These petitions seek to review the orders of the referee disallowing claims for payment out of the proceeds of real estate subject to mortgage; the real estate having been sold free and clear of liens.
The first question is as to the validity of the claim based upon a mortgage to Albert J. Eastwood, dated November 15, 1912, and recorded February 10, 1916.
The petition in bankruptcy was filed March 13, 1916, and adjudicated March 27, 1916.
The transfer of the mortgage by Eastwood to Todd-Mellor Company, the petitioner, is,dated March 6, 1916, and was recorded March 11, 1916, two days before the filing of the petition in bankruptcy.
The evidence reported is insufficient to show any ground for impeaching the Eastwood mortgage, except the fact that it was withheld from record. There is a failure of proof to show that it was not given for full consideration, or that the bankrupt was then insolvent.
I am of the opinion that the mere fact of failure to record is insufficient, in the absence of other circumstances, to show fraud, in which the bankrupt and the mortgagee, Easlwood, participated, and that in the hands of Eastwood the mortgage, so far as appears, was valid.
It follows that the Todd-Mellor Company could rightfully purchase it, that the transfer to the Todd-Mellor Company of this mortgage was not prejudicial to creditors, and that under the transfer from Eastwood it is entitled to claim rights as a third mortgagee in Ihe funds remaining after the satisfaction of the prior mortgages.
This mortgage was executed February 15, 1916, and was to secure payment of a note for $1,600. After deducting interest and a 10 per
The question is whether, upon the evidence, the referee was justified in applying Dean v. Davis, 242 U. S. 438, 37 Sup. Ct. 130, 61 L. Ed. 419, which holds that, where an advance is made to enable the debtor to make a preferential payment, the transaction presents an element upon which fraud may be predicated. As was said in that case:
“It is a question of fact in each, case wliat the intent was with which the loan was sought and made.”
The evidence seems sufficient to support the referee’s finding that the loan was sought for the purpose of procuring funds to pay the Italo-American Company, and the purpose to which it was immediately applied is in itself evidence of the intent with which it was sought. There is some confusion in the record, and the petitioner objects to the consideration by the referee of testimony given by the bankrupt before him. As it does not appear that this is properly a part of the record upon these petitions, this objection seems well taken, and this evidence may be disregarded.
In the record proper appears, however, the testimony of Albert S. Eastwood, a creditor (not the mortgagee under the earlier mortgage), which was given at the hearing at which the petitioner was represented by counsel. From his testimony it appears that in a conversation with Bassett, treasurer of the bank, the witness stated that “he thought the Andersons were in a pretty bad way,” and talked with the treasurer as to whether “we could get out some way together.” This was but a short time before the Todd-Mellor loan to Anderson and the payment to the bank.
I find no error in the referee’s conclusion that the bank had reasonable cause to believe that a preference was intended. That the efforts to secure a loan followed so shortly after this conversation, together with the fact of the immediate application of the proceeds, is in itself sufficient to warrant an inference that pressure was exerted by the bank to secure payment.
Upon the question of the intent with which the loan was made the evidence is circumstantial. The property offered as security for the loan was already heavily incumbered, beyond the ordinary margin of security, and the new loan sought was for an amount which practically covered, if it did not exceed, any possible equity in the real estate. A commission of 10 per cent, was charged, in addition to interest, and Mr. Todd, the president of the Todd-Mellor Company, testified, explaining this commission: “It was a chance, and we were getting well paid for it.” In reply to the question: “Q. Greater chance than you usually take?” he said: “In the ordinary course of business, but we do take them from time to time.”
Under all the circumstances, and in view of the prior unrecorded mortgage, the referee was entitled to find that the mortgage was not
That a mortgage of this character was taken upon such doubtful security, without inquiry as to the personal responsibility of the maker of the note, and as to whether the proceeds of the'note were to be applied to the reduction of the borrower’s other indebtedness, thus increasing the personal responsibility of the borrower, seems improbable.
Mr. Todd was a director and the secretary of the Italo-American bank, and his attorney, Mr. Ball, who examined the title, was also a director. It is improbable that the mortgagor sought a loan from a director of the bank with any intent of concealing the obligations to the bank; and it seems much more probable that the intent to apply the proceeds of the mortgage to the payment of the bank was stated as an inducement to secure the loan than that it was not stated, or that it was concealed from Mr. Todd. The unusual character of the security offered would naturally have led a business man of sagacity to malee full inquiries, and the, omission of the natural inquiry is hardly explainable, except upon the theory that the lender preferred not to be informed or to receive any notice which might affect the validity of his security.
What is in fact done by concurrent acts tends in itself to prove what was prearranged. The bank, after notice putting it on guard, secured its preference; the bankrupt borrowed the money applied to making this preference from .a director and secretary of the bank, after the examination of the title by another director of the bank.
Tn the absence of any credible explanation from the lender, the natural inference may be drawn from the circumstances.
The case in its general aspects is not unusual. In cases of preference, all knowledge of any intent to prefer or to assist in bringing about a preference is usually denied. The chief reliance must be upon circumstantial evidence, interpreted in the light of experience as to the ordinary methods adopted by creditors, who seek a larger share of a bankrupt’s assets than can be secured under a system of administration which calls for equality.
Upon a careful consideration of the very thorough briefs of counsel for the petitioner, I am of the opinion that the following orders should be made:
In petition No. 1, relating to the proceeds of the Eastwood mortgage, the order of the referee is reversed, and the claim of the Todd-
In petition No. 2, as to the mortgage to the Todd-Mellor Company, the order of the referee is approved and affirmed.
Draft decrees may be presented accordingly.
other cases see same topic & KEY-NUMBER in all Key-Numhered Digests & Indexes.