Gray & Dudley Hardware Co. v. Guthrie

• Decision Date: 12 April 1917
• Docket Number: 6 Div. 465
• Citation: 75 So. 318,200 Ala. 6
• Parties: GRAY & DUDLEY HARDWARE CO. v. GUTHRIE et al.
• Court: Alabama Supreme Court

75 So. 318

200 Ala. 6

GRAY & DUDLEY HARDWARE CO. v. GUTHRIE et al.

6 Div. 465

Supreme Court of Alabama

April 12, 1917

Response to Application for a Rehearing, May 17, 1917

Appeal from Chancery Court, Cullman County; James E. Horton, Jr. Chancellor.

Suit by Gray & Dudley Hardware Company against W.L. Guthrie, as trustee, and others. From decree for respondents, complainant appeals. Affirmed.

E.W Godbey, of Decatur, for appellant.

Sample & Kilpatrick, of Cullman, for appellee.

MAYFIELD J.

Appellant corporation filed its bill in the chancery court of Cullman county to foreclose a mortgage executed by Charles Ruehl on the 12th day of June, 1914, but which was not filed for record until September 3, 1914. The mortgage was to secure the payment of a note for $1,660.73, maturing the 1st of August, 1914, and any other indebtedness which might thereafter accrue or exist, before the maturity of the debt or the enforcement of the mortgage; but none, other than the note mentioned, was shown to have accrued, so the mortgage was given in effect to secure an existing indebtedness. There was, however, an agreement between the parties to the mortgage that if the mortgagor should assign and deliver to the mortgagee notes of third parties to the amount of $2,000 on or before the maturity of the note secured--that is before August 1, 1914--the mortgage should thereupon be treated as surrendered or satisfied, and the debt secured, extended until November 10, 1914. The bill was filed against the mortgagor, who had then become a bankrupt, and W.L. Guthrie, as his trustee in bankruptcy, and several creditors of the bankrupt mortgagor, who were also mortgagees of the bankrupt. The bill sought to have complainant's mortgage foreclosed and certain other mortgages declared void as against complainant. The trustee answered the bill, and made his answer a cross-bill seeking to have complainant's mortgage declared void as to the creditors of the bankrupt mortgagor, because there had been an attempted preference, in violation of the Bankruptcy Act, and because the mortgage was made also with intent to hinder, delay, or defraud the other creditors of the mortgagor. The chancellor denied to complainant any relief, as prayed or otherwise, but granted the relief prayed in the cross-bill of the trustee in bankruptcy. From the decree the complainant prosecutes this appeal.

The main question presented on this appeal for decision, that upon which most of the others depend, is whether or not complainant's mortgage, sought to be foreclosed, was void as against the existing creditors of the mortgagor, by virtue either of the bankruptcy statute or of our state statutes as to fraudulent conveyances. If void for any reason, or by virtue of any statute, state or federal, then of course complainant was entitled to no relief, that prayed or otherwise; if not void, but valid, then it was entitled to at least part of the relief prayed. We are of opinion that the chancellor reached the correct conclusion, and rendered a correct decree, so far as the complainant has any cause to complain.

While the mortgage was executed more than four months before the bankrupt filed his petition of bankruptcy, in the bankruptcy court, upon which he was subsequently adjudicated a bankrupt, yet by agreement it was withheld from record, to a time, September 3, 1914, within four months of the filing of the petition, and also by agreement it was not to be absolutely binding as a mortgage, even between the parties, until August 1, 1914, which was within four months. Moreover, the mortgage was upon a stock of lumber and materials which the mortgagor was using in his business, and which he continued to so use after the execution and the law day of the mortgage. While there is some evidence tending to show that the mortgagee assumed some sort of custody or control of the mortgaged property, it was not possession such as other creditors or the public would notice, or such as would charge them with notice. There was no removal, or actual change of the custody or control of the property, merely a marking or branding of some of it with initials or other marks to indicate that it was the property of the mortgagee.

The evidence satisfies us, however, as it did the chancellor, that there was no actual change of the possession, custody, or control of the mortgaged property, but that it was left in the custody and control of the mortgagor,with the right to use it in the business just as it had been theretofore used; and that some of it was actually so used; and that the mortgagor's employés had no knowledge or notice of any claim to the possession of the property so used.

