Opinion
Decided December 29, 1933.
Insolvent debtors — Action to set aside conveyance in fraud of creditors — Sections 11104 and 11105, General Code — Knowledge of fraudulent intent, material — Mortgagee not chargeable with notice of mortgagor's insolvency, when — Subsequent insolvency does not affect validity of mortgage transaction.
1. In an action to set aside a chattel mortgage as being in fraud of creditors, brought under favor of Section 11104, General Code, it devolves upon the plaintiff, before he can avoid the mortgage, to establish that the mortgagor executed the same in contemplation of insolvency and with intent to prefer the mortgagee to the exclusion of his other creditors and with intent to hinder, delay and defraud his other creditors.
2. Under Section 11105, General Code, the plaintiff must establish that the mortgagee knew of such fraudulent intent upon the part of the mortgagor.
3. A bank taking a chattel mortgage to secure the payment of notes due it, the mortgagor at the time making a signed statement which showed him to be solvent and to have property in excess of his liabilities, and there being no other evidence upon the subject, such bank is not chargeable with knowledge of the then insolvency of the mortgagor, if insolvent, or of any intention upon his part to prefer the bank to other creditors.
4. The fact that the mortgagor was subsequently rendered insolvent does not affect the validity of such mortgage transaction.
APPEAL: Court of Appeals for Clark county.
Messrs. Longley, Bogle Middleton and Messrs. Keifer Keifer, for appellant.
Mr. John W. Bricker, attorney general, and Mr. Lawrence E. Laybourne, for appellees.
In brief, plaintiff railroad company, after averring in its petition its corporate capacity and the official capacity of the defendants other than Leonard Wright, states that said Wright is indebted to it in the sum of $2,438.77 as rent for certain farm lands in Clark county under the terms of two certain written leases which are described in the petition; that while so indebted to plaintiff said Wright on June 7, 1932, executed and delivered to the defendant, the First State Bank of South Charleston, Ohio, a chattel mortgage conveying said chattel property to said bank to secure the payment of four notes totaling $4,500; that at the time of the execution and delivery of said mortgage said Wright was insolvent and unable to pay his debts, which far exceeded the total value of his assets; that said mortgage was executed by said Wright in contemplation of insolvency, and with the design to prefer his creditor, the First State Bank, to the exclusion in whole or in part of all his other creditors, and with intent to hinder and delay his other creditors; that the defendant bank, at the time of the execution and delivery of said mortgage, knew said Wright was insolvent and unable to pay his debts, that his debts were greatly in excess of his assets, and knew that said mortgage was made in contemplation of insolvency to prefer said bank to the exclusion in whole or in part of his other creditors, and with intent to hinder and delay his other creditors.
Plaintiff therefore prays that said chattel mortgage be set aside and held to be null and void, and that a trustee be appointed to take charge of the property described in the chattel mortgage, and of the other assets of said Wright, and to administer the same for the equal benefit of all the creditors.
To the petition of plaintiff the defendant, Ira J. Fulton, Superintendent of Banks of the state of Ohio, for answer, after admitting the corporate capacity of the parties other than Wright, states that on June 24, 1932, the First State Bank of South Charleston was closed and he took charge of same for the purpose of liquidation under the banking laws of Ohio, and that he is now in charge of said bank. Defendant further admits that on June 7, 1932, the defendant Wright was the owner of the chattel property in question and executed and delivered to the defendant, the First State Bank of South Charleston, Ohio, a mortgage conveying said chattel property to said bank to secure the payment of the notes described in the petition.
Defendant answering denies each and every other allegation of the petition not specifically admitted.
By way of cross-petition defendant says that on the twenty-sixth day of January, 1933, defendant recovered judgment against the defendant Wright in the Court of Common Pleas of Clark county, Ohio, in the sum of $4,644.40, no part of which has been paid; that said judgment was rendered for the balance due on the four promissory notes referred to in the petition; that on the seventh day of June, 1932, to secure the payment of said notes the said defendant Wright executed to the defendant bank a chattel mortgage on certain personal property, which is then described in detail, that the condition of said mortgage has been broken, and asks for foreclosure of same.
An issue was thus raised by the pleadings, and the case was submitted to the lower court with the result that the court found in favor of the defendant Superintendent of Banks upon his cross-petition and against plaintiff, and ordered the proceeds of the sale of the chattel property applied upon the judgment in favor of said Superintendent of Banks.
From such judgment an appeal has been taken to this court. The case has been submitted to us upon a transcript of the testimony taken in the lower court, together with a stipulation of counsel containing the letter of Harvey Elam, clerk of courts of Greene county, and the briefs of counsel.
This suit is brought under favor of Section 11104, General Code, which provides that:
"A sale, conveyance, transfer, mortgage or assignment, made in trust or otherwise, by a debtor or debtors, and every judgment suffered by him or them against himself or themselves in contemplation of insolvency and with a design to prefer one or more creditors to the exclusion in whole or in part of others, and a sale, conveyance, transfer, mortgage or assignment made, or judgment procured by him or them to be rendered, in any manner, with intent to hinder, delay or defraud creditors, shall be void as to creditors of such debtor, or debtors, at the suit of any creditor or creditors."
Section 11105, General Code, provides as follows:
"The provisions of the next preceding section shall not apply unless the person or persons to whom such sale, conveyance, transfer, mortgage or assignment is made, knew of such fraudulent intent on the part of such debtor or debtors, * * *."
From a consideration of the above sections it devolves upon plaintiff, before it can avoid the mortgage in question, to establish that the defendant Wright executed the same in contemplation of insolvency, and with the intent to prefer the bank to the exclusion in whole or in part of his other creditors and with intent to hinder, delay or defraud his other creditors.
By virtue of the provisions of Section 11105, General Code, it is also incumbent upon plaintiff to establish the fact that the bank knew of such fraudulent intent upon the part of the defendant Wright.
These requisites are not only found in the sections quoted, but one of the latest expressions of our Supreme Court upon this subject is reported in the case of Carruthers v. Kennedy, 121 Ohio St. 8, 166 N.E. 801. The first and second paragraphs of the syllabus are as follows:
"1. A conveyance by an insolvent debtor in contemplation of insolvency, made with a design to prefer the purchaser to the exclusion in whole or in part of other creditors, the purchaser not knowing of such insolvency or of the design to prefer but believing the vendor to be solvent, is valid.
"2. A conveyance by an insolvent debtor in contemplation of insolvency, made with intent to hinder, delay and defraud creditors, the purchaser not knowing of such insolvency or of such fraudulent intent, is valid."
We have read the record in this case, which is short, with great care, but shall not attempt to quote therefrom in detail.
The record clearly discloses the signed statement made by Wright at the time the mortgage in question was given, and this statement showed him to be solvent and to have property of some $6,000 in excess of his liabilities.
From our consideration of the record we cannot escape the conclusion that the testimony shows that Mr. Orbison, representing the bank, had no knowledge of the terms of the lease of the plaintiff, or of the then insolvency of Wright, or of any intention upon his part to prefer the bank to his other creditors.
The fact that the general depreciation of property and the subsequent foreclosure of a mortgage upon certain real estate in Greene county rendered Wright insolvent would not affect the transaction as of June 7, 1932. This transaction must be determined by the status of the parties as of June 7, 1932, the date of the execution of the mortgage.
When the entire testimony is considered we cannot escape the conclusion that plaintiff has failed to establish the requisite facts in order to secure the avoidance of the chattel mortgage in question.
The same decree will therefore be rendered in this court as was rendered in the court below.
Decree for appellees.
HORNBECK, P.J., and BARNES, J., concur.