Buck v.
Colbath, 3 wall. 334, affirmed on the point that a
suit prosecuted in the state courts to the highest court of such
state against a marshal of the United States for trespass, who
defends himself on the ground that the acts complained of were
performed by him under a writ of attachment from the proper federal
court, presents a case for a writ of error to this Court when the
final decision of that court is against the validity of the
authority thus set up by the marshal.
Following the Supreme Court of Iowa in its construction of the
local law of that state, this Court holds that a mortgage of a
stock of goods in a
Page 139 U. S. 267
store in that state, otherwise valid, is not invalidated by
reason of a parol understanding at the time of its execution that
the mortgagor may retain possession and sell the goods, and apply
the proceeds to his own support, and to keep up the stock, applying
only the surplus to the payment of the mortgage debt.
There is so much of a local nature entering into chattel
mortgages that this Court will accept the settled law of each state
as decisive in respect to any case arising therein.
The case is stated in the opinion.
MR. JUSTICE BREWER delivered the opinion of the Court.
The plaintiff in error was Deputy United States Marshal for the
Southern District of Iowa. Into his hands was placed a writ of
attachment, issued out of the Circuit Court of the United States
for that district in the case of
Marshall Field & Co. v.
George W. Hamilton. Under that writ, he levied upon the major
portion of a stock of goods in the possession of the defendant
Hamilton, the owner of a country store in the Town of Knoxville,
Iowa. The goods thus levied upon were subsequently sold by order of
the court. The defendants in error were creditors of George W.
Hamilton, secured by two chattel mortgages on the goods levied
upon. After demand, they commenced their action in the state court
to recover so much of the value of the goods levied upon by the
plaintiff in error as would satisfy their debts with interest. The
trial in that court resulted in a judgment in their favor. The
judgment was affirmed by the supreme court of the state, and from
such judgment of affirmance the case comes here on error. As to the
jurisdiction of this Court,
See Buck v.
Colbath, 3 Wall. 334.
It appears that the value of the goods taken on the attachment
was considerably in excess of the amount of the mortgage debts, so
that, if these mortgagees were entitled to recover
Page 139 U. S. 268
anything, they were entitled to recover the full amount of their
debts. It also appears that Hamilton had no property in the State
of Iowa subject to execution other than this stock of goods, and
that the portion of the stock not taken on the attachment was
appropriated in satisfaction of a prior mortgage. These mortgages
had no other security. The case therefore narrows itself to the
question whether these chattel mortgages were valid. They were
executed, respectively, July 4 and July 5, 1882, and were filed for
record on those days. The first (and the two were similar) was in
the usual form of chattel mortgages, and, for the consideration of
$346.62, conveyed to plaintiffs
"all my stock of dry goods and groceries, notions, boots and
shoes, book accounts, notes, and merchandise of every description,
now in my store in Knoxville, Marion County, Iowa, and to include
all goods and merchandise which may hereafter be brought into said
store,"
with the usual warranty of title, and to be void on condition
that Hamilton should pay the plaintiffs three notes dated July 4,
1882, Cone for $100, due September 4, 1882; one for $100, due
October 4, 1882, and one for $104.62, due November 4, 1882, with
interest. The mortgage further stipulated:
"And I, the said George W. Hamilton, do hereby covenant and
agree to and with the said Sperry, Watt & Garver that in case
of default made in the payment of the above promissory notes or in
case of my attempting to dispose of or remove from said County of
Marion the aforesaid goods and chattels or any part thereof, or
whenever the said mortgagee or his assigns shall choose so to do,
then and in that case it shall be lawful for the said mortgagee or
his assigns, by himself or agent, to take immediate possession of
said goods or chattels wherever found."
Then followed the usual power of sale, a provision for
attorney's fees in case the mortgage should be foreclosed by suit,
and that if anything remained after paying plaintiffs' claim, it
should be returned to Hamilton. The other mortgage, executed the
next day, was for $89.54, as evidenced by a promissory note for
that amount dated July 5 and due July 28, 1882, with interest.
