Case Name: A. T. Stewart et al. v. L. C. Hopkins et al.
Court: Supreme Court of Ohio
Jurisdiction: Ohio
Decision Date: 1876-12
Citations: 30 Ohio St. 502
Docket Number: 
Parties: A. T. Stewart et al. v. L. C. Hopkins et al.
Judges: Johnson, J., concurs with the majority in affirming the judgment, though notin some of the reasons given therefor.
Reporter: Ohio State Reports, New Service
Volume: 30
Pages: 502–542

Head Matter:
A. T. Stewart et al. v. L. C. Hopkins et al.
1. The internal revenue act in force in June, 1866, invalidated such instruments as were required to be stamped, only when the stamp was omitted with intent to evade the provisions of the act.
2. Where a note was secured by mortgage, the requirements of the revenue act were complied with, if either one was stamped in the highest amount required for either instrument.
3. Where an unstamped instrument, required by law to be stamped, was stamped subsequently to its execution, in accordance with the remedial section of the act of July 13, 1866, it was as valid as if stamped when it was made or issued.
4. Where an unstamped mortgage had been recorded, and the note which it was given to secure was subsequently stamped in an amount sufficient to validate both the note and mortgage, upon having such fact noted on the margin of the record, under the provisions of said remedial section, the record became as valid as if the note and mortgage had been sufficiently stamped.
5. But the provisions of the United States revenue act, which prohibit the recording of unstamped instruments, and declares their record to be void, applies only to such instruments as are required to be recorded by federal legislation, and to officers under federal control.
6. Under the law of this state, an unrecorded, mortgage, as between the parties thereto, is valid; and, as to all others, takes effect from the time it is left for record.
7. A mortgage given in good faith to secure a loan of money more than six months before the filing of a petition, upon which the mortgagor is declared a bankrupt., is valid as against his assignees in bankruptcy, if it be left for record by the mortgagee, in good faith, at any timé before the petition is filed.
8. The mere fact that a mortgagee withholds a mortgage from record does not necessarily invalidate the mortgage as against creditors; it may have effect against them after it is recorded, unless it be impeached for fraud, and in determining that question, such withholding from record must be considered.
9. A payment of a debt by an insolvent debtor can not be regarded as a forbidden preference under the 35th section of the bankrupt act, unless the debtor intended thereby to give a preference, and the creditor had reasonable cause to believe him to be insolvent.
10. The payment of a mortgage debt by an insolvent debtor, though within four months of the filing of his petition in bankruptcy, where the mort- . gage is full security for the debt, is not a preference within the mean ing of the bankrupt act, for the estate of the bankrupt is not thereby diminished.
11. Nor does it make any difference whether the mortgage be recorded or not at the time of the payment, for the mortgage is valid between the parties, and might be recorded at any time.
12. A sale of goods upon a mere promise by the purchaser to pay for them out of the avails of their sale and of a stock of other goods owned by the purchaser, where the transaction is understood by them to create no relation between them but that of debtor and creditor, docs not give the seller a lien on the goods, after their delivery, or on the avails of their sale, that can be specifically enforced; nor does it deprive the purchaser, where he owes the seller several debts, of the right to direct, when he makes a payment to such creditor, which debt shall be paid thereby.
13. Where a person owes another several distinct debts, he has the right to choose which debt he will pay first; and where, at the time of payment, he expressly directs what application is to be made of the payment, the creditor, if he retains the money, is bound to appropriate it as directed by the debtor.
14. The creditor can not divert a payment so made by his debtor, from the appropriation made by him, upon mere equitable considerations, that do not amount to an agreement between the parties giving the creditor a right to appropriate the payment otherwise than directed by the debtor, though mere equitable considerations may control, where the payment is made without designating its application.
15. Where a debtor owed the same creditor a debt secured by mortgages, and another on account, and paid to the creditor the amount of the mortgage debt, with the direction that it be applied in satisfaction of the mortgage debt, and the creditor, without the right so to do, refused to apply the payment as directed by the debtor, but retained the money, and the debtor, within four months thereafter, was declared a bankrupt: Held, that, as against the assignees in bankruptcy, the creditor can not apply the money on the account, nor can it be regarded as a debt or credit that may be set off against the account, under the provisions of the twentieth section of the bankrupt law, .and that it should be applied in satisfaction of the mortgage debt.
16. But a judgment, in such case, giving the money to the assignees, and the creditor the right to collect the same amount out of the mortgage premises, in satisfaction of a mortgage debt as a lien prior to that of the assignees, being of the same practical effect that an application of the money on the mortgage would have, is not substantially prejudicial to either party, and for that reason will not be reversed.
Error to the Superior Court of Cincinnati.
The original action was brought in the Superior Court of Cincinnati, by A. T. Stewart & Co., to foreclose six mortgages given by Lewis C. Hopkins and wife, to A. T. Stewart, to secure the payment of a note given by Hopkins to A. T. Stewart & Co., for $100,000. Hopkins and wife, together with Isaac M. Jordan and George Maxwell, trustees of Hopkins in bankruptcy, were made defendants. Hopkins did not answer: The trustees interposed several defenses and counter-claims.
The answer denies that the note was given for money loaned, and alleges that the plaintiffs were the bankers of Hopkins in New York city, and that the only consideration of the note was a promise to credit him $100,000 on his account. It alleges an omission to stamp the note and mortgages, with intent to evade the provisions of the internal revenue act of June 30, 1864, and that by reason thereof they are void. It sets forth specific sums to the full amount of the note, which it alleges were paid thereon, whereby it was liquidated. It alleges, also, that on January 2, 1868, when the mortgages were left for record, Hopkins was insolvent, and was contemplating bankruptcy; and that the mortgages were jnade and recorded for the purpose of giving plaintiffs a preference over other creditors, in fraud of the bankrupt act, all which the plaintiffs had reasonable cause to know, and in fact did well know.
By way of counter-claim, it is alleged that on June 6, 1866, when the note was made, the plaintiffs were, and for a long time had been, wholesale dry-goods merchants in New York ; that Hopkins was a wholesale dry-goods merchant in Cincinnati; that Hopkins at the time was indebted to plaintiffs $150,000, and also largely indebted to other persons, which indebtedness he was unable to pay; that at that time Hopkins was expecting to buy a large amount of merchandise on credit of plaintiffs and others; that plaintiffs were his bankers and correspondents, and fully acquainted with his plans; that plaintiffs and Hopkins were aware of the risks and uncertainties of the business, and apprehensive it might not be successful; that plaintiffs were to, and did give Hopkins a credit on Ms private account in the sum of $100,000, all or a greater part of wMch was to be applied to Hopkins’ indebtedness then existing, and Hopkins to give his note therefor ; that three days afterward Hopkins directed the application of $80,000 of the $100,000 to his credit on existing indebtedness, and the credit was given, although such indebtedness was not then due; that the mortgages were not executed until June 22, 1866, and were not intended to secure the note, but to secure future indebtedness, and was not recorded until January 2, 1868.
That it was agreed between plaintiffs and Hopkins, and was a condition on which the mortgages were given, that they should be kept secret in order not to impair the credit of Hopkins, and that the mortgages should not be recorded so long as Hopkins continued to pay interest on the note, nor without the consent of Hopkins, and that the mortgages were left unstamped so that they could not be recorded.
That it was' further agreed Hopkins should have the right to sell and dispose of the real estate without the consent of plaintiffs.
That Hopkins did pay the interest; that the mortgages were recorded without his knowledge or consent, and contrary to the agreement; and that Hopkins sold the greater part of the real estate, and used the proceeds for his own purposes; and that Hopkins paid $110,000 on the note, which his trustees in bankruptcy are entitled to recover for the benefit of his creditors; and ask a decree that plaintiffs hold the same in trust for them.
By way of counter-claim, the answer further alleges that Hopkins paid plaintiff in
1867, November 12...................'................... $10,000 00
“ December 23....................................... 17,000 00
“ “ 28....................................... 10,000 00
« “ 30....................................... 48,025 50
In all
$85,025 50
that at the time said several sums were paid Hopkins was insolvent; that he was adjudged a bankrupt on March 30, 1868 ; that the sums wei’e paid by him to plaintiffs, with a view to give them a .preference over his other creditors on their claim on the note; that plaintiffs had “reasonable cause to believe ” they were made in fraud of the bankruptcy act.
Ih conclusion, the trustees ask a judgment for $110,000, and a decree for the cancellation of the mortgages, and other relief.
