Claridge v. Evans

137 Wis. 218 | Wis. | 1908

Lead Opinion

Tbe following opinion was filed October 20, 1908:

WiNsnow, C. J.

In tbe foreclosure action tbe question is whether tbe mortgage of December 16, 1904, is void as a *223preference under tbe provisions of tbe bankrupt act. Tlie mortgage was given nearly two years before tbe petition in bankruptcy was filed, to one wbo was not at tbe time a creditor of tbe company, and for the purpose of securing advances which the mortgagee agreed to make to enable the company •to continue its business. The company was then in fact insolvent, as both parties knew, but the mortgage was made in good faith and both parties expected that the business would be successfully carried on. By innocent mistake the mort,gage was not recorded until a few. days before the bankruptcy proceedings, although the mortgagee supposed it was, and made his advances from time to time relying on his -.security. The last two advances were made before the beginning of the four-months period immediately preceding the bankruptcy proceedings, and for these advances foreclosure is claimed.

There can be no doubt that, in the absence of fraud, actual ■or constructive, this mortgage, though unrecorded, gave to the mortgagee a lien upon .the mortgaged property for the ■sums thereafter advanced under it, good as between the parties and as to all the world except subsequent purchasers -or mortgagees in good faith and for a valuable consideration. Secs. 2203, 2209, 2241, 2242, Stats. (1898) ; Mathwig v. Mann, 96 Wis. 213, 71 N. W. 105; Wis. P. M. Co. v. Schuda, 72 Wis. 277, 39 N. W. 558. It is familiar law that the trustee in bankruptcy takes the bankrupt’s property subject to all the equities impressed upon it in the hands of the bankrupt, unless otherwise provided in the bankrupt act. In other words, he has no greater right to set aside convey-•anoes or transfers than the bankrupt himself had, except in so far as the bankrupt law empowers hini to avoid such transactions in cases of actual or constructive fraud or in cases -of preference inhibited by the act. Security W. Co. v. Hand, 206 U. S. 415, 27 Sup. Ct. 720; Eastman v. Parkinson, 133 Wis. 375, 113 N. W. 649. No actual or constructive fraud *224is claimed in tbe present case, but tbe only claim is tbat the mortgage constituted a preference witbin tbe meaning of' subd. a and b of sec. 60 of tbe national bankruptcy act of’ 1898 (Act July 1, 1898, ch. 541, 30 U". S. Stats, at Large, 562, 1J. S’. Comp. Stats. .1901, p. 3445), as amended by the-act of February 5, 1903 (cb. 481, sec. 13, 32 TJ. S. Stats, at-Large, 199, 1J. S. Oomp. Stats. Supp. 1901, p. 1031). Sec. 60a provides tbat:

“A person shall be deemed to have given a preference if, being insolvent, be bas, witbin four months before tbe filing-of the petition, or after the filing of the petition and before the adjudication, procured or suffered a judgment to be entered against himself in favor of any person, or made a transfer of any of his property, and the effect of the enforcement of such judgment or transfer will he to enable any one-cí his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class. Where-the preference consists in a transfer, such period of four months shall not expire until four months after the date of’ tbe recording or registering of the transfer, if by law such recording or registering is required.”

Subd. b, sec. 60,' provides that:

“If a bankrupt shall have given a preference, and the-person receiving it, or to be benefited thereby, or his agent acting therein, shall have had reasonable cause to believe-that it was intended thereby to give a preference, it shall be voidable by the trustee, and he may recover the property or its value from such person.”

The mortgagee here knew that the company was insolvent, at the time the mortgage was given as well as at the time it. was recorded, and the trustee claims that, though it was given nearly two years before the bankruptcy proceedings were-commenced, still, because it was not recorded until.a few days before the petition was filed, it becomes a voidable preference by virtue of the last clause of subd. a, sec. 60. The-fundamental difficulty with the trustee’s contention is that-the sections deal with preferences alone, not with all business transactions, and the giving of a mortgage or other-*225security to secure repayment of a present loan, or a loan to be made in the future, is not a preference. In order to constitute a preference there must be an existing antecedent debt upon wbicb a payment is made or for which security is given. A security given for a debt created at the time is a present security and not a preference created by the mortgage. This seems clear from the language of the sections as well as from consideration of the evil intended to be averted thereby. A preference, as defined by the statute, is a transfer which will enable any one of the insolvent’s creditors to obtain a greater percentage of his debt than other creditors of the same class. It contemplates a class of existing creditors, one of whom is singled out for preference. The evil which was to be averted was the diminution of the bankrupt’s estate by a transfer to a favored creditor to the detriment of other creditors of the same class. The idea of the bankrupt law is that the bankrupt’s whole estate should go to the benefit of all his creditors equally, except as priority of certain kinds of claims may be provided for by the act, and that hence the bankrupt should not be allowed to diminish the common fund within four months before his bankruptcy by giving a preference to one creditor who has reason to believe that insolvency exists. When, however, a mortgage is given for a present loan of money to go into the bankrupt’s business, there is no diminution of the estate. Indeed, that very act may amount to a practical enlargement of the estate and enable the- insolvent to rescue his business from threatened ruin, and thus save all his creditors from loss-Thus Judge DilloN well said in Darby's Trustees v. Boatman's Sav. Inst. 1 Dill. 141, Fed. Cas. No. 3,511, under the-old bankrupt law (which also contained provisions condemning preferences) :

