MARCHE v. JOHNSON

MARCHE v. JOHNSON. Fraudulent Transfers; Deeds of Trust; Questions of fact. 1. Where insolvent traders, to secure a debt due the wife of one of them, give and record a chattel deed of trust on their store fixtures, license, lease, and other stock in trade on their premises, and to be placed thereon, reserving the right to retain possession until default, and the debt mentioned in the deed in trust is greater than that actually owed, and the grantors thereafter sell part of the stock in trade, but do not apply the proceeds of sale to the reduction of the debt or to the payment of their other creditors,—the deed of trust is not fraudulent as matter of law, but the question as to whether it is a fraud upon creditors is one of fact for the jury. (Citing see. 1120, D. C. Code [31 Stat. at D. 1368, chap. 854], providing that, in fraudulent conveyances, “the question of fraudulent intent shall be deemed a question of fact, and not of law.”) 2. Sec. 1120, D. C. Code, providing that the question of intent in fraudulent conveyances shall be deemed a question of fact, and not of law, does not deprive the courts of the right to declare an instrument to be fraudulent in every case that may come before them. No. 2252. Submitted February 10, 1911. Decided April 3, 1911. Hearing on an appeal by the defendant from a judgment of the Supreme Court of the District of Columbia, on verdict, on an issue made by a claim of title to property seized under a writ of attachment. Affirmed. the Court in the opinion stated the facts as follows: M. Marche & Company began an action in the municipal court to recover a debt of McDonald & Stone, and sued out a writ of attachment that was levied upon certain goods and chattels in a barroom and restaurant conducted by the defendants. the goods were sold, and the sum realized therefrom ¡($106.35) was claimed by Hayden Johnson and Thomas H. Patterson, trustees, in a claim proceeding authorized by the Code. Claimants offered in evidence a chattel mortgage executed by McDonald & Stone on June 30th, 1909, to said trustees, to secure the payment of twenty-five notes for $100 each, payable to Alida V. Stone; the first, three months after date, and one each month thereafter. The instrument conveyed all the furniture and fixtures in said restaurant and barroom, the barroom license, the lease of the building, and all stock in trade, including wines, liquors, brandies, cordials, etc., now located upon said premises or subsequently to be placed therein by said firm. The trust is upon the following terms: “In trust to suffer and permit the parties of the first part to retain possession of the said goods and chattels and personal property until the same shall and may be required, as hereinafter provided. And upon this further trust, upon default being made in the payment of said notes or either of them, or of any interest thereon when due, or any proper cost, charge, or expense in and about the same, then and at any time thereafter to take immediate possession of said goods and chattels and personal property, wheresoever the same may be found, and to sell the same at public auction upon such terms and after such public notice as the said parties of the second part, or the survivor of them, acting in the execution of this trust, shall deem advantageous and proper; and of the proceeds of sale or sales, first, to pay all proper costs, charges, and expenses, including a commission of 5 pereentum on amount of said sale to said trustees for services; second, to pay whatever then remains unpaid of said notes, whether the same be due or not, and thereafter to pay the surplus, if any, to whomsoever shall be lawfully entitled to the same. And upon this further trust, at any time hereafter, whether the said note shall be due or not, upon the security hereby given being in any wise endangered in the opinion of the said parties of the second part, or the survivor of them, by the removal of said goods and chattels, and personal property, and any of them, without the written consent of the said party of the second part or the survivor of them, or by the nonpayment of the rent of the premises where said goods and chattels may be placed, stored, or deposited, or by the rendering of a judgment or decree for the payment of money against said parties of the first part, or if said parties of the first part shall not keep the same insured in some good and reliable company against loss by fire to the extent of — dollars and assign the same to the use of said parties of the second part, or the survivor of them, for the more effectual securing of the payment of said indebtedness, or if the same shall become endangered in any other 'manner in the opinion of the said parties of the second part, or the survivor of them, then and thereafter, upon the written order of the holders of said notes, or either of them, to take possession of said goods and chattels and personal property, and sell the same, and dispose of the proceeds thereof, in the manner hereinbefore provided, as though default had been made in the payment of said notes.” The instrument was recorded July 8th, 1909. John W. Stone, on behalf of the claimants, testified as follows : That he was a member of the firm of Stone & McDonald, whose goods and chattels, as hereinbefore set forth, had been attached by the defendants herein; that he was the person who, with Thomas A. McDonald, executed the indenture or deed of trust hereinbefore set forth unto Hayden Johnson and Thomas H. Patterson, to secure one Alida Y. Stone; that the said Alida Y. Stone is his wife; that the said firm never received the full sum of $2,500 recited in the said deed of trust to have been paid in hand by the said Alida Y. Stone; that the sum of $1,100 had been received from Alida Y. Stone by the ■firm of Stone & McDonald, and that the said Alida V. Stone promised verbally to put up or advance the remaining sum of $1,400 to the said firm at some future date; that the goods attached were purchased and in the possession of the firm at the time the deed was executed; that at the time the attachments were made by the defendants herein, the place of business of said firm was closed up; that there had been