Davis v. Schwartz/Opinion of the Court

This is a contest between the attaching creditors and the chattel mortgagees of the property of John H. Schwartz, an insolvent debtor, formerly engaged in business at Ft. Madison and Chariton, in the state of Iowa, and at Dallas, in the state of Illinois. These two classes of creditors are in reality competitors in a race of diligence, the object of which was to obtain a lien upon and possession of the property in question.

1. As the case was referred by the court to a master to report, not the evidence merely, but the facts of the case, and his conclusions of law thereon, we think that his finding, so far as it involves questions of fact, is attended by a presumption of correctness similar to that in the case of a finding by a referee, the special verdict of a jury, the findings of a circuit court in a case tried by the court under Revised Statutes, § 649, or in an admiralty cause appealed to this court. In neither of these cases is the finding absolutely conclusive, as if there be no testimony tending to support it; but so far as it depends upon conflicting testimony, or upon the credibility of witnesses, or so far as there is any testimony consistent with the finding, it must be treated as unassailable. Wiscart v. Dauchy, 3 Dall. 321; Bond v. Brown, 12 How. 254; Graham v. Bayne, 18 How. 60, 62; Norris v. Jackson, 9 Wall. 125; Insurance Co. v. Folsom, 18 Wall. 237, 249; The Abbotsford, 98 U.S. 440.

The question of the conclusiveness of findings by a master in chancery under a similar order was directly passed upon in Kimberly v. Arms, 129 U.S. 512, 9 Sup. Ct. 355, in which a distinction is drawn between the findings of a master under the usual order to take and report testimony, and his findings when the case is referred to him by consent of parties, as in this case. While it was held that the court could not, of its motion, or upon the request of one party, abdicate its duty to determine by its own judgment the controversy presented, and de volve that duty upon any of its officers, yet, where the parties select and agree upon a special tribunal for the settlement of their controversy, there is no reason why the decision of such tribunal, with respect to the facts, should be treated as of less weight than that of the court itself, where the parties expressly waive a jury, or the law declares that the appellate court shall act upon the finding of a subordinate court. 'Its findings,' said the court, 'like those of an independent tribunal, are to be taken as presumptively correct, subject, indeed, to be reviewed, under the reservation contained in the consent and order of the court, when there has been manifest error in the consideration given to the evidence, or in the application of the law, but not otherwise.' As the reference in this case was by consent to find the facts, we think the rule in Kimberly v. Arms applies, and, as there is nothing to show that the findings of fact were unsupported by the evidence, we think they must be treated as conclusive. To same effect are Crawford v. Neal, 144 U.S. 585, 596, 12 Sup. Ct. 759; Furrer v. Ferris, 145 U.S. 132, 12 Sup. Ct. 821.

2. The real question in this case is whether the mortgages which were awarded priority of payment by the decree of the court below were valid securities at the time of the Schwartz failure, or were fraudulent and void as against his general creditors. If they were in fact given bona fide and for a valuable consideration, it is difficult to see why they should not be upheld, notwithstanding they were given for precedent debts, were executed and acknowledged under an impending fear of attachment, at a most unusual hour of the day, and were immediately foreclosed by the mortgagees, and possession taken of the property. There are undoubtedly indicia of fraud connected with the transaction, but, after all, they are only items of testimony bearing upon the main question; and, if there be nothing to impeach the consideration and the good faith of the parties, the fact that the mortgagees intended to obtain a preference over other creditors should not invalidate the mortgages, since the very object of giving such securities is to give a preference to the creditors therein designated. Hutchinson v. Watkins, 17 Iowa. 475; Chase v. Walters, 28 Iowa, 460; Stewart v. Bank, 76 Iowa, 571, 41 N. W. 318.

The fact that the assignee or the preferred creditor of an insolvent debtor is a relative or intimate friend is doubtless calculated to excite suspicion; yet in reality there is nothing unnatural in a dealer or trader who is in need of credit, or a loan of money to carry on his business, first applying to his relatives for such loans, and, if the evidence be undisputed that the money was advanced, the fact that the persons making the loan are relatives ought not to debar them from receiving security. Their rights are neither increased nor diminished by the fact of relationship. Magniac v. Thompson, 7 Pet. 348; Prewit v. Wilson, 103 U.S. 22; Estes v. Gunter, 122 U.S. 450, 7 Sup. Ct. 1275; Bean v. Patterson, 122 U.S. 496, 7 Sup. Ct. 1298; Garner v. Bank, 151 U.S. 420, 432, 14 Sup. Ct. 390; Aulman v. Aulman, 71 Iowa, 124, 32 N. W. 240; Van Patten v. Thompson (Iowa) 34 N. W. 763; In re Alexander, 37 Iowa, 454; Doyle v. NcGuire, 38 Iowa, 410. A general assignment to a relative as trustee for the benefit of creditors is open to more suspicion, since such are more often selected as instruments for creating a secret trust in favor of the assignor.

