Cauthorn v. Burley State Bank

Citation26 Idaho 532,144 P. 1108
CourtUnited States State Supreme Court of Idaho
Decision Date01 December 1914
PartiesL. H. CAUTHORN, Trustee of the Estate of A. C. DUNNING and GUY OLIN, Partners Doing Business Under the Firm Name and Style of "THE TOGGERY," in Bankruptcy, Appellant, v. BURLEY STATE BANK, a Corporation, Respondent

BANKRUPTCY-CHATTEL MORTGAGE-PREFERENCE-CAUSE OF ACTION-REASONABLE CAUSE TO BELIEVE TRANSFER WILL EFFECT PREFERENCE-PLEADING.

1. In an action by a trustee in bankruptcy to set aside a transfer on the ground that it effects a preference, and also that it is voidable as a fraud upon other creditors, under subdivision "e" of sec. 67 of the present bankruptcy law; the question as to a preference is determined from the facts and circumstances, and unless these are such as to produce a reasonable cause of belief in the mind of the person receiving the transfer that its enforcement would effect a preference, the transaction must be held valid. On the question as to whether a certain transfer is void because it is a fraud upon other creditors, the question must be determined by the evidence in each case.

2. Held, a chattel mortgage on a stock of goods which provides that the mortgagors may retain possession of the goods, sell them in the usual course of business, and each week pay a certain per cent of the gross proceeds of sales on the mortgage debt, is not void per se, but the question of its validity must be determined by the good faith or lack of good faith of the parties to the transaction.

APPEAL from the District Court of the Fourth Judicial District for Cassia County. Hon. Edward A. Walters, Judge.

Action by a trustee in bankruptcy to have a certain chattel mortgage declared illegal and void, and to have the mortgaged property turned over to the bankrupt's estate. Judgment for defendant. Plaintiff appeals. Judgment affirmed.

Judgment affirmed and costs awarded to the respondent.

W. E Abraham and James H. Wise, for Appellant.

"It does not now depend upon the purpose of intention of the debtor or creditor. It is implied that the debtor intended the transfer to be a preference at the time it was made." (In re Andrews, 144 F. 922, 75 C. C. A 562; In re First National Bank, 155 F. 100, 84 C. C. A. 16; Kimmerle v. Farr, 189 F. 295, 111 C. C. A. 27.)

"The trustee need not prove knowledge or belief, only reasonable cause to believe that a preference was intended." ( Lampkin v. People's National Bank, 98 Mo.App. 239, 71 S.W. 715.)

"This phrase includes reasonable cause to believe that the debtor is insolvent, for this is one of the elements of preference." (Thomas v. Adelman, 136 F. 973; In re Kullberg, 176 F. 585.)

"A person is always presumed to intend what is the necessary consequence of his act." (Western Tie & Timber Co. v. Brown, 196 U.S. 502, 25 S.Ct. 39, 49 L.Ed. 571; English v. Ross, 140 F. 630; Wilson v. Nelson, 183 U.S. 191, 22 S.Ct. 74, 46 L.Ed. 147; Forbes v. Howe, 102 Mass. 427, 3 Am. Rep. 475.)

"Whatever fairly puts a party upon inquiry is sufficient notice where the means of knowledge are at hand, and if the party under such circumstances omits to inquire and proceeds to receive the transfer or conveyance, he does so at his peril, as he is chargeable of knowledge and of all the facts, which by a proper inquiry he might have ascertained." ( Crittendon v. Barton, 59 A.D. 555, 69 N.Y.S. 559, 5 Am. Bankr. Rep. 775; Wager v. Hall, 16 Wall. (U.S.) 584, 21 L.Ed. 504; Hackney v. Hargreaves Bros., 68 Neb. 624, 94 N.W. 822, 99 N.W. 675; Andrews v. Kellogg, 41 Colo. 35, 92 P. 222; Walker v. Tenison Bros. Saddlery Co. (Tex. Civ. App.), 94 S.W. 166; Whitwell v. Wright, 115 N.Y.S. 48; Stevens v. Oscar Holway Co., 156 F. 90.)

"Where a mortgage is given to secure a present loan in a pre-existing debt, it is invalid as a preference and to the extent of the pre-existing debt secured thereby." ( City National Bank v. Bruce, 109 F. 69, 48 C. C. A. 236; Stedman v. Bank of Monroe, 117 F. 237, 54 C. C. A. 269; In re Hull, 115 F. 858; In re Wolf, 98 F. 84; In re T. Furse & Co., 127 F. 690, 62 C. C. A. 446.)

"Possession of a stock of merchandise by the mortgagor, with power to sell and retail the same, without requiring the proceeds to be applied to the payment of the debt due the mortgagee is void as to attaching creditors of the mortgagor." ( Lewiston National Bank v. Martin, 2 Idaho 734, 23 P. 920; Robinson v. Elliott, 22 Wall. (U.S.) 513, 524, 22 L.Ed. 758; Lyon v. Council Bluffs Sav. Bank, 29 F. 566, 578.)

"Knowledge on the part of the mortgagee that the mortgagor is disposing of his stock at retail in the usual course of business without devoting the proceeds to the payment of the debt is sufficient evidence of the mortgagee's consent to such sales to warrant a conclusion of fraudulent intent and avoid the mortgage." (Hayes Woolen Co. v. Gallagher, 58 Minn. 502, 60 N.W. 343; Scott Hardware Co. v. Riddle, 84 Mo.App. 275, 282; Ryan v. Rogers, 14 Idaho 309, 94 P. 427.)