a partnership disagreement between himself and McDonald, the other member of the firm; that he was endeavoring to force the said McDonald out of the business; that the business had only been in existence about two months when it was closed up; that a key to the said place of business was, at the time of the attachment, in the hands of Hayden Johnson, one of the plaintiffs herein. Upon cross-examination by counsel for the defendants the said John W. Stone testified further that at the time the attachments hereinbefore referred to were made by the defendants herein, that the said defendants were bona fide creditors of the firm of Stone & McDonald; that the firm of Stone & McDonald, after the execution and recording of the said deed of trust hereinbefore set forth, and while in the possession of the goods, merchandise, stock in trade intended to be secured thereby, made absolute sales thereof in the.ordinary course of business, and applied the proceeds thereof to their own personal use; that the firm made purchases of certain articles of trade after the execution of the deed of trust; that the firm of Stone & McDonald was insolvent at the time the said deed of trust was executed; that the said deed of trust had not been executed at the time the defendants herein became creditors of the said firm. At the conclusion of the claimants’ evidence, the defendants Marche & Company moved the court to direct a verdict for them, on the ground that the evidence was not sufficient to entitle claimants to recover, and that the said deed of trust is void as to the attaching creditors. The motion was overruled. Defendants offered no testimony. One prayer for the defendants was that the jury be instructed to return a verdict for them. This was denied, as well also four other prayers. These latter need not be given, as it is not seriously contended that their refusal was error. The court then charged the jury as follows: That they were to determine from all the facts in the case whether or not the deed of trust relied upon by the plaintiff was given by the said Stone & McDonald in good faith, or for the purpose of defrauding their other creditors; that in deciding this question the jury should take into consideration all the facts connected with the execution of the said deed; that they might consider in this connection that the deed of trust was given to secure the wife of one of the members of the firm; that only a part of the money professed to be secured by the deed of trust had been actually advanced by the beneficiary therein; that the grantors in the said deed of trust were insolvent at the time the same was given; that the instrument was not recorded until eight or nine days after the execution; that the proceeds of the sale of the chattels mentioned in said deed of trust were not applied, after the execution of said instrument, to the payment of the indebtedness thereby secured, nor to the payment of other creditors to whom they were indebted, the firm being in an insolvent condition; that if the jury find from these facts, as well as from the other facts in the case, that the said deed of trust was not given in good faith by the said Stone & McDonald to secure a bona fide indebtedness, but was given by them for the purpose of defrauding their other creditors, then the said trust would be void in law, and their verdict should be for the defendants. The jury found for the claimants, and from the judgment thereon, defendants have appealed. Mr. Louis L. Hamby and Mr. Leon Pretzfelder for the appellants. Mr, Hayden Johnson and Mr. Thomas H. Patterson for the appellees. [MAJORITY — Mr. Chief Justice Shepard] Mr. Chief Justice Shepard delivered the opinion of the Court: The charge of the court in submitting the question of the intent to defraud creditors by the execution of the chattel mortgage directs the attention of the jury to every fact and circumstance from which an intent to defraud creditors can be inferred, and the only objection to it is, that it submitted the question of fraud to the jury. The contention is that the instrument, by its terms, and in connection with the evidence concerning the possession and use of the stock in trade, constitutes a fraud upon creditors as matter of law; wherefore the court erred in refusing to direct a verdict for the attaching creditors. The validity of chattel mortgages upon merchandise where the mortgagors remain in possession, and sell and replenish the mortgaged stock in the ordinary course of business, has been the subject of much discussion, resulting in a conflict of decisions. The only statutory limitations upon chattel mortgages in this District is that they shall be recorded. That requirement was complied within this instance. The contention is that it is the settled law of this jurisdiction that mortgages of the character of that in question here are void as to prior creditors as matter of law, and the following cases are cited in support of the proposition. Selling v. Kimmell, 6 D. C. 273; Smith v. Kenney, 1 Mackey, 12; Robinson v. Elliott, 22 Wall. 513, 22 L. ed. 758. In Selling v. Kimmell, decided by the general term of the District supreme court in 1868, a retail jeweler gave a chattel mortgage upon his stock of merchandise to secure a note for $2,000, payable five years after date. The conveyance was in trust to suffer and permit the mortgagor to retain possession of, use, and enjoy said goods, wares, and merchandise until default made in the payment of said note, or until one quarter’s rent of the premises containing said goods, or of other premises to which they might be removed, should become due, and remain unpaid for ninety days, or should any judgment be suffered to be recovered, and execution thereon levied on said goods; and in either of these events the trustee was to take possession, make sale, etc. A judgment was recovered against the mortgagor, and the goods were seized under execution thereon. On a trial of the right of property in the special term, the court submitted the question of fraud in the transaction to the jury, who found for the claimant. The motion for new trial came before the general term on exceptions taken to the refusal of the trial court to