Hollenbeck v. Louden

152 N.W. 116, 35 S.D. 320, 1915 S.D. LEXIS 49

• Court: South Dakota Supreme Court
• Decided: April 15, 1915
• Docket: File No. 3635
• Status: Published

Opinion

McCOY, P. J.

This action was instituted to foreclose a chattel mortgage upon a stock of general merchandise given 'by defendant Louden to plaintiff. Defendant appeared and answered. W. A. Hazle, representing general creditors, as trustee in bankruptcy of defendant, Louden, by intervention, also became a party to the action. Findings and judgment were made and entered in favor of plaintiff adjudging said mortgage to be a lien upon said merchandise, and that the proceeds thereof be applied to the satisfaction of plaintiff’s mortgage indebtedness. The said trustee, as intervener, has appealed, assigning among ethers, as error, that the judgment is not sustained by the findings, and insufficiency of the evidence to sustain certain findings. The effect of the findings and judgment is to make plaintiff’s mortgage a prior lien upon said merchandise in preference to any of the creditors of the mortgagor. So far as the matters necessary to be considered are concerned, there is no material conflict in the evidence. The mortgage to plaintiff was executed and delivered on the ist day of March, 1913, and withheld from record until the 26th day of July, 1913.

[1] It is first contended by appellant that plaintiff’s mortgage is inherently void by reason of the provisions thereof, in that it covers a stock of general merchandise, and there is no provision therein with reference to sales from said stock in the usual course of retail trade, and no provision for any accounting of the proceeds of sales to the mortgagee, and no' provision as to after-acquired merchandise that might be added to said stock in the usual course of said business. It appears that the mortgagor did make sales from the mortgaged property, and did pay to plaintiff the amount of about $750. We are of the view that, under such circumstances, such a mortgage is not absolutely or conclusively void, but is prime facie or presumptively -void, and that the one claiming under such a mortgage has the burden of showing that it was made in good faith upon proper consideration and without intent to hinder or delay creditors-. This burden was met by plaintiff by showing it to be a purchase-money mortgage securing an indebtedness of $2,465, and being a part of the purchase price of said stock of merchandise, valued at about $9,000, which was, on the ist day of March, 1913, sold and delivered by plaintiff to defendant. There was no evidence tending to show that said mortgage was given with any intent, by either party, to defraud, hinder, or delay -creditors, or that said mortgagor was insolvent at the time of the excution of said mortgage, or at the time of the filing thereof, or that said mortgagor or mortgagee, at either of said -times, had any reason to be-' lieve that said mortgagor was insolvent, or that -said mortgage was made in view or contemplation of bankruptcy on the part of said mortgagor, so' as to make the giving thereof an unlawful preference, or void, under sections 60 and 67 of the federal Bankruptcy Act. The following authorities seem, to sustain this conclusion: Black Hills Mercantile Co. v. Gardiner, 5 S. D. 246, 58 N. W. 557; First National Bank v. Calkins, 12 S. D. 411, 81 N. W. 732; Cobbey on Chattel Mortgages, §§ 219 to 312; Robinson v. Elliott, 2 Wall. 513, 22 L. Ed. 758; Jones on Chattel Mortgages, § 405b; Greeley v. Winsor, 1 S. D. 618, 48 N. W. 214; Lane v. Starr, 1 S. D. 107, 45 N. W. 212; 1 Fed. Stat. Ann. § 60, pp. 672 to 677 ,and section 67, pp. 688 to 696; Asbury Park Association v. Shepherd (N. J. Ch.) 50 Atl. 65; Miller v. Shriver, 197 Pa. 191, 46 Atl. 926; Grant v. Powers Dry Goods Co., 23 S. D. 195, 121 N. W. 95.