T. Bailey Lee, for Respondent.

"If the trustee fail to prove any one of the elements necessary to constitute a preference, the transfer cannot be set aside." (Utah Assn. of Credit Men v. Boyle Furniture Co., 39 Utah 518, 117 P. 800; Crook v. People's Nat. Bank, 18 Am. Bankr. Rep. 684, note; McNaboe v. Columbian Mfg. Co., 153 F. 967, 83 C. C. A. 81.)

"Mere knowledge that a debtor is behind in his payments is insufficient to put his creditors upon inquiry, and charge them with facts an inquiry might disclose. Nor will the mere fact of taking security for a loan do so." (Loveland on Bankruptcy, p. 1003, note 47 and citations; Grant v. First National Bank, 97 U.S. 81, 24 L.Ed. 971.)

"Creditor is not bound to trace or investigate suspicious circumstances which come to his attention." (Blankenbaker v. Charleston State Bank, 111 Ill.App. 393.) Doubt or suspicion is insufficient. (Summerville v. Stockton Milling Co., 142 Cal. 529, 76 P. 243; Stuckey v. Masonic Sav. Bank, 108 U.S. 74, 27 L.Ed. 640.)

"An adjudication of bankruptcy soon after the transfer is insufficient to show reasonable cause to believe insolvency." (Loveland on Bankruptcy, sec. 506, note 68, and citations.)

And the burden of proof to show this "reasonable cause to believe" lies upon the trustee. (Kimmerle v. Farr, 189 F. 295, 111 C. C. A. 27; Arkansas Nat. Bank v. Sparks, 83 Ark. 324, 103 S.W. 626.)

Even had the partners been insolvent, this respondent must, under the language of sec. 11 of the Amendatory Act of 1910, have had "reasonable cause to believe that the enforcement of such transfer would effect a preference." (Loveland on Bankruptcy, sec. 492 and citations.)

"If a mortgage executed at the time the loan is made creates a lien on specific chattels, no preference is created." (Loveland on Bankruptcy, sec. 519; First Nat. Bank of Holdredge v. Johnson, 68 Neb. 641, 94 N.W. 837, 4 Ann. Cas. 485.)

In order to invalidate a mortgage such as the one involved here, actual fraud must be proven. The old common-law rule holding such mortgages fraudulent per se has been abolished by American jurisdictions which have recognized the utter impossibility amid modern business conditions of carrying on business under its restriction. (Etheridge v. Sperry, 139 U.S. 266, 11 S.Ct. 565, 35 L.Ed. 171; Williams v. Mitchell, 9 Kan. App. 627, 58 P. 1025; Whitson v. Griffis, 39 Kan. 211, 7 Am. St. 546, 17 P. 801.)

TRUITT, J. Sullivan, C. J., concurs.

OPINION

TRUITT, J.

This action was brought in the lower court by the appellant, L. H. Cauthorn, trustee in bankruptcy of the estate of A. C. Dunning and Guy Olin, bankrupts, against the Burley State Bank, a corporation engaged in the banking business at the town of Burley, Idaho, to have a certain chattel mortgage on a stock of merchandise and fixtures appertaining thereto, also located at said town, declared illegal and void and that the property described in said mortgage be turned over to said trustee as a part of the estate of said bankrupts.

The complaint sets up two separate causes of action. In the first cause set up therein, it is alleged that said A. C. Dunning and Guy Olin were on the 16th day of October, 1911, engaged in business as copartners under the firm name and style of "The Toggery" at said town of Burley; that said firm was at said date insolvent and that it was indebted to the defendant bank in the sum of $ 1,700. It further alleges that at said date said firm and said A. C. Dunning and Guy Olin executed and delivered to the defendant a promissory note in said sum of $ 1,700; that to secure the same they also at said time executed a chattel mortgage upon their entire stock of merchandise and fixtures used in the business and for no other consideration whatever; that said $ 1,700 was at said time a pre-existing, unsecured indebtedness, and that the transfer of said property was made for the benefit of said defendant with the intent to give it a preference as a creditor, and with intent to hinder, delay and defraud the other creditors of said parties, thereby making it possible for said defendant to obtain a greater percentage of its said debt than any other creditor in the same class. The complaint further alleged that at the time said chattel mortgage was given and said property transferred to the defendant, it had reasonable cause to believe that said parties were insolvent that a preference was intended, and the transfer of said property was received by defendant with the intent and purpose to hinder, delay and defraud the other creditors of said parties of the same class. It further alleges that the defendant at the time of this transaction was and for more than one year prior thereto had been the banker for said firm, and as such had full knowledge of its financial standing and condition, that its liabilities greatly exceeded its assets and...

To continue reading

Request your trial
2 cases
  • McConnon v. Holden
    • United States
    • Idaho Supreme Court
    • February 13, 1922
    ... ... public policy of the state for the court to lend its aid to ... one who founds his cause of action ... 630; Smith v. Smith, 4 Idaho ... 1, 35 P. 697; Fidelity State Bank v. Miller, 29 ... Idaho 777, 162 P. 244; First National Bank v. Harkey, ... v. Balliet, 38 Nev ... 164, 145 P. 941; Cauthorn v. Burley State Bank, 26 ... Idaho 532, 144 P. 1108; Blackwell v ... ...
  • Diamond National Corporation v. Lee
    • United States
    • U.S. Court of Appeals — Ninth Circuit
    • August 5, 1964
    ...Since the parties chose to ignore such provision, the mortgage on the shifting stock of merchandise is void. Cauthorn v. Burley State Bank, 26 Idaho 532, 144 P. 1108, cited by Diamond, only serves to illustrate the type of compliance required by the Idaho courts before validity is recognize......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT