Huntley v. Kingman Company/Opinion of the Court

This case turns upon the validity of the so-called 'deed of trust' executed by Duncan to Salters to indemnify the plaintiffs in error for their signatures upon Duncan's notes.

The property conveyed consisted of a storehouse and its fixtures, together with all the goods, wares, and merchandise contained therein, and the books, notes, and accounts of Duncan in his business as a general merchant, as well as all cattle and horses owned by him at Beef Creek. The testimony indicated that the deed did not include all the property of Duncan, but that he also had a farm near Beef Creek, although the proof was not clear as to its size or value.

No brief was filed by the defendant in error, but in the court below the following clauses appear to have been relied upon as invalidating the deed:

(1) The deed was to become null and void upon the payment of the notes secured by it, and there is an inference, though no express provision, that Duncan was to remain in possession until default.

(2) Upon default in the payment of either of the notes, it was made the duty of the trustee, upon the request of the beneficiaries, or either of them, to sell the property to the highest bidder for cash, either at public or private sale, with or without advertisement.

(3) Upon such sale being made, the trustee was to pay to the beneficiaries in proportion to the amounts for which each might be surety at the time of the sale, holding the remainder subject to Duncan's orders.

The court instructed the jury that, by the reservation of the surplus, the deed was fraudulent upon its face, and was sufficient ground for the plaintiffs' attachment, and the jury were accordingly instructed to return a verdict for the plaintiffs.

The case must be determined by the application of the general principles of the common law to the questions involved. It is true that by act of congress of May 2, 1890 (26 Stat. 81), certain general laws of the state of Arkansas, among which was a chapter relating to assignments for the benefit of creditors, were extended and put in force in the Indian Territory until congress should further provide. But the instrument in question in this case was made July 27, 1889,-before this statute was enacted,-so that neither the statutes of Arkansas, nor the decisions of the supreme court of that state, construing those statutes, constituted at the time a rule of decision of the United States court in the Indian Territory.

There is, upon this record, but little evidence of actual fraud in the execution of the instrument in question. The notes mentioned, the payment of which it was designed to secure, were given for money borrowed of Stevens & Henning, bankers of Gainesville, for the purchase of grain to feed certain cattle, in which Stevens & Henning had an interest. The beneficiaries were joint makers with Duncan of the notes so given to Stevens & Henning. It is entirely well settled, both in England and America, that at common law a debtor in failing circumstances has a right to prefer certain creditors, to whom he is under special obligations, though by such preference the fund for the payment of the other creditors be lessened, or even absorbed. If, as must be conceded, he has the right to pay one creditor in preference to another, even where he is aware of his inability to pay all in full,-in other words, where he is insolvent,-there is not just reason why, in making provision for all, by way of assignment, he may not make special provision for some. Marbury v. Brooks, 7 Wheat. 556, 577; Brashear v. West, 7 Pet. 608; Clarke v. White, 12 Pet. 178; Tompkins v. Wheeler, 16 Pet. 106; Grover v. Wakeman, 11 Wend. 187, 194; Tillou v. Britton, 9 N. J. Law, 120, 136; Blakey's Appeal, 7 Pa. St. 449, 451; Burrill, Assignm. 160; Jones, Chat. Mortg. § 356.

