Jones v. Third Nat. Bank

• Decision Date: 06 May 1926
• Docket Number: No. 7058.,7058.
• Citation: 13 F.2d 86
• Parties: JONES v. THIRD NAT. BANK OF SEDALIA. In re HARTMAN.
• Court: U.S. Court of Appeals — Eighth Circuit

13 F.2d 86 (1926)

JONES v. THIRD NAT. BANK OF SEDALIA In re HARTMAN.

No. 7058.

Circuit Court of Appeals, Eighth Circuit.

May 6, 1926.

George F. Longan and Thomas M. Jones, both of Sedalia, Mo., for appellant.

James T. Montgomery, of Sedalia, Mo., for appellee.

Before SANBORN, Circuit Judge, and MUNGER and JOHNSON, District Judges.

JOHNSON, District Judge.

Henry C. Hartman was adjudicated a bankrupt on the 9th day of August, 1923. Besides other indebtedness, the bankrupt at the date of his adjudication owed the Third National Bank of Sedalia, appellee, $2,513 for money borrowed from the bank, evidenced by a note of $2,400, dated June 4, 1923, and a note of $250, dated June 28, 1923, upon which a balance of $113 was unpaid. The bank at the date of adjudication also held a note of the bankrupt for $5,000 and a chattel mortgage on his personal property securing said note, both dated April 17, 1923. The bank presented its claim of $2,513 to the referee in bankruptcy, in which it set out that the $5,000 note and chattel mortgage were held as collateral security for the payment of the indebtedness of the bankrupt to the bank, and asked that its claim be allowed as a secured claim. The trustee filed objections to the allowance of the claim as a secured claim. The referee sustained the objections of the trustee. Upon review the District Court overruled the objections of the trustee, set aside the order of the referee, and allowed the claim as a secured claim. The trustee has appealed from the order of the District Court.

The questions presented by the appeal require this further statement of facts: Prior to the date of the execution of the $5,000 note and chattel mortgage, the bankrupt had become indebted to the bank in the sum of $4,650 for money borrowed by him from the bank. A part of this indebtedness was secured by chattel mortgages given in 1922. The balance was unsecured. About April 13, 1923, the president of the bank learned that the bankrupt had given a second mortgage on his farm, which was already heavily incumbered. Becoming apprehensive, the president of the bank wrote the bankrupt and requested him to call at the bank. On the 17th of April the bankrupt went to the bank, when, after an interview with the president of the bank, he and his wife executed the $5,000 note and chattel mortgage. A memorandum in these words was attached to the chattel mortgage:

"April 17, 1923, this note of $5,000 and chattel mortgage is given to the Third National Bank of Sedalia, Missouri, for any debts that are now owing or might be owing in the future to the Third National Bank by Henry C. Hartman and Hannah L. Hartman."

On June 4th the bankrupt paid his indebtedness to the bank. The bank at the time canceled the notes evidencing the $4,650 indebtedness and sent the chattel mortgages securing a part of this indebtedness to the office of the county recorder for cancellation and discharge. Mr. Harris, the president of the bank, testified that he offered to cancel and discharge the $5,000 note and chattel mortgage, but the bankrupt stated that he desired to make a new loan of $2,400 with the bank, and asked him to retain the $5,000 note and chattel mortgage as security for that loan. The $5,000 note and chattel mortgage were retained by the bank, and the loan made. A note for $2,400, dated June 4, 1923, and due 60 days after date, was taken. It contained this recital: "Having deposited or pledged with said bank as collateral for the payment of this note, due August 3, C. M. $5,000." On June 28th the bank made a further loan of $250 to the bankrupt, for which it took a note, signed by the bankrupt and his wife, due 60 days after date. This note contained no recital respecting collateral.

The trustee objected to the allowance of the amount due the bank on these two notes as a secured claim on numerous grounds. The bank asserts that the trial court committed no error in allowing its claim as a preferred claim, because it held the $5,000 note and chattel mortgage as collateral security for the payment of the $2,400 note and the balance of $113 unpaid on the $250 note.

