Leighton v. Morrill

Equity — Mortgage in Fraud of Insolvent Law — Mortgage not in usual Course of Business — Preference — Findings of Master — Presumptions of Fact — Costs. On a bill in equity, brought by the assignees of H., an insolvent debtor, against M., to set aside a mortgage given to him by H. as a fraud on the insolvent law, it appeared that H. applied to M. for a loan of $6,000, and that a portion of this sum was paid to H. at once, for which he executed a bill of parcels, afterwards exchanged for a bill of sale of his fixtures, and a part of his stock in trade. M. put his hand on the articles, saying that he took possession of them, and told H. that he left them with him as his agent or bailee. A month later, after M. had examined H.’s stock, and a full schedule had been made out, and M. had satisfied himself that H. was doing a profitable business, a mortgage of the greater part of H.’s goods was made for $6,000. M. redelivered the goods covered by the bill of sale, paid to H. a further sum in cash, and agreed to give him the balance of the $6,000 in goods which H. purchased from M. in the line of his trade. The mortgage was executed without haste or secrecy, and with the knowledge and approval of at least two of H.’s principal creditors, who were pot friendly to or co-operating with M., and H. stated to M., to whom the fact that H.’s property was insufficient to pay his debts was not known, that the amount advanced would enable him to pay his debts and go on. For move than a month afterwards H. did go on with his business, and then, upon M.’s discovery that the conditions of the mortgage had been broken, and that probably a fraud had been practised upon him, H. absconded. There was no evidence beyond the fact of his absconding, and the state of his assets, that he kept any property from his assignees, and the indications were that he carried nothing away with him, and that he spent all that he got in paying debts, and in the regular course of his business. Held, that it was impossible to discover any intention of M. to give a preference in this transaction, and that such an intention was disproved by the fact that neither party doubted that the bill of sale given for the money first advanced, whether a sale or a mortgage, was valid. The proposition that if a mortgage is given on the mortgagor’s whole stock in trade, at his only place of business, not merely warrants a finding, but, as matter of law, raises a prima facie presumption, that the mortgage is not given in the usual course of business, and that the mortgagee has reasonable cause to believe that a fraud on the insolvent law is intended, was held to narrow too much the function of the master as a judge of fact. Presumptions of fact generally are questions of fact, and are merely the major premises of those inferences which juries are at liberty to draw, in the light of their experience as men of the world, from the facts directly proved. The question whether a mortgage was not made in the usual and ordinary course of business of the debtor, within the meaning of Pub. Sts. c. 157, § 98, is a question of fact, and whether, if it was not so made, the inference shall be drawn that the mortgagee had reasonable cause to believe that a fraud on the insolvent law was intended, is another question of fact. A loan upon mortgage made to a debtor in embarrassed circumstances for the purpose of enabling him to pay his debts and go on, is not necessarily a fraud on the insolvent law. In proceedings by the assignees of an insolvent debtor to set aside a mortgage given by him in alleged fraud of the insolvent law, where the parties are strangers, and the defendant is not concerned with the fact that the plaintiff is a trustee, the full court, on appeal, will be slow to disturb the discretion of the single judge as to costs where the decree on the merits is affirmed.

Bill IN equity, filed in the Superior Court on April 29, 1889, by the assignees of John M. Humphrey, an insolvent debtor, against Charles F. Morrill, Alvin T. Morrill, Oakes A. Drinkwater, and Irving Smith, composing the firm of Morrill Brothers and Company, to set aside a mortgage given to them by Humphrey, as a fraud on the insolvent law, and against Edward C. Neal, who held a lien on the property of the insolvent debtor. A master, to whom the case was referred, found the following facts. The plaintiffs are assignees in insolvency of John M. Humphrey, of Lynn, who was adjudged an insolvent on April 16,1889, upon a petition filed against him by a creditor, Henry H. Green, on April 10,1889. Said Humphrey had, previous to said date, been engaged for several years in Lynn in the business of a retail jeweller. The defendants, Charles F. Morrill and others, copartners under the firm name of Morrill Brothers and Company, are wholesale jewellers in Boston. About the middle of January, 1889, Humphrey applied to Morrill Brothers and Company for a loan of $6,000, offering to give them as security therefor a mortgage on his stock of goods. Previous to this they had had but one business transaction, a small purchase from said firm by Humphrey, which was afterwards paid for by him. Said firm had been acquainted with Humphrey for about two years. Members of the firm, in consequence of this application, went to Lynn and made some examination of the stock of goods and books belonging to Humphrey, and agreed to make the loan. Humphrey represented to said firm that he wanted the money to enable him to pay debts and relieve himself from the embarrassment caused thereby, and also promised to trade with them thereafter to a considerable amount. He told them that he needed $1,500 at once to meet some pressing need, and that amount was paid to him by said firm about January 26, 1889, they receiving from him at first a bill in the form of a common bill of parcels, afterwards exchanged for a bill of sale in the common form, of the fixtures in Humphrey’s store, and of certain watches and articles of jewelry. A form of delivery of these goods to said firm was gone through with by Humphrey, he going among the goods and stating to one of the firm that he delivered them to the firm, and this partner placing his hand on some of the goods and saying that he took possession of them, afterwards telling Humphrey that he left them in Humphrey’s possession as an agent or bailee for the firm, and telling him that they were not to be sold without his making report of such sale to the firm. No change in position of said goods was made, nor any change in their situation or the surrounding circumstances, that could be seen by or known to third parties. The master found that no sufficient or legal delivery of the goods was made by Humphrey to said firm, but was of opinion, however, that the determination of the question of the sufficiency or legality of said delivery was rendered unessential to the decision of the matters involved in this case by the