Davis v. Schwartz

This suit was originally begun by a petition filed December 29, 1884, upon the equity side of the district court of Lee county, Iowa, by certain creditors, who had previously attached the stock in trade at Ft. Madison, Iowa, of one John H. Schwartz, to set aside and vacate four chattel mortgages upon such property, and subject the same to the payment of their debts.

Upon the following day the suit was removed, upon the petition of the plaintiffs Samuel C. Davis & Co., of St. Louis, and E. S. Jaffray & Co., of New York, to the circuit court of the United States for the Southern district of Iowa, in which court the record was filed January 9, 1885. Subsequently, and on January 17, a receiver was appointed, who took possession and made an inventory of the property, and soon thereafter sold the same for the net sum, after deducting costs and expenses, of about $50,000, which was placed at interest, by order of the court, and, with the accumulated interest, amounts now to upwards of $66,000, held by the court to abide its order herein.

To this petition of the attaching cerditors separate answers were interposed by Catharine Schwartz, John H. Hellman, Frant B. Kent, and the German-American Bank, the four mortgages, wherein each defendant set up his mortgage and notes; and, as these answers also set up certain affirmative facts which could not be met by replication, the petitioners, under leave of the court, filed an amended bill in equity, to which not only Schwartz and the four mortgagees were made parties, but a large number of other attaching creditors, whose interests plaintiffs averred to be inferior and subject to their own liens. Answers were filed to this bill by John H. Schwartz and the four mortgagees. Several of the other attaching creditors also interposed by answer and cross bill. One Katie Kraft also intervened, setting up a promissory note for $5,000, and claiming the benefit of a mortgage, not only upon the stock of goods at Ft. Madison, but upon another stock at Chariton, Iowa. A supplemental bill was also filed, setting up judgments obtained by the plaintiffs in the actions at law in favor of Samuel C. Davis & Co. in the sum of $14,358.20, and in favor of E. S. Jaffray & Co. in the sum of $6,168.07. Subsequently, another amended bill was filed, alleging that Catharine Schwartz and Frank B. Kent had caused to be inserted in their respective mortgages a large amount of property owned by Schwartz in Chariton, which property they had seized and converted to their own use. The prayer of the bill was that the mortgagees be required to account for and pay into court the value of the property so seized and converted, and that it be distributed under the order of the court.

It appeared that this Chariton stock was sold out by the mortgagees, and the proceeds, amounting to some $7,000, placed in the German-American Bank. Of this amount $4,075 was paid over to Catharine Schwartz, and a certificate of deposit for the sum of $2,500 delivered to the bank for the use of Kent.

A large amount of testimony was taken, and finally on January 16, 1889, the case was referred, by consent of parties, to a master 'to hear said causes and report to this court his findings of facts and conclusions of law.'

The following is a summary of the most important facts: John H. Schwartz, a citizen of Iowa, residing at Ft. Madison, had for some years been a retail dry goods and clothing merchant, carrying on his principal business at Ft. Madison, with an estimated stock of about $100,000, and with a branch store at Chariton, estimated at about $16,000, and another at Dallas City, Ill., estimated at $17,000. In addition to this, he owned real estate in Ft. Madison valued at $17,000, together with notes and accounts, stock in a ferry company and in a building association, the value of which was somewhat uncertain. There were a mortgage and mechanics' liens upon the real estate to the amount of about $13,000, under which the property was sold, and the values therein involved figure only indirectly in this controversy.

At this time,-December 29, 1884,-Schwartz was indebted to plaintiffs Samuel C. Davis & Co. to the amount of some $14,000, and to E. S. Jaffray & Co. to the amount of some $6,000, for goods sold, and to a somewhat greater amount to various other creditors in smaller sums. He was also indebted to one of his mortgagees, John H. Hellman, his father-in-law, to the extent of $22,180.37, evidenced by seven promissory notes of different dates, given from time to time during the eight previous years, for money borrowed and put into the business; and was further indebted to the German-American Bank in the sum of $8,168.35; to Catharine Schwartz, his mother, in the sum of $11,306.51 and to Frank B. Kent in the sum of $2,665. His total indebtedness appears, then, to have been about $84,000, and his assets about $144,000. Late in December, some $6,000 of his indebtedness to Jaffray & Co. falling due, he wrote to his father-in-law for his indorsement upon a promissory note for that amount. Hellman, desiring to investigate his son-in-law's business before becoming responsible for a further amount, went to Ft. Madison, learned the amount of his debts and assets, refused to advance any more money or sign the notes, and advised Schwartz to send for the representatives of Davis & Co. and Jaffray & Co., tell them of his situation and intentions, and ask for an extension of time.

