Union Bank of Chicago v. Kansas City Bank
136 U.S. 223 (1890)

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U.S. Supreme Court

Union Bank of Chicago v. Kansas City Bank, 136 U.S. 223 (1890)

Union Bank of Chicago v. Kansas City Bank

No. 13

Argued October 16-17, 1889

Decided May 19, 1890

136 U.S. 223

APPEAL FROM THE CIRCUIT COURT OF THE UNITED

STATES FOR THE WESTERN DISTRICT OF MISSOURI

Syllabus

Upon appeal from a decree in equity of the circuit court of the United States, accompanied by a certificate of division in opinion between two judges before whom the hearing was had, in a case in which the amount in dispute is insufficient to give this Court jurisdiction, its jurisdiction is confined to answering the questions of law certified.

Upon the question of the construction and effect of a statute of a state regulating assignments for the benefit of creditors, the decisions of the highest court of the state are of controlling authority in the courts of the United States.

Section 354 of the Revised Statutes of Missouri of 1819, concerning voluntary assignments for the benefit of creditors, does not invalidate a deed of trust in the nature of a mortgage by an insolvent debtor of all his personal property to secure the payment of preferred debts, reserving a right of redemption.

By the law of Missouri, one partner has power to bind his co-partners by a mortgage of all the personal property of the partnership to secure the payment of particular debts of the partnership.

A receiver derives his authority from the act of the court, and not from the act of the parties, and the effect of his appointment is to put the property from that time into his custody as an officer of the court for the benefit of the party ultimately proved to be entitled, but not to change the title or even the right of possession.

By the law of Missouri, a mortgage by one partner of the personal property of an insolvent partnership to secure the payment of particular debts of the partnership is valid, and does not operate as a voluntary assignment for the benefit of all its creditors under § 354 of the Devised Statutes of 1879, although another partner does not assent to the mortgage and has previously authorized the making of a voluntary assignment under the statute, and although the partner making the mortgage procures a simultaneous appointment of a receiver of all the partnership property.

This was a petition, in the nature of a bill in equity, filed in a court of the State of Missouri by citizens and corporations of other states, judgment creditors (each of them in the sum of less than $2,500), in behalf of all the creditors of James

Page 136 U. S. 224

B. Melone, of Macon, in the State of Missouri, Richard A. Melone and Charles H. Benedict, of Kansas City, in that state, and all three citizens of Missouri, and doing business at Kansas City as partners, under the name of Benedict, Melone & Co., against those three partners, three banking corporations of Missouri, and Charles Stewart, likewise a citizen of Missouri. The bill alleged that on February 16, 1882, Richard A. Melone, in behalf of the partnership, executed a deed of trust, a copy of which was annexed to the bill, purporting to be by and between the partnership of the first part, Stewart of the second part, and the three banks of the third part, and to convey to Stewart the personal property and choses in action of the partnership, provided that if the partnership should pay certain specified debts which it owed to each of the banks,

"then these presents and everything herein shall cease and be void, but if they, the said Benedict, Melone & Co., shall fail or make default in the payment of such indebtedness to said three above-mentioned banks, or any part thereof, when the same shall have become past due and payable for five days, then it shall be lawful for said party of the second part to sell said property in any manner he shall think fit, and out of the proceeds arising from said sale, pay off said indebtedness, or so much thereof as shall be unpaid, together with the costs and expenses of said sale, and the overplus, if any there be, shall be paid to said parties of the first part. Said party of the second part shall take immediate possession of said property."

The bill further alleged that this deed included all the partnership property; that the partnership and each partner were then, as all the defendants well knew, hopelessly insolvent; that on the same day, and simultaneously with the execution of that deed, Benedict, upon a suit commenced by him in a court of Missouri to wind up the partnership, procured the appointment of Stewart as receiver of its property, and he immediately qualified and entered upon his duties as such; that James B. Melone had previously authorized his co-partners to make a general assignment for the benefit of all

