People Sav Bank v. Bates

• Decision Date: 07 March 1887
• Citation: 120 U.S. 556,30 L.Ed. 754,7 S.Ct. 679
• Parties: PEOPLE'S SAV. BANK and another v. BATES and others
• Court: U.S. Supreme Court

120 U.S. 556

7 S.Ct. 679

30 L.Ed. 754

PEOPLE'S SAV. BANK and another v. BATES and others.

March 7, 1887.

This is an action of replevin involving conflicting claims under certain chattel mortgages executed by Freedman Bros. & Co. formerly merchants in the city of Detroit. The firm was composed of Herman Freedman, who managed its business in Detroit; Benjamin Freedman, who resided in New York, and had entire charge of the buying and of the firm's financial affairs in that city; and Rosa Freedman. At the beginning of the action the mortgaged property was in the custody of Leopold Freud as agent of the People's Savings Bank, plaintiff in error.

Bates, Rred & Cooley, the defendants in error, who were the plaintiffs below, claim priority under a mortgage given by Freedman Bros. & Co., February 7, 1881, to secure both the past indebtedness of the latter, amounting to $45,000 and upwards, for goods, wares, and merchandise sold and money loaned to them, and any future liabilities which might be incurred by the mortgagors for other goods purchased, or other moneys borrowed, from the mortgagees; the mortgage covering not only the goods, wares, merchandise, and other personal property then in the mortgagors' stores in Detroit, but also their notes, book-accounts, and securities, and all future additions to or substitutions for such goods and merchandise. o part of said indebtedness was created at the time of the execution of the mortgage.

The People's Savings Bank claims under a mortgage made by Freedman Bros. & Co. on the eleventh of February, 1881, to secure certain demand notes, aggregating $49,000, which were executed by that firm on the seventh day of February, 1881, and also 'all other paper indorsed' by it and held by the bank; that mortgage covering all the goods and merchandise then in the mortgagors' stores, and all thereafter put into them. This last mortgage provided that Leopold Freud, the bank's agent, should take immediate possession and sell the goods in the ordinary course of business, applying the proceeds to said indebtedness until the same was paid. The said demand notes represented past indebtedness; for they were given in place of other paper of the mortgagors' then outstanding, and which had not then matured. Each demand note was accompanied by a cognovit or 'confession of judgment,' under which, however, no action was taken. The mortgage to the bank was the first one filed in the proper office in Detroit, though it was not lodged until after the bank had notice, through its agent, that Bates, Reed & Cooley claimed to be in possession of or to have rights in the mortgaged property. Whether the bank, before the mortgage to it was given, had actual notice of the prior mortgage to Bates, Reed & Cooley does not clearly appear.

By the statutes of Michigan relating to chattel mortgages it is provided that 'every mortgage, or conveyance intended to operate as a mortgage, of goods and chattels, which shall hereafter be made, which shall not be accompanied by an immediate delivery, and followed by an actual and continued change of possession, of the things mortgaged, shall be absolutely void as against the creditors of the mortgagor, and as against subsequent purchasers or mortgagees in good faith, unless the mortgage, or a true copy thereof, shall be filed in the office of the township clerk of the township, or city clerk of the city, or city recorder of cities having no officer known as city clerk, where the mortgagor resides, except when the mortgagor is a non-resident of the state, when the mortgage, or a true copy thereof, shall be filed in the office of the township clerk of the township, or city clerk of the city, or city recorder of cities having no officer known as city clerk, where the property is.' 2 How. Ann. St. p. 1609, § 6193.

John Atkinson, for plaintiffs in error.

D. M. Dickinson, for defendants in error.

[Argument of Counsel from pages 559-560 intentionally omitted]

Mr. Justic

e HARLAN, after stating the facts in the foregoing language, delivered the opinion of the court:

