A valid lien is not divested by the mere fact of the holder of
it subsequently taking a transfer of the equity of redemption made
to him with a view of giving to him a preference, and in violation
of the Bankrupt Act. The transfer of the equity of redemption of
course is void.
ERROR to the circuit court for the Western District. of
Michigan.
Avery, assignee of Blake, a bankrupt, brought trover in
Page 87 U. S. 408
the court below against Hackley & Co. to recover the value
of certain saw logs, alleging that they had been transferred by the
bankrupt to the said Hackley & Co. in fraud of the Bankrupt
Act.
The case, as found by the court on a waiver of a jury, was
thus:
Hackley & Co. were owners of saw mills and engaged in sawing
logs, and so making boards from them. Blake was a lumberman without
capital, and engaged in buying logs and bringing them to saw mills
to be thus sawed into boards.
On the 25th of January, 1868, a contract was made between the
two parties, by which Blake, on the one hand, agreed to deliver at
the saw mill of the defendants 18,000,000 feet of saw logs to be
sawed into boards, and by which Hackley & Co., on the other,
agreed to advance to him $4 per 1,000 feet, to be paid from time to
time as the sawing advanced, and to be applied exclusively to the
purchase of logs to be brought to them to be sawed.
To secure the advances, the property in the logs was conveyed to
the defendants and the right of property vested in them, and they
covenanted that when the lumber was manufactured, they would send
it to market and sell it to the best advantage, the proceeds to be
equally divided between the parties.
Blake accordingly sent to the defendants large quantities of
logs, and the defendants advanced large sums ($77,000) of money
upon them, the case, as found, showing that but for the advances,
Blake could not have got this lumber from the forests and thence to
the defendants' mills.
During the spring of 1868, the price of lumber fell largely, so
much so that it seemed likely that all the logs which Blake had
sent to the defendants would be inadequate to repay to them their
advances on account of it. Hereupon Blake, on the 25th of May in
the year just named, informed the defendants that he was unable to
pay his debts, and proposed to make an assignment. They objected to
his doing this and requested him to make a bill of sale of his
property to them. This he made, the bill of sale embracing not
only
Page 87 U. S. 409
the logs then at their mills, but certain land from which it was
cut, and various property, saws, horses, oxen, wagons &c.,
which had been used in getting it from the place where it grew to
the mills.
The defendants, however, did not deliver up nor
cancel, nor agree to deliver up or cancel, the contract of January
25, but contrariwise, kept it in their possession.
The bill of sale of May 25 was made afterwards, with a view to
give the defendants a preference, and therefore in violation of the
Bankrupt Act.
On the 2d of June, 1868, Blake was decreed a bankrupt, and
Avery, the plaintiff below, appointed his assignee. Soon
afterwards, the creditors objecting to the bill of sale, the
defendants transferred to the assignee all the property conveyed by
the bill except the logs. These they had sold, the proceeds paying
them nothing above their advances previous to May 25, and on their
refusing to pay to the assignee these proceeds, he brought the
action below.
The question, of course, was whether this contract of the 25th
of January was abandoned by the defendants' doing what they had
done subsequent to it (that is to say, by their taking, in the
circumstances which they did, the bill of sale of May 25), and
merged in that bill. If so, the defendants had lost their lien,
since it was obvious that they could not stand on the new contract
of May 25, it having been plainly void as to creditors. On the
contrary, if the old security was not abandoned, then, although the
defendants had attempted to strengthen their hold on the logs by an
additional security, voidable at the election of creditors, and
which the creditors did avoid, the right of lien justly acquired
was not lost to the defendants, and they were at liberty to assert
it in this action.
The court below decided that the lien was not affected by what
was done on the 25th of May, and from that decision this writ of
error was taken.
Page 87 U. S. 410
MR. JUSTICE DAVIS delivered the opinion of the Court.
If the contract of January 25, 1868, was never surrendered or
abandoned, it is manifest that the defendants acquired an interest
in and lien upon the logs furnished by Blake to the extent of the
advances made by them. There could be, therefore, on the theory
that the contract of the 25th of January was subsisting, no ground
for the maintenance of this action. It is said, however, that the
defendants lost their rights under this contract by what occurred
and was done subsequently to its execution.
It is undeniable that before the execution of the contract of
May 25, the logs in controversy were in the possession of the
defendants, who had advanced on them to Blake a very large sum of
money. Without these advances, the logs could not have been cut,
banked, and put in the river, and unless the defendants have
plainly lost their right to retain the logs, common justice
requires that they should be repaid. The honesty of the transaction
is undisputed. Nor is there anything to show that the defendants
were aware of the insolvent condition of Blake until after the logs
had been delivered and the money advanced. They were proceeding in
good faith to carry out their part of the contract when they were
met by information of Blake's inability to go on with his business.
The bill of sale, as it is called, which they took embraced not
only the logs in controversy, but other personal property and real
estate.
It is fair to infer from the facts found in the case that the
bill of sale was not intended to clothe the defendants with any
greater rights in the logs than they possessed without it, for it
is very clear that the parties acted on the idea that the lumber,
when manufactured and sold, would fall short of reimbursing the
defendants for their advances, interest, and expenses. To save them
from anticipated loss was doubtless the motive for including the
remaining property of Blake, and not any expectation that
previously acquired legal rights would be enlarged. The giving this
preference has not operated to lessen the estate of Blake, as the
creditors
Page 87 U. S. 411
got everything but the logs, and these, as it turns out, Blake
had no interest in.
