United States v. Lankford

• Citation: 3 F.2d 52
• Parties: UNITED STATES v. LANKFORD et al.
• Decision Date: 15 November 1924
• Court: U.S. District Court — Eastern District of Virginia

3 F.2d 52 (1924)

UNITED STATES v. LANKFORD et al.

District Court, E. D. of Virginia.

November, 15, 1924.

Lester S. Parsons, Asst. U. S. Atty., of Norfolk, Va.

Wolcott, Wolcott & Lankford, Harry K. Wolcott, and Menalcus Lankford, all of Norfolk, Va., for E. Hogshire, Son & Co., Inc.

Richard H. Baker, of Norfolk, Va., for Merchants' & Mechanics' Sav. Bank.

GRONER, District Judge.

This is a suit by the United States to set aside and annul a deed of trust executed by E. Hogshire, Son & Co., Inc., to Menalcus Lankford, trustee. There is no suggestion from beginning to end of any actual fraud, and the evidence discloses beyond peradventure that the deed of trust was taken by the bank in good faith, but to secure a pre-existing indebtedness. The circumstances, briefly, were these:

The Merchants' & Mechanics' Savings Bank had been financing Hogshire for a long number of years. Apparently, some time about the beginning of the war, Hogshire, whose business was that of shipchandler, with stores at Norfolk and Newport News, obtained a government contract for the furnishing of supplies to government vessels, and required a large amount of money to carry on its business. The bank advanced the money and took an assignment of the payments due from the government; that is to say, the government checks as they were received were delivered to the bank and applied to the payment of the indebtedness. The government, at some period which is not disclosed in the evidence, canceled the contract, and left Hogshire with a considerable stock of marine supplies on hand and with an indebtedness to the bank of between $20,000 and $25,000. The bank, desiring to secure itself for this indebtedness, and desiring also to create a security upon which it might safely advance other money, took the deed of trust from Hogshire, in which was conveyed certain designated supplies located in the stores at Norfolk and Newport News, and in addition several motor trucks and motor boats used in the business.

At the time the deed of trust was executed, and for two or three years prior thereto, Hogshire had been steadily going behind; its losses for the three-year period aggregating considerably over $100,000. After the execution of the deed of trust the Newport News store was closed, and so continued up to the bringing of this suit. The supplies in the Norfolk store conveyed in the deed of trust were attempted to be identified by placing in the racks containing them little tags, about two inches in size, on which were typewritten the words "Surplus Stock D. T." The deed of trust contained the usual provisions applicable to such instruments in use in Virginia, and among other things provided that the grantor should remain in peaceable possession and take the profits thereof to its own use until default, etc., in the debt. About the time of the execution of the deed of trust one of the government revenue agents came to the place of business of Hogshire for the purpose of making an audit of its books, but at Mr. Hogshire's personal request, and upon his statement that that was a particularly busy season, inspection was delayed until the following fall. When finally made, it showed an indebtedness to the government on account of income taxes of approximately $200,000, which, together with interest and penalties, amounted to approximately $250,000.

The government claims that the deed of trust is void and of no effect, first, because it falls within the provisions of section 5187 of the Code of Virginia (1919), known as the "Bulk Sales Act"; and, secondly, because under the law in Virginia a deed of trust of chattel property, in which the grantor reserves the right to remain in possession and enjoyment of the property conveyed until default is made in the payment of the debt secured, and such reservation is inconsistent with the purposes of the conveyance and adequate to defeat them, is fraudulent per se.

I have given as careful consideration as the time at my disposal has permitted to the questions thus raised, and I am of opinion, first, that section 5187 of the Code is not applicable. This act provides that "the sale, transfer or assignment in bulk of any part or the whole of a stock of merchandise, * * * otherwise than in the ordinary course of trade, * * * shall be void as against creditors of the seller, * * *" unless the seller and purchaser shall do certain things, among which is the preparation of a list of creditors and their addresses, together with personal notification to the creditors, etc. Admittedly, none of these things required to be done were done in this case.

