Lyon v. Council Bluffs Sav. Bank

• Decision Date: 01 January 1886
• Parties: LYON and others v. COUNCIL BLUFFS SAV. BANK and others.
• Court: U.S. District Court — Southern District of Iowa

29 F. 566

LYON and others v. COUNCIL BLUFFS SAV. BANK and others.

United States Circuit Court, S.D. Iowa, Western Division.

September Term, 1886

Mills &amp Keeler and Wright, Baldwin & Haldane, for complainants.

D. C Bloomer, defendant.

SHIRAS J.

In the year 1884 one James Porterfield was engaged in business at Council Bluffs, Iowa, as a retail dealer in dry goods, and on the thirtieth of August of that year he borrowed of the Council Bluffs Savings Bank the sum of $3,500, for which he executed his three promissory notes, maturing September 29 October 29, and November 28, 1884, and to secure the payment thereof he also executed a chattel mortgage dated August 30 1884, and covering 'all my certain stock of dry goods, notions, hosiery, cloaks, and all other goods that are now in stock, or may hereafter be added thereto, owned and kept by me in a certain store, * * * together with all furniture and fixtures thereunto belonging; also all notes, book-accounts, and other evidences of indebtedness now owned by me. ' The mortgage, by its terms, permitted the mortgagor to sell the property in the ordinary course of trade. This mortgage was delivered to the bank at the time of its execution, but it was not recorded until March 20, 1885, nearly seven months after its execution.

In September, 1884, Porterfield went to New York, and bought, on credit, of complainants, goods of the value of $3,704.56, which were placed in the store containing the stock covered by the mortgage. When these sales on credit were made by the complainants, they had no knowledge of the existence of the unrecorded mortgage, and sold the goods in the belief that Porterfield's stock was unincumbered. On March 20, 1885, as already stated, the mortgage was placed upon record, and on the next day the bank took possession of the property described in the mortgage, for the purpose of foreclosing the same. On the twenty-fifth of March, 1885, Porterfield made a general assignment for the benefit of creditors to C. R. Scott, and complainants brought an action at law against Porterfield, aided by attachments, to the August term, 1885, of the circuit court of Pottawatamie county, and recovered judgments for the amounts due them from Porterfield. Complainants also filed a petition in equity in the state court for the purpose of contesting the validity of the mortgage to the savings bank, and asked the issuance of a writ of injunction under the provisions of section 3317 of the Code of Iowa. The writ was issued and served upon the bank, and then, upon application of complainants, who are, and were when the suit was commenced, citizens of the state of New York, the cause was removed into this court, and is now submitted upon the evidence introduced by both parties; the question being whether the chattel mortgage is valid as against the claims and equities of complainants.

Counsel for the mortgagee cites authorities in support of the well-recognized proposition, that the construction put upon the language of a state statute by the supreme court of the state is binding alike upon the federal and state courts, and then claims that the supreme court of Iowa, in a series of decisions beginning with Hughes v. Cory, 20 Iowa, 399, and ending with Meyer v. Evans, 66 Iowa, 179, S.C. 23 N.W. 386, has held 'that the fact that the mortgagor retains possession of the mortgaged property, and reserves the right to sell the same in the ordinary course of trade, and apply the proceeds to his own use, does not render the mortgage fraudulent in law;' and that consequently the United States courts are bound to hold, in all such cases, that the mortgage is valid as against all parties.

It would seem that a mischievous misunderstanding has arisen in the minds of many in the community, not only touching the rulings in this court upon the validity of chattel mortgages, but also in regard to the true meaning and scope of the decisions of the supreme court of Iowa upon this subject. The impression seems to prevail that the rulings of the federal and state courts upon the true construction of the Iowa statute are radically different; yet a careful examination of the rulings actually made will show that this impression is an error.

The fatal mistake made by many is in assuming, as is practically done by counsel for defendant in this case, that when the supreme court of Iowa decided, in Hughes v. Cory, and other cases based thereon, that, under the facts appearing in the several cases, the chattel mortgages under consideration could not be declared to be invalid as a matter of law, that the court meant to declare, and did declare, that the mortgages were valid as a matter of law. The rule actually laid down is that the court could not, under the facts presented in the several cases, declare, as a matter of law, that the mortgages were either valid or invalid, but that the question of invalidity was one of fact to be decided in each case upon the evidence and the conclusions to be deduced therefrom. To ascertain just what has been in fact held by the supreme court of Iowa, a brief examination of the leading cases may not be out of place.