Collateral security has been defined as some security additional to the personal obligations of the borrower. In re Waddell-Entz Co., 67 Conn. 324, 35 A. 257; Shoemaker v. National Mechanics Bank, 21 Fed. Cas. No. 12,801, pages 1331, 1334; D. M. Osborne & Co. v. Stringham, 4 S. D. 593, 57 N. W. 776; Edward P. Allis Co. v. Madison Electric Light & Power Co., 9 S. D. 459, 70 N. W. 650; 2 Words and Phrases, First Series, pp. 1252, 1253. In re Waddell-Entz Co., supra, the creditor held 10 bonds, of $1,000 each, issued by the debtor, as security for a loan of $4,500 evidenced by a demand note. The Supreme Court of Errors of Connecticut, in discussing the matter, said:

"The amount of his debt is not altered because in the demand note the 10 bonds delivered to him are called `collateral security.' They are not collateral security for the payment of the original debt. The demand note itself is, in a sense, a security, dependent for its value on the credit and property of the borrower. Another note, or 50 other notes, furnish a similar security. * * * `Collateral security' necessarily implies the transfer to the creditor of an interest in some property, or lien on property, or obligation, which furnishes a security in addition to the responsibility of the debtor. * * * A debtor's additional promises to pay cannot, from the very nature of the case, be treated as collateral security for his debt, unless such additional promises are themselves secured by a lien on property, or by the obligations of third persons. Under such circumstances, they may be treated as collateral security, so far as is necessary to obtain the benefit of the lien or obligation."

The bank claims that the negotiation of the $2,400 loan on June 4th was a new and independent transaction, in which it was agreed that the $5,000 note and chattel mortgage should be retained by the bank as collateral security. The $2,400 note so recites. Although the note of June 28th contains no such recital, the bank claims that the $5,000 note and chattel mortgage were held as collateral security for the loan by virtue of the memorandum attached to the chattel mortgage on April 17th. It is manifest that the $5,000 note itself added nothing of value to the $2,400 note, which the bankrupt gave the bank on June 4th. As said in Re Waddell-Entz Co., supra, "a debtor's additional promises to pay cannot, from the very nature of the case, be treated as collateral security for his debt, unless such additional promises are themselves secured by a lien on property. * * * Under such circumstances, they may be treated as collateral security, so far as is necessary to obtain the benefit of the lien or obligation." Undoubtedly the chattel mortgage was the security actually relied upon by the bank both on April 17th and on June 4th.

Although the memorandum attached to the $5,000 note and chattel mortgage, which recited that they were held as security for any debts that are now owing or might be owing in the future, was not detached, it is conclusive from the testimony that neither the bankrupt nor Mr. Harris on June 4th contemplated or intended that the bank would make future advances to the bankrupt to the amount of $2,600. If it be assumed it was understood on June 4th that the bank would make the $250 loan, it is certain that no other advances were contemplated. We have, then, a $5,000 note standing for and representing an indebtedness of $2,650, and the difference, amounting to $2,350, standing for and representing nothing. In other words, the $5,000 note was excessive and fictitious in that amount.

The decisions of the highest judicial tribunal of the state in which a chattel mortgage is made determine its validity in the national courts. Dodge v. Norlin, 133 F. 363, 66 C. C. A. 425. In Webb City Lumber Co. v. Victor Mining Co., 78 Mo. App. 676, the Kansas City Court of Appeals said:

"The law is now quite well settled in this state that a false statement of the consideration of a mortgage or the creation of a fictitious indebtedness is a badge of fraud. Touching this doctrine it has been said that `no device can be more deceptive and more likely to baffle, delay or defeat creditors than the creating of incumbrances upon their property by embarrassed men for debts that are fictitious, or mainly so. The false pretense of a debt or the designed exaggeration of one is an act of direct fraud,' so, `a false recital of consideration in an instrument, in the absence of explanation, justified a finding of fraud, and the misrecital must be intentional and not accidental; and subject to explanation, and that the evil design must be mutual, otherwise the transaction will stand against creditors except as to the excess.' Hawkins v. Alston, 4 Ired. Eq. 145. And it has been held that the taking of a mortgage for a greater amount than is due from one known by the mortgagee to be in failing circumstances and pressed by his creditors is conclusive evidence of fraud. Butts v. Peacock, 23 Wis. 359. And where a part of the consideration for which a chattel mortgage is given is fictitious or fraudulent as to creditors the entire mortgage will be vitiated. State ex rel. v. Hope, 102 Mo. 429 14 S. W. 985; Seger v. Thomas, 107 Mo. 635 18 S. W. 33; Nat. Tube Works v. Machine Co....