210 F. 499 | E.D.N.C. | 1914
On August 3, .1911,-upon the advice of his attorney, who was the attesting witness thereto, and after default in the payment of two of the notes at maturity, defendant caused his mortgage to be probated and recorded in the office of the register of deeds for Richmond- county. Pursuant to an understanding with defendant, the purchasers .took
On November 25, 1911, defendant instituted an action, in the state court, against the said purchasers and mortgagors, on the notes then due, and for the foreclosure of said mortgage. He took possession of the stock of drugs then on hand, fixtures, and soda fountain. At the date of the sale of said stock, January 16, 1911, neither said Orlando Brigman nor T. B. Dawson owned any property other than the stock purchased from defendant. Their financial condition was well known to defendant. They paid, on account of the notes, prior to November 25, 1911, $700, and, pursuant to an understanding had with defendant, at the time of making the purchase, drew from the proceeds of sales of goods each, $100 a month, and discharged approximately all of the indebtedness of $2,700 assumed by them. They made purchases of goods approximating $7,000, and were indebted on account thereof, November 25, 1911, in the sum of about $2,800. At the date of the registration of the mortgage, August 3, 1911, the Eagle Pharmacy was insolvent. ■ An examination of the claims filed indicates that a considerable portion of their indebtedness is for purchases made subsequent to August 3, 1911. Defendant says that the reason which induced him to have the mortgage registered was that they had not paid him the notes falling due in July and August, and that they were not giving proper attention to the business; that after he told his attorney that the mortgage was not registered, he became uneasy — thought it would have been better if he had registered it instead of leaving it in the bank — his attorney told him that he “had better have it registered.” He did not give his reasons for so advising him. He thought, after he got the mortgage on the record, he would come in ahead of the general creditors — that was the reason he put it on record. He says that he had no intention of hindering and delaying other creditors when he put the mortgage on record. Dawson testifies that, at the time of making the sale, defendant said to him—
“there was no need to mention how we bought the property. There was no need ior anybody to know anything about it.”
Orlando Brigman did not testify in this cause. The appraisers appointed, in the proceeding in bankruptcy, assessed the goods on hand, at the date of the adjudication, at $2,731.70, of which $394.85 were purchased subsequent to January 16, and prior to August 3, 1911, and $864.14, between August 3, and December 2, 1911. They assess the soda fountain at $837.50, and the show cases at $517.50. There was, at the date of the sale, a valid lien on the soda fountain, for $217, which was due and unpaid at the date the defendant took possession of the property. Dawson testifies that the value of the goods and fixtures on hand August 3, 1911, was about $4,000, and the debts about $6,000. They inventoried more than that amount.
On June 28, 1911, Dawson made a statement to J. W. Cole, representative of Bradstreet, that the firm owned “merchandise at cost, and
On December 2, 1911, a petition was filed by certain creditors of Brigman and Dawson, trading as the Eagle Pharmacy, in the District Court of the United States for the Eastern District of North Carolina, praying that said firm be adjudged involuntary bankrupts, and on February 8, 1912, upon proceedings had therein, said parties were adjudged bankrupts, and on February 20, 1912, plaintiff, Leake S. Cov-ington, was duly elected and qualified as trustee of said bankrupts. Pursuant to an order made in said proceeding, plaintiff took the said stock and fixtures into his possession, and thereafter sold the same, free of incumbrances, for the sum of $3,000, and holds the proceeds subject to the orders of the court. On July 6, 1912, the plaintiff filed this bill, praying that the said mortgage be declared invalid as against himself as trustee. The cause was, upon the maturity of the pleadings, brought to a hearing, etc.
Plaintiff attacks the mortgage of January 16, 1911, registered August 3, 1911, for that: First. It is a voidable preference under the provisions of section 60b of the Bankrupt Act qf 1898, as amended in 1903 and 1910. Second. That it is fraudulent and void a's against creditors under the statute in force in this state. Revisal 1905, § 960.
