United States v. Matthews, 7124.
| Decision Date | 29 February 1956 |
| Docket Number | No. 7124.,7124. |
| Citation | 139 F. Supp. 683 |
| Parties | UNITED STATES of America, Plaintiff, v. Henry W. MATTHEWS and Nettie Matthews, etc., Defendants. |
| Court | U.S. District Court — Northern District of California |
Lloyd H. Burke, U. S. Atty., San Francisco, Cal., for plaintiff.
Weis & Weis, Yuba City, Cal., for defendants.
This is an action for conversion brought by the United States against Henry W. Matthews and Nettie Matthews, doing business as Yuba City Livestock and Auction Company. Jurisdiction is derived from 28 U.S.C. § 1345.
On March 17, 1951, one Wheaton executed a crop and chattel mortgage to the Farmer's Home Administration, an agency of the plaintiff. The mortgage covered farm implements, machinery, and certain livestock specifically listed, as well as after-acquired livestock and property. It contained the usual provision that upon default, the mortgagee was entitled to immediate possession of the mortgaged goods. The mortgage was duly recorded on March 17, 1951 in Yuba County, the county in which Wheaton then resided and in which the property in question was then located.
On November 19, 1951, Wheaton defaulted on his obligations to the plaintiff and remained in default from that date until March 2, 1953. During the period in which he was in default, November 19, 1951 to March 2, 1953, Wheaton fraudulently removed, from time to time, certain of the livestock mortgaged to plaintiff and took them to Sutter County, where the defendants' business is located. Wheaton there had defendants sell the livestock at auction in the regular course of their business and turn the proceeds, less commission, over to him. Defendants did so, after obtaining Wheaton's signed assurance and warranty that the animals were free and clear of all liens or other encumbrances, including mortgages. There is no question regarding defendants' state of mind. They at no time during the relevant period had knowledge of plaintiff's claim or interest in the livestock. Nor is there any question of negligence by reason of facts which might have alerted them to the possibility that the goods were mortgaged to the plaintiff.
Defendants sold the animals for a total of $1526.22. From this sum, they subtracted their regular sales commission of 3% plus all expenses of the sale, and turned the net proceeds over to Wheaton.
On September 30, 1954, the United States brought this action for conversion against the defendants. The question presented is whether an auctioneer is liable in conversion to a mortgagee with a right to possession, where the auctioneer without knowledge of the mortgage in default, and in the absence of other facts which would alarm the reasonably prudent man to such a state of the title, sells goods presented to him in the ordinary course of business by the mortgagor in possession, and turns the proceeds over to that mortgagor.
The cases are quite numerous which have held auctioneers liable in conversion for selling mortgaged or stolen property, but only a few deal with the precise issue here presented. In considering that issue, therefore, we must leave aside the cases holding the auctioneer liable for selling the mortgaged or stolen goods with knowledge of the interest of the true owner in the goods, such as Dixie Stock Yard v. Ferguson, 1941, 192 Miss. 166, 4 So.2d 724; Green v. Crye, 1928, 158 Tenn. 109, 11 S.W.2d 869; and Forbush v. San Diego Fruit & Produce Co., 1928, 46 Idaho 331, 266 P. 659. In cases such as those, the rationale of the rule holding the auctioneer liable is easy to perceive and eminently just. Once the auctioneer is informed that the title in the property he is about to sell is in dispute, he acts at his peril in persisting in the sale. If he pays the proceeds to the wrong party after having been alerted to the disputed ownership, he should undoubtedly be held liable to the rightful owner. That principle was all that was involved in those cases. Whatever else may have been said there on either side of the question now before the court was dictum only.
Plaintiff further contends that the defendants in the case at bar had "constructive notice" from the proper recordation of the mortgage, and should therefore be held liable. This argument is entirely unfounded. The effect of recordation statutes of the type of that here involved, Cal.Civ.Code § 2957, is clearly limited to purchasers and creditors or other encumbrances, and has been held uniformly not to be applicable to auctioners without a property interest in the goods. First National Bank of Pipestone v. Siman, 1937, 65 S.D. 514, 275 N.W. 347; Frizzell v. Rundle, 1890, 88 Tenn. 396, 12 S.W. 918; Greer v. Newland, 1904, 70 Kan. 315, 78 P. 835, 70 L.R.A. 554; Kearney v. Clutton, 1894, 101 Mich. 106, 59 N.W. 419. The California cases, discussed below, do not even trouble to refute the suggestion of "constructive notice" to an otherwise innocent auctioneer on the basis of the recording of a mortgage. The fact of recording, therefore, is irrelevant to our inquiry, and does not require further discussion.
