566
FEDERAL REPORTER.
my mind why these claims should 'not be allowed is that none of'them are operating and supply claims. They are all for construction material, suoh as meters,pipes, and other material, which was used in the construction of the works, and not in their operation after they are COIlstructed. All these claims are therefore disallowed.
LYON
and others .". COUNCIT, BLUFFS SAV. BANK and others. D. IO'UJa:
w: D.September Term, 1886.) SroOK IN TRADE MORT-
Flu.UDULENT CONVEYANOES GA.GOR IN POSSESSION·
CHATTEL, MORTGAGE -
. In' August,'l884, P., a merchant, mortgaged to defendant bank, to secure the payment of three notes due in September, 'October, and November for $8,500, his goods then in stock, and that might thereafter be added thereto, together with the furniture and tlxtures, and all notes, book-accounts. and evidences of indebtedness owned by P. The mortgage, by its terms, permitted P. to sell the property in the usual course of trade. It was delivered to the bank at the tIme, of Its execution, but not recorded till March, 1885, seven months after. The notes were not paid when due. In September, 1884, P. purchased 0, f plaintiff, on credit, goods of the value of $8,704.56, which were' added to the mortgaged stock. Plaintiff, at the time of the sale. was igno,rant of the mortgage, and, made.the sale in the belief that the stock was unincumbered. The bank had a $5,000 mortgage on P.'s homestead, which was , exempt from, ex,ecution. It a,PP1"ied$2,OOO deposit,ed with it by P., proceeds of the saleo,f this stock of goods, in part payment of this mortgage. Plain· tiffrecQvered judgment against P. for his claim, attached the goods, and sued to set 'aside the mortgage. Held, that the chattel mortgage was void 8S against plaintiff;, because it, and the transactions under it, ,operated as a fraud on him. "
In Bill to set aside chattel mortgage. Mills &: Keeler and Wright, Baldwin &: Haldane, for complaina.nts. ,D. a. Bloomer, for defendant. SHIRAS, J. In the year 1884 one James Porterfield was engaged in business'at Council Bluffs, Iowa,as a retail dealer in dry goods, and on the thirtieth of August of that year he borrowed or:the Council Bluffs Savings Bank the sum of $3,500, for which he executed his three promissory notes, maturing September 29, October 29, and November 28, 1884, and to secure the payment thereof he also executed a chattel mortgage dated August 30, 1884, and covering ".aUrny certain stock of dry goods, notions; hosiery, cloaks, arid all other goods that are now ill stock, or may hereafter be added thereto', owned and kept by me in a certain store, **: ,:jC: togeth'er with all furniture and, fixtures thereunto belonging; also all notes, and other evidences of indebted-' ness now owned by ine." The mortgage, by its terms; permitted the' mortgagor to sell the property in the ordinary course of trade. This
LYON V. COUNCIL BLUFFS SAY. BANK.
5G7
mortgage was delivered to the bank at the time of its execution, but it was not recQrded until March 20, 1885, nearly seven months after its execution. In September, 1884, Porterfield went to New York, and on credit, ofcomplainants, goods ofthe value of $3,704.56, which were placed in the store containing the stock covered by the mortgage. When these sales on credit were made by the complainants, they had no knowledge of the existence of the unrecorded mortgage, and Bold the goods in the belief that Porterfield's stock was unincumbered. On March 20, 1885, as already stated, the mortgage was placed upon record, and on the next day the bank took possession of the property described in the mortgage, for the purpose of foreclosing the same. On the twenty-fifth of March, 1885, Porterfield madEra general assignment fortha bElnefitof creditors to C. R. Scott, and complainants brought an action at law Porterfield, aided by attachments, to the August term, 1885, of the circuit court' of Pottawatamie county, and recovered judgments for the amounts ,due them from Porterfield. Complainants also filed. a petition in equity in the state court for tpe purpose of ,contesting the,yalidity of the morttohthesavings bank, and asked the issuance oia writ of injunction under theproyisions of section 3317 of the Code pf Iowa. The writ was issued aP4 served upon the bank, llnd then, upon application of comare, and were when,the suit W8.$ cOIllmenced, citizens of ,the state of New York, the cause was removed into this court, and is now submitted. upon the evidence introduced by both parties; the question .being ;whllther the chattel·mortgage is valid as against the claims and equi,ties ,of complainants. Couns.el fQf' the mortgageEl cites authorities in support of the well-reeognized prop,osition, that the construction put upon the language of a state statute by the supreme court of. the state is binding alike upon thefe4eral and state courtB,and then claims that the supreme courtof Iowa, ina-series of decisions beginning withlf'U9lte8 v. Cory,20 Iowa, 399, an(1 with Meyer v. Evan8,66 Iowa, 179, S. C. 23 N. W. Rep. 386; hllS.held "that the fact that the. mortgagor retll.ins possession of the mortgaged property, and reserves the right to sell the sll.me in thE} ordinary course of. trll.de, and apply the proceeds to his own use, does not l,'ender the mortgage fraudulent in law;" and that consequently the United States, courts are bound to hold, in all such casas, that the mortgage is valid aE! all parties. It would seem that a mischievous misunderstanding has arisen in the minds of many in the community, not only touching the rulings in this court the validity of chattel mortgages, but also in regard to the true meaning and scope of the decisions of the supreme court of Iowa upon this subject. The impression seems to prevail that the rulings of ,the state courts upon the construction of the Iowa statutell.re radiQally different; yet a careful examination of the rulings actually m,ade,·will show that this impression is an error. fatallUistake made by many is in assuming, as is practically done by COUD!>el for ,defendantin this CJ\8e, that",when the supremeCQurt ()f
568
Iowa decided, in Hughes v. Cory, and- other cases based thereon, that, under the facts appearing in, the several cases, the chattelmortga:ges under consideration could not be declared to be invalid asa matter of law, that the court meant to declare, and did declare, that the' !l10rtgages were valid as a matter of law. The rl1le actually laid down is that the court could not, under the facts presented in the several cases, declare, asa matter of law, that the mortgages were either valid or invalid, but that the question of invalidity was one Qf fact to be decided in each case upon the evidence and the conclusions to be deduced therefrom. To ascertain just what has beenin fact held by thifsupreme court of Iowa, a brief aminationof the leading may not be out of place. Under the,rules of the common law, and under the provisions of the a.sconstrued in 'Pwyne'8 (hse, 3 Coke, 80, if the vendor statute of 13 or mortgagor ofchattels :was allowed' to continue in' possession, and use the property as his, own, the transfer would be deemed fraudulent as a matter of law. The Code of Iowa, §1923,provides that "no sale or mortgage of perpossession sonal property, where the ven<ioror' mortgagor thereof, is valid against 'existing creditors, or subsequent purchasers without notice, unless a written instrument conveying the saine is executed, acknowledged like conveyances of real estate, and filed for record with the recorder of the county where the holder of the property resides." ,By,this statute the recording of the mortgage gives the notice of change in ownership which was secured At the common law by requiring an actual: and visible change of possession, and therefore the mortgagor might retain possession of the property, the mortgage being recorded, without giving rise to a presumption of fra.ud as a matter of law. Torbert v. Hayden,l1 Iowa,435; Wilhelmi v.Leonard, 13 Iowa, 330; Jordan v. Lendrum, 55 Iowa, 478; S. C. 8 N. W. Rep. 311. By reason of the fact that the statute deClares the mortgage, if not recorded, to be invalid only against creditors andpuTchasers, itis held that an unrecorded mortgage will not, as between the mortgagor and mortgagee, be rendered invalid simply because it is not recorded, and also that an unrecorded mortgage is 'vfilid as against all' creditors andpurchasel'l:l who have actual notice of its 'existence when their rights accrue, {2l:fcGavran v. Haupt, 9 Iowa, 83; Allen v. Mc'Galla, 25 Iowa, 464;) also that, if withheld from the record for a time, and' then: recorded, the mortgage wiH become a lien, as against creditors and purchasers without actual notice of its existence, from the 'date when it is: filed for record. . These decisions of the supreme court of Iowa are constructions of the 'language and true meaning oithe Iowa statute; and the'federal courts are 'bound to follow these interpretations of its meaning in all cases wherein the rights dfpariies: are'dependElnt upon the meaning oftbestatute. No case can bEl round'in the reports, decided in the federal courts for Iowa, inwhich fi cOnstrtiG-tiob:6f the Iowa statute ha.s been adopted which dif. fers from that annot1tlced by the supreme court Of the state, It ispossihleth'at:casEl$ irtay be found which .do not differ greatly' in their facts, .and in conclusioushave been reached in the state and >
v.
