224 F. 739 | N.D.N.Y. | 1915
November 20, 1913, a petition in bankruptcy was filed against said James T. Mosher, and December 8, 1913, he was duly adjudicated a bankrupt. January 2, 1914, Emery A. Hamblin was duly appointed and qualified as trustee. Mosher, the now bankrupt, had been a customer of the First National Bank of Albany, N. Y., for some years prior to April 16, 1913, discounting paper at said bank from time to time, and on that day he informed Mr. Gallogly, the vice president of said bank, that he desired a loan of $10,000, in response to which Mr. Gallogly stated the bank would make the loan if secured. Mosher offered a second mortgage on his real estate, but Mr. Gallogly declined this, on the ground the bank could not make loans on mortgage, but at the same time informed Mosher he could give his note indorsed by some friend and secure such indorser by a mortgage on his real estate. Thereupon Mosher suggested Galib Bros, as indorser, and as Gallogly had known the said firm for some years and regarded the members as good business men and the firm responsible for a reason
“Don’t record it because I want to do some business. If you record it, it might be hard for me to do business”
—and thereupon Galib Bros, agreed not to record such mortgage. Of this agreement the said bank had nO‘ knowledge. This mortgage was not recorded until October 30, 1913, or 20 days prior to the filing of the petition in bankruptcy and 10 days subsequent to the last renewal of the note. November ,5, 1913, Galib Bros, assigned such mortgage to the said bank, and the assignment was that day recorded. This was done under the following circumstances, viz.: In October, 1913, Mr. Gallogly, vice president of the bank, heard that Mosher was in financial trouble and gambling heavily, which Mosher admitted, and thereupon turned the matter over to its attorneys, who learned that the mortgage had not been recorded. Galib Bros, were sent for and informed of Mosher’s financial condition and practices, and an assignment of the mortgage was thereupon requested and given. About this time Mosher offered the bank additional collateral security by way of chattel mortgage, but the bank declined, as under the then existing conditions it had no right to take same.
It conclusively appears that prior to taking the assignment of the mortgage to the bank Mr. Gallogly had become acquainted with Mosh-er’s financial condition, but there is no evidence to sustain a finding that the bank, or any of its officers, had any knowledge of the true financial condition of Mosher at the time the $10,000 note was given, indorsed by Galib Bros, and at the time the mortgage was given by Mosher to Galib Bros, as security to them for their indorsement. Some point was made in the testimony that the note was indorsed and delivered prior to the execution and delivery of the mortgage. This is of no consequence, as the mortgage was given the same day that the note was executed and delivered, and with, the understanding and agreement that the mortgage was to be given as a part of the transaction. Some point has also been made that the bank did not have actual knowledge that the mortgage was in fact executed and delivered at the time or on the day the note was indorsed and taken. This I regard as of no consequence, for the bank understood that Galib Bros, was to indorse the note and be secured by the mortgage executed by Mosher. It was all a part of the one transaction. There is no evidence or statement in the case that the bank declined to discount the note with Galibs’ indorsement thereon, and required as a condition of
It is not disputed that from time to time Mosher, now bankrupt, made financial statements to various commercial agencies which were communicated to the trade for the purpose of obtaining credit. Such statements were made in February, 1913, August, 1913, and possibly at other times. Other parties investigated Mosher’s condition by making inquiry and made reports as to his financial condition and the credit that was due him. The existence of the unrecorded mortgage was not disclosed by Mosher in making these financial statements, or in answer to inquiries made by other parties.