Page 136 U. S. 225

the partnership creditors without any preferences, and never authorized or approved the deed of trust; that the action of the two other partners in executing that deed to Stewart and having him appointed receiver was a fraudulent attempt on their part to evade the statute of Missouri concerning voluntary assignments; that by reason of the premises and of that statute, the deed of trust operated as a voluntary assignment of all the property of the partnership for the benefit of all its creditors; that all the partnership property was delivered to Stewart and taken possession of by him under the deed of trust; that out of the property, Stewart had realized the sum of $58,000, enough to pay all the creditors of the partnership about sixty percent of their debts if the preferences in the deed of trust should be set aside, but that Stewart, instead of performing the duties required of him by the aforesaid statute of Missouri, had treated the deed of trust as a valid mortgage, and had paid the debts of the banks in full, amounting to about $19,000, and was proceeding to distribute as receiver the rest of the trust fund in his hands. The bill prayed that the deed of trust might be declared to be a general assignment for the benefit of all the creditors of the partnership in proportion to their respective claims, that Stewart be ordered to make distribution accordingly, and that the banks be ordered to pay the sums received by them into the registry of the court.

Stewart and the three banks demurred to the petition, and before further proceedings in the cause, it was removed, on application of the plaintiffs, into the circuit court of the United States, and that court, upon a hearing on bill, answers, replication, and proofs, before Mr. Justice Miller and Judge Krekel, ordered the bill to be dismissed, and they certified a division of opinion on the following question:

"1. Is the instrument of writing in this case, called a 'deed of trust,' which we find as a matter of fact conveys all the partnership property of Benedict, Melone & Co. to Charles Stewart as trustee as security for the banks therein named, void for want of the assent of James B. Melone, one of the partners, which was never given to that transfer? "

Page 136 U. S. 226

"2. As James B. Melone did give his previous assent and directions to the making of an assignment for the benefit of creditors, does the deed of trust above mentioned operate as a general assignment for the benefit of all the creditors of the partnership under section 354 of the Revised Statutes of Missouri of 1879?"

"3. Does the making of that deed of trust, and appointment of a receiver, who is the same person as the trustee, on the same day, and as part of the proceeding to administer the assets of the insolvent partnership, to which the banks, and Stewart, and the partners in the firm of Benedict, Melone & Co., agreed, constitute a general assignment for the benefit of all the creditors, and require the receiver to administer the funds in his hands in that manner?"

A final decree was entered for the defendants in accordance with the opinion of the presiding justice, and the plaintiffs appealed to this Court.

Page 136 U. S. 229

MR. JUSTICE GRAY, after stating the case as above, delivered the opinion of the Court.

The claim of each plaintiff being for less than $5,000, and the amount in dispute therefore insufficient to give this Court jurisdiction of the whole case, our jurisdiction is confined to answering the questions of law presented by the certificate of division of opinion between the judges before whom the case was heard in the circuit court. Rev.Stat. §§ 650, 652, 693; Act of February 16, 1875, c. 77, § 3, 18 Stat. 316; Dow v. Johnson,100 U. S. 158; United States v. Ambrose,108 U. S. 336; Jewell v. Knight,123 U. S. 426.

The determination of these questions is governed by the law of Missouri, where the deed of trust was made and the parties to it resided. In ascertaining the construction and effect of section 354 of the Revised Statutes of the state of 1879, which is supposed to affect the case, it is important to bear in mind the law of Missouri as it existed before those statutes were enacted. The Supreme Court of Missouri, in 1852, speaking by Mr. Justice Gamble, said:

"It is not necessary to quote books for the purpose of showing that a debtor in failing circumstances may give a preference to one or more of his creditors to the exclusion of others, and that such disposition of his effects is not impeachable on the ground of fraud because it embraces all his property,"

and accordingly upheld assignments by insolvent debtors of all their property to pay particular creditors. Murray v. Cason, 15 Mo. 378, 381; Richards v. Levin, 16 Mo. 596, 599.

Page 136 U. S. 230

It was also well settled by the decisions of that court that each partner, by virtue of the relation of partnership, and of the community of right and interest of the partners, had full power and authority to sell, pledge, or otherwise dispose of all personal property belonging to the partnership for any purpose within the scope of the partnership business, and might therefore, without the concurrence of his co-partners, mortgage the partnership property by deed of trust to secure the payment of a partnership debt, Clark v. Rives, 33 Mo. 579; Keck v. Fisher, 58 Mo. 532, although one partner, without the concurrence of his co-partners, could not delegate to a stranger the right of the partnership to administer the partnership effects, and therefore could not make a general assignment of all the property of the partnership for distribution by the assignee among the partnership creditors, retaining no equity of redemption in the partnership, Hughes v. Ellison, 5 Mo. 463; Hook v. Stone, 34 Mo. 329.

