In re Frey

Decision Date24 November 1926
PartiesIn re FREY.
CourtU.S. District Court — District of Minnesota

Brown, Somsen & Sawyer, of Winona, Minn., for petitioner.

E. V. Knauf, of Winona, Minn., for trustee.

JOHN B. SANBORN, District Judge.

The bankrupt, on December 31, 1925, gave to F. E. Brown, the petitioner, his note for $700 payable one year after date, and to secure its payment executed a chattel mortgage upon all of his store fixtures and stock in trade, including certain radios. The mortgage, which was a Minnesota contract, contained these provisions:

"Stock to be kept up to $500 in value wholesale at all times, permission being given to sell stock and replenish same, this mortgage to cover all new stock bought to replenish and keep up stock. Serial numbers of radio sets are 26960, 22694, 24158, 10495, 26888, 26952, 13711, and others. Wholesale price of each of these radios upon sale is to be applied on the mortgage in reducing same."

The mortgage was duly filed for record and recorded the same day it was executed. Frey remained in possession of the mortgaged property and made sales therefrom in the usual course of business. He made only two small payments to the mortgagee of not over $4, disposed of all of the radio sets except two, but did not apply their wholesale price upon the mortgage.

The note and mortgage represented $700 actually loaned by Brown to Frey, and the note and mortgage were both given in good faith and without any intent to defraud the bankrupt's creditors. On June 19, 1926, Frey was adjudged a bankrupt, and thereafter Jacob L. Meyer was appointed his trustee. He took possession of the property claimed to be covered by the chattel mortgage, and petitioned the court for an order allowing him to sell the property at private sale, free of liens, and to adjudge the mortgage void as constituting a fraud upon creditors. The referee held the mortgage void, and authorized the sale of the property claimed by the mortgagee to be covered by it, free from liens. It is this order of the referee which comes before this court for review.

The rule in Minnesota for a great many years has been that a chattel mortgage with an agreement that the mortgagor may retain possession and sell or dispose of the property as his own, without satisfaction of the mortgage debt, is fraudulent as a matter of law and voidable as against the mortgagor's creditors. Dunnell's Minnesota Digest, 3885, citing the following cases: Chophard v. Bayard, 4 Minn. 533 (Gil. 418); Horton v. Williams, 21 Minn. 187; Stein v. Munch, 24 Minn. 390; First Nat. Bank v. Anderson, 24 Minn. 435; Mann v. Flower, 25 Minn. 500; Bannon v. Bowler, 34 Minn. 416, 26 N. W. 237; Filebeck v. Bean, 45 Minn. 307, 47 N. W. 969; Gallagher v. Rosenfield, 47 Minn. 507, 50 N. W. 696; Hayes v. Gallagher, 58 Minn. 502, 60 N. W. 343; Pierce v. Wagner, 64 Minn. 265, 66 N. W. 977, 67 N. W. 537; Pabst v. Butchart, 67 Minn. 191, 69 N. W. 809, 64 Am. St. Rep. 408; Clarke v. Nat. Citizens' Bank, 74 Minn. 58, 76 N. W. 965, 1125; Donohue v. Campbell, 81 Minn. 107, 83 N. W. 469; Citizens' State Bank v. Brown, 110 Minn. 176, 124 N. W. 990; Harris v. Spencer, 130 Minn. 141, 153 N. W. 125.

The most recent case is Secord v. Northwestern Tire Co., 159 Minn. 473, 199 N. W. 84. The mortgage there in question contained this provision: "It is expressly understood by all parties concerned that as any of the above stock is sold at least the amount of the wholesale price of that which is sold is to be deposited as payment on the attached notes."

And also: "So long as the conditions of this mortgage are fulfilled, the undersigned (mortgagors) shall remain in peaceful possession of said property, agreeing in consideration thereof to keep such property in as good condition as it now is without expense to the mortgagee."

With reference to this mortgage, the court said: "A mortgage of a stock of merchandise permitting the mortgagor to remain in possession and sell at retail and retain the proceeds of the sale without applying the proceeds on the mortgage debt is constructively fraudulent. Dunnell, Minn. Dig. § 3885, and cases cited. The rule applies though the mortgagor agrees to pay the balance of the proceeds on the mortgage after defraying the expenses of keeping up the stock and the expenses of running the business. Pabst Brewing Co. v. Butchart, 67 Minn. 191, 69 N. W. 809, 64 Am. St. Rep. 408...

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2 cases
  • Solomon v. Northwestern State Bank
    • United States
    • United States Courts of Appeals. United States Court of Appeals (8th Circuit)
    • 24 Febrero 1964
    ...proceedings. The court was apparently aware that there might be fraud or collusion at the time of enforcement. This court in In Re Frey, 15 F.2d 871 (8th Cir.) many years prior to the enactment of the present Minnesota statutes, recognized that Minnesota adhered to the general rule that an ......
  • In re De Luxe Oil Co.
    • United States
    • U.S. District Court — District of Minnesota
    • 4 Noviembre 1940
    ...in the mortgage in that case that the new substituted stock should be subject to the lien of the mortgage. In the case of In re Frey, D.C., 15 F.2d 871, there was a Minnesota free-handed mortgage of store fixtures and stock in trade, with a provision requiring the mortgagor to replenish sol......

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