Gustlin v. Whitham
| Decision Date | 01 September 1923 |
| Docket Number | 56. |
| Citation | 292 F. 782 |
| Parties | GUSTLIN v. WHITHAM et al. In re SPARBOE. |
| Court | U.S. District Court — Northern District of Iowa |
Mortgages executed by bankrupt in favor of certain creditors held not merged in a subsequent conveyance of the lands for the benefit of such creditors and others, but the conveyance held subject to the mortgages.
The plaintiff, Clyde C. Gustlin, as trustee in bankruptcy of one Carl Sparboe, filed his bill, in which he prays for the annulment of a certain contract of assignment, a deed conveying 400 acres of land in Kossuth county, Iowa, and a bill of sale of certain live stock and other personal property, executed by the bankrupt on July 18, 1921, running to the defendants W. L. Whitham, Gilbert Knudson, and Max M Hemingway, for the use and security of the other defendants Hamilton County State Bank, Randall Savings Bank, State Bank of Ellsworth, George P. Christianson, and John H. Sparboe the above-named banks being Iowa corporations.
The bill in substance alleges the adjudication of Carl Sparboe as a voluntary bankrupt on November 29, 1921, upon his petition filed that day, the election and qualification of the plaintiff as trustee, and that on the 18th day of July, 1921 said bankrupt, being insolvent, with knowledge thereof by the defendants, and with intent to prefer defendant banks, said Christianson, and John H. Sparboe, his creditors, and with further intent to defraud other creditors, executed and delivered to the defendants Whitham, Knudson, and Hemingway the three instruments above named, conveying all of his property not exempt from execution, for the use and security of the last-named five defendants, with preference to said five named creditors, and in fraud of his other creditors that the deed and bill of sale were executed in pursuance of the terms of a contract of assignment and were all one transaction; that there was no present consideration given for said conveyances, the sole consideration being pre-existing debts, and that they were executed with intent on the part of the bankrupt to hinder, delay, and defraud his existing creditors, of which intent all defendants were fully advised; that the effect of said transfer, if enforced, will enable the creditors for whose use and security it was made to obtain a greater percentage of their debts than other creditors of the same class, and that the defendants had reasonable cause to believe at the time of the consummation of said transfers that preferences were intended; that said conveyances taken together constitute an assignment of all property of the bankrupt not exempt from execution, for the benefit of only a part of his creditors, and not in proportion to the claims of all of his creditors on the date of their execution as required by section 3071 of the 1897 Code of Iowa; that said transfers were fraudulent, for at the time of their execution and as a part of the transaction a consideration of $500, paid him by the defendants, bankrupt promised not to file a voluntary petition in bankruptcy until after the expiration of four months, bankrupt being a farmer and his principal business the tilling of the soil; that the transactions of July 18, 1921, were a part of a scheme devised and entered into by the bankrupt and the defendants long prior to that date for the purpose of defrauding the creditors of the bankrupt; that as a part of said scheme the bankrupt on May 2, 1921, executed and delivered to the defendant Hamilton County State Bank an instrument in the form of a mortgage conveying the east three-quarters of the north half of section 16, township 86 north, range 23 west of the 5th P.M., Kossuth county, Iowa, which purported mortgage was made subject to a first mortgage of $24,000; that on the same date the bankrupt executed and delivered to the defendant State Bank of Ellsworth a real estate mortgage conveying the southwest quarter and the southwest quarter of the southeast quarter of section 9, township 86 north, range 23 aforesaid, which purported mortgage was subject to two other mortgages aggregating $28,000; that as a part of said scheme to defraud the defendant creditors agreed with the bankrupt to release from said mortgage of May 2d bankrupt's homestead, being the northeast quarter of the northwest quarter of said section 16, which release was thereafter on July 18, 1921, executed and recorded; that said purported mortgages of May 2, 1921, are void and of no effect as against the plaintiff, for that the respective acknowledgments thereof by the bankrupt were made before officers of the defendant banks, grantees in said mortgages, as well as because of the fraudulent acts alleged in connection with the making and execution of the same; that it was the intent of all defendants that the mortgages of May 2, 1921, should merge in the contract, deed, and bill of sale made on July 18, 1921; that the defendants were advised and understood that the mortgages of May 2, 1921, were invalid, for the reason that the signature of the wife of the bankrupt had been obtained by fraud, and by reason of the physical and mental condition of the wife at the time her signature was obtained she did not know and understand the meaning of her act, and that her signature was procured by undue influence of the bankrupt and the defendants; that the instruments of July 18, 1921, were intended to supersede and substitute the mortgages of May 2, 1921, with the hope and intention of substituting a valid security for an invalid security, providing the bankrupt could be induced to refrain from voluntary bankruptcy for the period of four months thereafter, and further for the purpose of eliminating from the preliminary arrangement of May 2d the inequality of credit among themselves; that the reasonable value of said lands in excess of prior first mortgages was the sum of $75,000, and the reasonable value of the personal property conveyed by the bill of sale was $6,000.