The tendency of courts, in modern times, has been not to hold instruments of this character to be fraudulent and void upon their face, unless they contain provisions plainly inconsistent with an honest purpose, or the instrument indicates with reasonable certainty that it was executed, not to secure bona fide creditors, but to enable the debtor to continue to carry on his business under cover of another's name. So early as 1805, it was held by this court, in U.S. v. Hooe, 3 Cranch, 73, that the mortgage of a part of his property, made by a collector of revenue to the surety upon his official bond, to indemnify him for his responsibility, and to secure him for indorsements at the bank, was valid against the United States, though it turned out that the mortgagor was unable to pay all his debts at the time the mortgage was given, and the mortgagee also knew at this time that he was largely indebted to the United States. It was contended that the mortgage was fraudulent upon its face, but the case was distinguished from Twyne's Case, 3 Coke, 81, in the fact that in Twyne's Case the deed was of all the property, was secret, was of chattels, and purported to be absolute, yet the vendor remained in possession, and exercised ownership over them, while in the case then under consideration the deed was of a part of the property, was of record, was of lands, and purported to be a conveyance which left the property conveyed in the possession of the grantor. The case was also distinguished from Hamilton v. Russell, 1 Cranch, 310, in which this court declared an absolute bill of sale of a personal chattel, of which the vendor retained possession, to be a fraud. In Lukins v. Aird, 6 Wall. 78, an absolute deed of land, with a secret reservation to the grantor to possess and occupy it for a limited time, was held to lack the element of good faith, though made upon a valuable consideration; for, while it purported to be an absolute conveyance on its face, there was a secret agreement between the parties, inconsistent with its terms, securing a benefit to the grantor at the expense of those he owed. The deed was held to be void by reason of the trust thus secretly created. So, in Robinson v. Elliott, 22 Wall. 513, a chattel mortgage which provided that, until default was made in the payment of the notes, the mortgagor might remain in possession of the goods, sell the same as theretofore, and supply their places with other goods, which should become subjected to the lien of the mortgage, was held to be a fraud upon its face, although the mortgage was recorded according to law. The decision was put upon the ground that both the possession and the right of disposition were to remain with the mortgagors: 'They are to deal with the property as their own, sell it at retail, and use the money thus obtained to replenish their stock. There is no covenant to account with the mortgagees, nor any recognition that the property is sold for their benefit. Instead of the mortgage being directed solely to the bona fide security of the debts then existing, and their payment at maturity, it is based upon the idea that they may be indefinitely prolonged. * *  * It is very clear that the instrument was executed upon the theory that the business could be carried on as formerly by the continued indorsement of Robinson, and that Mrs. Sloan was indifferent about prompt payment.' There was no ruling in this case, however, that a mere retention of possession would have avoided the mortgage. Upon the other hand, it was held in Stewart v. Dunham, 115 U.S. 61, 5 Sup. Ct. 1163, that in the absence of fraud a transfer by a debtor in Mississippi of all his property to one of his creditors in satisfaction of his debt was valid. The case was disposed of as one of general law. And in Estes v. Gunter, 122 U.S. 450, 7 Sup. Ct. 1275, a deed by an insolvent debtor in Mississippi to secure sureties upon his note, though made in advance of, and in contemplation of, a general assignment for the benefit of creditors, was held to be valid under the laws of that state, though containing a provision that the creditor should remain in possession until the maturity of the note. In this case, also, the common law did not seem to have been affected by any local statute. So, too, in Smith v. Craft, 123 U.S. 436, 8 Sup. Ct. 196, a bill of sale of a stock of goods, by way of preference of a bona fide creditor, was held not to be fraudulent, as matter of law, by reason of a stipulation that the purchaser should employ the debtor, at a reasonable salary, to wind up the business.

The latest expression of this court upon the subject is contained in the case of Etheridge v. Sperry, 139 U.S. 266, 11 Sup. Ct. 565, in which certain creditors of one Hamilton were secured by chattel mortgages upon a stock of goods levied upon by an execution creditor. There was no reservation of interest to the mortgagor, but an express provision that if he defaulted in payment, or attempted to remove from the county any part of the mortgaged property, the mortgagee might take immediate possession, and before the maturity of the secured notes. The question presented was whether, as matter of law, a mortgage given by a merchant on his stock of goods, to secure debts not yet due, which had no imperfections upon its face, contained no reservations for the benefit of the mortgagor, was apparently only for the security of the mortgagee, and gave him full power to take possession upon default of payment, was invalidated by a parol understanding at the time of its execution that the mortgagor might use the proceeds of his sales to support himself, and to keep up the stock by purchase, applying only the surplus to the payment of the mortgage debt, or whether such understanding was simply to be taken into consideration, with the other circumstances, as bearing upon the question of good faith. The cases of Bank v. Hunt, 11 Wall. 391; Robinson v. Elliott, 22 Wall. 513; and Means v. Dowd, 128 U.S. 273, 9 Sup. Ct. 65,-were all reviewed and distinguished, and it was held that the chattel mortgage was not necessarily invalidated by the parol agreement that the mortgagor was to retain possession with the right to sell goods at retail; the court placing its opinion largely upon the Iowa cases, which were regarded as resting upon sound principles. See, also, Bank v. Bates, 120 U.S. 556, 7 Sup. Ct. 679.

