Case ID: ohio-st_20/html/0110-01.html
Source: Caselaw Access Project
Author: {"author": "Scott, J. Welch, J.,", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Kleine, Hegger & Co. v. L. Katzenberger & Co.
    
      A stipulation in a mortgage of goods, that the mortgagor shall retain possession and sell the goods in the usual retail way, paying over the money received therefor to the mortgagee, as the goods are sold, does not render the mortgage, per ae, fraudulent and void as against other creditors of the mortgagor. The question of good faith arising upon such stipulation is one of foot, for the determination of the jury.
    Error to the district court of Hamilton county.
    The original action in this case was brought in the court of common pleas of Hamilton county, by defendants in error, to recover the possession of specific personal property. Upon the trial the ease was submitted to the court, without the intervention of a jury, under an agreement of the parties showing the following state of facts :
    Jacob Kern, being indebted to the defendants in error, Lazarus Katzenberger and Moses Bing, Jr., partners, as L. Katzenberger & Co., in the sum of $3,300, to secure the payment thereof, on June 19,1866, executed and delivered to them a chattel mortgage on his entire stock of goods, consisting of ready-made clothing, then in his store, No. 415 Main street, Cincinnati. The mortgage was filed in the Recorder’s office, on the day following. On June 25, 1866, the plaintiffs in error, Kleine, Hegger & Co., filed a petition in the superior court of Cincinnati, against Jacob Kern, the mortgagor, caused an order of attachment to issue thereon, and seized the goods described in the mortgage, as the property of Kern; and thereupon the defendants in error replevied the goods from the sheriff, claiming a light to their possession under the mortgage.
    It was claimed by plaintiffs in error, that this mortgage upon its face was inoperative and void in law, by reason of the following stipulation which it contained:
    “ The said Jacob Kern, to retain possession of said goods and chattels, but on default of payment, or any attempt of said Jacob Kern to sell said goods or chattels (except in the usual retail way, and that he will then pay over the money received therefor to the mortgagees, as the goods are sold), or remove them from the county, or from their present location, or upon any seizure of them by any process of law, or upon any failure to comply with the provisions contained in the second covenant of this mortgage, then the said L. Katzenberger and Moses Bing, partners, as L. K atzenberger & Co., may take them into their possession.”
    It was agreed by the parties that the issues in the case should depend upon the single question of the validity or invalidity of the mortgage by reason of the provision aforesaid. That if, in the opinion of the court, this stipulation would necessarily invalidate the mortgage, then judgment should be entered for defendants below, and their damages be assessed at an agreed sum; otherwise judgment to be entered for plaintiffs below, for the possession of the goods, and for nominal damages.
    The court found in favor of the plaintiffs below, and entered judgment accordingly. Upon petition in error this judgment was subsequently affirmed by the district court; and the question raised by the assignments of error here, is whether this judgment of affirmance is erroneous.
    
      Egly & Warden for plaintiffs in error:
    The mortgage is inoperative and void as against the creditors of Kern, because, under it, he retained possession of the goods mortgaged, and had power to sell them at retail. Collins v. Myres, 16 Ohio, 547; Freeman v. Rawson, 5 Ohio St. 1; Harmon v. Abbey, 7 Ohio St. 218.
    
      If void as against execution creditors, it is and must also be void as against an attaching creditor.
    