• Plaintiffs, in their replication, deny, with considerable detail, the allegations made in the answer, but they admit remittances of the following sums, on the dates following, viz:
1867, November 9...................................... $10,000 00
“ Decembei’ 20....................................... 17,000 00
“ “ 28......................................'.. 10,000 00
“ “ 31....................................... 48,025 50
and also the $25,000 stated in the petition, which is credited on the note. As to the four remittances above mentioned, not including the $25,000, they say :
“ That said remittances were received by plaintiffs, in the regular course of business, on the third day after they were made; that said Hopkins'requested said remittances to be credited on said mortgage debt, and by false and fraudulent representations obtained the consent of one J. M. Hopkins, a clerk in the employ of plaintiffs, to credit the first two of said remittances on said mortgage note, although said remittances were in fact never so credited, nor had plaintiffs any knowledge of such assent being procured, nor had said Hopkins any right to so direct the application of either of said remittances, having previously procured the delivery to him of large amounts, to wit, one hundred 'thousand dollars in value, in cash merchandise, on the express promise that he would appropriate all the surplus proceeds from the sales of the same, with other goods, as they should be daily received, toward paying for said cash merchandise, and making his account for such merchandise, and for cash paid out by plaintiffs for him to other persons, satisfactory to plaintiffs. On which account plaintiffs immediately advised L. C. Hopkins that they would-not consent to apply said last two remittances to said mortgage debt. Plaintiffs aver that they held all of said remittances subject to the order of said L. C. Hopkins, as they held all other moneys remitted to or deposited with them by the said L. C. Hopkins, at the time when the rights” of the trustees in bankruptcy accrued, “and subject to the law of set-off', as is provided in said bankrupt act.”
The testimony and exhibits given in evidence on the trial-are voluminous. Upon the whole case, the court found that Hopkins borrowed of Stewart & Co. $100,000 on the 6th day of June, 1866, and gave his note therefor in the city of New York, where the interest allowed by law is seven per cent.; that the note was payable on demand, with interest cpiarterly until paid ; that Hopkins paid thereon
May 4, 1867................................ $25,000 00
November 12,1867...................................... 10,000 00
December 23,1867....................................... 17,000 83
That there was $57,924.16 due on the note, with interest from December 23, 1867, making $75,956.46 due June 3, 1872, the first day of the term of the court.
That on June 22, 1866, Iiopkins gave the six mortgages in suit to secure the note ; that the mortgages w.ere left for record January 2, 1868, arid'-were duly recorded.
That on the petition of the creditors of Hopkins, filed February 29,1868, he was, April 30,1868, adjudged a bankrupt ; and that the defendants, Jordan and Maxwell, were appointed his trustees in bankruptcy, and thereby became entitled to the estate of Hopkins for the benefit of his creditors.
That the mortgages were the first lien on the premises therein described, and ordered the land to be sold to pay the amount due' on the note.
As to the counter-claim of the trustees in bankruptcy, the court found that, in addition to $25,000 paid and credited on the note May 4, 1867, Hopkins remitted to Stewart
& Co. the following sums, which were received, as follows, viz:
November 12, 1867.......................................... $10,000
December 23, 1867 .......................................... 17,000
December 31, 1867 ................................. 10,000
January 2, 1868................................................ 48,025
That plaintiffs consented, at the request of Hopkins, to credit the first three of the remittances on their mortgage note, and that the same are proper credits thereon. That when Hopkins made the last two remittances, it- was with his express instructions in writing that they should be applied in discharge of the mortgage claim; but that the plaintiffs refused, and had a right to refuse to so apply them. That the plaintiffs, without right so to do, applied said last two remittances on their general merchandise account against Hopkins; and that the amount of said remittances remained iu the plaintiffs’ hands as the moneys of Hopkins, subject to his order, until the rights of his trustees in bankruptcy attached thereto on the 29th day of February, 1868; aud that the plaintiffs have no right thereto as a set-off, or cross demand, under the 20th section of the bankrupt act.
The court rendered judgment against the plaintiffs in favor of the trustees for the amount of said two remittances; to which judgment the plaintiffs excepted. They excepted also to the allowance of the •"remittances of $10,000 of November 13,1867, and of $17,000 of December 23, 1867, as a credit on the mortgage claim.
The trustees excepted to so much of the judgment as found that the mortgages were legally executed, valid, and accepted in good faith; and to the finding that anything was due on the note or mortgage, or that any money was loaned thereon; and to the rendition of any judgment in favor of the plaiutiffs, and to the refusal of the court to render judgment in their favor for the amount of $110,000 remitted by Hopkins to be applied on the mortgage claim; and excepted generally to all rulings of the court prejudicial to their interests.
Each party filed a motion for a new trial, which were overruled. A bill of exceptions was taken, embodying all the evidence.
Each party filed a petition in error in the supreme court, and alleged error corresponding to their respective exceptions to the judgment rendered in the case.
Perry & Jenney, for plaintiffs in error,
submitted the following propositions of law as applicable to this case:
I. Assignees and trustees in bankruptcy stand in the place of the bankrupt, and take his choses and property, subject to all the equities to which they were subject in the hands of the bankrupt.
II. The rule is universal, and wherever persons agree concerning a particular subject, that, in any court of equity, as against the party himself, and any claiming under him, voluntarily or with notice, raises a trust.
III. If the bankrupt had obtained goods or other pi’operty on credit, under an agreement to put it on sale, and apply the proceeds to a particular purpose, in which the person from whom they were obtained had an interest, a trust attaches, as between the parties, which equity will recognize; and if the creditor, in such case, without fraud or fault on his .part, is put into possession of the money, he may lawfully apply it according to the agreement.
IY. Neither a bankrupt nor his trustees can lawfully require money so obtained to be applied to a different purpose from the one agreed.
Y. A debtor, owing more than one debt to the same person, and making a payment to him, may require it to be applied on either debt, and the requirement must be fulfilled; provided the payment offered is in legal-tender money, and in full of the debt on which it is to be applied.
YL. The fifth proposition applies generally to eases where no legal element enters into the relation of the parties to each other, beyond the general relation of debtor and creditor, and there it ends.
YII. Where the parties hold the general relation of debtor and creditor, and at the same time, by contract or otherwise, transact business under special arrangement, which requires the application of the proceeds of a particular fund or branch of business to a particular debt or line of liabilities, the fifth proposition is not applicable.
VIII. Where, in cases, supposed in the seventh proposition, a debtor offers payments, and requires their application, contrary to the rights of the creditor, and obtains a waiver of objections by the creditor, under a misapprehension of the source from which the money was procured, such waiver is of no legal effect, unless ratified by the creditor, after obtaining full knowledge of the circumstances
And ax-gued:
I. On the question of the application of payments we admit the rule to be in substance as laid down in Domat by Strahan, secs. 22, 80; Gaston v. Barney, 11 Ohio St. 510, modified or affected by equitable considerations, and contend that none of the contested payments, in this case, appear to have been made with money or legal-tender notes, and none of them were, if accepted, payments in full.
In the broadest view of the rule, neither of the contested payments was such as Hopkins had a right in law to insist upon; and the question, to that extent, does not depend upon his rights, but upon a supposed waiver, by plaintiffs, of their rights.
Their right to refuse the application of these sums was not merely technical, but was substantial. His lack of right to insist upon the application was substantial, aud reached to the bottom of the transaction. The case is not the kind of case to which the general rule is applicable. An important clement existed in the relations of the parties ■which removed the transaction into a different legal category.
As merchants who gave the firm larger credit than it obtained elsewhere, plaintiffs had an interest that the plan proposed by Hopkins, and on the strength of which he obtained the loan, and on the strength of which the firm obtained credit afterward, should be carried out. In addi tion to tliis, was the agreement in August or September, 1867, made in order to procure more goods, that the firm would remit to plaintiffs the proceeds of their sales; and the fulfillment by plaintiffs of their part of it, by sending them the goods. On the strength of his character and this plan, the firm obtained credit from the date of the loan ; and on the strength of this agreement, they obtained credit. Legará v. Bodges, 1 Yes. Jr. 478; Story’s Eq., sec. 1231; 2 Story, 555 ; In re Sckiebler, B. L. R., 9 Ch. App. 726.
Our contention is that Ilopkins was personally bound not to apply the proceeds of the firm sales as he attempted to apply them in the payments under discussion. Ilenne-Icer v. Wegg,4: Q. B. 792 ; City Discount Co., Br. L. R., 9 Com. PI. 701; Renick v. Bank, 8 Ohio, 533 ; Steel v. Stuart, Br. L. R., 2 Eq. 84; Reed v. Boardman, 20 Pick. 446 ; Clark v. Iselin, 21 Wall. 360; Cook v. Tullís, 18 Wall. 332; lb. 340 ; Avery y. Hackley, 20 Wall. 411; In re Colemere, Br. L. R., 1 Ch. App. 128; Mercer y. Peterson, Br. L. R., 2 Excheq. 304; Button v. Crutioell, 17 Jur. 392, 72 Eng. C. L. 15 ; Bx parte Tempest, Br. L. R., 6 Ch. 70; Jones v. Barber, Br. L. R. 6 Q. B. 77 ; Archbold on Bankruptcy, 431, 1097; In re Softley, L. R., 20 Ex. 746; Gibson v. Warden, 14 Wall. 244.