During all of this time, including the time when the $10,000 note was given and thé mortgage executed, "Mosher' was insolvent. And thereafter, and while the mortgage remained unrecorded, it is a fact that various parties, relying upon the reports of the trade agencies' and upon the. information given to other parties in answer to inquiries, and upon the apparent equity of Mosher in this mortgaged property, filled orders given by Mosher and extended new and further credit to him. There is no evidence that Galib Bros., or either of the firm, was cognizant of the financial condition of Mosher at the time they indorsed the note and took the mortgage as security to their indorsement, and there is no evidence that the bank had any knowledge, at the time the note was discounted and the mortgage executed to secure the indorsement of Galib Bros., that Mosher was insolvent or financially embarrassed to a serious extent. Neither is there any evidence that the bank or Galib Bros, were informed that Mosher was making financial statements which concealed the existence of. the mortgage. There is no evidence in the case, or in the statement of facts, that would justify the inference or conclusion or- a finding that Galib Bros, neglected or failed to record the mortgage for the purpose of cheating or defrauding then existing, or subsequently existing, creditors of Mosher. Galib Bros, of course knew that a failure to record the mortgage would keep record knowledge of its existence from then existing and subsequently existing creditors of Mosher, but there is no evidence that they had any information which led them to believe, or which ought to have led them to believe, that Mosher would make any false or untrue statements as to the existence of such mortgage. When the mortgage was assigned to the bank it had knowledge for the first time of the agreement not to record it. I do not think it can be held or found that there was any express purpose or design on the part either of Mosher cfr Galib Bros., at the time the note was indorsed and the mortgage given, to cheat, defraud, deceive, or mislead existing creditors, or those persons who should subsequently become creditors. The mortgage at that time was not intended as a preference, inasmuch as it was given to secure Galib Bros, for its indorsement upon a note given for a new consideration; that is, a present loan of money made by the bank.
Under the conditions existing and known to Galib I3ros. when the note was indorsed and the mortgage delivered, it was a valid security, unless the agreement not to record, entered into for the purpose stated, made it void as to general creditors, who should thereafter become such.
The real questions are:
1. Was this mortgage fraudulent and void as to the general creditors of Mosher, who thereafter extended credit to him on the faith of his real estate being unincumbered by such a mortgage? If so, it was void for the same: reason in the hands of the bank. The bank did not discount the note on the faith of the mortgage being given to the indors-ers as security. No evidence or concession sustains such a conclusion.
2. Was the bank entitled to an assignment of such valid security as the Galibs or Galib Bros, had ?
3. Another question under the facts of this case is this: Is the mortgage deemed to have been given to secure an antecedent debt and given as of the date of its record and therefore within the four months preceding the filing of the petition in bankruptcy, or did the four-rnonth period begin to ran at the date of the record of the mortgage?
“A rale within those constituting the doctrine of subrogation is that the creditor shall have the benefit of any obligations or collateral securities which the principal debtor has given to the surety or person standing in tile situation of a surety. Such securities are regarded as trusts for the better security of the debt, and the fact that, the creditor did not originally rely upon the credit of such collateral security, or know of its existence in the first instance, 3s immaterial. Vail v. Foster, 4 N. Y. 312; Curtis v. Tyler, 9 Paige [N. Y.] 432; National Bank of Newburgh v. Bigler, 83 N. Y. 51; Wager v. Link, 134 N. Y. 122 [31 N. E. 213]; Keller v. Ashford, 133 U. S. 610 [10 Sup. Ct. 494, 33 L. Ed. 667]; New London Bank v. Lee, 11 Conn. 112 [27 Am. Dec. 713]; Meyers v. Campbell, 59 N. J. Law, 378 [35 Atl. 788]; First Nat. Bank v. Hunton, 70 N. H. 224 [46 Atl. 1049]; Matter of Fickett, 72 Me. 266; Kramer & Bahm’s Appeal, 37 Pa. 71. The rule is applicable here. The right of subrogation is founded upon principles of equity, and not in contract It is to be so administered as to accomplish, through general equitable rules, what is just and fair between the parties. It does not depend upon privity, nor- is it confined to cases of strict suretyship. Subrogation is an act of law, and a mode which it adopts to compel the ultimate discharge of the debt by him who In good conscience ought to pay it, and to relieve him whom none, hut the creditor could ask to pay. Tí in 1he performance of a contract conditions arise which require to effect such result the intervention of the right, the court will so decree, provided thal in so doing the law is not violated or a contract altered. Pease v. Egan, 131 N. Y. 262 [30 N. E. 102]; Morehouse v. Brooklyn H. R. R. Co., 185 N. Y. 520 [78 N. E. 179, 7 Ann. Cas. 377]; Arnold v. Green, 116 N. Y. 566 [23 N. E. 1]. The defendant became surety to the-Brick Company for the payment of the debt of the Contracting Company. His guaranty was a separate, independent contraet that he would pay the debt if the company did not. He placed his financial responsibility as*744 a security for the payment of the purchase price of the bricks. The trust for the better security of the debt attached to the guaranty as it would have attached to property deposited by the Contracting Company with the Brick Company as security.”