Schwartz accordingly telegraphed for these representatives, who arrived at Ft. Madison on Saturday morning, December 27th, and held a conference with him at his house in the presence of Hellman. Schwartz gave a full account of his debts and assets, and asked for an extension of the Davis and Jaffray claims. Schwartz and Hellman claim that they were given to understand that the extension would be granted, and that the representatives of these firms would return, after dinner, with the extension notes prepared for Schwartz to sign. There is some dispute as to what was done that day, but, instead of returning to Schwartz, it appears that the two representatives prepared petitions for attachments upon his stock, though the writs were not issued, apparently because they were awaiting indemnity for the surety upon the attachment bond. It seems that Schwartz and Hellman became suspicious at the failure of the representatives of the two firms to return with the extension notes, and on Sunday evening met at the residence of one of their counsel, Casey & Casey, at which were present John H. Hellman, John H. Schwartz, H. D. McConn, cashier of the German-American Bank, and Joseph B. Schwartz, a brother. After midnight, and before dawn of Monday morning, the 29th, the four chattel mortgages in question were drawn up, taken to the bank, acknowledged before a notary, and delivered to the recorder of deeds, and filed by him about 5 o'clock in the morning.

A demand was immediately made by the mortgagees upon Schwartz for payment. The latter, expressing regret that he was unable to comply with such demand, presented to each one of the mortgagees a key to his store in Ft. Madison, where the largest part of the goods was; whereupon the mortgagees at once, and at a very early hour in the morning, entered into possession, put up notices that the goods were being sold under mortgage, and, by the time the attachments were levied had made sales of about $70 worth of property.

As soon as it was known that the mortgages were made, and the mortgagees were in possession, Davis & Co. and Jaffray & Co. sued out their writs of attachment, and at once levied the same upon the stock of goods and upon the real property owned by Schwartz in Ft. Madison. Under indemnity bonds given by the attaching creditors, the sheriff, as provided by the statutes of Iowa, continued in possession, the mortgagees relinquishing their claim to the property, and falling back upon the present suit to enforce their debts.

The master made his report on January 1, 1890, finding the mortgage to Hellman valid, and the others invalid, upon the ground that they embraced notes or accounts claimed to be owing by Schwartz to the mortgagees, which were not in fact debts due to such mortgagees; that the amount so secured had been fraudulently exaggerated for the purpose of defrauding the general creditors; and adjudging that, so far as such mortgagees had received payment on their debts derived from sales of the property mortgaged, they should account to the attaching creditors who had garnished such mortgagees, according to the priority of such creditors in effecting these garnishments.

To this report exceptions were filed by both parties, and, the case coming on to be heard before the court, certain exceptions of the defendants were sustained, and a final decree entered adjudging the several mortgages to be valid conveyances and first liens, and dismissing the bill so far as the same attacked the validity and priority of such mortgages. The decree then proceeded to find the several amounts due the mortgagees, ordered that they should be paid out of the fund in court, and the surplus, over and above paying mortgage debts and receiver's costs and expenses, was ordered distributed to the general creditors pro rata; that is, in proportion to the amount shown to be due and owing said parties from the insolvent debtor. It was further decreed that the mortgage defendants served as garnishees be discharged as such garnishees, and, as the fund in court had been loaned, upon bond and security, to the Polk County Savings Bank of Des Moines, that the clerk withdraw the money from such bank, and make payment to the several parties adjudged to be entitled thereto. From this decree plaintiffs appealed to this court.

John W. Noble and Jas. C. Davis, for appellants.

David Sheean, for appellees.

Mr. Justice BROWN, after stating the facts in the foregoing language, delivered the opinion of the court.