[2] It is also contended by appellant that, under section 2085, Civil Code, providing that mortgages of personal property are void as against creditors unless filed; plaintiff’s said mortgage is void as against any and all the creditors of said mortgagor, Louden. It appears that said mortgagor has two classes of creditors: (1) Those whose debts against Louden were incurred prior to the execution of plaintiff’s mortgage; and (2) those whose debts were incurred between the time of the execution and filing of said mortgage. In one sense a mortgage, where the same is withheld from retorcí, as in this case, is void as to all the creditors of the mortgagor, • but those creditors of the first class, who became such before the existence of the mortgage, are not in a position to avoid such mortgage, unless, before the filing thereof, they have acquired a lien thereon by way of execution or attachment lev)', or otherwise; while creditors of the second class, who became such while such mortgage was being withheld from record, are in a position to avoid such mortgage at any subsequent time either before or after the filing thereof, without having acquired a lien thereon prior to such filing. As to creditors, of the first class such a mortgage is conditionally void; the condition being that the creditor must acquire some lien on the mortgaged property prior to the filing of the mortgage. Noyes v. Brace, 8 S. D. 190, 65 N. W. 1071; Jones on Chattel Mortgages, § 245; Harrison v. South Carthage Mining Co., 106 Mo. App. 32, 79 & W. 1160. As to creditors of the second class such mortgage is absolutely void, and it makes no difference whether the creditor was deceived or misled, for the statute makes no such condition, and neither does it make any difference whether or. not the mortgage was withheld from record with fraudulent intent or by agreement. It is the fact of withholding the same from record which makes void the mortgage. A creditor extending credit during the period the mortgage was withheld is as much harmed by the good-natured well-intended indolence and carelessness of the mortgagee as he would be by a fraudulent agreement not to file the same for record. Such a creditor at any subsequent time may avoid such a mortgage in any proper proceeding without having acquired a lien on the mortgaged property prior to the filling thereof. Ephraim v. Kelleher, 4 Wash. 243, 29 Pac. 385, 18 L. R. A. 604. The same construction is given to similar statutes in the states of Missouri, New York, New Jersey, Michigan, North Dakota, and California. Harrison v. South Carthage Mining Co., 95 Mo. 80, 68 S. W. 963; Id., 106 Mo. App. 32, 79 S. W. 1160; Karts v. Gane, 136 N. Y. 316, 32 N. E. 1073; Button Co. v. Speilmann, 50 N. J. Eq. 120, 24 Atl. 571; Cutler v. Steele, 85 Mich. 627, 48 N. W. 631; Hilliard v. Cagle, 46 Miss. 336; Bank v. Oium, 3 N. D. 193, 54 N. W. 1034, 44 Am. St. Rep. 533; Ruggles v. Cannedy, 127 Cal. 290, 53 Pac. 911, 59 Pac. 827, 46 L. R. A. 371; Jones on Chattel Mortgages, § 245. This is sometimes spoken of as the “New York” rule, which rule has been heretofore approved by this court. Kimball v. Kirby, 4 S. D. 152, 55 N. W. 1110; Jewett v. Sundback, 5 S. D. 111, 58 N. W. 20; Noyes v. Brace, 8 S. D. 190, 65 N. W. 1071; Pierson v. Hickey, 16 S. D. 46, 91 N. W. 339. It will be noted, however, that the courts of New York and New Jersey go further, and hold that antecedent creditors may avoid such a mortgage, al-though they' acquired no lien until after the filing, of such mortgage. We are of the view, however, that the weight of authority is otherwise in this particular. It is contended that the former decision of this court in Bank v. North, 2 S. D. 480, 5X N. W. 96, establishes a different rule; but we are of the view that that decision was controlled by the facts and issues peculiar to that case, and is not applicable to the facts of this case. The case of Noyes v. Brace, in principle, is the same as the case at bar, and this court pointed out the distinguishing differences of Bank v. North in the Noyes Case. Applying the rule to this case, it necessarily follows that all those creditors of Louden, who became such before the 1st day of March, 1913, but who had not obtained a lien of some character upon the mortgaged property 'before the filing of said mortgage, have no- rights prior or superior to plaintiff’s mortgage, while all the debts and claims of those creditors' incurred during the time said mortgage was being withheld from record should be prior and take precedence over plaintiff’s mortgage, as such mortgage is void as to the indebtedness owned by such creditors.

[3] It also, appears that on. the 1st day of March, 1913, Louden also gave a second chattel mortgage, to Hoy & Mc-Closky, covering the same stock of merchandise, and which mortgage is not a concurrent lien, but was by its terms made subject or inferior to plaintiff’s mortgage, by referring thereto as a prior mortgage, and which second mortgage- was filed March 6, 1913, the lien of which second mortgage is also junior, to the extent of the amount of the first mortgage, as to the indebtedness incurred by said mortgagor to the subsequent creditors while the said first mortgage was withheld from record, on the ground that the lien of this second mortgage, which by its terms is subject to the first mortgage, only covers the equity of the mortgagor in the mortgaged property remaining after the satisfaction of the first mortgage, and for the reason that, under the circumstances of this case, the second mortgage owned -by Hoy & McClosky would not become a first mortgage lien upon the displacement by or becoming void of the first mortgage as to subsequent creditors. The second mortgagees should not in. equity be placed in any better or more favorable position, by the failure to file the first mortgage, than, they would have been in, had the first mortgage been timely filed. A second or junior mortgage only creates a lien on the mortgagor’s equity remaining after the satisfaction of the first mortgage. Anderson v. Oskamp, 10 Ind. App. 166, 37 N. E. 1055; Old National Bank v. Heckman, 148 Ind. 490, 47 N. E. 953; Tolbert v. Horton, 31 Minn. 518, 18 N. W. 647; Id., 33 Minn. 104, 22 N. W. 126; Perrine v. Bank, 55 N. J. Law, 402, 27 Atl. 640; Hibbard Co. v. Cribb, 80 Wis. 398, 49 N. W. 823, 15 L. R. A. 768; Arnold v. Stock, 81 Ill. 407; 25 Cyc. 678; 20 Am. & Eng. Ency. p. 1022; Cobby, Chattel Mortgages, § 1039; Lyons v. Archer, 32 S. D. 314, 143 N. W. 286. The rights of the subsequent creditors, to the extent of their claims, have 'displaced the rights of plaintiff under his mortgage. Both mortgages are prior to the rights of general creditors who have no intervening equities.