The agreement referred to was made in August or September, probably in August, and repeated from time to time. The petition in bankruptcy was filed the last of February following, more than four months, and perhaps six months from the date of the agreement. It was not an agreement which the law requires to be in writing, nor which is contrary to any provision of the bankrupt act. Were it likened to an unrecorded chattel mortgage, it would still create an .equity between the parties, to the same extent as if in- writing and recorded, or deposited. The money now in controversy was placed in the hands of plaintiffs before they knew of the bankrujjtcy, and without collusion on their part. It is money to Avhich, as between them and Hopkins, they were equitably, and it is contended, legally entitled. The fact that Hopkins wished them to apply it in a'manner contrary to the agreement, and of their re fusal, do not oblige them to give it back to him. If he had requested a return of the money by mail or express to Cincinnati, or if he had appeared in New York and demanded it, or if he had checked upon it for others, how would it stand ? Seed v. Boardman, 20 Pick. 446 ; Homat, sec. 2273.
The recording of a mortgage is no part of its execution. It is valid, as between the parties, without recording ; and, when recorded, gives a prior lien as against all creditors and others, who had not by execution levied,, attachment, or otherwise, before recording it, obtained a lien. Wilson v. Leslie, 20 Ohio, 161; Clark v. Schuyler, 16 Ohio, 322, 323; Barr v. Hatch, 3 Ohio, 530; Freeman v. Hewson, 5 Ohio St. 1; Webb v. Brown, 3 Ohio St. 253, 261, 265 ; Swift v. Holdridge, 10 Ohio, 285; Hallowell v. Bayless, 10 Ohio St. 537; Slide v. Maxwell, 4 Ohio St. 236; Kendall $ Co. v. Mason, 7 Ohio St. 198; Day v. Munson et al., 14 Ohio St. 488 ; Seaman v. Eager, 16 Ohio St. 209; Paine, Kendall § Co. et al. v. Mason, 7 Ohio St.' 198 ; Gibson v. Warden, 14 Wall. 244.
The same authorities show that the same rule applies to chattel mortgages, and that when recorded they take effect, as against all not having prior liens, from the time they were executed. An unrecorded chattel mortgage, without transfer of possession, is a contract of no higher grade than the oral contract in this case.
The equitable idea of looking to the source, from which the money was obtained, is further exemplified by the rule, that one partner has- no fight to order partnership money which he offers in payment, to be applied on his individual debt. Campbell v. Matthews, 6 Wend. 551 ; and Capen v. Alden, 5 Met. (Mass.) 268, where the circumstances, though not the same as in this case, involve the same legal elements.
To sum up this part of the argument, the principle contended for is this : That with the engagements existing between the plaintiffs and Hopkins, and the credit obtained by Hopkins as a consideration for his promises, as between himself and them, he had no right to require the contested remittances to be applied on the note. Such requirement has no legal effect, except so far as ratified and consented* to by plaintiffs. There is no pretense of such consent or ratification with reference to the last two remittances. The-first two is equally without intended confirmation by plaintiffs. And the circumstances show they would not have consented, if aware of the true nature of the transaction. Phosphate of Lime Co. v. Green, L. R., 7 C. P. 53; Piche v. Ashbury Railway Carriage Co., L. R., 9 Exch'eq. 239.
II. TIow is the question changed as between plaintiffs- and the trustees ?
It is not changed. The trustees stand in the place of Hopkins. The point is not debatable. Gibson v. Warden, 14 Wall. 244-248; Longstreth v. Pennock, 20 Wall. 57o;. Cook v. Tullís, 1.8 Wall. 332.
An insolvent debtor is under no duty to go into bankruptcy, unless his creditors choose to put him there. Wilson v. City Bank, 17 Wall. 473; Cooky. Tullís, 18 Wall. 340;-lb. 388.
As to how a preference may be created, see Gibson v. Warden, 14 Wall. 244; Long v. Pennecher, 20 Wall. 575;-. 17 Wall. 473 ; Mays v. Britton, 20 Wall. 214; Little v. Alexander, 21 Wall. 500 ; Clark v. Iselin, 21 Wall. 373; Watson y. Taylor, 21 Wall. 378; Doe v. Childress, 21 Wall. 643-
Collins & Herron, for plaintiff in error,
submitted the following propositions:
I. If a debtor owing a mortgage debt induces the mortgagee to sell -and deliver to him goods on credit, upon his-special promise that he will pay him for the goods out of the proceeds of the sale by the debtor of the same goods,, and of other merchandise kept for sale in the debtor’s-store, then the debtor, when he afterward remits such proceeds to the creditor, has no right to divert the same to the-payment of the mortgage debt.
II. The' mortgagee may refuse to apply the money upon the mortgage debt, and, after giving the debtor notice of such refusal, may hold it subject to the further order of the- •debtor ; and if the bankruptcy of the debtor intervenes, the law will make the money so held a set-off, pro tanto, against .any amount proved in bankruptcy to be due the creditor from the debtor on other accounts.
The respective claims constitute “ mutual debts,” in the sense in which that phrase is used in the bankrupt law.
And argued that the facts presented two questions: First. Is the mortgage debt paid ? Second. If the mortgage debt is not paid, are not those remittances of December 28th and 30th a set-off or compensation, pro tanto, of plaintiffs’ claim against the bankrupt, under the twentieth section of the.bankrupt act, relating to mutual debts and credits?.
Before entering upon the question whether the mortgage debt is paid, we will notice some preliminary objections to the mortgage itself.
a. As to the invalidity of the mortgage on account of fraud, in that there was a secret agreement that it should not be recorded.
This objection is not well taken, either in fact or law. As to the law, such an agreement would not affect the validity of the mortgage as between the parties, nor its validity as against genei'al creditors, who acquired no specific lieu on the property, between the time when the mortgage was made and the time when it was recorded. Gill v. Finney, 12 Ohio St. 38 ; Fosdick v. Barr, 3 Ohio St. 471; Sidle v. Maxwell,.4 Ohio St. 236 ; Clark v. Iselin, 21 Wall. 360.
b. As to its invalidity, in that it was not sufficiently ■.stamped.
On this point, we refer the court to Beebe v. Hutton, 47 .Barb. 187 ; Hitchcock v. Sawyer, 39 Yt. 412 ; Harper v. Clark, 17 Ohio St. 190.
c. As to its validity for that it was a part of the agreement that Hopkins might sell the mortgaged property and pay the mortgage from the proceeds.
This, Stewart and Judge Hilton both deny; but, conceding it to be true, it was not illegal. Kleine, Higger § Co. -v. Katzenberger § Co., 20 Ohio St. 110.
We now come to the main question : Was the mortgage to A. T. Stewart & Co. paid ?
That Hopkins intended to pay it by his remittances of November 9 and December 20, 28, and 30, there can be no doubt.
If there was nothing in this case but a question whether, as a general rule, a debtor has not “ an absolute right to have the payments applied as directed,” we would never have brought this suit, and would now abandon it.
We i’ely, then, upon this proposition, viz : That Hopkins had no right to make the application of the remittances of December 28th and 30th, which he attempted to make, because there had been a distinct agreement to apply those funds on the unsecured account; and where there has been a contract to apply funds in a particular way, the general rule of law as to application of payments does not govern.
As to the evidence showing such agreement, it is all one way. In view of the evidence and of the agreement, it is clear that Hopkins had no right to direct the application of those remittances to the mortgage debt. A. T. Stewart .& Co. had a right to say, as Mr. Libbey did promptly say, we will not so apply them. Neither could their assent have been presumed. They did not get possession of the money by giving any such assent, either directly or impliedly. When they refused to make such application, the funds simply remained in their hands, like all previous remittances, subject to Hopkins’ order.
That the law of appropriation of payments is only a branch of the law of contracts, see Chitty on Contracts, 752; 2 Parsons on Contracts, 140,147, 356; Renick v. Bank, 8 Ohio, 529; Copen v. Alden, 5 Met. 268; Hughes v. Mc-Dougal, 17 Ind. 399; 14 B. Mon. 348; 33 Me. 428; Henniker v. Wigg, 4 Adolph. & E. 792.
As applicable to the second proposition submitted by Messrs. Collins & Herron, they cited section 20 of the bankrupt act, Revised Stat., sec. 5073; Gibson v. Bell, 1 Bing. N. C. 768; Murray v. Riggs, 15 Johns. 571.
And as to unlawful preferences, see see. 35 bankrupt act, Revised Stat., sec. 5021 ; Ashby v. Steeve, 2 W. & M. 347 Toof v. Martin, 13 Wall. 40 ; Wilson v. City Bank, 17 Wall. 473 ; ^Moys v. Britton, 20 Wall. 214; Little v. Alexander, 21 Wall. 500 ; Clarke v. Iselin, 21 Wall. 373, 375 ; Cook v. Tallis, 18 Wall. 332; Tiffany v. Boatman’s Inst., 18 Wall. 376.
