157 F. 106 | E.D. Wis. | 1907
(after stating the facts as above). The •question of law arising in this case involves the construction of a Wisconsin statute. It is therefore a local question, as the federal court in such a case adopts the ruling of the highest judicial tribunal of the state. This proposition is so familiar as to require the citation of no authorities. The Wisconsin Supreme Court has consistently held that a chattel mortgage, which upon its face stipulates that the mortgagor may retain possession of the mortgaged property, sell and dispose of the same in the usual course of business, and appropriate any part of such proceeds to his own use and benefit, is fraudulent and void as to creditors. Place v. Langworthy, 13 Wis. 629, 80 Am. Dec. 758; Steinart v. Deuster, 23 Wis. 136; Blakeslee v. Rossman, 43 Wis. 116 ; Anderson v. Patterson, 64 Wis. 557, 25 N. W. 541; Bank v. Lovejoy, 84 Wis. 611, 55 N. W. 108; Bank of Kaukauna v. Joannes, 98 Wis. 328, 73 N. W. 997; Franzke v. Hitchon, 105 Wis. 13, 80 N. W. 931 ; Durr v. Wildish, 108 Wis. 401, 84 N. W. 437. Under these cases it is not a question of intent, because such an arrangement necessarily tends to hinder, delay, and defraud creditors.
The mischief that called forth this stringent doctrine was the hardship imposed upon the general creditor who. found between him and his debtor a chattel mortgage on a stock of goods which allowed the mortgagor to retain possession, and to appropriate to his own use, the avails of the business, while such creditor was remediless. As against such creditor, such a mortgage under Wisconsin decisions is void as matter of law without regard to the question of the intention of the parties to the mortgage. The mortgage in suit expressly allows the mortgagor the privilege of disposing of the avails of the business to its own uses and purposes, provided only: (a) The interest on the Fond is paid; (b) the sinking fund, amounting to $500 per quarter, or $2,000 per annum, is provided for. Beyond this the power of sale and -appropriation is unrestrained.
It is true, as contended upon the argument, that there is no evidence reflecting upon the actual good faith of any of the parties to the transaction; but under the Wisconsin law this is an immaterial circumstance. As Mr. Justice Ryan said in his opinion in Blakeslee v. Ross-man, supra: “But intent, bona fide or mala fide, is immaterial to an instrument per se fraudulent in law. The fraud which the law imputes to it is conclusive.” The practical effect of this stringent rule was to invalidate every chattel mortgage covering stock in trade, unless the entire proceeds of sales were applied upon the mortgage. The Legislature therefore saw fit to relax the rule by enactment of section 2316b, which requires frequent statements to be filed by the mortgagor, showing amount of sales and disposition of proceeds, etc. This provision does not avail the intervener, because there was no compliance with its terms.
It is true, as contended by the intervener, that in Wisconsin general creditors cannot attack the validity of judgments or levies for collusion or fraud, but must first exhaust their legal remedies. Gilbert v. Stockman, 81 Wis. 602, 51 N. W. 1076, 52 N. W. 1045, 29 Am. St. Rep. 922; Weber v. Weber, 90 Wis. 467, 63 N. W. 757. It is also true that the only effect of a failure to file the affidavit of renewal required by section 2315, Rev. St. 1898, is to render a chattel mortgage invalid as against subsequent purchasers or mortgagees in good faith, or creditors who thereafter acquire liens on the property. Lowe v. Wing, 56 Wis. 31, 13 N. W. 892; Ullman v. Duncan, 78 Wis. 213, 47 N. W. 266, 9 L. R. A. 683; French Lumbering Co. v. Theriault, 107 Wis. 627, 83 N. W. 927, 51 L. R. A. 910, 81 Am. St. Rep. 856. But we are not considering the construction of that section. The vice in the chattel mortgage which we are considering vitiates it as to simple creditors, and is thus distinguished from the other alleged imfirmities arising under sections 2315 and 2316. Russell v. St. Mart., 180 N. Y. 355, 73 N. E. 31; Re Antigo Screen Door Co., 123 Fed. 249, 59 C. C. A. 248; Security Warehousing Co. v. Hand, 206 U. S. 415, 27 Sup. Ct. 720, 51 L. Ed. 1117. The only impediment in the way of the simple creditor is that under the rules of practice he cannot attack the mortgage by an independent action in equity. The Supreme Court of Wisconsin has, however, several times held that such a contest may be waged by an assignee representing general creditors under the said assignment laws, upon the theory that his powers were substantially the'same as a trus
It is also true that the effect of the filing of a petition in bankruptcy, as laid down in Mueller v. Nugent, 184 U. S. 1, 22 Sup. Ct. 269, 46 L. Ed. 405, has been modified by the Supreme Court in York Manufacturing Co. v. Cassell, 201 U. S. 344, 26 Sup. Ct. 481, 50 L. Ed. 782, so that the institution of bankruptcy proceedings no longer has the effect of an attachment or an injunction; but the Supreme Court of Wisconsin has squarely decided in Mueller v. Bruss, 112 Wis. 406, 410, 88 N. W. 229, that a trustee in bankruptcy under the present act, representing only creditors at large, may maintain an action in equity to set aside transfers of property by the bankrupt in fraud of creditors. This is put upon the ground that the bankruptcy act renders it practically impossible for creditors to comply with the equitable rule, and that ■equity does not demand impossibilities. Jackman v. Bank, 125 Wis. 476, 104 N. W. 98.
