Source: http://supreme.nolo.com/us/139/266/case.html
Timestamp: 2019-04-21 02:46:19+00:00

Document:
There is so much of a local nature entering into chattel mortgages that this Court will accept the settled law of each state as decisive in respect to any case arising therein.
The plaintiff in error was Deputy United States Marshal for the Southern District of Iowa. Into his hands was placed a writ of attachment, issued out of the Circuit Court of the United States for that district in the case of Marshall Field & Co. v. George W. Hamilton. Under that writ, he levied upon the major portion of a stock of goods in the possession of the defendant Hamilton, the owner of a country store in the Town of Knoxville, Iowa. The goods thus levied upon were subsequently sold by order of the court. The defendants in error were creditors of George W. Hamilton, secured by two chattel mortgages on the goods levied upon. After demand, they commenced their action in the state court to recover so much of the value of the goods levied upon by the plaintiff in error as would satisfy their debts with interest. The trial in that court resulted in a judgment in their favor. The judgment was affirmed by the supreme court of the state, and from such judgment of affirmance the case comes here on error. As to the jurisdiction of this Court, See Buck v. Colbath, 3 Wall. 334.
"all my stock of dry goods and groceries, notions, boots and shoes, book accounts, notes, and merchandise of every description, now in my store in Knoxville, Marion County, Iowa, and to include all goods and merchandise which may hereafter be brought into said store,"
"And I, the said George W. Hamilton, do hereby covenant and agree to and with the said Sperry, Watt & Garver that in case of default made in the payment of the above promissory notes or in case of my attempting to dispose of or remove from said County of Marion the aforesaid goods and chattels or any part thereof, or whenever the said mortgagee or his assigns shall choose so to do, then and in that case it shall be lawful for the said mortgagee or his assigns, by himself or agent, to take immediate possession of said goods or chattels wherever found."
execution of the mortgages. It appears that in the forepart of that year, Hamilton had had a partner named Douglas, and the first mortgage was for goods bought by that firm, and the second for goods bought by Hamilton alone, after he had purchased Douglas' interest in the partnership. It is contended that these mortgages should be considered as executed simultaneously, and parts of one transaction, and as equivalent to a general assignment for the benefit of creditors, and that, having preferences in them, they are void under the state law respecting assignments. But this contention is clearly untenable. The instruments, on their faces, are mortgages given to secure debts not yet due. The mortgagor had no thought of closing out his business. He expected to continue in it, and hoped out of the profits thereof to pay this indebtedness coming due in the future. He had, on June 26, given a prior mortgage to secure another creditor, and on July 6, the day after the execution of the last mortgage in controversy, when another creditor demanded security, he declined to give it without including in the mortgage all his other creditors, and did execute such a mortgage. So that, if we could ignore the form of the several instruments, the only one which by any pretense could be called an assignment for the benefit of creditors was the one executed on the 6th day of July, an instrument not contemplated at the time these mortgages were given, and one forced upon him by the subsequent demands of another creditor. Obviously these instruments were, in the intent of the parties, what upon their face they appear to be -- simply conveyances for security -- chattel mortgages.
such mortgages are fraudulent and void in law as to creditors."
"The issue submitted to you is this: were the mortgages of plaintiffs executed in good faith and for the purpose of securing a bona fide indebtedness due to them from George W. Hamilton at the time, or were the same executed by Hamilton and received by the plaintiffs for the purpose of defrauding creditors of George W. Hamilton."
"In determining the question of fraud in the execution of mortgages, you should take into consideration all the evidence that has been introduced bearing upon that question. Fraud is never presumed, but must be proved by the party alleging the same, and in determining whether or not there was fraud in any transaction, you should consider all the circumstances of the case, and while the debtor's retaining possession, or the fact of the insolvency of the mortgagor, do not as a matter of law determine the transaction to be fraudulent, yet in determining the question of fact, you may consider the insolvency of the mortgagor, if he was insolvent, the fact of his retaining possession of the goods mortgaged, if he did so retain them, and what agreement, if any, was made between the parties with reference to the disposition that should be made of the goods so in his possession, and from all the evidence and circumstances in the case you will determine whether the transactions between the plaintiffs and Hamilton were in good faith, or whether they were designed and intended by the parties to defraud the other creditors of Hamilton."
"At the time I executed the first mortgage to Sperry, Watt & Garver, it was understood between Mr. Ayers [he being the attorney of the mortgagees] and me that I was to go on selling goods in the ordinary way, and that I would be able to pay out. I was to use the money received from the sale of goods, and use some of the money to buy goods, and I was to pay out of the proceeds, the running expenses of the establishment, and to take out whatever was needed for the support of myself and family, and to use the money in buying goods as I saw proper in carrying on the business, filling up the stock and all that, and the money deposited in the bank that I did not need for the other purpose was to be applied on the payment of the debt."
