Brecht v. Law Union & Crown Ins.

WOLVERTON, District Judge (after stating the facts). The questions presented in this case of which I deem it important to take note are the same as those presented in the case of Vancouver National Bank v. Law Union & Crown Insurance Company (just decided) 153 Fed. 440, save one, which I will now determine. That question is whether, by virtue of the contract of August 25, 1905, between the St. Johns Lumber Company and the plaintiff, a change was effected in the interest, title, or possession of the property, the subject of the insurance, such as renders the policies of insurance upon which the action is based void under the stipulations and conditions therein contained. In the view I take of the question, its solution depends upon the proper interpretation of the contract. It is contended, on the one hand, that the instrument was intended' by the parties as an unconditional conveyance of the property from the vendor to the vendee, in trust for the purposes therein stated, or, if' not so determined, then that it operates as an assignment of the property irrevocably for the benefit of the creditors of the St. Johns Lumber Company; while, upon the other hand, it is strongly insisted that the writing portends a chattel mortgage only, and that its true purpose was merely to secure the payment of the debts of the St. Johns Lumber Company. Thé instrument should be construed by its four corners, so as to give all parts of it operation, if possible, and this in connection with file attending circumstances and conditions as shown by the testimony [455] introduced at tlie hearing. If it was tlie purpose to convey the property to Brecht as a security for tlie payment of his demands, along with the demands of other creditors of the St. Johns Lumber Company, then it should be deemed and considered a mortgage; and, by whatever name it may be called, equity looks beyond that, and determines the true intent and purpose of the parties, as gathered from the instrument itself and the attending conditions under which it was executed. If, however, it was the purpose to vest the ultimate legal title in Brecht, in trust though it may be, to be disposed of as his judgment might suggest, for the purpose of procuring funds whereby to meet the obligations outstanding against the St. Johns Lumber Company; and that it was merely intended that the vendor should be entitled to the surplus only of what might be left after disposing of the property and applying the proceeds to the debts, then the instrument should be considered as a deed of trust simply, and not as a mortgage. Mr. Justice Bean has noted the distinction between a mortgage and a deed of trust, in the case of Ladd v. Johnson, 32 Or. 195, 200, 10 Pac. 756. He says: “A mortgage or deed of trust in tlie nature of a mortgage is intended as security for the payment of money, or for the performance of some collateral act, and becomes void upon such payment or performance; * * * while a deed of trust of tlie character under consideration here is an absolute and indefeasible conveyance of the whole of the grantor’s title, for the purpose expressed. The former, whatever the form of the instrument, or whatever name may be given it by the parties, creates a mere lien, while the latter conveys title.” On the other phase of the question, as to whether this contract should be considered an assignment for the benefit of the creditors, the distinction is clearly made by Caldwell, Circuit Judge, in the case of Bartlett v. Teah (C. C.) 1 Fed. 768. He says: “A mortgage does not invest the mortgagee with an absolute and indefeasible title. The equitable title, called the ’equity of redemption,’ remains in the mortgagor. The mortgage is a security for the debt, and creates a lien upon the property in favor of the creditor. There is no difference in legal effect between a mortgage with a power of sale and a deed of trust executed to secure a debt, where the power of sale is placed in a third person. Both are securities for a debt. Both create specific liens on tlie property; and in both the equitable title or right of redemption remains in the debtor, and is an estate or interest in the property that the debtor may sell, or that may be seized and sold under judicial process l>y his other creditors, subject to tlie lien created by the mortgage or deed of trust. * * * An assignment for the benefit of creditors is well defined to be ‘a transfer by a debtor of some or all of his property to an assignee in trust, to apply tho'same, or the proceeds thereof, to ihe payment of some or all of his debts, and to return the surplus, if any, to the debtor.’ Burrill on Assignment, § 2. The terms of the instrument in this case bring it exactly within this definition, and stamp it as an assignment for the benefit of creditors, and not a mortgage, or deed of trust in the nature of a mortgage. Unlike a mortgage or deed of trust, it was not given by way of security. There is no defeasance clause giving the grantor the right of redemption. It does not create a lien on the properly, but conveys it absolutely for the purpose of raising a fund to pay debts; and, if valid, it passed the absolute title, legal and equitable, to the grantors in the deed, subject to the trust, and placed the same beyond the reach of the debtor, as well as her creditors, until the purposes of the trust were satisfied. When the debts were paid, the debtor liad a right to tlie surplus, but until that was done she had no legal or equitable interest