The defendants, answering, admit the execution of the instruments of July 18, 1921, but deny that they were executed by the bankrupt or received by the defendants, either with the intent to prefer the defendants or defraud the other creditors of the bankrupt, and deny that said instruments conveyed all of the property of the bankrupt not exempt from execution. Defendants further deny that there was no present consideration given for said conveyances, and deny that they were executed with intent to hinder, delay, and defraud the bankrupt's other creditors. But the defendants aver that on May 2, 1921, the bankrupt executed and delivered to the Hamilton County State Bank a mortgage on the east three-quarters of the north half of section 16 aforesaid, to secure an indebtedness of $30,000, owing by the bankrupt to the Hamilton County State Bank, Randall Savings Bank, and George P. Christianson, and that as a part of the consideration of the execution of the instruments of July 18, 1921, the Hamilton County State Bank, Randall Savings Bank, and George P. Christianson caused said mortgage to be released as to the northeast quarter of the northwest quarter of said section 16, said 40 acres being the bankrupt's homestead, which was of the value of $12,000, and which release was to the detriment of said defendants in the sum of $10,000; that the State Bank of Ellsworth advanced to the bankrupt on the execution of the instruments of July 18th, the sum of $2,000. The defendants further deny that the effect of the transfers of July 18th would be to enable the defendants Hamilton County State Bank, Randall Savings Bank, State Bank of Ellsworth, and George P. Christianson to obtain a greater percentage of their debts than they would have received without said instruments, and that said instruments afforded grounds for said defendants to believe that said transfers would give them a preference within the meaning of the acts of Congress relating to bankruptcy, but, on the contrary, that the defendants were possessed of valid and sufficient security before the execution of the instruments of July 18th, which were of greater value than they had through the execution and delivery of said instruments: that at the time of the execution and delivery of the instruments of July 18th there was neither equity in nor value in said property that would enable defendant John H. Sparboe to secure anything on his indebtedness. The defendants deny that said instruments so executed on July 18th, taken together, constitute an assignment of all of said bankrupt's property not exempt from execution, or an assignment for the benefit of creditors in derogation of section 3071 of the Code of Iowa, or that said conveyances were fraudulent. Defendants further deny the payment to the bankrupt of $500 as an inducement for bankrupt to refrain from filing his petition in bankruptcy within the period of four months, or that the bankrupt did so promise.
Defendants further answering, admit that on May 2, 1921, bankrupt executed and delivered to the Hamilton County State Bank a mortgage on the east three-quarters of the north half of said section 16, and that on May 2, 1921, bankrupt executed and delivered to the State Bank of Ellsworth a mortgage on the southwest quarter and the southwest quarter of the southeast quarter of said section 9, but defendants deny that the execution of said mortgages entered into any purpose of defrauding creditors of the bankrupt, or that they were executed as a part of any scheme to defraud creditors. The defendants admit that they released from the lien of the mortgage of May 2d the homestead of the bankrupt, but deny that there was any fraud in so doing. The defendants deny that the mortgages of May 2d were void because of their being acknowledged before officers of the defendant banks or...
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