In re Noel

• Decision Date: 17 April 1905
• Parties: In re NOEL.
• Court: U.S. Court of Appeals — Fourth Circuit

137 F. 694

In re NOEL.

United States District Court, D. Maryland.

April 17, 1905

John N Steele and John Hinkley, for trustees in bankruptcy.

Edgar H. Gans and Robert Biggs, for Commonwealth Bank.

MORRIS District Judge.

Edgar M. Noel, who was in a large way a building contractor, was adjudged a bankrupt May 26, 1903, upon his voluntary petition. At the time of his application he owned and was living in a fee-simple dwelling house on Mt. Royal avenue, in Baltimore City. This property was subject to two mortgages One was a mortgage executed by himself and wife, December 26 1900, to Nathan Rohr, and duly recorded, for $3,000. The other was a mortgage to the Commonwealth Bank of Baltimore for $13,000, dated January 23, 1903, and recorded February 5, 1903; that is to say, within four months prior to his adjudication. After the adjudication the Commonwealth Bank acquired by assignment the $3,000 mortgage, and, by virtue of a consent of the mortgagors contained in the mortgage, but without making the trustees parties to the case, and without application for the sanction of the bankrupt court, procured, August 30, 1903, a decree of the circuit court No. 2 of Baltimore City appointing Robert Biggs trustee to foreclose the above-mentioned first mortgage, and advertised the property to be sold on September 11, 1903. The trustees of the bankrupt's estate filed their petition on September 9, 1903, praying an injunction to stop the sale on the ground that the second mortgage of $13,000 was void as a preference; that the property was worth at least $20,000, having been scheduled by the bankrupt as of the value of $25,000; and that a sale under a decree for foreclosure in the state court would hinder and delay the proper administration of the estate of the bankrupt by the trustees. The court in bankruptcy granted the injunction prayed for. The Commonwealth Bank answered the petition, and made a motion to dissolve the injunction. After a hearing of the motion the court passed an order, October 10, 1903, rescinding the injunction, and permitted a foreclosure sale under the decree in the state court upon condition that the court costs and commissions to be allowed by the state court on the $3,000 first mortgage, and all taxes, water rent, and other charges, should be taken out of the proceeds, and that the first mortgage of $3,000 and interest should be paid to the Commonwealth Bank, and the balance should be deposited subject to the order of this court, to abide the determination of this court as to the validity of the second mortgage of $13,000 given to said Commonwealth Bank. Under the sanction of this order the mortgage was foreclosed, and the controversy now to be determined is as to the validity of the said $13,000 mortgage under which the bank claims the balance of the proceeds of sale, which balance has provided to be less than the amount of its claim.

The trustees of the bankrupt's estate, claiming said balance, filed their petition, praying that the $13,000 mortgage be declared void; setting out the following grounds for the relief prayed for: That on October 13, 1901, Noel obtained from the Commonwealth Bank a loan of $13,000, for which he gave his promissory note payable 45 days after date, and as security he and his wife executed a second mortgage to said bank upon the said Mt. Royal avenue property. The said mortgage was not recorded, and the said note was paid December 7, 1901. That on December 14, 1901, he again applied for and obtained a loan for $13,000 from the bank on the security of his interest in the said property, giving his note payable 45 days after date, and again he and his wife gave a mortgage to said bank on said property. That the mortgage, at the request of Noel, was not recorded. That said loan was then renewed every 45 days, maturing on March 8, 1902, on April 25, 1902, on June 8, 1902, on August 22, 1902, on October 25, 1902, and on January 23, 1903, and on each of said dates a new note and a new mortgage were given to the bank by Noel. That none of said mortgages were recorded, except the last one, dated January 23, 1903, which was recorded by the bank after notice to Noel on February 5, 1903 (within four months prior to Noel's adjudication), and under which the bank now claims. The trustees, in their petition, charge that the loan to Noel made on December 14, 1901, has never been, in fact, repaid, and is the identical loan now claimed by the bank, and attempted to be secured by the mortgage dated January 23, 1903, and recorded February 5, 1903; that the alleged payments of the different notes given in renewal of said loan were fictitious payments, and no money passed from Noel to the bank. They charge in their said petition that at the time the loan was made the bank knew that Noel was largely indebted and was daily incurring new indebtednesses, and that, by withholding from record all of the six successive mortgages given to secure the said loan of $13,000, they gave Noel a fictitious credit, which was a fraud upon all his creditors becoming such after December 14, 1901, and was void as to all such creditors. They further charge that on January 23, 1903, Noel was insolvent, and was so when the mortgage was recorded on February 5, 1903, within four months of the filing of Noel's petition in bankruptcy, and that it is void as an unlawful preference.