All mortgages or securities by which the grantor reserves a benefit, or by which the grantee is required to make a release, or to do any act impairing his existing rights, are by that fact rendered void. Code, §§ 4287, 4293.

Where a mortgage is taken on a stock of goods with an understanding that the mortgagor is to continue in business in charge of the goods, necessarily disposing of them from time to time, such mortgage is fraudulent and void as to present and subsequent creditors of the mortgagor. Gillespie v. McClesky, 160 Ala. 289, 49 So. 362. The following authorities are to the same effect: Benedict v. Renfro, 75 Ala. 121, 51 Am.Rep. 429; Owens v. Hobbie, 82 Ala. 467, 3 So. 145; Bank v. Eborn, 84 Ala. 529, 4 So. 386; Woodall v. Kelly, 85 Ala. 368, 5 So. 164, 7 Am.St.Rep. 57; Murray v. McNealy, 86 Ala. 234, 5 So. 565, 11 Am.St.Rep. 33; McDermott v. Eborn, 90 Ala. 258, 7 So. 751; Pugh v. Harwell, 108 Ala. 486, 18 So. 535.

Though a mortgage may be valid on its face, it may be rendered invalid by a subsequent agreement, and though the agreement be in writing, it will be then considered as having entered into the mortgage and formed a part thereof, and if it would have been void in the first instance, it would be void in the second. Roden & Co. v. Norton & Co., 128 Ala. 137, 29 So. 637; Birmingham Co. v. Roden & Co., 110 Ala. 511, 18 So. 135, 55 Am.St.Rep. 35; Stephens v. Regenstein, 89 Ala. 561, 8 So. 68, 18 Am.St.Rep. 156; Tryon v. Daimwood, 80 Ala. 321.

We are of the opinion that the evidence in this case shows that the mortgagor was allowed to remain in possession of, and to use, the property after the law day, and that by such an agreement the mortgage was withheld from record after it was known by both parties that the mortgagor was insolvent or in failing circumstances. We know of no reason why a different rule should apply, as to a mortgage on an ordinary stock of merchandise, usually kept in stores, from the rule as to a mortgage, as in this case, on a stock of lumber and timber which has been used, and is continued to be used, in the business of manufacturing wagons, buggies, etc., and selling the same, by the mortgagor in the usual course of business.

We are also of the opinion that both parties believed that the mortgagor was in failing circumstances when the mortgage was executed, and were confirmed in, or convinced of, such fact when the mortgage was recorded. While neither may have been absolutely sure or certain that the mortgagor did not then own property or assets sufficient to pay all his debts, we are satisfied that both parties apprehended insolvency, and that the mortgage was intended to provide against what was thereafter actually made certain, that the mortgagor was insolvent, and to assure that the mortgagee should be thereafter preferred over other creditors, when settlement should be had among the creditors in the bankruptcy proceedings. Section 60 of the Bankruptcy Act provides in part as follows:

"Where the preference, consists in a transfer, such period of four months shall not expire until four months after the date of the recording or registering of the transfer, if by law such recording or registering is required.

We hold that the evidence in this record clearly brings the mortgage in question within the preferential class prohibited by this section of the Bankruptcy Act. The law requires such mortgages to be recorded, to be valid as against certain persons, claims, or creditors, whereas this mortgage was not filed for record four months before the petition in bankruptcy was filed, and by agreement between the parties was withheld from record for the interest and protection of the mortgagor, and probably to the detriment of other creditors.

If the mortgage in question was valid when made, and would have created a preference among creditors, such as prohibited by the Bankruptcy Act, had the petition been filed within four months from its execution, then the mere failure to file for record would not destroy its validity or the lien created thereby.

The effect and object of the amendment of the Bankruptcy Act, as above set out, was to extend the time within which the conveyance or assignmcnt or preference could be assailed, and the property conveyed or assigned subjected as assets for the benefit of all the creditors alike, thereby avoiding the preference. It did not make void or voidable any mortgage conveyance, assignment, or preference which would not otherwise have been voidable had it been made within the four months of the filing of the petition of bankruptcy; but it did have the effect to make the date from which the four months should be reckoned start from the recording or filing for registration, rather than from the date of execution, though whether the transaction in question was void or voidable must be ascertained from the facts and circumstances existing at the date of execution, rather than from those obtaining at the date of the filing for record. The federal court has thus construed the object and effect of the amendment above quoted, relied upon by the...