J. A. Jordan, for defendant in error, claimed:
1. That there was paid, by Hopkins, witliiu four months, previous to the filing of petition in bankruptcy — February 29, 1868 — to A. T. Stewart & Co., $146,567.22, upon a preexisting indebtedness.
2. At the times of the payment of said money, said Hop- . kins was insolvent.
3. The payment's made by Hopkins to Stewart & Co. were made with a view to give them a preference over his other creditors. They were made by Hopkins with full knowl- ' edge of his insolvency. Bump on Bankruptcy, 798; Briggs v. Moore, 3 B. R. 602; Bison v. Knopp, 4 B. R. 349; Traders’ Bank v. Campbell, 3 B. R. 498; Lamson v. Burton, 4 B. R. 1; 6 B. R. 353 ; 2 Bliss, 423; 14 Wall. 87; Sinkman v. Wilcox, 1 Dillon, 161; Wager v. Hall, 5 B. R. 181; 3 Bliss, 28; 16 Wall. 584.
4. At the times of said payments said A. T. Stewart & Co. had reason to believe and did believe that said Hopkins, was insolvent, and that said payments were made in fraud of the provisions of said bankrupt act.
5. That defendant in error — Isaac M. Jordan, trustee — is-entitled to a judgment against said A. T. Stewart & Co. for •the benefit of the general creditors of said L. C. Hopkins, for said sum of $146,567.22, and interest thereon from January 1, 1868.
6. There was no agreement that said Hopkins was to send, to A. T. Stewart & Co. the proceeds of sales of his stock of goods, to pay any debt he might owe them.
7. It does not appear that the $146,567.22, or any part of it, were the proceeds of sales of said stock of goods.
8. As to $85,025.50 of said money, Hopkins did not pay the same in fulfillment of any such promise.' He never consented to its application, hence did not ratify.
9. An agreement that Hopkins was to send A. T. Stewart & Co. the proceeds of the sales of his stock of goods to be purchased, to pay a debt he owed, or which was to accrue to ■them, could not be specifically enforced in equity, nor would ■its subsequent performance relate back to the time of the the agreement. Bump on Bankruptcy, 803 (8 ed.); Bunk v. Hunt, 11 Wall. 391; Massey v. Allen, 17 Wall. 351. And as to the unrecorded mortgages: Moore v. Young, 4 Biss. 128 ; 2 L. C. in Eq., pt. 2, p. 238 ; Christmas v. Griswold, 8 Ohio St. 558; 6 Am. L. Rev. 50; 7 B. R, 1; 5 B. R. 218; >■Gibson v. Warden, 14 Wall. 244.
10. Where a debtor agrees to . apply remittances in payment of a particular debt, and then refuses and sends the money with directions to apply it on a different debt, and the creditor retains the money and uses it, or refuses to make the application, he consents to apply it as directed. ■Smith’s Mer. L. (3 ed., Am. notes,) 670; Hill v. Gregory, Wythe, 81, 435.
11. No part of said sum of $146,567.22 was secured by ■said mortgages. They never attached as liens on said real • estate, as against the rights acquired by the other creditors of said Hopkins to share in an equal distribution of his property.
1st. Because said note of $100,000, purporting to be secured by said mortgages, was paid before said mortgages were delivered to the recorder of Hamilton county for ■record.
2d. Because it was agreed and understood, between A. T. '■Stewart & Co. and Hopkins, that said mortgages should be .and were withheld from record until said Hopkins became indebted to said other creditors now represented by said trustee.
3d. Because said A. T. Stewart & Co. knew that 'said Hopkins was in failing circumstances, but concealed it, and the fact that they held said mortgages from his creditors, and represented to them that Hopkins was solvent.
4th. Because said mortgages were not executed by stamping and delivering for record until within four months from the filing of said petition in bankruptcy. Act of March 16, 1838, S. & C. 469.
I claim that, under this statute, the mortgage is not executed until it is delivered for record; that such delivery is part of its execution, and until then it is null and void, both in law and in equity; that it is not good as a legal mortgage, and that a court of equity will grant no relief, because there -is no mortgage to form the basis of the suit. And equity will require the person to whom the mortgage is delivered to complete its execution, and assert it as a lien in the mode provided by the statute. As long as this remedy at law exists, equity will not interfere. And until it is so delivered for record, a court of law will not grant relief. Bankrupt Act, see. 35 ; Rev. Stat., sec. 3422, p. 676; Stansel v. Roberts, 13 Ohio, 148; Mayhew v. Coombs, 14 Ohio, 428; Jackson v. Luce, 14 Ohio, 517; White v. Denman, 16 Ohio, 59; 16 lb. 533; Coombs v. Parker, 17 Ohio, 292; Roos v. Ewing, 17 Ohio, 500; Foster v. Barr, 3 Ohio St. 471; Sidle v. Maxwell, 4 Ohio St. 236; Bloom v. Noggle, 4 Ohio St. 45 ; Erwin v. Shuey, 8 Ohio St. 509 ; Harvey v. Crane, 2 Biss. 496.
12. But if the court should hold said mortgages valid and said note unpaid, to any extent, then to that extent the money sent by Hopkins, to be applied on said note, should be held in trust, by said A. T. Stewart & Co., for said Hopkins, and should be paid to said Isaac M. Jordan, trustee, for the benefit of said general creditors. Smead v. Chrisfield, 1 Disney, 18; West v. Maddock, 16 Ohio St. 418.
Isaac M. Jordan, for defendants in error:
The claim of Isaac M. Jordan, surviving trustee, from the pleadings and evidence, now is, that he is entitled to recover from said A. T. Stewart & Co. the sum of $146,-567.22, paid as a preference, and interest thereon from January 1, 1868.
In answer to the claims made for a balance on said $100,-000 note and mortgages, I claim :
1. That the $100,000 note and mortages were not given to secure any indebtedness on account of the purchase of merchandise, by Hopkins of A. T. Stewart & Co., but simply to secure any cash they might pay to or for Hopkins, and that inasmuch as the entire cash account was fully paid by October 29,1867, the note and mortgages were satisfied and extinguished. Spader v. Lawler, 17 Ohio, 871.
2. The mortgages given to secure the note were not valid, añd created no liens upon the estate of Hopkins, as against the creditors of Hopkins, whose interests are represented by the trustees, because—
1. The note represented the balance of the cash account • being an ever-renewing and ever-changing debt, no security could be given to secure such a debt.
2. The mortgages being (given) made under an agreement by which they were not to be recorded, and by which Hopkins was permitted to sell the lands so mortgaged, as- and how he pleased, makes them fraudulent and void against all creditors.
3. That while it may be true that the trustees take the-bankrupt’s estate, not as purchasers, but subject to all the equities as existing against Hopkins, yet that the mortgages having been made under circumstauces which gave A. T. S. & Co. no right to record it without Hopkins’ consent, and being of no value as a security until then, had no legal effect until that consent was given, or until, in fact, recorded, and that this recording, under the circumstances, made with full knowledge of Hopkins’ insolvency, was a fraud on the bankrupt law.
These mortgages were fraudulent, because of a secret arrangement outside of the mortgages, that Hopkins should have the right to sell the property.
This arrangement amounted, in connection with the fact that they were not recorded, to a secret trust or reservation of a beneficial interest for the benefit of Hopkins, outside of the terms of the mortgages, inconsistent with them, and .amounting to a fraud in law, which makes the mortgages invalid. See Colburn v. Pickering, 3 New Hampshire, 424.
“Express trusts may be created, not only by writing or parol, but by a secret understanding between the parties, when nothing is said or written on the subject. But in whatever way they may be created, their nature is the same.” Littell, 255; 8 N. H. 288; Hilliard on Sales, 340, 341; 1 ■‘Smith’s Lead. Ca. 34, 66, 67; Hills v. Elliott, 12 Mass. 31; 2 Pick. 136, 137 ; Webb v. Hoff, 9 Ohio St. 430-438 ; 19 Pick. 237; King v. Wilcox, 11 Paige Ch. 594; Merrill v. Meshan, 5 Buy, 345; Reed v. Livingston, 3 Johnston’s Ch. 481-500 ; 1 Roots, 324; 2 Pick. 411; 1 Pet. C. C. 464; 3 Wend. 411; Wells, Adm’r, v. Roff, 9 Ohio St. 435; 23 Maiue, 22 ; 1 Story Eq. 352; Eoublanc Eq. —; 4 Wash. C. ■C. 137; 3 Co. 83; 12 Yesey, 147-155; 4 Day, 324; 5 Pet. 264; 7 Paige, 124; 5 Yesey, 155; Palmer, 416; 1 Atkins.
I claim that the note itself, purporting to .be secured by the mortgages, has been paid oif.
