In re Hickerson

• Decision Date: 19 June 1908
• Citation: 162 F. 345
• Parties: In re HICKERSON.
• Court: U.S. District Court — District of Idaho

162 F. 345

In re HICKERSON.

United States District Court, D. Idaho, Northern Division.

June 19, 1908

A. S Hardy, for First National Bank.

A. C Emmons, J. B. Campbell, and Jas. De Haven, for objecting creditors and trustees.

DIETRICH District Judge.

On March 22, 1906, the bankrupt, being engaged in the retail mercantile business at Grangeville, Idaho, and being indebted to the First National Bank of that place, executed two notes each for $3,000, due on demand, and secured by a chattel mortgage of the same date, in favor of the bank, covering the stock of goods, which apparently consisted in the main of such articles as are usually carried in a hardware store.

After a general reference to the merchandise as being situate in a certain store building and also in a warehouse, both located in Grangeville, there is set forth the following specific description:

'* * * And all other goods, wares, and merchandise forming a part of the stock of said Walter Hickerson in said stores and warehouses, or situated adjacent thereto, or elsewhere in Idaho county, and owned by the first parties (Hickerson and his wife) or either of them, together with all fixtures, consisting of shelving, counters, showcases, desk, safe, scales, etc., used in connection with and situated in either said stores or warehouse of said first parties, together with all additions which may be made to said stock of goods and merchandise, whether in said stores or warehouse, or elsewhere, and also all book accounts, notes, and debts due or owing, or to become due or owing, both for and on account of sales of goods, wares, and merchandise in said merchandise business and otherwise; all of the said property being now in the possession of said parties of the first part in the city of Grangeville, Idaho county, Idaho, and free from all incumbrances.'

It is further provided:

'That it is understood and agreed that the said parties of the first part may remain in the possession of said property and stock of merchandise, and may sell and dispose of the same in the usual course of trade, as the agents of second party only, and that all such sales shall be for its benefit, and that first parties shall account to second party on the last day of each month, commencing March 31, 1906, for the proceeds of all such sales as its agents, and the proceeds of the sales of the said personal property shall be the property of the second party, whether consisting of cash, notes, or accounts, and the said proceeds shall be applied to the payment of said indebtedness.'

The mortgage was acknowledged and sworn to in the manner required by the statutes of Idaho, and it was delivered to the mortgagee upon the day of its execution. The bankrupt was indebted to the bank on overdrafts in an amount a little less than the aggregate of the mortgage notes, and the amount of the difference was placed to his credit, with authority to check against it. The mortgage was not recorded until February 11, 1907. In the meantime the mortgagor continued to carry on his mercantile business in the ordinary way, and out of the proceeds of his sales and collections he paid the expenses of the business, including freight bills and clerk hire, and the balance he deposited from time to time in the bank of the mortgagee; the amounts so deposited aggregating a total sum of nearly $12,000. From time to time he drew checks upon the bank, and directed it to honor overdrafts in the payment of accounts against him, so that when he went into bankruptcy he was indebted to it in an amount approximating $3,000, besides the notes secured by the mortgage.

On February 16, 1907, five days after the mortgage was recorded, the mortgagor filed his petition, and upon February 20th he was adjudged a bankrupt. A trustee was appointed and took possession of all of his property, including that claimed to be covered by the mortgage, and upon April 6, 1907, applied for authority to sell the stock of merchandise. In response to a notice of hearing upon such application the mortgagee appeared and asked that the mortgage lien be recognized in any order of sale which should be made, whereupon the trustee and most of the creditors objected to a recognition of the validity of the mortgage. It was thereupon agreed that an order for a sale might be made, with the understanding that the proceeds of the property claimed to be subject to the mortgage lien should be held in lieu of the property itself; neither the mortgagee nor the objecting parties losing any rights or being in any wise prejudiced by reason of the conversion of the property into money. Accordingly an order was made and the property was sold. Evidence was taken before the referee, and by stipulation the whole matter is submitted to the court for its original decision upon the evidence, without any findings or report from the referee.

