Bank of Perry v. Cooke , 3 Okla. 534 ( 1895 )

OPINION OF THE COURT. The opinion of the court was delivered by The petition in error states nine assignments of error, but in the brief but four are argued and brought to the attention of the court. Without taking up the assignments of error in the order in which they are presented, we will say at the outset, that if the Bank of Perry's mortgage is void as to the creditors of Brogan Jackson and J. E. Jackson, the plaintiff in error can not complain. Naturally the first question which presents itself is: Was the mortgages executed by Brogan Jackson and J. E. Jackson, to the Bank of Perry, in law, void, or given with the intent to hinder, delay and defraud the creditors of the said Brogan Jackson and J. E. Jackson?

The evidence shows, and the court so finds, "that these mortgages were retained by the bank and not filed of record until the 20th day of February, 1894, at 4:30 o'clock P. M., for the reason that if said mortgages were so filed, they would injure and ruin the commercial credit of J. E. Jackson." The court further finds that:

"J. E. Jackson continued to run his mercantile business and buy and sell goods and merchandise in the usual course of trade after said mortgages were given, the same exactly as before, no notice of any kind being given to any person of said chattel mortgages until the 20th day of February, 1894, the goods being sold from said stock and new goods bought and placed herein daily, some of the purchases being made during that time from Nix, Halsell Co. and some from the Armour Packing Co., and during the time from the 10th of February, 1894, to and including the 20th day of February, 1894, before these mortgages were filed for record, more than $700 worth of goods and more than the amount of the notes and interest given to the Bank of Perry, was sold from this stock of goods by J. E. Jackson, no account being kept of the same excepting of the amount of the proceeds of such sales which were deposited by J. E. Jackson in the Bank of Perry, $465 of such amount being deposited in the Bank of Perry, $100 of the amount of such sales was retained by J. E. Jackson and the balance of the proceeds of such sales being expended in the purchase of goods for said store and in running expenses of said store and other expenses of said J. E. Jackson."

From this statement can the Bank of Perry, mortgagee, have a prior and valid lien upon the stock of goods in question, as against the creditors of Jackson who claimed by mortgage or attachment lien? This is not a new question, but has been passed upon by nearly every court in the country and from a very early day in our jurisprudence. Many of the courts" have disagreed and a conflict of authorities has arisen, but the disagreement has arisen principally upon the question when an instrument allowing the mortgagor to remain in possession and deal with the property as his own, is absolutely void upon its face as a matter of law, or whether it is fraudulentper se, the power to sell being only evidence of a fraudulent intention which should go to the jury along with other questions of fact affecting the transaction. In this case the question was submitted to the court and a jury waived, and the court found that there was fraud. We are asked to review the judgment of the court upon the facts and to say that the conclusions of law are incorrect.

In determining this question we take it that it is unnecessary to enter upon a long discussion of the principles involved or to quote at length from the authorities. While there has been some difference in many of the courts as to whether such a mortgage as given in this case, not followed, by possession of the mortgagee, is absolutely void or simply a badge of fraud, or whether it is a question for the jury, yet in this case there can be but little doubt. The court found upon the facts that the mortgage was fraudulent and given for the purpose of hindering and defrauding the creditors of the mortgagor, Junius E. Jackson and John Brogan.

Plaintiffs in error cite but one authority to sustain their position — Black Hills Mercantile Co. v. Gardiner et al, 58 N.W. Rep. 557. This case does not seem to be upheld by the weight of authority. In that case on the 3d of May, 1892, a mortgage was given on a stock of goods for $1,950 and on the 6th day of May, 1892, another mortgage was given on said stock for $1,790, the second mortgage was filed for record on May 24, and the other on May 23. From the time of the execution of the mortgage until the attachments, the mortgagors were allowed to remain in possession of the stock the same as before the mortgages were given, and sold goods in the ordinary course of trade and retained the proceeds. The mortgages contained no clause allowing the mortgagors to remain in possession, but the mortgagees allowed them to do so. The supreme court held that the mortgages were good and that the evidence did not show any fraud. Plaintiffs in error rely upon this case as presenting the law on the subject.

This question has never been definitely settled in this court, and, therefore, we should with care endeavor to arrive at the proper conclusion in the matter. Courts have disagreed upon the question involved and there is a great mass of irreconcilable decisions on the subject. It is impossible to harmonize them, and it will be useless for us to try to do so. We will simply try to arrive at a just conclusion in the matter and have our opinion supported by the weight of authority and the better reasoning on the subject, as we take it.

