Citizens State Bank v. Brown

• Decision Date: 11 February 1910
• Docket Number: Nos. 16,458 - (161).,s. 16,458 - (161).
• Parties: CITIZENS STATE BANK OF TRACY v. FREMONT S. BROWN.<SMALL><SUP>1</SUP></SMALL>
• Court: Minnesota Supreme Court

110 Minn. 176

CITIZENS STATE BANK OF TRACY v. FREMONT S. BROWN.¹

Nos. 16,458 - (161).

Supreme Court of Minnesota.

February 11, 1910.

Action in the district court for Lyon county against the trustee in bankruptcy of the partners doing business under the name of the Tracy Furniture Company to recover a balance of $2,661.95 on three promissory notes dated May 8, 1907, which were secured by a chattel mortgage of the same date upon a stock of goods, and to have the mortgage, Exhibit B, declared a lien against the property therein described and against moneys received from the sale thereof. The answer alleged that the mortgage of February 4 and that of May 8, 1907, were executed with the intent of the parties thereto to hinder, delay and defraud the creditors of the bankrupts; that on May 8, 1907, the bankrupts were insolvent, the mortgage was a preference under the bankruptcy laws, and the effect of the mortgage was to enable plaintiff to obtain a greater percentage of its debt than any other creditor of the same class.

The case was tried before Olsen, J., who made findings of fact and as conclusions of law found that the amount due on the mortgage lien was $2,136.85, the mortgage, Exhibit B, was a valid lien upon $3,138.36 of the proceeds of the sale of the stock in the hands of the defendant trustee to the extent of $2,136.85, subject to such expenses

and charges of the trustee as might be found chargeable against said proceeds by the bankruptcy court. From a judgment entered pursuant to the findings, defendant appealed. Reversed.

[Plaintiff and respondent sought to subject certain funds in the hands of defendant and appellant as trustee in bankruptcy to the lien of a chattel mortgage given by the bankrupts on a stock of merchandise. In June, 1906, two brothers borrowed $2,000 from the plaintiff bank and secured the notes therefor by chattel mortgage. About June 1 one Schmid bought out one of the brothers, formed a partnership with the other, took over the stock of goods, and assumed the mortgage. The new firm borrowed an additional $1,000, and gave a new note and mortgage for $3,000. Subsequently various payments were made, and new loans negotiated, and new mortgages placed upon the stock of merchandise. On February 4, 1907, the entire indebtedness, amounting to $3,000, was renewed, and a new mortgage, described as "Exhibit A," executed. This instrument provided that the mortgagors should have the privilege of selling from the stock in the usual course of retail trade, but required that the purchase price of each article sold should be immediately applied on the mortgage indebtedness. This date is significant, because the trial court found that there had been filed and allowed in the bankruptcy court claims against said mortgagors:

                Accruing prior to February 4, 1907 ......................... $2,407 94
                Accruing between February 4 and May 8, 1907 ................  1,263 84
                Accruing since May 8, 1907 .................................    377 11
                                                                             _________
                                      Total ................................ $4,048 89
                

There was not sufficient property in the hands of the trustee to pay these claims. On May 8, 1907, the mortgage was renewed, other notes were executed for the same sum, and a chattel mortgage was given to secure the same, described as "Exhibit B." All mortgages were duly filed. Nothing was actually paid by the debtors on the mortgage, except that $518.42 was paid in daily payments from June 27 to July 2, 1907. It is true that goods were sold to the amount of $738, which was not in fact paid over to the mortgagee, but was applied by the court on the mortgage indebtedness. New goods were added to the stock, which the trial court held the trustee was entitled to retain free from the lien of the mortgage. Between February 4 and May 8, 1907, the mortgagors sold goods from the stock at retail in the usual course of business for cash or credit to the amount of over $3,000, but the mortgagors did not apply the proceeds to the mortgage debt. The mortgagors were found to have been solvent on February 4, 1907, but in failing circumstances, or else insolvent, on May 8, 1907. The plaintiff bank had no knowledge or notice of such insolvency on May 8, or at any time until June, 1907. On July 2, 1907, a receiver was appointed in proceedings in voluntary bankruptcy. On July 23 the mortgagors were adjudged bankrupts. Afterwards the defendant was appointed trustee in bankruptcy. All remaining assets, including the unsold part of the stock of merchandise mortgaged to plaintiff, was delivered to him. From a judgment in favor of plaintiff, defendant appeals.]

Korns & Johnson, for appellant.

N. J. Robinson and J. A. Rickert, for respondent.

JAGGARD, J. (after stating the facts within [] as above).

Plaintiff properly insists that a mortgage on a stock of merchandise, which provides that the mortgagors may retain possession and sell in the usual course of retail trade, so long as the proceeds of the sale of the goods are to apply on the mortgage in reduction thereof, is valid on its face, and is not fraudulent as against creditors or subsequent purchasers, if executed for a valuable consideration, unless it is shown that there was some agreement between the parties that the mortgagors might use the proceeds of the sale of the goods for their own use, instead of applying it on the mortgage. Bannon v. Bowler, 34 Minn. 416, 26 N. W. 237; Donohue v. Campbell, 81 Minn. 107, 83 N. W. 469; Wilson v. Walrath, 103 Minn. 412, 115 N. W. 203; Conkling v. Shelley, 28 N. Y. 360, 361, 84 Am. Dec. 348; Frank v. Vollkommer, 205 U. S. 521, 27 Sup. Ct. 596, 51 L. Ed. 911; Jones, Chattel Mtgs. p. 530, c. 9. The fact, however, that sales were subsequently made, the proceeds of which were not applied to the mortgage indebtedness, is cogent, although not necessarily conclusive, evidence that it was the understanding of the parties to the mortgage, when it was made, that the mortgagor might do so. Donohue v. Campbell, supra.

In Horton v. Williams, 21 Minn. 187, it was said: "The conduct of the parties in dealing with the mortgaged property may, however, furnish evidence in some cases amounting to a moral certainty that the mortgage was executed with a fraudulent intent. Thus, in the case of a mortgage on a stock of goods in a retail shop, where the mortgagor continues in possession, making sales from day to day as owner, and dealing with the goods and the proceeds as his own, with the mortgagee's knowledge and assent, it is extremely difficult to resist the conclusion that this course of conduct on the part of the mortgagor was contemplated and intended by the parties when the mortgage was made." Actual fraudulent intent is not material. Gallagher v. Rosenfield, 47 Minn. 507, 50 N. W. 696; and see 8 Columbia Law Rev. 309; Joseph M. Hayes Woolen Co. v. Gallagher, 58 Minn. 502, 60 N. W. 343; Charles Baumbach Co. v. Hobkirk, 104 Wis. 488, 80 N. W. 740; Potts v. Hart, 99 N. Y. 168, 1 N. E. 605; Hangen v. Hachemeister, 114 N. Y. 566, 21 N. E. 1046, 5 L.R.A. 137, 11 Am. St. 691.

In Standard v. Schultz, 45 Kan. 52, 25 Pac. 625, it was pointed out that under the course of dealing pursued by the debtor he had the same control over the property, and exercised the same right to sell and to make an application of the proceeds of sale, as if the chattel mortgage had never been executed. The chattel mortgage could be used by the debtor as a...