Frankhouser v. Ellett

22 Kan. 127

• Court: Supreme Court of Kansas
• Decided: January 15, 1879
• Status: Published

Opinions

The opinion of the court was delivered by

Brewer, J.:

Action of replevin. Judgment in favor of plaintiff, defendant in error, to review which this proceeding in error has been brought. Passing by all preliminary questions as to the sufficiency of the record, we pass to a consideration of the substantial matters in dispute. The case was tried by the court, without a jury, and upon an agreed statement of facts.

This statement of facts shows that on March 9th, 1876, one Charles J. Kendall was indebted to the defendant in error, Ellett, for money borrowed — $3,263.43 — and as an accommodation indorser for $2,500. To secure this, Kendall ‘executed to Ellett the chattel mortgage set out in the reeord, which was recorded in the proper office on March 10th, 1876. This borrowed money became due about May 9th, 1876. The notes on which Ellett was indorser became due respectively about March 24th, 1876, and about April 14th, 1876. About May 13th' 1876, Tenant, Walker & Co. ■sued out an attachment against said Kendall, which came into the hands of plaintiff in error, an officer, and on said day a portion of the property so mortgaged was seized by said officer, under said attachment; and thereupon this action of replevin was commenced by Ellett, an order of delivery duly issued, and the said attached property taken and delivered to Ellett. The decision of this case depends upon the question as to whether or not this mortgage is valid. The stipulations in the chattel mortgage, so far as material, are in these words:

“The property sold is to remain in the possession of the said party of the first part until default be made in the payment of the debt and interest and indorsed notes aforesaid, or some part thereof; but in case of a sale or disposal, or attempt to sell or dispose of the same, or a removal of or attempt to remove the same from said county of Osage, or an unreasonable depreciation in the value, or if from any other cause the security shall become inadequate, the said party of the second part may take such property, or any part thereof, into his possession; and upon taking such property into his own possession, either in case of default or as above provided, said party of the second part shall sell the same at public or private sale, and after satisfying the aforesaid debt and interest thereon, and all necessary and reasonable costs, charges and expenses incurred, out of the proceeds of sale, he shall return the surplus to said party of the first part, or his legal representatives; and if from any cause said property shall fail to satisfy said debt and interest aforesaid, said party of the first part hereby agrees to pay deficiency.”

It is admitted that the notes secured by said mortgage represented a valid and bona fide indebtedness of said Kendall. There is no admission' that, at the time said mortgage was executed, Kendall had or ever entertained any idea or intention, by its execution or otherwise, to hinder, delay or defraud his creditors; nor is there any evidence of any such idea or intention, unless it can be said, as matter of law, from all the facts in the agreed statement, that he had such intention.

It is agreed that Ellett had no knowledge, at the time the mortgage was given, that Kendall intended either to hinder, delay or defraud his creditors, unless the facts of which he did have knowledge should be deemed knowledge of such intention, and that he took the mortgage in good faith for the purpose and with the intention solely of securing his said claim against said Kendall, unless the facts stated show a want of good faith.

The only other facts in the statement that can be material, are: That at the time the mortgage was given, Kendall owed several parties in different amounts, aggregating about $1,850; that the mortgage in question covered all Kendall’s property except about $2,000 in accounts, $1,600 of which were considered by Kendall to be good, and three town lots valued at $27.50. Ellett had knowledge that some of these claims were sent to the bank of which he was president for collection, and that K. could not pay his indebtedness in the usual course of his business. At this time K. made an effort to get extensions from all his creditors except Ellett, and before he got these extensions Ellett consulted an attorney, under whose advice the mortgage was given, said attorney informing Ellett that if the mortgage was duly filed for the period of two months the lien created by it would be valid. The mortgage was executed. Kendall got his extensions “under the impression and with the hope that before said indebtedness could again mature, he would be able to sell his entire stock of goods and pay his debts, and with the hope of avoiding the-odium of having failed in business.” Kendall did not inform these creditors that he was about to give this mortgage. After the execution of said mortgage, Kendall, with the consent, knowledge and agreement of Ellett, continued in his business of general merchant, and with Ellett’s consent and agreement held and controlled said mortgaged goods, disposed of the same in the usual way, received and controlled the proceeds and made deposit thereof, amounting to $1,350, in the Osage City Savings Bank, in the name of Ellett, for the purpose of having the same applied to the refunding to Ellett money advanced by him to. take up the note of $2,000 to said bank, upon which Ellett was accommodation indorser as aforesaid, and which $1,350 was so applied. Kendall was permitted to buy goods to replenish the stock, and check upon Ellett’s account in said bank to pay for same, and did so check to the extent of about $400 for a few necessary staple goods to keep said stock in order, which goods were bought and shipped in Kendall’s name, and placed in his store-room with the said mortgaged goods, but were always so kept by K. separate from the mortgaged goods. Kendall also, with the knowledge and consent of Ellett, used groceries and goods out of his store and said mortgaged goods and money derived therefrom, necessary to support his family from the time the mortgage was given, March 9, 1876, to May 13, 1876. It may be added that Tenant, Walker & Co., and said plaintiff in error, had actual notice and knowledge of said mortgage at the time of said levy under the attachment, and that Ellett protested against the levy.