It is also true that the mortgages must have been given for a valuable consideration, and must have been executed and received in good faith, and for an honest purpose. It has been the accepted law ever since Twyne's Case, 3 Coke, 80, that good faith as well as a valuable consideration is necessary to support a conveyance as against creditors. In that case, Pierce, being indebted to Twyne in 400, was sued by a third party for  200. Pending such suit he conveyed all his property to Twyne, in consideration of his debt, but continued in possession, sold certain sheep, and set his mark on others. It was resolved to be a fraudulent gift, though the deed declared that it was made bona fide. Most of the cases illustrative of this doctrine, however, have been, like that of Twyne, wherein a debtor, knowing that an execution was to be taken out against him, had sold his property to a vendee having knowledge of the facts, for the express purpose of avoiding a levy, or receiving a consideration which could not be reached by execution. In such cases the fact that he receives a good consideration will not validate the transaction, unless, at least, the creditor has obtained the benefit of the consideration. A like principle applies where a mortgage is given and withheld from record in order to give the mortgagor a fictitious credit. Cadogan v. Kennett, Cowp. 432; Blennerhassett v. Sherman, 105 U.S. 100, 117; Sayre v. Fredericks, 16 N. J. Eq. 205; Sweet v. Wright, 57 Iowa, 514, 10 N. W. 870; 1 Story, Eq. Jur. § 353; Klein v. Hoffheimer, 132 U.S. 367, 10 Sup. Ct. 130; Holt v. Creamer, 34 N. J. Eq. 181; Clements v. Moore, 6 Wall. 299; Wickham v. Miller, 12 Johns. 320; Pulliam v. Newberry, 41 Ala. 168; Robinson v. Holt, 39 N. H. 557.

In Twyne's Case, the facts that the sale was accompanied by a secret trust in favor of the debtor, and that the vendor remained in possession, showed that it was not intended as a bona fide preference to the creditor, but merely as a trick to keep the property away from the other cerditors.

But where a person, being lawfully indebted to several creditors, makes a mortgage or other conveyance to one for the open and avowed purpose of preferring him, then, in the absence of a law of the forum prohibiting preferences, such mortgage or conveyance is valid, though it may operate to bar other creditors from obtaining satisfaction of their debts. A mortgage which may have the effect of hindering other creditors is not necessarily unlawful, though a mortgage given to defraud them is always so. Stewart v. Dunham, 115 U.S. 61, 5 Sup. Ct. 1163; Estes v. Gunter, 122 U.S. 450, 7 Sup. Ct. 1275; Smith v. Craft, 120 U.S. 436, 8 Sup. Ct. 196; Huntley v. Kingman & Co., 152 U.S. 527, 14 Sup. Ct. 688; Lead Co. v. Haas, 73 Iowa, 399, 33 N. W. 657, and 35 N. W. 494, and cases cited.

In this case the preferred creditors receive no more than they are entitled by law to have, and the fact that they know that other creditors will suffer by their preference does not show a want of good faith. The effect of every mortgage to a creditor as security for the payment of a pre-existing debt is to withdraw the value of the property covered by the security from the assets of the debtor, which would otherwise be available in satisfaction of his other debts. But unless a general bankrupt law, or a law of the particular state, makes the preference illegal, it is difficult to see why mortgages given under the circumstances that these were given should be held to be invalid. The fact that they were given at night, under the instant apprehension of legal proceedings, and that their execution was followed by an immediate delivery of possession, only indicates that the insolvent debtor wished, in the selection of his creditors, to prefer his own friends, rather than the plaintiffs, who would have secured to themselves the position of preferred creditors by suing out attachments and levying upon his property. In short, they were attempting to do what the mortgagees themselves successfully carried out. The equities of the latter are at least equal to those of the plaintiffs. We do not understand it to have ever been doubted that a debtor may openly prefer one creditor to the rest, and may transfer property to him, or give him security, even after others have begun their actions. Holbird v. Anderson, 5 Term R. 235. In this case it was said by Lord Kenyon (page 238): 'The words of the statute 13 Eliz. do not apply to this case, for this warrant of attorney was given on a good consideration; and the other words in the act, 'bona fide,' only apply to those cases where possession is not delivered, or where it is merely colorable.' See, also, Estwick v. Caillaud, Id. 420.