in the property, or its proceeds, that could be sold or incumbered or seized on attachment or execution by her creditors.” [456] This case has the .sanction of Shiras, District Judge, in a much later case, reported as Appolos et al. v. Brady et al., 49 Fed. 401, 1 C. C. A. 299. Special reference is there made to the Arkansas authorities, which hold very clearly to the same principle. Richmond v. Mississippi Mills, 52 Ark. 30, 11 S. W. 960, 4 L. R. A. 413; Robson v. Tomlinson, 54 Ark. 229, 15 S. W. 456. See, also, Holliday v. Benoist, 37 Mo. 501. The like distinction as between a mortgage and an assignment for the benefit of creditors is stated in Bank v. Crittenden, 66 Iowa, 240, 241, 23 N. W. 646, 648, as follows: “If the conveyance is to a trustee, and tiie debtor intends to divest himself, not only of the title to the property, but of all control over- it, if it is intended as an absolute conveyance of all of his property, and is made for the purpose of securing a distribution of its proceeds among his creditors, or a portion of them, in legal effect it is an assignment for the benefit of creditors, no matter what name or designation the parties may have given it. On the other hand, if the intention of the debtor is merely to secure his debt to one or more of his creditors, and the conveyance is not intended as an absolute disposition of his property, but he reserves to himself a right therein, the conveyance will be treated as a mortgage, even though the debtor is insolvent at the time, and it covers all his property, and but a portion of his debts are secured by it.” See, also, Sabichi et al. v. Chase, 41 Pac. 29, 108 Cal. 81. The same doctrine has been announced in the Oregon Supreme Court in the case of Monteith v. Hogg, 17 Or. 270, 20 Pac. 327. Mr. Justice Bord, in speaking for the court, says: “An assignment whereby the debtor conveys all his property for the benefit of his creditors amounts to a complete cession or surrender of his property to his creditors. It operates to vest in the assignee the legal title to the property, but the beneficial interest is in the creditors, the eestuis que trust. He is seized not for himself, but for the creditors, and as a consequence the moment he is seized the beneficial, substantial interest passes out of him into them. Necessarily the converse of this proposition must be true as to the assignor’s interest in the property assigned. After the assignment he is devested of the legal title to the property assigned, and the only possible interest he can have is wholly uncertain and contingent, and according to the nature of the transaetion'only results after the payment of the debts, and is confined to such residuum as may remain of the unappropriated property or its proceeds. In a word, until the purposes of the trust are satisfied, the assignor has no legal or equitable rights in the assigned property.” Now, we will turn to the instrument itself, and determine its character. By the first provision, after reciting the consideration, the contract purports to grant, bargain, sell, convey, assign, and set over unto the plaintiff- all of the property (describing it in detail), together with all moneys, claims, demands, lumber on hand and in stock and logs intended to be -cut into lumber. Then, following the habendum clause, it is stipulated that, in consideration of the foregoing, the plaintiff assumes and agrees to pay all outstanding indebtedness owing by the lumber company incurred in connection with the milling business, and also all of certain labor claims amounting to the sum of $307, as exhibited by a schedule attached. By the third paragraph it is stipulated that the plaintiff shall be given possession of the mill, and everything connected therewith, and of all the property mentioned and described in the contract, and that he shall have the fight, at his election, to operate the mill in such manner as he may deem proper, and shall sell any of the property at any time, as he may see fit, for such prices [457] as he may be able to obtain for the same; that an account of all the debts contracted in connection with the operation of the mill subsequent to the transfer shall be kept, and the amount thereof deducted from the money received from the collection of the accounts or the sale of the property. It is further provided that, after the sale of such property, the plaintiff shall pay, first, the operating expenses of the mill; and, second, all the debts and demands due from the lumber , company to said plaintiff, and, after the full payment thereof, the surplus, if any remain, shall be paid over to the company. Then follows the provision that the lumber company shall, on demand, at any time, execute and deliver to the plaintiff, or whomsoever he may designate, such bills of sale, assignments, or conveyances as the plaintiff may deem proper to fully vest in him, or in such other persons as he may designate, the entire legal and equitable title to all the property owned by the lumber company. There is nothing upon the face of this instrument, or in the plain reading thereof, to indicate in any way that it was designed or intended as a mortgage. It purports to convey an absolute title, without reservation or right of redemption. The power of sale in the vendee is absolute, and not conditional in any way upon the vendor’s failure in payment of the indebtedness specified. While the application of the proceeds is fixed by the conditions of the trust, no declaration is to be found that the sale should