Crowder v. Allen-West Com'n. Co.

• Decision Date: 30 March 1914
• Docket Number: 4036.
• Citation: 213 F. 177
• Parties: CROWDER v. ALLEN-WEST COMMISSION CO.
• Court: U.S. Court of Appeals — Eighth Circuit

213 F. 177

CROWDER v. ALLEN-WEST COMMISSION CO.

No. 4036.

United States Court of Appeals, Eighth Circuit.

March 30, 1914

Syllabus by the Court.

In 1899 H. made a composition agreement with his creditors and an agreement with A., one of them, which was unknown to the others, to pay his claim in full in consideration of his loan to H. of the money required to pay the other creditors the composition percentage of their claims, and in 1910 he was adjudged a bankrupt. Held, these facts furnish no ground for the disallowance of A.'s claim against the estate of the bankrupt because the composition creditors never rescinded the voidable composition and had no cause of action against A., and H., the debtor, had voluntarily paid, after the execution of the composition, the moneys loaned him by A. to pay the other creditors.

Such a composition agreement, while executory, is not enforceable and after execution is voidable, not void, and creditors may rescind it and return, if practicable, to their former position, but they have no other remedy. The debtor may recover

the excess above the composition percentage which he pays to the preferred creditor before the execution of the composition or the excess which he is compelled to pay thereafter, but he may not recover the excess which he voluntarily pays it thereafter.

A mortgage of merchandise in use in trade and other property in Arkansas, which contains stipulations that the mortgagor's property is conveyed and surrendered to the possession of the mortgagee, that the mortgagor is to act as the agent of the mortgagee in the sale of the stock of merchandise on hand and to be purchased, that he is the agent and representative of the mortgagee in everything pertaining to the business, and that he will make statements and reports of the business and property to the mortgagee as requested is not an absolute conveyance of the property to the mortgagee and the establishment of the relation of principal and agent between the mortgagee and mortgagor, but is notwithstanding the stipulations regarding agency, a mortgage only.

H., an insolvent debtor, made false statements of his financial condition to creditors and commercial agencies and failed to state his debt to his largest creditor from time to time between August, 1899, and December, 1910, when he was adjudged a bankrupt. A., his largest creditor, knew he was insolvent, but hoped and believed that by loaning him more money it could enable him to make his business so prosperous that he could and would pay his debts. It continued to loan him money to pay his other creditors and to carry on his business until his debt to it had increased from $7,730.00 on September 1, 1901, to $238,835.40 more than the value of the security it had obtained for it, in December, 1910. Meanwhile it had taken three mortgages on his property to secure his debt to it which it had recorded.

A creditor must have been guilty of some moral turpitude or some breach of duty whereby other creditors were deceived to their damage to constitute such a fraud as will estop him from sharing with them in the distribution of the proceeds of the estate of his debtor in bankruptcy. A willful intent to deceive or such negligence as is tantamount thereto is an essential element of such an estoppel.

A creditor of an insolvent debtor is a competitor of his other creditors. He stands in no fiduciary or contractual relation to them, and he owes them no duty to inform them of his debtor's financial condition or of the amount of his indebtedness to him.