subsequent events, hereinafter stated, in the dealing between the parties. Afterwards, in pursuance of the agreement between the firm and Humphrey, a full schedule of his goods was made, and a mortgage thereof made by him to them dated and delivered February 25, 1889, and recorded in the clerk’s office of the city of Lynn on the same day. A form of redelivery of the first mentioned lot of goods was gone through with by said firm to said Humphrey. Upon the execution of this mortgage, S3,500 id cash was paid to Humphrey by said firm, and they agreed to give him the balance of SI,000 covered by the mortgage, which they did by selling him goods to that amount before proceedings in insolvency were commenced against him. Humphrey made a statement to the firm, while this transaction was in progress between them, of his indebtedness to various parties, and told them it showed all his debts. The master found that this statement was not a true one, and that at the time he made it he had not sufficient property to pay his debts, and this was true at the time he made said mortgage; but did not, however, find that the fact that his property was insufficient to pay his debts was known to said firm. It did not appear whether any part of the money so paid to Humphrey was used by him in the payment of his debts. On or about April 2, 1889, he absconded, and it did not appear at the hearing that he had since been heard from by any person. Humphrey was commonly known in the jewelry trade in Boston, and generally in business circles in Lyrnn and Boston, as a person of poor financial standing and reputation. He had in a great number of instances given checks on banks in which he deposited when he had no funds to meet them, and his checks and promissory notes had been protested for non-payment in a very large number of instances; this having been done throughout the year preceding the giving of the mortgage. Besides the instances above given, he was during that year in almost continual financial difficulties, and this was well and generally known among his acquaintances. The master found that Humphrey at the time he made the bill of sale to the firm, and when he made the mortgage to them, was unable to pay his debts in. the ordinary course, as persons carrying on trade ordinarily do. Inquiry by the firm among the acquaintances of Humphrey, or in ordinary business circles or sources of inquiry, would have disclosed said facts to the firm. The mortgage covered all the fixtures and furnishings of the store occupied by Humphrey, and his whole stock in trade, and all his property, except book accounts not exceeding a face value of $500, and certain diamonds pledged to secure debts of nearly their full value; and the mortgage by Humphrey was not made in the usual and ordinary course of his business. The mortgage was given by Humphrey to the firm with a view to secure to them the payment of $1,500, and of $119 for a watch sold to him by the firm before the mortgage was given, and $162, the amount of a protested note of Humphrey held by the firm, and thereby give them a preference, and also with a view to prevent his property^ from coming to his assignee in insolvency, to prevent the same from being distributed under the laws relating to insolvency, and to defeat the provisions thereof, Humphrey being at the time the mortgage was given insolvent and in contemplation of insolvency. The master found that the firm, when they took the bill of sale and the mortgage, actually knew that Humphrey was of poor financial standing and reputation ; that he was in financial embarrassment, and before the date of the mortgage knew of a note of Humphrey for $162 being protested on February 16,1889, for non-payment, said note being purchased after protest by the firm; and further found that the firm at the time they received the mortgage, as well as when they received the bill of sale, had reasonable cause to believe that Humphrey was insolvent and in contemplation of insolvency, and that the mortgage and the bill of sale were made in fraud of the laws relating to insolvency and to defeat the object thereof. The master found that the mortgage was void, and that the plaintiffs had the right to retain possession of the property described in the mortgage and the bill of complaint as assets of the estate of Humphrey, subject to the rights therein of the defendant Neal, and that Neal, under the instruments annexed to his answer, had the right to the possession, as the owner thereof, of certain of said goods as to the identity of which the parties were agreed, unless the sum of $2,000, due to him on account thereof from Humphrey, was paid to him. Nothing was paid to the firm by Humphrey on the mortgage, and if the same were valid, the face of the mortgage, and interest thereon at the rate mentioned in the notes secured thereby, would be due to the firm. The findings in regard to Neal are not material to the points decided in this case. At the hearing before the master, in addition to the facts stated in his report, there was evidence tending to show that, at the time the defendants paid to Humphrey the $1,500, he stated to them that he desired the money to pay his indebtedness, and to go on in business; that he represented to them that he was worth from five to six thousand dollars over his liabilities; that the defendants examined his accounts and stock, and thought that he was doing a thriving and profitable business, and that he had assets beyond the property covered by the mortgage. One Green, to whom Humphrey owed a large sum of money, testified that two or three days before the mortgage was made Humphrey informed him that it was about to be done; that he made no objection to it, and that just before the mortgage was put on Humphrey wanted to know how much he owed him; that on comparison of their papers they tallied exactly; and that Humphrey said that he was going to put the mortgage on for the express purpose of paying him. Another creditor of Humphrey, one Carpenter, testified that he knew that the mortgage was about to be taken, and in January, 1889, had advised the defendants to loan money to Humphrey. Upon the examination of one Hill, who had been in the employ of Humphrey, Hill was asked from whom he had borrowed money for the purpose of taking up protested notes or checks of Humphrey; and upon objection being made, the master ruled “ that, it appearing by the mortgage and evidence introduced by the plaintiff that this mortgage was given to Morrill Brothers and Company on the whole stock in trade of Humphrey at his only place of business, this fact is prima fade evidence of a cause of belief in Morrill Brothers and Company that the conveyance was not made in the usual and ordinary course of business.” Hearing in the Superior Court, before Lathrop, J., who found for the defendants, and ordered the bill to be dismissed, with costs to the defendants ; and the plaintiffs appealed.