Sandy Valley Grocery Co. v. Patrick

• Decision Date: 19 March 1937
• Citation: 267 Ky. 768
• Parties: Sandy Valley Grocery Co. et al. v. Patrick et al.
• Court: United States State Supreme Court — District of Kentucky

267 Ky. 768

Sandy Valley Grocery Co. et al. v. Patrick et al.

Court of Appeals of Kentucky.

Decided March 19, 1937.

Chattel Mortgages. — Provision in mortgage on stock in trade, which was permitted to remain in mortgagor's possession for

sale, that goods purchased to replace those sold should become subject to mortgage, held invalid as against creditor becoming such after execution of mortgage and did not entitle mortgagee to preference to proceeds in hands of receiver.

Appeal from Boyd Circuit Court.

HOWES & WALKER and WHEELER & WHEELER for appellants.

HOWARD VAN ANTWERP, Jr., for appellees.

OPINION OF THE COURT BY JUDGE THOMAS.

Affirming.

The various appellants were creditors of Paris Pelphrey and Beulah Pelphrey, who were jointly engaged in operating two retail grocery stores in the city of Ashland, Ky. The indebtedness of the separate appellees was evidenced by notes executed by the two Pelphreys, to secure which they executed mortgages on the contents of the two grocery stores, all of which occurred in 1932. The debtors remained in possession of the mortgaged stocks of merchandise and operated them until January 11, 1935, when appellants filed this equity action against them in the Boyd circuit court to foreclose their mortgages. Upon their motion the court appointed a receiver to take charge of and operate the two stores until the further orders of the court. That was done for a period of three months, when the court directed a sale of the property by the receiver under specified terms, which he carried out according to the directions of the judgment. Through the operation of the stores, by the receiver, plus the proceeds of sale, there came into his hands for distribution among creditors slightly more than $2,000 after paying expenses of the sale and the operation of the two stores.

In the meantime other general creditors of the Pelphreys intervened and set up their claims. There were a large number of others who filed their claims with the receiver before he made his final report. Prior thereto an issue arose between the general creditors and appellants, as mortgagees of the two stocks of merchandise, as to whether the latter had a superior lien against the proceeds in the hands of the receiver so as to prefer their debts over those of the general creditors, the stocks having completely changed since the time the mortgages were given. The receiver in his report recommended that appellants were not entitled to such preference and that they should participate in the distribution of the proceeds as general creditors with all of the others of that class. Appellants filed exceptions to that item of the report, and on final submission thereof to the court it sustained the recommendation of the receiver and entered judgment accordingly, to reverse which appellants prosecute this appeal.

The mortgages given to appellants expressly provided for the lien therein created to attach to and embrace all subsequently acquired stock that the mortgagors might add to their supply and whereby the stock would become replenished because of sales therefrom made in due course of the operation of the business. It will thus be seen that the sole question for determination is — whether or not it is competent as against third persons for a mortgagor to place in lien future acquired property which is not owned by him, potentially or otherwise, at the time he executed the mortgage or gave the lien?

When the question first came before the courts for determination they were confronted by the rigid provisions of the common law relating to mortgages as it then existed. Those principles were, that the mortgagee by virtue of the mortgage became the title holder to the property with a condition that, if the mortgagor would discharge the indebtedness according to the terms of the mortgage, the conveyance (mortgage) would be null and void. Reasoning from that standpoint, it was declared that no one could convey property that he did not then own and that such an attempt was void as to third parties, but valid as between the immediate parties thereto on the ground that the stipulation for encumbering future acquired property, as contained in the encumbering instrument, was tantamount to an agreement on the part of the mortgagor to place the future acquired property in lien as soon as he became vested with the title to it, and that equity would regard that as done which should be done. Therefore the conclusion was reached that at law such a mortgage of future acquired property was void, but in equity as between the parties it would be enforced on the principle stated.

The general rule as so stated and as finally formulated is declared in this excerpt from 5 R.C.L. 403, sec. 27: "At common law a chattel mortgage can operate only on property actually in existence at the time of giving the mortgage, and then actually belonging to the mortgagor, or potentially belonging to him as an incident of other property then in existence and belonging to him. The decisions, however, have not been uniform in applying this common law doctrine, and exceptions and limitations have been engrafted on it. For example, under the common law rule it would seem clear that a provision in a mortgage on a stock in trade that goods purchased to replace those sold shall become subject to the mortgage is a nullity at law, and yet it is sometimes held that this is not the case, apparently making an exception as to this class of mortgages. In equity while a chattel mortgage of after-acquired property passes no title to such property, it operates to create an equitable interest in the mortgagee under the maxim that equity considers that as done which ought to be done, the mortgage being deemed to be an executory agreement which attaches to the property when acquired. The equitable doctrine has been rejected in some jurisdictions, in so far as the rights of third persons are concerned."

Some of the many Kentucky opinions acknowledging and applying such general rule, in the abstract, are Forman v. Proctor, 9 B. Mon. 124; Phillips v....