If my proposition is correct, that these mortgages were invalid for any of the reasons urged in the argument, or were fraudulent for reason of a want of legal or proper •consideration, or as fraudulent, in fact or in law, then we have an undoubted right to recover back these moneys paid ■on it.
The principles laid down in the bankrupt law, applicable to this case, are :
1. That as trustees in bankruptcy, we succeed to all the rights, not only of Hopkins, but of the creditors of Hopkins. Bump on Bankruptcy, 326 ; In re Metzger, 2 .Bankrupt R. 114; Foster v. Hockley, 2 Bankrupt R. 131; Bradshaw v. Klein, .1 Bankrupt R. 146.
That Hopkins was insolvent can not be denied at the date of these payments, and that -he knew it, must be very clear.
“ When a debtor is insolvent and knows it, any payment then made by him to a creditor in full, must be made with an intent to prefer.” Bump on Bankruptcy, 451; 3 B. R. 149 ; 4 B. R. 114, 150, 158.
The intent to prefer will be inferred from the act of pref•erence. Resor v. Knapp, 4 Bankrupt R. 114
The belief of A. T. Stewart & Co., that Hopkins was insolvent, need not be shown. The question is not, did they believe, but did they have reasonable cause to believe. See .Seammon v. Cole, 3 Bankrupt R. 100; Forbes v. Rowe, 102 Mass. 457.
The omission of A. T. Stewart & Co. to deliver the mortgages for record, was a fraud upon the general creditor, and therefore the mortgages are invalid as against them. Barker v. Smith, 12 Bankrupt R. 474; Hildreth v. Sands, 2 Johns. Ch. 35 ; Hilderbran v. Brown, 17 B. Mon. 779.

Opinion:
Day, Chief Judge.
The exceptions taken by each party in the court below, and their respective petitions in error, •bring in review all the material points in the original case.
The actiou was brought for the enforcement of mortgage liens. The first questions to be considered relate to the validity of the mortgages. They are claimed to be void chiefly on two grounds: 1. By reason of their defective execution under the revenue laws of the United States. 2. That they were made to defraud the creditors of the mortgagor.
It becomes necessary to consider the first objection in its effect as between the parties to the mortgages, and its effect in relation to third persons.
The mortgages were given to secure the payment of a •note for $100,000. The note was stamped when it was made, with a revenue stamp of $50. The note was made in New York, on the 6th of June, 1866. The mortgages were executed in Cincinnati, on the following 22d day of •June, and were forwarded to New York without being stamped.
The stamp of $50 was all the law required for the validity of the note alone. But, as to the mortgages, the revenue laws of the United States required an additional stamp of $50 on the note, or that they should, be separately stamped in a sum of twice that amount.
Without reciting the testimony, we deem it sufficient to say that the evidence convinces us that the parties in — ' tended to stamp the note when it was made, with a stamp of the amount required by law for the validity of both the note and the mortgages made for its security, and that the failure to do so, was through the mere misapprehension or inadvertence of the attorney under whose supervision the business whs transacted.
Neither party had any intention of evading the revenue-laws of the United States. The act then in force invalidated instruments which were required to be stamped, only when the stamp was omitted " with intent to evade the provisions of the act." Harper v. Clark, 17 Ohio St. 190; Campbell v. Wilcox, 10 Wall. 421.
Moreover, the attorney of the mortgagees, who had the-custody and control of the note and mortgages, after the-mistake in relation to the stamp was discovered, applied to-the collector of the district where the note was executed, and made such a showing before him, that, in accordance-with the provision of the revenue act, that officer affixed in due form an additional stamp of $50 to the note. The act of July 13, 1866, then in force, provides that the instrument so stamped " shall thereupon be deemed and held to be as-valid, to all intents and purposes, as if stamped when made or issued." 14 U. S. Stat. at Large, 143.
The amount of revenue stamps on the note, when so-stamped, was equal to that required by law for mortgages-of the amount of the note; and section 160 of the act, enacts that " whenever any bond or note shall be secured by mortgage, but one stamp shall be required to be placed on such papers; provided, that the stamp duty placed thereon shall be the highest rate required for said instruments, or either of them." 13 U.-S. Stat. at Large, 294.
Eor both these reasons, then, the mortgages can not be invalidated for want of compliance with the revenue laws; of the United States.
But it is claimed that under the state statute, an unrecorded mortgage is of no validity whatever. This must be denied. It does not take effect as to third persons until it is left for record; but, as between the parties to the mortgage, it is effective whether it be left for record or not.
It is also claimed that since a mortgage does not take effect until it is recorded, and that inasmuch as the revenue laws of the United States declare that the record ot any unstamped instrument which is required to be stamped shall be void, the record of the mortgages in question before they were duly stamped, was void as against the assignees in bankruptcy of the mortgagor.
The mortgages were recorded in accordance with the statutes of the state, January 2, 1868. The rights of the assignees to the mortgage premises attached on the 29th day of February following, when the petition was filed on which the mortgagor was adjudged a bankrupt.
The mortgages, then, being in fact recorded before the rights of the assignees attached, so far as regards the law of the state, were existing liens prior to that of the assignees, and valid as against them.
"Was the legal effect of the record under the laws of the state impaired by reason of the mortgages being insufficiently stamped when they were recorded ?
The internal revenue act then in force declared that the record of any unstamped instrument, required by law to be stamped, should be utterly void, and should not be used in evidence. U. S. Stat. 1866,14 Stat. at Large, 141.
"We have already shown that the plaintiffs availed themselves of the remedial provisions of the act, by having the note sufficiently stamped, to validate the mortgages.
The act also contained a provision for validating the record of unstamped instruments. It declares that when the original instrument has been duly stamped, a new record, or a note of the correction on the original record, may be made, and that thereupon the " original instrument, or a record thereof, may be used in all courts and places in the •same manner and with, like effect as if the instrument had been originally stamped."
The record of the case before us does not contain a copy of the mortgages, nor a copy of their record; and the evidence in regard to the correction of the record of the mortgages in compliance with the revenue act, is indefinite; but enough appears to render it quite probable that the remedial provisions of the act in regard to the record were fully complied with by the plaintiffs. Nor is it claimed to the contrary by the assignees. But they claim that the correction of the mistake or neglect in regard to the stamps on the note did not take place until after the 29th day of February, 1868, when their rights attached.
It perhaps might be a sufficient answer to this claim to .say that the record of the case before us does not show when the correction was made.
But a copy of the note presented in argument shows that the stamp placed on the note by the revenue collector was -canceled in May, 1868, after the petition in bankruptcy was filed.
But if this fact appeared in the record before us, it may be doubted whether it would be of any avail to the assignees ; for, however the case may stand, upon the facts of the case, under the remedial provisions of the revenue act, the important inquiry arises as to whether the act, so far as it invalidates records of unstamped instruments, applies to the case before us.
The determination of this question depends upon the construction to be given to sections 152 and 163 of the act, as amended by the 9th section of the act of 1866, which is the only part of the act necessary to be considered.
Section 152 declares " that it shall not be lawful to record any instrument," required by law to be stamped, unless it is duly stamped, and that " the record of any such instrument," not stamped, " shall be utterly void, and shall not be used in evidence."
Section 163 declares that no instrument, required by law to be stamped, which is not sufficiently stamped, " shall be recorded, or admitted, or used as evidence in any court," until stamped as required by law.
Without denying that it is within the power of taxation conferred upon Congress, to levy, taxes and collect them by means of stamps placed on written instruments, and to enforce the observance of the law by the imposition of penalties ; yet the power of Congress to prescribe as a penalty that which invades the rules of evidence in the state courts, has been denied by the highest courts of many of the-states, and in others so gravely doubted that at the present time it may be regarded as settled by the decided weight of authority that, whether the disputed power exists or not, since the act does not in express terms apply to the courts of the several states, and the provision excluding unstamped instruments from being giving in evidence can have full application and effect by confining it to the federal courts, its application must be regarded as limited to* the courts over which Congress has legislative control. Carpenter v. Snelling, 97 Mass. 452; Green v. Holway, 101 Mass. 243 ; People v. Gates, 43 N. Y. 40 ; Clements v. Conrad, 19 Mich. 170 ; Craig v. Dimock, 47 Ill. 308 ; Bunker v. Green, 48 Ill. 243 ; Wallace v. Cravens, 34 Ind. 534 ; Griffen v. Ranney, 35 Conn. 239; Duffy v. Hobson, 40 Cal. 240; Bumpass v. Taggart, 26 Ark. 398; Davis v. Richardson, 45 Miss. 499 ; Dailey v. Cocker, 33 Texas, 815.
The same sections of the act, which prohibit unstamped instruments and documents from being used in evidence, forbid the recording of such instruments. For the same-reason, therefore, that the clauses prescribing a rule of evidence must be regarded as applicable to the federal courts only, those relating to the recording of instruments not stamped as required by law, must be held to apply to such instrumeants as are required to be recorded by federal legislation and to officers under federal control.
