In re Hunt

• Decision Date: 22 July 1905
• Citation: 139 F. 283
• Parties: In re HUNT.
• Court: U.S. District Court — Northern District of New York

139 F. 283

In re HUNT.

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

July 22, 1905

C. L Andrus, for claimant Delaware National Bank.

Hamilton J. Hewitt, in pro. per. (M. M. Palmer, of counsel).

RAY District Judge.

June 4 1903, John A. Hunt, the bankrupt, and Sarah J. Hunt, his wife, of Delhi, N.Y., gave a mortgage on all his real estate to the Delaware National Bank, of the same place, reciting as indebtedness to the bank of $5,000 (in fact it was considerably less), 'secured to be paid by their (the mortgagors') certain notes,' and 'conditioned for the payment of the said sum of five thousand dollars ($5,000) in the aggregate, and any and all renewals thereof with interest. This mortgage is given as security for the payment of all liability or liabilities of the parties of the first part to the said bank, or party of the second part, due or to become due or that may hereafter be contracted. ' This mortgage was recorded in the clerk's office of the county of Delaware, N.Y., on the 10th day of June, 1904, at 1 o'clock p.m., Liber 88 of Mortgages, page 26. On the 17th day of June, 1904, said John A. Hunt was duly adjudicated a bankrupt on his own petition duly filed that day. The existence of the mortgage from the time of its execution to that of its recording, one year and six days, was known to the mortgagors and the bank and its officers only. It is conceded by the bank that when the mortgage was given Honeywell, the president of the bank, and who did the business in taking it, and who took the acknowledgments thereof, asked Hunt if he would not give him a mortgage to secure what he owed the bank; that Hunt consented, requesting that it be not recorded, and asking it it was necessary to record it, and also stating he owed no one else, and that to record the mortgage might or would hurt his credit in New York; and that the president of the bank said in reply he would not be in a hurry about recording it. The president very soon thereafter consulted counsel for the bank, one of the directors, as to the necessity for recording the mortgage, and was advised by such counsel, a director of the bank, it was not necessary, in view of Hunt's statement that his entire indebtedness was represented by obligations in the bank.

The proof of claim sets out seven promissory notes, each made by John A. Hunt, each payable at said bank, and each duly indorsed by the person to whose order same was made payable, and aggregating in amount $4,721. Several of them are indorsed by Hunt's wife, who joined in the mortgage. The claim states that each of these notes was given in renewal of a like note for the same or a greater amount, and held by said bank when the mortgage was given. The proof establishes the truth of this statement to the amount of $3,900 thereof in any event. The real estate mortgaged-- and the bankrupt had no other-- is worth not to exceed $4,500. At the time the mortgage was given, the said mortgagor, now the bankrupt, owed at least $25,000 in that vicinity and elsewhere, or about $20,000 more than his indebtedness at the bank. This had been his indebtedness to various parties for several years. The personal estate of said Hunt was worth about $3,000, and consisted almost entirely of his stock in a grocery store which he was conducting in Delhi. He had dealt with the bank for several years. The referee finds:

'That his dealing with the bank, creditor, began in 1893, increasing gradually down to the 4th day of June, 1903, at which time he owed the bank $4,150. The money borrowed from the bank was placed to his credit, and checked out in his business, the bank taking notes of the bankrupt, indorsed by his wife, representing the loans. The evidence also discloses that the bankrupt renewed the notes representing his indebtedness to the bank from time to time from five days to ninety days. His account was frequently overdrawn, and checks upon the same were often dishonored and protested by the bank under the same management as at the date of the execution and delivery of the mortgage. That about June 3, 1903, Mr. Honeywell, president of the bank, came to the bankrupt, and asked him if he (the bankrupt) and his wife would give the bank a mortgage to secure the amount be had in the bank. The bankrupt replied that he would. There was something said between the bankrupt and the president of the bank about recording the mortgage, but what is was the bankrupt does not appear to be very positive. Mr. Honeywell very positively denies that he agreed not to record the mortgage; the conversation being: 'He asked if it was necessary to record it, and I (Honeywell) said, 'I suppose so.' When I told him he said he would rather a little it weren't; it would hurt his credit in New York. I told him I wouldn't be in any hurry about it. Q. Did you tell him you wouldn't record it? A. No, sir."