The fact that the execution of the mortgages was immediately followed by a delivery of possession of the property mortgaged, so far from being a badge of fraud, has rather a contrary tendency, and was evidently resorted to to avoid an implication of fraud from the retention of possession by the mortgagor. A prompt and vigorous enforcement of an honest debt is by no means indicative of fraud, and it does not lie in the mouth of the plaintiffs, who are themselves taking steps in the same direction as the mortgagees, to cavil at their success.

It is also true that, by the law of Iowa respecting assignments for the benefit of creditors, preferences are forbidden; but the authorities in that state hold that a sale or mortgage to pay or secure the payment of preexisting bona fide debts is not to be considered an assignment within the statute, even when made in contemplation of insolvency, or when the debtor, by the mortgage, intends to hinder other creditors who are about to obtain liens upon his property, unless, at least, the mortgage was intended to operate, not as a security, but as a general assignment for the benefit of creditors, or is made in such connection with a general assignment as to constitute both but one and the same transaction. Farwell v. Howard, 26 Iowa, 381; Lead Co. v. Haas, 73 Iowa, 399, 33 N. W. 657, and 35 N. W. 494; Gage v. Parry, 69 Iowa, 605, 29 N. W. 822; Kohn v. Clement, 58 Iowa, 589, 12 N. W. 550; Aulman v. Aulman, 71 Iowa. 124, 32 N. W. 240.

It is sometimes difficult to determine whether a particular instrument is a mortgage or an assignment with preferences. The test most frequently applied is whether the conveyance is of all the property of the debtor, and is made to a trustee for the benefit of certain creditors. In such cases it is usually held to be an assignment, but, if the conveyance be made directly to the creditor himself, it is ordinarily treated as a chattel mortgage. Jones, Chat. Mortg. § 352a; Burrill, Assignm. p. 11.

We do not regard the fact that the property conveyed was nominally more than double in value to the amount of debts secured thereby to be in itself indicative of fraud, since the property conveyed was a stock of goods of somewhat uncertain value, and when sold realized but little more than was necessary to pay off the mortgages. Indeed, this court held directly in Downs v. Kissam, 10 How. 102, 108, that it was not even a badge of fraud that a mortgage was made to cover more property than would secure the debt due.

The fact that goods were spirited away from the store on Sunday night would undoubtedly assume a serious importance were it shown to have been done directly or indirectly for the benefit of Schwartz; but the goods seem to have been taken away in a sleigh by some of the clerks, who took this method of paying themselves for the amounts due them for wages, aggregating $282.77. It appears that they took no more than sufficient to reimburse themselves, and that they were charged upon the books with the goods taken, at cost price. Although, of course, the proceeding was irregular, there is no evidence to connect either Schwartz or the mortgagees with it, and the clerks did no more for themselves than Schwartz would have been at liberty to do for them if he had been present, viz. to prefer them to the amount of the wages severally due them.

The case, then, reduces itself to the simple question whether the mortgages were given for bona fide existing debts to the amount expressed upon their faces; and this involves an inquiry into the consideration of each mortgage separately.

3. So far as regards the mortgage to John H. Hellman, which covered only the stock at Ft. Madison and the book accounts, both the master to whom the case was referred and the court agreed in holding it to be valid. In this connection, the master found Schwartz to be indebted to Hellman, his wife's father, as evidence by his notes, for money borrowed, amounting, with interest, to $22,180.37; that Hellman, before leaving Galena, had prepared memoranda of these notes, which amounted, upon their face, to $20,380.98, together with another note for $1,000, payable to his son John V. Hellman, in consideration of money loaned to Schwartz. This note had been assigned by the payee to his wife, Wenona, but, being afraid that Schwartz was in a bad way financially, it was agreed between the father and son that the former should purchase the note, which was then in his safe; that Wenona should indorse it; that the father should be charged with it on his books, and the son, who was then owing the father to that amount, or more, should be creditied therewith. But the entry upon the books was not made until after John H. Hellman returned from Ft. Madison, and was then entered as of December 29th. AS THE NOTE REALLY BELONGED TO JOHN H. HEllMan, and was transferred to him before he left Galena, though the entry had not yet been made, there can be no just criticism upon his including it in his mortgage. Even if the purchase had not been made, there is nothing improbable in John V. Hellman desiring that his wife's note should be secured, and if he suspected, as he doubtless did, that Schwartz was likely to fail, he would naturally put the note in his father's hands to be secured with the much larger amount due this father; and if the latter caused it in good faith to be included in his mortgage, supposing it to be lawful to do so, the mortgage would not thereby be invalidated.

