Opinion
10-11-1901
ASBURT PARK BUILDING & LOAN ASS'N v. SHEPHERD et al.
Frank Durand, for complainant. Flavel McGee, for defendant John E. Lanning. Samuel C. Cowart, for defendant Charles L. Shepherd.
Suit by the Asbury Park Building & Loan Association against James H. Shepherd and others. Decree for complainant.
Frank Durand, for complainant. Flavel McGee, for defendant John E.
Lanning. Samuel C. Cowart, for defendant Charles L. Shepherd.
STEVENS, V. C. Two suits to foreclose mortgages on separate properties have been instituted by complainant. Similar questions are presented in each suit, and they will be considered together. The complainant is a building and loan association. It holds four mortgages made to it by James H. Shepherd on his residence, and five mortgages on his business property in Asbury Park. The first of these mortgages was given in 1889, and the last two on October 20, 1899. Charles L. Shepherd, a brother of James, holds a mortgage made and delivered by James on September 3, 1898, but not recorded until November 4, 1899. The Asbury Park & Ocean Grove Bank holds a mortgage dated on December 19, 1898, and recorded on December 28, 1898. On March 5, 1900, James H. Shepherd was adjudicated a bankrupt by the district court of the United Statesfor the district of New Jersey, and on April 9, 1900, John E. Lanning was appointed trustee in bankruptcy. The petition in bankruptcy was filed in February,—less than four months after the last two mortgages made to complainant were given, and less than four months after the mortgage made to Charles L. Shepherd was recorded. On this state of facts the following claims are made: The building and loan association claims that all its mortgages are first in order of priority. Charles L. Shepherd claims that the two mortgages given to the building and loan association in October, 1899, are subsequent in priority to his mortgage, because taken with notice, and that the bank mortgage is subsequent for the same reason. The trustee in bankruptcy claims that the two mortgages given to the building and loan association in October, 1899, are voidable, because given by way of preference within four months before the filing of the bankruptcy petition; and he further claims that Charles L. Shepherd's mortgage is voidable (1) because given by way of preference, and recorded within four months before the filing of the petition; and (2) because given with intent to hinder and delay creditors. I will briefly state my conclusions on these different claims.
1. I think that the mortgages given to the building and loan association are first in order of priority. It appears that in October, 1899, James H. Shepherd, being behind in the payment of interest and dues, proposed to the association that it should make him an additional loan of $11,000, of which $5,731.68 would cover arrearages of interest, dues, and fines on all the mortgages held by the association; $2,100, a prior mortgage held by a stranger; $654, dues and interest to accrue to February, 1900; $1,248, dues and interest to accrue to February, 1901, on the seventeenth series of stock and on the mortgage in connection with which that stock was pledged; and the balance, premium and expenses. This proposition was accepted, and the money lent was, part of it, paid in cash, and part of it applied in the manner above stated. At no time in the progress of this transaction did the association have any notice of the existence of the Charles L. Shepherd mortgage. It is not, however, pretended that the notice was actually given at the time. The proof is that about a year prior thereto Mr. Winsor, who was secretary of the association, had had, in his character of president of the Asbury Park & Ocean Grove Bank, an interview with Charles L. Shepherd, in which the existence of the mortgage was made known to him. The proof is further that the loan was approved by the board of directors, of which Mr. Winsor was one; for the minutes show that he voted at the directors' meeting in favor of the loan. Mr. Winsor's only connection with the loan was this vote, and his attestation of the president's order for payment. But it is not shown that the interview had with Charles L. Shepherd in the preceding year was present to Winsor's mind either when he voted or when he attested the order; much less that he communicated what he had heard to any officer or director of the loan association. If the question how far notice to a single director binds the corporation be in doubt, see Thomp. Corp. § 5221; Bank v. Christopher, 40 N. J. Law, 435, 29 Am. Rep. 262. There is no doubt whatever that, where the information, acquired in the course of a previous transaction to which the corporation is a stranger, is not present to the director's mind, it does not affect the company. Hence it must be held in this case that the association is not affected with notice.
2. Mr. Winsor, when the bank mortgage was made, did have notice as its president of the existence of the Charles L. Shepherd mortgage, and consequently the latter has priority over the former, unless it appears that there was an agreement between the bank and Shepherd to the contrary. I think the evidence falls short of showing an agreement. The verbal understanding testified to by Mr. Winsor, and denied by both the Shepherds, is "that, provided the notes that he [Charles L. Shepherd] was indorser on were paid he allowed our mortgage to go on record before his." This, if proved, is, in terms, only an agreement that one mortgage may be recorded before the other; not that the mortgage prior in time is to be postponed. Both Winsor and James H. Shepherd seem to have thought that the bank mortgage was necessarily first in order of priority because first recorded, and such also, at some subsequent period, seems to have been the idea of Charles L. Shepherd; but I fail to find in the evidence any definite agreement of postponement such as the law could enforce.