COUNCIL BLUFFS SAV. BANK.
569.
federal courts; but it will appear that these differing decisions are not based tlpondiverseconstructions of the Iowa statute, but upon diverse conclusions of fact drawn from the evidence in the cases. As between a creditor and a mortgagee the question of the rights arising'iinderthe mortgage may be (1) a· question of priorities of lien, in cases iti which fraud is not an element, and where the question of priority usually depends upon the meaning of the statute of the state; (2)' a questiQn of fraud, in which the inquiry is whether the mortgage is in fact fraudulent, as against creditors, by reason of the' fact tllat it is used as Rcover and shield for the protection and benefit of the mortgagor, to the injury' and delay of creditDrs, or that its existence is kept a secret,' with thb intent to thereby mislead third parties, to their loss and injury. The question of whether' amprtgage is fraudulent in fact is not determinable usually by the construction of the Iowa, providing for the recording of mortgages,aIl,d the retention of the mortgagor, but is a question of fact, to be determined in each case upon the evidence submitted and pertinent to the issue. Let us now see what are the views 'of the supreme court of Iowa upon what facts may be considered as tenq.ing show fraud. In the Qase of Torbert v. Hayden, 11 Iowa, 435, the trial court had ruled, in instructing the jury, that a mortgage of personal property, which giVes to the mortgagor the possession and right to sell the property, was fraudulent in law, irrespective of the intent of the parties., The. supreme cqurt reversed this ruling, holding that the statute authorthe mortgagor to remain in possession, and that whether the power ofdisposition by the mortgagor rendered it void W/l,S a question of fact. Thus it is said: . , "On the other band, it is easy for us to conceive how such a mortgage may fraudulent in fact, whether the possession of the property be in one party or the other, and notwithstanding it may be regularly executed, dUly recorded; and all fair upon its face; yet such fact or fraudulent intent must be shown by extrinsic evidence, and be pronounced by the jury. But in so doing the jury'could infer nothing from the possession of the property by the lDortgagor, fot this would be entirely consistent with the authority of the statute if the parties had duly complied with the terms thereof. The manner, however; of possession, would be a proper subject of inquiry. If it was accompanied with the power of disposition, or used in any way inconsistent with the Object of the security of the rights of the mortgagee, there would be badges of qaud, not absolute, but prima facie, requiring explanation. * * * Wb!3ther, therefore, possession, with the right to deal with the property as his own, is fraudulent in a mortgagor, is a qu,estion of intent, and will depend entirely upon the circumstances explaining such acts of ownership.. If a stock of goods is mortgaged to their whole value, and the mortgagor ispermittl'd to hold sell, and pocket the proceeds, such acts would be wholly irreconcilable with the object of the mortgage and the interest of the mortgagee; and the inference that the mortgagor had a secret or beneficial interest reserved would perhaps be irresistible. These illustrations show, as we think, the soundness of the rule that whether a chattel mortgage under our statute, when the mortgagor retains possession. and deals with the property as his own, is fraudulent or not, is a question ·of fact for the j I1ry, and not one of law for· the court."
570
In Hughes v. Cory, 20 Iowa, 399, is found a fulldiscussio ll of the meaning of the Iowa statute, with a review of all the previous decisions, and the conclusion is reached that "the mere retention of possession, where; the instrument is recorded, is, therefore, no longer either per se fraudulent, or a badge of fraud in law.' It may be a circumstance, with others, to prove fraud· in fact." After a citation of authorities, the opinion proceeds: "We admit that, if the instrument is fraudulent in fact. it is invalid; but this was not pretended. A mortgage may be fraudulent in fact because there is no real d'ebt,or, if one, because it is knowingly and purposely overstated, to deceive and keep off other creditors. When these facts are proved, fraud is an inference of law, and the jury is, under the direction of the court, bound to find it. Or, though thel'ebe a.real debt, yet, if it can be shown that the controlling motive and object in t'aking the mortgage was not to se· cure the debt, but to hold the instrument as a shield to protect the debtor from his othercrtlditors, this would make the mortgage fraudulent. The court should· so instruct, and the jury should so find·. These are in-. stances of actuaL fraud, and. other. ClJ,Sas may be easily imagined. Any instrument is fraudulent which is a mere trick or sham contrivance, or which originates in bad motives or intentions, that is made and received for the purpose of warding off other creditors. ... ... ... But, if the debt be real, and the creditor, in goOd faith, desires'security, what objection is there, in reason, to just sUch a.transaction as that which is disclosed in the mortgage now before us? ... ... ... Why, we ask, shonld he not be permitted t() stipulatefor time, and for the right to dispose of his godds, and apply the proceeds to the payment of his debts? . "No reason can be given, unless the "rrangement be such, from its intrinsic nature or inevitable tendency, as unnecessarily and injuriously to affect or impair the rightS of other creditors. ·A creditor ought not,' says GIBSON, J., in Glow v. Woods, 5 Sergo & R. 275-280, · to be suffered to secure himself by means,which will work an, ,injury to third persons.' This is right. Norought a debtor in failing circumstances be permitted, by deed, mortgage. or aSSignment, so to dispose of ,bisproperty as to reserve a portion for himself, or to postponebis creditors. ... ... ... The most that could be Claimed by the defendants would be that the special provision enabling the mortgagor toseU the goods would be evidence of fraud in fact, the value and strength of which would depend upon the other circumstances of the case. If the value to sell for a of the goods largely exceeded the amount, of the debt, limited time, in the usual retail way, especially if the.stipulated proceeds were strictly applied towards the rednction of the debt, would of itself be no very satisfactory evidence that the mortgage was fraudulent; that is, that it was taklln to delay 'lndkeep off other creditors, and for the benefit of the mortgagor. But if the debt exceeded the value of the goods. if the sales were made an\! the proceeds not applied, and property was depreciating, or being or to the mortgagor's use, this would be quite ,satisfactory evidence, certainly, unless rebutted and explained, that the mo:rtgagewas intended, not as a security to the mortgagee, b)lt:as a shield to tbe.lllortgagor, and therefore . In this case of Hughes v. Cory mortgage provided that the mortgMqr.might sell the goods in the usual way of trade; being bound, however, .tomake additions thereto, 80 that the amoul1tof the stock should not be substantially diminished, and being further Qound to apply 33! per cent. of the sales to the payment of the mortgage debt. Of course,
LYON 11·. OOUNCIL.l3LUFFS SAY. BANlt.
