In re Matthews

• Decision Date: 10 June 1901
• Citation: 109 F. 603
• Parties: In re MATTHEWS (McDONALD, Intervener).
• Court: U.S. District Court — Western District of Arkansas

109 F. 603

In re MATTHEWS (McDONALD, Intervener).

United States District Court, W.D. Arkansas, Fort Smith Division.

June 10, 1901

The record in this case shows that a petition in bankruptcy was filed against Joe P. Matthews, bankrupt, on the 13th of October, 1899, and service was immediately issued and had. He was not adjudicated a bankrupt, however, until March 9, 1900. In the meantime, on the 20th of November, 1899, the property now in controversy (it being real estate) was turned over by the bankrupt to Harry E. Kelly, as agent for Elihu Chauncey Charles Chauncey, and William L. Savage, trustees, and was in his possession as such agent when Matthews was adjudicated a bankrupt. In his schedule Matthews sets forth this property, describing it as 'Lot No. 7, block 530, Reserve addition to the city of Ft Smith,' and also sets forth that the same is incumbered by a lien of Ed Thomas for material and labor for $100, a lien of J. M. Tenny for the sum of $244, lien of D. J. Young for $100, lien of Dyke Bros. for $325, and a mortgage to Elihu Chauncey and others, trustees, $4,000. It appears from the record that on the 28th day of April, 1899, Elihu Chauncey, Charles Chauncey, and William Littleton Savage, as trustees, loaned Joe P. Matthews the sum of $4,000 on lot 7 block 530, in the city of Ft. Smith, Ark. Matthews borrowed the money with the avowed purpose of using it to put up a wholesale storehouse upon said property, worth $5,500, and stated at the time he borrowed the money that the lot was worth $2,500. Said trustees loaned the money with the understanding that it was to be used for the same purpose. The mortgage was placed on record on the 29th day of April, 1899. In making this loan Matthews procured Harry E. Kelly, paying him a commission of $200 to make it. Harry E. Kelly was at the time, and had been for at least 10 years past, the general agent of the trustees aforesaid. When the mortgages and notes were executed and placed on record, they were sent on by Kelly to said trustees, who forwarded the money to Kelly about the 15th of May, 1899. While Kelly, on the 29th of April, had credited Matthews on his books with the $4,000 loan, he never, in point of fact, turned over the $4,000 to Matthews at all, but kept it under his own control, and paid all of it out (as had been his previous custom in transacting business for said trustees) to the contractors, laborers, mechanics, and material men who constructed the building, except the sum of $1,000, which he disbursed as follows: $300 of it he gave to his clerk and brother-in-law, who had a lien upon the lot for the balance of the purchase money to that amount; $200 of it he took out as his commission for making the loan for Matthews; and $500 of it he turned over to Matthews with the understanding that it was to be paid to one of the material men, but it was never paid to him. So that $1,000 of the borrowed money, so far as the proof shows, never went into the building at all. In holding this money, and disbursing it in the way in which he did, the court finds, as a matter of fact, that Harry E. Kelly was the agent and representative of the trustees. On the dates, and for the amounts set opposite their respective names, the following material men procured judgments in the state circuit court for material furnished and which went into said building, to wit: J. M. Tenny & Co., October 5, 1899, $268; H. L. Goddard, November 2, 1899, $188, Dyke Bros., October 5, 1899, $331.30. These judgments were all filed and allowed in the bankrupt court. Shortly after Matthews went into bankruptcy, the trustees aforesaid, who made the Matthews loan, assigned the mortgage and note to Harry E. Kelly, their general agent at Ft. Smith, for the purpose of collection. He advertised the property for sale under the mortgage, and is now in possession thereof. A. A. McDonald, the trustee in bankruptcy for Matthews, though not in possession of the property, thereupon filed a petition before the referee, setting up the existence of the mortgage, and the existence of the several mechanics' liens hereinbefore stated, and other liens also, on said property, and represented to the court that the sale of the property, under such circumstances, would not bring its real value, and prayed the court that all interested parties have notice, and for an order directing the sale of the property free from all incumbrances, and that the proceeds of said sale stand in lieu of said property, and for the bringing in of the proceeds of said sale to be distributed as the court might determine the priority of said lienholders; and also for a restraining order prohibiting the said Kelly from selling said property, or any part thereof, under said mortgage, until the matters presented were properly adjudicated in that proceeding. Thereupon an arrangement was made, whereby it was agreed by and between counsel for the said Chaunceys and Savage, and the counsel for said trustee in bankruptcy, and the counsel for J. M. Tenny & Co., Dyke Bros., and H. I. Goddard 'that the said Chaunceys and Savage, and the creditors of the bankrupt above named, would, in response to the petition of said trustee, file with and before the referee in bankruptcy their respective interventions, setting up their respective claims of priority of liens upon the property above described; that no injunction should issue upon the petition of the said trustee; and that no sale of the property should be had until the rights of the respective parties had been determined upon said interventions. ' And thereupon each of the interveners, in accordance with this agreement, filed their respective interventions in response to the application of said trustee before the referee in bankruptcy. The intervention of the said Elihu Chauncey, Charles Chauncey, and William L. Savage, trustees, is in the following language:

