82 Kan. 597 | Kan. | 1910
The opinion of the court was delivered by
This action was brought by W. E. Brooks, as trustee of the estate of F. P. Madison, a bankrupt, against the Bank of Beaver City, to set aside a preference obtained through two mortgages executed by F. P. Madison to the bank, under which the bank took and appropriated mortgaged goods of the value of $1571. The petition alleged that on March 15, 1907, Madison was engaged in a general merchandise business in Beaver City, and that upon that date a bankruptcy proceeding was instituted against him, on the ground that he had executed the two mortgages mentioned, one dated March 12, 1907, and the other March 15, 1907, while he was in an insolvent condition, and that it was done with the intent to prefer the bank over other creditors. It was alleged that at the time of obtaining the mortgages and the possession of the goods the bank and its officers knew that Madison was insolvent and intended to prefer the bank over others of his creditors. Later, and on April 19, 1907, he was duly declared a bankrupt. In its answer the bank alleged that on September 13, 1906, it made a loan to Madison of $1017.42, and to secure the payment of the debt took a chattel mortgage on his stock of goods; that on March 12, 1907, the whole of the debt and interest being due, the bank obtained a new note for the amount of the debt, and also another
According to the testimony the bank actually loaned money to Madison in 1906 and took a mortgage on his stock of goods, but this mortgage was never recorded, and the bank did not take possession of the goods under it. On the other hand, it allowed Madison to continue in possession of the goods, sell them in the usual course of trade, buy other goods to replenish the stock, without keeping the new goods separate from those mortgaged and without accounting to the bank for the proceeds of the sales made. Madison testified that between September 13, 1906, and the execution of the mortgage on March 12, 1907, he bought goods at wholesale houses, put them in his store and carried on a regular retail business, replenishing his stock whenever he saw fit to do so, and using the money derived from the sales in his business and in living expenses as he had done prior to the execution of the mortgages. He stated that the stock was kept up so that it was of about the same value as when the first mortgage was given, but that it did not consist of the same goods, and that it was impossible to tell how many of the mortgaged goods remained in stock when the mortgage of March 12, 1907, was given. It also appears that prior to the giving of the mortgages of March, 1907, Madison was' in fact insolvent, and that on March 12, 1907, he sent a message to the cashier of the bank telling that officer of his financial condition; that he was unable to run. the store any longer; that a representative of one of
The mortgages of 1907, taken by themselves, constituted voidable preferences. They were given and recorded within four months before Madison was adjudged a bankrupt, for a preexisting debt to the bank, whose officers knew of Madison’s insolvency and that the mortgages were intended as preferences. The bank took possession of the goods under the mortgages with' full knowledge of the financial condition of Madison, and upon his suggestion that he could not meet his obligations and that therefore the bank should take the mortgages and the goods to meet its claim. (National Bankruptcy Act of 1898, §§ 60, 67e, 30 U. S. Stat. at L., ch. 541; Sherman v. Luckhardt, 67 Kan. 682; Brandenburg, Bankr., 3d ed., § 962; Collier, Bankr., 7th ed., p. 666.)
That the mortgages of March, 1907, were acts of bankruptcy and preferences was decided in the bankruptcy proceeding, but apart from that adjudication it is clear from the evidence that, considered by themselves, they came within the condemnation of the bankruptcy act. It is contended, however, that these mortgages were but renewals of the mortgage of September 13, 1906, which, as we have seen, was given to secure the payment of a loan made at that time. This mortgage, it appears, was never recorded, and the bank did not take possession of the goods under it. On the matter of recording, it is contended in behalf of the bank
In Implement Co. v. Schultz, 45 Kan. 52, the mortgagor was allowed to continue in possession of a stock of goods, selling them as before, with the knowledge and acquiescence of the mortgagees, having the same control over the goods as he had before the mortgage was executed, and applying the proceeds at his own discretion, and it was held that such a mortgage is as a matter of law fraudulent and void. In a later case, where a mortgagor Was permitted to sell the mortgaged property without limitation, and no provision was made as to what should be done with the proceeds, the mortgage was held to be void as against creditors. (Rathbun v. Berry, 49 Kan. 735.) In Oklahoma, where this transaction took place, the supreme court held that an arrangement which gave a mortgagor possession of a stock of goods with the right to convert the goods into money and appropriate the money as he pleased was a nullity. It was there said:
“Such a privilege is against the policy of the law, and wherever stocks of merchandise have thus been mortgaged and the privilege of appropriation by the mortgagor to his own use has been thus permitted by the terms of the mortgage, the decisions of the courts of this country have condemned them with almost entire unanimity, and the instrument itself has been as uniformly held to be fraudulent and void as a matter of law, irrespective of the question as to whether any fraud or fraudulent intent did, in fact, exist.” (Little Company and Horsfall v. Burnham, Hanna, Munger & Co., 5 Okla. 283, 293.)
The arrangement by which the mortgagors were allowed to sell the goods as their own, without accounting to anyone for them, and to appropriate the money derived from the sales to their own purposes, is incompatible with the purpose of a mortgage lien. As was said in Robinson v. Elliott, 89 U. S. (22 Wall.) 513,
The conceded facts as to the plans and purposes of Madison and the bank are sufficient to show that the mortgage was without validity, and even the recording of the same would not have cured the illegality of the attempted transfer. The taking of possession of the goods by the bank in March, 1907, did not validate the mortgage of 1906. It appears, however, that possession was not taken under that mortgage, nor until after the execution of the one dated March 12, 1907, and it, as we have seen, was executed only a few days before the bankruptcy proceeding was begun. The undisputed facts show clearly enough that the taking of possession of the goods by the bank under the mortgages consti- ' tuted a voidable preference. (Shale v. Bank, post.)
The judgment is reversed and the cause remanded, with the direction to enter judgment in favor of appellant.