The mortgagees, respectively, insist that there was, within the meaning of the statute, an immediate delivery to them, followed by an actual and continued change of possession of the things mortgaged; the bank claiming to have taken possession under its mortgage on the eleventh of February, 1881, while Bates, Reed & Cooley, denying that the bank ever had such possession as the law requires, contend that they took possession on the fifteenth of February, 1881. But the claim of neither party in that respect is satisfactorily sustained by the proof. The evidence does not show such open, visible, and substantial change of possession as the law required in order to give notice to the public of a change of ownership. Doyle v. Stevens, 4 Mich. 93. In a sense, both parties were in possession by agents early on the morning of the fifteenth of February, each claiming the exclusive right to manage and control the property under the terms of the respective mortgages. As the contest for such management and control was likely to result in an unseemly display of force, the parties, on that day, entered into an agreement which recited their respective claims of priority both of possession and of right, and provided, 'neither party waiving or surrendering any right or advantage,' that the possession of each should remain as it then a s, and that the business should continue as it was then being conducted; all the proceeds of sale being deposited in bank, and remaining there intact until these conflicting claims should be settled by judicial decision or by agreement. The claims were not settled by agreement; and the defendants in error, having insisted that this arrangement was not being carried out in good faith, and having been refused exclusive possession brought this action, as they might do consistently with the agreement, to obtain a judicial determination of their rights. In adopting that course, they surrendered no right they had in the premises.

In behalf of the bank it is contended that the mortgage to Bates, Reed & Cooley was fraudulent as against subsequent creditors and mortgagees in good faith, in that the mortgagees contemplated that the mortgagors should remain in possession, and prosecute the business in the ordinary mode. The mortgage of February 7, 1881, certainly contains no provision of that kind. But if the extrinsic evidence establishes that such a course upon the part of Freedman Bros. & Co. was in fact contemplated by Bates, Reed & Cooley, it would only show that the mortgagees were willing to give the mortgagors an opportunity to avoid a suspension of their business and bankruptcy; the additions to the stock in trade being bought under the mortgage, so as to compensate the mortgagees for any diminution in value by reason of goods disposed of in the usual course of business. If the mortgage had, in terms, made provision for such a course upon the part of the mortgagors, as the bank contends was in the contemplation of the mortgagees, it would not be held, as matter of law, to be absolutely void or fraudulent as to other creditors. Oliver v. Eaton, 7 Mich. 108, 112; Gay v. Bidwell, Id. 519, 523; People v. Bristol, 35 Mich. 28, 32; Wingler v. Sibley, Id. 231; Robinson v. Elliott, 22 Wall. 523. The good faith of such transactions, where they are not void upon their face, is, under the statutes of Michigan, a question of fact for the determination of the jury. Oliver v. Eaton and Gay v. Bidwell. That rule does not, however, restrict the power of the court to give to the jury a peremptory instruction covering such an issue, when the evidence is all on one side, or so overwhelmingly on one side as to leave no room to doubt what the fact is. In this case there is an entire absence of any evidence impeaching the good faith of Bates, Reed & Cooley in procuring the mortgage of February 7, 1881. There is nothing whatever to show that they had any purpose to commit a fraud, or to put their mortgagors in such a position that the latter could more readily deceive or defraud other creditors.

Besides, as the court below held upon this branch of the case, the bank, in its capacity as a creditor at large, is not entitled to attack the prior mortgage as fraudulent upon the grounds just stated. This general proposition is conceded by counsel; the usual way, he admits, being for the creditor who has no particular claim in the property to acquire a specific interest therein through the levy of an attachment or execution. Hence he says that, while it is often stated that conveyances of this sort are void as to creditors generally, they must put their claims in the form of a judgment or attachment before they are in a position to attack them; the object of the attachment or execution being to bring the attacking party into privity with the property. And such seems to be the rule recognized by the supreme court of Michigan. In Feary v. Cummings, 41 Mich. 376, 383, 1 N. W. Rep. 946, the court, construing a somewhat similar statute, said: 'If the mortgage was made with the intent to hinder, delay, or defraud creditors, (Comp. Laws, § 4713,) or, inasmuch as the possession was not altered, if it was not put on file prior to plaintiffs becoming creditors, it was invalid as against them; the law being that those who became creditors while the mortgage is not fie d are protected, and not merely those who obtain judgments or levy attachment before the filing. Still one, as creditor at large, can question the mortgage. He can only do that by means of some process or proceeding against the property. Section 4706.' In that case the court cites Thompson v. Van Vechten, 27 N. Y. 568, 582, in which it was held, in reference to a somewhat similar statute, that 'the mortgage cannot be legally questioned until the creditor clothes himself with a judgment and execution, or with some legal process, against his property; for creditors cannot...