'Come now Elihu Chauncey, Charles Chauncey, and William L. Savage, trustees, and show that heretofore, to wit, on April 28, 1899, they loaned to the said Joe P. Matthews $4,000.00, and took as security therefor a mortgage upon lot 7, in block 530, Reserve addition to Fort Smith, Ark., dated on that day, and duly acknowledged and recorded in the office of the circuit clerk and ex officio recorder of said county of Sebastian, Arkansas, in the Fort Smith district thereof, on April 29, 1899, on page 4 of Book 22 of Mortgages. Said mortgage was due in five years from date, with interest at seven per cent. per annum, and is now unpaid. Said loan was made to said Matthews to enable him to erect a building upon said lot for business purposes, and for that purpose only, and said mortgage was so given and received for the purpose of raising money with which to build upon said premises. Said money was, as these interveners are informed and believed, actually used in the erection by said Matthews of the building now standing upon said lot, and said mortgage is a first lien on said premises. Wherefore these petitioners pray that they may be adjudged to have a first and prior lien upon said premises.

'Mechem & Bryant, Attorneys for Interveners.'

The other interveners, J. M. Tenney & Co., H. I. Goddard, and Dyke Bros., also filed interventions, setting up their liens as mechanics and material men, and prayed to have their liens declared prior to that of the said mortgagees. Thereupon all of the parties appeared before the referee, their testimony was taken, and the case was argued and submitted to the referee, who rendered his decision thereupon, holding that the lien of the mortgage of the said Chaunceys and Savage upon the property was prior to that of the other interveners, and ordered that the trustee in bankruptcy proceed to sell the property, and bring the funds into court, and that, when said fund is so brought into court, the proceeds be applied-- First, to the expense of the sale; second, to the payment of the mortgage indebtedness, less the amounts received by the mortgagees for rent; and the remainder applied pro rata to the claims of the other interveners. From this decision and order of the referee the interveners J. M. Tenny & Co., H. I. Goddard, and Dyke Bros. filed their petition for review, and assigned as error: First, that the said referee erred in holding that the evidence was not sufficient to postpone the lien of said mortgage to the mechanics' and material men's liens of the said creditors; second, that the said referee erred in holding that said mortgage lien should not be postponed to the respective liens of said creditors to the extent of the money arising from said mortgage, and not applied to the payment of claims of said creditors for labor performed and materials furnished in the construction of the buildings on said lots. The Chaunceys and Savage, as trustees, and the other creditors, except Dyke Bros., J. M. Tenny & Co., and H. I. Goddard, submitted to the decision and order of the referee, and have not asked to have the same reviewed.

As to the claim of Dyke Bros., Mr. . . . Dyke testifies that, after he made the contract for the furnishing of this lumber, and before he furnished any portion of it, he called on Mr Kelly, in pursuance of a previous understanding between them to the effect that, when the Chaunceys were furnishing money through him to construct buildings, he (Kelly) desired Dyke Bros. to always notify him of the amount of the contract, and that heretofore he had always reserved the money for them, and that that is the reason why he called on Kelly in the Matthews case; that, in pursuance of this understanding, he called on Kelly in the Matthews case, and told him that his bill of lumber would be about $400, and Kelly said to him that he had $1,500 in his hands, belonging to Matthews, and that he would see that he (Dyke)...