In re Harnden

• Decision Date: 22 October 1912
• Docket Number: 6.
• Citation: 200 F. 175
• Parties: In re HARNDEN.
• Court: U.S. District Court — District of New Mexico

200 F. 175

In re HARNDEN.

No. 6.

United States District Court, D. New Mexico.

October 22, 1912

Reid &amp Hervey, of Roswell, N.M., for petitioner.

A. J Nisbet, of Roswell, N.M., opposed.

POPE District Judge.

The present review involves a decision upon the validity of a mortgage held by the Dexter State Bank against Harnden. The facts are that on December 9, 1910, Harnden borrowed from the bank $600, secured by a chattel mortgage upon his stock which was never recorded. On March 8, 1911, the bank made a further loan, and a new note was given for the old loan of $600 and the new loan, aggregating $950, which note was made payable in 30 days and was secured by a new chattel mortgage. The new mortgage was not placed upon record until May 26 1911. The reason for this, as stated by the cashier of the bank, was because it was not their custom to record mortgages unless occasion required. The mortgage was not only upon the stock then in hand, but also upon after-acquired stock. Harnden was conducting a retail business next door to the bank, and notwithstanding the mortgage he continued to sell at retail until closed by execution the early part of 1912. The bank took no steps to foreclose this mortgage, but filed an affidavit of renewal on February 2, 1912, thus complying with the statute, which requires such renewal affidavit to be filed within 30 days preceding the expiration of a year from the original filing for record.

While the mortgage contains no stipulation that the business was to be continued, and while it contains no stipulation that any accounting was to be made to the bank from the sale of goods, the surroundings of the parties would indicate that the bank knew that the business was to be continued and the goods to be sold in due course of retail trade, and that without express agreement it expected to be paid from time to time such amounts upon its indebtedness as the condition of the business justified. It appears from the evidence that the bank had such intimate knowledge of the condition of Harnden's business from the very inception of its mortgages as to be advised that his financial condition was precarious. This knowledge resulted from its having collections sent it against him and from its acquaintance with his business, derived from being next door to him. There was no agreement between Harnden and the bank that the mortgage of March 8, 1911, should be withheld from record, and the bank cashier testified that it was finally recorded on May 26, 1911, only because Harnden was conducting his business in such a way as to lead the bank to consider it to its interest to place this mortgage of record.

Upon this state of facts the referee held the mortgage invalid. The referee seems to have determined this as a matter of law from the foregoing undisputed facts. He says in the course of his opinion:

'There may be actual fraud of creditors, without the intent to defraud, and in the consideration of this case it is not the purpose of the referee to cast any reflection upon the intention of the parties to this mortgage.'

From this finding it would appear that the referee's view was that, with no intention to defraud, the making of a mortgage under such circumstances constituted a legal fraud upon the rights of creditors and was therefore void.

The questions certified to the court by the referee are as follows:

'(a) As a matter of law, is a chattel mortgage containing a clause providing for a lien on goods afterward purchased by the mortgagor, in the regular course of trade, with no provision for any accounting for the goods sold, or for applying any of the proceeds of goods sold, on the mortgage debt, valid as against wholesale merchants who sold the goods to the mortgagor?

'(b) Is a chattel mortgage given by a merchant on his stock of goods to secure a note, the mortgagor continuing to buy and sell goods, in the regular of the note, the mortgagor continuing to buy and sell goods, in the regular course of trade, with the full knowledge, consent, and assistance of the mortgagee, no effort to take possession of the goods or to foreclose the mortgage for a year after maturity of note, the mortgagee having full knowledge almost from the time of the making of the mortgage that the mortgagor was unable to pay his debts, in a failing condition, and on the verge of bankruptcy, with creditors pressing him on every side, a valid lien on goods purchased by the mortgagor under such circumstances?