Upon the part of the trustee and the objecting creditors it is contended: (1) That under the terms of the mortgage the indebtedness secured thereby must be deemed to have been paid, in view of the deposit by the mortgagor in the bank of the mortgagee of proceeds from the sales of the mortgaged property amounting to more than the indebtedness secured by the mortgage; (2) that the mortgage is voidable as a preference under section 60a of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 562 (U.S. Comp. St. 1901, p. 3445)); (3) that the mortgage is fraudulent, and that as against the trustee and creditors the lien thereof cannot be enforced upon any of the assets of the estate.

Upon the first point, it is, I think, fairly inferable from the evidence that there was some understanding between the parties from time to time by which the mortgagor waived his right to have the proceeds of the business applied to a reduction of the mortgage indebtedness. The record does not disclose an express agreement to that effect, but the conduct of the parties was such that the bankrupt must have known and acquiesced in, if he did not in terms authorize, the credit of his deposits to his current account, upon which he drew from time to time. This being the case, he could not be heard to object to the diversion of the funds from the purpose designated in the mortgage. Clearly a second mortgagee or other lienor would have the right to raise such objection; but I am not clear that either the trustee or the objecting creditors occupy such a favorable position in this proceeding, and in consideration of the view I have taken of the other questions, and the doubt I entertain as to the real understanding of the parties, I have concluded to consider the diversion of the proceeds of the mortgaged property only so far as the fact is material to the question of the good faith of the parties.

Does the mortgage transaction, as disclosed by the record, constitute a preference under section 60a of the bankruptcy act? By the amendment of 1903 (Act Feb. 5, 1903, c. 487, Sec. 13, 32 Stat. 799 (U.S. Comp. St. 1907, p. 1031)) it is provided that, to constitute a preference, the period during which the transfer is made shall not expire until four months after the date of the recording or registering of the transfer, if by law such recording or registering is required. The mortgage 'transfer' must therefore be deemed to have been made on the 11th day of February, 1907, only five days before the filing of the petition in bankruptcy. Humphrey v. Tatman, 198 U.S. 91, 25 Sup.Ct. 567, 49 L.Ed. 956.

It is earnestly argued by counsel for the bank that the evidence is insufficient to show the insolvency of the debtor on February 11, 1907; but, although the record is somewhat meager and unsatisfactory, I think it is sufficient to bring the transaction within the statutory definition of a preference. While it does not appear that the mortgagor was insolvent in contemplation of law on the 22d day of February, 1906, still we have the undisputed fact that at that time the bank, which had been extending to him credit without security, was demanding that its claim be secured, and the mortgagor declined to give a mortgage upon property which he could claim as exempt, but did give a mortgage upon his stock of merchandise, which was the only other property he had free from incumbrance. It is also undisputed that from the time the mortgage was executed until the same was filed the business was conducted at a loss, and the mortgagor's financial ability declined. From the conduct of the parties and their close business relations, I cannot avoid the conclusion that when the mortgage was given the failure of the mortgagor, while not desired, or even expected, was a possible contingency contemplated by both parties, against which it was thought the mortgage would, in a measure, protect the bank, and that when the mortgage was filed the mortgagee knew or had reason to believe that the mortgagor was preparing to go into bankruptcy; nor can I doubt that the effect of the mortgage, if enforced, will be to enable the mortgagee to obtain a greater percentage of its debt than other creditors of the same class. It is argued by counsel for the bank that there is no conclusive proof that all creditors will not be paid in full; but from the showing made entire satisfaction is, to say the least, wholly improbable, and I doubt whether the bank's suit would be so vigorously pressed if it could be reasonably expected that all claims would be paid in full. I conclude that the mortgage must be held to be voidable as a preference under the law.

We come to a consideration of the third objection. The mortgage was not recorded for nearly a year after it was executed and delivered, and then just a few days before the petition in bankruptcy was filed. A mere failure to record an instrument is not conclusive evidence of...