“If a bankrupt shall bave * * * made a transfer of any of bis property and if, at the time of the transfer, * * * or, of the recording or registering of the transaction, if, by law recording or registering thereof, is required, and being within four months before the filing of the petition in bankruptcy, * * * the bankrupt be insolvent and the * * * transfer then operate as a preference, and the person receiving it, or to be benefited thereby * * * shall then Jiave reasonable cause to believe that the enforcement of such * * * transfer would effect a preference, it shall be voidable by the trustee and he may recover the property or its value from such person.” Collier, Bankruptcy (9th Ed.) 784.
’ There would seem to be but little room for construction of this language. It is quite clear, especially in the light of the judicial construction of the language used in the statute prior to the adoption of the amendments and the evident purpose of the Congress in making them.
“To be sure an unregistered mortgage is not pronounced void absolutely and under all circumstances, but it is ‘required to be recorded’ in the sense in which that phrase is customarily used, and the language of requirement is similar to that employed in the registry law of most of the states.”
Two of the elements entering into a voidable preference — insolvency of the debtor, at the time of' registration, and registration within four months before the filing of the petition in bankruptcy — are shown either by uncontradicted evidence or by the record. The only question open to discussion is whether defendant had reasonable cause to believe then — that is, at the date of registration — that the enforcement of- his mortgage would effect a preference. The state of his mind, in that respect, must be ascertained from an examination of his own evidence and the surrounding conditions and circumstances. The circumstances attending the sale and execution of the mortgage — the fact that the business had not been successful, the relation which the accumulated indebtedness bore to the value of the property sold, the agreement by the purchasers to pay $300 quarterly, the agreement that, in addition to the rent of $50 a month, the partners were to withhold each, $100 per month, for their personal use, the assumption of $2,700 indebtedness then due, the absence of any outside resources upon which they could draw to meet such a large draft on the business — were well calculated to create a belief in the mind of any reasonably intelligent man that the venture would soon be wrecked. He must have known that they would be compelled to replenish the stock by making purchases on credit. This is emphasized by the uncontradicted testimony of Dawson that, when the sale was made, defendant said to him and his son,, the other purchaser, “that there would be no use telling people
The mortgage was kept off the record, and the business was continued under the same name and style, the assumed indebtedness of $2,-700, and the rent, was paid, $700 of the purchase money paid before the mortgage was recorded, and each partner drew out $100 a month. The defendant lived in the same town with the purchasers, and “occasionally came in,” etc.; one of them had been his clerk, the other was his son. Two notes were overdue when defendant consulted his attorney and, upon his advice, caused his mortgage to be probated upon the oath and examination of his attorney and recorded. Conceding that there was no express agreement between the parties at the date of its execution that the mortgage was not to be recorded, the fact is that it was not registered until more than six months after its execution. That he registered it “because he believed that he would get a lien on the property then”; they (mortgagors) “didn’t come up, and I talked' with Mr. Cameron [his attorney], and I went and had it recorded. * * * After he told me, I was uneasy. I thought it would have been better, maybe, if I had had it registered instead of leaving it in the bank.”
To' the question, “You thought after you got that paper on record you would come in ahead of the general creditors?” He answered, “Yes.” He says that he had no intention to hinder or delay the other creditors when he put the mortgage on record. There is abundant evidence, .coming from defendant, that, although an illiterate man, he had previously, acting for his wife, engaged in a number of transactions in which he had taken mortgages and had them recorded. The inference is irresistible that he knew that the law required its registration to make it effectual against the creditors of the mortgagors.
“The preference arose when the mortgages were recorded, and not as of the date they were given. In other words,. the amendment' of 1903 was intended to remedy the evil resulting from secret instruments of transfer of the bankrupt’s property, the withholding of them from record until shortly before the institution of bankruptcy proceedings, and the then assertion of them , as of the prior date of their execution and delivery. And’this was accomplished by making the rights of a creditor, thus favored, determinable by the conditions existing when he caused the transfer to him to be recorded as required by the state law, rather than by those existing at the time he secured it.”
The learned judge states a condition, existing in that case, which accurately describes the conditions in the instant case.