The statutes of Kansas that have any bearing upon this subject, are § 3 of the act for the prevention of frauds and perjuries, which reads: “Every sale or conveyance of personal property unaccompanied by an actual and continued change of possession, shall be deemed to be void, as against purchasers without notice, and existing or subsequent creditors, until it is shown that such sale was made in good faith and upon sufficient consideration. This section shall not interfere with the provisions of law relating to chattel mortgages.” And § 9 of art. 2, of ch. 68: “Every mortgage, or conveyance intended to operate as a mortgage, of personal property, which shall not be accompanied by an immediate delivery, and be followed by an actual and continued change of possession of the things mortgaged, shall be absolutely void as against the creditors of the mortgagor, and as against subsequent purchasers and mortgagees in good faith, unless the mortgage, or a true copy thereof, shall be forthwith deposited in the office of the register of deeds in the county where the property shall then be situated, or, if the mortgagor be a resident of this state, then of the county of which he shall at the time be a resident.”

The first proposition of counsel for plaintiff in error is, that as the possession of the mortgaged property was retained by the mortgagor, the mortgage, although duly filed in the ■office of the register of deeds, must be deemed to be void as .against creditors, until- shown to have been made in good faith and upon sufficient consideration, and that no such ■showing having been made, the district court erred in not holding the mortgage void. In other .words, he contends that the same rule applies in mortgages as in sales, and that retention of possession is presumptive evidence of fraud; that the failure to deposit the mortgage in the register’s office renders the instrument absolutely void, while the depositing ■does not make it even prima facie valid. Depositing is absolutely essential to the validity of a chattel mortgage; without it none can be enforced against creditors. Delivery of possession of the mortgaged property, or proof of good faith and sufficient consideration, is also essential; so that a mortgagee must prove more than a vendee. A party-who claims only a lieu, must do more to make his lien good than one who •claims full title. Of course, á legislature may so order, but its language should be explicit. A doubt would be solved against an intention to so order.

In support of his views, counsel has furnished us with an elaborate argument, fortified by an abundant citation of authorities. Yet we cannot agree with his law or assent to his view of the facts. An examination of the authorities would be useless; to reconcile them is impossible. It will be sufficient to state our conclusions, and refer to a few of the leading authorities sustaining them.

There is nothing inhérently vicious or against public policy in a mortgage. The right to mortgage-is an incident to ownership. As a man may sell; so may he mortgage his personal property. Possession is not an essential element of title.' A man' may own property in another’s possession. This is universally recognized in cases of loan, agency, and bailment; and the owner, in such cases, does not forfeit his title, or the right to assert and protect it even against third parties, by tbe mere fact of non-possession. If an owner may surrender his possession without losing title, why may not one acquire a good title without acquiring possession ? Must the origin of title be accompanied by possession, to make it perfect against third parties ? There seems to be no-sufficient reason therefor. A failure to deliver possession may be evidence tending to show no sale, or a lack of good faith; but as a delivery of possession is not essential to a transfer of title, a want of it is not conclusive evidence that there was no sale. A sale or mortgage is good inter partes without delivery of possession; so the authorities agree. If it is void as against creditors, it should be because some wrong is thereby done to them; but if the transaction is in good faith, and they have notice of it, wherein are they wronged ? If they claim that they are wronged, ought .they not to prove the fact ?