The statutes of Missouri restricting voluntary assignments have always been construed rather strictly by the supreme court of the state.

By the earliest statute upon the subject,

"In all cases in which any person shall make a voluntary assignment of his lands, tenements, goods, chattels, effects, and credits, or any part thereof, to any person in trust for his creditors, or any of them, it shall be the duty of the assignee"

to file an inventory of the assigned property in the office of the clerk of the circuit court of the county in which the assignee resides. Missouri Rev.Stat. of 1845, c. 10, § 1, reenacting Act of February 15, 1841, § 1, Missouri Laws of 1840-41, p. 13.

In the Revised Statutes of 1855, c. 8, § 1, that section was reenacted, and at the end of the chapter this section was added:

"§ 39. Every provision in any assignment hereafter made in this state providing for the payment of one debt or liability in preference to another shall be void, and all debts and liabilities within the provisions of the assignment shall be paid pro rata from the assets thereof."

The Supreme Court of Missouri repeatedly and uniformly held that, taking those two sections together, section 39 only prohibited

Page 136 U. S. 231

preferences among the creditors designated in an assignment either of the whole or of part of the debtor's property, but did not invalidate partial assignments for the benefit of some of the creditors of the assignor, and was so far inefficient to prevent preferences among creditors, and the court observed:

"If the legislature wish to strike at the root of the evil they must go back to an old principle of the common law which permits a debtor to prefer one creditor to another, and which privilege can be effected in a variety of modes other than those referred to in our statutes concerning assignments."

Shapleigh v. Baird, 26 Mo. 322, 326; Johnson v. McAllister, 30 Mo. 327; Many v. Logan, 31 Mo. 91; State v. Benoist, 37 Mo. 500, 516.

An act of February 13, 1864, repealed section 39 of the act of 1855, and enacted that "Every assignment hereafter made in this state" under the provisions of the act of 1855

"shall be for the benefit of all creditors who shall present and prove up their claims under the provisions of said act, and all debts and liabilities so proved and allowed shall be paid pro rata from the assets thereof."

Act of February 13, 1864, §§ 8, 9, Missouri Laws of 1863-64, p. 6. In 1865, this provision was reenacted in this form:

"Every voluntary assignment of lands, tenements, goods, chattels, effects, and credits made by a debtor to any person in trust for his creditors shall be for the benefit of all the creditors of the assignor in proportion to their respective claims."

Gen.Stat. of 1865, c. 112, § 1; 1 Wagner's Stat. (3d ed.) 150.

In 1878, the construction and effect of this provision were drawn in judgment before the Supreme Court of Missouri in Crow v. Beardsley, 68 Mo. 435, where a debtor had conveyed his stock of merchandise by a deed of trust in no respect differing from the one now before us to secure the payment of certain of his creditors. It was contended that the provision of the statute just quoted avoided all conveyances of property which gave a preference among creditors. But it was held that while that provision had a wider scope than § 39 of the act of 1855, and was designed to prevent any preference of creditors "by assignment," yet it did not avoid deeds of

Page 136 U. S. 232

trust in the nature of mortgages, which were only securities for the payment of debts. The court clearly pointed out the distinction between assignments and deeds of trust in the nature of mortgages, saying:

"An assignment is more than a security for the payment of debts. It is an absolute appropriation of property to their payment. . . . The distinction is that an assignment"

"is a conveyance to a trustee for the purpose of raising funds to pay a debt, while a deed of trust in the nature of a mortgage is a conveyance in trust for the purpose of securing a debt, subject to a condition of defeasance."

"The deed in question here is therefore a deed of trust in the nature of a mortgage."

Id., 437, 438. Upon these reasons it was adjudged that the deed was not within the statute concerning assignments, and could not be avoided by a creditor not named in it except for fraud. The section there construed was afterwards reenacted in the same words in section 354 of the Revised Statutes of 1879, which were the statutes in force when the deed of trust in this case was made.

The only embarrassment in the present case has been occasioned by the course of decision in the circuit court of the United States within the State of Missouri originating in a case decided in 1882 by an opinion of Judge Krekel with the concurrence of Judge McCarthy. Martin v. Hausman, 14 F. 160.