These claims of the mortgagees were for goods sold during the six
months prior to the
Page 139 U. S. 269
execution of the mortgages. It appears that in the forepart of
that year, Hamilton had had a partner named Douglas, and the first
mortgage was for goods bought by that firm, and the second for
goods bought by Hamilton alone, after he had purchased Douglas'
interest in the partnership. It is contended that these mortgages
should be considered as executed simultaneously, and parts of one
transaction, and as equivalent to a general assignment for the
benefit of creditors, and that, having preferences in them, they
are void under the state law respecting assignments. But this
contention is clearly untenable. The instruments, on their faces,
are mortgages given to secure debts not yet due. The mortgagor had
no thought of closing out his business. He expected to continue in
it, and hoped out of the profits thereof to pay this indebtedness
coming due in the future. He had, on June 26, given a prior
mortgage to secure another creditor, and on July 6, the day after
the execution of the last mortgage in controversy, when another
creditor demanded security, he declined to give it without
including in the mortgage all his other creditors, and did execute
such a mortgage. So that, if we could ignore the form of the
several instruments, the only one which by any pretense could be
called an assignment for the benefit of creditors was the one
executed on the 6th day of July, an instrument not contemplated at
the time these mortgages were given, and one forced upon him by the
subsequent demands of another creditor. Obviously these instruments
were, in the intent of the parties, what upon their face they
appear to be -- simply conveyances for security -- chattel
mortgages.
The other contention is that the court erred in refusing to give
this instruction:
"1. If the jury find from the evidence that the mortgagor in the
chattel mortgages in evidence in this case was left in possession
of the stock of goods mortgaged, with no provision for the
application of the entire proceeds of sales to the payment of debts
secured by the mortgages, but with the privilege, express or
implied, of continuing the business of buying and selling as before
the making of the mortgages, and applying a portion of the proceeds
of sale to his own use, then
Page 139 U. S. 270
such mortgages are fraudulent and void in law as to
creditors."
In its charge the court thus stated the question:
"The issue submitted to you is this: were the mortgages of
plaintiffs executed in good faith and for the purpose of securing a
bona fide indebtedness due to them from George W. Hamilton
at the time, or were the same executed by Hamilton and received by
the plaintiffs for the purpose of defrauding creditors of George W.
Hamilton."
It further instructed the jury that the insolvency of Hamilton,
if proved, would not of itself avoid the mortgages, and that he had
the right to prefer any of his creditors. And upon the question of
fraud, it gave this instruction:
"In determining the question of fraud in the execution of
mortgages, you should take into consideration all the evidence that
has been introduced bearing upon that question. Fraud is never
presumed, but must be proved by the party alleging the same, and in
determining whether or not there was fraud in any transaction, you
should consider all the circumstances of the case, and while the
debtor's retaining possession, or the fact of the insolvency of the
mortgagor, do not as a matter of law determine the transaction to
be fraudulent, yet in determining the question of fact, you may
consider the insolvency of the mortgagor, if he was insolvent, the
fact of his retaining possession of the goods mortgaged, if he did
so retain them, and what agreement, if any, was made between the
parties with reference to the disposition that should be made of
the goods so in his possession, and from all the evidence and
circumstances in the case you will determine whether the
transactions between the plaintiffs and Hamilton were in good
faith, or whether they were designed and intended by the parties to
defraud the other creditors of Hamilton."
On the face of the instruments, there is clearly no foundation
for the instruction which was refused. There is no reservation of
interest to the mortgagor. On the contrary, the express provision
is that if he defaults in payment, if he attempts to dispose of or
remove from the county the mortgaged property, or any part of it,
and whenever the mortgagee
Page 139 U. S. 271
shall see fit, the latter may take immediate possession. While
from the fact that the property mortgaged is a stock of goods in a
store, possession of which is left with the mortgagor, there may be
an implication that sales at retail by him were contemplated, yet
express authority is given to the mortgagee to take possession at
the first sale, and before the maturity of anyone of the secured
notes. So that upon the face of the mortgages there is nothing to
suggest or justify the instruction. The mortgagor was put upon the
stand as a witness for the plaintiffs in error, and testified as
follows:
"At the time I executed the first mortgage to Sperry, Watt &
Garver, it was understood between Mr. Ayers [he being the attorney
of the mortgagees] and me that I was to go on selling goods in the
ordinary way, and that I would be able to pay out. I was to use the
money received from the sale of goods, and use some of the money to
buy goods, and I was to pay out of the proceeds, the running
expenses of the establishment, and to take out whatever was needed
for the support of myself and family, and to use the money in
buying goods as I saw proper in carrying on the business, filling
up the stock and all that, and the money deposited in the bank that
I did not need for the other purpose was to be applied on the
payment of the debt."