If,'then, the inhibition of the act extends only to federal officers and to instruments required by federal law to be^ recorded, the penalty invalidating the record of unstamped.. Instruments can have no further extent, for it is the record of only "such instrument" that is declared to be void.
Nor is this construction of the act unsustained by authority. In Moore v. Quirk, 105 Mass. 49, the Supreme Court of Massachusetts held that the provision of the act in question does not affect a record under state laws. The opinion of the court is briefly stated as follows: " The clause of the internal revenue act which provides that instruments not stamped as therein required shall not be recorded, can not be construed as prohibiting the performance by the officers of the commonwealth of the duties imposed upon them by its statutes, but must be limited in Interpretation and effect to records required or authorized by acts of Congress, for the same reasons upon which the prohibition in the same clause against giving unstamped instruments in evidence in any court has been decided to be applicable to the federal courts only, and not to extend to the state courts." To the same effect is the case of Moore v. Moore, 47 N. Y. 467.
Concurring in this view of the act, a majority of the court .are constrained to hold that the revenue act did not invalidate the record of the mortgages in question.
The assignees further contend that the mortgages were void under the provisions of the 35th section of the bankrupt act, for the reason that they were not recorded until within four months before the petition in bankruptcy was filed. But that section declares only such conveyances to be void as are made by the bankrupt within that period as a preference. He made and delivered the mortgages to the plaintiffs more than a year before the petition in bankruptcy was filed, and before the insolvency of the mortgagor existed or was anticipated. Without being recorded, they were valid securities in the hands of the plaintiffs. The mortgagor, on delivery of the mortgages, had done all 'in his power to do, to transfer the title to the mortgagees. As against him, the mortgages were operative from their date. If the mortgagees were satisfied with the security .afforded by the mortgages unrecorded, there was no neces :sity for recording them. The record was only necessary to .give them effect against those not parties thereto. It was not for the bankrupt, but for the creditors secured, to determine whether they should be recorded or not. The delivery of them for record was in no sense his act, but it was theirs alone. " The preference which the law condemns is a preference made within the limited time by the bankrupt, and uot a priority lawfully gained by a creditor; and the preference gained by the record was not a preference made by the bankrupt." Bump. 9 ed. 800 ; In re Wynne, Chase's Decisions, 227 ; Folsom v. Clemence, 111 Mass. 273; Seaver v. Spink, 65 Ill. 441; Sawyer v. Turpin, 1 Otto, 114. If, then, the mortgages were otherwise unobjectionable, and not withheld from record for a fraudulent purpose, they were not invalidated by the mere fact that they were recorded within the time limited in the 35th section of the bankrupt act, before the filing of the petition in bankruptcy.
"We are thus brought to consider the question whether the mortgages were void on the ground that they were made to defraud the creditors of the mortgagor.
L. C. Hopkins, the mortgagor, was the controlling member of a mercantile firm doing an extensive wholesale and retail business in the city of Cincinnati; and the mortgagees were wholesale merchants in the city of New York. The firm consisted of A. T. Stewart and William Libbey, with two others who attended to the business of the firm in foreign countries. Mr. Libbey had the principal management of the business in New York, and Mr. Stewart had the general supervision and control of all the business, of the firm both at home and abroad.
Hopkins & Co. had for a number of years been heavy purchasers of Stewart & Co., and had a large line of credit with their house. By arrangement between the two firms, Stewart & Co. kept a cash account with Hopkins & Co. •separate from the merchandise account of the two firms.
Early in the season of 1866, Hopkins & Co. made arrangements to greatly enlarge their business facilities in Cincinnati, and to raise the necessary capital for the increased trade contemplated, Mr. Hopkins applied to Mr. Stewart for 3 personal loan of $100,000.
The relations between them had long been of a friendly-character, and Mr. Stewart seems to have had unbounded' confidence in the business ability and integrity of Mr. Hopkins. After stating what had been done to enlarge his business, Mr. Hopkins represented that he had a large surplus in the firm of Hopkins & Co.; but that for the purpose of further enlarging the business of the house, he desired to sell a portion of the real estate owned by him, which he represented to be worth over $200,000, but could .not be-immediately converted into cash. This real estate he proposed to mortgage to secure the loan, and for the same purpose to assign his life policies, amounting to $60,000. Eor aught that appears, the representations of Mr. Hopkins in regard to his pecuniary circumstances were in accordance'with the truth at that time. •
Mr. Stewart accepted the proposition of Mr. Hopkins, and gave him a check on a city bank for $100,000, and took his note for that amount to Stewart & Co. But as Mr. Hopkins had neither a description of the land, nor the life policies with him at New York where the business was-done, the execution of the mortgages and assignment of the policies were intrusted to him to be done after his return to Cincinnati.
Accordingly,' oh June 22, 1866, Hopkins executed the mortgages and the assignment of the policies to Mr. Stewart, and forwarded them to New York. The mortgages, ten in number, were made on as many separate parcels of property, for convenience of sale to pay the note.
Mr. Hopkins says he requested, when he negotiated the-loan, that the mortgages should be withheld from record,, and that they should be respectively returned as the parcels of land were sold, and the proceeds applied in payment of the note: He says no reply was made to this request. But' it is denied by Mr. Stewart, and Judge Hilton, his legal adviser, who were the only persons present when the business was transacted, that any such request was made. They testify that no arrangement whatever was made riot to have the mortgages recorded. When the mortgages were received in New York, they were placed in a trunk, containing Mr. Stewart's valuable papers, which was in the sole charge of Judge Ilil'ton. The judge being absent when they were received, they remained a long time without particular notice and remained unrecorded, for which neglect he says he was blamable.
The check given for the note was soon after handed to Stewart & Co. and by them placed to the credit of Hopkins & Co. as so much money received of them. He checked it out again, as he did all moneys credited in the cash account of the parties, in payment to Stewart & Co. and other'merchants for merchandise in his business..
Hopkins & Co. continued apparently to prosper in business, and had an unlimited credit with Stewart & Co., for more than a year after the loan was made; and within that time Mr. Hopkins paid $25,000 on the note. But the financial revulsion that took place in the summer of 1867 found him with a large stock of goods on hand, and the great fall of prices on sales brought him to the bankruptcy that followed in the ensuing winter. When, however, the loan and mortgages wei-e made, Hopkins was solvent, and none of the parties contemplated the reverses that followed. All their subsequent transactions show that the confidence of Stewart & Co. in the solvency and integrity of Mr. Hopkins continued until about the time of his failure.
The evidence does not establish — it rather rebuts any fraudulent intent in making the mortgages. The strongest circumstance to the contrary was the long delay in delivering them for record; but that seems to have been an inadvertence, not unlike that of the failure to sufficiently stamp the note, resulting in part from a confident belief that they would be soon paid from the sales of real estate, and that no necessity would arise requiring their record.
We are not justified in finding that there was an agreement to keep the mortgages from record. But had that been the ease, it would not of itself have rendered the mortgages void, though it would have been a matter for consideration, in connection with other facts, in determining the question of the alleged fraud. Sawyer v. Turpin, 1 Otto, 114; Folsom v. Clemence, 111 Mass. 273.
The object in making the mortgages was not to hinder or delay creditors, nor to procure false credit; but was to secure a loan of money made in good faith to pay debts and buy increased quantities of goods for the enlargement of a supposed prosperous business. The money was so applied. It was regarded as an effort to convert real estate into money, to be represented in an equal amount of property invested in merchandise, which was supposed to be no less advantageous to creditors by a change of the form in which the property consisted. The transaction, as regarded at that time, was not so much to procure an increase of credit as it was to obtain, an advance on property then designed to be added to the assets of the mercantile firm; but subsequent events, in part those that affected generally the business of the country, resulted in disappointment to all concerned.
The mortgages being regarded as valid and effective against the assignees, their claim to recover the amount of .$25,000 paid and credited on the mortage note, May 4,' 1867, nearly ten months before the petition in bankruptcy was filed, becomes groundless. But they claim the right to recover of the plaintiffs $85,025.50 paid ou the note within four months before the petition was filed. Ou the other hand, the plaintiffs claim that the payments constituting that sum should not be applied on the note, but should be credited ou their account against Hopkins & Co. for merchandise.
This amount was forwarded by Hopkins from Cincinnati to New York, in four installments, and each remittance was accompanied by his written instructions for its application on the note.
In regard to the remittances of $10,000, Nov. 12,1867, and of $17,000, Dec. 23, 1867, the court below found, as matter of fact, that the plaintiffs consented to their application on the note in accordance with, the instructions of Mr. Hopkins. The testimony will not warrant us to controvert that finding. As between the parties to the note, these remittances must, then, be regarded as payments on it at their respective dates, which were less than four months before the proceedings in bankruptcy were begun.
