121 F. 630 | 5th Cir. | 1903
after stating the case as above, delivered the opinion of the court.
The appellants’ first contention is that the mortgages executed by Josephson to the bank are void under the provisions of the bankrupt act, because they were not placed on record before Josephson filed his petition in bankruptcy. This view is urged on our attention with great earnestness, and with the citation of many authorities. The view we take of the case, however, makes it unnecessary for us to decide this question.
The appellants’ second contention is that the mortgages are void under the common law and the .statutes of Georgia. It is conceded by the learned counsel for the appellee that if these mortgages, on the facts shown in the record, are void under the laws of Georgia, they would not be enforced in the federal courts as valid liens against the general creditors of the bankrupt. Etheridge v. Sperry, 139 U. S. 276, 11 Sup. Ct. 565, 35 L. Ed. 171. It is provided by statute in Georgia that a mortgage must be recorded. Code 1895, § 2724.
“Mortgages not recorded within the time required remain valid as against the mortgagor, but are postponed to all other liens created and obtained, or purchases made prior to the actual record of the mortgage. If, however, the younger lien is created by contract, and the party receiving it has notice of the prior unrecorded mortgage, or the purchaser has the like notice, then the Hen of the older mortgage sbaH be held good against them.” Code 1895, § 2727.
The effect of these statutes, as construed by the Supreme Court of Georgia, is that a judgment obtained before the mortgage is recorded has priority over it, and by the failure to record a mortgage in time the mortgagee risks the precedence of after-acquired mortgages and judgments. Hardaway v. Semmes, 24 Ga. 305; Richards v. Myers, 63 Ga. 763. The contention of the learned counsel for the appellee is unquestionably correct — that the mere failure to record a mortgage does not affect its validity as between the parties, and that the mortgage would remain an incumbrance upon the property, entitled to satisfaction prior to the claim of creditors who had established no liens on the property. But in view of the facts of this case, it will be seen that a proper conclusion can only be reached by considering not only the registration law, but also the laws requiring mortgages and' conveyances to be made and held in good faith.
Both by statute and by the common law that prevails in Georgia, certain acts by debtors are made fraudulent in law against creditors and others, and as to them null and void. Among these:
“Every conveyance of real or personal estate, by writing or otherwise, and every bond, suit, judgment and execution, or contract of any description, had or made with intention to delay or defraud creditors, and such intention known to the party taking; a bona fide transaction on a valuable consideration and without notice or ground for reasonable suspicion shaU be vaHd.” Code Ga. 1895, § 2695, subd. 2.
In Robinson v. Woodmansee, 80 Ga. 249, 4 S. E. 497, the trial court instructed the jury that:
“If they believed that Eobinson made these mortgages, and there was an understanding with the persons receiving them that they should be kept off the record for the purpose of protecting his financial credit, then the mortgages would be fraudulent as to all persons extending credit to Eobinson after this date.”
The court, commenting on this charge, said:
“We think this part of the charge erroneous. Under the facts of the case, it was not, as a matter of law, fraudulent to agree not to record the mortgages. It is not necessarily a fraud to agree not to record a mortgage. The agreement or understanding may have been made with the most honest intention. It is for the jury to say what the intention was — whether the mortgages were given by the debtor for the purpose of hindering, delaying, or defrauding his creditors. * * * It has been held ‘that an arrangement or understanding in regard to withholding mortgages from record until the mortgagors should have trouble did not render the mortgages void, but was*633 a matter for the consideration of the jury In passing upon the question of fraud.’ ” 80 Ga. 254, 255, 4 S. E. 500.
The effect of this decision is that an agreement between the mortgagor and mortgágee not to record a mortgage is a badge of fraud, but it does not amount to a fraud in law, that would authorize the court to instruct the jury peremptorily to find the transaction fraudulent, but that the evidence should be passed on by the jury. In the case before us, the proceeding being in accordance with equity procedure and principles, the court has not the aid of a jury, and is required to weigh the evidence, and give it effect according to its weight.