      Long & Kramer for defendants in error:
    If the mortgagor was permitted to retain possession and sell in the usual retail way, for his own benefit, we admit the cases relied upon by counsel for plaintiffs in error would be decisive in this ease ; and the law is too well settled in this State to be the subject of discussion. But such is not the condition upon which the mortgagor was permitted to have possession and power of disposition. He was required to sell and pay over the proceeds, as rapidly as sales were made, to the mortgagees. In other words, he was constituted the agent of the mortgagees, the possession being given to him for that purpose ; and the sales to be made by him were not for his benefit, but were to be made for the benefit of the mortgagees.
    No reported case can be found in Ohio applicable to the question raised on the condition of this mortgage, while in New York, Pennsylvania, Michigan, Maine, and other States, the question has been decided and the mortgage containing such condition held valid.
    “Where the mortgagee permitted the mortgagor to remain in possession, for the purpose and with the power of selling the goods, such mortgage, although recorded, would not avoid the sale, even if it did not express, in any way, such purpose and power, if they could be inferred from the circumstances : supposing the whole transactions to be boná-fide, the mortgagor would be considered as selling the goods as the agent of the mortgagee, and the proceeds would belong to the mortgagee, and if sold on credit, the debt could not be reached by an attaching creditor of the mortgagor, through the trust process.” Parsons on Contracts, 571.
    “ Although the mortgage contains an express stipulation, that the mortgagor shall remain in possession, until default of payment, and with power to sell for the payment of the mortgage debt, the mortgagee may, nevertheless, sustain trover against an officer attaching the goods as the property of the mortgagor.” Mallody v. Chandler, 3 Fairfield, 282; 
      Forbes v. Parker, 16 Pickering, 462; Welch v. Whitmore, 25 Maine, 86; Ferguson v. Thomas, 26 Maine, 499.
    “ An agreement, upon the mortgage of chattels, that the mortgagor shall keep possession and retail the goods for cash only, paying over the money to the mortgagee, is not fraudulent in law, but presents a question of good faith for the jury.” Ford et al. v. Williams, 24 N. Y. Rep. 359. Denio, J., in deciding this case, says: “ The chattel mortgage under which the plaintiff claims title, was not illegal, on account of anything contained in it, and being filed, according to the statute, it was capable of being sustained against the creditors of the mortgagor, by proof sufficient to rebut the inference of - fraud, arising out of the retention of possession by him.” The court say further : “ It would not have been inconsistent with the nature of the transaction or with good faith, that the mortgagees by themselves, or their agent should have been permitted to sell the goods iy retail, for cash and apply the money which they might bring toward the discharge of the debt which the mortgage was given to secure.” The court further held: “ That they had a right to make the mortgagor their agent for that purpose?
    
    The same rule was again applied and the decision in Ford v. Williams affirmed in Miller v. Lockwood, 32 N. Y. Rep. 293.
    In a recent case in Michigan, it was held: “That a chattel mortgage of a stock of goods, which leaves the mortgagor in possession, and, by inference, authorizes him to sell, in the usual course of business, is good between the parties, and not necessarily fraudulent as to creditors.” Gray v. Bidwell, 7 Mich. 519.
    The right of the mortgagee to make the mortgagor his agent for the sale of the mortgaged property rests upon the well-settled principle in the administration of trusts, that it is competent for an assignee, for the benefit of creditors, to make the assignor an agent to carry out the purpose of the trust. Hitchcock v. St. John, 1 Hoff. Ch. 521; Nicholson v. Leavitt et al., 4 Sandf. 252; Shattuck v. Freeman, 1 Metc. 10, 14; Browning v. Hunt, 6 Barb. 95.
    
      When the goods have been pledged by the mortgagor as a security for the payment of the debt, if the intention of mortgagor and mortgagee is bond fide, on the part of the mortgagor to appropriate the goods for that purpose, and the mortgagee to receive them, it is immaterial by whom they are sold, whether by the mortgagor, the mortgagees, or a third party, provided the parties have agreed upon the mode of disposition.
    
