113 F. 804 | 7th Cir. | 1902
after the foregoing statement, delivered the opinion of the court.
The proof is undisputed that the mortgage in question was made and accepted to secure a present loan by the appellant to the corporation of $12,500, and that previous to the negotiations for the loan no transactions had taken place and no acquaintance existed between the principals; but the validity of the mortgage is assailed upon two propositions: (t) That the corporation was insolvent, and by the transaction gave a preference to two of its creditors, — one being its president, — and the appellant received the mortgage with notice of such insolvency and purpose, thus violating the provisions of the bankruptcy act; (2) that the mortgage covered stock, manufactured and in process, with an understanding outside the terms of the instrument that sales could be made therefrom, by and for the exclusive use of the mortgagor, and the entire security was thus invalidated under the law of Indiana. Unless one or the other of these contentions is sustainable, the appellant is entitled to the relief sought by his petition, as jurisdiction to that end, if questionable, was not questioned, and the express submission amounts to consent. Bryan v. Bernheimer, 181 U. S. 188, 197, 21 Sup. Ct. 557, 45 L. Ed. 814.
I. The mortgagor corporation was insolvent in fact, if not so considered by its president, and obtained the loan for the purpose of
For a considerable period prior to the loan in controversy, and up to the filing of the petition for involuntary bankruptcy, the corporation was actively engaged in the business of manufacturing and selling bicycles. The amount of invested capital does not appear, but its plant consisted of machinery, tools, and fixtures, the value of which depended largely upon successful operation of the business, estimated on behalf of the appellant, when the loan was made, at $25,000 to $30,000, and appraised as bankruptcy assets at $5,000. Mr. Winters, the president of the corporation, was a lawyer of Chicago, actively engaged in the practice of his profession; and his principal part in the business of thé corporation was in connection with the finances, in the use of his personal credit and influence to obtain means for carrying on the operations of the company. Needful funds and credit were thus furnished, both through temporary loans made by his friends or clients upon collaterals of the company, and through a plan of “check-kiting,” whereby Mr. Winters sent checks upon his Chicago bank, signed in blank, to be filled out and used by the company as required. Drafts or checks would then be forwarded by the company to him for the amount, and funds were provided to meet his Chicago check when presented, either through
The testimony presents no ground for suspicion of actual fraud or collusion in the transaction, and on the part of the appellant and his attorney it is unquestionable that the loan was made as an in'terest-bearing investment, on the faith of the valuation reported of the mortgaged property as a going concern, and with the expectation of a continuance of operations to meet the payments. For the failure in expectation and judgment the appellant must bear the loss, but the bankrupt law does not invalidate his security for mere error in judgment. If he acted in good faith, contemplating no fraud upon the act, his remnant of security is left undisturbed, while mala fides on his part will deprive him even of benefit in that. On the issue so raised, the utmost that the testimony tends to show of notice of the financial condition of the company and the object of the loan is this: That the amount invested in the plant and material left it with insufficient funds to enlarge or carry on with profit a successful business; that it had been compelled to borrow, on short time and with collaterals, and was then owing several thousand dollars so borrowed, of which payment was required; that a permanent 'loan was urgently needed and desired to pay up such indebtedness and furnish means to push the business; and that the value of the plant was deemed sufficient to secure such loan. The conditions thus outlined cannot be treated as extraordinary in the line of manufacturing enterprise, and do not imply insolvency, as defined in the present bankruptcy act, in view of the valuation then placed upon the property by the appellant's appraiser. Notice of insolvency of the borrower, to impeach the bona fides of the loan, must be based on a valuation of assets in the condition existing when the loan was made, with the works in operation, and not ‘on the appraised value after an adjudication of bankruptcy, whatever may be the rule for ascertaining the fact of insolvency when that issue is directly involved. So the appellant’s knowledge of the intention to pay the indebtedness to Webber, and making his check for $5,522.29 to pay the same, and information that other portions of the loan were intended to pay debts of the company which had been met temporarily by Winters’ “check-kiting” arrangement, do not affect the bona fides of the loan, in the absence of notice of insolvency.
