Fred F. Pfeiffer, as Sole Trustee of the Estate of James W. Hennessy, a Bankrupt, Appellant, v. John M. Roe, Respondent

Fred F. Pfeiffer, as Sole Trustee of the Estate of James W. Hennessy, a Bankrupt, Appellant, v. John M. Roe, Respondent. Purchase-money chattel mortgage containing a provision that the purchase price of any chattel sold he paid to the mortgagee—when fraudulent as to the purchasei ”s .creditors — when a creditor or the trustee in bankruptcy may sue — action at law to recover the property from the mortgagee. Where, upon the sale of a. stock of goods, the possession thereof is delivered to the vendee, who executes to the vendor a purchase-money mortgage empowering the vendee to make sales from such stock of goods and requiring the vendee to pay over to the vendor, not the amount realized from the' goods sold, but simply the purchase price (as between the mortgagee and mortgagor) of each item of the goods so sold as set forth in an inventory taken at the time of the sale, which inventory was not embraced in or filed with the chattel mortgage, such chattel mortgage is void as to the vendee’s creditors. Creditors of the vendee, whose claims were in existence at the time of the execution of the chattel mortgage, may, in the event of the vendor’s taking possession of the mortgaged property and selling the same, compel the latter to account for the value of the mortgaged property, although at the time the mortgagee took possession the creditors were not in a position to enforce their claims, and irrespective of whether or not the vendor was adjudged to have ■ been insolvent at the time of the execution of the mortgage. A trusteb in bankruptcy of the vendee succeeds to the rights of the latter’s creditors, and where an action is brought against the mortgagee to recover the value of the mortgaged property, and is tried by stipulation of the parties before the court without a jury, it is not a good ground of objection, on an appeal from a judgment in favor of the trustee in bankruptcy, that the action. was not brought in equity. Chester and Houghton, JJ., dissented. Appeal by the plaintiff, Fred F. Pfeiffer, as sole trustee of the estate of James W. Hennessy, a bankrupt, from a judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of Schuyler on the 18th day of July, 1904, upon the decision of the court, rendered after a trial at the Schuyler Special Term, dismissing the plaintiff’s complaint. The plaintiff is the trustee in bankruptcy of one James W. Hennessy. The action is to recover the value of certain personal property taken by the defendant from James W. Hennessy a short time before the filing of the petition in bankruptcy under two chattel mortgages given by the said Hennessy to the defendant. Plaintiff claims the right to recover the value of a part of this property on the ground that it was transferred as a preference within four months of the filing of the petition in bankruptcy and claims to recover the value of the whole thereof upon the ground that-the mortgages under which the property was taken by the defendant were fraudulent and void as to the creditors of the bankrupt to whose rights the plaintiff has succeeded. Upon the 8tli of February, 1900, James W. Hennessy purchased of the defendant a stock of shoes. At the time of this purchase an inventory of said stock was made and the price at which each article was transferred was set down in the inventory opposite the said article. Hennessy gave back to the plaintiff a chattel mortgage in which he acknowledged an indebtedness of $2,680.54, “ being for the purchase price of the stock of boots, shoes, rubber goods,” etc., as shown by the inventory of said stock taken by said parties February 7, 1900. For securing the payment of said debt'all the said goods were sold, assigned and transferred to the defendant. In the chattel mortgage was found this provisión: “ During the first year from the date hereof the said Hennessy is to pay to the said Roe the purchase price of each item of said stock shown b/,said inventory as fast as the same shall be sold by him, accounting to the said Roe daily therefor, and the amount of each month’s sales shall at the end of each month be deducted from the amount of the principal sum unpaid. During the second year from the date hereof the said Hennessy is to pay to said Roe the purchase price of each item of stock as fast as the same shall be sold by him as above mentioned, and at the end/ of each month pay enough in addition thereto to make ten per cent, of the whole amount of the principal sum unpaid.” The mortgage contained the usual safety clause and the usual power óf sale in casé of default. Up to January 25, 1901, about $1,000 had been paid upon the purchase price of said property. Further property -had been purchased and placed in stock. At that date the defendant took from the said Hennessy another, chattel mortgage covering the property in said store not included in the first mortgage. This second chattel mortgage was similar in form to the first mortgage, giving, authority to the mortgagor to sell the property and account to the mortgagee for the purchase price thereof. Upon January thirty-first the defendant took possession of the goods under his two chattel mortgages and sold the' same thereunder. The property under the