Nicholls v. McShane

• Court: Colorado Court of Appeals
• Writing for the Court: WILSON, J.
• Citation: Nicholls v. McShane, 16 Colo. App. 165, 64 P. 375 (Colo. App. 1901)
• Decision Date: 11 March 1901
• Parties: NICHOLLS v. McSHANE et al.

64 P. 375

16 Colo.App. 165

NICHOLLS v. McSHANE et al.

Court of Appeals of Colorado

March 11, 1901

Appeal from district court, Gilpin county.

Replevin by John C. McShane and others against John H. Nicholls to recover mortgaged property taken by the defendant under an attachment. From a judgment in favor of plaintiffs, defendant appeals. Affirmed.

Rogers, Cuthbert & Ellis, Bicksler & McLean and Hurlburt & Hicks, for appellant.

C.C Brown and Robinson & Anfenger, for appellees.

WILSON J.

This is a contest between attachment and mortgage creditors. A Rachofsky, a merchant in Central City, was indebted to the First National Bank of that city, and, the bank demanding security, he executed to plaintiff McShane for this purpose a chattel mortgage upon the stock of goods in his store. McShane was vice president and a director of the bank, and, the evidences of indebtedness held by it against Rachofsky being first assigned to him by the bank, Rachofsky executed a new note for the total amount thereof, being $8,263, payable directly to McShane one day after date, and to secure this the chattel mortgage was given. On the next day, Rachofsky, of his own motion, executed and delivered to McShane, as trustee, a second mortgage, subject to the first, but upon the same stock of goods, to secure an alleged indebtedness by him to various other creditors, in the amount of about $13,500. McShane took possession of the entire stock under the mortgages. Within a few days thereafter, various other creditors of Rachofsky, holding claims unsecured to the amount of about $15,000, instituted suits thereon by attachment, and under the writs issued therein defendant Nicholls, the sheriff of the county, took the entire stock of goods from the custody and possession of McShane. Thereupon McShane and the parties named in the second chattel mortgage, for whom he was trustee, instituted this suit in replevin for the recovery of the goods. The answer set up as a defense that the claims of the attachment creditors were for goods sold to defendant Rachofsky under false and fraudulent representations by which the sale was fraudulent; that the two chattel mortgages were executed with the intent on the part of Rachofsky to hinder, delay, and defraud his creditors; that the mortgagees had knowledge, either actual or constructive, that the purchase by Rachofsky from the attachment creditors was fraudulent; and also that he executed the chattel mortgages with the intent to hinder, delay, and defraud his creditors, and that they participated in said fraud. The allegations in detail are quite lengthy, but we believe this to be a sufficient statement of them to understand the points at issue. Upon the trial, after the evidence had been concluded, the court, upon motion of plaintiffs, instructed the jury to return a verdict in their favor, which was done, and judgment entered accordingly.