      Egly & Warden, for plaintiffs in error, in reply:
    The true construction of the mortgage is not that the mortgagees reserved the right to sell at retail, appointing the mortgagor their agent for that purpose. The true construction seems to be this: If the mortgagor shall attempt to sell otherwise than in the usual retail way (whatever that may mean), and without accounting to the mortgagees for the moneys received as proceeds of sales made by him, the mortgagees have the option to seize the goods; but, if the mortgagor shall sell in the usual retail way, and shall fail to account as aforesaid, then the mortgagees shall have the right to take the property, if they so elect. In effect, the provision gives the mortgagor the right to sell at retail in the usual way, on his account, at his own discretion, merely reserving a right to the mortgagees to an account for the moneys received by him on such sales. He may sell either for cash or on credit, but the sales are his, and for his benefit, though the proceeds are to go to the mortgagees, if they desire to receive them. We insist that the provision in this respect is, in effect, for the benefit, not of the mortgagees, but of the mortgagor. It is not in accordance with the rule, that “ the mortgage must be precisely what it purports and professes to be, and must operate an absolute surrender of the property for the security of the mortgagee.” (Freeman v. Rawson, supra.)
    The mortgage was not what it professed and purported, in a part of its provisions, to be. On the contrary, it was a device, artificially contrived to evade the rules of law in that behalf, before that time declared by the supreme court.
    The mortgage by no means operated an absolute surrender of the property for the security of the mortgagees. On the contrary, the mortgagor retained possession of the mortgaged property, with a right to sell the same for his own benefit, in the usual retail way, but on the condition that, after having exercised his own discretion in the sale, as to price, as to purchaser, and as to terms of purchase, he should pay the proceeds of sale to the mortgagees, in extinction of his debt, indeed, but so as to give a preference to creditors, not in the transfer of the property in effect, but only in the proceeds of sale. To us it appears that such a contract was opposed to public policy; and we cannot doubt that it is, substantially, such a contract as the cases on which we rely declare entirely void.
    Among the objections to this provision is its indefiniteness. What is the “ usual retail way”? If we were to concede that it might be competent for the mortgagees to reserve a right of selling at retail, and to appoint the mortgagor their agent for that purpose, we should still insist that, in order to make a provision to that effect valid as to thircl parties, it must be distinct, clear, and definite — so that no question whatever, either of its purport, or of its real meaning, or of its actual effect, could be raised. In other words, such transactions being, in general, opposed to public policy, every attempt to provide for an exceptional case must be made in clear, definite, unmistakable terms. If we are right, this provision is clearly not such as to deserve respect in a court of justice.
   Scott, J.

The only question in this ease is, whether the possession and power of disposition reserved to the mortgagor by the terms of the mortgage, necessarily render it fraudulent and void as against his other creditors.

On behalf of plaintiffs in error, it is claimed that the cases of Collins and McElroy v. Myers, 16 Ohio, 547; Freeman v. Rawson, 5 Ohio St. 1, and Harman v. Alley, 7 Ohio St. 218, have settled the answer to this question in the affirmative.

We fully recognize the authority of those cases, and are not disposed to question the soundness of the principle which they establish.

But in ascertaining the principle upon which they rest, we must keep in view the state of facts to which it is applied in those cases, and limit the generality of the language accordingly. In each of those cases the terms of the mortgage were suck as to reserve to the mortgagor the right to sell the mortgaged property on his own account. In the first case, the mortgagor retained possession of the stock of goods mortgaged, “ for the ordinary purposes of barter and sale,” with the full right to use the proceeds of sales, for any purpose whatever, at his own discretion, until condition broken. So in the second case, where goods, valued at $15,000, were mortgaged to secure a debt of $519, and the mortgagor “was permitted to remain in possession, and with the assent of the mortgagee, to go on and sell the mortgaged property, and deal with it as his own, after the mortgage was executed,” the court held the mortgage void, because “ all the beneficial uses of the property, the power to use and dispose of it for his own benefit,” were retained by the mortgagor. And it was said there, as in the former case of Collins v. Myers, that as the mortgagor “ might dispose of the property to a creditor at will, to satisfy a debt, we see no reason why a creditor might not seize it against his will, for the same object.” In the case of Harman v. Abbey, as well as in that of Collins v. Myers, it was attempted to mortgage “ a floating stock of goods,” the mortgagor being permitted in each case to sell on his own account and to replenish the stock, with an agreement that the mortgage lien should attacii to and cover all subsequent additions to the stock. This was held to be inconsistent with the idea of “ a certain security upon specific property.” In this last case of Harmam v. Abbey, the mortgagor was allowed, by the terms of the mortgage, to continue selling the goods at retail, and the only restriction upon his power to dispose of the proceeds at his pleasure was, that he was “not to withdraw any portion thereof from the business, beyond the amount of necessary expenses.” This arrangement evidently contemplated that creditors who had become or might become such in the course of “ the business” might be paid from the proceeds of sales, at the pleasure of the mortgagor.