[4] If plaintiff’s mortgage had been timely filed, the priorities and claims of the respective parties in and to said merchandise, or the proceeds thereof, at the commencement of this action, would, approximately, have been as follows:

(1) The claim of $1,760, and interest, the balance then unpaid on plaintiff’s mortgage.

(2) The claim of $1,062, and interest, the balance then unpaid on the second mortgage to Hoy & Mc’Closky.

(3) The claim of $750, personal exemption to Louden as a debtor under the statute.

(4) The claims of general creditors to the amount of about $1,800.

(5) The surplus, if any, belong to Louden after the payment of all debts.

It will be noted that ,if plaintiff had timely filed his mortgage, then those creditors whom we term “subsequent creditors” —that is, those whose claims accrued between March 1 and July 26, 1913 — would have been included in the class of general creditors. The claims of these ' subsequent creditors represent about $1,200 of the $1,800 referred to in the foregoing “No. 4.” It will also be noted that there was about $2,800 incumbrances, secured by mortgages, ahead of Louden’s claim for exemptions, and about $3,550 ahead of the claim of general creditors. Now, under the view heretofore expressed, what was the effect of plaintiff’s withholding his mortgage from record? Simply this: To substitute such subsequent creditors to the extent of their claims, not exceeding the amount of the first mortgage, in place of plaintiff, and to relegate plaintiff Jo the extent of a like amount back into the class of general creditors ir the place occupied by such subsequent creditors. This is the only equitable and just adjustment of priorities that will preserve the rights, of all the other interested parties. Neither the rights of the second mortgagees, the right of Louden to exemption, nor the rights of general creditors should have been or were affected by plaintiff’s failure to file his mortgage. When the claims of the subsequent creditors shall have been satisfied, cut of the property or proceeds covered 'by plaintiff’s mortgage, which otherwise would have gone to plaintiff had he timely filed his mortgage, as against these other interested parties, that would amount pro tanto to an extinction of the mortgage lien; but would not extinguish, pro tanto the debt due plaintiff secured by such mortgage, but would leave him with the remainder of such debt in the status of a general creditor. As against the second mortgagees, the Louden exemption, and general creditors, the prior incumbrances on the property could not be increased.

It therefore necessarily follows:

• (i) That the subsequent creditors, whose claims accrued during the time plaintiff’s mortgage was withheld from record, have the first right or priority to the extent of their claims.

(2) That plaintiff has the second right or priority for the balance remaining of said mortgage debt after the payment of said subsequent creditors.

(3) That Hoy & McClosky have the third right or priority immediately after the amount necessary to extinguish plaintiff’s mortgage.

(4) That Louden has the fourth priority to the extent of his exemption; but in this connection, however, if it should occur that the proceeds remaining after the extinction of the first mortgage are insufficient to satisfy the Hoy & McClosky mortgage, then such second mortgage would be entitled to apply the mortgagor’s said exemption to the satisfaction of such balance, or such portion of such exemption as may be necessary to satisfy the second mortgage in full.

(5) The .general ceixlitors, including plaintiff, to the amount of his mortgage taken by subsequent creditors, have the next and fifth, priority.

[5] It is contended that, by reason of a confusion of property, plaintiff’s mortgage lien has been destroyed as against creditors. It appears that after the giving' of said mortgages the mortgagor acquired other goods and merchandise, and intermingled the same with the mortgaged stock, and that he also indiscriminately made sales at retail from the whole stock, and that when plaintiff. took possession for the purpose of foreclosure 'be also took possession of whatever then remained of the after-acquired goods. At the time plaintiff took possession, the after-acquired merchandise might have substantially been separated fiom the mortgaged portions. Plaintiff was required, by order of court,’ to foreclose his mortgage by action. After the commencement of the foreclosure action, by amicable arrangement between plaintiff and the creditors, a receiver was appointed to' take possession of and sell and convert said stock of goods into money, and which arrangement had been partially carried out prior to' the taking of possession by the trustee in bankruptcy. The receiver sold a large portion of said stock, and in his making of. sales no attention to or account was kept of the after-acquired part of the stock, and at this time the identity of the substantial part of the after-acquired part of the stock has been completely lost, and that at this time the amount of such after-acquired goods would be but a mere guess. It does not appear that this situation of affairs came about by reason of any willful or negligent acts on the part of plaintiff, but that the other parties in interest in this action were as much at fault in that particular as plaintiff; and we are therefore of the view that -the rule as to the confusion of mortgaged property is not applicable.

The .judgment appealed from should be modified to conform to the views herein expressed, and, as modified, is affirmed, and costs should not be assessed by or against either party.