1. Under the Statute of Frauds in Indiana, which enacts in
"SECTION 111. That no assignment of goods by way of mortgage
shall be valid against any other person than the parties thereto
when such goods are not delivered to the mortgagee or assignee and
retained by him unless such assignment or mortgage shall be duly
recorded."
And in
"SECTION 21. That the question of fraudulent intent in all cases
shall be deemed a question of fact."
the mortgagor of chattels personal may, if the transaction be
fair and the mortgage made by him be duly recorded, retain
possession of personal chattels.
2. But the effect of the statute is not to make every recorded
mortgage, which prior to the statute would have been held
fraudulent in law,
prima facie valid.
3. The recording of the mortgage contemplated by the statute was
meant as a substitute for possession, but was not meant to protect
a mortgage from all illegal stipulations contained in it.
4. Hence, where a trading firm in a city in Illinois owing money
evidenced by a series of notes coming due from time to time for
some months in advance made a mortgage of their stock of goods, the
mortgage containing this clause:
"And it is hereby expressly agreed that until default shall he
made in the payment of someone of said notes or some paper in
renewal thereof, the parties of the first part may remain in
possession of said goods, wares, and merchandise and may sell the
same as heretofore and supply their places with other goods, and
the goods substituted by purchase for those sold shall, upon being
put into said store or any other store in said city where the same
may be put for sale by said parties of the first part, be subjected
to the lien of this mortgage. "
Page 89 U. S. 514
The instrument then concluding with powers to the mortgagee,
upon any default, to have the right to enter into said store of the
firm and take possession of a sufficient amount of goods to
satisfy, pay, and discharge all the paper due, and have full power
and authority, upon ten days' public notice, to sell at public
auction such amounts of said goods as should be necessary to pay
said paper.
Held:
1. That the court was the proper party to say whether on its
face the
mortgage was void.
2. That it was so void.
On the 7th of July, 1871, John and Seth Coolidge, brothers, were
partners in the retail dry goods trade in Evansville, Indiana,
having been thus in business there since the year 1863. On the day
just named, they owed to a Mrs. Sloan $3,174 for money previously
borrowed of her to aid them in their business.
They also owed the First National Bank of Evansville $7,600,
evidenced by seven promissory notes of the firm -- all maturing
between the 25th of July and the 6th of October of the year 1871 --
on which one Robinson was then an accommodation endorser, and to
secure to Mrs. Sloan the payment of what was due to her and to
indemnify Robinson as endorser, they made to them a chattel
mortgage upon their stock of goods then in their rented store,
including also the furniture and fixtures connected with the
same.
The mortgage, after reciting the liability of the firm to
Robinson on the notes endorsed by him, stated that it was
contemplated that in order to take up the notes or some of them, it
might become necessary to renew the same or to discount other
notes. The recital of the indebtedness to Mrs. Sloan, by note at
four months, with interest, was also made with the statement that
if not convenient to the firm to pay it at maturity, it might be
renewed from time to time as the parties should agree.
After these recitals and that of the mutual understanding of the
parties concerning the continuance of the debts, the property was
conveyed, the mortgage proceeding thus:
Page 89 U. S. 515
"And it is hereby expressly agreed that until default shall be
made in the payment of someone of said notes or some paper in
renewal thereof, the parties of the first part may remain in
possession of said goods, wares, and merchandise
and may sell
the same as heretofore and supply their places with other goods,
and the goods substituted by purchase for those sold shall, upon
being put into said store or any other store in said city where the
same may be put for sale by said parties of the first part, be
subjected to the lien of this mortgage."
The instrument concluded with separate powers to the mortgagees,
Robinson and Mrs. Sloan, on default in payment of their respective
claims, to seize and sell sufficient goods to satisfy the same.
All the debts owing by the firm at the date of the mortgage,
other than those secured by it, have been paid, except $3,500 due
to one Alfred Coolidge, father of the two partners Coolidge, for
borrowed money.
The mortgagors remained in possession of the property and bought
and sold as they had been accustomed to do from the date of the
mortgage to August 7, 1873, when Seth Coolidge, one of the
partners, died. During this interval of twenty-five months, the
interest and less than $100 of the principal of Mrs. Sloan's debt
was paid, and the interest and about one-third of the principal of
the bank debt. The note of Mrs. Sloan's was not renewed, but was
overdue about twenty-one months. Robinson continued to endorse for
the firm. Immediately after the death of Seth Coolidge, the
property of the firm, consisting of the old stock, goods
subsequently purchased, and debts due the firm, was inventoried and
appraised and found to be very little in excess of the debts owing
by the firm. This inventory and appraisement was completed on
September 15, and on the following day Robinson and Mrs. Sloan
seized the goods and were about to sell them. However, on the 26th
of September and before the ten days required by the terms of the
mortgage for notice of sale had expired, proceedings in bankruptcy
were begun against the surviving partner, Seth Coolidge, and an
injunction was got to stay any sale.