“An insolvent person may properly make efforts to extricate himself from his embarrassments, and therefore he may borrow money and give at the time security therefor, provided always the transaction be free from fraud in fact and *226upon, the bankrupt act; and Pence it is a settled principle of bankrupt law, both in England and in tbis country, tbat advances, made in good faitb to a debtor to carry on business upon security taken at tbe time, do not violate either tbe terms or policy of tbe bankrupt act.”

Tbis principle is definitely laid down and approved in tbe cases of In re Wolf, 98 Fed. 74; In re Clifford, 136 Fed. 415 ; First Nat. Bank v. Pa. T. Co. 124 Fed. 968, and In re Noel, 137 Fed. 694, and in effect in Rogers v. Page, 140 Fed. 596. In tbe Noel Case tbe court said: “As to tbe question of preference under tbe bankrupt act, it is clear tbat a present loan on security is not a preference” — citing sec. 67, subd. d (Act July 1, 1898, cb. 541, 30 U. S. Stats, at Large, 565, U. S. Comp. Stats. 1901, p. 3449), of tbe bankrupt act, wbicb reads as follows:

“Liens given or accepted in good faitb, and not in contemplation of or in fraud upon tbis act, and for a present consideration, wbicb bave been recorded according to law, if record thereof was necessary in order to impart notice, shall not be affected by tbis act.”

Tbe very word “preference” means tbat one person is favored above others who before tbe favor was shown stood on equal footing. Bouvier defines it as “the paying or securing, to one or more of bis creditors, by an insolvent, the whole or part of their claim to tbe exclusion of tbe rest.” Tbis seems entirely clear, and probably there would bave been no attack on tbe mortgage were it not for tbe concluding-clause of subd. a, sec. 60, wbicb in effect declares tbat if the local law requires recording of tbe transfer, tbe four-months period during wbicb preferences are inhibited shall not expire until four months after tbe date of tbe recording. But this clause does not define a preference, nor purport to malee a preference out of a transaction wbicb was not a preference before. It only applies where the transfer itself constitutes a preference. In order to ascertain what a preference in *227fact is, we must go to the first part of the section, which, as we have seen, defines it in accordance with the natural meaning, namely, a transfer to one creditor out of a class. So we are not concerned here with the last clause, because it only refers to preferences, and there has been no preference to which it can apply. The construction of this last clause, especially with regard to the scope of the words “if by law such recording or registering is required,” has occupied the attention of several of the inferior federal courts with varying results. In the Northern District of New York it was held, under registry laws practically identical with our own, that a real-estate mortgage was not required to be recorded within the meaning of the clause in question, and hence that such a mortgage, given in good faith more than four months before the bankruptcy proceedings, but not recorded until just before the petition was filed, could not be invalidated as a preference. In re Hunt, 139 Fed. 283., A contrary result was reached, under substantially different registry laws, in English, v. Ross (M. D. Pa.) 140 Fed. 630. In a number of cases in the inferior federal courts it has been held, in reference to chattel mortgages, that where the state law-requires them to be recorded in order to validate them as against creditors or purchasers in good faith, although valid between the parties, they are required to be recorded within the meaning of the bankrupt act. First Nat. Bank v. Connett, 142 Fed. 33; Loeser v. Sav. D. Bank, 148 Fed. 975; In re Reynolds, 153 Fed. 295. In these cases the clause in question was held * applicable. In the first two the mortgages were given to secure existing debts. In the last case, however, the mortgage was given to secure a present loan, and so the case may rightly be said to be in some sense an authority in support of the trustee’s contention here. It is to be noted, however, that the point that the transaction was not a preference of a creditor at all was neither suggested nor considered in the case, and that the law of Arkansas, which governed the *228mortgage, provided that no mortgage should be a lien on the mortgaged1 property until actually filed in the proper office, while in Wisconsin a chattel mortgage is a valid lien as between the parties though never filed, and_ a real-estate-mortgage given in good faith is valid as to all the world, except subsequent purchasers in good faith, though never recorded. But we should not feel inclined to follow these authorities, even if they were exactly in point. When the supreme court of the United States decides that the preference section in the bankrupt law applies to such a transaction as the giving of the mortgage in the present case, we shall of course bow to that decision. Until that time we shall follow what seems to us the correct principle as laid down in this opinion. The result is that Glaridge was entitled to a judgment of foreclosure against the fund in court.

