Rogers v. Page

• Decision Date: 06 November 1905
• Docket Number: 1,389.
• Citation: 140 F. 596
• Parties: ROGERS v. PAGE et al.
• Court: U.S. Court of Appeals — Sixth Circuit

140 F. 596

ROGERS v. PAGE et al.

No. 1,389.

United States Court of Appeals, Sixth Circuit.

November 6, 1905

Williams & Lancaster and Pritchard & Sizer, for appellant.

King Waters & Page and Brown & Spurlock, for appellees.

This is a bill by the trustee in bankruptcy of I. B. Merriam to recover the purchase price of a tract of coal land alleged to have been sold and conveyed by the bankrupt to his brother Thos. Merriam, within four months of bankruptcy, for the purpose of preferring said Thos. Merriam by the application of the price to the payment of an alleged indebtedness to the purchaser, contrary to the provisions of the bankrupt act. There was a decree holding the application of the purchase price to have been a preference, and requiring the executor of Thos. Merriam to pay to the complainant a sum sufficient to pay the bankrupt's unsecured debts. The complainant appealed, because the court did not require the full amount of the purchase money to be paid to him, and the executor of Thos. Merriam has appealed from the entire decree.

Before LURTON, SEVERENS, and RICHARDS, Circuit Judges.

LURTON Circuit Judge (after stating the facts).

The facts as we find them to be upon the weight of the evidence necessary to be preliminarily stated, are these:

1. On January 1, 1903, I. B. Merriam, the bankrupt, and C. H Jarnagin, being joint owners of a tract of coal land situated in Cumberland county, Tenn., joined in a sale and conveyance of same to Thos. Merriam, a brother of the bankrupt. For the undivided interest of I. B. Merriam, Thos. Merriam agreed to pay $65,000 in money and $20,000 in the stock of the Tennessee Lumber & Coal Company, a corporation to which Thos. Merriam immediately sold and conveyed the land. This purchase price was appropriated by agreement between the parties as follows: (a) In clearing the title by acquiring a small interest in a part of the land owned or claimed by one Wright, $5,400. (b) By discharging a lien upon the bankrupt's interest in favor of the Chattanooga Savings Bank, $2,000. One of the conditions of the sale was that the above prior liens should be paid off, so that the remainder of the purchase price is alone involved in the question of an unlawful preference. The shares of stock thus received were immediately pledged to Thos. Merriam to secure him as indorser of a note for $10,000, that day made and discounted by I. B. Merriam in a bank at Rochester. The remainder of the cash proceeds of sale, after providing for the two superior liens mentioned above, and the proceeds of the new note indorsed by Thos. Merriam, were applied and appropriated as follows: First, to the payment of an alleged indebtedness of I. B. Merriam to Thos. Merriam; second, to Thos. Merriam's exoneration as security or indorser upon obligations of I. B. Merriam to a bank at Rochester, N.Y., the residence of Thos. Merriam; third, to the exoneration of Thos. Merriam, as security or indorser for I. B. Merriam or I. B. Merriam & Son, upon paper outstanding at Chattanooga, the place of residence of the bankrupt. The funds with which these latter payments were made were placed in the hands of I. B. Merriam, bankrupt, with the distinct agreement that Thos. Merriam should be protected by the payment of the claims upon which he was liable.

It is possible that out of the gross sum of $75,000 in money arising from the sale of the land, including the $10,000 raised by pledge of the shares of stock received as part of the price, that a few thousand dollars, not exceeding $10,000, was used by the bankrupt for purposes other than the protection of his brother; for the evidence is not clear or detailed as to the sums retained in the first instance by Thos. Merriam on account of the indebtedness of I. B. Merriam to him or for the purpose of paying off claims at Rochester upon which he was liable in some form of suretyship. Neither is the evidence satisfactory as to the precise amount of the claims paid off at Chattanooga by I. B. Merriam out of the proceeds of sale under his agreement to protect his brother by such application of that part of the price brought to Chattanooga from Rochester. At the time of this transfer and appropriation I. B. Merriam was hopelessly insolvent, and within 10 days he filed his voluntary petition to be adjudicated a bankrupt, and was so adjudged. His assets consisted of a number of parcels of real estate situated in Chattanooga, all mortgaged for their full value or more, and a remnant of a stock of merchandise belonging to the firm of I. B. Merriam & Son, appraised at $1,800. The debts of I. B. Merriam individually and of I. B. Merriam & Son, excluding debts due to Thos. Merriam, or secured by him, and wholly unsecured, aggregate approximately $50,000, with no assets to apply to their payment if the purchase price of this coal land be excluded. It is therefore evident that when I. B. Merriam agreed to apply the proceeds of the sale of this land in exoneration of Thos. Merriam as his surety, and in payment of the alleged indebtedness to him, that he was hopelessly insolvent and could not but know that such was the case. Neither was this a recent condition, for the evidence satisfactorily shows that for several years he had been in failing circumstances, and that his creditors were held off only by the apparently unincumbered condition of his coal lands, and the constant promise that he was about to dispose of them for a price which would pay all of his debts and disencumber his Chattanooga property.