This testimony was repeated by him in different words but
disclosing no additional facts, and it is upon this statement of
the understanding between him and the attorney of the mortgagees
that this instruction was based. He did not in fact use any of the
proceeds of the sales made by him for his own support, although his
possession was not disturbed by the attachment until after the 13th
of August, 1882, but used the entire proceeds in buying some
additional goods for the store and in paying his debts. Perhaps
this is only material on the question of good faith, and does not
detract from the damaging effect, if any there be, of the
understanding between the parties at the time of the execution of
the mortgage. So the question is presented whether, as a matter of
law, a mortgage given by a merchant on his stock of goods to secure
debts not yet due, which upon its face has no imperfections,
contains no reservations for the benefit of the mortgagor, and
is
Page 139 U. S. 272
apparently only for the security of the mortgagee, and gives him
full power to take possession on default in payment, or on any
misconduct of the mortgagor, or whenever he pleases, is invalidated
by the fact of a parol understanding at the time of its execution
that the mortgagor may use the proceeds of his daily sales to
support himself and to keep up the stock by purchases, applying
only the surplus, but all of that, to the payment of the mortgage
debt; or whether such an understanding is simply to be taken into
consideration, together with the other circumstances, as bearing
upon the question of the good faith of the parties. The contention
of the plaintiff in error is in support of the first alternative of
this question, and he relies mainly on the cases of
Bank of Leavenworth v.
Hunt, 11 Wall. 391;
Robinson
v. Elliott, 22 Wall. 513, and
Means v.
Dowd, 128 U. S. 273.
While there are some points of similarity between each of those
cases and this, and while there are observations in the opinions
filed in them pertinent and correct with reference to the special
facts which, if disconnected from those facts and applied here,
might seem authoritative, yet there are clear and sufficient
reasons why neither the decisions nor the opinions should control
this case. In
Bank of Leavenworth v. Hunt, the validity of
a chattel mortgage was in question. But it had not been filed in
the office of the register of deeds, as required by the statutes of
Kansas, and under those statutes was therefore void as against
creditors. It was said in the opinion that it was void for another
reason, and that was that the mortgagors were permitted to remain
in possession and to continue to sell the goods as before the
mortgage. But, as appears from the statement of facts, these sales
were not made with a view of appropriating the surplus proceeds to
the payment of the mortgage debt, but for the sole benefit of the
mortgagors.
In
Robinson v. Elliott, a case coming from Indiana, the
objection to the chattel mortgage appeared on the face of the
instrument, in that it permitted the mortgagor not only to retain
possession, but to sell and buy as theretofore, with no stipulation
for the application of the surplus proceeds to the payment of the
mortgage debt, the only stipulation being that
Page 139 U. S. 273
the purchased goods should come within the lien of the mortgage.
Apparently this retained power of sale by the mortgagor was in no
respect for the benefit of the mortgagee, but to enable the
mortgagor to continue in business in defiance of his unsecured
creditors, protected by the lien of this mortgage. The conduct of
the parties after the mortgage was in harmony with this apparent
intent, and removed any uncertainty as to the scope and purpose of
the instrument. It was not intended by that decision to hold that a
chattel mortgage was void because it provided for a retention of
possession by the mortgagor, and a sale by him. On the contrary,
Mr. Justice Davis, delivering the opinion of the court, carefully
used this language:
"We are not prepared to say that a mortgage under the Indiana
statute would not be sustained which allows a stock of goods to be
retained by the mortgagor and sold by him at retail for the express
purpose of applying the proceeds to the payment of the mortgage
debt. Indeed, it would seem that such an arrangement, if honestly
carried out, would be for the mutual advantage of the mortgagee and
the unpreferred creditors. But there are features engrafted on this
mortgage which are not only to the prejudice of creditors, but
which show that other considerations than the security of the
mortgagees or their accommodation even entered into the contract.
Both the possession and right of disposition remain with the
mortgagors. They are to deal with the property as their own, sell
at retail, and use the money thus obtained to replenish their
stock. There is no covenant to account with the mortgagees, nor any
recognition that the property is sold for their benefit."