Chief Justice Bronson, in Griswold v. Sheldon, 4 N.Y. 581, early announced the doctrine that a mortgage of the character in question was fraudulent and void. While the decision of the court was not unanimously concurred in, yet, since that time the doctrine has been well settled in that state. The chief justice in that case says:

"But if the intention to allow Burdick to dispose of the mortgaged property as owner cannot be gathered from the face of the deed, still the goods were left in his possession, and he was, in fact, allowed to deal with them as owner, and disposed of them as a merchant to his customers, from the date of the conveyance down to the time of the levy. Such a transaction the law always has, and I trust always will, pronounce a fraud upon creditors and purchasers."

In Southard v. Brenner, 72 N.Y. 424, the court, in discussing the subject, says:

"Where, at the time of the execution of a chattel mortgage upon a stock of merchandise, it is understood and agreed between the parties that the mortgagor may go on and sell the stock and use the proceeds, generally, in his business, and the agreement is carried out by permitted sales, the transaction is fraudulent in law as against the creditors of the mortgagor."

And again in the same decision the learned court use the following language which expresses the correct doctrine, as we think:

"Such an agreement included in and making a part of the written instrument of mortgage would clearly invalidate it as fraudulent in law, as that term is understood; that is, would be conclusive evidence of fraud in fact, and would be so held by the court as a matter of law. This was decided in Edgell v.Hart (5 Seld. 213.) Whether the agreement is in or out of the mortgage, whether verbal or in writing, can make no difference in principle. Its effect as characterizing the transaction would be the same. The difference in the modes of proving the agreement cannot take the sting out of the fact and render it harmless. If it is satisfactorily established, the result upon the security must be the same. It is the fact that such an agreement has been made and acted upon that in law condemns the security, and not the fact that it is proved by the instrument of security, instead of by parol or in some other way."

In Potis, Administrator, v. Hart, 99 N.Y. 168, the court use the following language:

"A chattel mortgage is fraudulent and void as to creditors where it was given with the tacit or express understanding and arrangement that the mortgagor may sell and dispose of the mortgaged property, and apply the avails to his own use. Such an agreement may be inferred from the fact, that the mortgagor does, with the knowledge and assent of the mortgagee so sell and dispose of the property and apply the avails."

In the same case the court after discussing the proposition as to allowing the mortgagor to remain in possession and sell and apply the proceeds to his own use, says:

"The parties to a mortgage cannot thus play fast and loose with the mortgaged property and thus hinder and delay creditors."

Chief Justice Ryan of Wisconsin, one of the ablest judges that court ever had, in the case of Blakslee v. Rossman,43 Wis. 124, in reviewing this question, except that the mortgagor was allowed to retain one-half of the proceeds of the sale for his own use, and apply the other half to the payment of the mortgage debt, says:

"But we prefer to rest our judgment on the ground first stated. The license given to the mortgagor to retain half the proceeds and use them at his pleasure, makes the written contract of the parties fraudulent and void in law as against creditors; absolutely void as to them, beyond all aid from extrinsic facts. Parol evidence can make it neither better nor worse. Intent does not enter into the question. Fraud in fact goes to avoid an instrument otherwise valid. But intent,bona fide or mala fide, is immaterial to an instrument per se fraudulent and void in law. The fraud which the law imputes to it is conclusive. So a fraudulent agreement of parties, by parol, goes as fraud in fact to impeach a written instrument valid on its face. Fraud in fact imputed to a contract is a question of evidence, not fraud in law. And no agreement of the parties in parol can aid a written instrument fraudulent and void in law. (Wood v. Lowry, 17 Wend. 492; Edgell v. Hart,9 N.Y. 213; Robinson v. Elliott, 22 Wall. 513.)"

It was said by the supreme court of Ohio as early as 1847, in the case of Collins and McElroy v. Myers, 16 Ohio, 547:

"A mortgage upon a specific article with possession and power of disposition left in the mortgagor, is in truth no mortgage at all; it is no certain lien. The power to hold possession and dispose of the property, is inconsistent with the very nature of a mortgage. It indeed would not perhaps be going to far to say that such an instrument was a nullity. It is the next thing to a sale of a horse with possession and power of disposition retained to the vendor. Except in the case of a mortgage, it would be contended that a time might happen when the mortgagee could assert possession; but before condition broken and possession taken, it would be hard to discover any difference. * * * As to all the world except as to the parties themselves, such a mortgage will be held void, as against the policy of the law."

It was further said in the case just cited that there was no specific lien, but a floating mortgage, which attaches, swells and contracts, as the stock in trade changes, increases and diminishes.