A mortgage is a lien. The grantor does not purport to transfer his entire interest. He retains all not necessary to perfect the security. Possession may be of little benefit to the grantee, but of great benefit to him. Why should he, after notice is given to the world of what has been done, be compelled to surrender that which is of so much benefit? A mortgage differs from a pledge, in that possession is necessary to perfect the latter, and not the former. If possession is not necessary, why should a lack of it' be held a wrong? Why should that which is right in and of itself be considered evidence of wrong ?

But it may be said that third parties, presuming title from possession, may be misled, to their prejudice. But with notice, they cannot be misled. Eegistration is notice.

Again, it is said that such a transaction may be used as a cover for wrong. So may almost any transaction. A delivery of possession is not conclusive against wrong. Why should a legitimate transaction be condemned because improper use may be made of it ? But the statute concerning sales says a failure to deliver possession is prima fade evidence of wrong as against creditors. True; but in sales there is no registration, and therefore no notice. In mortgages, there is registration and notice.

Again, the statute impliedly grants the right to stipulate, for a retention of possession by the mortgagor: (Gen. Stat., p.585, §15.) Can that which the legislature authorizes to be done be construed to be evidence of wrong? Can an act done in pursuance of law be adjudged fraudulent per se, or even evidence of fraud ?

i.Retention of possession of property6]^ ftauíN01’ Briefly, then, we hold that the statute authorizes a stipulation in a chattel mortgage for a retention of possession by the mortgagor, and that a possession retained in. accordance with the terms of such mortgage is do not, when the mortgage is duly filed, per se fraudulent, or even prima faeie evidence of fraud, as against creditors or subsequent purchasers. Gay v. Bidwell, 7 Mich. 521; People v. Bristol, 35 Mich. 28; Hughes v. Cory, Adm’r, 20 Iowa, 399; Smith & Co. v. McLean, 24 Iowa, 322; Briggs v. Parkman, 2 Metc. (Mass.) 258; Jones v. Huggeford, 3 Metc. (Mass.) 515; Googins v. Gilmore, 47 Me. 9; Brett v. Carter, U. S. Dist. Ct., 3 Cent. Law Jour. 286; Hunter v. Corbett, 7 Upper Canada, Q. B. 75; Bullook v. Williams, 16 Pick. 33; Forbes v. Parker, 16 Pick. 466; Shurtleff v. Willard, 19 Pick. 211; Miller v. Whitson, et al., 40 Mo. 97; Harrington v. Brittan, et al., 23 Wis. 541; Call v. Gray, 37 N. H. 428; Robinson v. Elliott, 22 Wall. 513; Golden v. Cookril, 1 Kas. 267. Neither can we concur in the view taken by the learned counsel of the facts. They having been agreed to, this court can consider them. as readily and fully as the district court. (K. P. Rly. Co. v. Butts, 7 Kas. 308.) And our conclusion agrees with that of the district court, rather than that of counsel. We think the facts show good faith and sufficient consideration. The latter is not disputed. It is admitted that the debt was a valid subsisting debt, one that Kendall was justly bound to pay. Nor is there any suggestion even that the mortgage was given to secure more than the actual indebtedness. Being an honest debt, Kendall had a right to prefer it, and Ellett a right to seek a preference, even though such preference paid his debt in full, and left the other creditors nothing. (Cuendet v. Lahmer, 16 Kas. 527.) Did Kendall intend to defraud his other creditors? That he preferred his largest creditor, though á relative, is not evidence of such intention. The exercise of an undoubted right does not show wrong. He sought an extension of the other claims, but he did this in the hope of selling his entire stock and paying all claims. There is nothing to show that this was not a reasonable and justifiable expectation. If so, it does not indicate an intention to defraud. He continued in business, and the proceeds of the sales, with the exceptions to be hereafter noticed, were applied to the payment of his preferred creditor. This does not look like intent to wrong. If he had appropriated the proceeds of such sales, or squandered them, such conduct might be significant of wrong; but applying them fairly and honestly to the payment of his debts, although all went to one creditor, shows honesty of purpose. Again, while the mortgage covered doubtless the bulk of his property, he retained, uncovered by its lien, property deemed by him of sufficient value to nearly discharge all other indebtedness. This again looks like honest dealing. It shows he was not seeking to cover his entire property. That he was doing something of a business, is evident from the amount of his cash sales and payment on Ellett’s debt; and it would seem a not unreasonable expectation that if he was permitted to continue his business, he would soon be able to discharge all his indebtedness. But further, whatever may have been his secret thought; Ellett had no knowledge of any intent to defraud his other creditors, unless, as stated, such knowledge can be implied from knowledge of the other facts stated. What are they? That he was indebted to other parties: that would be good reason for seeking security and preference, but would not imply either wrong intent on Kendall’s part, or knowledge of such intent in Ellett. That Kendall was seeking and obtaining extensions : but that would seem to be the best way consistent with security and preference to Ellett of paying such creditors. To stop business, and turn his property over to Ellett, to be closed out at forced sale, would not apparently inure to the interest of such creditors, or leave much for the payment of their claims. So far as can be gleaned from the facts stated, it would appear that Kendall was-pursuing the best policy consistent with his undoubted right to prefer Ellett — of protecting his other creditors; and Ellett’s knowledge of these facts cannot fairly be tortured into knowledge of a secret intent of Kendall’s to defraud them.