Page 89 U. S. 516
Coolidge having been decreed a bankrupt, one Elliott, on the
15th of November, 1873, was appointed his assignee, and demanded
the goods from Robinson and Mrs. Sloan. They refused to deliver
them to him. Hereupon, Robinson and Mrs. Sloan filed a bill against
Elliott, setting forth the facts as above given and praying that an
account might be taken of what was due to them and that the goods
might be sold to pay it. Elliott, the assignee, demurred, and the
court below sustained the demurrer and rendered a decree dismissing
the bill. Robinson and Mrs. Sloan then brought the case here.
The Statute of Frauds [
Footnote
1] of Indiana makes the following provisions:
"SECTION 10. No assignment of goods by way of mortgage shall be
valid against any other person than the parties thereto when such
goods are not delivered to the mortgagee or assignee, and retained
by him, unless such assignment or mortgage shall be acknowledged as
provided in cases of deeds of conveyance and recorded in the
recorder's office of the county where the mortgagor resides within
ten days after the execution thereof."
"SECTION 21. The question of fraudulent intent in all cases
arising under the provisions of this act shall be deemed a question
of fact, nor shall any conveyance or charge be adjudged fraudulent
as against creditors or purchasers solely upon the ground that it
was not founded on a valuable consideration. "
Page 89 U. S. 520
MR. JUSTICE DAVIS delivered the opinion of the Court.
There are few subjects which have been more discussed in the
courts of this country, with less uniformity of decision, than that
of sales and mortgages of personal goods without delivery of
possession. In Indiana, the statute of 13th Elizabeth has been
adopted, and two provisions applicable to this case engrafted on
it. The first declares that
"No assignment of goods by way of mortgage shall be valid
against any other person that the parties thereto when such goods
are not delivered to the mortgagee or assignee and retained by him
unless such assignment or mortgage"
shall be duly recorded. And the second says "that the question
of fraudulent intent in all cases shall be deemed a question of
fact."
Prior to the incorporation of these provisions in the statute,
it was necessary to the validity of chattel mortgages in
Page 89 U. S. 521
Indiana that there should be a manual delivery of the mortgaged
property to the mortgagee, who should continue to hold the same in
his possession. These provisions changed the law in this particular
and permitted the retention of the possession of personal property
by the mortgagor in a chattel mortgage given as a security for the
payment of debts. And there can be no question that in Indiana, a
mortgage which simply allows the mortgagor to retain the possession
and use of the property until breach of the condition is, when duly
recorded,
prima facie valid. But it is insisted that the
effect of these provisions is also to make a mortgage of a stock of
goods, containing a provision authorizing the mortgagor to retain
possession for the purpose of selling in the usual course of trade,
prima facie valid, and that the court cannot, as a matter
of law, pronounce it fraudulent. This, we think, is going beyond
what the legislature intended. If registration was intended, as we
think it was, as a substitute for delivery of possession, it was
not meant to be a protection for all the other stipulations
contained in a mortgage. If so, it could be used as a cover for any
fraudulent transaction, which would have to be treated, on the
theory advanced, as valid until the contrary was shown.
It is true the law conferred on the parties the right to agree
that the possession of the property could remain with the
mortgagor, provided the mortgage be recorded; but if the mortgage
contains other provisions which, on legal principles, vitiates the
whole instrument, it is difficult to see how recording it could
make it even
prima facie valid. The Bill of Sales
Registration Act in England makes void all bills of sale not filed
as required, if unaccompanied by possession. An eminent writer, in
speaking of this act, says:
"Of course, the mere fact of due registration of a bill of sale
under this act does not necessarily make it good against creditors.