apparently only for the security of the mortgagee, and gives him full power to take possession on default in payment, or on any misconduct of the mortgagor, or whenever he pleases, is invalidated by the fact of a parol understanding at the time of its execution that the mortgagor may use the proceeds of his daily sales to support himself and to keep up the stock by purchases, applying only the surplus, but all of that, to the payment of the mortgage debt; or whether such an understanding is simply to be taken into consideration, together with the other circumstances, as bearing upon the question of the good faith of the parties. The contention of the plaintiff in error is in support of the first alternative of this question, and he relies mainly on the cases of Bank of Leavenworth v. Hunt, 11 Wall. 391; Robinson v. Elliott, 22 Wall. 513, and Means v. Dowd, 128 U. S. 273. While there are some points of similarity between each of those cases and this, and while there are observations in the opinions filed in them pertinent and correct with reference to the special facts which, if disconnected from those facts and applied here, might seem authoritative, yet there are clear and sufficient reasons why neither the decisions nor the opinions should control this case. In Bank of Leavenworth v. Hunt, the validity of a chattel mortgage was in question. But it had not been filed in the office of the register of deeds, as required by the statutes of Kansas, and under those statutes was therefore void as against creditors. It was said in the opinion that it was void for another reason, and that was that the mortgagors were permitted to remain in possession and to continue to sell the goods as before the mortgage. But, as appears from the statement of facts, these sales were not made with a view of appropriating the surplus proceeds to the payment of the mortgage debt, but for the sole benefit of the mortgagors.
"We are not prepared to say that a mortgage under the Indiana statute would not be sustained which allows a stock of goods to be retained by the mortgagor and sold by him at retail for the express purpose of applying the proceeds to the payment of the mortgage debt. Indeed, it would seem that such an arrangement, if honestly carried out, would be for the mutual advantage of the mortgagee and the unpreferred creditors. But there are features engrafted on this mortgage which are not only to the prejudice of creditors, but which show that other considerations than the security of the mortgagees or their accommodation even entered into the contract. Both the possession and right of disposition remain with the mortgagors. They are to deal with the property as their own, sell at retail, and use the money thus obtained to replenish their stock. There is no covenant to account with the mortgagees, nor any recognition that the property is sold for their benefit."
of the mortgagors, as the bank contends was in the contemplation of the mortgagees, it would not be held, as a matter of law, to be absolutely void or fraudulent as to other creditors. Oliver v. Eaton, 7 Mich. 108, 112; Gay v. Bidwell, 7 Mich. 519, 523; People v. Bristol, 35 Mich. 28, 32; Wingler v. Sibley, 35 Mich. 231; Robinson v. Elliott, 22 Wall. 513, 89 U. S. 523. The good faith of such transactions, where they are not void upon their face, is, under the statutes of Michigan, a question of fact for the determination of the jury. Oliver v. Eaton, and Gay v. Bidwell."
See also Allen v. Massey, 17 Wall. 351. While in the foregoing quotation reference is made only to the statutes of the state, the law is as fully established by repeated decisions of its supreme court as by the express language of its statutes. This decision not only gives countenance to the ruling of the trial court in this case, but also warrants an examination of the settled law of the state, as evidenced by the decisions of its highest court. In respect to the latter, there can be no doubt. Independently of the ruling in this case, see Torbert v. Hayden, 11 Ia. 435; Hughes v. Cory, 20 Ia. 399; Meyer v. Gage, 65 Ia. 606, and Meyer v. Evans, 66 Ia. 179. In the first of those cases, it appeared that the mortgagors, with the knowledge of the mortgagee, remained in possession, and sold in the ordinary course of business about a thousand dollars' worth of goods, the proceeds of which were applied to their support and the rent and expenses of the store, and the transaction, having been found to have been in good faith, was sustained, and the mortgage adjudged valid. This decision was in 1861.
been that the reservation by the mortgagor of the right to retain possession of the property and sell it in the ordinary course of business does not render the mortgage fraudulent in law. See Torbert v. Hayden, 11 Ia. 435; Hughes v. Cory, 20 Ia. 399; Clark v. Hyman, 55 Ia. 14; Sperry v. Etheridge, 63 Ia. 543; Jaffray v. Greenbaum, 64 Ia. 492. This holding is based upon the construction given to certain statutes of the state, and it has been adhered to for more than twenty years, and has become a rule of property in the state, and we see no occasion now for departing from the rule that has been thus established."
And in the last case, by the terms of the instrument there was reserved a right to sell at retail in the ordinary course of trade, and there was, besides, a parol understanding that the mortgagor should keep up the stock and pay the expenses out of the proceeds of the business, and there was no provision in the mortgage, and no agreement, that the surplus proceeds should be applied on the debt, but by the terms of the mortgage, the mortgagee had the right at any time to take possession of the property and sell the same for the satisfaction of his debt. And it was held that the mortgage was not invalidated thereby, but that its validity depended on the good faith of the parties to the transaction.
and surely subsequent creditors have no right to complain if they deal with the mortgagor with full knowledge of such relations. Existing creditors may, of course, challenge the good faith of the transaction, but if they cannot disturb an absolute sale when made in good faith, why should they be permitted to challenge a conditional sale if made in like good faith? The fact that fraudulent relations are possible is hardly a sufficient reason for denouncing transactions which are not fraudulent. So if the question were open, or a new one, unaffected by any settled law of the state, we incline to the opinion that the question is not one of law so much as it is one of fact and good faith, and that the decision of the Supreme Court of Iowa rests on sound principles. Jewell v. Knight, 123 U. S. 426; Smith v. Craft, 123 U. S. 436. Reference may also be made to the opinion of MR. JUSTICE BRADLEY of this Court, holding the circuit court in the Western District of Texas, Barron v. Morris, 14 Nat.Bank.Reg. 371, and the opinion of Mr. Justice Strong in the circuit court in New Jersey in Miller v. Jones, 15 Nat.Bank.Reg. 150.

References: v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v.