be void upon the payment of such demands; nor is there anywhere to be found in the- writing any condition suggestive of a mortgage agreement, or of a deed of trust in the nature of a mortgage. Aliunde the written agreement, one of the partners of the firm of the St. Johns Lumber Company testifies that all claims and demands against the firm were intended to be included in the schedule attached, but that a few were omitted through oversight; and, when asked what was the purpose of executing the instrument to Brecht, he replied: “It was for the protection of Mr. Brecht and myself and the creditors. We got considerably involved, as the lists show there, and was behind in our payments. We hadn’t collected up our hills as we should, and first thing we knew we were cramped. And there was one of the creditors was about to commence an action against us, and I was afraid it would sacrifice the property. So Mr. Brecht and I talked it over, and he agreed, if I would secure him in some way, that he would stand between me and those creditors, and pay them off as we could work it out of the business. And the result was we got up this agreement. And this creditor, the one that was liable to give us the trouble, he paid him off the first one, some $2,300 or $2,400.” Prior to the time of entering into this agreement Brecht held two chattel mortgages against the property for the security of his demands, amounting to more than $7,500. This constitutes all the testimony that has any bearing upon the purpose for which the contract was executed. The only statement of the witness explanatory of the purpose is that Brecht agreed that, if he (the witness) would secure him in some way, he would stand between witness and those creditors, pay them off as they should work it out of the business. The result was the agreement, and to that we are referred to determine how Brecht was to be secured. The matter aliunde does not therefore materially help us. There was 'no understanding tantamount to a defeasance, and no agreement changing the relations of the parties except as expressed in the con [458] tract itself. The last paragraph was designed apparently as a provision for further assurance as to title. In view of the conditions, therefore of the contract, construed in the light of the testimony, so far as it sheds any light, and in further, consideration that the contract in the form in which we find it supersedes two chattel mortgages, which were concededly such, it seems to me that there can be but one conclusion, namely, that it was intended solely as a trust agreement or deed to enable Brecht to dispose of the property, and vested the title absolute in him. Whether it be called a trust agreement or trust deed, or a deed of Assignment for the benefit of creditors, is of no practical importance, as in either event it carried the title, and does not constitute a mortgage or mere lien for the security of Brecht. It is insisted by the plaintiff that, if there was left in the vendor an insurable interest in the property, then it could not be considered that there was a change of interest, title, or possession within the purview of the policies. But I cannot agree to this proposition. It is very clear that a bond for a deed, under the authorities, will transfer the equitable title, and yet there remains in the vendor, perhaps, an insurable interest, or an interest which the insurance companies might legally insure. Yet, as has been seen in the Vancouver Bank Cáse (just decided) 153 Fed. 440, where the equitable title has been transferred, that in itself works a change of interest such as will void the policy under the clause invoked here; but, under the present contract, I am of the opinion that no insurable interest remained in the St. Johns Lumber Company. Lazarus v. Commonwealth Ins. Co., 22 Mass. 76. Another view is here suggested, in addition to the arguments made in the Vancouver National Bank Case, that it was permissible for the plaintiff to show that it was the intention of the parties to make the loss payable to Brecht “as his interest may appear,” and not to him absolutely. I am of the opinion that this would result in a change in the written contract itself, and is therefore not competent under the rules of evidence. As the contract reads, the loss is made payable to 'Brecht without else; and, under the stipulation, as has been seen in the former case, Brecht was appointed, with the consent of the company, to receive the amount of the loss, and is in reality made a trustee for that purpose, and thus he is authorized to sue in his own name and •recover the whole of the loss. No condition being imposed upon him to show that he has any interest whatever in the subject of insurance, it is only necessary for him to establish the condition that the loss was made payable to him. Whereas, if the loss was made payable to him “as his interest may appear,” he would have to show such interest as he had, and could not recover otherwise. So I say that any testimony which would have a tendency to show an intention of the parties contrary to what is written would be inadmissible, as it would vary the terms of the contract. The other two questions insisted upon here, namely, that plaintiff is without an insurable interest, and that the slips attached to the policies contain all the conditions affecting the insured, are settled in the Vancouver National Bank Case. These considerations lead to a rendition of judgment for the defendant, and the complaint will therefore be dismissed.