571
if the provisions of the mortgage were carried out, the result would be that therrl'ortgage debt would be paid, and the mortgagor would have thell on hand a stock equal in value to that possessed by. him when the mortgage was given. The trial court held the mortgage to be fraudulent upon its face, and excluded it from the evidence submitted. The supreme court reversed this ruling, and laid down the principle to be applied in such cases as follows: . "What the court decides in the present cause is that the mortgage was not conclusively fraudulent on its face, or fraudulent per8e,. aaa matter of law; that whether fraudulent infact or not should have been decided upon all including, of course, the terms of the instrument itself." the In Olarkv.!Iyman, 55 Iowa, 14, S. C. 7 N. W. Rep. 386, the court reaffirmed the rule announced in Hughes v. Cory, that the reservation of the right to sell the mortgaged .goods in the of not, as a rrt4tter of law, render the mortgage fraudulent, even though the mort,. gage did not require the mortgagor to account (or and pay to the mortgageeany part of the proceeds of the goods, and that the mortgage was valid, unless it was fraudulent in fact, and. that a careful examination of the whole evidence failed to show that the mortgagee took the mortgage for the purpose of delayin!t or defrauding creditors.. In Sperry.v. Etheridge, 63 Iowa, 543, S. C. 19 N. W. Rep. 657, it is stated that"There was evidence tending to prove that, when the mortgages were given, tb.e.re was. a parol agreement between plaintiffs and Hamilton to the effect that lIamiltcm should remain in possession of the property, and should continue to carry on the business of the store, selling the goodl!lin the usual course of trade. and applying the proceeds toO the payment Of his debts. and to the purchase of other goods to replenish his stock. and to the paYment of the running expensel!lof the l!Itore. and for the support of himself and family. The evidence all!lo tends to prove. thatE:amilton was insolvent at the time the mortgagel!l were given. * * * The ruling of the circuit court was, in effect-Fi1'st. that thll facts which the evidence tended to prove, if proved, would not render the mortgages fraudulent in law; and, second, that said facts would not have any tendency to prove that the mortgagel!l were given and received with any actual intent to defraud the other creditors of Hamilton." As to the first point, the supreme court held that the doctrine of Hughes v. Cory sustained the circuit court in holding that the mortgages would not be declared fraudulent as a matter of law; but upon the second point the supl'emecourt ruledthe circuit court erred in refusing to submit to the jury the question whether the mortgagel!l were fraudulent in fact. It cannot be said that there wal!l no eVoidence tending to prove that they were executed with intent to defraud or delay the other creditors of Hamilton. It is said in Torbert v. Hayden,ll Iowa, 435: 'Whether a chattel mortgage, when the mortgagor holds possession, and deals with the mortgaged property as his own. is fraudulent or not, is a question of fact for the jury, and not one.of law for the court.' And in HY,ghes v. Cory it is said that, while the mere retention by the mort$agor of the property, where the inl!ltrument is reco!ded, is no longer either per 8e fraudulent or a badge of fraud, it may be a circumstance, with others, to prove fraud in fact. The evidence given on the trial tended to establish a nnmber of circumstances, in addition to the fact that the mortgagor retained
FEDERAt' REPORTER.
possession:' Buch as the Insolvency of the mortgagor. and, the parol agreement. that he might seIl the property. and appropriate a portion of the proceeds to his individual use, which the defendlt0t bad the right to have considered in determi!ling the question whether the ,mortgage was given, with an actual fraudulent intent."
In Jaffray v. Greenbaum, 64 Iowa, 492, So C. 20 N. W. Rep. 775, on behalf of the attaching creditors. it was contended that the court should declare the mortgage fraudulent in law, because it was provided in the mortgage that themortgagors shOUld retain possessionof the goods, with the right to ,carr,}' on for' one year; being bmin'd, however, to pay the expenses of carrying the business, and to keep up the value of the mortgaged property by, making additions thereto. ·It was held that, under Hughe$v. Cory, the mortgage could not be declared fraudulent as a matter of law; it being stated, however, that "a mortgage upon a stock of goodswhich shOUld provide for sales that would exhaust the stock, without any provision for an application of the proceeds on the mortgage debt, might well be declared fraudulent. SUCh a mortgage could hardly be deenled to have been taken as security; and, if it wae not taken as seourity, the inference would be that it was solely for the debtor's protection by hindering other creditors. " InMe'!Jer v. 'Evansj66 Iowa, 179, S.C. 23 N. W. Rep. 386, the rule laid down in Ht£ghes v. Cory is again affirmed and followed. We have thus dted the leading Cases to be found in the Iowa Reports upon the question of chattel and without exception they re.fer to Hughes v.Cory as the case which fully and authoritatively construes the statute of Iowa regarding chattel mortgages, and the changes worked thereby in the rule of the common law. Upon that case, then, we are justified in relying, when called upon to ascertain the view taken by the supreniecollrt of Iowa ()f the provisions of the Iowa' statute, and ,the validity of chattel mortgages thereunder. , " , What, then,aie the general to be deduced frointhe opinion in Hughes v. Cory, as illustrated and explained by the later decisions based thereon? They are: (1) That,l1nder the statute ofIowa, the recording ,of a chattel mortgage takes the place of the change of possession required by.the rule of the common law." (2) That the fact that the mortgagor :of chattels remains in possession of the, property, with' the right to use the same, or even, in the case of a stock of goods, with the right to sell the same in the usual course of trade, will not justify a court,in holding the mortgage to ,be fraudulent liS a matter of law. (3) That, in s1.1,ch cases, the quesdon of invalidity on ground of fraud is a question of fact, to be determined, in each case, upon all the facts and circumstances of the particular transaction, including the provisions of the written instruttlent'or mortgage. (4) That the mere fact that the mortgagor, by the reservations in thembrtgage, contracts for and exercises thei'ight to sell the mortgaged goods in the usualc0\tfse of trade, does not necessarily show that the mortgage is frauduleI,lt in fact. Regard must be had to the object and purpose of this right thus reserved, and the actual use made thereof. If, by reaSon of such sales, the mortgaged stock is being de-
on
BI,UFFSSAV. BANK.
