Cragin v. Carmichael

DILLON, Circuit Judge. The chattel mortgage of the bankrupt to the defendants below was executed and delivered to them on May 24th, 1872, more than four months before the filing of the petition in bankruptcy. This mortgage was duly recorded October 4th, 1S72, within four months of the bankruptcy. On the 15th day of November, 1872, the defendants below took actual possession under their mortgage, and were in possession when the petition for adjudication of bankruptcy was filed, which was on the 19th day of the same month. Two errors are assigned, which I proceed to notice. The court below properly instructed the jury that the plaintiff’s petition counts solely upon facts which entitle him to recover, under section 35 of the bankrupt act, the exclusive ground of the action being an alleged illegal preference to the defendants under that enactment. And following the views of Chase, C. X, in Be Wynne [Case No. 18,117], the court instructed the jury that the preference, if any was given by the mortgage, was given when - that instrument was made and delivered on the 24th day of May, from which period the four months limitation began to run, and not from the period when it was recorded, since the recording was not the act of the bankrupt, but alone the act of the creditor. And accordingly the jury were told that if they found “that the giving of the mortgage was more than four months before the 19th day of November, 1S72, [the day the petition in bankruptcy was filed], the plaintiff cannot-recover under the bankrupt act on the ground of illegal preference.” As this instruction was in favor of the defendants, the giving of it, even if it was erroneous, cannot be assigned by them as error. But the defendants below claimed that under the pleadings an illegal preference under the bankrupt act was the only ground upon which a recovery was sought, and therefore the instructions which the court gave, to the effect that the answer so far helped the plaintiff’s case that it put the validity of the defendants’ mortgage as a statutory instrument in issue, and that if this was not valid under the laws of Iowa as against creditors, plaintiff might recover on that ground. In this the court erred. The first count of the answer was a general denial, and this put in issue all the material allegations of the petition, and- devolved on plaintiff the necessity of recovering, and of recovering alone, upon the case stated in the petition. The petition could have been so framed as to assail the mortgage, both because it was fraudulent under the bankrupt act and under the common law or -statute of the state. But as it was not thus framed, the special affirmative defence set up in the answer could not be relied on by the plaintiff as a separate ground of recovery. The other error assigned relates to the court’s instruction as to effect under the statutes of Iowa of- not recording the mort [708] gage. On this subject the court charged, the jury as follows: “If you find that the mortgage was in fact executed on the 24th day of May, A. D. 1872; that the defendants kept it in their own possession without filing it for record until the 4th day of October, 1872; that debts accrued against the bankrupt in the intervening time, and that the creditors whose debts were so contracted had no notice of the existence of the mortgage; that in the meantime the mortgagor retained possession and control of .the mortgaged property; that the defendant seized the property under and by virtue of the mortgage alone, withheld it from the assignee and refused to deliver it on his demand, and that the claims of the creditors intervening between the execution and filing of the mortgage for record remain unsatisfied—then the plaintiff is entitled to a verdict” NOTE [from original report]. The principal cases construing the statutes of the state as to chattel mortgages, and the effect of mortgagor retaining possession,are Miller v. Bryan. 3 Iowa, 58; Crawford v. Burton. 6 Iowa, 476: Mc-Gavran v. Haupt, 9 Iowa, S3; Kuhn v. Graves, 9 Iowa, 303; Campbell v. Leonard, 11 Iowa, 489; Torbert v. Hayden (leading case), 11 Iowa, 435: Hughes v. Cory. 20 Iowa, 399; Allen v. MeCalla, 25 Iowa, 404. The correctness of this instruction must be determined by the statutes of the state respecting chattel mortgages, and the recording thereof; and the question whether the mortgage to the defendants was void as to creditors is just the same as if no assignee in bankruptcy had been appointed, and it had been attacked by attaching or judgment creditors. When a conveyance is attacked for fraud, outside of the bankrupt act, by the assignee in bankruptcy, he represents the rights of general creditors, and may for such fraud avoid the instrument, though he has no specific lien on the property thereby conveyed. The state statute contains the following provisions applicable to the present inquiry: “No sale or mortgage of personal property, where the vendor or mortgagor retains actual possession thereof, is valid against existing creditors or subsequent purchasers without notice, unless recorded,” &c. Revision of 1S60, § 2201. Another section (2203) enacts that from the time such mortgage is duly recorded “it shall be deemed complete as to third persons, and shall have the same effect as though it had been accompanied by an actual delivery of the property mortgaged.” These provisions have been frequently before the- supreme court of the state, and have received a settled construction. Hughes v. Cory, 20 Iowa, 300; Allen v. MeCalla, 25 Iowa, 465. These cases settle the law in the state of Iowa to be that an unrecorded mortgage of chattels, where the mortgagor retains possession, is valid against attaching creditors with notice of its existence at any time before levy. Accepting this construction, as I think we must as a rule of decision here, it is clear that the charge of the court below, however correct on common law principles aside from statute regulation, is not consistent with the exposition of the statute by the supreme court of the state. In this case it will be remembered that the mortgage was recorded nearly six weeks before the petition in bankruptcy was filed, and that at that time the defendants were in • actual- possession under their mortgage. Prom the time it was recorded all parties were bound to take notice of it, and from that time it became “complete as to third persons, and had the same effect as though it had been accompanied by an actual delivery of the property mortgaged.” Besides, the mortgagee was in actual possession when the bankruptcy proceedings were commenced. If a sheriff, on the 19th day of November, had attached or levied upon the goods for a creditor, he would have been bound to take notice of the mortgagee’s rights, and if the mortgage was not fraudulent in fact because made or used to hinder, delay, or defraud creditors, the attachment or levy would be subordinate to the mortgage. Now, as above observed, the assignee in attacking a conveyance as invalid under the laws of the state, has precisely the rights which an attaching creditor would have had, and no greater; and as to such a creditor the mortgage would not have been invalid merely because his debt was created without notice of it, and before it was recorded. As to the assignee in bankruptcy, he must show something more to defeat a mortgage on record, when the bankruptcy proceedings were commenced, than that debts were created Without notice of it before it was recorded. The judgment below is reversed, and cause remanded for a new trial. Reversed.