The assignees have no claim to the amount of these payments, other than what they can assert under the 35th section of the bankrupt law, as being payments made by an insolvent debtor in preference of a creditor having reasonable cause to believe him to be insolvent.
It is quite apparent from the evidence that these payments were not made by Hopkins with a view to give a preference to the plaintiffs ; but were made for the purpose of relieving his real estate from what was regarded by him, and was in fact, a valid mortgage incumbrance, so that it might be more available both to himself and his creditors. Nor is it at all clear that the plaintiffs, when these two payments were made, believed or had reasonable cause to believe that Hopkins was insolvent. But the assignees can not recover under that section, without establishing, both the intent of the debtor to give a preference, and that the creditor had reasonable ground to believe him to be then insolvent. Mays v. Fritton, 20 Wall. 414; Clark v. Iselin, 21 Wall. 360; Little v. Alexander, Ib. 500.
But the payment of a mortgage debt, where the mortgage, as in this case, is full security for the debt, is not a preference within the meaning of the bankrupt act. For (as Lord Denman reasoned in Marshall v. Lamb, 5 Ad. & Ell. N. S. 115,) the assignees have the mortgaged property, " and it is indifferent to them whether they have the property free from the mortgage, (supposing it to exceed in value the amount of the mortgage,) or the property subject to the mortgage and the amount of the mortgage money in cash." It does not diminish the bankrupt's estate available for the payment of his other debts. The payment merely relieves the mortgaged premises of the same amount which would otherwise have to be made out of the land for the same purpose by the assignees. It has been repeatedly held by the Supreme Court of the United States that an exchange of property or securities which do not diminish the bankrupt's estate, is not a preference under the bankrupt act. Cook v. Tullis, 18 Wall. 332 ; Burnhisel v. Firman, 22 Wall. 170. In Sawyer v. Turpin, 1 Otto, 114, it was held that the substitution of a mortgage, within four months before the filing of the petition in bankruptcy, for an unrecorded mortgage taken more than four months before, is not a forbidden preference under the act where the new mortgage is recorded before the petition is filed, and the mortgage taken up is of equal value to that substituted for it. And in Clark v. Iselin, 21 Wall. 360, it was held that the payment of a judgment, which was not a forbidden preference, to relieve personal property of an equal or greater amount from the levy of an execution was not a preference under the act. The principle settled in these cases is decisive against the right of the assignees to recover the amount of the two payments in question.
The remittances of $10,000, Dec. 28,1867, and $48,025.50, Dec. 30, 1867, being the balance due on the note, Stewart & Co. declined to credit thereon, as directed by the letter of Hopkins accompanying each remittance. Neither did. they at that time credit these remittances on either the cash or merchandise account of Hopkins & Co.; but held them subject to the further order of Hopkins.
The plaintiffs contend that they had the right to refuse the application of these remittances on the note, as requested, and claim that they are entitled to have them credited on the merchandise account of Hopkins & Co. The ground of this claim is that Hopkins & Co. purchased goods of them under such special agreement that Hopkins had no right to divert the proceeds of their sales to the payment of the note-; and that his attempt to do so authorized them to hold the money subject to his further order, and his bankruptcy having intervened, the law will set off the same against the account due them for goods.
On the other hand, the assignees seek a recovery of the money on the ground that Hopkins owned it when their rights accrued; or, if not, that it must be regarded as a payment forbidden by section 35 of the bankrupt law.
The agreement relied upon by the plaintiffs is based chiefly on the testimony of Air. Libbey, one of the plaintiffs. He testified that from August, 1867, the purchases by Hopkins & Co. of their house consisted largely of what are denominated " cash goods, such as prints, bleached and brown goods, muslins, etc. — goods sold usually by parties at cost price as an inducement for trade, and are necessary for a jobber to have on baud to keep his trade alive." . . . "The amount the firm was owing us at that time being large, and payments not being promptly provided for, it called for an interview-with Hopkins and Turner, both of them, at different times, to insist upon payments being made as fast as their bills matured — at the same time they were making large purchases of us, principally of cash goods. They both of them promised us that remittances should come forward immediately, not only to pay up their past-due account, but to fully cover the purchases then being made by them. As an illustration, they were, during the month of September, purchasing between thirty and forty thousand dollars' worth of goodsthese goods we declined to deliver. Mr. Turner at that time stated that Mr. Hopkins had requested him to say that any purchases that he made of-us at that time, during his visit to New York, should be promptly remitted for, and that they wanted a statement of our account, so that they would know about what amount was due by them, and the amount of new purchases being made, so that they could remit us the amount to cover. They positively promised to remit us the proceeds of the sales of these goods, then being purchased, in connection with larger amounts which these goods would enable them to realize from the sale of fancy and other goods, which their stock largely consisted of."
He states that during the autumn months of 1867, Hopkins & Co.'s purchases of cash goods of Stewart & Co. were "in the neighborhood of $105,000;" and further says: " They promised to remit us their entire receipts ; that they had no payments to make apart from us and in connection with their notes maturing and being paid by us ; that then-sales, from the accommodation which we were rendering them,'in connection with the deliveries of cash goods, would be very large, and they would very soon be able to square up their accounts with us, and make everything satisfactory to us by their remittances.
" During this period he discounted some of his own paper held by other parties, and drew upon us for the amount, and we paid Ins drafts. During this period, also, we purchased for his account, in the market, cash goods, which were delivered to him and the bills paid by us; that is, the purchases were made by him and accepted by us, the parties declining to deliver to him — the reason we did not know, but we presume his line of credit with these parties was full. ¥e so understood." . . .
" I understood from Messrs. Hopkins & Turner that then-gen oral stock of goods, apart from what are termed cash articles, was very large, and that it was indispensable to them to have a quantity of these cash goods to work off this heavy stock of other merchandise.
" From my knowledge of business, I knew this was a fact, and I knew that it was indispensable for them to have such goods, arid relying implicitly on their integrity and ability to pay, they were delivered."
Mr. Turner testified that he never told Mr. Libbey that Mr. Hopkins would remit the proceeds of any specific goods; and, speaking of the transaction in September, 1867, said : " I told him this : That Mr. Hopkins had requested me to say that he would remit for that lot of goods that I bought at that time ; they were domestic goods, sheetings and prints; that if he would send the goods, he would remit the money forthwith ; and on those conditions he let me have the goods."
In regard to the same matter, the testimony of Mr. Hopkins is as follows :
" Q. I want to call your attention to a statement made by Mr. Libbey, which you may have heard in the reading of his deposition : Did you or not, at any time, state to him, or any other of the plaintiff's, that you would appropriate the proceeds of the sale of any particular articles of personal or real property to the payment of any purchases of cash goods or time goods made in the year 1867 ?
"A. I did not make the statement in that shape. I sent word to Mr. Libbey, through -my agent, Mr. Turner, who was acting as my agent, that I would remit the amount'to him, not the proceeds of any particular articles. I did not xsay I would remit the proceeds of these identical goods, but that I would remit the amount of those goods.
"Q. That is what I wanted to get at, whether it was to make remittances in payment, or undertaking to remit the proceeds of any particular articles ?
"A. Not the proceeds of any particular articles, but I did promise him I would send the payment right along for those goods — cash goods."
It is claimed in behalf of the plaintiff's, that the delivery of the cash goods to Hopkins & Co., under the agreement shown by this testimony, gave them a right to the proceeds of their sale in the nature of a trust; or, at all events, that the agreement was of such a character as to give the plaintiffs the right to decline to apply any money arising from the sales of merchandise by Hopkins & Go. on the note before their account to the pDlaintiffs was fully paid.
But we think the testimony in question, carefully scrutinized and read in the light of the remaining evidence, does not establish an agreement of the character and effect claimed by the plaintiffs, nor did the parties so understand it by the transactions referred to.
It is not claimed that any fraud was resorted to in obtaining any of the goods. The title to the cash goods passed as fully to the purchasers as did that of any goods bought of the plaintiffs by Hopkins & Co. At most, the plaintiffs, by reason of the large purchases of this kind of goods by Hopkins & Co., and of their delays in payment of other goods, exacted renewed assurances of prompt payment, otherwise they would have refused so large a line of credit on this class of goods.
Moreover, the promised remittances related as much to the proceeds of the sale of all other goods as to the avails of the cash goods; and related equally to goods then on hand and those purchased of other parties. No trust was understood to attach to the sale of the cash goods then bought more than to that of any other goods, to which there is no pretense of any special trust.
