Schwanz v. Farmers Co-Op. Co. , 204 Iowa 1273 ( 1927 )

On or about April 15, 1924, Herman and Cora B. Schwanz, his wife, executed and delivered to intervener Lorimor State Bank, Lorimor, Iowa, two promissory notes for $2,500 each, securing the payment thereof by a chattel mortgage upon certain live stock and all increase thereof. The property was owned by the mortgagors and appellant in partnership, and the mortgage purported to cover only the undivided interest of the former therein. On July 25th following, Herman Schwanz filed a voluntary petition in bankruptcy, attaching a schedule of the mortgaged property and setting out the mortgage. Thereafter, and in due time, the property in controversy was set aside by the court to the bankrupt as exempt. The mortgage, which, under the United States statute, gave a preference to the mortgagee, was invalid as to the non-exempt property. The exempt property thus set off to the bankrupt was purchased of him by appellant, who, on or about February 25, 1925, caused the same to be shipped to St. Joseph, Missouri, and there sold upon the market. Appellant is a member of the Farmers Co-operative Company of Lorimor, in the name of which the hogs were shipped, and to which the proceeds of the sale were sent, and in turn deposited in the defendant First National Bank of Lorimor. The net proceeds of the sale, as found by the court, were $1,698.93. This action was commenced by appellant against both the Farmers Co-operative Company and the First National Bank of Lorimor, to recover the above sum. The Lorimor State Bank, mortgagee, intervened, claiming a lien upon a portion of the hogs sold, and asking that a trust be impressed upon the proceeds of the sale of the property covered by the mortgage, in the sum of $1,050, and for an order directing the payment thereof to it. Issues were joined on the petition of intervention, and, so far as necessary to the decision of the points covered by this appeal, will be referred to later. Appellant concedes that he had actual knowledge of intervener's mortgage prior to the purchase of the hogs.

I. The first proposition argued by appellant, — namely, that a partner cannot give a valid mortgage upon his interest in the chattel property of the copartnership to secure his individual indebtedness, — is ruled by our prior 1. PARTNERSHIP: decisions. The mortgage is not, per se, invalid, assets: but is subject to all partnership liens and chattel debts. Fargo Co. v. Ames, 45 Iowa 491; In re mortgage to Assignment of Cutler Horgen, 204 Iowa 739. The secure partnership debts were all paid, and the lien of partner's intervener's mortgage became absolute, upon the debt. interest of the mortgagor in the partnership property. The particular property in question had been set aside to the mortgagor as exempt, prior to the purchase thereof by appellant. The mortgage, having been executed within four months prior to the date on which the petition in voluntary bankruptcy was filed, was invalid, under Section 9644, U.S. 2. BANKRUPTCY: Compiled Statutes, as to non-exempt property. discharge: This, intervener concedes, but contends that effect on this in no wise affected the lien of the existing mortgage upon the exempt property. The decision liens. of this question turns on the effect of the discharge of the mortgagor in bankruptcy. Exempt property constitutes no part of the bankrupt estate, and the jurisdiction of the bankruptcy court is limited to the ascertainment and setting off to the bankrupt of the exempt property. Lockwood v.Exchange Bank, 190 U.S. 294 (47 L. Ed. 1061); Eckhardt v. Hess,200 Iowa 1308. By receiving his discharge in the bankruptcy court, the mortgagor was released from all further personal liability. But it seems to be well settled, both in the Federal and state courts, that such discharge does not release or in any way affect a lien arising out of contract upon exempt property.In re Bailey, 176 Fed. 990; In re Hartsell Son, 140 Fed. 30;Ingram v. Wilson, 60 C.C.A. 618 (125 Fed. 913); Lockwood v.Exchange Bank, supra; Johnson v. Turnholt, 199 Iowa 1331;Eckhardt v. Hess, supra; First Tr. Sav. Bank v. Kleih, 201 Iowa 1298.

Reliance is placed by appellant upon Drees v. Armstrong,180 Iowa 29. The case is not in point. The plaintiff in that action held unsecured notes against the defendant, which he filed in the bankruptcy court. The defendant was the owner of a homestead acquired subsequent to the creation of the debt, and it was, therefore, not exempt from execution on a judgment therefor. After the discharge of the defendant in bankruptcy, the plaintiff commenced an action on the notes, which, as stated, he had previously filed in the bankruptcy proceedings, aiding such action by an attachment levied on the homestead of the defendant. The defendant set up his discharge in bankruptcy as a defense. The court held that the claim of the plaintiff was extinguished by the discharge of the defendant in bankruptcy, and that the failure of plaintiff to secure an order suspending the entry of such discharge until he could litigate his claim in the state court was fatal to his right to thereafter proceed against the property. All of the cases cited by appellant in his brief, — to wit, Drees v. Armstrong, supra; In re Brumbaugh, 128 Fed. 971; Inre Downing Paper Co., 147 Fed. 858; In re Wells, 105 Fed. 762; Inre Tiffany, 147 Fed. 314; Roden Grocery Co. v. Bacon, 66 C.C.A. 497 (133 Fed. 515); In re Maher, 169 Fed. 997; In re Castleberry, 143 Fed. 1021, — are of the same character, and to the same effect. In the case before us, the intervener is not seeking to assert a personal claim against the mortgagor, but only to enforce the lien of his mortgage upon exempt personal property. We have already pointed out that the lien of the mortgage was not affected by the mortgagor's discharge in bankruptcy.