Under the rules of the common law, and under the provisions of the statute of 13 Eliz., as construed in Twyne's Case, 3 Coke, 80, if the vendor or mortgagor of chattels was allowed to continue in possession, and use the property as his own, the transfer would be deemed fraudulent as a matter of law.

The Code of Iowa, Sec. 1923, provides that 'no sale or mortgage of personal property, where the vendor or mortgagor retains actual possession thereof, is valid against existing creditors, or subsequent purchasers without notice, unless a written instrument conveying the same is executed, acknowledged like conveyances of real estate, and filed for record with the recorder of the county where the holder of the property resides.'

By this statute the recording of the mortgage gives the notice of change in ownership which was secured at the common law by requiring an actual and visible change of possession, and therefore the mortgagor might retain possession of the property, the mortgage being recorded, without giving rise to a presumption of fraud as a matter of law. Torbert v. Hayden, 11 Iowa, 435; Wilhelmi v. Leonard, 13 Iowa, 330; Jordan v. Lendrum, 55 Iowa, 478; S.C. 8 N.W. 311. By reason of the fact that the statute declares the mortgage, if not recorded, to be invalid only against creditors and purchasers, it is held that an unrecorded mortgage will not, as between the mortgagor and mortgagee, be rendered invalid simply because it is not recorded, and also that an unrecorded mortgage is valid as against all creditors and purchasers who have actual notice of its existence when their rights accrue, (McGavran v. Haupt, 9 Iowa, 83; Allen v. McCalla, 25 Iowa, 464;) also that, if withheld from the record for a time, and then recorded, the mortgage will become a lien, as against creditors and purchasers without actual notice of its existence, from the date when it is filed for record.

These decisions of the supreme court of Iowa are constructions of the language and true meaning of the Iowa statute, and the federal courts are bound to follow these interpretations of its meaning in all cases wherein the rights of parties are dependent upon the meaning of the statute. No case can be found in the reports, decided in the federal courts for Iowa, in which a construction of the Iowa statute has been adopted which differs from that announced by the supreme court of the state. It is possible that cases may be found which do not differ greatly in their facts, and in which different conclusions have been reached in the state and federal courts; but it will appear that these differing decisions are not based upon diverse constructions of the Iowa statute, but upon diverse conclusions of fact drawn from the evidence in the cases.

As between a creditor and a mortgagee the question of the rights arising under the mortgage may be (1) a question of priorities of lien, in cases in which fraud is not an element, and where the question of priority usually depends upon the meaning of the statute of the state; (2) a question of fraud, in which the inquiry is whether the mortgage is in fact fraudulent, as against creditors, by reason of the fact that it is used as a cover and shield for the protection and benefit of the mortgagor, to the injury and delay of creditors, or that its existence is kept a secret, with the intent to thereby mislead third parties, to their loss and injury.

The question of whether a mortgage is fraudulent in fact is not determinable usually by the construction of the Iowa statute providing for the recording of mortgages, and the retention of possession by the mortgagor, but is a question of fact, to be determined in each case upon the evidence submitted and pertinent to the issue. Let us now see what are the view of the supreme court of Iowa upon what facts may be considered as tending to show fraud.

In the case of Torbert v. Hayden, 11 Iowa, 435, the trial court had ruled, in instructing the jury, that a mortgage of personal property, which gives to the mortgagor the possession and right to sell the property, was fraudulent in law, irrespective of the intent of the parties. The supreme court reversed this ruling, holding that the statute authorized the mortgagor to remain in possession, and that whether the power of disposition by the mortgagor rendered it void was a question of fact. Thus it is said:

'On the other hand, it is easy for us to conceive how such a mortgage may be fraudulent in fact, whether the possession of the property be in one party or the other, and notwithstanding it may be regularly executed, duly recorded, and all fair upon its

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