first chattel mortgage was sold for $900 and-under the second chattel mortgage for $300. Upon February fifth thereafter a petition was filed by~a creditor of . Hennessy that he be declared a bankrupt. Thereafter the said Hennessy was declared a bankrupt by the District Court of the United States, and this plaintiff was appointed his trustee in bankruptcy and has duly qualified as such. This action was thereupon brought to recover from the defendant the value of the goods taken ■ by him under these chattel mortgages. By stipulation of the parties the action was tried before the court without a jury. Plaintiff’s complaint was dismissed and judgment entered accordingly. The plaintiff has here appealed. James O. Sebring, for the appellant. O. P. Hurd and John M. Roe, for the respondent. [MAJORITY — Smith, J.:] Smith, J.: These mortgages were fraudulent as to creditors. In Brackett v. Harvey (91 N. Y. 214) the head note in part reads: “ A chattel mortgage is not rendered void, as to creditors of the mortgagor by a provision authorizing him to sell the mortgaged property and apply the proceeds of sales toward the payment of the mortgage debt. * * * But an agreement,. although outside of the mortgage and oral simply, that the mortgagor may use a portion of the proceeds of .sales for his own benefit, avoids the' mortgage.” In the case at bar the authority -was given to sell and the mortgagor was required to account to the mortgagee only for a part of the'sale price, to wit, such. part thereof as represented the purchase price at' which the property was sold by the mortgagee to the mortgagor. If that purchase price had been named in the mortgage, the mortgage might well be deemed to have been one upon the specific articles to the extent only of the purchase price. That purchase price, however, nowhere appears in the mortgage and is only found in an 'inventory which is not attached to the mortgage or filed therewith, and which is accessible to the mortgagor and mortgagee only. Such a mortgage would have in it every vice which inheres in a mortgage giving authority to sell without accounting to the mortgagee for any part of the proceeds of the sale. It is a mere cover of property which is being sold in general trade obnoxious to every principle . of fair dealing with creditors. These mortgages being void, existing creditors had the right to compel the mortgagee to account for the value of the property taken thereunder, and this although the property was taken thereunder by the mortgagee before the creditors were in position- to enforce their claims. (Mandeville v. Avery, 124 N. Y. 376; Stephens v. Perrine, 143 id. 476.) . This plaintiff, as trustee in bankruptcy, succeeds under the letter of’the statute to the rights of these creditors. In subdivision e of section 70 of the Bankruptcy Law (30 IT. S. Stat. at Large, 666) it is provided: “ The trustee may avoid any transfer by the bankrupt of his property which any creditor of such bankrupt might have avoided, and may recover the property so transferred, or its value, from the person to whom it was transferred unless he was a bona fide holder for value prior to the date of the adjudication. Such property may be recovered or its value collected from whoever may have received it except a bona fide holder for value.” In this view of the ease it matters little whether the adjudication of bankruptcy established the insolvency of the bankrupt prior to the date of the petition or whether the defendant be bound thereby. The fact that the plaintiff is the legal trustee of the bankrupt is not here questioned, and the right of the trustee to recover the value of this property does not rest upon the fact of insolvency at the time of the giving of these mortgages. But the learned judge at Special Term has dismissed this complaint apparently upon the theory that the action was not proper in form: He has cited the case of Houghton v. Stiner (92 App. Div. 171) as holding that an action at láw was not maintainable to recover the value of this property and has apparently for this reason in part dismissed this complaint. , In that; case an action in equity was brought to recover certain 'property transferred by a bankrupt to a creditor Within four months of the filing of the petition in bankruptcy as an illegal intended, preference. The complaint was demurred to upon the ground that the plaintiff had an adequate remedy at law.. All that was there held was that plaintiff might proceed in equity and that ".the complaint stated a good cause of action. ■ In the complaint in the case at bar the facts are fully stated,. -The relief asked for is that authorized by the statute: The case was tried before the judge Without a jury upon stipulation of the parties: If upon the pleadings and proof, therefore,/the plaintiff was entitled to any relief, we are unable to find anything in the authority, cited by the learned judge at Special Term which would forbid the granting of such relief. Upon the proofs, then, we are of the opinion that the plaintiff has established, a cause of action, and that the judgment dismissing his complaint was erroneous and should be reversed. , All concurred, except Chester .and Houghton, JJ., dissenting. ■ judgment reversed upon law and facts and new trial granted, with costs to appellant to abide event.