Deupree v. Watson

• Decision Date: 30 June 1914
• Docket Number: 2457.
• Citation: 216 F. 483
• Parties: DEUPREE v. WATSON.
• Court: U.S. Court of Appeals — Sixth Circuit

216 F. 483

DEUPREE v. WATSON.

No. 2457.

United States Court of Appeals, Sixth Circuit.

June 30, 1914

F. W Schmitz, of Covington, Ky., for appellant.

U. J Howard, of Covington, Ky., for appellee.

Before WARRINGTON and KNAPPEN, Circuit Judges, and HOLLISTER District judge.

HOLLISTER District Judge.

The controversy in this case is between William J. Deupree trustee in bankruptcy of Luther B. Watson, and Mrs. Watson, mother of the bankrupt, over a mortgage given by him to her, which was, by the District Court, awarded priority over the claims of unsecured subsequent creditors.

The mortgage is attacked on several grounds: That the debt is fraudulent in whole or in part; that the mortgage is in itself fraudulent; that it was withheld from record and became invalid under section 496 Kentucky Statutes (1903), as against subsequent creditors without notice of its existence; that it was withheld from record in order to enable the mortgagor to obtain credit, and that it constitutes a preference under sections 60a and 60b of the Bankruptcy Act of 1898 and the amendments of 1903 and 1910.

The conflicting testimony was carefully weighed by the referee as shown by his report. He found the amount of the debt was as claimed by Mrs. Watson, that the mortgage itself was free from taint, and that it was withheld from record through no fraudulent reason. Judge Cochran weighed the testimony with even more than his usual painstaking and discrimination, and affirmed the judgment of the referee ((D.C.) 201 F. 962). Under these circumstances, this court would not be warranted in reaching a different conclusion 'upon anything less than a demonstration of plain mistake. ' This rule is established and of frequent application in this court and elsewhere. Bank v. Mack, 163 F. 155, 158, 89 C.C.A. 605, 24 L.R.A. (N.S.) 184; Wabash Ry. Co. v. Compton, 172 F. 17, 21, 96 C.C.A. 603; In re Holden, 203 F. 229, 232, 121 C.C.A. 435; 1 Loveland on Bankruptcy (4th Ed.) pages 225, 226. That demonstration is not forthcoming. On the contrary, the testimony fully justifies the conclusion reached by the district judge and the referee.

Mrs. Watson, evidently a woman of considerable business experience and judgment, had carried on for many years a saloon business in Covington, Ky., on premises owned by her near the Latonia Race Track. Her husband kept the bar and she attended to the business transactions necessary to carry on that business. She and her husband spent in acquiring, and upon, the property as much as $18,000. She was the owner of other parcels of real estate and had maintained good credit. Her husband had died some little time prior to the transactions which give rise to this controversy and she had intermarried with one Wilson, from whom afterwards she was divorced and restored to her former name of Watson. Her son, Luther, the bankrupt, 23 years of age, enjoyed the confidence of his mother, and also of William Riedlin, president of the Bavarian Brewing Company, Covington. The fact that he was about to go into the saloon business near his mother's saloon caused negotiations between him and her in December, 1908, looking to the purchase by him of her saloon premises. For some time before he had been operating her saloon on his own account and had incurred an indebtedness to the Moerlein Brewing Company of Cincinnati of some $1,600, to secure which he had given chattel mortgages on saloon fixtures and chattels on the premises. He had been accustomed to purchase most of the beer used by him from that company, although he obtained a small part from the Bavarian Brewing Company. The purchase price agreed upon between him and his mother was $10,800, of which $4,000 was to be paid in cash and the balance, $6,800, was evidenced by five promissory notes one payable each year, the first for $700 and each of the others for $1,525, to be secured by mortgage upon the premises.