Passing to the action to recover the preferential payments, made within the four-months period, we find a different question. These were payments made upon an antecedent debt. True it was a secured debt, but only to the amount of the security. On June 25, 1906, when the four-months’period began, the company owed Glañdge $5,000 and his security was only of the value of $1,125. Thus, as to the sum of $3,215, Glaridge was an unsecured creditor, and he could not, with knowledge of his debtor’s insolvency, obtain a valid preferential payment on his unsecured debt within the four-months period, because this would give him" a greater percentage than any other unsecured creditors, of whom there were a considerable number. After exhausting his security his debt is of the same class as all other unsecured contract-debts which are not given priority by the terms of the bankrupt act. The judgment in the second action was therefore correct.

It follows that in the foreclosure action the judgment must be reversed, with costs, and the action remanded with directions to enter judgment of foreclosure against the fund *229in court, while in tbe trustee’s action to recover tbe preferential payments tbe judgment must be affirmed, with costs.

By the- Court. — It is so ordered.






Dissenting Opinion

Tbe following opinion was filed November 10, 1908:

SiebecKee, J.

(dissenting). I cannot concur in tbe court’s bolding tbat, under tbe provisions of tbe bankruptcy act, as amended February 5, 1903, Claridge did not secure a preference under tbe mortgage .recorded October 19, 1906. It is conceded tbat tbe mortgagee knew .that tbe mortgagor was insolvent at tbe time tbe mortgage was. given as well as when it was recorded. A mortgage given by a debtor, either to secure payment of a present loan or to secure future advancements, whether given within or prior to tbe four months before the filing of tbe petition in bankruptcy, creates no preference under tbe bankruptcy act, but a mortgage so given to one of a class of creditors to secure a prior debt creates a preference, in tbat such mortgage creditor is thereby taken ■from a class of creditors for preference. Unless such a mortgage was void under tbe local law, such a preference, before tbe anlendment of February 5, 1903, could only be attacked if given within tbe four months immediately preceding tbe filing of tbe petition in bankruptcy. This state of tbe law permitted debtors to give security to favored creditors by keeping the instruments off tbe record and thereby to conceal the fact of such preference from existing and subsequent ■creditors. Such a practice was well calculated to lull such other creditors into a sense of security as to tbe debtor’s financial responsibility and to induce tbe belief tbat all bis ■creditors stood on an equality as to payment out of bis estate. In fact, it afforded an opportunity to give a secret preference to some one or more of tbe same class of creditors and resulted in inequities among tbe members of such a class, if, by not recording such security, its giving could be kept secret *230for four months. The amendment of February 5, 1903, it seems to me, was intended to prevent such secret securities. I3y such amendment (see. 60) the bankruptcy act declared, in effect, that if an insolvent, within four months before the filing of the petition, should transfer any of his property and thereby enable a creditor to obtain a greater per cent, of his debt than others of the same class, it should be declared a preference; and, “where the preference consists in a transfer, such period of four months shall not expire until four months after the date of the recording or registering" of the transfer, if by law such recording or registering is required.” As I view it, this court gives no other effect to the amendment than to hold that the validity of a transfer, made prior to the four months pending the filing of the petition but recorded within that period, may be assailed as of the date when the transfer was made. The language of the amendment, when applied to what precedes it, discloses an apparent intent by Congress to make the time of recording-the time of transfer of the property covered by the instrument of transfer, instead of the time when the transfer would be effectual under the local law. Under the amendment of' February 5, 1903, the validity of a voidable preference should, I think, be determined as of the day on which the-mortgage was recorded, which in this case is October 16,. 1906, instead of the day of its delivery to Mr. Olaridge, December 16, 1904 These facts present a case of a transfer within the four months prior to the filing of the petition in bankruptcy, when the mortgagor was insolvent to the knowledge of the mortgagee, and, under the ruling of the court, enables Mr. Olaridge to obtain a greater percentage of his-pre-existing claim than the other creditors of the same class. Under the circumstances the mortgage was fraudulent within the provisions of the bankruptcy act, and the trustee should be entitled to judgment declaring it void, and awarding him the amounts applied within the four months before the filing *231of the petition in bankruptcy, in payment of the debt secured by it, as adjudged by the lower court. I deem the following cases, referred to in the opinion of the court, as controlling and supporting these conclusions: First Nat. Bank v. Connett, 142 Fed. 33; In re Reynolds, 153 Fed. 295; English v. Ross, 140 Fed. 630.