When it is said, therefore, in those cases, that a mortgage of personal property, with possession aud a power of disposition reserved to the mortgagor, is fraudulent and void as against his other creditors, we are to understand this as referring to a power of disposition for the mortgagor's own benefit. It is only where the power of sale is such as to leave in the mortgagor a dominion over the property, inconsistent with the alleged lien of the mortgage, that the latter has been held per se fraudulent and void. In none of these cases was it necessary to go further; and this is the extent of the authorities cited in their support.

But in the present case no power of disposition for his own benefit was left in the mortgagor. So far from permitting him to exercise the rights incident to absolute ownership, the terms of the mortgage allow him to sell the property only in the usual retail way, and require him to “pay over the m-oney received therefor to the mortgagees as the goods are sold.” The fact that the goods may be thus sold for the sole benefit of the mortgagees, and the proceeds applied in discharge of the mortgage debt, is entirely consistent with the idea of a lien upon the goods for the security of the mortgagees. And the fact that the proceeds cannot be applied otherwise, at the pleasure of the mortgagor, is inconsistent with the idea of his absolute ownership.

That the mortgagor should thus act as the agent of the mortgagees in selling the goods, for their benefit, is not necessarily in fraud of the rights of other creditors, and, if the transaction is bona fide, it is difficult to see why it should not be upheld. Such an arrangement raises only a question of good faith, to be determined by the jury in the light of all the evidence,. and is not per se fraudulent. Ford v. Williams, 24 N. Y. R. 359; Miller v. Lockwood, 32 N. Y. R. 293; 1 Parsons on Contracts, 571.

A majority of the court think the judgment below rnust be affirmed.

White and Day, JJ., concurred.

Brinkerhoee, C.J., and Welch, J., dissented.

Welch, J.,

dissenting: To hold the paper in question a valid mortgage would be, in my judgment, to open a wide door for fraud. A mortgage of goods is a sale of the goods, with a condition of defeasance. This paper evidences no sale. In brief, it imports a sale with a reservation of the power to re-sell, which is in law and in fact no sale at all. It is an agreement that the owner of the goods will continue to sell them, as he had been theretofore accustomed to sell them, and account to the mortgagee for the proceeds, and that he will deliver to the mortgagee such of them as may remain unsold at the end of the three months, or at any prior period when he shall fail to account for the proceeds, or shall sell the goods otherwise than in the usual way. This is a mere covenant or promise to sell the goods to other persons, and account for the proceeds to the mortgagee. The power to sell the goods w;as no ageney. It was part of the contract. It was a reservation of the original dominion and power inherent in the owner of the goods, and by the terms of the contract could be exercised in spite of the mortgagee, and could not by him be revoked or superseded. Such a paper put upon record was no notice to the world that the goods had been mortgaged, and that, therefore, the mortgagor could not impart a good title. On the contrary, it was notice to all subsequent purchasers that the mortgagor was the only party who could impart a good title. Such a paper cannot safely be held to be a valid mortgage. To sustain it as a mortgage would be to narrow and obscure the line between bona-fide transfers of property for the security of creditors, and color-able transfers for the benefit of the failing debtor, and thus, as it were, to invite fraud..