In re Soudan Mfg. Co.

• Citation: 113 F. 804
• Decision Date: 12 February 1902
• Docket Number: 828.
• Parties: In re SOUDAN MFG. CO. v. DUNNAHOO. STITES
• Court: U.S. Court of Appeals — Seventh Circuit

113 F. 804

In re SOUDAN MFG. CO.

STITES v. DUNNAHOO.

No. 828.

United States Court of Appeals, Seventh Circuit.

February 12, 1902

Smiley W. Chambers and James D. Andrews, for appellant.

George H. Peaks and James L. Harman, for appellees.

This appeal is from a judgment of the district court, sitting in bankruptcy, in the matter of Soudan Manufacturing Company bankrupt, on review of findings by the referee, whereby a mortgage lien claimed by Robert N. Stites, appellant, against the plant, machinery, and tools of the bankrupt, is disallowed, and upon additional findings by the court the ruling of the referee that the mortgage 'constitutes no valid existing lien on any of the property' of the bankrupt is affirmed. The Soudan Manufacturing Company, an Illinois corporation, had its plant, consisting of machinery tools, and fixtures, at Elkhart, Ind., and was there engaged in the manufacture and sale of bicycles, while its president A. H. Winters, resided at Chicago, Illinois. The mortgage in question was executed August 1, 1900, to secure a present loan of $12,500 by the appellant for the purposes of the corporation, and was duly recorded prior to August 10, 1900 when a creditors' petition was filed for an adjudication of bankruptcy against the corporation. In the course of proceedings thereupon the appellant filed his petition to have such mortgage declared a first lien upon the machinery, tools, and fixtures of the bankrupt with result as stated. The loan was made upon the mortgage security without previous business relations between the parties, with information that the corporation was carrying on an active business, was in need of funds to pay off existing indebtedness, especially to meet advances made by one Webber, to furnish relief from present embarrassment and increase the output; and relying upon an investigation alone of the title to and apparent value of the machinery and fixtures, then in operation as a going concern, and upon general statements on the part of Mr. Winters, the president, with no examination of the books of the corporation or other investigation of its financial standing and ability.

Before JENKINS and GROSSCUP, Circuit Judges, and SEAMAN, District Judge.

SEAMAN District Judge, after the foregoing statement, .

The proof is undisputed that the mortgage in question was made and accepted to secure a present loan by the appellant to the corporation of $12,500, and that previous to the negotiations for the loan no transactions had taken place and no acquaintance existed between the principals; but the validity of the mortgage is assailed upon two propositions: (1) That the corporation was insolvent, and by the transaction gave a preference to two of its creditors,--one being its president,-- and the appellant received the mortgage with notice of such insolvency and purpose, thus violating the provisions of the bankruptcy act; (2) that the mortgage covered stock, manufactured and in process, with an understanding outside the terms of the instrument that sales could be made therefrom, by and for the exclusive use of the mortgagor, and the entire security was thus invalidated under the law of Indiana. Unless one or the other of these contentions is sustainable, the appellant is entitled to the relief sought by his petition as jurisdiction to that end, if questionable, was not questioned, and the express submission amounts to consent. Bryan v. Bernheimer, 181 U.S. 188, 197, 21 Sup.Ct. 557, 45 L.Ed. 814.

1. The mortgagor corporation was insolvent in fact, if not so considered by its president, and obtained the loan for the purpose of paying up certain indebtedness, and with the effect of giving a preference to the creditors mentioned, within the definition of section 60a of the bankruptcy act; and while the appellant was not 'the person receiving' such preference, 'or to be benefited thereby,' within section 60b, it is clear that the transaction violated section 67e of the act, if the loan was made upon the mortgage with notice that the corporation was then insolvent, and that it was intended thereby to accomplish unlawful preferences, or under circumstances which charge the appellant with notice that violation of the act was the purpose of the loan. It is equally clear that section 67d saves from invalidity the security thus founded upon a present consideration, if 'accepted in good faith and not in contemplation of or in fraud upon this act,' and, in the absence of notice which impeaches the good faith of the transaction as so defined, the mortgagee is entitled to the benefits of his lien, notwithstanding the fraud, if any there was, on the part of the mortgagor. In this view the inquiry is narrowed to the proof of facts and circumstances brought home to the appellant, or to the attorney who conducted the transaction for him, touching both the insolvency of the borrower and the unlawful purpose of the loan. The findings below are, in effect, that the corporation was insolvent when the loan was made, and the appellant had notice of such condition, of the use to be made of the loan, and had 'reasonable cause to believe that it was intended thereby to give' preferences. Conceding for the moment that the insolvency and notice so found would justify the conclusion against the validity of the mortgage, the review upon this appeal cannot rest upon such findings alone. Section 25 provides for the appeal to be taken 'as in equity cases,' and thus removes the 'cause entirely, subjecting the law and fact to a review and retrial. ' U.S. v. Goodwin, 7 Cranch, 108, 110, 3 L.Ed. 284; 1 Rose, Notes, 485. And thereupon the material facts must be ascertained from the testimony which is brought up for review.

For a considerable period prior to the loan in controversy, and up to the filing of the petition for involuntary bankruptcy, the corporation was actively engaged in the business of manufacturing and selling bicycles. The amount of invested capital does not appear, but its plant consisted of machinery, tools, and fixtures, the value of which depended largely upon successful operation of the business, estimated on behalf of the appellant, when the loan was made, at $25,000 to $30,000, and appraised as bankruptcy assets at $5,000. Mr. Winters, the president of the corporation, was a lawyer of Chicago, actively engaged in the practice of his profession; and his principal part in the business of the corporation was in connection with the finances, in the use of his personal credit and influence to obtain means for carrying on the operations of the company. Needful funds and credit were thus furnished, both through temporary loans made by his friends or clients upon collaterals of the company and through a plan of 'check-kiting,' whereby Mr. Winters sent checks upon his Chicago bank, signed in blank, to be filled out and used by the company as required. Drafts or checks would then be forwarded by the company to him for the amount, and funds were provided to meet his Chicago check when presented, either through friends, or by special arrangement at the bank. For the purpose of taking up indebtedness so incurred, and to provide a margin against future need for such expedients, Mr. Winters states that he applied to various parties for a loan, to be...