Brown v. Grand Rapids Parlor Furniture Co.

• Decision Date: 02 October 1893
• Docket Number: 83.
• Citation: 58 F. 286
• Parties: BROWN et al. v. GRAND RAPIDS PARLOR FURNITURE CO. et al.
• Court: U.S. Court of Appeals — Sixth Circuit

58 F. 286

BROWN et al. v. GRAND RAPIDS PARLOR FURNITURE CO. et al.

No. 83.

United States Court of Appeals, Sixth Circuit.

October 2, 1893

Statement by TAFT, Circuit Judge:

This was an appeal from a decree of the circuit court for the western district of Michigan, southern division. The bill was filed by Willard S. Brown, Jacob G. De Turk, and John T Brown, citizens of the state of Pennsylvania, against the Grand Rapids Parlor Furniture Company, a corporation of Michigan, and other defendants, the beneficiaries of certain mortgages made by the furniture company to secure debts owing to them. The bill was for the purpose of setting aside these mortgages, as made by the furniture company to hinder, delay and defraud creditors, and also as being assignments in violation of the assignment law of Michigan, and, further, as invalid because made by the directors of the furniture company to secure debts, in the payment of which the directors had a personal interest. The Grand Rapids Parlor Furniture Company had been organized in April, 1886, in the name of the Strahan & Long Furniture Company, with a capital stock of about $10,000. The company was organized by Harry W Long, defendant herein, and others. Long's share of the stock was $5,000, to pay for which he borrowed money of his wife, Margaret, another defendant, to whom he gave his note for the amount. In January, 1889, the name of the company was changed to the Grand Rapids Parlor Furniture Company. The capital of the company was increased so that the paid-up capital amounted to $21,500. Harry Long presented his wife with 128 shares. She became the owner of 40 other shares making her the holder of 168 shares. Her husband, then, was the owner of 282 shares; she held 168; W. J. Long, Jr., brother of Harry, held 189 shares; James M. Pierce, 200 shares; Harry Hubbard, 20 shares; and John E. Moore, 1 share. The Long brothers and Thomas M. Pierce were directors. At various times, Harry Long had loaned the company money, so that in March, 1891, he held its notes for $6,800. In that month, Mrs. Long, who held separate property of her own, received from her father and her uncle, and managed by J. W. Champlin, became nervous lest the ownership of the stock might subject her to a liability, under the statutes of Michigan, to the payment of labor claims against the corporation, and she therefore desired to part with her stock. Her husband purchased the stock, and paid off an obligation of his own, owing to his wife, by transferring all the notes which he held against the corporation, for $6,800. A day or two after, a bank in Grand Rapids having refused to renew a note of the company for $3,000, upon which Harry Long was indorser, Mrs. Long was induced to give to the company some street-railway stock which she owned, valued at $3,000, to enable the company to renew the notes with the collateral, and, further, to agree to let the company have $1,000 additional when needed, on condition that it would give her security, whenever she might demand it, for the entire debt, including the $6,800 as well as the new loans. At a stockholders' meeting a resolution was passed, authorizing the directors to comply with this condition, and the $3,000 of street-railway stock was delivered in March, 1891. The other $1,000 was never called for. In July, 1891, the company was asked to pay a $1,000 note held by Clara M. Pierce, wife of Thomas M. Pierce, one of the directors. Legal proceedings were threatened, to collect the note. The company had no money to pay it. Harry Long notified his wife, who was at Mackinac, that she ought to demand security, and she at once made such demand. Judge Champlin, also, was advised, and he superintended the obtaining of the security. The mortgage was drawn by Moore & Wilson, and covered all the merchandise and assets of the company, with the exception of the bills receivable. On the same day, somewhat later, Harry Long directed Moore & Wilson to make a mortgage to Charles M. Wilson, trustee, to secure labor debts; a note to the Fifth National Bank for $1,000; a note to the Fourth National Bank for $5,000; Clara M. Pierce, $1,000; Asa Denison, $1,000; Northwestern Trimming Company, $383; J. V. Farwell Company, $307; W. and J. Sloan, $667. Harry Long was indorser on the notes for $6,800 held by his wife, and also upon the notes held by the Fifth and Fourth National Banks; and upon those held by Denison, the Northwestern Trimming Company, J. V. Farwell Company, and by Sloans. W. J. Long was indorser on the paper at the Fourth National Bank. All the stockholders, as has been already stated, were personally liable for the labor debts. The two mortgages were executed July 18th, and were filed July 20th; the one at 9:25 A. M., and the other at 9:28 A. M. July 21st, Judge Champlin, as the agent for Mrs. Long, and Wilson, as the trustee for the creditors named in the mortgage to him, took possession, jointly. On the 28th of July the complainants filed this bill on behalf of themselves, and other creditors similarly situated. Wilson, the trustee, was appointed receiver, and has brought into court $21,500 as the fund realized from the assets of the defunct corporation. The debts of the corporation amount to about $37,000. If both mortgages are sustained as valid, they will more than consume the assets of the corporation. The circuit court held that the mortgages were valid, and entered a decree dismissing the bill.

