy Baw at any moment, it is not at all strange that the defendants would prefer to hold their previous mortgages intact. Indeed, it would be remarkable for them to voluntarily elect a merger of the earlier instruments. It seems to me that there was no merger of the mortgages of May 2d, and that the acts of the parties clearly expressed an intention not to merge. And, even if no such intention was evidenced by the acts of the parties, I think that under the circumstances a merger would fall with the fall of the instruments in which merged. I do not think the plaintiff can consistently say that the mortgages of May 2d merged in the instruments of July 18th and in the same breath say that the instruments of July 18th were void. The rule and equitable maxim, that he who would have equity must do equity, applies to trustees in bankruptcy with equal force as to other individuals. I hardly think that the twenty-first finding of the special master should interpreted as a finding that the instruments of May 2d merge with the instruments of July 18th. It was undoubtedly true that the parties contemplated the observance of the instruments of July 18th, but such intent was not consistent with the further intent to maintain intact the previous instruments. If, however, such finding be interpreted as a finding of merger, I think it unsupported by the evidence, and to that extent it is set aside. The third proposition relates to the instruments of July 18th. Did they, when taken together, in the circumstances, amount to a “general', assignment * * * by an insolvent * * * for the benefit of creditors * * * ”, and, if “for the benefit of all his creditors, in proportion to the amount of their respective claims” ? (Code Iowa 1897, § 3071.) It must be conceded that, but for certain circumstances connected with the transaction, these instruments, taken together, embody many, if not all, of the elements of a general assignment. The special master found that the transaction disposed of all of the bankrupt’s property not exempt from execution, and this finding is not excepted to. Counsel, however, discussed the question in argument, and examination of the evidence rather strongly indicates that there were a few head of cattle not exempt and not described in the bill of sale. These cattle were referred to in the testimony as “reactors.” There is a paragraph in plaintiff’s bill rather strongly implying that there might have been other property. In paragraph 6 plaintiff alleges that the amount of net assets of the estate of the bankrupt which has come into the possession or knowledge of the trustee does not exceed the sum of $2,000. Presumably plaintiff in this sum did not include the property he is now endeavoring to establish title to, as such property would exceed many times $2,000. However, I shall let that matter rest upon the finding of the special master. The fact remains that this instrument was not the result of any desire or purpose on the part of the bankrupt to distribute his property among his creditors. On the contrary, it was for the entirely selfish purpose of regaining his homestead. The transaction was not the ordinary voluntary conveyance to a trustee for the benefit of his creditors, the assignor thus relinquishing all dominion over such property. It was a cold, calcu — 791 — lated, arm’s length transaction with adversaries, upon a stipulated consideration moving directly to himself. Not only this, but the instrument now called an assignment was one of mutual obligation. It contemplated in express terms, not immediate conversion of the property, but its retention; it stipulated for the leasing of the lands, and to whom they should be in preference leased, viz. the bankrupt’s brother. It stipulated for retaining the stock and personal property on the farm for use by such brother or his agents. Now, these things, in connection with subsequent facts appearing in evidence; that is, that not only did the bankrupt’s brother lease the lands from defendants ifi pursuance of the contract, but he immediately subleased to the bankrupt or members of his family, or at least made some arrangement with them for the use of the farm. The bankrupt’s testimony is as follows: “My brother that rented the farm got half the crop, and the bank or trustees the other half. • John put some cattle in the pasture in October. The boys and I have farmed the farm for 1922; I can’t say on just what terms. John was helping us get along.” It is quite clear, when one considers this testimony in connection with the stipulation and reservation in the collateral contract, that the bankrupt was far from contemplating the matter as being entirely for the benefit of his creditors. Now, it is well established by the decisions of the Supreme Court of Iowa that in that state the question as to whether a transaction amounts to a general assignment for the benefit of creditors is one of intent. Roberts, Butler & Co. v. Press, 97 Iowa, 475, 66 N. W. 756; Letts, Fletcher & Co. v. McMaster & Dryden, 83 Iowa, 449, 49 N. W. 1035; Kohn Brothers v. Clement, Morton & Co., 58 Iowa, 589, 12 N. W. 550; Cadwell’s Bank v. Crittenden, 66 Iowa, 237, 28 N. W. 646; Diemer v. Guernsey, 112 Iowa, 393, 83 N. W. 1047. . In view of all these circumstances I am of opinion that the transaction of July 18th was not a general assignment for the benefit of creditors, but was a security, and the special master seems to have so found. The special master’s finding was; “9. That said deed, Exhibit No. 7, was intended by the parties as a