There is no pretense or evidence ,to show that the bank connived at keeping the mortgage from record, or in the making of representations as to the financial condition of Mosher. The main question is, Could Galib Bros, have enforced the mortgage on payment of the note? There is no pretense that that firm is not liable. to th'e bank on its indorsement.
The New York statute in effect simply declares that an unrecorded real estate -mortgage is not good as a lien as against—
“subsequent purchaser in good faith and for a valuable consideration, from the same vendor,, his heirs or devisees, of the same real property or any portion thereof, whose conveyance is first duly recorded.”
It is good against such purchasers unless they first record their con-' veyances. The statute as to recording such a mortgage is permissive. The language is—
“may be recorded in the office of the clerk of the county where such real property is situated.”
Then comes the penalty for not recording, viz.: '
“Every such conveyance not so recorded is void as 'against any subsequent purchaser in good faith and for a valuable consideration, from the same ven-' dor, his heirs or devisees, of the same real property or any portion thereof, whose conveyance is first duly recorded.”
“Q. Will you please state the circumstances leading up to the' execution and the delivery of that b.ond and mortgage to you? What the mortgage was given for and all of the circumstances connected with it? A. The mortgage was given to us to secure our indorsements on Mosher’s notes to the First National Bank. Q. In what sum were these notes? A. §510,000. Q. When was the mortgage given? A. It was given in Mr. Nellis’ office. Q. By which you mean Mr. Merwin H. Nellis of this city?' A. Mr. Nellis, Jr.; yes, sir. Q. At whose request did you go to Mr. Nellis’ office? A. Mosher’s. Q. State what took place there, describing all the transactions'in detail?”
Here objections were interposed, but he was finally allowed to answer. Of the competency of the testimony there can be no question. It was then and there that the mortgage was drawn, delivered, and accepted. This was the transaction the validity of which is in question; this the res gestae.
“A. Mr. Mosher, and nay brother, and Mr. Nellis and myself were there. And when Mr. Nellis drew the mortgage, before signing it we asked him if we could go and show it to another party- to see if it was all right or not, and he said ‘Certainly, you can.’ Mosher and I' went to Mr. Gleason’s office, and Mr. Gleason read over the mortgage, and he suggested that a few things should be in the mortgage, which he wrote on a slip of paper and gave to us to take to Mr. Nellis. And so we took down the mortgage to Mr. Nellis, and Mr. Nellis accepted the changes. In the meantime, after signing the mortgage, we asked Mr. Nellis if this mortgage should be put on record. He said, ‘Not necessarily.’ He said, ‘This is a blanket mortgage and don’t have to be on record.’ And he went in the back room, I suppose he talked to his father. He went to his father and had a conversation with him, and he came back and told-us we didn’t have to put the mortgage on record. So, finally, we took the mortgage over and kept it to ourselves. Later on, when we heard that*747 Mosher was Rambling heavily, we went to Mr. Gleason and told him. the facts, and he said, ‘Let me have the mortgage,’ and f said, ‘The mortgage is with ns here,’ and he said, ‘Why didn’t you have it on record?’ and we said, ‘Mr. Nellis told us we didn’t have to put it on record, being a blanket mortgage,’ and he said. ‘Go and put it on.’ * * *
“air. Ilatt: Q. Mr. Galib. you indorsed the $30,000 note for Moslier prior to receiving' and prior to the execution of the mortgage which you subsequently took on his property? A. Yes. Q. And wiihout receiving any security at the. time you indorsed it, (lid yon not? A. Yes.
