In re Hartman

• Decision Date: 20 February 1911
• Citation: 185 F. 196
• Parties: In re HARTMAN.
• Court: U.S. District Court — Northern District of New York

185 F. 196

In re HARTMAN.

United States District Court, N.D. New York.

February 20, 1911

John Conboy, for claimant Kepler.

A Raymond Cornwall, for trustee.

RAY District Judge.

February 17, 1909, Ernest H. Hartman, the above-named bankrupt, was indebted to his father-in-law, William Kepler, in the sum of $500 for money loaned about February 2, 1907, and Kepler had also indorsed his notes amounting to the sum of $1,855 at that time, which were held or had been discounted by the First National Bank of the Thousand Islands. On that day February 17, 1909, the said Hartman gave to the said Kepler a chattel mortgage covering his tools, implements, merchandise furniture, and personal property of every kind which was more particularly described in his schedule attached to the mortgage.

Hartman was a mechanic and was also running a small store in which he had a stock of merchandise worth somewhere from $300 to $500. This mortgage in the schedule signed by Hartman contains this clause:

'And I hereby agree that (as) the items of said stock are sold, I will keep a list of the sales and will pay over the proceeds to William Kepler to be by him applied on the indebtedness for which this mortgage is made and on the notes which he has indorsed for me.'

The mortgage itself contained this clause:

'Articles of merchandise shall be paid for when sold, that is, the money received for them shall be paid over to William Kepler when received, and the whole indebtedness shall be paid up in one year from date hereof, that is, on the 17th day of February, 1910.'

This mortgage was duly filed and is valid on its face.

The Court of Appeals of the state of New York has many times decided that a chattel mortgage is not per se void because of a provision contained in it permitting the mortgagor to sell the mortgaged property, provided the mortgage also requires the mortgagor on making sales to pay over the proceeds thereof and apply them to the payment of the mortgage debt. This is the normal and proper purpose of a chattel mortgage, viz., to apply the mortgaged chattels to the payment of a mortgage debt. The mortgagee has the right to constitute the mortgagor his agent for the purpose of selling the property and to account to and pay over to the mortgagee the proceeds of the sales in reduction of the debt. Brackett v. Harvey, 91 N.Y. 214, 221; Ford v. Williams, 24 N.Y. 359; Conkling v. Shelley, 28 N.Y. 360, 84 Am.Dec. 348; Miller v. Lockwood, 32 N.Y. 293; Robinson v. Elliott, 22 Wall. 524, 22 L.Ed. 758.

There are cases holding that any clause in a chattel mortgage which permits the mortgagor to sell the property on credit, even if the collections when made are to be turned over to the mortgagee, makes the mortgage void. These cases are not good law. If, however, the clause authorizing sale by the mortgagor permits unrestricted and unlimited credit, the mortgage is void. This appears from the cases already referred to. The mortgage in question, while contemplating a sale on credit, did not contemplate or provide for or permit unrestricted and unlimited credit. The whole debt was to be paid within one year, and it follows that credit must be limited and restricted to the year; otherwise the proceeds of the sales could not be applied to a reduction of the indebtedness.

The difficulty in this case is that the evidence shows beyond any reasonable doubt whatever that the agreement between the mortgagor and the mortgagee was very different from the one recited in the mortgage itself. A chattel mortgage given and filed is fraudulent and void as to creditors when accompanied by an agreement between the parties, whether found in the mortgage or not, which authorizes and permits the mortgagor to treat and deal with the mortgaged property as his own and to sell same and use the proceeds thereof or any part thereof for his own benefit.

That is what was done in this case. Both the mortgagor and the mortgagee, in substance and effect, concede it. The treatment of the property and of the proceeds of sales by the parties to the mortgage shows that this was the agreement and understanding. I so find the fact to be, and the conclusion is irresistible. Kepler says that he did not know whether Hartman applied the proceeds of sales of stock on the notes or not; that Hartman said he would 'what he could.' He also says, 'I knew he (Hartman) had to live. ' He also says, 'Why the agreement was he was to go on and do work and use what stock he required. ' He also says that he gave Hartman permission to use and sell from the stock 'as he required. This was our talk and agreement at the time of the mortgage. He (Hartman) turned over some of the receipts to me when I was there, and some he paid on the notes, presume he used some to live on. ' He also says that he gave him his consent to sell the stock the proceeds to be turned over, but 'I did not get much of it. ' Also, 'I expected he would sell same as any merchant.'

Hartman says, in substance, that the agreement was he was to sell and to sell on credit. He says that he ran a general account and used money collected on accounts for the support of his family. Paid what he could on the notes. Used some of the proceeds of the stock to purchase new stock with. Replenished the stock with proceeds of sale. Hartman also says that from the time the mortgage was given to the time the petition was filed he did not keep an accurate...