The recording of a mortgage is intended to give notice of the incumbrance on the property. In that regard, it serves the same purpose that the possession of the property by a mortgagee or vendee would serve. In view of that fact, t'he case of Smith v. McDonald, 25 Ga. 379, contains pertinent observations. In that case a party requested the court to charge the jury that a subsequent creditor has no right to complain of badges of fraud that existed before his debt was contracted. Lumpkin, J., delivering the opinion of the court, and commenting on the requested charge, said:
“It is conceded that if a vendor make an absolute conveyance of land, and continue in possession, it is a badge of fraud, as against creditors. Had Daniel B. Smith abandoned the occupancy of this land before this debt was contracted, counsel might very properly have asked the charge which he did. But Daniel B. Smith not only remained in possession to the time when the debt was contracted, but to the date of the judgment and the levy. The badge continuing then required explanation as against the subsequent debt, as well as against debts existing at the time of the sale. Indeed, the presumption is stronger in favor of the new debts than the old, for they may be supposed to have been contracted upon the credit given to the defendant on account of his possession and apparent ownership of the property.”
The evidence, without contradiction, shows that the bank advanced money to Josephson for which the mortgages were given. While a consideration is, of course, necessary to sustain the mortgages, this fact is by no means conclusive of their validity. As said by Bleckley, J., in Phinizy v. Clark, 62 Ga. 623:
“A fraudulent conveyance cannot stand against creditors, whether made to secure a debt or not. The conveyance must be pure. It must be made bona fide, and with no purpose, known to or suspected by the creditor, to hamper and entangle the property as against other creditors, for the sake of hindering or delaying them. If made partly to secure a debt, and partly to hinder, delay, or in any way defraud other creditors, and the creditor taking the deed has knowledge of this latter intention, or grounds for reasonable suspicion, no title will pass as against the other creditors.”
And the learned judge added:
“It is enough that we rule there must be no fraud which would vitiate any conveyance under any section of the Code, or any part of the common law in force here, and that no material badge of fraud must be left unexplained.”
A mortgage not at first fraudulent may become so by being concealed, ‘.‘because by its concealment persons may be induced to give credit to the grantor.” And omissions to place deeds on record are often held to be instances of secrecy, within the rule. Bump on Fraud. Conveyances (1st Ed.) 82, and cases there cited.
In Hildreth v. Sands, 2 Johns. Ch. 35, Chancellor Kent approved
In Alabama there are statutes requiring mortgages to be recorded. If not recorded, they are made void as to purchasers for a valuable consideration, mortgagees, and judgment creditors having no notice thereof. Code Ala. 1896, §§ 1005, 1006. As in Georgia,.the unrecorded mortgage is good as between the parties to it, and is good as against creditors who have not obtained a judgment or other incumbrance on the property. The statute in that state, declaring all conveyances void which are made to hinder, delay, and defraud creditors, is not greatly unlike the statute in Georgia. Code Ala. § 2136. In Lehman v. Van Winkle, 92 Ala. 443, 450, 8 South. 870, the court had occasion to consider the effect,of withholding a mortgage from record, lest it might injure the mortgagor’s business and credit. The court said:
“But when, as here alleged, the failure to record is not a mere omission, attributable to inadvertence, inconvenience, or negligence, but is an affirmative and intentional withholding from record, with the ulterior purpose*635 charged In the bill, we cannot be in doubt that the transaction is tainted with actual fraud, which will vitiate it as against subsequent creditors, and the like, who have been drawn into contractual relations with the mortgagors by assuming their apparent to be their real status with respect to the property covered by the mortgage; and this result follows notwithstanding the conveyance is free from infirmity in every other respect.”
In Mobile Savings Bank v. McDonnell, 87 Ala. 736, 6 South. 703, after holding, on the particular facts of that case, that the mortgage was not made void, the court indicated that, if it had been withheld from record for the fraudulent purpose of upholding the credit of the debtor, it would have been declared void as against simple-contract creditors whose debts were incurred in the meantime.
In Baker v. Pottle, 48 Minn. 479, 51 N. W. 383, it was decided that if a mortgage is withheld from record by an agreement between the mortgagor and mortgagee, in order that the credit of the former may not be impaired, it is a fraud as to any one who becomes a creditor of the mortgagor, relying upon the false appearance of responsibility thus created. Central Bank v. Doran, 109 Mo. 40, 18 S. W. 836, is to the same effect.