Edward Taggard and Arthur C. Denison, for appellants.

John E. More and Kingsley & Kleinhaus, for appellees.

Before JACKSON and TAFT, Circuit Judges, and BARR, District Judge.

TAFT Circuit Judge, (after stating the facts.)

It is not contended on behalf of the complainants that the debts which the mortgages in question were given to secure are not valid debts of the company, with the exception of the note held by Clara M. Pierce for $1,000. Whether the Pierce note is a valid obligation is not material on this issue, because the other secured debts, if the mortgages are held valid, are more than enough to consume the fund in court. There is no charge of actual bad faith made with reference to the giving of these mortgages. The contention of the complainants is that these mortgages should be held to be invalid--First, because they are, in effect, common-law assignments, with preferences, as between creditors, and are therefore void under the statute of Michigan (2 How. St. § 8739) which provides that 'all assignments commonly called common-law assignments for the benefit of creditors shall be void unless the same shall be without preference as between such creditors, and shall be of all the property of the assignor not exempt from execution;' second, because the mortgages were given by an insolvent corporation to secure debts in which the stockholders and directors, whose votes made the mortgages the act of the corporation, had a personal interest in them, as grantors thereof.

1. The question whether these chattel mortgages are void, as common-law assignments giving preference to creditors, under the statute of Michigan, is a question purely of local law. This is expressly decided by the supreme court of the United States in the case of Etheridge v. Sperry, 139 U.S. 266, 11 S.Ct. 565. Mr. Justice Brewer, speaking for the court, said in that case:

'While chattel mortgages are instruments of general use, each state has a right to determine for itself under what circumstances they may be executed, 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 a great diversity in the ruling 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.'

There can be no doubt that, under the decisions of the supreme court of Michigan, the mortgages in question here are not violations of the statute forbidding preferences in common-law assignments. It is said that at the time these mortgages were executed, under the then last decision of the supreme court of Michigan, in Kendall v. Bishop, 76 Mich. 634, 43 N.W. 645, these mortgages would have been invalid, and that the law of the state, which this court should follow with respect to the mortgages, is the law which was in force as then expounded by the supreme court. Conceding, for the purposes of the argument, that under the case of Kendall v. Bishop, supra, these mortgages must be held invalid, we are of opinion that, if subsequent decisions of the supreme court have reversed the principle announced in that case, we should follow those subsequent decisions. The right of the complainants and their general creditors to take the mortgages was a remedy, and not a contractual right; and there is nothing in this case to show, or justify a presumption, that the debts represented by the complainants and other unsecured general creditors were contracted on the faith of the inability of the corporation to prefer creditors by chattel mortgage. Certainly, it would not impair their contracts of indebtedness if the legislature of Michigan had repealed the statute making common-law assignments with preferences void. If so, the law of the state of Michigan which we are to administer, is the law of the state, as expounded by its highest tribunal, when the remedy comes to us for our enforcement. It was decided in Warner v. Littlefield that a debtor, though insolvent, might secure a...