'(c) Is a chattel mortgage containing a clause providing for a lien on 'all goods now in said store, or hereafter placed there,' a valid lien on goods subsequently purchased from wholesale merchants in the regular course of trade, where it is shown that the mortgagor, with the full knowledge and consent of the mortgagee, was permitted to continue business, to buy and sell goods in the regular course of trade, make no report to the mortgagee, and thus permitted and assisted by the mortgagee allowed to sell a large part of the original stock of goods and to incur large new indebtedness for new goods, valid against creditors made under such circumstances?'

The question of the validity of a chattel mortgage upon a stock of goods, with an after-acquired clause, where the mortgagor is left in possession with right to continue the business, has been the subject of much consideration from the courts, and there has been such a diversity of opinion from the courts as to leave the matter involved in great confusion. The divergence of the courts is indicated by 6 Cyc. 1104-1120. It is believed that the current of state authority is to the effect that where such a mortgage is accompanied with an agreement, either made collaterally or embodied in the mortgage, that the mortgagor shall account for the proceeds to the mortgagee, the mortgagor is in that case considered as the agent of the mortgagee for the management of the stock, and the mortgage is considered valid. If, on the other hand, there is no such understanding the mortgage is void.

The line of cleavage seems to be as to whether the mortgage is made for the benefit of the mortgagee or the mortgagor. If the mortgagor is allowed to dispose of the stock without any understanding that he is to account for the proceeds, the arrangement is deemed one primarily for his benefit, and, as it acts as a shield between him and his creditors, it is considered fraudulent as to them. On the other hand, if the mortgagor is by express understanding to account to his mortgagee for the proceeds, the instrument is deemed to be for the benefit of the mortgagee and is allowed to stand. There are states, however, that hold that, notwithstanding the absence of an agreement to account for the proceeds, the mortgage is still not void as a matter of law. An illustration of this is found in Peabody v. Landon, 61 Vt. 318, 17 A. 781, 15 Am.St.Rep. 903, where the matter is very lucidly discussed.

Whatever, however, may be the condition of the state decisions, the question, so far as it is to be decided by a federal court, is considerably narrowed by the well-settled principle that the federal courts, in determining the validity of the chattel mortgage, follow the decisions of the state courts. This doctrine proceeds upon the principle that the validity of a chattel mortgage, executed within a state, is a matter for the state, and the federal courts will accept the settled law of each state as decisive of the question. Etheridge v. Sperry, 139 U.S. 266, 11 Sup.Ct. 565, 35 L.Ed. 171; Bamberger v. Schoolfield, 160 U.S. 159, 16 Sup.Ct. 225, 40 L.Ed. 374; Hartford Ins. Co. v. Chicago Co., 175 U.S. 100, 20 Sup.Ct. 33, 44 L.Ed. 84; Thompson v. Fairbanks, 196 U.S. 516, 522, 25 Sup.Ct. 306, 49 L.Ed. 577; Humphrey v. Tatman, 198 U.S. 91, 25 Sup.Ct. 567, 49 L.Ed. 956; In re Geiver (D.C.) 193 F. 128; Dooley v. Pease, 180 U.S. 126, 21 Sup.Ct. 329, 45 L.Ed. 457; Swager v. Smith, 194 F. 762, 114 C.C.A. 482, and cases cited; Holt v. Crucible Co., 224 U.S. 262, 32 Sup.Ct. 414, 56 L.Ed. 756; Knapp v. Milwaukee Co., 216 U.S. 545, 30 Sup.Ct. 412, 54 L.Ed. 610.

So carefully has this doctrine been guarded that the Supreme Court of the United States, while following what is apparently the law of the state as to the chattel mortgage then under consideration, has said that, if this apparent rule should afterwards be decided by the state court to be improperly announced, it would be the duty of the federal Supreme Court thereafter to modify its views accordingly. Humphrey v. Tatman, 198 U.S. 91, 93, 25 Sup.Ct. 567 49 L.Ed. 956. It becomes a question, therefore, in determining this matter, as to the condition of the New Mexico decisions. If the courts of...