578
preciated materially in value, and the /proceeds of the sales, instead of being used in payment of the mortgage debt, are used for the special benefit and advantage of th,emortgagor, such fact justifies the finding that the mortgage is intendedartd used as a means of warding off other preditors,andsecuring the enjoyment of the property to the mortgagor, in which case the mortgage:wouldbe fraudulent in fact. (5) That, where the facts proven show either that there is no real debt due from the mortgagor ,to the mortgaj1;ee, or that the amount is; knowingly overstated for the pu'rpose of deceivhig creditors, or that, though there be a real debt ,of ltmount stated in the mortgage, the, controlling motive art'<;l objectm and taking the .mortgage is not solely security for the debt, butto:hold the instrument as a shield for the protection of the debtor against other creditors; or as ,8 means of war.ding off other creditors,or wrongfully hindering and delaying them, for the benefit of the debtor, thert, the facts being proven, fraud is an inference oflaw, and the cour'tis bound to instruct the jury that, the facts being proven" fraud is the necessary legal inference; or, to quote the exact words used in Hughes v. OJr.tI:"When the facts are proved, fraud is an inference oflaw, and the jury is, uncierthe direction of the court, bound to ,find it." Let us now examine the rulings made by the federal courts, and Bee whatprincjples are recognized or announced therein on this subject. " Theleaciing case decided bythe supreme court is.that of Robinson v. EUiott l 2,2 Wall. 513. The court, after cOl1siderinl!; the special provisions ,of the In,diana statute, and the construction thereof by the supreme court of thl;l.t sta.te, ·proceeds to say: . is, therefore, I1-0thing in the way of the consideration of the main question involved in this'controversy on its merits. If chattel mortgages were formetly, in'most of the states,treated as invalid, 'unless actual possession wa,s,surlxmdere!l to the mortgagee, it is not so now, for modern legislation has, as a general thing, (the cases to the contrary being exceptional,) conceded the right to mortgagor to retain possession, if the transaction is on good and bona fide. Thill concession is in obedience to the wants of 'wh'icll deem it beneficIal to the community that the owners of the perstmal property should be able to make bona fide mortgages of it, to secure creditors, without any actual change of possession. But the creditor must take his contract, that it does not contain provisions of no advantage to him, but which benefit the debtor, and were designed to do so, and are ,injuriOUS to other creditors, The law will not sanction a proceeding of this kind. If he goes beyond thiEl, and puts into the contract stipulatJop.s ' Which have the effect to 'the property of his debtor, a court of equity will not lend its aid to enforce the contract. These principles are not disputed, but the courts of thecouhtry are not agreed in their application to mortgages with somewhat analogous provisions to the one under consideration.. T.he c,ases cannot be reconciled by any process of reasoning, or any principle of law. "As the question has never befo,re been presented to this court, we are at liberty to adopt that rule on the subject which seems to us the safest and wisest. It is not difficult to see 'that the mere retention and use of petsonal 'property until default: is altogether.a different thing from thl:' retention of possession, accompanied with tke power to dispose of it for the benefit of the mortga,garalone. The former is permitted by the laws of Indiana, is con_...,., .
'sistent wIth' the idea of, security, a.nd may be for the' accommodation· of the mortgagee; but the latter ia inCOnSUltent with the natllreandcharacter of,!, mortgage. is no pro,tection ,D,loJigagee, and of itself! a pretty a : not ,to ..say that a effectual shield mortgage, under the Indiana statute., would not be sustained which allows a stock of goQds to be retained by'tM'mortgagor, and sold by him at retail for the express purpose of applying tJie ptoceeds to the payment of the mortgage debt. Indeed. it, would seem that sullh an arrangement, if honestly carried out. wpuld be for the' miUtual!w'vantage .of the mortgagee .aJld. unpreferred on this mortgage which are not creditors. But there are features only to the prejudice of crewtors,but which show that other .considerations than the security of the mortgagees.pr their accommodation, 'entered into the contract. Both the possession arid light of disposition remain with the mortgagors. They'afe to deal with the property as their own, sell it at retail,and use the money thus obtained to replenish their stock.' 'fhere is. no covenant to account withthemOJ;,tgagees, nor· any recognition that the property is sold for their benefit. lnatelld of the .mortgage being directed solely to the bona fide securityof.the debts .then existing, and their payment ,at mat,urity, it is based on the idea;that they may be ihdefipitely prolonged." . . . , .