The instrument considered in
Means v. Dowd was regarded
by this Court more in the nature of an assignment for the benefit
of creditors than as a chattel mortgage, and the same elements were
discovered in that instrument, and in the subsequent conduct of the
parties, as appeared in the case in 22 Wall. In neither of those
cases is it affirmed that a chattel mortgage on a stock of goods is
necessarily invalidated by the fact that either in the mortgage, or
by parol agreement between the parties, the mortgagor is to retain
possession, with
Page 139 U. S. 274
the right to sell the goods at retail. On the contrary, it is
clearly recognized in them that such an instrument is valid,
notwithstanding these stipulations, if it appears that the sales
were to be for the benefit of the mortgagee. What was meant was
that such an instrument should not be used to enable the mortgagor
to continue in business as theretofore, with full control of the
property and business, and appropriating to himself the benefits
thereof, and all the while holding the instrument as a shield
against the attacks of unsecured creditors. Neither was it
suggested in either of those cases that this Court, in determining
the validity of a chattel mortgage, would ignore the settled law of
the state in which the transaction took place, as established by
the decisions of its highest court. On the contrary, there was an
intimation that this Court would respect such decisions. In the
opinion in
Robinson v. Elliott, this Court said there had
been no decision of the question by the supreme court of the state,
though as to the present state of the law,
see Morris v.
Stern, 80 Ind. 227;
McFadden v. Fritz, 90 Ind. 590;
Fisher v. Syfers, 109 Ind. 514;
Muncie National Bank
v. Brown, 112 Ind. 474;
New v. Sallors, 114 Ind. 407,
and
Mayer v. Feig, 114 Ind. 577, but noticed some
intimations and citations in one of its opinions which it was
thought tended to support the conclusion reached. And the opinion
in
Means v. Dowd, not only noticed this intimation in the
former case, but expressly referred to the law as established in
North Carolina, that being the state in which the transaction took
place. Further, in the case of
People's Savings Bank v.
Bates, 120 U. S. 556, a
case coming from the State of Michigan and involving the question
of the validity of a chattel mortgage, MR. JUSTICE HARLAN,
delivering the opinion of the Court, referred to the law of the
state as controlling. He said:
"In behalf of the bank, it is contended that the mortgage to
Bates, Reed & Cooley was fraudulent as against subsequent
creditors and mortgagees in good faith, in that the mortgagees
contemplated that the mortgagors should remain in possession and
prosecute the business in the ordinary mode. . . . If the mortgage
had, in terms, made provision for such a course upon the part
Page 139 U. S. 275
of the mortgagors, as the bank contends was in the contemplation
of the mortgagees, it would not be held, as a matter of law, to be
absolutely void or fraudulent as to other creditors.
Oliver v.
Eaton, 7 Mich. 108, 112;
Gay v. Bidwell, 7 Mich. 519,
523;
People v. Bristol, 35 Mich. 28, 32;
Wingler v.
Sibley, 35 Mich. 231;
Robinson v. Elliott, 22
Wall. 513,
89 U. S. 523. The good faith
of such transactions, where they are not void upon their face, is,
under the statutes of Michigan, a question of fact for the
determination of the jury.
Oliver v. Eaton, and
Gay v.
Bidwell."
See also Allen v.
Massey, 17 Wall. 351. While in the foregoing
quotation reference is made only to the statutes of the state, the
law is as fully established by repeated decisions of its supreme
court as by the express language of its statutes. This decision not
only gives countenance to the ruling of the trial court in this
case, but also warrants an examination of the settled law of the
state, as evidenced by the decisions of its highest court. In
respect to the latter, there can be no doubt. Independently of the
ruling in this case,
see Torbert v. Hayden, 11 Ia. 435;
Hughes v. Cory, 20 Ia. 399;
Meyer v. Gage, 65 Ia.
606, and
Meyer v. Evans, 66 Ia. 179. In the first of those
cases, it appeared that the mortgagors, with the knowledge of the
mortgagee, remained in possession, and sold in the ordinary course
of business about a thousand dollars' worth of goods, the proceeds
of which were applied to their support and the rent and expenses of
the store, and the transaction, having been found to have been in
good faith, was sustained, and the mortgage adjudged valid. This
decision was in 1861.
In the second case, decided in 1866, the mortgage on its face
reserved the right to sell in the usual course of business, and to
add to the stock by the purchase of other goods, with the
stipulation that thirty-three percent of the sale should be applied
on the mortgage debt, and, in an elaborate opinion by Judge Dillon,
the mortgage was sustained. In the third case, decided in 1885,
there was simply a reservation of possession, with the right to
sell at retail, and in respect thereto the court summed up the law
of the state in these words:
"And the uniform holding of this court has
Page 139 U. S. 276
been that the reservation by the mortgagor of the right to
retain possession of the property and sell it in the ordinary
course of business does not render the mortgage fraudulent in law.
See Torbert v. Hayden, 11 Ia. 435;
Hughes v.
Cory, 20 Ia. 399;
Clark v. Hyman, 55 Ia. 14;
Sperry v. Etheridge, 63 Ia. 543;
Jaffray v.