The validity of this security, however, does not depend upon the solvency of the borrower, or upon notice, actual or constructive, of its financial condition. The policy of the bankrupt law respecting liens for a present consideration differs radically from its treatment of preferences generally, or security for an existing indebtedness. While a preference is voidable (vide section 60b) when accepted1 with
“Tliero is nothing in the bankrupt law which interdicts the lending of money to a man in Darby’s condition [an insolvent], if the purpose be honest, and the object not,fraudulent. And it, makes no difference that the lender had good reason to believe the borrower to be insolvent, if the loan was made in good faith, and without any intention to defeat the provisions of the bankrupt act. It is not difficult to see that in a season of pressure the power to raise money may be of immense value to a man in embarrassed circumstances. With it he might be saved from bankruptcy, and without it financial ruin would bo inevitable. If the struggle to continue his business be an honest one, and not for the fraudulent purpose of diminishing his assets, it is not only not forbidden, but is commendable.”
And it was thereupon held, in conformity with the rule in England, “that advances may be made in good faith to a debtor to carry on business, no matter what his condition may be, and the party making these advances can lawfully take security at the time for their repayment.” See 8 Notes on U. S. Reports, 190, citing cases which follow this rule; also the same case, before Dillon, circuit judge, and Treat and Krekel, district judges, under the title of Darby v. Institution, 1 Dill. 141, Fed. Cas. No. 3,571. In accordance with the view so held, the act of 1867 was subsequently amended to provide that nothing in section 35 of the act (section 5128, Rev. St.) “shall be construed to invalidate any loan of actual value, or the security therefor, made in good faith, upon a security taken in good faith on the occasion of making such loan.” 18 Stat. pt. 3, c. 390, § 11. The like provision in the present act was obviously framed in the same view, and the rule so stated is equally applicable. In re Wolf, 98 Fed. 84, 3 Am. Bankr. R. 555; In re Davidson, 109 Fed. 882, 5 Am. Bankr. R. 528. We are of opinion, therefore, that the appellant’s security is not invalid under the provisions of the bankruptcy act.
2. The contention that the mortgage is void under the law of Indiana rests upon two propositions: (1) That a general clause in the mortgage, after the schedule of machinery, tools, and fixtures, includes as well the stock on hand and in process of manufacture, and that the proof shows an understanding outside the instrument permitting sale of such stock, in usual course, by the mortgagor for its exclusive benefit; and (2) that such an agreement is fraudulent, under the statutes of the state, and invalidates the entire mortgage. Assuming, but not deciding, the first proposition to be well founded, we are of opinion that the second is untenable, for the reason that the question is one of local law, and the supreme court of Indiana has ruled decisively against the construction sought in this case in Davenport v. Foulke, 68 Ind. 382, 34 Am. Rep. 265, and Lockwood v. Harding, 79 Ind. 129, approving the like ruling in Barnet v. Fergus, 51 Ill. 352, 99 Am. Dec. 547. The doctrine of these cases, which governs the mort
‘‘It is clear, therefore, that the chattel mortgage was, In any event, a valid and binding lien upon tbe [property not subject to such sale by the mortgagor], and that far forth it was not void in any view of the law.”
The earlier cases indicating a different view are thereby overruled, and those cited in the opinion below and on the argument as holding contra — including, of course, In re Burrows, 7 Biss. 526, Fed. Cas. No. 2,204, and Stout v. Price, 24 Ind. App. 360, 55 N. E. 964, 56 N. E. 857 — cannot be followed. The petition filed by the appellant claims only the property scheduled in the mortgage, comprising machinery, tools, and fixtures, whereof sale by the mortgagee is expressly prohibited by the terms of the instrument; and it is not claimed that the alleged agreement for sale applied to such property, — no lien being asserted against the stock or other personal property in the hands of the trustee, — and, upon the authority of the decisions referred to, the lien so asserted must be upheld.
The decree of the district court is reversed, with direction to allow the claim of the appellant in conformity with this opinion.