“Mr. Ilatt: Q. On the same day that you indorsed the note? A. I think it was. * * *
“Mr. Savage: Q. The mortgage was given to secure your indorsement? A. Yes. Q. Mr. Hatt asked you if you had indorsed the note before you got ihc mortgage, and you answered that you had. At that time did you, or did you not, understand that you were to get a mortgage to secure your indorsement? A. Certainly we understood so. Q. What was your delay in getting the mortgage? A. It was done right the same day.”
It is not questioned that the mortgage was executed and delivered the same day the note, or notes, was indorsed. It is agreed that before the note and mortgage were executed:
“Moslier told the Galibs when he asked them to indorse the note that he was a little short of money and wanted to uphold his business. They had known Mosher a good many years, were follow countrymen, and agreed to do it. Mosher asked them not to record the mortgage, saying, ‘Don’t record it, because I want to do some business. If you record it it might be hard for me to do business’ — and they agreed to withhold it from record. Of this agreement the bank had no knowledge. Galibs admit that they made no investigation as to Mosher’s liabilities, that they knew- he was in business, and that his credit would be affected by the recording of the mortgage. Mr. Samuel G. Galib testifies: ‘The transaction betweep Mr. Mosher and us was merely a friendly matter; we had previously indorsed his notes to the amount of $!!,- 000. We thought, of course, that this mortgage was not really a lien against the property. It was merely a security for these notes.’ Galib never received any interest on the mortgage; ‘it was merely done for a favor.’ ”
Is there anything here that put Galib Bros, on inquiry, or made it incumbent on that firm to inquire of Mosher as to- his financial condition and charge them with all the knowledge they might have obtained? This was not the obtaining security for the payment of an antecedent indebtedness, but security for the present indorsement of Mosher's note or notes to the extent of $10,000.
An agreement not to file a chattel mortgage is a badge of fraud, and may invalidate it as to subsequent creditors. Such a mortgage is required to he filed, and is notice to all subsequent creditors, and intended as such. Filing a chattel mortgage is for the purpose of giving notice. To agree not to file is substantially equivalent to agreeing not to give notice. It is not conclusive, but a circumstance of more or less cogency, and there must be some proof of actual fraud as distinguished from constructive fraud, based on a failure to record. Collier on Bankruptcy (10th Ed.) page 957, and cases there cited. • Is this true of a real estate mortgage? If it is “required” to he recorded within the meaning of the Bankruptcy Act, and is not recorded until within the four-month period, it is a preference if not given in good faith and for a present adequate consideration; that is, is given to secure an antecedent debt.
In the case now before this court there was a present valid and adequate consideration for the execution and delivery of the mortgage, viz., the indorsement by Galib Bros, of Mosher’s note for $10,-000, and the mortgage was given to secure the indorsement, that is, secure Galib Bros, against loss by reason of that firm lending their credit becoming responsible for the payment of such note. The note was at once discounted, and Mosher had the money. So far as appears, it was used by him for legitimate purposes in his business. It is a somewhat startling and novel proposition that, if A. borrows money of B. for the conduct of his business and evidences the debt by his promise to pay negotiable note, indorsed by C., A. cannot secure C., as a condition of his making the indorsement, by giving a mortgage on his real estate, even if A. is insolvent at the time, but C. is ignorant of the fact. Is it possible that before indorsing and taking his security therefor C. must inquire of A. as to the condition of his business and as to his solvency? And suppose that A. does ask C. not to record such mortgage fpr the reason the recording of it would injure his business and credit, and C. agrees that he will not record, thereby taking his chances that A. will not execute any other conveyance by way of deed or mortgage, is this of itself either a preference or a fraud? In such case there is no proof of actual fraud, and' it seems clear there is no constructive fraud, as under the New York statutes general creditors are in no wise affected by the nonrecording of a real estate mortgage. In the Matter of the Metropolitan Dairy Co., Bankrupt, 224 Fed. 444, - C. C. A. -, decided June 22, 1915, the Circuit Court of Appeals, Jn this, the Second, circuit, said:
“It is a wholly novel proposition, to us that the officer and director of a corporation which is losing money, is in financial straits, and facing imminent failure may not lend it money of his own on its mortgage of its personal property — to secure only the cash turned over, without any subterfuge, including any existing indebtedness to him. No authority to such a proposition is cited; certainly neither the Bankrupt Act, nor section 66 of the New York Corporation Law, supports it. It certainly is not giving a preference to give security on free assets to the extent of new hard cash paid into the treasury by any one.”