The Bulk Sales Act has been adopted in a great many states, and there is some conflict as to the application of the act to what is commonly known as a chattel mortgage. The difference between the cases that hold that the act applies to chattel mortgages and those that hold that it does not apply appears to rest upon the question as to whether or not title passes to the goods conveyed under the mortgage or trust. In the cases holding that title remains in the mortgagor, it has been generally held that a chattel mortgage is not a "sale, transfer or assignment." In those states in which it has been held that title does pass by the deed of trust or mortgage, the act has been held to apply.

While it is true that there is no Virginia decision directly on this point — that is to say, construing the effect of the act itself — the case of Hale v. Horne, 21 Grat. 112, it seems to me, is conclusive of this question. This was a contest between a deed of trust creditor and a judgment creditor, and in passing upon the title or interest acquired by the purchaser of property subject to a deed of trust the Supreme Court of Appeals of Virginia uses the following language:

"What interest had William M. Mitchell in the lands after he gave a deed of trust? Whatever interest he had was liable for his other debts. The whole of a man's property is liable for his debts. A mortgage is regarded in equity as a mere security for the debt, and only a chattel interest. And until a decree of foreclosure, the mortgagor continues the real owner of the fee, and may lease, sell, and in every respect deal with the mortgaged premises as owner. The equity of redemption is descendible by inheritance, devisable by will, and alienable by deed, precisely as if it were an absolute estate of inheritance at law. * * * It was entirely competent, therefore, for Mitchell, after the conveyance of his land in trust for the payment of debts, to make an absolute conveyance of them to Nuckols and Gregory. And his deed was good to pass title to them, subject, however, to the incumbrance of the deed of trust. And after the payment of the whole of the debts secured by the deed of trust, the grantor and his vendees, by operation of the statute, are entitled to hold the land, at law or in equity, notwithstanding a conveyance has not been made by the trustee."

The conclusion, therefore, that I have come to, is that a chattel mortgage is not an instrument of sale, transfer, or assignment, and that until payment or foreclosure the relation of the parties is that of debtor, on one side, and creditor, secured by a lien, on the other.

As to the second point: The deed on its face contains the following provisions:

"Witnesseth that the said E. Hogshire, Son & Co., Incorporated, doth hereby grant with general warranty unto the said Menalcus Lankford, trustee, the following personal property, to wit:

"One gas boat, named Dispatch 2d, 61 feet in length, 4 foot beam, 3 foot draft, 200 horse power Speedway engine.

"One gas boat, named Eva Lee, 45 feet in length, beam 12 feet, draft 4 feet, 40 horse power.

"One gas boat, named River Queen, length 45 feet, beam 10 feet, draft 3 feet, 40 horse power Lathrop engine.

"One Reo truck, factory No. 68184.

"One Reo truck, factory No. 68191.

"One Autocar truck, two-ton, factory No. 32958, motor No. 23534.

"One G-M-C truck, two-ton, factory No. 412892.

"One coupé (Ford make), factory No. 5,602,115.

"One coupé (Ford make), factory No. 5,616,158.

"Together with a lot of machinery, motors, and equipment contained in storage and located on the second and third floors at No. 133 West Main street, Norfolk, Virginia.

"All of said property being inventoried and a copy of said inventory being hereto annexed and made a part hereof, the said machinery, motors, and equipment being segregated and marked for identification and located as hereinabove set out.

"And also the following personal property located and stored on the first, second, and third floors of the storehouse of the party of the first part numbered 133 West Main street, Norfolk, Virginia, the said property being fully set out in an inventory of same hereto annexed and made a part hereof, said inventory being dated as of July 21, 1923, and the inventory being on pages numbers 1, 2, 3, 4, 5, 6, 7, 8, 9, and 10; all of said property being segregated and marked for the purpose of identification.

"And also the following personal property located on the first and second floors of the building...