If there were any reasonable doubt about the intention of the
defendants not to abandon the contract of January 25, it is set at
rest by the consideration that when the bill of sale was executed
and delivered, there was no agreement to cancel it, nor was it in
fact cancelled, but was held and retained by the defendants.
Naturally if they had intended to rest their right to the logs
exclusively on the bill of sale, they would have surrendered the
former security. It is therefore not a case where an old security
is abandoned and given up and a new one taken as a substitute for
that which previously existed. If, then, the contract of 25th
January was not merged in the contract of 25th May, the latter one
cannot operate an extinguishment of the former, the fairness of
which has not been denied. This would not be the case if both
contracts were valid, unless by express agreement, and it would be
singular if such an effect could be produced where one of them
could be avoided by creditors as against the policy of the law. The
creditors, having elected to avoid the fraudulent conveyance, take
the property as though it had never been made, and subject to all
lawful liens upon it. The assignee, standing in the place of the
bankrupt, acquired no greater rights than he possessed, and the
defendants neither gained nor lost any rights because of the bill
of sale.
These general views are sustained by authorities which seem
decisive of the point at issue. [
Footnote 1]
One of these authorities,
White v. Gainer, [
Footnote 2] was trover by the assignee
of a bankrupt. The defendant, a maker of
Page 87 U. S. 412
cloth, who had a lien on some cloth in his possession, purchased
it of the bailor, together with several other pieces, after he
became bankrupt, and when the cloth was demanded of him by the
assignees of the bankrupt, refused to give it up, saying, "I may as
well give up every transaction of my life."
It was contended at the trial that the lien was merged in the
purchase and that at all events it was waived because not set up
when the cloth was demanded. The judge directed the jury that the
demand should have been accompanied with a tender of the amount due
for the workmanship on the cloths, but reserved the point as to the
merger of the lien.
On deciding the motion for a rule
nisi to set aside the
verdict, Best, C.J., said:
"It has been urged that he [the defendant] bought the cloths
after the bankruptcy. If that were so, he stands in the same
situation as every other purchaser under the same circumstances;
the purchaser is liable to restore them to the assignees, but the
assignees must take them subject to such rights as had accrued
previously to their claim, and the bankruptcy of the bailor will
not deprive the defendant of the right to which he is entitled --
the right of lien. It might have been otherwise if the defendant,
when called on to surrender the goods, had relied on the purchase,
but this was not the case, and the verdict must stand."
The rule laid down by Chief Justice Best is applicable here.
The assignee of Blake had no right to the property until he had
tendered the advances upon it, and there is no evidence that the
defendants placed their refusal to deliver the property upon any
particular ground. In the absence of this evidence, it is a
reasonable presumption that the lien, if not asserted in terms, at
least was not, when demand was made, waived. It is true the
defendants claimed, after the execution of the bill of sale to the
creditors of Blake and other persons, to be the absolute owners of
the property conveyed to them, but so far as the logs were
concerned,
Page 87 U. S. 413
this claim was doubtless founded on the belief that the price of
lumber would not advance, and if it did not, according to the
estimates which were made, Blake had no interest in them. If so,
although the claim of absolute ownership might not be legally
correct, it had a basis of fact to rest upon, and does not prove
that the defendants intended to abandon their lien. Indeed it would
be a harsh rule to infer the abandonment of a lien to the extent of
this one, contracted in good faith in the prosecution of a
legitimate business, unless the evidence on the subject left no
other alternative.
It is said that after the execution of the bill of sale, the
lumber was not sold no joint account, and therefore the lien was
waived. The answer to this is that the contract by which the lien
was secured did not require the lumber to be sold on joint account.
If the defendants sent the lumber to market, sold it to best
advantage, and divided the proceeds, the contract on their part was
complied with. They had entire control over it, and the manner of
sale is immaterial and cannot affect the rights of the parties.
The leading purpose of the Bankrupt law is to secure an equal
distribution of the bankrupt's property among his creditors. This
purpose was accomplished in this case when the bill of sale was set
aside, but the assignee seeks to go further and increase the estate
more than seventy thousand dollars by relieving the bankrupt from
the performance of a per existing valid contract. This he cannot do
unless on the clearest proofs that the defendants intended to
abandon this contract and rely wholly on the bill of sale. As these
proofs are wanting, the judgment is
Affirmed.
[
Footnote 1]
In re Kahley, 4 B.R. 124;
Ladd v. Wiggin, 35
N.H. 428;
Towle v. Hoit, 14
id. 63;
Stedman
v. Vickery, 42 Me. 136;
Hoyt v. Dimon, 5 Day 483;
Britt v. Aylett, 6 English 475;
Mead v. Combs, 4
C.E.Green (New Jersey) 112;
Ripley v. Severance, 6
Pickering 474;
Sawyer v. Turpin, 5 B.R. 339;
Eastman
v. Porter, 14 Wis. 39;
Stokoe v. Cowan, 29 Beavan
637;
Meshke v. Van Doren, 16 Wis. 319;
White v.
Gainer, 2 Bingham 23.
[
Footnote 2]
2 Bingham 23.