It was held by the supreme court of Kansas in the case ofLeser v. Glaser, 4 P. 1030, 32 Kan. 546, after quoting the following remarks by James O. Pierce in 17 Amer. Law Rev. 350,et seq.:

"All cases in which a power of sale of the goods by the mortgagor is provided for, are, therefore, to be tested by the question whether such sales are to be made in his own behalf and at his own discretion, and with control of the proceeds reserved to him; or whether they are to be made solely in pursuance of the trust as a real one; that is, for the benefit of the grantee or mortgagee, and with provision that the proceeds shall be applied on his debt."

The supreme court, following, says:

"We think there is much reason for the distinction made by Mr. Pierce. The first class of mortgages mentioned by him ought generally to be held void, while the other class of mortgages ought generally to be held valid."

It was held by the supreme court of New Mexico, in the case of Speigelberg v. Hersch, 4 P. 705; 3 N.M. 185:

"Whatever may have been the motive which actuated the parties to this instrument, it is manifest that the necessary result of what they did do was to allow the mortgagors, under cover of the mortgage, to sell their goods as their own, and appropriate the proceeds to their own purposes; and this, too, for an indefinite length of time. A mortgage which, in its very terms, contemplates such results, besides being no security to the mortgagees, operates in the most effectual manner to ward off other creditors; and where the instrument on its face shows that the legal effect of it is to delay creditors, the law imputes to it a fraudulent purpose. * * * That this fraudulent transaction should be carried on under the forms of law, is simply a scandal to an honorable profession. The law gives no sanction to such arrangements and will hold them void as against creditors, as tending to encourage and sustain frauds, and to hinder creditors in the collection of their just demands."

In the case of Brasher v. Christophe, 10 Colo. 284, 15 Pac. Rep. 403, where the same question was under discussion, the court says:

"Whatever the motives of the parties to such a transaction may be, viewed as a moral question in the business of every-day life, its effects are injurious, and in law and equity such agreements are fraudulent per se as against creditors and subsequent incumbrances."

This question has had the careful consideration of the supreme court of the United States, in the case of Robinson v.Elliott, 22 Wall. 512, and it was held by the full bench unanimously that where a mortgagor was allowed to retain the possession of a stock of goods with the power to sell and dispose of the mortgaged property and apply the proceeds to his own use, that the mortgage was absolutely void. The opinion of the court was delivered by Justice Davis, and in commenting upon the question, he uses the following language:

"But the creditor must take care in making his contract that it does not contain provisions of no advantage to him, but which benefit the debtor, and were designed to do so, and are injurious to other creditors. The law will not sanction any proceeding of this kind. It will not allow the creditor to make use of his debt for any other purpose than his own indemnity. If he goes beyond this, and puts into the contract stipulations which have the effect to shield the property of his debtor, so that creditors are delayed in the collection of their debts, a court of equity will not lend its aid to enforce the contract. These principles are not disputed, but the courts of the country are not agreed in their application to mortgages, with somewhat analogous provisions to the one under consideration. The cases cannot be reconciled, by any process of reasoning, or on any principle of law. As the question has never before been presented to this court, we are at liberty to adopt that rule on the subject which seems to us the safest and wisest. * * * *

"Whatever may have been the motive which actuated the parties to this instrument, it is manifest that the necessary result of what they did was to allow the mortgagors, under cover of the mortgage to sell the goods as their own, and appropriate the proceeds to their own purposes; and this, too, for an indefinite length of time. A mortgage which, in its very terms, contemplates such results, besides being no security to the mortgagees, operates in the most effectual manner to ward off other creditors; and where the instrument on its face shows that the legal effect of it is to delay creditors, the law imputes to it a fraudulent purpose. The views we have taken of this case harmonize with the English common law doctrine, and are sustained by a number of American decisions."

The courts of Colorado, Illinois, Mississippi, Nevada, Oregon, Tennessee, Texas, Virginia, Washington, West Virginia, Ohio, Wisconsin, New York, New Mexico, Minnesota, Missouri, Pennsylvania, Arkansas, the District of Columbia and the United States supreme court, as well as others, have held that where a mortgagor is allowed to retain the possession of the mortgaged property, with an agreement to sell the same and apply the proceeds to his own use, is absolutely void as against creditors. This doctrine we believe to be the sound reasoning of the subject, supported by the great weight of authority, and should be announced as the law of this court.