4. The mortgage to the German-American Bank, which covered not only the stock at Ft. Madison, but that at Chariton, and the book accounts at both places, was given on its face to secure two notes, of $5,000 and $500, made to the bank, as well as a note for $1,500 made to H. Cattermole, president of the bank, and assigned to the bank, together with a note of $1,000 to Pauline Schwartz, also assigned to the bank,-these notes aggregating $8,000. This mortgage was found by the master to be fraudulent, as against the general creditors, by reason of the inclusion of the Cattermole and Schwartz notes.

So far as concerns the Cattermole note, the finding is that McConn, the cashier of the bank, who acted for it at the Sunday evening meeting at Schwartz's house, demanded not only security for the bank, but for Cattermole himself. As Cattermole was not present, no transfer of the note could have then been made by him, and there is no pretense that it was then transferred. The note was not produced at the time, and McConn knew that there was no entry upon the books of the bank to show that the bank owned the note. It appears that the bank afterwards became the owner of the note by giving therefor its own note in exchange, although it is not certain when this took place, since the books of the bank show no entry whatever of the transaction, either to charge the bank with the liability or to credit it with the Cattermole note as an asset. But, putting a construction upon this transaction most favorable to the plaintiffs, it only appears that the bank did not actually own the note at the time the mortgage was given. The Cattermole note had been given by Schwartz for money loaned, and had been in possession of the bank for 2 1/2 months before the failure. The money had been loaned to Schwartz under a promise by him to give a real-estate mortgage, and McConn, who was a cousin of Cattermole, upon the failure of Schwartz to give the mortgage, had agreed to take the note off of his hands.

The note of $1,000 to Pauline Schwartz was sold and delivered by John H. Schwartz to McConn for about two-thirds its face value and interest. It seems that the money represented by this note had been sent, in 1879, in the form of a draft, by Hellman to his daughter Pauline, who was the wife of John H. Schwartz, as a Christmas present. Schwartz appears to have used the money himself, and given his note therefor, dated December 27, 1879. When the mortgage was given, he turned it over to the bank for its face value, upon his wife's request that he should realize upon it for her. No entry was made upon the books of the bank, because, as McConn explained, 'it was a small matter, and we thought it would be adjusted in a few days, and we did not want any more of John H. Schwartz's matters mixed up.' The money to pay for the note was taken from an envelope in the bank by McConn. This was undoubtedly outside of the usual course of banking business, and was open to some suspicion; but there is nothing to impeach the consideration for which the note is said to have been given, and nothing but the somewhat unusual nature of the transaction to contradict McConn's story with reference to this purchase by the bank.

Of both these notes it may be said that, whether they were actually owned by the bank or not, there is nothing to indicate that they were not just debts of John H. Schwartz. It would also seem that McConn's inclusion of these notes in the mort gage to the bank was made in good faith supposing that he had the right to cover them by the same security he was taking in favor of the bank. While the fact that a mortgage is given for a larger amount than is due is doubtless a suspicious circumstance, raising a presumption of fraud, and may, under certain circumstances, avoid the whole mortgage (Wood v. Scott, 55 Iowa, 114, 7 N. W. 465; Lombard v. Dows, 66 Iowa, 243, 23 N. W. 649; Taylor v. Wendling, 66 Iowa, 562, 24 N. W. 40; McNichols v. Rubelman, 13 Mo.App. 515; Holt v. Creamer, 34 N. J. Eq. 181; Heintze v. Bentley, Id. 562; Mead v. Combs, 19 N. J. Eq. 112), it will only have this effect when given willfully, in connivance with the mortgagee, and with an actual design to impose upon and defraud the general creditors.

In all such cases the question of good faith is one of fact, and a mere error of judgment will not be imputed as a fraud. The fact that the debt so included was a bona fide debt, and that the act of the mortgagee in so including it was subsequently affirmed by the creditors interested, will be strong evidence that no actual fraud was intended. Shirras v. Caig, 7 Cranch, 34; Lombard v. Dows, 66 Iowa, 243, 23 N. W. 649; Davenport v. Cummings, 45 Iowa, 219; Miller v. Lockwood, 32 N. Y. 293; Frost v. Warren, 42 N. Y. 204; Goff v. Rogers, 71 Ind. 461; Barkow v. Sanger, 47 Wis. 505, 3 N. W. 16; Van Patten v. Thompson (Iowa) 34 N. W. 763.

