Johnston v. Columbus Insurance & Banking Co. ( 1904 )

Calhoon, J.,

delivered the opinion of the court.

These three cases, though differing in some respects as to the pleadings, all rest substantially on identical facts, and since the result in each case must turn upon a pure question of fact, and that the same question of fact, one opinion will apply to all. There is no dispute in reality between the parties as to the law governing the cases. It is, of course, clear that a mere withholding of the instruments in this case from record, unattended by any other circumstances, would not be a fraud. Instruments may be withheld from record as the result of mere inattention, indifference, or mere agreement to withhold, without fraudulent purpose. In such case the only penalty the law visits upon the party so withholding is the risk that some other lien creditor may record his lien in the meanwhile, and so obtain priority over the instrmnents withheld from record. But if the evidence goes beyond this, and clearly and convincingly, as it must always do in cases of actual fraud, shows that the withholding from record was the result of an agreement so to do between the grantor and grantee, and, further, that the instruments were to be so withheld with the intent on the part of the grantor and grantee that knowledge of such instruments should be withheld from the public, so as to give the grantor a fictitious credit,' enabling him to obtain credit from others trusting him on the faith of his supposed ownership of the property conveyed in the instruments, then such facts make a. case of actual fraud. In the Klein case, 64 Miss., 41 (8 South., 204), the court found that Mrs. Klein simply trusted, as a wife and mother usually does, to her husband and her son, and had no knowledge of the facts connected with the business in any way; that she did not know that a conveyance in .that case ought to be recorded, and was wholly in ignorance of any agreement that it should not be recorded. In the case of Day v. Goodbar, 69 Miss., 687 (12 South., 30), it appeared that one of the members of a mercantile firm executed a mortgage, not on firm property, but on about one-third only of the individual property of one member of the firm, and the proof failed to show sufficiently that there was any agreement to withhold the instruments from record. So far as these two cases are concerned, therefore, it is obvious that there was no actual fraud. The case of Hilliard v. Cagle, 46 Miss., 309, is also manifestly a case based on actual fraud, although an unfortunate expression in the first part of the opinion would seem to indicate that the court thought it was a case of constructive, and not actual, fraud. The facts of the case, however, plainly show actual fraud, as pointed out in Klein v. Richardson and Day v. Goodbar, supra.

