In re Standard Telephone & Elec. Co.
Decision Date | 22 September 1907 |
Citation | 157 F. 106 |
Parties | In re STANDARD TELEPHONE & ELECTRIC CO. |
Court | U.S. District Court — Eastern District of Wisconsin |
This is a proceeding to review the findings and final order of John S. Maxwell, Esq., referee in bankruptcy, in the matter of the intervention of K. K. Knapp. The entire property of the bankrupt was by it turned over to the receiver, and subsequently to the trustee in bankruptcy, who retained possession of the same until such property was sold free and clear of incumbrances, under an agreement with mortgagee that proceeds should stand in place of property, for the purposes of determining the rights and equities of the parties. The bankrupt, a Wisconsin corporation, under its articles of association, was impowered to manufacture and sell all appliances and apparatus suitable for telephone purposes, and to operate telephone lines and exchanges, and to conduct the business of telephoning in any way. It had established and was, at the time of the adjudication, operating one small telephone exchange at the village of Sheridan, Wis., but its principal business was manufacturing and selling apparatus. Aside from such small telephone exchange, the assets of said bankrupt consisted of a stock in trade and trade fixtures at Milwaukee, Wis., where it had carried on its manufacturing business. One K.K. Knapp, as trustee under certain bonds secured by chattel mortgage upon such stock in trade, etc intervened and filed a petition in this court, wherein he claimed a first lien by virtue of certain chattel mortgages executed by the bankrupt to him as trustee to secure certain bonds, praying that the trustee in bankruptcy be required to answer his petition, and that the mortgage be decreed to be a first lien to be first satisfied out of the proceeds of the sale of assets. Thereupon the trustee in bankruptcy, by his answer to the petition, assailed the validity of the mortgage upon three grounds, viz.: First, that the chattel mortgage is fraudulent and void as to creditors, because of the express agreement contained therein that the mortgagor should remain in possession, continue the conduct of the business and sale of the mortgaged property, and apply the proceeds to its own use; second, that the mortgage is void as to after-acquired property; third, that the mortgage is void as to general creditors, and the trustee in bankruptcy, because of the failure to file the affidavit of renewal required by the Wisconsin statutes. No issue of fact was developed by the proof, and the case must be ruled by the application of legal principles.
It appeared that the trustee in bankruptcy represented only general creditors; that the mortgage was not renewed at the expiration of two years, as required by sections 2315, 2316 of the Revised Statutes of 1898 of Wisconsin; and that no statement in writing was filed of the amount of sales, etc as required by section 2316b of the Revised Statutes of 1898; that ever since the execution of the chattel mortgage the bankrupt company, in the course of its business, made sales from the mortgaged property and applied the proceeds to its own use; and that said property was at all times in the possession of the mortgagor. The referee finds that said K K. Knapp at all times knew that the business was being so transacted, and that it was at all times contemplated and understood by and between said parties that the business should be so transacted, and sales of the mortgaged property so made, and the proceeds so applied to its own use. As conclusion of law the referee found that the mortgage was fraudulent and void as to the creditors of the bankrupt, and dismissed the petition. It appears that the original chattel mortgage was supplemented by a new mortgage for the purpose of extending time of payment of bonds, but for the purposes of this discussion it may be treated as a single document. The bank of Wisconsin, a simple creditor, asked to intervene, and the bankrupt also answered the petition, both setting up substantially the same defenses as were interposed by the trustee.
The ruling of the referee was largely based on the following provisions of the chattel mortgage:
It is further provided that upon application of the first party the trustee (Knapp) may waive the payment of said sinking fund for any quarter, and in the event of said trustee electing not to require such payment for such sinking fund the moneys which would otherwise have been placed therein shall remain at the disposition of said first party, to be divided as dividends, or to enlarge, extend, improve, and repair such business, etc. No fraud in fact was imputed to the bankrupt company, or to Knapp, the trustee, or to the bondholders. The bonds were executed and delivered for a valuable consideration. Said mortgage provides for a sinking fund of $500 quarterly, $2,000 annually, out of the net proceeds, or, if necessary, out of general resources, and it was stipulated that no dividend should be declared or paid on capital stock, when any portion of said sinking fund, or the interest on said bonds, should not have been duly provided for.
The following are the sections of the Wisconsin statutes to which reference will be made:
Section 2316b provides in substance that every mortgagor of any stock of goods, etc., of which he is in possession, and from which he is permitted to make sales and apply proceeds upon the debt, shall file a statement showing amount of sales, amount applied on mortgage, and amount of new stock bought, etc., every 60 days, and upon failure to file such statement the debt shall become immediately due, and after 15 days the mortgage shall cease to be a lien except as between the parties.
Miller, Mack & Fairchild, for the trustee.
Knapp, Haynie & Campbell (Mr. Breeden, of counsel), for K. K. Knapp, trustee.
Vilas, Vilas & Freeman, for Bank of Wisconsin.
Spence & Marshutz, for the bankrupt.
QUARLES, District Judge (after stating the facts as above).
The question of law arising in this case involves the construction of a Wisconsin statute. It is therefore a local question, as the federal court in such a case adopts the ruling of the highest judicial tribunal of the state. This proposition is so familiar as to require the citation of no authorities. The Wisconsin Supreme Court has consistently held that a chattel mortgage, which upon its face stipulates that the mortgagor may retain possession of the mortgaged property, sell and dispose of the same in the usual course of business, and appropriate any part of such proceeds to his own use and benefit, is fraudulent and void as to creditors. Place v. Langworthy, 13 Wis. 629, 80 Am.Dec. 758; Steinart v. Deuster, 23 Wis. 136; Blakeslee v. Rossman, 43 Wis. 116; Anderson v. Patterson, 64 Wis. 557, 25 N.W. 541; Bank v. Lovejoy, 84 Wis. 611, 55 N.W. 108; Bank of Kaukauna v. Joannes, 98 Wis. 328, 73 N.W. 997; Franzke v. Hitchon, 105 Wis. 13, 80 N.W. 931; Durr v. Wildish, 108 Wis. 401, 84 N.W. 437. Under these cases it is not a question of intent, because such an arrangement necessarily tends to hinder, delay, and defraud creditors.
The mischief that called forth this stringent doctrine was the hardship imposed upon the general creditor who found between him and his debtor a chattel mortgage on a stock of goods which allowed the mortgagor to retain possession, and to appropriate to his own use, the avails of the business, while such creditor was remediless. As against such creditor, such a mortgage under Wisconsin decisions is void as matter of law without regard to the question of...
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