Luther had been promised $4,500 by the Moerlein Brewing Company to assist in carrying through the transaction for which he was to give a mortgage. $500 of this he needed for improvements upon the premises and $4,000 to make the cash payment to his mother. In January, Mrs. Watson employed D. A. Glenn, a reputable lawyer of Covington, to prepare the necessary papers embracing a deed from Mrs. Watson to Luther, a mortgage to the Moerlein Brewing Company for $4,500, and the purchase-money mortgage for $6,800, referring specifically to the Moerlein mortgage to which it was subordinate. The deed was dated January 20, 1909; was acknowledged by her then husband, to whom it had been sent at Memphis for his signature; and was by her acknowledged February 15, 1909. It was delivered the next day.

Luther, being dissatisfied with the delay of the Moerlein Brewing Company in furnishing the $4,500, applied to Riedlin and obtained the money at the Farmers' & Traders' National Bank at Covington through the indorsement of Riedlin to whom, his wife joining, he executed a mortgage to secure that sum. One of the most convincing arguments for the bona fides of Mrs. Watson's mortgage is that, in the consummation of the transaction of sale, the fact that William Riedlin became the paramount mortgagee instead of the Moerlein Brewing Company, as had been expected, was overlooked, and the mortgage to Mrs. Watson, as originally drafted, remained unchanged.

Mrs. Watson being indebted for something more than $1,100 for improvements on the premises, the indebtedness was paid out of the $4,000, and she received a check from Luther on February 16, 1909, for the balance. The check was made the same day the deed was delivered, and Luther and his wife executed the mortgage for $6,800 and the notes which it secured. On that day Luther, Riedlin, and Theissen, a lawyer of Covington employed by Riedlin to examine the title to the property, met at the bank for the purpose of closing the negotiations for the loan of $4,500. Since the deed from Mrs. Watson to Luther recited a consideration of $1 and other considerations paid and to be paid, Mr. Theissen thought Mrs. Watson ought to be consulted. Her son called her over the telephone, or she called him. She complained that a transaction in which she was so vitally interested ought not be carried on unless she were represented. Riedlin then talked with her and told her a first mortgage was about to be given to him to secure the $4,500 and advised her not to put her mortgage on record as to do so would amount to 'double taxation,' in that the property was already assessed and her mortgage would be, if she put it on record. Glenn, her lawyer, also advised her not to put the mortgage on record.

After the purchase and apparently up to the time he left Covington in August, 1910, Luther carried on quite a large business, and in the spring of 1909, the exact date not being important, he paid the Riedlin mortgage from the proceeds of $6,000 borrowed on mortgage from a bank, and discharged the Moerlein chattel mortgages. That mortgage, having been at once recorded, is conceded to be prior to Mrs. Watson's mortgage.

Through the Moerlein Brewing Company a saloon had been established in the neighborhood in competition with Luther's business and Riedlin loaned $1,900 (constituting his unsecured claim) to Luther for the purpose of constructing a bowling alley, better toilet facilities, and other improvements, so as to make his resort more attractive than it was. Luther, after becoming the owner of the saloon, bought all his beer from the Bavarian Brewing Company.

Luther, up to the time of abandoning his business in August, 1910, was apparently doing well, but was either unable to or had not paid Riedlin his $1,900 nor the Bavarian Brewing Company's debt of $3,041.22 owing it for beer. The claims of Riedlin and the brewing company constitute by far the greater part of Luther's unsecured indebtedness.

In August, 1910, Riedlin demanded of Luther a mortgage to secure the $1,900. Luther, realizing that injury might result to his mother, her mortgage not being recorded, declined to secure Riedlin, and appreciating his inability to pay him and the brewing company and his other creditors, he, without notifying his mother or any one, left home and obtained employment at Detroit, where he was living with his wife and children at the time his deposition was taken during the pendency of these proceedings. It is probable that he went away either because he was ashamed or afraid to meet his creditors, or was oppressed by the sense of failure and wanted to begin life over in another locality.

On August 13, 1910, Luther employed a lawyer to prepare a mortgage to his mother for $6,800 which he and his wife executed and left with the lawyer with directions to record the same. It was recorded on the 15th. After the 13th he...