mortgage and not an absolute, conveyance.” And in No. 11 the same finding is made as to Exhibit 8, the bill of sale, and no exception has been taken to either of these findings. Now, a general assignment, as contemplated by section 3071 of the 1897 Code of Iowa, is not a mortgage, but an absolute conveyance for the benefit of creditors. The fourth proposition is: “Are the conveyances of July 18, 1921, invalid because executed with intent to hinder, delay, and defraud creditors within the meaning of section 87e, or section 70a, or section 70e of the Bankruptcy Act as amended?” The special master in finding 13 in substance so found, and an exception is urged to that finding. The special master found: “(14) That on the 18th day of July, 1921, W. L. Whitham, Gilbert Knudson, Max M. Hemingway, the Hamilton County State Bank (through its officers and — 792 — agents), Randall Savings Bank (through its officers and agents), George P. Christianson, and John H. Sparboe, knew that Carl Sparboe was insolvent.” No exception has been taken to this finding, and I think it amply-supported by the evidence. We therefore start with tire proposition that the bankrupt at the. time of the transaction was insolvent, and that the defendants all knew of that fact. Defendants also knew that the bankrupt was transferring, in consideration of a release of his homestead, all or substantially all of his property not exempt from execution. They therefore must have known that the effect of the transfer, if enforced, would be to give the beneficiaries a greater per cent, than any other creditors of the same class. They further knew that the purpose and intent of the transfer by the bankrupt was thereby to obtain a release of his homestead. Therefore there was on the face of • the transaction a selfish benefit to the bankrupt as the moving factor. The bankrupt proposed and attempted to convey to the particular defendant -creditors all of this personal property, and qualifiedly the equity of redemption in the lands, all of which were general assets, in consideration for the defendants giving up a part of the security which they then held, but which no other creditor could take. It may be said that the defendants had no culpable or fraudulent intent as against any other creditor, and were actuated only by a desire to secure their own debt. I am inclined to think that this is true, and that no actual fraudulent intent was entertained. However, the defendants knew, or should have known, that the motive which actuated the bankrupt was that of gaining a personal advantage, and not merely securing his creditors. With this knowledge on the part of the defendants, the transaction would be fraudulent within the meaning of the sections of the Bankruptcy Act above mentioned, to the extent of all property secured under the conveyances of July 18th, and not embraced within the existing mortgages of May 2d. I therefore think the exception to finding 13 should be. and hereby is, overruled. Fifth: “Would tbe conveyances of July 18, 1921, if enforced effect a preference witbin tbe' meaning of section 60 of tbe Bankruptcy Act?” . The special master in his nineteenth finding in substance so finds. In my opinion the transaction did constitute a preference in favor the defendants, voidable under section 60 of the Bankruptcy Act (Comp. St. § 9644), unless that result is defeated by the lapse of more than four months between the execution of the instruments and the filing of the petition in bankruptcy. This brings us'to a consideration of the "effect of the record of the deed and bill of sale of July 18th. The plaintiff excepted to the failure of the master to find “that on the 18th-day of July, 1921, O. J. Henderson was a stockholder in the defendant Hamilton County State Bank,” I think the special master should have so found. The evidence establishes that fact beyond dispute. I therefore sustain the exception of the plaintiff in this respecr and find such fact. It appears without controversy that both the deed and bill of sale were acknowledged before the said O. J. Henderson, a stockholder in the Hamilton County State Bank, one of the interested parties to the transaction, and in such circumstances such acknowledgment — 793 — thereof would be void, and the admission to record of such instrument under such acknowledgment would not impart constructive notice. Now, upon this point a distinction should be made between the effect of this upon the deed, Exhibit 7, and the bill of sale, Exhibit 8. As to the deed, the trustee in bankruptcy is not a subsequent purchaser without notice, and therefore registration of the instrument is not required, within the meaning of section 60b of the Bankruptcy Raw, by section 2925, Iowa Code of 1897. On the contrary, the trustee in bankruptcy, as to the bill of sale, the vendor or mortgagor retaining actual possession, will be deemed vested with all of the rights, remedies, and powers of a judgment creditor holding execution duly returned unsatisfied, and as to such creditor such bill of sale without record would be invalid. In my opinion, equity and the circumstances of the case require setting aside the contract, deed, and bill of sale of July 18, 1921, so far as they affect the title and right of the trustee in bankruptcy, and that the mortgages of May 2, 1921, running to the Hamilton County State Bank as security to itself and the other defendants named and the State Bank of Ellsworth, should be held valid and enforceable, and that the trustee should take title'subject thereto.