Among the cases which hold to this doctrine are the following: City Bank v. Goodrich, 3 Col. 139; Wilcox v.Jackson, 7 Col. 521; Brasher v. Christophe, 10 Col. 284, 15 Pac. Rep. 403; Wilson v. Voight, 9 Col. 614, 13 Pac. Rep. 726;Greenbaum v. Wheeler, 90 Ill. 296; Dunning v. Mead, id. 376;Goodheart v. Johnson, 88 Ill. 58; Simmons v. Jenkins, 76 Ill. 479;Joseph v. Levi, 58 Miss. 843; Harmon v. Hoskins, 56 Miss. 142;Morrill in re. 2 Sawyer C. C. 356; Jacobs v. Erwin, 9 Or. 52; Bremer v. Fleckenstein, id. 266; Catlin v. Vurrier, 1 Sawyer C. C. 7; Rome Bank v. Hasleton, 15 Lea. 216, McCreasleyv. Haslock, 4 Baxter, 1; Tennessee Bank v. Ebbert, 9 Heisk. 153; Texas Bank v. Lovenberg, 63 Tex. 506; Wray v. Davenport.79 Va. 19; Perry v. Shenandoah Bank, 27 Gratt. 755;Lang v. Lee, 3 Rand. 410; Wineburg v. Schaer, 2 Wn. 328; Foxv. Davidson, 1 Mackey, 102; Gauss v. Doyle, 46 Ark. 122; Gaussv. Orr, id. 129; Lund v. Fletcher, 39 Ark. 325; Potts v. Hart,99 N.Y. 168; Brackett v. Harvey, 91 N.Y. 214; Southard v.Brenner, 72 N.Y. 424; Griswold v. Sheldon, 4 N.Y. 581; Collinsv. Myers, 16 Ohio, 547; Blakslee v. Rossman, 43 Wis. 116;Steinart v. Duester, 23 Wis. 136; Place v. Langworthy,13 Wis. 629; Leser v. Glaser, 4 Pac. Rep. 1030, 32 Kan. 546; Pierce on Mortgages; Speigleberg v. Hersch, 4 P. 705, 3 N.M. 185;Robinson v. Elliott, 22 Wall. 512; Twyne's Case, 3 Coke 90, Smith's Lead. Cases, p. 1; Freeman v. Rawson, 5 Ohio St. 1;Harmon v. Abbey, 7 Ohio St. 218; Ball v. Slafter, 26 Hun. 353; Putnam v. Osgood, 52 N.H. 148; Horton v. Williams,21 Minn. 187; Walter v. Wimer, 24 Mo. 63; Stanley v. Bruce, 27 Mo. 269; White v. Graves, 68 Mo. 218; Welsh v. Bikey, 1 Pa. 57;Homeer v. Geseman, 17 S. R. 251; Williams v. Lord, 75 Va. 390;Mann v. Flower, 25 Minn. 500.

There is no question from the evidence but what at the time of the execution of the mortgages in question, there was an agreement and understanding between the mortgagor and mortgagee that the mortgages were not to be placed of record for some time; that as a matter of fact they were not placed of record for ten days after their execution; that there was a tacit understanding or agreement that the mortgagor should carry on the business in the usual way; that he sold goods and bought others, paid debts and applied the proceeds arising from the sales to his own use. The evidence shows that the average sales per day were over $100, and sufficient was realized from the stock of goods after the mortgages were executed and before they were placed of record and possession taken, to have paid the entire debts of the mortgages.

The mortgages were placed of record at 4:30 o'clock on the 20th day of February, and the first attachment was levied, as shown by the sheriff's return, at 4:28 o'clock P. M., on the 20th day of February, 1894, and the other attachments followed closely thereafter. Under this statement of facts we are asked to hold that the court erred in finding that the mortgages executed to the Bank of Perry were fraudulent and void. It may be contended that the mortgage does not show upon its face, sufficient facts to warrant a court in holding that the mortgage is fraudulent and void, but even conceding this, the facts aliunde clearly bring it within the rule, and the court would have erred had it not held the mortgage to have been so. It seems that this case comes clearly within the rule as laid down by the authorities cited, and that it cannot meet the test. The mortgagor undoubtedly was allowed to retain possession of the stock of goods, carry on his business in the usual course of trade and apply the proceeds to his own use. We believe that the better rule is that such a mortgage should be held as absolutely void as to creditors. We do not think that when such a state of facts presents itself it becomes a question of fact as to fraud, but that it is a question of law. Being a question of law we cannot say that the court erred in holding the mortgages void.

Neither is it apparent that plaintiff in error ever gained lawful possession under its mortgages. The finding of fact by the court upon this question is clearly supported by the evidence, and possession thus gained can avail nothing under the law. This being true a discussion of the effect of a lawful possession need not be had.

The other questions raised by counsel are immaterial under this holding of the court, and if well taken, could avail them nothing.

The judgment of the court below will be affirmed.

Bierer, J., having presided below, not sitting; all the other Justices concurring.