\
The court then proceeds todiecuBs the facts, and, viewing the instrument in the light throWn thereon by the acts of the parties l the conchlsion is reached that, "whatever may have been the motive which actuated the parties tothis instrument, it is manifest that tM necessary result of whanhey did do was to allow the mortgagors, under cover of the and appropriate the proceeds to mortgage, to sell the goods as their their own purpoE'es; and this, too, for an indefinite length Ciftime." And, as the court found that the mortgage on its face showed that this was the object and intent of the parties, tl}e law would impute to it a fraudulent ,purpose, and. therefore declare it void; which conclusion,. in effect, is the same as that announced in Hughea v.Cory, to-wit, that, facts are proven, fraud is an inference oflaw, and the jury is, under the direction of the court, bound to find it." Turning now to the decisions made in this circuit, we find that in a'agin v. Carmichael,2 Dill. 519, it was ruled that in the state of Iowa, under the construction of the statute of the state as made by the state supreme court, "an unrecorded mortgage of chattels, where the mortgagor retains possession, is valid against attaching creditors with notice ofits 'existence at any time before levy." .' In OrOOk8 v. Stuart, 2 McCrary, 15, S. C. 7 Fed. Rep. 800, it appeared #iat the mortgages were not recorded for about a year after their execution, and that the mortgagors, with the consent of the mortgagees, continued in possession of the stock of goods, selling the same in the usual course of trade, and using the proceeds for their. own purposes. The circuit judge held that, under the construction of the statute by the state supreme court, the fact that the mortgages were not recorded would not same, in favor ofcreditbrs who had notice of the existence of mortgageJ:l at any time befol'e they obtained a lien thereon by levy or otherwise, and that thisconstrJlction of the statute was binding upon the federal court, but that the question whether the mortgages should be held void independently of the statute, upon the ground that the mort-
675
gagor had', with the assent of the mortgagee, remained in possession for overa year, selling the property'as his own, and using the proceeds for his own purposes, was a question ofgeneral jurisprudence, not depending upon the state law, and to which the decision of the supreme court in Robinson v. Elliott was applica.ble; .and that, under the doctrine ofthat case, it must be held that theiQortgage was void. In Argall v. Seymour, 4 McCrary, 55, it appeared that the mortgage did not by its terms permit ,the mortgagor to remain in possession and sell the goods, but the evidence showed that the mortgagor did, with the assent. of the mortgagee, remain in possession for about 60 days, and dealt'Vith the property ,as his own; but there was no other evidence of actual or intentional fraud, or of an intent to C9ver up the property, and protect it froIll/other creditors, and the court held that there was not evidence enough to show fraud in the mortgage, and therefore. it was held valid as againstallereditorsexcept such as might have been misled into deal.. ing with the. mortgagor during the time the mortgage had been withheld from tlierecord, leaving the property in possession oHhe mortgagee. The opinion in the case clearly reoognizes the doctrine ofRobi'f/.800 v. Bawtt to be that if the facts oIthe case. whether these are shown by the recitals in themorlgage or by proof ol the acts of the parties, or by both, show that the mortgage, instead of being intended as eo bonafide security,JoJ' the debt, is used as a means of hindering and delaying other creditors, then it is fraudulent in fact,and that the law will so declare it. ,This case also enuflCiates and enforces the doctrine that if the mortgagee wiillholds the mortgage from the record, permits the to remain in possession and deal with the property as his own, and thus enables the mortgagor to buy goods on credit upon the faith of being the owner of an unincumbered stock of goods, the rights of the innocent vendor may be superior to those of the mortgagee. In Simonv. Openkimer, 20 Fed.· Rep. 553, it appeared that the mortgage was withheld from record for some eight months, the mortgagors remaining. in possession, selling the goods as their own, and using the proceeds for their own benefit, and buying on, credit goods to a large amount; the parties selling the same having no knowledge of the existence of the unrecorded mortgage; which goods were placed in the sto.ck covered by the mortgage, and were subsequently taken possession of by the mortgagee; and, in view ofthese facts, it was held"That theIIloJ.1;gagee is estopped .from asserting that he has, under his mortgage, a valid lien superior and prior to the rights of the creditors. Knowing that the mortgagor was dealing with the stock as his own, and that third parties would be justified in believing that the stock belonged to Openheimer free from any lien, the mortgagee stands by, and permits him to hold himlJeU out to the world as the OWnerot: the stock free from liens, and to .buy on credit a very large quantity of goods, which were added to the stock, and rnad!'l subject to the Hen of the as petween the mortgagor and mortg3,gee. Having chosento'keep the knowledge of the existence of his mortgages f.tom the public, when he should; in good conscience, have given publicity·thereto, and having thereby misled the creditors into making large salell:of.:goOdson credit to the mortgagor, he should ,not now, when it
FEDERAlIi REPORTER.
tato Ilis vWid pJ,iorl!lln ahhe
and to,their injUry, be allowed to assert that he the whicll. goods sold in ignorance ,of thl;l"existence ' ' . . ' " : ", '" ,'. ,
ItlR'lInM8'fJ v. Toum" 20 Fed. Rep. 558, the same rule is recognized. The case of Wells v. Langbein;' Id.183riscited as an authority for the doctlfine that: the mere fact that the mortgage upon its face provided that the mortgagor' should remain in:possessioll, with the right to sell in the usual course of trade,rendersthe mortgage void, without erence to the question of the lllanner:and purpose of the sale. Taking certain sentences,found in the opinion; by themselveBj:as intended to lay down an abstract proposition, and this construction would find support; but that is not the true consllructionofthe opinion. The main ques,! tiondiscussedin that case Was'8S,: to the effect to be given to the fact that the mortgagee had taken pOssession of the goods, before a levy was made thereon:. Upon the other proposition, the statement is that the mortgagees came within the ruleanmmnced in. Robin80n Y. b'1,liott and CrOOks..,. Stuart,and it was pot. intended 'to extend -in any manner the rule as recognized and announced: in these cases. . The view actually entertained iSIDoni fully set forth in the subsequent case of Maish v. Bird, 22 Fed. Rep. 576, in whi<lh it was strongly contended by oounsel, upon petition for rehearing, thai :the mortgage, by its terms, showed that it was the intent of the parties that the mortgagor should remain in possession, and'sell the good$ in the usual way of trade, and that, therefore, it must be declared veid a,sa matter of law; but it was held that" it is clear, therefore, that the mere fact that the mortgagor remains in possession, and sells the goods at retail, does 'not ipso facto determine the question of the validity or invalidity of the mortgage. The query is, does he sell them for his own benefit, or for the benefit of Lhe mortgagee? Now, this question may be answered from the:stipulatioIlexpressly stated'Mlthemortgage, or from information derived from the acts onhe parties. If from either or both sources it ap. pears that the sales are made by the mortgagor, with the consent of the mortgagee, for the benefit afthe former, then the case is brought within the rule announced in, Robinson v.' Elliott." The mortgage was sustained On the ground that the evidepce: failed to show that it was used or in. tended as a cover and protection to the mortgagor. These cases are all that are reported in the Iowa districts, and fairly represent the views held by the federal courts in Iowa upon the tions therein involved. Itwill be noticed that these cases present two different questions: _ First. The rule to be followed where the mortgagee has intentionally withheld the mortgage frOm record, permitting the mortgagor to remain possession, and to deal with the stock covered by the mortgage as his Q:Wn., and thereby aiding the mortgagor to buy goods on credit, which. otherwise he could not have done, which goods,whenso bought on credit, and added to the stock, pass, by the terms of the mortgage, to the mortgagoo. The cases cited hold that the fact that the mortgage was