Again, Kendall was permitted to replenish his stock; but the character of the goods purchased, the manner in which they were purchased and paid for, and subsequently held by-Kendall,. strongly indicate good faith. Only a few necessary staple goods .were purchased. Such purchases are always necessary to keep up the business and sell the other goods. Where all staple goods are sold, and their places not supplied, every one knows that business will fall away from the store, and that the sale of the other goods becomes slow, difficult, and generally at reduced prices; so that by such purchases Kendall was pursuing the very best course to enable him to realize the most out of his stock. Surely this does not indicate a purpose to let his creditors slip, and defraud them of their debts.

Again, the goods so purchased were not commingled with the mortgaged goods, but kept separate; and they were paid for by a new and unsecured loan from Ellett. To that extent, Ellett was foregoing his security and entering the list of unsecured creditors. It is as though Ellett was releasing some of the mortgaged goods from the servitude of his lien, and thus enlarging the amount of property available to the general creditors. Such conduct, so far from being evidence of bad faith, is very strong evidence to the contrary.

And it must further be borne in mind, that this was not part of the mortgage stipulation, but by virtue of a subsequent arrangement. It means simply that Ellett was willing to loan him $400 without security, to help him keep on -in business and make the most profitáble-.conversion of his property into cash. Finally, Ellett permitted him to support his ■family out of the store and proceeds of sales. There is no agreement to this effect in the mortgage; still, it was done .with Ellett’s knowledge and consent. It does not appear how much was so used in the support of the family; it does appear that Kendall remained in charge of the goods, and continued the business. Such services some one must render to convert the goods into money, and such services call for compensation. If the business of reducing the assets to cash was ■ pursued as steadily and rapidly as was consistent with ■obtaining fair value for them, and if the amount used for the support of his family was only half what would be reasonable compensation for the services, it is difficult to see how the creditors were wronged, or how such conduct could be .held evidence of wrong intent. Of course, circumstances .might be such that the appropriations from the store for support would cast grave. suspicions on the bona fides of the transaction, but even then it would be simply one fact to be weighed with others. And where the simple fact appears •that goods were used out of the store for the support of the one employed in making sales, with no statement of amount so used, or the value of such services, such fact can have little weight, and certainly cannot overthrow an otherwise admitted good faith. So that if the burden of proving good faith rested upon the mortgagee, we think the admitted facts show such good faith.

2. Possession of mortgaged property by moro Igreeikentfwheu not fraudulent, ■ and how to be judged. Another proposition of counsel is, that conceding good faith, the mortgage must be held invalid, because by agreement outside the mortgage the right to dispose of the goods and use the proceeds in support of his family was reserved to the mortgagor. It is claimed that, though the parties act in the utmost good faith, still the law will not . . ... , , sanction a transaction like that. Again we mus.t © dissent from counsel. We think the rule to be, . i . j , . . ■» that where a mortgage is given upon a stock ® r of goods, and by agreement outside the mortgage the mortgagor is permitted to continue the business and dispose of the goods in the ordinary way, and use some portion of the proceeds in the support, of his family, the transaction will be upheld or condemned according as it is ■entered into and carried out in good faith, or not. The mortgagor, if he may keep the possession, may as well make the sales as a stranger. He acts in that respect as a quasi agent at least of the mortgagee, and as- such agent and salesman is entitled to compensation for his services. Doubtless such arrangements are liable to abuse, and should always be closely •scanned; but still, they are not absolutely and in all cases to be adjudged void as matter of law. See, in support of this, the authorities heretofore cited.

There being no other question in this case, the judgment will be affirmed.

Valentine, J., concurring.