The fact remains, however, that the bank did not record it, and in the meantime extensive credit to Hunt was given and extended by other parties. It also appears that on two occasions the president of the bank stated, in substance, to inquirers to whom Hunt owed money, that he owned his real estate clear.

By order of the referee this mortgaged property was sold, and the proceeds of the sale deposited to await the determination of the court as to the validity of the mortgage as a lien in preference to the claim or right of the trustee. In short, in the bank or the trustee entitled to the proceeds? Subdivision 'b' of section 60 of the act approved July 1, 1898, c. 541, 30 Stat. 562 (U.S. Comp. St. 1901, p. 3445), entitled 'An act to establish a uniform system of bankruptcy throughout the United States,' as amended by the act approved February 5, 1903, c. 487, 32 Stat. 799 (U.S. Comp. St. Supp. 1903, p. 416), provides:

'If a bankrupt shall have given a preference and the person receiving it, or to be benefited thereby, or his agent acting therein, shall have had reasonable cause to believe that it was intended thereby to give a preference, it shall be voidable by the trustee, and he may recover the property or its value from such person. And, for the purpose of such recovery, any court of bankruptcy, as hereinbefore defined, and any state court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction.'

If the giving of the mortgage under the circumstances constituted the giving of a preference within the meaning of the act, it is plain that the bank and its agent, Honeywell, the president, not only had reasonable cause to believe, but knew, that a preference was intended; that is, that by giving the mortgage the mortgagor intended to give a security that should result in paying his indebtedness to the bank to the extent of $5,000 from his real estate before paying anything to any other creditor from that property. He intended to prefer the bank. His other property was insufficient by many thousands of dollars to pay his other indebtedness. The evidence also shows that the mortgage was given to secure an extension of his indebtedness to the bank; that is, a renewal of his notes. Of course, after obtaining the mortgage which secured the indebtedness of Hunt, the bank was willing to carry and renew the notes. For four months, at least, it was necessary for the bank to carry them and keep the mortgage secret; that is, unrecorded. If not kept secret, it could have been avoided by the trustee in bankruptcy, provided such proceedings had been instituted. This the bank knew. The fact that officers of this bank went on the bond of Hunt as supervisor of the town is of no consequence. The funds were kept in the bank, and do defalcation of any amount could have occurred. Again, there was no thought that Hunt, even if insolvent, would misappropriate the funds coming into his hands as such officer. The bank and its agent intended to secure and secured this mortgage for the purpose of obtaining a preference in the sense just stated. The transaction shows all this. No other inference logically or honestly can be drawn from the transaction in the light of the surroundings. But, to constitute a voidable preference within the meaning of the bankruptcy act, something more is necessary. Subdivision 'a' of the same section (section 60) says, 'A person shall be deemed to have given a preference if, being insolvent' (Hunt was insolvent) 'has has within four months before the filing of the petition * * * made a transfer of any of his property' (this he has done, for a mortgage is a transfer. See subdivision 25, Sec. 1, 30 Stat. 545 (U.S. Comp. St. 1901, p. 3420)), 'and the effect of the enforcement of such * * * transfer ' (mortgage) 'will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class. ' (This it will do, for there were other creditors of the same class, who will receive nothing if this mortgage prevails.) 'Where the preference consists in a transfer' (mortgage) 'such period of four months 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. ' This last sentence was added by the amendment of February 5, 1903. As introduced in the House of Representatives by the author of the amendment, as it was reported from the judiciary committee of the House of Representatives, and as it passed the House, the words 'or permitted, or if not, from the date when the beneficiary takes notorious, exclusive or continuous possession of the property transferred,' followed the word 'required,' and ended the sentence. Had the section become a law in this form, the ending of the amendment would have been, 'if by law such recording or registering is required or permitted,' etc...