The act was not passed with a view of making good a title which was
not good before, but for the protection of creditors. [
Footnote 2] And to the same effect is
Wood v. Lowry. [
Footnote
3] "
Page 89 U. S. 522
It is argued, however, that there can be no such thing in this
class of cases as constructive fraud, because under the statute,
the question of fraudulent intent is one of fact. But the Supreme
Court of Indiana has decided the question differently. The statute
of that state for the prevention of frauds embraces twenty-two
sections. The tenth relates to the registration of chattel
mortgages; the seventeenth enacts that every assignment &c., of
any estate in lands or of goods made with intent to hinder, delay,
or defraud creditors shall be void, and the twenty-first declares
that the question of fraudulent intent, in all cases arising under
the provisions of this act, shall be deemed a question of fact. It
will thus be seen that the last section applies to conveyances of
land as well as to assignments of goods by way of mortgage. In
Jenners v. Doe on the demise of Pomeroy, [
Footnote 4] the question was whether a deed
of trust on certain lands was void as to creditors who did not
consent to it. The court of original jurisdiction held the deed
void upon its face as a question of law. It was contended that this
ruling was erroneous, and that in all cases the instrument must be
referred to the jury in connection with the facts. But the supreme
court held the ruling to be correct. They said that the provisions
embraced in the seventeenth and twenty-first sections of the
statute have declared, not changed, the law on the subject; that
the court must in the first instance determine upon the legal
effect of a written instrument, and if that be to delay creditors,
it is rejected. If, however, on its face it conforms to the law, it
is received in evidence and the question of the intent with which
it was executed is an open one for the jury. It would seem to be
the view of the court in this case, as well as in the preceding one
in the same volume of
Nutter v. Harris, that the
twenty-first section applies to cases of actual or meditated and
intentional fraud, and is not applicable to written instruments
which the law adjudges to be fraudulent on their face and
consequently void.
There is therefore nothing in the way of the consideration
Page 89 U. S. 523
of the main question involved in this controversy on its
merits.
If chattel mortgages were formerly, in most of the states,
treated as invalid unless actual possession was surrendered to the
mortgagee, it is not so now, for modern legislation has, as a
general thing (the cases to the contrary being exceptional)
conceded the right to the mortgagor to retain possession, if the
transaction is on good consideration and
bona fide. This
concession is in obedience to the wants of trade, which deem it
beneficial to the community that the owners of personal property
should be able to make
bona fide mortgages of it, to
secure creditors, without any actual change of possession.
But the creditor must take care in making his contract that it
does not contain provisions of no advantage to him, but which
benefit the debtor and were designed to do so and are injurious to
other creditors. The law will not sanction a proceeding of this
kind. It will not allow the creditor to make use of his debt for
any other purpose than his own indemnity. If he goes beyond this
and puts into the contract stipulations which have the effect to
shield the property of his debtor, so that creditors are delayed in
the collection of their debts, a court of equity will not lend its
aid to enforce the contract. These principles are not disputed, but
the courts of the country are not agreed in their application to
mortgages with somewhat analogous provisions to the one under
consideration. The cases cannot be reconciled by any process of
reasoning or on any principle of law. As the question has never
before been presented to this Court, we are at liberty to adopt
that rule on the subject which seems to us the safest and wisest.
It is not difficult to see that the mere retention and use of
personal property until default is altogether a different thing
from the retention of possession accompanied with a power to
dispose of it for the benefit of the mortgagor alone. The former is
permitted by the laws of Indiana, is consistent with the idea of
security, and may be for the accommodation of the mortgagee, but
the latter is inconsistent with the nature and
Page 89 U. S. 524
character of a mortgage, is no protection to the mortgagee, and
of itself furnishes a pretty effectual shield to a dishonest
debtor. 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 it 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. Instead of the mortgage's being directed solely to the
bona fide security of the debts then existing and their
payment at maturity, it is based on the idea that they may be
indefinitely prolonged. As long as the bank paper could be renewed,
Robinson consented to be bound, and in Mrs. Sloan's case it was not
expected that the debt would be paid at maturity, but that it would
be renewed from time to time as the parties might agree. It is very
clear that the instrument was executed on the theory that the
business could be carried on as formerly by the continued
endorsement of Robinson, and that Mrs. Sloan was indifferent about
prompt payment. The correctness of this theory is proved by the
subsequent conduct of the parties, for the mortgagees remained in
possession of the property and bought and sold and traded in the
manner of retail dry-goods merchants from July 7, 1871, to August
7, 1873. During this period of twenty-five months Robinson endorsed
as usual, and Mrs. Sloan was content with the payment of a small
portion of the principal of her debt. Instead of getting it
Page 89 U. S. 525
renewed, as contemplated by the mortgage, she seems to have been
willing to let it remain dishonored, and the fair inference from
the averments of the bill is that Robinson would have continued to
endorse, and Mrs. Sloan exhibit the same easy indifference on the
subject of her indebtedness, if the death of Seth Coolidge had not
dissolved the firm and compelled an inventory and appraisement,
showing the desperate condition of the mortgagors. It hardly need
be said that a mortgage which by its very terms authorizes the
parties to accomplish such objects is, to say the least of it,
constructively fraudulent.