What are the facts of this particular case ? J. M. Billups, on November 5, 1894, was president of the Columbus Insurance and Banking Company, and had been for thirty years theretofore, and he remained president to the date of his death, August 11, 1902. On November 5, 1894, he executed a deed and bill of ■sale and a trust deed to said bank, which conveyed all his known visible property, to secure an indebtedness due said bank of some $30,000. It is perfectly clear that he was insolvent at the time, and that this insolvency was well known to the bank. All these instruments were acknowledged before C. H. Ayres, who was a notary public, and also the teller of the bank. The trustee in the deed of trust was a director in tbe bank, and a majority of the directors were related to Billups either by consanguinity or affinity. It is impossible to escape the conclusion from the testimony that there was an agreement between .the bank and Billups that these instruments should be withheld from record. Semiannually, for eight years, the question of whether the deed and deed of trust should be recorded was discussed by the directors, and on each occasion the conclusion was still to keep them from record. They were so continuously withheld from record from the date of execution until 50 minutes after 4 o’clock p.m. on August 11, 1902, when they were filed for record, such filing occurring only a few minutes after the death of Billups, the chancery clerk having had the papers handed to him by a brother of Billups a few days before Billups’ death, with instructions not to file them for record until after his death. At the time (November 5, 1894) of the execution of these instruments J. M. Billups was individually indebted to the appellee bank in the .sum of $27,000, and after the execution of these instruments in part payment of said indebtedness, he still owed the appellee about $16,000, which was that day evidenced by two notes — one for $10,712.51, secured by sixty shares of bank stock, of the par value of.$6,000, and a paid-up policy of life insurance for $5,070, payable and absolutely assigned to the appellee, and one note for $5,000, secured by a deed of trust on Billups’ homestead, in Columbus, Miss. As additional security for these two notes, it was agreed that Billups’ salary as president and the dividends on said sixty shares of bank stock should be applied on December 31st of each and every year to the payment of the two notes, and they were so applied. On that same day — November 5, 1894 — as a part of the same transaction, a statement of the indebtedness of Billups & Banks, cotton commission merchants, composed of Billups and Col. Banks, was made to the appellee by the cashier of the appellee bank. This statement showed that the firm of Billups & Banks acquired a credit of some $34,000, which was that day secured to the bank by two notes, of some $17,000 each, payable in one and two years from date, the notes being executed by Billups and Banks as individuals, and not as a firm. After the payment of said firm indebtedness on November 5, 1894, by Billups, of some $7,000, he was then indebted to Billups & Banks in the sum of about $9,000. So that, to summarize, on November 5, 1894, IVIaj. Billups stripped himself of all his property by these instruments, and owed the following amounts, approximately: $16,000 on his individual account to the bank; $34,000 on the indebtedness of Billups & Banks to the bank; $9,000 to Billups & Banks, Billups having assigned as security for this an insurance policy for $5,000. This statement, fully proved by the evidence, makes out a total indebtedness on November 5, 1894, on the part of Billups, of about $59,000, or, if it be said that he owed only half of the firm debt of Billups & Banks, of about $42,000. Billups was insolvent on said date, and remained so until the day of his death, and Banks paid the bank the whole of the indebtedness due by Billups & Banks. These instruments were kept in the vault of the bank for the entire eight years, but were put promptly to record within a few minutes after Billups’ death, having been sent to the clerk some forty-eight hours before his death, with instructions not to record until after his death. It is clear that an agreement was made betAveen Billups and the directory of the bank so to Avithhold these instruments from record; the directory, according to some of the witnesses, doing so reluctantly, at Billups’ earnest insistence. It further appears that, from, the time of the execution of these- instruments until the death of Billups, all the property conveyed to the bank remained assessed to Billups for state and county taxes, and that these taxes were actually paid by Billups as an individual, although it also appears that the bank reimbursed him for the taxes so paid. It further appears, from the deposition of Armstrong, tax collector, that Billups paid the taxes on the plantation and personal property and his dwelling 'house (all this property being embraced in one receipt) by his individual check, and the taxes on the other real estate owned by the bank and managed by Billups by giving his check as president of the bank, the tax receipts for 1900 and 1901 showing that the payments of taxes on the other lands of the bank and on this land were made several days apart. It further appears that all of the personal property on the plantation, consumable in its use, of the value of about $2,200, was dealt with by Billups as if it were his own, in all respects — -a large part of it being used up — and that Billups retained possession of all said'lands conveyed by him to the said bank, controlling and exercising dominion over them, from the time of the execution of the instruments to the day of his death, just as if he were owner. It does appear, however, further, that there was a renting of some kind by the bank to Billups for the year 1902, for $900.80, of the plantation. This $900.80 would seem to be the exact amount, to a cent, which 8 per cent per annum on the ■purchase price of the plantation, $9,060, added to the purchase price of the personal property, $2,200 ($11,260 in all), would make. The personal property consisted of twenty-two mules, five wagons, one gin, one press, one mower and rake, one yoke of oxen, ten cows and calves, forty head of hogs, twelve double plows, twenty-two sets of plow gear, twenty-eight sweeps, and fifteen single plows. .But Billups was allowed to control all said personalty as if it were his own. At his death there were only three or four mules found on the plantation. This rent of $900.80 for the land remained the same from 1895 to Billups’ death, no effort being made by the bank to rent to any other party. But the year after his death the same plantation, without the $2,200 of personal property, was rented for $1,100. The control and possession of all this property — farm and per- ' sonalty — was open to the inspection of every one; and it is abundantly shown by the testimony that all persons in the neighborhood of the farm, including one Hines, who had been for ■ seven years manager of the home plantation, supposed all the time that Billups owned the plantation, and never knew anything to the contrary until after his death. It further appears that Billups gave Walker a note for $638, securing it by note reciting twenty-three bales of cotton “made on my plantation in the Trinity neighborhood,” and one to Wood for $500, reciting that it was secured by seventeen bales of cotton grown on “my home place.” This property had been conveyed before these notes were made. The evidence makes it too clear for disputation that Billups was believed by all the public to be, after the execution of these instrumentsi to the bank, just as completely owner of the property conveyed by him to the bank as he had been before their execution. And it further appears satisfactorily that the creditors in these three suits extended credit to Billups upon the faith of his ownership of this property, and that, if they had known that he was not the owner, no credit would have been extended. We thiuk the clear result of the testimony is, further, that the bank knew, and was bound to have known, that Billups was contracting debts all the while after the execution of these instruments until his death. It appears, for example, that in 1898 and 1899 the notes he gave the bank were secured by collateral, and that this collateral was so many bales of cotton to be raised, but that, as he did not make enough to satisfy outside parties who had claims on the crop, the bank waived its claim on that cotton and held those notes without any security whatever. It also appears that large checks were sometimes drawn on the bank by Billups, the cashier, however, stating that he only remembered the parties to whom payable in one or two instances — especially mentioning two cheeks to Eobertson & Co: in January, 1902. Col. Banks, vice president and director of the bank, testified that a major part of the planters in that section did business, on a credit,, and that he did not know whether the bank knew that Billups was farming on credit, but supposed it did. During all these eight years, from November 5, 1894, Billups, until his death, engaged in large farming operations, renting his home place from the bank and other land from three or four parties near this place. He was the senior member of the old firm of Billups & Banks, commission merchants, from 1892 until January 16, 1900. Billups was about seventy years of age when he executed these instruments.

