In re Hanover Milling Co.
| Decision Date | 23 March 1929 |
| Docket Number | No. 7569.,7569. |
| Citation | 31 F.2d 442 |
| Parties | In re HANOVER MILLING CO. |
| Court | U.S. District Court — District of Minnesota |
S. A. Johnson and Henry Spindler, both of Buffalo, Minn., for petitioner.
Allen & Fletcher and G. A. Timerman, all of Minneapolis, Minn., for trustee.
The referee determined: That the bankrupt was adjudicated March 2, 1928. That on March 31, 1928, James E. Mehan was elected trustee and qualified. That on February 15, 1920, and prior thereto, August C. Vollbrecht and Fred W. Vollbrecht had been doing business as copartners as Hanover Milling Company, their business consisting of the operation of a flour and feed mill. That on June 15, 1920, they executed a trust deed dated February 15, 1920, to H. E. Kirscht, to secure the payment of $25,000 of bonds. That the trust deed was recorded in the office of the register of deeds of Wright county, Minn., on July 13, 1920. That the Hanover Milling Company, now bankrupt, was organized in the month of June, 1922, and on June 16th of that year the partnership deeded its property to the corporation, subject to the trust deed, and the corporation assumed and agreed to pay the bonds and to operate its business and to conform to all the terms of the trust deed. That the business of both the milling company and its predecessor, the partnership, had been the operation of a flour and feed mill, and that both had bought grain, storing it in bins and elevators, ground feed, and manufactured and sold flour, feed, and other products. That between the 15th day of February, 1920, and the 2d day of March, 1928, there were on hand at all times in the mill and elevators quantities of flour, grain, and feed which the partnership and corporation sold from time to time to its customers, using the proceeds in meeting the expenses of operating its business, paying salaries, taxes, and interest on the bonds secured by the trust deed. That between the time of the execution of the trust deed and the filing of the voluntary petition in bankruptcy, certain machinery was installed in the mill. That the bonds secured by the trust deed were sold to various persons residing in or near the village of Hanover, Minn., a town of some 250 inhabitants. That Kirscht, the trustee under the deed, was a resident of Hanover; that he resigned as trustee, and Zachman is now the trustee. That the total amount of bonds outstanding is $25,000. That at all times subsequent to the execution and sale of the bonds, the holders thereof, the first trustee, and his successor were aware of the fact that the bankrupt, and previously the partnership, were conducting the business of the Hanover Milling Company in accordance with the terms of the trust deed. That the only source of income which the partnership and the corporation had was the money derived from the sale of flour, feed, and other products manufactured by it, and the grinding of feed. That the bonds have not been paid, nor has interest been paid upon them since August 15, 1927. The conclusion that the referee arrives at from these facts is that this trust deed is void as to creditors.
The trust deed in question recites that the Vollbrechts, "the mortgagors, are lawfully engaged in the business of manufacturing, buying, selling and generally dealing in flour, feed, grain, breakfast foods, and other articles manufactured from grains or cereals," and in operating in connection therewith grain warehouses, elevators, and cars for carrying of grain, flour, and food products; that improvements and additions to the plant are and will be needed; that the mortgagors have power to issue bonds and to secure payment of such bonds by the execution of a deed of trust and mortgage covering their property, franchises, rights, and privileges, now owned or hereafter to be acquired by them. It was also recited in the form of bond set forth in the trust deed that the bonds and trust deed are to be considered together as parts of one and the same contract. The trust deed covers the real estate upon which the mill is situated, 40 acres of ground partially converted into a reservoir for water backed from the dam, and the dam lying across the Crow river, with bulkheads, icebreakers, piles, fishway, canals, etc.; also all buildings, improvements, and appurtenances standing or constructed or placed on the lands, including flour mill, frame building, and other buildings specified, fixtures and fittings, machinery and equipment, "and all articles or items of property of every nature whatsoever now contained in any building or buildings standing upon said lands, or which may hereafter be contained in any building or buildings now erected or to be erected upon the said lands, or any part thereof." This trust deed was never filed as a chattel mortgage, but was recorded as a mortgage upon real estate.
The theory of counsel for the trustee in bankruptcy and of the referee is that the trust deed included the stock of flour and feed which the mortgagor was permitted to retain in its possession and to sell and dispose of without applying the proceeds to the payment of the mortgage debt, and that therefore, under the laws of Minnesota, it was fraudulent as to creditors.
An examination has been made of all the Minnesota cases which have been found in which the rule relied upon here has been invoked or referred to. These are: Chophard & Son v. Bayard, 4 Minn. 533 (Gil. 418); Horton v. Williams, 21 Minn. 187; Whittier v. Chicago, M. & St. P. Ry. Co., 24 Minn. 394; First Nat. Bank of Fergus Falls v. Anderson, 24 Minn. 435; Mann v. Flower, 25 Minn. 500; Bannon v. Bowler, 34 Minn. 416, 26 N. W. 237; Gallagher v. Rosenfield, 47 Minn. 507, 50 N. W. 696; Hayes Woolen Co. v. Gallagher, 58 Minn. 502, 60 N. W. 343; Pierce v. Wagner, 64 Minn. 265, 66 N. W. 977, 67 N. W. 537; Pabst Brewing Co. v. Butchart, 67 Minn. 191, 69 N. W. 809, 64 Am. St. Rep. 408; Donohue v. Campbell, 81 Minn. 107, 83 N. W. 469; Citizens' State Bank of Tracy v. Brown, 110 Minn. 176, 124 N. W. 990; Harris v. Spencer, 130 Minn. 141, 153 N. W. 125; Berkner v. Lewis, 133 Minn. 375, 158 N. W. 612; First Nat. Bank of Beaver Creek v. Wiggins, 154 Minn. 84, 191 N. W. 264; Secord v. Northwestern Tire Co., 159 Minn. 473, 199 N. W. 84. Each of these cases deals solely with a chattel mortgage.
The Supreme Court of Minnesota has never held that a mortgage covering both real estate and chattels, under which the mortgagor was permitted to retain possession of the chattels and to dispose of them without applying the proceeds upon the mortgage debt, was void as to the real estate.
There are, however, some statements in the earlier cases which would make it appear that if the mortgage is void as to any of the property covered by it, it is void altogether. Such a statement is found in the case of Horton v. Williams, supra, on page 192 of 21 Minn. But this language appears in that case: It was held in that case and subsequent cases that where the mortgage itself did not provide that the mortgagor in possession might make sales as owner, dealing with the goods and the proceeds as his own, the question of the intent with which the mortgage was made is a question of fact.
In the case of Gallagher v. Rosenfield, supra, on page 511 of 47 Minn. (50 N. W. 697), appears this language: ."
It is very evident that in some of the later cases the Supreme Court of this state has tried to avoid the harshness and obvious injustice of the rule in cases where there was no actual fraud. In the case of Donohue v. Campbell, supra, Chief Justice Start says, on page 109 of 81 Minn. (83 N. W. 470): ...
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