II. Intervener appeared in the bankruptcy court, and filed objections to the discharge of the mortgagor and to the setting aside to him of the property in controversy as exempt. Other claims were asserted by intervener, and tried 3. CHATTEL and disposed of in the bankruptcy proceedings. MORTGAGES: These proceedings and the acts and conduct of enforcement the intervener in connection therewith are all after set up by appellant as estopping him from contest in asserting the lien of his mortgage or seeking bankruptcy. the impressment of a trust upon the proceeds of the mortgaged property. The point is without substantial merit. Intervener had a right to assert and litigate any proper claim in the bankruptcy court. The lien of the mortgage was in no way waived. It is true that the bankrupt was compelled to litigate his right to exemptions, which was contested by intervener. The adjudication of this point, if such it may be called, by the bankruptcy court in no wise affected the lien of intervener's mortgage upon the exempt property, and it is difficult to conceive how an estoppel can be predicated upon the facts disclosed. Intervener has at all times insisted upon the lien of its mortgage, and the mere fact that it failed to defeat the claim of the bankrupt to exemptions or his right to discharge is not such an adjudication as will prevent it from demanding the enforcement of the lien.

III. The remaining proposition for discussion relates to the extent of recovery to which intervener is entitled. It is contended by appellant that the petition in intervention proceeds upon the theory that the purchase of the pigs by 4. CHATTEL appellant from the mortgagor constituted a MORTGAGES: conversion thereof, and that, at most, transfer by intervener is entitled to recover their value at mortgagor: the time of such conversion; or, if the doctrine liability of of conversion is not applicable, and appellee purchaser: bank holds the proceeds of the sale of the enforcement property for the use and benefit of the of trust. mortgagee, that appellant is entitled to have the expense of feeding and marketing the hogs set off against such fund. Intervener is not seeking to recover the value of the property as for a conversion, but is asking the impressment of a trust upon the sale of the mortgaged property. The pigs purchased by appellant of the mortgagor were covered by the mortgage as increase, and were not, of course, specifically described therein. The pigs were mingled with others of similar size and breed, so that, at the time the same were sold on the market, it would have been difficult, if not impossible, for the mortgagee to have identified them, unless by the testimony of appellant. Appellant had actual knowledge of the mortgage, and the purchase of the pigs was necessarily subject to the lien thereof. The mortgagee was not bound to proceed immediately to foreclose its mortgage. The mortgaged property was preserved by appellant upon his premises, and did not lose its identity. The difficulty that would have confronted the mortgagee, had a foreclosure of the mortgage been attempted, would have been to pick out and segregate the particular property from the herd with which it was commingled. It was the right of the mortgagee to defer foreclosure of the mortgage until the maturity of the debt for which it was security, or until it desired to take action under the mortgage. The lien continued so long as the property remained in existence. It would have been the duty of appellant, upon demand of the mortgagee, if made at any time prior to the final sale thereof, to turn over the property to the bank. If he refused to do so, the mortgagee might treat such refusal as conversion, and bring an action for the value of the property at the time demand was made; or it could prosecute an action for the replevin of the property, and recover the same, or its value at the time of such demand. Such has been the rule in this state for many years. McDonald v. Norton,72 Iowa 652. Had the mortgagee brought detinue or replevin, it would have been entitled, under the foregoing decision, to recover the property or its value, and such recovery would not have been subject to diminution on account of expense incurred by appellant in feeding and caring for the property. Neither the lien nor the right of the mortgagee to at any time possess itself of the property under its mortgage, or to recover its value, if it could not be produced, was in any way affected by the sale thereof by the mortgagor or its purchase by appellant. The measure of recovery in favor of the mortgagee in this action is the same as it would have been if the action were detinue or replevin. The applicable principle must be the same.

Appellant does not question the right of intervener, if the lien of the mortgage was not discharged by the proceeding in bankruptcy, to have a trust impressed upon the proceeds in its favor. That such is the right of the mortgagee in this jurisdiction is well settled. Cable v. Iowa St. Sav. Bank,197 Iowa 393; First Nat. Bank v. Riggle, 195 Iowa 189; Hamm Brew. Co.v. Flagstad, 182 Iowa 826; Jones v. Home Sav. Bank, 200 Iowa 1186. What has already been said sufficiently disposes of appellant's plea of adjudication of the issues involved herein in the bankruptcy proceedings. The adjudication had nothing to do with the lien of intervener's mortgage upon exempt property, or his right to pursue the same in the state court.

The decree of the court is affirmed. — Affirmed.

EVANS, C.J., and De GRAFF, VERMILION, ALBERT, MORLING, and KINDIG, JJ., concur.