5. The mortgage to Catharine Schwartz was given to secure one note for $2,296.35; another for $500; a note for $5,000, payable to Katie Kraft, Schwartz's sister, upon which Catharine Schwartiz was surety; a note for $318, payable to A. S. Gage & Co., upon which Catharine was surety, and which had been paid by her; and also the sum of $2,382.97 due upon an open account for goods and merchandise, and cash advanced and owing by John H. Schwartz. This mortgage is assailed as fraudulent, upon the ground that the last item consisted of merchandise and cash advanced to John H. Schwartz from another store in Ft. Madison, the business of which was solely conducted by Joseph C. Schwartz, in the name of his mother, Catharine. It seems that when the business began she loaned to Joseph $8,000, which composed the capital of the concern, which loan was secured by note. He bought and sold the goods, paying all the bills, and not accounting to her, save to pay the interest due upon the note, and took the profits to himself. It thus appears that the debt really belonged to Joseph C. Schwartz and not to Catharine, although the three parties swore that it was due to her as the nominal proprietor of the store. It does, however, appear conclusively that Joseph was indebted to his mother in a sum largely in excess of the account; that the consideration of the account was goods bought, nominally, at least, of Catharine, and that she was responsible to the creditors of that establishment. As the accounts were kept in her name, she had the legal title to the account, and Joseph only an equity in them. But as, in any event, the debt was bona fide, and, under the circumstances, must be presumed to have been included in the mortgage with the consent of Joseph, the mortgage ought not to be held void on that account. It was a debt honestly owing by John H. Schwartz; was intended to be included in his mortgage; and he had as much right to secure his brother Joseph as his mother, Catharine. His creditors were not placed in any worse position by reason of the fact that he security was not given directly to Joseph. The form in which the security should be given was really a question between the parties themselves, and did not in any way concern the plaintiffs. So, also, it is quite immaterial whether the Katie Kraft note was originally made to her, or to her husband Joseph, and by him indorsed to her. There is very little, if anything, to indicate that it did not represent a bona fide debt, or that Catharine Schwartz, the mortgagee, was not held for its payment. In addition to this, however, Mrs. Kraft herself filed an intervening petition, claiming the amount of the note and the benefit of the mortgage to Catharine Schwartz, and a separate decree was made in her favor.

Upon the whole, we think the court below was correct in sustaining this mortgage.

6. The mortgage to Frank B. Kent covered the property both at Ft. Madison and Chariton, and was given to secure the payment of a note for $2,500 executed by Schwartz, March 1, 1884, and payable one year after date. His decree was for $3,601.42.

In this connection a motion was made by Kent to dismiss the appeal from the allowance of his claim, upon the ground that the requisite amount is not involved to give jurisdiction to this court. We think this motion should be granted. It is true, the four mortgagees were made joint defendants to the bill, but in reality their interests were several. The mortgages were separate, and a several and distinct decree was made in favor of each for the payment of his claim. A separate bill would have lain again each mortgagee, but, as certain of the questions involved were common to all mortgages, they were, as matter of convenience, all made parties to the same bill. The rulings of this court are uniform and consistent to the effect that where several plaintiffs claim under the same title, and the determination of the cause necessarily involves the validity of that title, this court has jurisdiction, though the individual claims do none of them exceed the requisite amount; but when the matters in dispute are separate and distinct, and are joined in one suit for convenience venience or economy, the case will be dismissed as to claims not exceeding $5,000 Schwed v. Smith, 106 U.S. 188, 1 Sup. Ct. 221; Hawley v. Fairbanks, 108 U.S. 543 2 Sup. Ct. 846; Stewart v. Dunham, 115 U.S. 61, 5 Sup. Ct. 1163; Estes v. Gunter, 121 U.S. 183, 7 Sup. Ct. 854; Gibson v. Shufeldt, 122 U.S. 27, 7 Sup. Ct. 1066; Henderson v. Coke Co. 140 U.S. 25, 11 Sup. Ct. 691; Railway Co. v. Parker, 143 U.S. 42, 12 Sup. Ct. 364; Chapman v. Handley, 151 U.S. 443, 14 Sup. Ct. 386.

As it is clear in this case that the validity of each mortgage depended upon its own consideration, independent of the others, and the decree in favor of each mortgagee was several and distinct, the motion dismiss must be granted.

And as we agree that there was no error in the court below holding the other mortgages to be valid securities, and entitled to preference as against the attaching creditors, the appeal as to Kent must be dismissed, and as to the others the decree of the circuit court must be affirmed.