In Coder v. Arts, 213 U. S. 223, 29 Sup. Ct. 436, 53 L. Ed. 772, 16 Ann. Cas. 1008, it was held by the Supreme Court:
“In this case a mortgage given within four months of filing the petition to secure advances, and while the mortgagee did not know of the mortgagor’s insolvency, although the latter did, and which mortgage was found not to have*749 been made with intent to hinder, delay, or defraud creditors, held not to be voidable under section 67e of the Bankruptcy Law, and that the mortgagee was entitled to priority thereon with interest.”
“A mortgage, being a valid instrument, as between the mortgagor and mortgagee, a subsequent judgment creditor has nothing to say, in respect to its being recorded or otherwise. The recording act relates to subsequent purchasers in good faith and for a valuable consideration, and not to judgment, creditors. A subsequent judgment will not be preferred over a prior unregistered mortgage given to secure future advances or liabilities, unless there has been a fraudulent intent, on the part of the mortgagee, in withholding his mortgage from the record. The mere fact of retaining a mortgage six or seven months, without having it recorded, will not operate as a fraud upon subsequent creditors of the mortgagee, by the mortgagor, so as to postpone the mortgage to their judgments.”
The court also said, all concurring:
“There is no case holding that a mortgage to secure future advances, or the liability to be incurred by future indorsements, must be recorded, to protect the mortgagee against subsequent judgments.”
The recording of an incumbrance upon property [real] is notice to subsequent purchasers or incumbrancers only and has no retrospective effect upon prior lienors. Ackerman v. Hunsicker, 85 N. Y. 43, 39 Am. Rep. 621. The recording of a deed or mortgage is constructive notice only to those who have subsequently acquired some interest or right in the property under the grantor or mortgagor. Williamson v. Brown, 15 N. Y. 354.
The sole object and effect of the recording acts is te> protect subsequent purchasers and incumbrancers against previous deeds, mortgages, and liens which are not first recorded, and the record of a deed or mortgage is constructive notice to those only who subsequently acquire an interest or right in the property under the mortgagor or grantor. Stuyvesant v. Hall, 2 Barb. Ch. (N. Y.) 151; Stuyvesant v. Hone, 1 Sandf. Ch. (N. Y.) 419; Hall v. Nelson, 23 Barb. (N. Y.) 88; Id., 14 How. Prac. (N. Y.) 32.
If, as to general creditors, Galib Bros, had a perfect right not to record this mortgage, and it was not a badge of fraud not to record it, how could it be a fraudulent act to agree not to' record it so far as general creditors are concerned, that firm having no notice Mosher would run in debt on false representations, or that he was in fact insolvent? How can it be a fraud as to general creditors to agree not to do that which the person charged with fraud had a perfect right not to do ? If the evidence should show that such person in so agreeing wras acting to aid a scheme or purpose to defraud, it would be
“See. 263. Conveyances witli Intent to Defraud Creditors Void. — A conveyance or assignment in writing or otherwise, of an estate, interest, or existing trust in real property, Or the rents or profits issuing therefrom, or a charge on real property, or on the rents or profits thereof, made with the intent to hinder, delay or defraud creditors, or other persons, of their lawful suits, damages, forfeitures, debts or demands, or a bond or other evidence of debt given, suit commenced or decree or judgment suffered, with the like intent, is void as against every person so hindered, delayed' or defrauded.
“Sec. 264. Conveyances Void as to Creditors, Purchasers and Incum-brancers, Void as to Heirs and Assigns. — A conveyance, charge, instrument or proceeding, declared by this article to be void as against creditors, purchasers or incumbrancers, is equally void as against their heirs, successors, personal representatives or assigns.