577
not recorded is a matter open to explanation; but, if it appears that the mortgagee intentionally withheld the instrument from record, keeping the existence thereof secret, and permitted the mortgagor to remain in possession of and deal with the stock of goods as his own, and to buy additions to the stock on credit, thereby aiding the mortgagor in making purchases of goods on a false credit, the goods, when thus purchased, being added to the stock covered by the mortgage, the'mortgagee will be estopped, as against parties thus misled, from asserting the existence of a lien under his mortgage. " In tIle leading case of Pickard v. Sears, 6 Adol. & E. 469, it was stated that "the rule of law is clear that where one; by his words or conduct, willfully causes another to believe the existence-of a certain state of things, and induces him to act on that belief so as to alter his own previous position, the former is concluded from averring against the latter a different state of things as existing at the same time;" or, as stated in the subsequent case of Gregg v. Wells, 10 Adol. & E. 90: "A party who nt'gligently or culpably sta.nds by, and allows another to contract on the faith and understanding of a fact which lYe can contradict, cannot afterwards dispute that fact in an action against the person whom he has himself assisted in deceiving." · In Morgan v. Railroad Co., 96 U. S. 716, in discussing the effect of an" estoppel in"pais, it is said: "The principle is an important one in the administration of the law. It not unfrequently gives triumph to right and justice when nothing else could save them from defeat. It proceeds upon the ground tbat he whO has been silent as to his alleged rights when he ought in good faith to have spoken. shall not· be heard to speak when he ought to be silent. He is not permitted to deny a state of things which, by his culpable silence or misrepresentations. he had led another to believe existed, and who has acted accordingly upon that belief. The doctrine always presupposes error on one side. and fault or fraud upon the other, and some defect of which it would be inequitable for the party against whom the doctrine is asserted to take advantage." In the cases in which an estoppel has been applied to defeat the mortgage lien, it appears that there was error on part of the creditors, who were induced to sell their goods on credit to one whom they supposed was in fact the owner of an unincumbered stock of goods, and whom they were justified in believing was in truth the full owner of the goods, with the undoubted right to sell the same and apply the proceeds to the payment of the debts created in replenishing the stock, whereas, in fact, if the mortgage be held valid, he was not such owner, and the goods, so soon as added to the stock, became bound for the mortgage debt, and this error arose ftom the fault of the mortgagee, in that, while he permitted the mortgagor to remain in possession and deal with the stock as his own, he also intentionally withheld the mortgage from record, thereby enabling and aiding the mortgagor, by means of a false credit, to buy goods on credit, and thus subject to the lien of his mortgage property procured from the owner by means of a misrepresentation to which he has given aid and countenance by withholding the mortv.29F.no.12-37
FEDER4-b REPORTER.
gage from record. No decision upon this exact question by the supreme court of Towa has been called to my attention, but that COJlrt has always fully recognized and enforced, the doctrine of estoppel in cases demanding its application, and will doubtless do so, in cases involving chattel mortgages, when the facts are such as to require and justify the application of the principle. The. second question presented and decided in the cases arising in the federal courts is the rule to be applied when it appears that the mortgagor has, with the assent of the mortgagee, beenleft in possession of the stock covered by the, mortgage, with the right to sell the goods, and use the proceeds for his own benefit, and not for the purpose of paying the mortgage debt. The doctrine of the cases is that where it appears from the provisions and stipulations of the mortgage, or from the acts of the parties, or from both sources, that! it was the intent of the parties that the mortgagor should remain in possession of the stock of goods, and sell the same in theusual.course of business, and apply the proceeds to his own uses,andbenefit, and not to the payment of the mortgage debt, this is evidence. showing that the mortgage, isstead of being intended as .a bonafide security fora debt,was intended and used as a means of hindering and delaying other creditors, an,d as a protection to the debtor, enabling him to carryon his business,and sell the property for his own benefit under the shield of the chattel mortgage; and where, in fact, this has been the use made of the mortgage, the inference of fraud is an inference of law. It will also be borne in mind that parties are presumed ' to have intended that which is: the necessary and natul'al result of their oWn deliberate acts; and that, in determining the intent of parties, the evidence of their acts is of more weight than their mere statements or declarations, even though under oath. We find, then, that the decisions in the federal courts hold that, under the statute of Iowa, the mere failure to record a chattel mortgage does not, as between the mortgagor and mortgagee, render the same invalid; that it has fuIJ force, and is valid as to third parties who have actual knowledge of its eXistence, the same as though recorded; and that, in the absence of fraud or groupds of estoppel, it takes effect when it is finally recorded, and becomes a lien as against all parties who have not acquired rights by purchase, or liens prior to the of record in ignorance of the existence of the mortglige; that the retaining of possession of the mortgaged property, with the right to sell the Same in the usual course of trade, is permissible under the Iowa statute, provided such possession and selling are not used as a means of defrauding other creditors. Robi'fl,BOn v. Elliott, Cragin v. Oarmichad, Crook8. v. Stuart, BUpra. On these questions, which are mainly dependent upon the construction of the Iowa statute, the federal courts follow the rulings made by the supreme court of Iowa. As to the rule to be applied when the mortgagee intentionally withholds the mortgage from record, and aids the mortgagor in purchasing goods on credit from parties who do not know of the existence of the secret liep, the doctrineC?f estoppel is applied, in order to prevent the
LYON 11·. COUNCIL BLUFJ<'S SAV · BANK.
