Brown v. Leo, 12 F.2d 350 (2d Cir. 1926)

John Griffin, of Hornell, N. Y., for plaintiff in error.

Harry L. Allen, of Hornell, N. Y., for defendant in error.

Before HOUGH, MANTON, and HAND, Circuit Judges.

HAND, Circuit Judge (after stating the facts as above).

It was, of course, irregular to sue out a writ of error to a decree in equity, and a bill of exceptions was unnecessary and improper. However, such errors of form we now ignore, and we shall therefore at once approach the case upon the merits. As it concerns the title to land, we are to decide it after the law of the state.

It has been the law of New York since 1837, at least, that a chattel mortgage, under which the mortgagor not only remains in possession, but is authorized to sell the goods *351 and use the proceeds on his own behalf, is a fraud on creditors. Wood v. Lowry, 17 Wend. 492. Just why this should be so we are not altogether clear. A person in possession of a stock of goods, from which he is free to sell as he pleases, may perhaps deceive creditors into supposing that they are unconditionally his. Again, it is possible to reason that this inference is stronger when he replenishes the stock, at least as to the substituted goods. But the last is not a necessary element in the fraud, and, as we shall show, the doctrine has nothing to do with ostensible ownership. Therefore it can rest only upon some supposed conceptual repugnancy between the mortgage and the reserved power, quite regardless of any evils which may result from their coupling.

At any rate it is thoroughly well established, though it requires an actual agreement creating the power; mere acquiescence of the mortgagee not being enough (Gardner v. McEwen, 19 N.Y. 123; Frost v. Warren, 42 N. Y. 204), and though it yields when the mortgagor agrees to pay the proceeds of any sale upon the debt (Conkling v. Shelley, 28 N.Y. 360, 84 Am. Dec. 348; Brackett v. Harvey, 91 N. Y. 214). But the agreement may be dehors the mortgage (Southard v. Benner, 72 N.Y. 424; Potts v. Hart, 99 N.Y. 168, 1 N. E. 605), and it makes the lien invalid not only as to the stock of goods to which it applies, but even as to separate stocks or fixtures which the mortgagor has no power to touch (Edgell v. Hart, 9 N.Y. 213; Russell v. Winne, 37 N.Y. 591, 97 Am. Dec. 755; Hangen v. Hachemeister, 114 N.Y. 566, 21 N.E. 1046, 5 L. R. A. 137, 11 Am. St. Rep. 691; Skilton v. Codington, 185 N.Y. 80, 77 N.E. 790, 113 Am. St. Rep. 885; In re Volence [D. C.] 197 F. 232 [per Hough, J.]; In re Leslie-Judge Co., 272 F. 886 [C. C. A. 2]).

In Benedict v. Ratner, 268 U.S. 353, 45 S. Ct. 566, 69 L. Ed. 991, the Supreme Court considered the doctrine in a case involving assigned accounts. We had held it a part only of the general doctrine of reputed or ostensible ownership, and therefore inapplicable to intangibles. But the court said no; that the law of New York made the agreement a fraud merely because of the repugnancy of which we spoke just above, and quite independently of whether its exercise gave to the mortgagor a false credit. Just before the decision in Benedict v. Ratner, we decided the only case in which, so far as we can find, the doctrine was urged in the case of a mortgage of real and personal property. Hammond v. Carthage, etc., Co. (C. C. A.) 8 F.(2d) 35. The discussion there was not necessary to the decision, because the mortgage was carefully drawn, apparently with the purpose of excluding from the lien all property over which the mortgagor retained a power of sale.

So far, however, as we said that a single mortgage of land and chattels might be valid as to the land and void as to the chattels, when the mortgagor was given the right to dispose of the chattels on his own account, we think that our decision must be regarded as overruled by Benedict v. Ratner, supra. We thought that in such cases there was no actual fraud, but that the possession of the chattels by the mortgagor, being "strongly repugnant" to the common law, if coupled with a power to sell, in effect left no mortgage at all. These considerations did not, in our judgment, apply to so much of the instrument as incumbered the land, especially as a mortgage of land in New York does not pass title. Hence there was no reason why the same instrument should not be good as a mortgage as to the land and bad as to the chattels. It was like the case of a mortgage, bad as to chattels for lack of filing, but good as to land because recorded. Chemung, etc., Co. v. Payne, 164 N.Y. 252, 58 N.E. 101. As there was no fraud to taint the whole, it might be good so far as it was a mortgage at all.

We cannot take this position after Benedict v. Ratner, supra. That case declared that the law of New York made such an agreement actually fraudulent, quite independently of any dislike of the common law for continued possession by the mortgagor as ostensible ownership. Thus we think that we may no longer distinguish between a mortgage covering land and chattels and one covering two stocks of chattels. As authoritatively construed for us, the law of New York finds an obliquity in coupling with the lien a beneficial power in the mortgagor to sell the goods, quite aside from any false credit he may so procure. This pervades and taints the instrument as a whole, and there can be no difference whether the property to which the power does not extend is land, or an independent stock of chattels, or fixtures, as in Hangen v. Hachemeister, supra, Skilton v. Codington, supra, and In re Volence, supra.

Therefore we must say that the mortgage is void as to the land, as the trial court found it as to the chattels. It must be set aside in both respects, and the trustee declared entitled to the land free and clear, not only of *352 the deed of June 23, 1916, but of the mortgage of October 28, 1915.

Decree reversed, and case remanded for further proceedings in accordance with the foregoing.