“Sec. 265. Fraudulent Intent, Question of Fact. — The question of fraudulent intent in a case arising under this article, shall be deemed a question of fact and not of law; and a conveyance or charge shall not be adjudged fraudulent as against creditors, purchasers or incumbrancers, solely on the ground that it was not founded on a valuable consideration.
“Sec. 266. Rights of Purchaser of Incumbrancer for Valuable Consideration Protected. — This article does not in any manner affect or impair the title of a purchaser or incumbrancer for a valuable consideration, unless it appears that he had previous notice of the fraudulent intent of his immediate grantor, or of the fraud rendering void the title of such grantor.”
My conclusions are:
1. That there was no preference, as the mortgage was accepted in good faith as security for a present indorsement by the mortgagee of Mosher’s note for $10,000, and that this was an adequate present consideration for its execution and delivery. Therefore there was no constructive fraud. Also, that the Bankruptcy Act as to general creditors does not require such a mortgage to be recorded, and as it was given more than four months prior to the filing of the petition, it can only be avoided for actual fraud, although not recorded until within four months of the filing of the petition in bankruptcy.
2. That as Galib Bros, did not know Mosher was insolvent, had no information which imposed on that firm the duty of making inquiry so as to charge the firm with knowledge of his insolvency when the mortgage was given, and as there was no duty to record or obligation resting on Galib Bros, so far as general creditors were concerned, the agreement not to record the mortgage does not establish fraud.
This case is not within and covered by the case of Blennerhassett v. Sherman, 105 U. S. 100-117 (26 L. Ed. 1080), where it was held:
“1. A mortgage of his entire estate, executed by an insolvent mortgagor to a creditor, who knows of his insolvency, and who, for the purpose of giving him a fictitious credit, actively conceals Hie mortgage, withholds it from record, and represents Mm as having a large estate and unlimited credit, by which means ho is enabled to contract other debts which he cannot pay, is void at common law.
“2. A mortgage executed by an insolvent with intent to give a preference to a creditor, who has reasonable canso to believe him to be insolvent,, and knows that it is made in fraud of the provisions of the Bankrupt- Act, and who, for the purpose of evading them, actively conceals it and withholds it from record for two months, is void, although executed more than two months before the filing of a petition in bankruptcy by or against the mortgagor.”
There the court said, and wc assume advisedly:
“It is not to be disputed that, except as forbidden by the bankrupt law, a debtor has the right to prefer one creditor over another, and that the vigilant creditor is entitled to the advantage secured by his watchfulness and attention to his own interests. ^Neither can it be denied that the mere failure to retord a mortgage is not a ground for setting it aside for the benefit of subsequent creditors who have acquired no specific lien on the property described in the mortgage.
■‘But. where' a mortgagee, knowing that his mortgagor is insolvent, for the purpose of giving him a fictitious credit actively conceals the mortgage which covers his entire ('state and withholds it from the record, and while so concealing it roiiresenls the mortgagor as having a large estate and unlimited credit, and by those means others are induced to give him credit, and he fails and is unable to pay the debts thus contracted, the mortgage will be declared fraudulent and void at common law, whether the motive of the mortgagee be gain to himself or advantage to his mortgagor.”
It is obvious that no such state oí facts have been shown in the case at bar. So far as the evidence and agreed statement show, the firm of Galib Bros, was ignorant of the insolvency of Mosher, of his running in debt and making untrue statements, and of his purpose so to do, and they made no statements or representations whatever as to his financial condition or responsibility, and were not called upon to do so.
In Re National Boat & Engine Co. (Butterfield v. Woodman) (D. C.) 216 Fed. 208, Judge Hale, at page 214, correctly stated the doctrine of the Supreme Court, of the United Stales, viz.:
“Where, by collusion of the mortgag'd’, the mortgagee withholds a mortgage from record for the purpose of giving the mortgagor a fictitious credit, and inducing others to give him credit, * * * the mortgage is fraudulent at common law.”
Lastly. The order of the referee must b.e reversed, and an order made awarding the money in controversy to the bank, to be applied on the note.
So ordered.