579
perpetration of a frand upon innocent parties. This is the application of a familiar principle, not dependent upon the Iowa statute. On the question of invalidity as against creditors, the rulings made in the federal courts find ample support in the doctrines announced in Hughes v. Gory. That case expressly holds that, granting the right to execute a. mortgage upon a stock of goods, with a stipulation that the mortgagor may, for a time, remain in possession and sell the goods, applying the proceeds to the payment of his debts, still "a creditor ought .not to be suffered to secure hims'elf by means which will ultimately work an injury to third persons; nor ought a debtor in failing or insolvent circumstances be permitted by deed. mortgage, or assignment so to dispose of his property as to reserve a portion for himself, or to postpone .his creditors;" and, further, that in case permission to sell for a limited time is given, "especially if the stipulated proceeds were strictly applied towards the reduction of the debt, this would of itself be no very satisfactory evidence that the mortgage was fraudulent; that is, that it was taken to delay and keep off other creditors, and for the benefit of the mortgagor. But if the debt exceeded the value of the goods; if the sales were made, and the proceeds not applied, and the property was depreciating or being gradually dissipated or appropriated to the mortgagor's use,-this would be quite satisfactory evidence, certainly, unless rebut.ted and explained, that the mortgage was intended, not as a security to the mortgagee, but as a shield to the mortgagor, and therefore fraudulent." What is required in the administration of the law in cases of the character under consideration is, on the one hand, to recognize and enforce the right of a creditor to obtain, and the debtor to give, security for the payment of an honest debt, even though. the form of the security may be such as to prevent other creditors from levying 'upon the property of the common debtor until the secured creditor is paid in full, and, on the other hand, to prevent such a use being made of a security given as that it operates as a shield and protection to the debtor, enabling him to use and consume for his own benefit the property covered by the mortgage, and yet leaves the debt supposed to be secured thereby unpaid; for, if this is allowable, it clearly follows that the security, instead of being in fact a security for the benefit of the creditor, turns out to be a security to the debtor against the claims of other creditors, who are consequently unjustly hindered and delayed in obtaining satisfaction of the debts honestly due them. Where a creditor takes security by way of mortgage upon a stock of goods, leaving the mortgagor in possession with the right to sell in the usual course of trade, the circumstances require of him that he shall not permit his security to be used as a cover and shield to the debtor, to the injury of other creditors. The execution of the mortgage upon the stock . of goods practically prevents the other creditors from levying upon the stock until the debt is paid; and, as the mortgagee )mows this fact, he should do that which equity and good conscience require under the circumstances. To illustrate the situation. Suppose a mortgage, to se-
580
cure a bona fide deht of $5,000 due in five years, is executed upon the stock in trade of a merchant, and duly recorded; he being left in possession, with the right to sell in the usual course of trade. Third parties obtain judgments against the mortgagor, and can find no property to levy on, save the stock in trade covered by the mortgage. As the gagee is not in possession of the goods, a lien cannot be established on the goods by a garnishment of the mortgagee, nor can a personal claim against him be created thereby. Ourtis v.. Raymond, 29 Iowa, 52; First Nat. Bank v. Perry, Id. 266. The interest of the mortgagor in the goods is not such that the same can be levied upon under the execution. Campbell v. Leonard, 11 Iowa, 489; Gordon v. Hardin, 33 Iowa, 550. Under the usual form of chattel mortgages in Iowa, if the execution is levied upon the goods, the mortgagee can at once retake the goods; and, when this right is asserted, there is no interest left in the mortgagor which can be made subject to the execution. Wells v. Chapman, 59 Iowa, 658; S. C. 13 N. W. Rep. 84l. In Hughes v; Cory it is suggested that, if the-mortgagee has the right to possession,. the creditors might garnish, and then, under section 3216 of the Revision, have a receiver appointed. The later decisions, just cited, show, however, that no interest in or lien upon the goods can be created by a garnishment, and hence no foundation can be laid for asking the appointment of a receiver. Furthermore, section 3216 of the Revision, now s ction 2970 of the Code, is confined to cases of attachment, and cannot be made available in aid of an execution. Again, in Hughes v. Cory, it is said that, if the creditor admits "the validity of the mortgage, he can levy on the goods,-certainly after a tender." It has been since decided that the mortgagor has no interest left in the mortgaged goods which can be levied upon. How, then, can the execution creditors become clothed with the right to make a tender? Ordinarily, the debtor cannot compel the creditor to accept payment of the debt until the same becomes due. If the creditors have no lien upon the goods, and cannot create any until after a tender, upon what is the right to make the tender and compel its acceptance based? But even if the right to make a tender exists, and by making the same the right to levy upon the stock covered by the mortgage is thereby conferred, still, in many cases, it would be but a barren right. The judgments held by the unsecured creditors may be for amounts due to laborers, or persons of limited means, who would be wholly unable to raise the sum of money needed to make the requisite tender, Indeed, in the great majority of cases, the necessity of tendering, and, if accepted, paying, the amount due upon the mortgage, would practically preclude the creditors from making a levy upon their executions, even if the right so to do was beyond question. Therefore, in the supposed case of a valid mortgage for $.5,000, payable in five years, upon a stock of goods left in pQssession of the mortgagor, with the right to sellin the usual course of trade, in what way could execution creditors reach the debtor's property included in the mortgage? In fact, does any legal method exist? Are not the credit·
COUNCIL BLUFFS SAY. BANK.
581
ors, in the supposed case, under the of the supreme court of Iowa, compelled practically to wait until the goods are released from the protecting lien and shield of the mortgage, by the payment of the debt secured thereby? If there exists any sh9rter path, it has not yet been made plain, and he who makes the venture must do so knowing that many dangers and pitfalls surround the way, even if no absolutely insurmountable barriers are encountered. I am not arguing that the doctrines found in the several decisions of the supreme court of Iowa construing the rights of creditors under the statute of Iowa are not correctexpositionsofthe law. Just the contrary. It is because, under the statute of Iowa as expounded by the supreme court of the state, creditors are placed at such a disadvantage when a. mortgage is executed upon a stock of merchandise, leaving the mortgagor in possession, that it becomes the duty of the mortgagee not to increase this disadvantage by laches on his part. It seems too often to be 1assumed by counsel and clients that if, in fact, there is an honest debt due, and a mortgage to secure its payment at a future day can be procured upon the stock in trade of the debtor, that the only duty incumbent upon the mortgagee is to see to it that the stock is not red uced below the amount needed to ultimately pay the mortgage debt, and that, therefore, the mortgagor may permit the debtor to remain in possession, selling the goods in the usual course of trade, and using the proceeds to carryon the business and pay the family expenses of the debtor, or for any other purpose the mortgagee may see tit; and that, as the motive of the creditor was simply to get his debt secured, and, that being accomplished, he is that the debtor may continue his business for an unlimited \ time in his own way, and without accountability for the proceeds realized from the mortgaged property, it cannot be said that the intent of the }"larties was to unjustly hinder and delay the other creditors. This view of the question wholly ignores the rights of the other creditors, and the duty the mortgagee owes to them. In taking the mortgage upon the stock in trade of the common debtor, and leaving him in possession with the right to sell, the mortgagee knows that the legal effect of his act is to place the stock under the protection of the mortgage, and thereby,so long as the mortgage remains in force; practically to shield the property from being seized in satisfaction of the debts due the unsecured creditors. He knows that, equitably if not legally, the surplus of the stock over and above so much as may be needed to satisfy his claim belongs to the creditors; that is to say, is justly liable for the debts due them. He has no right to waste or destroy this surplus, nor is he justified in aiding the debtor in so doing, nor is he justified in permitting the debtor, under the shield of his mortgage, to consume the surplus for his (the debtor's) use and benefit. If he does do so, then he is aiding the debtor in using the mortgage as a means of keeping the other creditors at bay, while the property is being appropriated, not to the payment of the mortgage debt, but to the uses of the deptor. In order to prevent just such a result, it is the duty of the mortgagee, in order that the other creditors may not be unjustly debarred from subjecting the property of
582
. . 'FEDERAL RllJPORTER.