The fundamental principle involved in all of these cases has never been more aptly and briefly expressed than by Lord Denman, C. J., who said that: '
“Where one by his words or conduct willfully causes another to believe in the existence of a certain state of things, and induces him to act on that belief, so as to alter his own previous position, the former is concluded from averring against the latter a different state of things as existing at the same time.” Pickard v. Sears, 6 Ad. & El. 469, 33 Eng. Com. Law Rep. 115.
These authorities and principles seem to be clearly applicable to the facts of this case. The mortgages were withheld from record for the avowed purpose of bolstering the credit of the mortgagor so that he might make other debts. Cabaniss, the president of the bank, who had entire charge of the transactions with Josephson, testified :
“I knew that Mr. Josephson was going to New York to buy goods, and that these loans were not on record. I knew that if I had put them on record I would have destroyed his commercial credit at the time.” Again: “I know that, as a business man, that if I had this mortgage recorded it would have destroyed his credit My purpose in keeping it off the records was not to injure him in making the loan, but to benefit him.”
Leonard, the bank’s discount clerk, testified that he did not send the mortgages to be recorded, but that he “would have sent them if I had not been told not to.”
We learn from Leonard that, in due course of business, he would have sent the mortgages to have been recorded if he had not received instructions to withhold them; and we learn from the president of the bank why those instructions were given. Josephson avails himself fully of the favor conferred on him by the withholding of the mortgages from record. He continues to buy goods, and his new creditors are now contesting, through the trustees, the validity of the mortgages. He never mentioned the mortgages. He furnished the commercial agencies with a statement of his financial condition, but did not disclose the fact that any of his property was mortgaged.
It is a circumstance not without weight that two of the mortgages were on the goods in Josephson’s store, and that he was permitted to continue to sell them in his retail business, and that the goods purchased to replenish or enlarge the stock, by .the terms of the two mortgages, were included in them. It does not appear that the cash realized by the sale of the goods was applied to the payment of the mortgages. The creditors who seek to avoid the priority of the mortgages are those who sold goods to the mortgagor after the execution of the mortgages, and while they were withheld from record.
Up to the very moment that Josephson filed his petition in bankruptcy, both he and the bank, so far as actions could speak — and they often speak more forcibly than words — asserted that the property of the former was' not mortgaged. Both seemingly profited by this course. It seems to us inequitable to permit the bank at the last moment to produce the mortgages, and contradict the assertions made by the conduct of both the mortgagor and the mortgagee, to the injury of those who were misled and deceived. It has been said that, if one is silent when he should speak, he will not be permitted to speak when he should be silent; and is it not also just to say that if one, for improper motive, refuses to claim openly under a mortgage when duty to others requires him to do so, he shall not be permitted to assert such claim when justice to others forbids?
The leading facts that constrain us to a conclusion unfavorable to the appellee may be briefly summarized: The mortgagor and mortgagee had intimate business relations for a period of 20 years. The five mortgages covered substantially all of the property of the former. Two of them embraced a stock of goods which the former was permitted to hold and continue to sell. They also embraced new goods purchased to replenish the stock. The law of the state required mortgages to be recorded to keep them good against junior incumbrances. The recording of the mortgages would have destroyed the credit ot the mortgagor. They were withheld from record for about 16 months by the mortgagee for the avowed purpose of bolstering the credit of the mortgagor. The mortgagor made a statement of his financial condition to a commercial agency, suppressing the fact that his property was mortgaged. Going to replenish his stock, he referred the wholesale merchants to the financial statement he had made, but said nothing of the mortgages. He made new debts for goods, which, when bought, came under the two mortgages, and filed a petition to be adjudged a bankrupt, and on the same day and hour the mortgagee, being notified by telephone, filed the mortgages for record. We cannot avoid the conclusion that this conduct was unfair, unjust, and inequitable to the new creditors of the mortgagor, who were imposed upon by the apparent freedom from liens of all of Josephson’s property. It is the peculiar province of courts of equity to grant relief in such cases. In this case it is equitable and just to reduce things to that condition which the bankrupt and the bank, through its officers,
The decree of the district court is reversed, and the case remanded, with instructions to proceed conforming to this opinion. Reversed.
McCORMlCK, Circuit Judge, dissents.