The mortgage, in view of the provisions of the law o£ this state for recording mortgages, is an instrument required to be recorded within the meaning of the amendment of February 5, 1903. As held in the English Case, supra, the amendment contemplates that instruments shall be recorded whenever recording is necessary to protect the transferee against subsequent purchasers, even though such instruments may be valid between the parties thereto without recording. The mortgage to Glaridge, in my opinion, should be judged, on the question of preference, as if executed and delivered on the day it was recorded. When so considered, it results in a preference under the established facts, and it is fraudulent and void under the bankruptcy aet.

KebwiN, J. I concur in the foregoing dissenting opinion of Mr. Justice Siebeckeb.

The following opinion was filed December 15, 1908:

WiNsnow, O. J.

The appellant moves for a rehearing in the action brought by the trustee to recover the preferential payments made within the four-months period, and urges two grounds, viz.: (1) That the note of $1,000, which is said in the statement of facts to have been.paid June 29th, was in fact paid June 23d, and hence was not paid within the four-months period; and (2) that there is no finding to the effect that Glaridge had reasonable cause -to believe that a preference was intended when these payments were made, and hence that there can be no recovery under subd. b, sec. 60, *232of the bankruptcy act. Act July 1, 1898, ch. 541, 30 U. S. Stats, at Large, 562 (U. S. Comp. Stats. 1901, p. 3445).

1. As to the first claim, the matter must be considered as settled adversely to the appellant’s contention by finding of fact number 17 in the preference action, to which there was no exception. That finding says that on the 29th day of June, 1906, Olaridge paid to himself from the funds of the association $1,003.80 as payment in full of a note of $1,000 and interest secured by the mortgage, and that on the 25 th day of August, 1906, he paid to himself $1,519.75 as payment in full of the $1,500 note, and that at both times he knew the association to be insolvent. It is true that in the •seventh finding a list is given of the various notes given under the mortgage, with their respective dates of payment, and that in such list the $1,000 note has opposite to it, as the date of payment, “June 23, 1906.” This makes an apparent contradiction in the findings, but the seventeenth finding, being a specific finding directed to the special question of the time of payment, must be held as controlling over the mere recapitulation of the notes contained in finding 7. Phalen v. Hershey L. Co. 136 Wis. 571, 118 N. W. 219. An error in printing the cases in the two actions may here be noted which may account for the misapprehension of appellant’s counsel ■on this point. In both printed cases the findings in the foreclosure action are printed as the findings of the court, and these findings did not contain finding 17 as above quoted, but ;an entirely different proposition. We were obliged to go to the record in the preference action to find the correct findings.

2. It is true that the statute requires that a preferred creditor must have had reasonable cause to believe that a preference was intended at the time of receiving his preference before the same can be set aside, and it is equally true that in the present case there was no finding that Olaridge had such cause, either on the 29th of June or on the 25th of August, but only that he had such cause on the 19th of Octo-*233her, when tibie mortgage was recorded. This was evidently upon the theory that his rights were to be determined solely by the situation at the time of the recording of the mortgage. The court, however, found that the association was insolvent, to the knowledge of Claridge, at the time the mortgage was executed, and was also insolvent at all times within the four months immediately preceding the bankruptcy proceedings, which fact was also within the knowledge of Claridge. It ■also appeared without dispute that Claridge was the active manager of the entire business of the association from the time of the giving of the mortgage up to the time of its bankruptcy, and in fact was the only person who had personal and accurate knowledge of its affairs; and further, that as secretary he in fact made the preferential payments to himself. Thus he was, in effect, both debtor and creditor, and whatever he knew in one capacity he also knew in the other. The 'complete and practically hopeless insolvency of the association was known to him when he made the payments to himself, and it was also known to him that the effect of each payment was to enable himself as creditor to obtain a greater percentage of • his debt than other creditors of the same class. Thus at the time he made the payments he knew that all the facts existed which are necessary to constitute a preferential payment under subd. a, sec. 60, of the bankruptcy act. In order that a preference within the terms of subd. a, sec. 60, should be recoverable, the statute only requires that the creditor should have reasonable cause to believe that a preference was intended. 1 Eemington, Bankruptcy, § 405. Could a creditor, to whom the utterly insolvent and practically hopeless condition of his debtor had been fully explained, at the time he received a payment or transfer, be heard to say with any reason that the facts known to him did not give him reasonable cause to believe that a preference was intended? We think not. A finding to the contrary could hardly be sustained, and hence the motion for a rehearing must be denied.

By the Court. — It is so ordered.

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