The trustee in bankruptcy of the estate of J. M. Hawks appeals from the allowance by the court below of the unsecured claim of the Allen-West Commission Company for $238,835.40. Hawks was adjudged a bankrupt on December 30, 1910, the property of his estate has been sold for some less than $100,000, and the claims of other creditors aggregate about $125,000. The contention of the trustee is that the claim of the commission company should be disallowed because from 1899 until 1910 it conspired with Hawks to conceal his indebtedness to maintain his credit and thereby to defraud his other creditors. The salient facts established in the case are these: The commission company was a cotton factor engaged in the business of loaning money to Hawks and other merchants in the country to enable them to advance money to their customers who were raising cotton so that they could control the shipment of the cotton in their respective communities and send it to the commission company, which sold it on commission and applied the proceeds to the respective debts of these merchants. On August 1, 1899, Hawks was insolvent and his 27 creditors, one of whom was the commission company made a composition with him whereby they released him from his debts to them set forth in the composition agreement upon the subsequent payment to them of 40 per cent. of their claims. On August 10, 1899, the commission company and Hawks made a secret contract that the former would loan him the money to pay this 40 per cent. to his other creditors and that he would pay his debt, which amounted to $3,987.57, to the commission company in full. The commission company loaned Hawks the money, and with it he paid all his other creditors 40 per cent. of his debts to them, and on August 31, 1899, he made a mortgage to that company on a lot he owned in Reyno, Ark., his stock of merchandise valued at $2,500, his store fixtures, 5 horses, 11 mules, his cotton crop on 300 acres, his corn crop on 25 acres, his farm implements, notes and accounts to secure the payment to the commission company of his debt to it of $3,987.57, of a note of $2,500 which he had signed with A. M. Dudgeon and Joseph Dudgeon, of the amounts it should advance to him for all purposes, including its advances to him to pay the 40 per cent. of the claims of the other creditors pursuant to the contract of August 10, 1899, which was specifically referred to in the mortgage and made a part thereof. This mortgage recited that the commission company had agreed to advance money to Hawks to pay these creditors and to purchase goods, and it contained an agreement that Hawks then surrendered and the commission company took possession of the mortgaged property; that Hawks was to act as the agent of the company in gathering and marketing the crops; that in the sale of the merchandise on hand and to be purchased, and in everything pertaining to the business, he was the agent and representative of the commission company; that he was to ship the cotton he picked, or purchased, or received, to the commission company, to be sold by it on account; and that he was to make statements of the business to the commission company as often as requested. The conditions of the mortgage were that if he paid the company the sums it advanced, with 8 per cent. interest, on or before January 1, 1900, and performed the agreement of August 10, 1899, then the mortgage should be void; but that if he failed to perform any of his covenants contained therein, or if he should purchase goods or supplies contrary to the instructions or desire of the company, then it should have the right to take possession of all the property mortgaged and all of the property purchased by Hawks, to sell the same and to apply the proceeds to the payment of Hawks' debt to it, returning the balance to him. The mortgage was speedily recorded, and the commission company continued to loan money to Hawks, to receive and sell his cotton, and to apply the proceeds to the payment of his debt to it until his bankruptcy in December, 1910. The lien of this mortgage of August, 1899, expired, as against other creditors, in 1904. The debt of Hawks to the commission company specified in the composition agreement and the debt for his advance to pay the 40 per cent. to pay the other creditors was paid prior to 1904 by the lawful application of the payments upon the account from the sales of cotton shipped by Hawks to the commission company prior to that time, but by agreement of the parties, and by payment of interest, his debt on account of the Dudgeon note survived and became a part of the claim of the commission company against his estate in bankruptcy.

On May 13, 1908, Hawks mortgaged to the commission company all the real estate he had to secure the payment of the Dudgeon note and his debt to the commission company on open account; on August 6, 1910, he mortgaged to it two other pieces of real estate for the same purpose, and these mortgages were recorded soon after their respective dates.

During the 11 years between the composition in August, 1899, and the bankruptcy in December, 1910, there was a voluminous correspondence between Hawks and the commission company, the burden of which was sharp protests by the commission company against Hawks' large and increasing debt to it and repeated advice and requests that he contract his business and pay his debts. But Hawks increased his business until he was operating several stores. He bought and shipped cotton in large quantities to the commission company and bought and sold other merchandise at his stores. He paid all his other mercantile creditors with the money derived from the sales at his stores and from the money advanced to him by the commission company until in December, 1910, is indebtedness to that company had risen to $250,000, and it discovered by an audit of his books that he was owing large amounts to other creditors, when it ceased to honor his drafts and he was adjudged a bankrupt. From the date of the composition to the bankruptcy he was continuously insolvent, but the commission company hoped and believed that by advancing him more money it could enable him to make his business so profitable that he could and would pay...