We come now to the cases directly in point, holding the auctioneer liable in conversion although his payment of the proceeds to the mortgagor in possession was innocent and reasonable. The latest of these that has been found is First National Bank of Pipestone v. Siman, 1937, 65 S.D. 514, 275 N.W. 347, 349. In that case, commission merchants sold sheep in the course of their business, and paid the proceeds over to the mortgagee, unaware that the mortgage was in default. They were held liable in conversion to the mortgagee. The court cited, as does the plaintiff here, the Restatement of Agency, Section 349 of which reads as follows:
"`An agent who does acts which would otherwise constitute conversion of a chattel is not relieved from liability by the fact that he acts on account of his principal and reasonably, although mistakenly, believes that the principal is entitled to possession of the chattels.'"
The court then cites at 275 N.W. 349, a number of cases in support of the application of this principle to auctioneers without notice. The cited cases include Greer v. Newland, 1904, 70 Kan. 310, 77 P. 98, 70 L.R.A. 554, and Forbush v. San Diego Fruit & Produce Co., 1928, 46 Idaho 231, 266 P. 659. The citation in the Greer case refers to the first hearing of that case in the highest court of Kansas. It was an action in contract, not in conversion, and the auctioneers were held liable on the ground that they had had "constructive notice" by reason of the recording of the mortgage. On rehearing, 1904, 70 Kan. 315, 78 P. 835, the court held that there was no "constructive notice", and that the auctioneers could not be liable under the theory of contract, in any event. It reversed and remanded the case below. No subsequent decision is recorded. The Forbush case involved notice to the auctioneer, thus taking it out of the class of cases dealing with the principle contended for now, and raised a further question as to the interest of the auctioneers in the property itself, the court saying that the auctioneers had a status with respect to the property "not that of a mere commission merchant." 266 P. 664.
Of the other cases cited by the court, a number squarely support the rule contended for by plaintiff here. Kearney v. Clutton, 1849, 101 Mich. 106, 59 N.W. 419, holds an innocent auctioneer liable in conversion, pointing out that the auctioneer may protect himself against such liability by requiring indemnity from the seller. Robinson v. Bird, 1893, 158 Mass. 357, 33 N.E. 391, holds an innocent auctioneer liable, without discussion. Spraights v. Hawley, 1868, 39 N. Y. 441, 100 Am.Dec. 452, holds the auctioneer liable as an agent of a converter, assisting in the conversion. Wing v. Milliken, 1896, 91 Me. 387, 40 A. 138 is a more doubtful case, for the reason that the defendant there may have been something more than an auctioneer or commission merchant acting in the regular course of his business.
Many of the cases holding the innocent auctioneer liable make reference to the early New York case of Hoffman v. Carow, 1839, 22 Wend., N.Y., 285. That interesting case, dealing with the liability in conversion of an innocent auctioneer, for the sale of stolen goods, was decided by a vote of fifteen Senators and the Chancellor against the votes of five Senators. Three opinions were written for the majority, holding the auctioneer liable although innocent. The Chancellor's opinion, at 22 Wend. 293, treated the case as one of the rights of true owner and purchaser in stolen property, and showed that under the English law the doctrine of market overt did not bar a suit to recover stolen property from the innocent purchaser. Senator Edwards, also for the majority, seemed to assume that to hold for the auctioneer would be to deprive the rightful owner of his remedies against all others, including the purchaser, again under the doctrine of market overt. See 22 Wend. 295. Senator Verplanck, for the majority still, agrees that when the handling of the goods in question is done by "mere agents", it would be unjust to impose liability upon the "common carriers, ship masters and others, through whose hands goods feloniously or wrongfully obtained might pass." He then distinguishes the case under consideration by pointing out that the auctioneer performs the act which is the conversion of the goods into money, and that therefore he should be liable. Thereupon, Senator Verplanck puts forward the theory which has become the modern rationalization of the rule, despite its conceded harshness:
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United States v. Sig Ellingson & Co.
..."purchasers and creditors or other encumbrancers", and do not apply to auctioneers without a property interest in the goods. D.C.N.D.Cal.1956, 139 F. Supp. 683, 685. Therefore, it can be concluded that the auctioneer in the Matthews case had no notice of the mortgage, actual or constructive......