In that case, the debtors assigned and transferred their whole stock in trade by a deed which declared that it was made to secure certain debts therein mentioned, but directed the assignee to proceed at once to sell the property, and out of the proceeds to pay the debts as they matured, and provided that, after they had been fully paid, "this deed shall be released," and reserved no right of redemption to the assignors. Upon a review of the decisions of the Supreme Court of Missouri, and especially Shapleigh v. Baird, State v. Benoist, and Crow v. Beardsley, above cited, it was held that, as the deed did not purport to be a security for a debt, leaving an equity of redemption in the grantors, and empowering the trustee to sell only if the debts specified should not be paid

Page 136 U. S. 233

at maturity, but conveyed the property absolutely to the trustee, to be sold for the payment of the debts named and preferred in it, it was not a mortgage security, but an assignment for the benefit of creditors, and Judge Krekel laid down this general rule:

"A debtor in Missouri, under it legislation and adjudications thereon, may, though he be insolvent at the time, prefer one or more of his creditors by securing them; but he cannot do it by an instrument conveying the whole of his property to pay one or more creditors. Instruments of the latter class will be construed as falling within the assignment laws, and as for the benefit of all creditors, whether named in the instrument or not."

14 F. 166.

he rule thus laid down has since been followed by the same and other judges in the federal courts within the State of Missouri, and has been extended, in disregard of the adjudication of the supreme court of the state in Crow v. Beardsley, so as to hold a deed of trust in the nature of a mortgage of all the personal property of the debtor to be a voluntary assignment within the meaning and effect of the Missouri statute. Dahlman v. Jacobs, 16 F. 614; Kellog v. Richardson, 19 F. 70; Clapp v. Dittman, 21 F. 15; Perry v. Corby, 21 F. 737; Kerbs v. Ewing, 22 F. 693; Freund v. Yaegerman, 26 F. 812, and 27 F. 248; State v. Morse, 27 F. 261.

That rule, as thus construed and applied, has not, however, always been approved in the circuit court. In Clapp v. Dittman, above cited, MR. JUSTICE BREWER, then circuit judge, confessed that if it were a new question, his own conclusion would be different, and in harmony with the decisions in National Bank v. Sprague, 20 N.J.Eq. 13, 28; Farwell v. Howard, 26 Ia. 381; Doremus v. O'Harra, 1 Ohio St. 45; Atkinson v. Tomlinson, 1 Ohio St. 237, and other cases, and declared that he should follow the rule as having been established by the course of the decisions in the courts of the United States within the State of Missouri until there should be some authoritative construction of the statute by the Supreme Court of the United States or by the supreme court

Page 136 U. S. 234

of the state. 21 F. 17. See also Perry v. Corby, 21 F. 737; Freund v. Yaegerman, 27 F. 248; Elgin Co. v. Meyer, 30 F. 659; Weil v. Polack, 30 F. 813.

The decision in Crow v. Beardsley has always been treated in all the courts of the state as settling the law of Missouri upon the subject. It has been followed by the St. Louis Court of Appeals in Holt v. Simmons, 16 Mo.App. 97, and by the Kansas City Court of Appeals in Sampson v. Shaw, 19 Mo.App. 274, and in Smith & Keating Co. v. Thurman, 29 Mo.App. 186, and it has been approved and acted on by the Supreme Court of Missouri in a very recent case in which the court, after repeating and enforcing the reasoning upon which Crow v. Beardsley proceeded, said:

"The assignment law of Missouri is not, in letter or spirit, a bankrupt or insolvent debtor's act. A debtor, whether solvent or insolvent, may in good faith sell, deliver in payment, mortgage, or pledge the whole or any part of his property for the benefit of one or more of his creditors to the exclusion of others, even though such transfer may have the effect of delaying them in the collection of their debts. Its terms in no way qualify the rule by which the character of this instrument is to be determined. Reading the instrument, then, as a whole in the light of the circumstances under which it was executed, was it intended as a security, or as an absolute, unconditional conveyance in praesenti to the grantee of all the grantor's interest in the property, both legal and equitable, to the exclusion of any equitable right of redemption?"