Thus it appears that the general doctrine of equity that to institute such a suit a creditor must be armed with a judgment and execution is observed in Wisconsin, but that such rule is one of procedure only, and not a condition precedent. The same doctrine is held in Skilton v. Codington, 185 N. Y. 80, 77 N. E. 790, 113 Am. St. Rep. 885. This authority is the more persuasive because Wisconsin borrowed its statute from New York. The Wisconsin law in favor of simple creditors ■commends itself to me on stronger grounds than mere comity. It is in harmony with the spirit of the bankruptcy law.
This is not a plenary suit to recover assets. The property in controversy is in the custody of the court. The mortgagee, who was never in possession, intervenes, as he lawfully may do, asserting his claim by virtue of the mortgage, and asking that the trustee may be required to answer his petition. Consent is given to the sale of the property by the trustee, upon condition that the proceeds stand in lieu of the original property. The trustee in his answer asserts that the mortgage is fraudulent and void as to creditors under the Wisconsin law. Therefore we have here a controversy as to the status of property which is in the custody of the court. By section 2, subd. 7, Bankr. Act of July 1, 1898, c. 541, 30 Stat. 545 [U. S. Comp. St. 1901, p. 3421], the court is required to determine all controversies so arising. Collier’s Bankruptcy (6th Ed.) p. 28; Re Antigo Screen Door Co., 123 Fed. 253, 59 C. C. A. 248; Whitney v. Wenman, 198 U. S. 539, 552, 25 Sup. Ct. 778, 49 L. Ed. 1157.
Section 67b reads as follows:
“Whenever a creditor is prevented from enforcing his rights as against a lien created, or attempted to be created by his debtor, who afterwards becomes a bankrupt, the trustee of the estate of such bankrupt shall be subrogated to and may enforce such rights of such creditor for the benefit of the estate.”
By section 67e it is made the duty of the trustee to recover or reclaim the property by legal proceedings or otherwise for the benefit of the estate.
Under these circumstances the conclusion is irresistible, first, that the trustee is fully equipped to ,make a defense in behalf of simple creditors, which the}'- could not make for themselves; and, second, that it becomes a mere matter of administration for the court to proceed and determine this controversy according to the local law. Re Antigo Screen Door Co., 123 Fed. 251, 59 C. C. A. 248; Re Pekin Plow Co., 112 Fed. 308, 50 C. C. A. 257; Re Andrae (D. C.) 117 Fed. 561, 564. Under these circumstances the contention of the intervener is hostile to the letter and spirit of the bankruptcy act. A claim has the same intrinsic merit before as after judgment. The judgment creditor here takes his place as an unsecured creditor, without superior privilege or advantage. The theory of the bankrupt act is that “equality is equity.” What sanction can be found in this act for allowing judgment creditors, if there were such, to share the proceeds of a fraudulent mortgage', and deny participation to the general creditors? If the mortgaged property constitutes assets of the estate, it must be equally distributed. To hold that the entire body of the estate — as would'be the case here — should be handed over to a mortgagee whose lien is fraudulent as to creditors, on the ground that the claims proven in the estate have never been merged in judgments, would do violence to the spirit and genius of the bankruptcy act. Under the peculiar circumstances of this case there is no room for this contention of the intervener. In re Blake, 150 Fed. 280, 80 C. C. A. 167; In re Ducker, 134 Fed. 43, 47, 67 C. C. A. 117. I do not deem it necessary to discuss the other alleged infirmities of this chattel mortgage.
It is strenuously urged by the intervener that the bankrupt corporation finds the laws of its being in chapter 86 of the Revised Statutes of 1898 of Wisconsin under which it was incorporated; that to deny it the power and attributes thereby conferred is to preclude its existence as a going concern; that therefore the statutory provisions which we have been considering are not applicable. I have carefully examined all the sections of chapter 86 which have been cited. While some óf these provisions may affect the right to hypothecate after-acquiréd 'property, I can find nothing which relieves a corporation from the operation of the general law applicable to a fraudulent chattel mortgage upon a stock in trade, it would be a strange oversight if the Legislature of Wisconsin has allowed one of its corporate creatures to defeat the general policy of the state in such an important particular.
With apparent sincerity the intervener complains that he has been