Central Trust Co. v. East Tennessee Land Co.

71 F. 353, 1895 U.S. App. LEXIS 3273

• Court: U.S. Circuit Court for the District of Eastern Tennessee
• Decided: December 20, 1895
• Status: Published

Opinion

SEVERENS, District Judge,

sitting by designation because of the disability of CLARK, District Judge (after stating the facts). The mortgage and lien attempted to be executed and created by the East Tennessee Land Company were, in my opinion, fraudulent and void in law as to then existing creditors. The facts show, in substance, that the company, having gone on and created debts until it was necessary to raise further means for continuing its business, resorted to the scheme of issuing its bonds for 81,000,000, and securing them by a mortgage of all its solid assets, such as would furnish grounds of confidence to creditors. It is true, there were other assets, but they were largely speculative and uncertain in their character, and not to be relied upon by creditors for their debts. They might be something or nothing, as the boom upon winch the corporation was moving should prosper or fail. Here it failed, as is the common issue. The mortgage or trust deed was so drawn as to close the gates against access by the creditors to the valuable assets of the company, and to leave them to the manipulation and use of the debtor, and sale by it for its own benefit, and assured to the debtor the privilege of conversion to its own use and its own expenditures the property which would be useful for such purposes, without let or hindrance from creditors, who were thus compelled to stand in wait, and be satisfied at the pleasure of the debtor. If this is not a hindrance to creditors, it would seem difficult to contrive one. The answer offered is that the remedy still remained to the creditor to pursue the assets by a bill in equity. This is inadequate. That has always been the right of a creditor, and it would' be novel to hold that that relieved the hindering contrivance of illegality. The English statutes against fraudulent conveyances are the foundation of the statutes on this subject in nearly all (perhaps all) of the states. Their construction and effect in each state are what the local decisions in such state attribute to them. Those statutes in Tennessee, as construed and applied by the supreme court, in my opinion, forbid such conveyance as this. The present case is a very fit one for. the application of the doctrines held in Tennessee upon this subject, and the public policy of the state in the protection of its citizens would doubtless be advanced by a rigorous adherence to these doctrines in such cases. In the case of subsequent creditors, the situation is different. In the case of a concealed fraud, one subsequently becoming a creditor might be exposed to the like injury; but where that of which he might otherwise complain is open, and before his face, he accepts the situation, and should abide the consequences. He has nothing to complain of. The result, with reference to that branch of the controversy, without going' at large into it, is that, in my opinion, as to the then existing creditors, these mortgage liens are void, but that they are not void as to creditors who became such subsequently. ■The result will be that the mortgage must be to that extent (that is, to the extent necessary to protect pre-existing creditors) held invalid, but as against others it will be held valid.