1. This court recently passed upon one of the questions which is material in this case, and our decision then made is strongly relied upon by defendant, in connection with a recent decision of the United States supreme court, to secure a reversal of this judgment. Reid, Murdoch & Co. v. Bird, 15 Colo.App. 116, 61 P. 353; Browning v. De Ford, 20 S.Ct. 877 44 L.Ed. 1033. A consideration of the questions involved and determined in these two cases will settle the most difficult question in this case, and the one which will in fact determine the appeal. The Bird Case in this court was one wherein the creditor elected to rescind the sale, and sought to recover in replevin the identical goods which he had sold to the debtor, from a mortgagee, who had taken possession of and held them under a mortgage to secure other creditors. It was there held by this court, in effect, that where the vendor of goods had a right to rescind the sale for fraud of the purchaser, and acted promptly in the exercise of such right, a creditor of the purchaser, by taking a chattel mortgage on the goods to secure a preexisting debt, did not become a purchaser for value, and acquired no title, as against the seller so seeking to rescind, to the goods sold by him and sought to be recovered in replevin. Under this decision, it would not be necessary, in order to sustain a recovery by the vendor in such case, that it must first be shown that the mortgagee had notice or knowledge of the fraud on the part of the purchaser. This is upon the principle that the original purchaser never acquired any title, this being defeated by his fraud. The mortgagee was held not entitled to the rights and privileges of an innocent purchaser for value, because he had simply taken his mortgage upon the goods as security additional to the security which he already had for a debt existing at the time the fraudulent purchase was made. He had given no new or additional consideration, and had parted with nothing on the faith of the apparent and pretended ownership of the goods secured by the fraudulent purchase. He could not, therefore, acquire by the mortgage even an equitable claim to a lien upon any property to which the mortgagor had no title, even though embraced in the mortgage. He would not be in the position of an actual purchaser, who without notice or knowledge of any fraud, and relying upon the possession and apparent ownership of his vendor, had paid a bona fide valuable consideration and received a transfer of the goods. Browning v. De Ford was a case wherein the vendor of the goods, under circumstances which gave him the right to rescind the sale, elected, however, not to do so, but to sue in attachment for the value of the goods. The contention of the mortgagees in that case was that by suing for the purchase money, and attaching the goods as the property of the mortgagor, the defendants confirmed the sale, and that hence the mortgage was valid, notwithstanding knowledge of the mortgagees that the goods had been fraudulently purchased. The court held that the contention was not sound, and that in such case it made no difference as to the rights of the mortgagees whether the action was in replevin or assumpsit. If defrauded creditors pursued the latter course, the mortgagees, under such contention, knowing that the goods were fraudulently purchased, stood in the position of seeking to take advantage themselves of the debtor's fraud, and to obtain a preference to which they were not justly nor equitably entitled. In that case, the creditors seeking the remedy by attachment rather than in replevin, knowledge by the mortgagees of the fraud on the part of the purchaser of the goods was essential to a recovery by the attaching creditors, thus differing from the case where the vendor rescinded the sale, and sought to recover in replevin the identical goods which had been secured from him by fraud, as was the case in Reid, Murdoch & Co. v. Bird, in this court. The reason for the difference in principle seems to us apparent. The vendor in the latter case sought to recover only the goods which had been obtained from him by fraud, and which he was able to identify, and such recovery did not place the mortgagee in any worse position than he was at the time that his debt was created. It prevented, and rightfully so, one creditor from securing an undue preference over another through the instrumentality of fraud perpetrated by the purchaser from the one, and the mortgagor to the other. In the case where the creditor elects to confirm the sale as between him and the vendee, and seeks by suit in attachment to recover the purchase money, he might, if the same principle controlled as in the other case, obtain an undue advantage and preference over the mortgage creditor, because his debt would be first satisfied out of the entire property of the vendee, without regard to that which had been sold by him. It is a reasonable and sound rule, therefore, that this he should not be allowed to do, unless it be first shown that the mortgagee had knowledge of, or participated in, the fraud of his mortgagor. This is expressly declared to be the rule in the De Ford Case. The court said in its opinion: "To make out their case, the attaching creditors were bound to show--First, that the goods were fraudulently purchased; and, second, that the mortgagees, or Vance, their agent, was a party to, or cognizant of, such frauds." Before the attaching creditors could make out a case entitling them to the relief sought, the court held it to be first necessary for them not only to show that the debts due to them had been fraudulently contracted, but also to go further, and show that the mortgage was fraudulent, and then prove that they had a title superior to the mortgage creditors, in which event only they would be entitled to recover. This, the court said, "might be done by evidence that the mortgage was taken in pursuance of a scheme to defraud the general creditors, or that the mortgagees took their security with the knowledge that it covered goods which had been purchased upon fraudulent representations, and that the purchases were made under such circumstances as would entitle the vendors to rescind the sale and reclaim the goods." In other words, to defeat the mortgage, they must substantially make out the same character of case as would have been required of them in order to have defeated a...