3. The trustee in bankruptcy claims that the two mortgages given to the building and loan association in October, 1899, are voidable, because given by way of preference within four months before the filing of the petition. It is settled law that a mere exchange of securities within the four months is not a preference, within the meaning of the bankrupt law; the reason being that the exchange takes nothing from the other creditors. Sawyer v. Turpin, 91 U. S. 120, 23 L. Ed. 235; Stewart v. Platt, 101 U. S. 742, 25 L. Ed. 816. Section 67d of the bankrupt act provides that liens given or accepted in good faith, and not in contemplation of or in fraud upon the act, and for a present consideration, which have been recorded according to law, shall not be affected by it. Now, the consideration of the new mortgages was paid partly in cash. To that extent they were given for a present consideration. The rest of the consideration was applied to pay debts secured by the old mortgages. The new ones covered the same property that the old ones covered.No additional property was included in the latter, or withdrawn from the other creditors. The transaction is therefore unimpeachable. If, however, the case were otherwise, and it appeared that some unlawful element in the transaction avoided it as to the trustee in bankruptcy, the effect would be merely that the new mortgages would stand as security for the cash actually paid, and the old mortgages would be revived as to the entire debt which they secured. Burnhisel v. Firman, 22 Wall. 176, 22 L. Ed. 766. Mr. Winsor's evidence is that the debt, as computed under the new mortgages, would be about the same as that computed under the old ones.
4. The trustee's next contention is that the Charles L. Shepherd mortgage is voidable because given by way of preference, and recorded within four months before the filing of the petition. The statutory language (section 60b) is that incumbrances of the class mentioned "given" within the four months shall be voidable; but the argument is that, because the petition to have the debtor adjudicated a bankrupt may, under section 3b, be filed within four months after the date of recording them, therefore the court should, by construction, read the word "recording" into section 60; or, at all events, declare that "given" means (inter alia) "recorded." I am quite unable to agree to this. It seems to me that section 60 is perfectly clear and unambiguous. Giving a mortgage is quite a different thing from recording it, and congress itself recognized the difference when it put the word "given" in the one section and omitted it in the other. It may seem, at first blush, a little Incongruous to make that a ground for adjudicating a man bankrupt which is not a ground for setting aside the transfer which is the foundation of the adjudication. But this apparent incongruity disappears when we consider that congress may well have thought it proper to give creditors an opportunity to investigate the bankrupt affairs by putting into operation the machinery of the act, when it is proved that the preferred creditor has done such a suspicious thing as to keep his transfer off the record, while it was unwilling to go the length of setting it aside if shown to be otherwise unobjectionable. The other property of the bankrupt, mortgaged or untransferred, would still be subject to distribution under the law. Be this as it may, the words of section 60 are unambiguous, and it is not within the province of the court to add to them,—to go further than congress has gone. The rule of the common law is that an insolvent may prefer his creditors, and this rule still prevails, except in so far as the federal legislature has seen fit to alter it. Coll. Bankr. p. 309 et seq.
5. The next question is one of state law. Was the mortgage given by James H. Shepherd to his brother, Charles, made with intent to hinder and delay creditors? After a careful consideration of the evidence, I am unable to say that it was. There is no proof that James H. Shepherd was insolvent when he made it. There is no proof that Charles L. Shepherd supposed, or had reasonable cause to believe, that he was. He was a retail merchant doing business in Asbury Park. In the course of this business he borrowed from the bank on paper indorsed by his brother. He secured this brother by a mortgage on his real estate. At the time it was made, he requested his brother not to record it. This happened a year and a half before he was declared bankrupt. There was no agreement on his brother's part not to record it; but it was, at his request, withheld from the record for over a year, and it was not recorded until his brother found that he had made the additional mortgages to the savings institution. The evidence is that during that time James had been representing to his brother and to others that his monthly payments to the building and loan association were gradually reducing the principal of his debt. I can find in the case no circumstances or fact affecting Charles L. Shepherd from which an inference of fraud may be drawn which did not exist in the two cases of Bank v. Jones, 50 N. J. Eq. 244, 24 Atl. 928, on appeal Lake v. Bank, 50 N. J. Eq. 486, 27 Atl. 636, and Andrus v. Burke (N. J. Ch.) 48 Atl. 228. It was sought to distinguish the case in hand from that of Bank v. Jones in the circumstance that there the mortgagor was the president of a bank, engaged in no other business, while here he was a merchant. But the opinion approved on appeal does not warrant such a distinction, and the subsequent case of Andrus v. Burke, where the debtor was a contractor, shows that it is without controlling force. It did not prevail in Folsom v. Clemence, 111 Mass. 273, and in Stewart v. Hopkins, 30 Ohio St 502.