It is hard to understand why, if there was no agreement not to record the instruments, as is stoutly urged, the bank should have been so thoroughly dominated by Billups while he lived and should put them so instantly to record upon his death. The-existence of these instruments was kept from the knowledge of all persons except the parties thereto, and perhaps one or two members of Billups’ family. It is also impossible to understand how, if, as contended by the bank, it did not know that Billups was contracting any other debts, it should have been so anxious to record the instruments as soon as he was dead. If it was unnecessary to record them during his life, when he might have contracted future debts, if the bank was satisfied that he owed none, then why, after he was dead and could not possibly contract any more- debts, should the bank rush the papers to record ? It is asked very earnestly, What advantage was there to accrue to the bank from withholding these instruments from record? It seems to us the answer is plain and perfect. If the public had known the true situation on the 5th of November, 1894— that this bank had as its president a man who had at the close of that day stripped himself of every particle of property, and who was hopelessly insolvent, and who still owed the large sums we have referred to, to the bank, after all credits had been applied, and that the bank had allowed this president in the past to so largely overdraw, and proposed for the future to keep secret the true situation as to his ownership of the property he had theretofore owned — is it not perfectly obvious that confidence in the bank itself would, have been seriously shaken, if not destroyed, and its own credit thereby impaired or taken away ? Surely no elaboration is needed to make this plain. It might very well be that the bank wished no breach with its president, no resort to courts for the collection of its debts, no disclosure to the public of the methods of dealing between it and its president or of the fact that the president and vice president owed the bank nearly $70,000, since such knowledge might well have tended to shake the confidence of the public in the safety and saneness of the bank’s management. Such considerations would be very material in inducing the action of the bank in concealing these instruments from the knowledge of the public.

We have given this case the most careful, painstaking, and protracted examination, and we are constrained by the inexorable facts of the case to hold that the case here made, as above set out, is one of actual fraud. If actual fraud could only be made out by declaration of the parties to a scheme which the law condemns, there would be few cases indeed in which the arm of the law could reach and uncover it, letting in the light of day; for all such schemes are, from their very nature, surrounded with secrecy, and the actors therein ought not to be expected to proclaim themselves amenable to the law’s condemnation. Courts must always look to the dealings and conduct of the parties, rather than to any declaration they may make, 'as to the fraud, or not, of the transaction, assailed. The view which we have taken is abundantly supported by authority. It is supported by Hilliard v. Cagle, 46 Miss., 309, cited with approval in Blennerhassett v. Sherman, 105 U. S., 100 (26 L. ed., 1080); by the Sherman-Blennerhassett case itself, and numerous authorities therein reviewed; by Mobile Sav. Bank v. McDonnell, 87 Ala., 736 (6 South. Rep., 703); by Lehman, Durr & Co. v. Van Winkle (Ala.), 8 South. Rep., 870; by Central Nat. Bank v. Doran, 109 Mo., 40 (18 S. W., 836); by Walton v. First State Bank (Colo. Sup.), 22 Pac., 440 (5 L. R. A., 765; 16 Am. St. Rep., 200); by Clayton v. Exchange Bank, 121 Fed. Rep., 630 (57 C. C. A., 656); and by the authorities ,cited at p. 113, vol. 24, Am. & Eng. Ency.Law (2d ed.), which have been accurately analyzed by learned counsel for. the appellant (Rice v. Wood, 31 L. R. A., 638, note N).

We do not think the doctrine has anywhere been more accurately expressed than by that great judge, Chief Justice McClellan, in Lehman, Durr & Co. v. Van Winkle, decided in 1891, supra; and we approve that statement of the doctrine, which is as follows: “Had there been no understanding looking to the concealment of the mortgage by keeping it from the records — no purpose so to do, to the end of bolstering up Belzer & Parker’s credit — but only an unintentional omission to record it, of course the only effect of not recording it would be to postpone it to after-acquired liens. But as here alleged, the failure to record it is not mere omission, attributable to inadvertence, inconvenience, or negligence, but is an affirmative and intentional withholding from record, wit-h the ulterior purpose charged in the bill, and we cannot be in doubt that the transaction is tainted with actual fraud, which will vitiate it as against subsequent creditors and the like, who have been drawn into contractual relations with the mortgagors by assuming their apparent to be their real status with respect to the property covered by the mortgage; and this result follows notwithstanding the conveyance is free from infirmity in every other respect. Blennerhassett v. Sherman, 105 U. S., 100 (25. L. ed., 1080), and numerous cases there cited and quoted; Bank v. McDonnell, 87 Ala., 736 (6 South. Rep., 703).” In all these cases of actual fraud, the principle on which the party holding the mortgage or deed of conveyance is postponed, and the defrauded creditors let in, to be first paid out of the avails of the property mortgaged or conveyed, is, as well said in the citation from the Am. & Eng. Ency. Law, supra, that such defrauded creditors are not required to have secured a lien before such instruments have been actually recorded, but that their claim for relief is based on fraud, and not on the protection of the recording acts; and it will be specially noted in the case at bar that we are dealing, so-far as the plantation is concerned, with the case of an absolute deed, where the vendor was left in possession, contrary to the essential nature and terms of the conveyance, and not with a mortgage, where continued possession by the mortgagor for a reasonable length of time would be consistent'with the nature of the security, as pointed out in Mobile Sav. Bank v. McDonnell, supra.

It follows from these views that the decree in each of these cases is reversed, and the cause remanded to be proceeded with in accordance with this opinion; the complainants being entitled to have their claims first paid out of the property, except legal homestead, conveyed by said Billups to the bank.