Greenbaum, 64 Ia. 492. This holding is based upon the
construction given to certain statutes of the state, and it has
been adhered to for more than twenty years, and has become a rule
of property in the state, and we see no occasion now for departing
from the rule that has been thus established."
And in the last case, by the terms of the instrument there was
reserved a right to sell at retail in the ordinary course of trade,
and there was, besides, a parol understanding that the mortgagor
should keep up the stock and pay the expenses out of the proceeds
of the business, and there was no provision in the mortgage, and no
agreement, that the surplus proceeds should be applied on the debt,
but by the terms of the mortgage, the mortgagee had the right at
any time to take possession of the property and sell the same for
the satisfaction of his debt. And it was held that the mortgage was
not invalidated thereby, but that its validity depended on the good
faith of the parties to the transaction.
From these decisions and others, running through a period of
thirty years, there can be no doubt as to the settled law of the
state and as to the law established, as was said by the supreme
court in
Meyer v. Gage, supra, mainly, at least, from a
construction of the state statutes. Can such a settled construction
be ignored by this Court, and the judgment of the highest court of
the state be reversed on error in a matter depending partially at
least upon the construction of state statutes? It would be strange
indeed if this Court should adjudge that there was error on the
part of the supreme court of a state in following its own rulings,
uniform and undisturbed for a quarter of a century. The matter is
not one of purely general commercial law. While chattel mortgages
are instruments of general use, each state has a right to determine
for itself under what circumstances they may be executed,
Page 139 U. S. 277
the extent of the rights conferred thereby, and the conditions
of their validity. They are instruments for the transfer of
property, and the rules concerning the transfer of property are
primarily, at least, a matter of state regulation. We are aware
that there is great diversity in the rulings on this question by
the courts of the several states, but whatever may be our
individual views as to what the law ought to be in respect thereto,
there is so much of a local nature entering into chattel mortgages
that this Court will accept the settled law of each state as
decisive in respect to any case arising therein.
Chicago Union
Bank v. Kansas City Bank, 136 U. S. 223.
Indeed, if this were an open question, we could not be blind to the
fact that the tendency of this commercial age is toward increased
facilities in the transfer of property, and to uphold such
transfers so far as they are made in good faith, and it is at least
worthy of thought whether the rulings made by the Supreme Court of
Iowa do not tend to make chattel mortgages more valuable for
commercial purposes, without endangering the rights of unsecured
creditors. The law now generally requires a record of all such
instruments, and that, like the recording of a real estate
mortgage. gives notice to all parties interested of the fact and
extent of encumbrances. Why should a transaction like this be
condemned if made in good faith and to secure an honest debt? The
owner of a stock of goods may make an absolute sale of them to his
creditor in payment of a debt. If an absolute, why not a
conditional, sale, with such conditions as he and his creditor may
agree upon? As between the parties, no court would question this
right or refuse to enforce the conditions. The interests of the
general public are not prejudiced by any such transaction between
debtor and creditor. Indeed, they are rather promoted by any
arrangement under which the mortgagor can continue in business, for
in ninety-nine cases out of a hundred, the taking of possession by
a creditor results in closing the business and turning the debtor
out of employment. The only parties who can claim to be injuriously
affected are unsecured creditors. But they are notified by the
record of the exact relations between the mortgagor and
mortgagee,
Page 139 U. S. 278
and surely subsequent creditors have no right to complain if
they deal with the mortgagor with full knowledge of such relations.
Existing creditors may, of course, challenge the good faith of the
transaction, but if they cannot disturb an absolute sale when made
in good faith, why should they be permitted to challenge a
conditional sale if made in like good faith? The fact that
fraudulent relations are possible is hardly a sufficient reason for
denouncing transactions which are not fraudulent. So if the
question were open, or a new one, unaffected by any settled law of
the state, we incline to the opinion that the question is not one
of law so much as it is one of fact and good faith, and that the
decision of the Supreme Court of Iowa rests on sound principles.
Jewell v. Knight, 123 U. S. 426;
Smith v. Craft, 123 U. S. 436.
Reference may also be made to the opinion of MR. JUSTICE BRADLEY of
this Court, holding the circuit court in the Western District of
Texas,
Barron v. Morris, 14 Nat.Bank.Reg. 371, and the
opinion of Mr. Justice Strong in the circuit court in New Jersey in
Miller v. Jones, 15 Nat.Bank.Reg. 150.
We see no error in the decision of the Supreme Court of Iowa,
and it is
Affirmed.