2. Neither do we see any reason for disagreeing with the court below in respect to its conclusion that Thos. Merriam was aware of his brother's condition at the time he bought the land here involved, or of such suspicious facts as to charge him with inquiry and notice of such facts as he might have learned by an inquiry conducted in good faith. The bankrupt was his brother. For several years he had been supporting his credit, both by endorsements and by lending him money. He claims that as far back as 1897 he had taken his brother's note for $35,000 secured by an unrecorded mortgage upon his undivided interest in this coal land. This note he claims was for moneys theretofore loaned his brother from time to time which at the time the note and mortgage were given approximated $25,000, and for additional sums which he might thereafter lend him. This debt grew by reason of further alleged loans and through accumulation of interest until it approximated $44,000 at the date of payment, January 1, 1903. In addition to this, he claims to have incurred liability for him to the extent of probably $15,000 more. That his brother's affairs were not prosperous and that his debts were increasing he was bound to know from the nature of his own transactions with him. It is true he did not live at Chattanooga, but he occasionally visited his brother and concedes some degree of knowledge touching other indebtedness of the bankrupt. His deposition in support of his defense has been carefully read. It is neither full nor frank, and impresses us with the conviction that he was aware of the precarious condition of his brother's affairs as far back as September, 1897, when he claims to have demanded a mortgage upon this coal land. That he should agree not to record the instrument then taken until he should deem it necessary for his own protection is significant of his knowledge of his brother's condition and of the effect upon his credit if recorded. The very fact that after carrying his brother for years he should demand the immediate payment of his entire debt out of the proceeds of the sale of this land, and his exoneration from liability as surety by the payment of every debt upon which he was bound, admits of but one explanation in the light of this evidence, and that is that he knew his brother was insolvent, and that, if he was not thus preferred, he would lose a large part of his debt. The mere fact that the mortgage of 1897 was not recorded does not, under the law of Tennessee, affect its validity, except as to creditors and purchasers without notice, if it was made for a valuable consideration and in good faith.

As between the parties to the instrument, it was, if made and held in good faith, a perfectly valid security. Shannon's Tennessee Code, Sec. 3749; Grady v. Sharron, 6 Yerg. 320; Hays v. McGuire, 8 Yerg. 92; Green v. Goodall, 1 Cold. 404; Woods v. Bonner, 89 Tenn. 411, 18 S.W. 67. Being a valid security under the law of the state, it was entirely competent for the mortgagee to demand and receive payment, or to enforce his lien in default, and, if foreclosure occur or payment is received by the voluntary action of the mortgagor before the property is seized by creditors or impounded as a consequence of an adjudication in bankruptcy, the transaction will not be a preference, provided the unrecorded lien was created more than four months before adjudication. The preference over other creditors in such case was given when the mortgage was executed and delivered. Sabin v. Camp (C.C.) 98 F. 974; Humphrey v. Tatman, 198 U.S. 91, 25 Sup.Ct. 567, 49 L.Ed. 956. It follows that if the defendant has shown an appropriation of a part of the purchase price of the bankrupt's coal land in satisfaction of a valid indebtedness secured by an unrecorded lien made, accepted, and held in good faith, more than four months before the filing of the mortgagor's voluntary petition in bankruptcy, he may escape a decree against him to that extent.

3. The real controversy is as to whether the unrecorded security set up by the defendant was a valid, good-faith instrument. But before considering this question of fact, it is necessary to determine whether the good faith of this unrecorded mortgage is open to question under the pleadings....