The principal reliance of the court below in this case was placed upon Means v. Dowd, 128 U.S. 273, 9 Sup. Ct. 65, which was a conveyance of all the goods and personal property of the assignor to provide for the payment of certain debts, and to indemnify the indorsers upon certain notes. The instrument was variously called a 'deed of trust,' an 'assignment,' and a 'mortgage.' It contained an express provision that the grantors were to remain in possession of the property, and continue to sell the goods for cash only, and to collect, under the direction and control of the grantees, the proceeds to be deposited in bank weekly, and applied, under the direction of the grantees, to replenishing the stock by such small bills as might be agreed upon, and to the payment of the debts of the firm in a specified order; and in case of failure to make payments, or if for any other cause the grantees might so elect, it should be lawful for them to take possession, and dispose of the same at public or private sale. This instrument was held to secure to the assignor an interest in, or an unlimited control over, the property conveyed, which had the effect of hindering or delaying creditors, and to be void, as being a fraud. 'In the case before us,' said Mr. Justice Miller, 'the whole face of the instrument has the obvious purpose of enabling the insolvent debtors who made it to continue in their business unmolested by judicial process, and to withdraw everything they had from the effect of a judgment against them; for it is shown that, except the goods in this place of business transferred by the conveyance, they had nothing of value but one or two pieces of real estate incumbered by mortgage for all they were worth. It specifically provides that the grantor shall remain in possession of the said property and choses in action, with the right to continue to sell the goods and collect the debts, under the control and direction of the grantees.' The instrument was treated as an artful scheme to enable insolvent debtors to continue in business, in connection with the preferred creditors, at the same time withdrawing their property from the claims of other creditors which might be asserted according to the usual forms of law, and that, by the mere expedient of paying interest upon the indebtedness, they had it in their power to continue in business with a large stock of goods on their shelves, and defy the unprotected creditors. The authority to take possession was accompanied by no direction for immediate sale or winding up the business; but, on the contrary, their discretion as to taking possession and selling seemed to be absolute, and intended to be controlled for their own benefit and that of the debtors, without regard to the unsecured creditors. While the case bears a strong analogy to the one under consideration, we think it is distinguishable in the fact that there was an express provision that the mortgagors should remain in possession and continue business at the will of the mortgagees, who were given such powers as would enable the mortgagors to continue in business for their benefit, and at the same time to bid defiance to the unsecured creditors. In this case there is not only no express reservation of possession to the mortgagor, but even if there had been, in view of the fact that such possession was immediately surrendered to the mortgagee, it is difficult to see how unsecured creditors could have been deceived or prejudiced by such reservation. In Means v. Dowd the mortgage was not recorded, as required by law, for nearly three months after its execution; and the mortgagors were permitted, for several months, to control the goods, and to deal with them as their own. Even when the trustees did in fact take possession, they made no change in the sign, nor in the manner of conducting the business, but kept the same books, by the same bookkeeper, and also employed the mortgagors to conduct the business, upon a salary, for them.

There can be no doubt, upon this record, that the deed of trust in question was made upon a valuable consideration, and for the protection of bona fide sureties. The clause most relied upon by the court below is the one which requires that after payment to the beneficiaries, and the expenses of the trust, the remainder should be held subject to the order of Duncan. But, if it were not to be paid to Duncan, to whom should it be paid? Clearly, the trustee was not entitled to retain any more for himself than was necessary for the payment of the trust, and a reasonable compensation for his own services. If he had retained more than this, he might have been compelled by Duncan to account to him for such surplus. Clearly, he had no right to pay it to certain of the creditors in preference to others. If he had been a general assignee for the benefit of all the creditors, he would have been obliged to pay them pro rata, but he was not. He was a trustee of a part-not necessarily of the whole-of Duncan's property, for the benefit of certain creditors; and, if any surplus were left after the payment of these creditors, it might properly be paid to the mortgagor for the benefit of others.

Whatever may be the rule with regard to general assignments for the benefit of creditors, there can be no doubt that in cases of chattel mortgages (and the instrument in question, by whatever name it may be called, is in reality a chattel mortgage) the reservation of a surplus to the mortgagor is only an expression of what the law would imply without a reservation, and is no evidence of a fraudulent intent. This was the ruling of the court of appeals of New York in Leitch v. Hollister, 4 N. Y. 211, where the assignment was to the creditors themselves, for the purpose of securing their demands. 'A trust,' said the court, 'as to the surplus, results from the nature of the security, and is not the object, or one of the objects, of the assignment. Whether expressed in the instrument, or left to implication, is immaterial. The assignee does not acquire the entire legal or equitable interest in the property conveyed, subject to the trust, but a specific lien upon it. The residuary interest of the assignor may, according to its nature, or that of the property, be reached by execution, or by bill in equity.' Cases in which reservations for the benefit of the assignor have been held to invalidate the assignment have usually been those where the reservation was either secret, or was upon its face detrimental to the interest of the creditors, and a practical fraud upon them. But, if the reservation be only of any surplus which may chance to remain after the debts are paid, it is difficult to see why it should invalidate the instrument, as the creditors obtain all they are entitled to, and the surplus is that which, as matter of law, properly belongs to the mortgagor. It so rarely happens that a surplus is realized after the payment of all the debts that courts should not be too technical in holding that the reservation of such surplus invalidates the instrument, unless it appears to have been made with fraudulent intent. If a surplus had been realized in this case, it is difficult to see what could have been done with it, except to return it to the mortgagor, in view of the fact that the trustee was not a general assignee for the benefit of all the creditors. Dunham v. Whitehead, 21 N. Y. 131; Curtis v. Leavitt, 15 N. Y. 9, 204; Beck v. Burdett, 1 Paige, 305; Camp v. Thompson, 25 Minn. 175; Calloway v. Bank, 54 Ga. 441; Hoffman v. Macall, 5 Ohio St. 124.

The judgment of the court below must therefore be reversed, and the case remanded, with directions to set aside the verdict and grant a new trial.

Mr. Chief Justice FULLER concurred in the result.