“The mortgages of the bank, required by law to be recorded, having been recorded within four months of the filing of the petition in bankruptcy, and at a time when the mortgagor was insolvent, the effect thereof being to enable the bank to obtain a greater percentage of its claims than other creditors of the same class, a preference arose under section 60a. Was it voidable under section 60b? In other words, did the bank have reasonable cause to believe that it was intended thereby to give a preference? The bank knew that the mortgagor was insolvent, and that a preference was in fact then created, but, in a strict sense, it cannot be said that it had reasonable cause to believe that one was intended. While the situation is somewhat anomalous, we believe that it was within the spirit of the amended act, and that the voidable element is established by the knowledge of the bank when its mortgages were recorded that the mortgagor was insolvent and contemplated a disposition of his property.”
The same view is adopted by Judge Cochran in Ogden v. Reddish (D. C.) 200 Fed. 977. After defining a voidable preference under section 60b, as amended, he says:
“These three tilings must have existed at either of two.particular times, to wit: Either at the time of making the mortgage, or at the time of its recording.”
These decisions commend themselves to the judgment as being correct interpretations of the present provisions of section 60b. They are in accordance with a natural and reasonable construction of. the language of the section, and are sustained by the history of the statute and its amendment to meet conditions presented by the decisions of the court.
“Except for sinister purposes it is difficult to imagine why a party, holding a mortgage on a stock of merchandise, when the statute provides for its registration, should wish to secrete the mortgage, carry it in his pocket, instead of putting it on record, thus giving notice to the commercial world of the financial condition of the mortgagor. The well-earned character of the state of North Carolina and of its native population for honesty, favoring a square deal, is in keeping with the law as decided in Cheatham v. Hawkins, 76 N. C. 335,” etc.
In re Duggan, 183 Fed. 405, 106 C. C. A. 51 (C. C. A. 5th Cir.), it is held that:
“A chattel mortgage given hy a bankrupt on his stock of merchandise, and withheld, from record for several months by the mortgagor, under a tacit agreement to do so because of the effect which the record would have on the mortgagor’s credit, is fraudulent and void, both as to prior and subsequent creditors.”
Judge Shelby, after citing decided cases, concludes:
“When the mortgage is declared void, the trustee holds the mortgaged property unincumbered by the mortgage, and it is subject to pro rata distribution just as any other property of the bankrupt.” Bank v. Shackelford, 208 Fed. 677, 125 C. C. A. 575.
In Hafner v. Irwin, 23 N. C. 496, cited in Blennerhassett v. Sherman, 105 U. S. 100, 26 L. Ed. 1080, it is said:
“There was evidence tending to show that it was a condition of this instrument, and as understood between the parties thereto, that it should not*507 be registered nor put in use, but kept a secret from the world until after the 20tli February, ensuing, etc. * * * We feel ourselves justified in holding that, when secrecy is a part of the consideration of such securities, the securities are contaminated thereby, and ought not to be regarded as given bona fide.”
Such is the law as held by all courts; it is most salutary in its effect upon commercial credit, and promotes honest, fair dealing, and the protection of unsecured creditors, who extend credit to persons under the impression that their property is unincumbered. While it is argued here that there is no sufficient evidence to show an agreement to withhold the mortgage from the record, it must be conceded that there is much in the evidence and the conduct of the parties to sustain the inference that there was at least “a tacit understanding” to that effect. It requires -no strained construction of the uncontroverted evidence to reach the conclusion that the purchasers of the stock could not have conducted the business without purchasing goods on credit, and that with this mortgage on the record they would have been unable to do so — no reasonably prudent merchant would have extended them credit —and all of this was well known to defendant. I have not considered the’matters referred to in the amended answer. The defendant is not in a position, in this, action, to raise the questions suggested by thé averments therein. The sole question which can be litigated between plaintiff trustee and defendant is the validity of the mortgage of January 16, 1911, as against the rights of creditors represented by him as trustee.
A decree will be drawn declaring that, for the reasons stated herein, plaintiff is entitled to retain the proceeds of the property sold by him pursuant to the order heretofore made in the proceeding in bankruptcy, and to administer same in accordance with the provisions of the Bankruptcy Act. The plaintiff will recover his cost, etc.