the debtor to the plJ.yment of their claims, to see to it that the proceeds , of the stock are fairly applied to the payment of the debt secured by the mortgage, and are not consumed by the debtor for his own benefit, and reach of the other creditors, whose claims thus placed forever beyond and equities are as meritorious as his own. All that is required of umortgagee, under the doctrines laid down in the decisions of the federal courts, is that, for the of third parties from whom the mortgagor may otherwise buy goods on credit, they being ignorant of the existence of the mortgage lien, the mortgagee must place his mortgageonrecord promptly, which is nothing more than is required of him by the statute of Iowa; and he must not permit the mortgagor, under cover of the mortgage, to sell the property, and, instead of applying the proceeds to the payment of the debt secured by the mortgage, use the same for his own benefit. Certainly, these requirements are not burdensome upon the mortgagee, and experience shows that, unless tht>y are enforced, chattel rnortgagesbecome in fact an easy means of hindering and delaying creditors for the benefit of the mortgagor,-a result which proves the wisdom of the rule which holds that it is the duty of the mortgagee to observe the requirements above named. Properly construed and applied, the principles announced in Hughes v. Cory sustain every ruling found in the cases subsequently decided by the federal courts, and, instead of there being a want of substantial harmony between the principles enforced by the federal courts and by the supreme court of Iowa upon these questions, it seems to me that, practically, they are in accord. It is this belief, and the hope that a comparison of the decisions would show such substantial agreement, and tend to make clear the rules to be applied in cases of this character, that has led me into preparing so lengthy an opinion in the present cause. Whether I have succeeded, in any degree, in accomplishing the object aimed at, may be doubtfhlj but I only hope that I have not made"confusion worse confounded." Coming at last to the facts of this particular case, what do we find? The mortgage was executed August 30,1884, to secure three notes maturing September 29, October 29, and November 28, 1884. None of these notes were paid at maturity, yet the mortgage was not recorded until in March, 1885. Why? The mortgagor testifies that it was understOod and agreed that it should not be recorded, as it would injure his credit. ,The officers of the bank deny that there was any agreement not to record the mortgage, but give no explanation why it was withheld from record, except that they relied on the mortgagor's promise to pay. When the notes matured, they were not paid, and the bank officers testify that they repeatedly urged and demanded payment of the notes, but unsuccessfuUy. Under such circumstances, it is not possible that the bank was actuated by any purpose in withholding the mortgage from the record other than that of aiding Porterfield to maintain a false credit, and by means thereof to purchase goods on credit, which, being added to the mortgaged stock, became subject to the lien or the mortgage held by the bank. As against complainants, therefore, who were misled into
583
selling nearly $4,000 worth of goods on credit, and which now form a large part of the stock upon which the bank claims a prior lien under its mortgage, it must be held that the bank is estopped from asserting any rights under its mortgage. Furthermore, it appears from the evidence that, after the last note secured by the mortgage came due, to-wit, November 28, 1884, the mortgagee permitted the mortgagor to remain in possession until March 20,,1885, and to sell the goods, using the proceeds for his own purposes. It appears that the bank held a mortgage upon the homestead of Porterfield to seCUre a debt of $5,000. From the money realized from the eale of the mortgaged goods, the bank received and applied 82,000 in part payment of the real-estate mortgage; thereby relieving the homestead, which is exempt from execution, from so much of the debt resting' thereon. This was the exact equivalent of handing the money to Mr. Porterfield to be hidden away by him beyond the reach of legal process. The officers of the bank testify that they felt a sympathy for Mrs. Porterfield, and that Porterfield would not agree to apply the money on the chattel mortgage debt, and that they yielded, and made the application upon the homestead mortgage. This is no excuse. The money was in the bank, and the bank had the' undoubted legal right to charge up against it the overdue notes. Again, the money, as the proceeds of the mortgaged stock, was legally applicable to payment of the debt secured on the stock. The bank, having full legal, as well as actual, control over the money, instead of applying the same to the payment of the mortgage debt, permitted Porterfield to apply it in payment of the debt secured on the homestead; thereby effectually withdrawing the sum thus paid from reach of the other creditors. Not only this, but the moneys realized from the sale of the stock during the seven months Porterfield remained in possession, and which were not deposited in bank, were not used in reducing the debt due the bank, but were otherwise used by Porterfield. The bank officials and their counsel are unquestionably honest in the belief they express, that no just exception in any particular can be taken to the action of the bank in the premises; and it is for this reason that I have sa:id that a mischievous misconception seems to be entertained by many in regard to the rights and ,duties of mortgagees towards other creditors. In effect, it is claimed on behalf of the bank that it had a perfect right to leave the mortgagor in full possession of the stock of goods, and yet withhold the mortgage from the record, not only until the debt secured thereby Came due, but for months afterwards, and by so doing to aid the' mortgagee in keeping up a false credit, and to buy on credit large quantities of goods from parties who had no knowledge of the exOf the mortgage, which goods, when bought, were added to the stock, and thus rendered liable to the secret lien of the mortgage; and, further, that the bank was entirely justifiable, not only in permitting the mortgagor to sell the goods up to the date of the maturity of the mortgage, but for months thereafter, using the proceeds, not in payment of the mortgage debt, but for other purposes beneficial to the mort-
584
gagof, but also in permitting the mortgagor to use $2,000 of the money in hands of the bank, in payment .of a lien upon his homestead; thus practically withdrawing this sqm from the reach of other creditors, the payment being made when the bank knew that Porterfield was hopelessly insolvent. The most liberal construction of the doctrines announced in Hughes v. Cory WQuld not suffice to sustain the validity of this mortgage under the undisputed facts of the case, and it must therefore be declared void as against complainants. As the case involves other issues, and the rights of other parties, which are not. yet ready for a hearing, the decision. now made is confined simply to the question arising between complainants and the savings bank; and is to the effect that, as against complainants, the chattel mortgage held. hy the hank is invalid and void.
COBURN and'others v. CEDAR
LAND & CATTLE Co., Limited.
CEDAR VALLEY IiAND & CATTLE Co" Limited, v. COBUBN and others. (Oircuit Oourt, 1.
w: n. Hi8souri, w: n.
July, 1886.)
SETTLEMEliT-PEliDING LITIGATION-PRESUMPTION AS TO COMPLETENESS AND FINALITY.
Wherever parties are in litigation, antagonistic claims. and a settlement is proposed and accepted, it will be presumed that all matters in controvers)' in that litigation were included within the settlement, unless the contrary Clearly appears.
2.
SAME-EVIDENCE REVIEWED-COSTS.
The evidence in this case reviewed at length. and held, that there has been a fuU settlement of all the matters in controversy. and that the several bills and cross-bills must be dismissed, each party paying his own costs.
In Equity. Bill and cross-bill. For a statement of the facts in this case, see 25 Fed. Rep. 791. Coburn & Ewing applied for a rehearing, see post, 586. Karnes IX EBB and J. G. Waters, for Coburn & Ewing. George W. McCrary and Adams t:t Field, for the Company. BREWEB, J. There have been two actions pending between these parties in each .of which both bill and cross-bill were filed. While thus negotiations for settlement were entered into, which have resulted in a settlement, and the question now presented is the extent of that settlement. After several propositions had been made by both parties, on the twenty-seventh of February, the cattle company sent to .Coburn & Ewing a letter in which all propositions of theirs were declined, and in which it was stated that "the only terms upon which the board can agree to compromise the claim of the com-