Manifestly it was executed to enable the mortgagors to continue
their business and appear to the world as the absolute owners of
the goods, and enjoy all the advantages resulting therefrom. It is
idle to say that a resort to the record would have shown the
existence of the mortgage, for men get credit by what they
apparently own and possess, and this ownership and possession had
existed without interruption for ten years. There was nothing to
put creditors on their guard. On the contrary, this long-continued
possession and apparent ownership were well calculated to create
confidence and disarm suspicion. But apart from this, security was
not the leading object. If so, why does Mrs. Sloan's note remain
overdue for twenty-one months, and why does Robinson continue to
endorse? This conduct is the result of trust and confidence, which,
as Lord Coke tells us, are ever found to constitute the apparel and
cover of fraud.
In truth, the mortgage, if it can be so called, is but an
expression of confidence, for there can be no real security where
there is no certain lien.
Whatever may have been the motive which actuated the parties to
this instrument, it is manifest that the necessary result of what
they did do was to allow the mortgagors, under cover of the
mortgage, to sell the goods as their own and appropriate the
proceeds to their own purposes, and this too for an indefinite
length of time. A mortgage which, in its very terms, contemplates
such results, besides
Page 89 U. S. 526
being no security to the mortgagees, operates in the most
effectual manner to ward off other creditors, and where the
instrument on its face shows that the legal effect of it is to
delay creditors, the law imputes to it a fraudulent purpose. The
views we have taken of this case harmonize with the English common
law doctrine, and are sustained by a number of American decisions.
In the American editor's note to
Twyne's Case, [
Footnote 5] most of the cases in this
country on the subject are collected and classified. [
Footnote 6]
It is contended by the appellants that the rulings of the
Indiana courts are in favor of the validity of this mortgage, and
the main case relied on to support this position is
Maple v.
Burnside. The facts of this case are stated in the opinion of
the court in a way to render it difficult for any practitioner
outside of the state to understand the application to them of the
legal rules which are discussed, but there is nothing to show that
the mortgage there considered contained any provision permitting
the mortgagor to remain in possession of the property and deal with
it as his own, nor does the judgment of the court involve any such
question. The case would seem to be chiefly valuable as an
authoritative exposition of certain points of
nisi prius
practice. Although we have been unable to find any case from
Indiana of similar facts with the one at bar, yet the decision in
New Albany Insurance Company v. Wilcoxson, [
Footnote 7] would seem to imply that when
such a case did arise, it would be decided in accordance with the
views we have presented. The point ruled in that case is that if a
mortgage is executed merely to protect property in the hands of the
mortgagor from his creditors other than the mortgagee, the
mortgagor retaining possession and the right of disposition, and
these facts appear upon the face of the mortgage, it would be
fraudulent and void as against other creditors, and should be so
declared by the court. And the court, to sustain this
proposition,
Page 89 U. S. 527
refer to
Freeman v. Rawson, [
Footnote 8] a standard authority in this class of
cases, for the views we have advanced on this subject.
Finally it is insisted if the mortgage is held void in law,
still the delivery of the goods in pledge vests a sufficient lien
prima facie to enable the appellants to enforce their lien
in equity.
The answer to this is that the case made by the bill does not
proceed upon such a delivery at all, but upon the mortgage and
seizure under it. Besides, if the appellants could turn the
proceeding into a voluntary pledge by the debtors, it would not
help them, for it would violate the preference clause of the
Bankrupt Act, as they got the goods only twelve days before the
petition in bankruptcy was filed.
Decree affirmed.
[
Footnote 1]
Seventh American edition, vol. 1, p. 7.
[
Footnote 2]
May on Fraudulent Conveyances, p. 120.
[
Footnote 3]
17 Wendell 495-496.
[
Footnote 4]
9 Ind. 461.
[
Footnote 5]
In Smith's Leading Cases, vol. i, p. 52, 7th American
edition.
[
Footnote 6]
See also Mittnacht v. Kelly, 3 Keyes 407;
Yates v.
Olmsted, 65 Barbour 43;
Barnet v. Fergus, 51 Ill.
352;
Re Manly, 2 Bond 261.
Re Kahley, 2 Bissell
383.
[
Footnote 7]
21 Ind. 355.
[
Footnote 8]
5 Ohio State 1.