And it was accordingly adjudged that the assignment law was inapplicable to a deed of trust, conveying all the debtor's property, real and personal (except his homestead and household furniture, and a horse and buggy) to a trustee in trust to secure the payment of part of his debts, for which he was liable either as principal or as surety, which appeared to the court, upon a view of all its provisions as applied to the facts of the case, to be

"not an absolute indefeasible assignment of all the grantor's title, both legal and equitable, in the property, 'in trust for his creditors,' but a deed of trust to secure the

Page 136 U. S. 235

payment of debts and other liabilities in which the grantor has an interest in the property conveyed,' for the protection of which 'equity gives him a right of redemption, though no clause of defeasance was inserted in the deed."

Hargadine v. Henderson, 97 Mo. 375, 386-389.

The question of the construction and effect of a statute of a state regulating assignments for the benefit of creditors is a question upon which the decisions of the highest court of the state, establishing a rule of property, are of controlling authority in the courts of the United States. Brashear v. West, 7 Pet. 608, 32 U. S. 615; Allen v. Massey, 17 Wall. 351; Lloyd v. Fulton,91 U. S. 479, 91 U. S. 485; Sumner v. Hicks, 2 Black 532, 67 U. S. 534; Jaffray v. McGehee,107 U. S. 361, 107 U. S. 365; Peters v. Bain,133 U. S. 670, 133 U. S. 686; Randlph's Executor v. Quidnick Co.,135 U. S. 457. The decision in White v. Cotzhausen,129 U. S. 329, construing a similar statute of Illinois, in accordance with the decisions of the Supreme Court of that state as understood by this Court, has therefore no bearing upon the case at bar. The fact that similar statutes are allowed different effects in different states is immaterial. As observed by MR. JUSTICE FIELD, speaking for this Court:

"The interpretation within the jurisdiction of one state becomes a part of the law of that state, as much so as if incorporated into the body of it by the legislature. If, therefore, different interpretations are given in different states to a similar local law, that law in effect becomes by the interpretations, so far as it is a rule for our action, a different law in one state from what it is in the other."

Christy v. Pridgeon, 4 Wall. 196, 71 U. S. 203. See also City of Detroit v. Osborne,135 U. S. 492.

In the present case, there can be no doubt that the deed of trust conveying the personal property of the partnership to secure the payment of its debts therein named and reserving in the clearest terms a right of redemption to the grantors by providing that if they shall pay those debts, the deed shall be void, as well as by authorizing the trustee to sell the property only in case of their failing to pay those debts or any part thereof for five days after they became payable, was, according to the settled his course of decision in the courts of the state

Page 136 U. S. 236

of Missouri, a mortgage only, and not an assignment under the statute relied on, and therefore, according to the decisions in Missouri cited at the beginning of this opinion (no fraud being proved or suggested), an instrument which one partner had the inherent authority to bind the partnership by although his co-partners did not join in it.

The deed of trust executed by and with the consent of two of the three partners being a valid mortgage and not an assignment within the meaning of the statute, the fact that the third partner had authorized his co-partners to execute an assignment which was never executed cannot affect the validity of the operation of the deed of trust.

Nor did the simultaneous appointment of a receiver of the partnership property at the suit of one of the partners alter the nature of the deed of trust or transform it into a voluntary assignment within the meaning of the statute of Missouri as construed by the supreme court of the state. A receiver derives his authority from the act of the court appointing him, and not from the act of the parties at whose suggestion or by whose consent he is appointed, and the utmost effect of his appointment is to put the property from that time into his custody as an officer of the court for the benefit of the party ultimately proved to be entitled, but not to change the title or even the right of possession in the property. Skip v. Harwood, 3 Atk. 564; Anon., 2 Atk. 15; Wiswall v. Sampson, 14 How. 52, 65, Ellis v. Railroad Co., 107 Mass. 1, 28; Maynard v. Bond, 67 Mo. 315; Heiman v. Fisher, 11 Mo.App. 275, 281. And in the present case, the three banks have claimed and received payment of the full amount of their debts from Stewart as trustee under the mortgage, and not as receiver under the appointment of the court.

The necessary conclusion is that each of the questions certified must be answered in the negative, and that the decree of the circuit court dismissing the bill must be

Affirmed.

Page 136 U. S. 237

THE CHIEF JUSTICE, having been of counsel, and MR. JUSTICE BREWER, not having been a member of the Court when the case was argued, took no part in its consideration or decision.

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