declare the chattel mortgage fraudulent in law. The exceptions were sustained. The instrument was declared void upon two grounds: first, because of the reservation of the right of the mortgagor not only to retain possession of the goods, but to use and enjoy the same; second, because there was no description of the articles conveyed by which they could be identified. ' It was this express reservation of the right to use and enjoy the property during the five years, unless levied upon in the meantime by judgment creditors, or liable to distress for rent, that determined the judgment of the court. Mr. Justice Wylie, who delivered the opinion of the court, declared that one might ■encumber his personal property and remain in possession of it if the deed be recorded. “But,” he said, “he cannot do two things which are inconsistent one with the other. He cannot make a deed of trust which will leave him in possession, and with the same powers to manage, ‘use, and enjoy’ the property as though it were his own. If the deed of trust confer •these rights upon him, they are rights which belong only to an .absolute owner, and property so held is responsible to his creditors as though he held it absolutely; and the deed is void on its face. To constitute a valid deed of trust of personal property-to secure a debt, it must look alone to that object. If It contain provisions intended to enable the maker of it to secure the use and enjoyment of the property for himself, and ’by means thereof plainly tends to defraud, hinder, or delay ■other creditors, the deed is void, and it is the duty of the ■court to decide the.question for itself, and-not to leave it to the uncertain arbitrament of a jury.” The foregoing was a declaration of the law then, and is ■doubtless sound to-day. But there is a marked difference between the instrument to which it was applied, and the one Involved here. The next case (Smith v. Kenney) was a suit in equity to set aside a deed of trust as a fraud upon creditors. The instrument was quite like the one under consideration, .and the question of its validity was before the court on both the law and the facts. Mr. Justice Wylie, who again delivered •the opinion of the court, said of the provision that the mortgagor should retain possession of and use the said goods and ■chattels: “We think that the word ‘use’ was probably retained in the printed form of the deed, and that nothing was really intended by it, further than to allow the grantor to remain in the occupancy of the premises, and take care of and use the property, subject to the rights of the trustee, because the trustee had the power to follow the goods into anybody’s hands. And it is further provided that in case Kenney should be found removing them, the trustee has power to take immediate possession.” The instrument was declared fraudulent because the evidence showed that part of the indebtedness secured was ■fictitious, and its inclusion was for the benefit of the grantor. In Robinson v. Elliott (arising in Indiana), the mortgage held to be fraudulent in law differed from the present one, and, as said in the later case of Etheridge v. Sperry, 139 U. S. 266-273, 35 L. ed. 171-175, 11 Sup. Ct. Rep. 565: “It was not intended by that decision to hold that a chattel mortgage was void because it provided for a retention of possession by the mortgagor, and a sale by him.” In Etheridge v. Sperry the terms of the mortgage were quite similar to the terms of this, and the evidence regarding sales by the mortgagor ^and the uses of the receipts was substantially the same. The trial court refused an instruction that the instrument was fraudulent in law, and submitted the question of fraudulent intent to the jury. This was upheld as correct. It is ■objected to the controlling effect of that decision that it was necessarily determined by the law as declared by the ■ court of last resort in the State of Iowa, wherein the case arose. It is true that it was held that the decision must follow the law as so declared, but the court expressly approved the Iowa decision as sound in principle. After giving reasons for this view, Mr. Justice Brewer, who delivered the ■opinion of the court, said: “So, if the question were open, •or a new one, unaffected by any settled law of the State, we incline to the opinion that the question is not one of law, so much as it is one of fact and good faith; and that the decision of the supreme court of Iowa rests on sound principles.” In a later case in which the general doctrine of Etheridge v. Sperry was referred to with approval, it was said: “The tendency of courts in modern times has been not to hold instruments of this character to be fraudulent and void upon-their face, unless they contain provisions plainly inconsistent, with an honest purpose, or the instrument indicates with reasonable certainty that it was executed, not to secure bona fidecreditors, but to enable the debtor to continue to carry on his-business under cover of another’s name.” Huntley v. Kingman & Co. 152 U. S. 527-532, 38 L. ed. 540-542, 14 Sup. Ct. Rep. 688. The learned trial justice was evidently governed by the-views expressed in Etheridge v. Sperry, in submitting the question of fraud to the determination of the jury. It is to be noted that the mortgage in question covered also-the furniture and fixtures of the establishment that were kept for use, and not for sale, as well as the stock in trade. Nor does the record show what proportion of the fund claimed was realized from the sale of these, or what proportion from the-sale of merchandise. The modern tendency, referred to above, is manifested in. the section of the Code applying to fraudulent conveyances, in the proviso: “That the question of fraudulent intent shall be- deemed a question of fact, and not of law.” Code, sec. 1120 [31 Stat. at L. 1368, chap. 854]: By the reference to this provision of the Code, we are not to be understood as saying that the Congress could deprive the courts of the right to declare-an instrument to be fraudulent in law in every case that may come before them. We think there was no error in refusing the. appellants’ request, and the judgment will therefore be affirmed with costs. Affirmed.