The Commonwealth Bank answered the petition of the trustees. It protested that the court was without jurisdiction to hear and determine the issues presented in said petition, in the form presented to the court, and reserved all exceptions it might make to the jurisdiction of the court to hear and determine the same. It asserts that in the dealings between it and Noel as to said loan of $13,000 for 45 days, made on December 14, 1901, Noel stated that it was a temporary loan, and that it would be paid at maturity, and asked that the mortgage should not be recorded; that, each time the note matured, Noel made the same request, and was granted a loan, and the bank took on each transaction a new note and a new mortgage, until finally, on February 5, 1903, the bank notified Noel of its intention to put the mortgage on record, and did so. In its answer the bank avers that it made the loan in absolute good faith, without any reason to believe that Noel was financially embarrassed, but, on the contrary, during the years 1901 and 1902 it had reason to believe that Noel was prosecuting a number of large and profitable contracts, and that said loan was only a temporary accommodation. It asserts that the withholding of the mortgage from record was not with any intent to give Noel a fictitious credit, or to aid him in misleading any person with whom he might have business dealings. The answer asserts that the bank did not know that Noel was insolvent on January 23, 1903, and denies that the taking of the mortgage constitutes a preference, within the meaning of the bankrupt act; that it has not filed any claim or taken part in the bankruptcy proceedings.

The testimony of the witnesses varies but little from the allegations of the pleadings. It appears that Noel in December, 1901, had on his hands a number of very large building contracts-- among them, a contract for the building of the Fifth Regiment Armory, in Baltimore City, at the contract price of about $250,000. He was a customer of the Commonwealth Bank, and had assigned that contract to the bank, so that it was to receive all the payments due to Noel as they were paid, and was to advance him the money required for his current payments in connection with that contract. Finding he needed more money, he applied for this additional loan of $13,000 on the security of a mortgage of his dwelling house; Noel expecting he might need it until he received the final payments on the armory contract, but the bank making no agreement to let him have it longer than the 45 days, at the end of which each note was made payable. With regard to the ultimate recording of the mortgage, it would seem to have resulted from the fact that the bank officers in February, 1903, became convinced that disputes which Noel was encountering in obtaining the final payments on that contract, would prevent his paying the note at maturity from the source from which he had been expecting the money. They then notified Noel that they would record the mortgage. As to the continuance of the loan, the transaction was that, before the 45-day note matured, Noel would request the bank to continue the loan, and its officers would have a new mortgage prepared, and Noel and his wife would come to the bank and execute it, and he would make a new note. The cashier would then draw his cashier's check for $13,000 to the order of Noel, who would indorse and deposit it to his account, and draw his check on the bank for $13,000, and hand it to the cashier, and would receive back the old note and the old mortgage. The interest was charged up against his account quarterly, together with interest for all the discounts and advances which Noel had from the bank on which interest was payable.

Jurisdiction.

The first question presented is that raised by the Commonwealth Bank by the reservation in its answer of the right to except specially to the jurisdiction of the court in bankruptcy to hear and determine the issues presented by the petition of the trustees, in the form in which they are presented by said petition to the court. It is urged in argument that the question whether or not the mortgage of January 23, 1903, to the bank, is void, and is to be set aside, can be determined (unless by the consent of the bank) only in an independent plenary suit in equity. And in support of this contention counsel for the bank cite Bardes v. Harwarden Bank, 178 U.S. 524, 20 Sup.Ct. 1000...