The reinittanees contemplated were only in continuance of what had long been the course of business between the parties. Nothing new was contemplated. Eor a number of years previous, Hopkins & Co. had kept their cash account in New York with the plaintiffs. The avails of their large business had long been remitted to the plaintiffs, and all their Eastern accounts paid by checks on them. No new relation between the parties was created, nor any different mode of payment for goods purchased established. More emphatic promises of prompt payment were exacted. That was all. Nothing more was needed in the estimation of the plaintiffs, for they seem to have had no doubt of the solvency of Hopkins & Co. Indeed, the whole substance of the transaction is. expressed by Mr. Libbey, when he said, speaking of it in relation to these goods, that, " relying implicitly on their integrity and ability to pay, they were delivered." This was the whole foundation of the credit given. No other security, either upon the goods or flieir avails, was secured or contemplated. The facts of the case, then, will not warrant us in attaching a special trust to the goods or their proceeds. Neither is it shown -that the money in dispute arose from the sale of the cash goods, nor from what source it came.
Not only did the relations of the parties remain the same, after the transactions in question, as they were before, but they did not differ essentially from those sustained by Hopkins & Co., as to the character of credit given to them for goods, toward other merchants; for when they failed, they were indebted to other creditors 'more than half a million of dollars, who, like the plaintiffs, had trusted them for goods, " relying implicitly on their integrity and ability to pay," and their assurances of prompt payment.
This view of the case is fully sustained by the dealings of the parties after the conversations spoken of by Mr. Libbey; indeed, they can iiot be reconciled upon any other theory, and are inconsistent with that now advanced by the plaiutiffs. Eor Hopkins & Co. continued to remit the avails of their sales to the plaintiffs, and the plaintiffs continued to pay their checks in favor of other parties as they had ever done ; and they continued to credit payments on their merchandise account, or on the note as directed by Hopkins, as they had always done before, and this they did up to the time of his failure. Not until he had suspended business, late in December, 1867, did the plaintiffs ever claim an arrangement by which they had any special rights in the premises; yet, in the meantime, during the transactions referred to, from the first of September to the time of Hopkins' failure, his firm had remitted to the plaintiffs more than sufficient to fully pay them all their demands. "Without including the money in controversy, and that credited on the note, Hopkins & Co. remitted to .the plaintiffs after the first of September, 1867, over $435,000; and, within the same period, the plaintiffs paid the checks of Hopkins & Co. in favor of other merchants to the amount of nearly $320,000 ; leaving in their hands an amount greater than that of all the cash, goods sold by the plaintiffs to Hopkins & Co. during the period in question, though it is noticeable that this large amount was paid by the plaiutiffs while Hopkins was owing them an amount nearly equal to the full amount so . paid.
The acts of the plaintiffs after the supposed arrangement were consistent only with the idea that then, as ever before, they were dealing with Hopkins & Co., " relying implicitly on their integrity and ability to pay," and are inconsistent with the existence of any special agreement changing the relations and legal rights of the parties. No such supposi tion appears to have been entertained by the plaintiffs until their implicit confidence in Hopkins was shattered by his unexpected suspension in business, by selling out his stock of goods, which occurred the day before he remitted the first installment of the $58,025.50 now in question. The plaintiffs then, it would seem, for the first time, became alarmed, and Mr. Libbey hastened to Cincinnati, put the mortgages on record, and then informed Hopldns that these remittances would not be credited on the note, but would be passed to his credit on his merchandise account, to which Hopkins objected, and there the matter was left until the rights of the assignees attached.
It was the failure of Hopkins that first brought the plaintiffs to a realizing sense that they were the victims of misplaced confidence, and of the necessity of applying all funds in their hands to the satisfaction of their unsecured claims ; for they continued to pay Hopkins & Co.'s checks in favor of other parties in large sums up to the time that Hopkins sold out and went out of the mercantile business, and to that time continued to apply moneys checked or paid to them upon their account^or on the note as Hopkins might direct.
It is quite clear that neither of the parties supposed that they had made any agreement that bound Mr. Hopkins to pay the account of Hopkins & Co. before he might pay his individual note. Nor did Mr. Libbey, when he refused to apply the last two payments on the note as directed, make any pretense that there was a special agreement authorizing it. The subsequent correspondence, in relation to the matter, clearly shows that there was none; and leaves little doubt that the idea of any agreement of the kind, which is supposed to have had its birth during the autumn of 1867, was not, in fact, conceived until the following year. It also shows that the legal advisers of the plaintiffs in New York found nothing in the case creating any relation between the parties, other than that ordinarily existing between 'debtor and creditor.
Under this state of fact, a majority of the court hold that no agreement existed between the parties, which, takes the case out of the ordinary rules of law controlling the application of money paid to a creditor who holds two claims against the debtor making the payment, where no special facts exist controlling its application.
In the present case, no objection was made by the creditor to receiving the two remittances in dispute in payment of the note, on the ground that they came in separate installments, neither of which paid the note in full. Nor, indeed, could such an objection be of any avail; for each was made with the same direction by the debtor; both were retained by the creditor; and, in the aggregate, they amounted to the full sum due on the note:
The full amount was paid for a specific purpose, designated by the debtor -when made — to be upon, and in satisfaction of, the mortgage note. In such a case the creditor has no right to retain the money and divert it to another purpose, unless it be by virtue of a contract depriving the debtor of the right to make his election as to the application to be made of payments of his own money. Mere equities, that would be available to the creditor in case the debtor fails to direct the application of a.payment, will not be sufficient. The minds, of the parties must meet, upon some valuable consideration, in understanding that the debtor is debarred from making the application designated by him. No such contract, we have seen, existed in this case. Goods were not obtained by the debtor upon the promise that an account should be paid before the note. Neither party so understood it, nor did they act upon any such understanding; though, as events transpired, it would have been advantageous to the plaintiffs, however hard it may have been for Hopkins, or his other creditors, who have claims to his assets equally equitable, and against whom such an advantage ought to be obtained only upon the existence of a clear right thereto.
Whatever, then, may be the law where the debtor, owing several debts to the same creditor, fails to direct the application of a payment when made, and the application is not controlled by a binding agreement, it is indisputably settled that he " has the power to make the application at the time, of payment, which he may do either by express words, or a conduct indicative of his intention." Smith's Mer. Law, 670.
This doctrine has never been controverted in this state. Oh the contrary, in Gaston v. Barney, 11 Ohio St. 506, it was expressly held to be so well settled as not to require the citation of authorities, that "where one person is indebted to another on various accounts, he has an undoubted right to choose which debt he will pay first;" and that where partial payments are accepted by the creditor without objection, he is bound "to make the appropriation of the payment, which the debtor, at the time of parting with his money or effects, may have directed."
The plaintiffs, though they kept the money, declined to make the application directed by Hopkins when he made the payment. They were neither authorized to credit it on their cash account, nor to apply it otherwise than as directed by the payer. Equity will regard that as done which ought to be done. The court below, therefore,, might well have applied it in satisfaction of the note and mortgages. This the court did not do; but it permitted the plaintiffs to recover the same amount out of the mortgage securities, which are abundantly good for that sum, and gave the assignees the money. The practical effect of the judgment is the same as it would have been had the money been applied in satisfaction of the note and mortgages; for it can make no substantial difference to the plaintiffs whether the money be applied in satisfaction of the mortgages, or be given up, and recovered again on the mortgages. In either case they obtain the same sum in discharge of the mortgage debt. Nor does it make any difference with the estate of the bankrupt, whether the money be, in the first instance, applied to relieve the mortgaged premises from incumbrance, or it be given to the assignees, who must make the same application of it. In the end it results the same, practically, as if the court below had applied the money, as it ought to have done, in satisfaction of the note and mortgages. Neither party, therefore, is substantially prejudiced by the judgment below. There is, then, no necessity for its reversal on the ground of a misapplication of the money; and, there being no other error, the judgment might well be affirmed on this ground alone.
But the same result may be arrived at upon another, though (for myself I may be permitted to say) less satisfactarv, ground.
The money was remitted to the plaintiffs for a specific purpose. It was not intended the title thereto should pass to' them for another purpose. The plaintiffs were not, therefore, authorized, by crediting it on account, to convert it into a mere debt. Nor was it money remitted to be used, or held in trust, in any manner to result in a debt of the plaintiffs to Hopkins or Hopkins & Co. Strictly speaking, then, it could not be classed as among the " mutual debts or mutual credits between the parties," authorized by the twentieth section of the bankrupt law, to be set-off against each other; for that section was not intended to change or enlarge the law of set-off" beyond what the principles of legal or equitable set-off previously authorized. Sawyer v. Hoag, 17 Wall. 610. Ordinarily that does not become a debt w'hich was not intended as such, nor a credit that was not in the contemplation of the parties to become a credit in the nature of a debt. Waterman on Set-off, secs. 148 aud 153.
In this condition the money was held when the rights of the assignees attached. They succeeded not only to all the rights of Hopkins, but were further endued by law with power to disregard all payments made by him, by way of preference, within four months before their rights attached. The payments made by Hopkins to the plaintiffs were within that period. It is true he did not make them with a view to a forbidden preference, but to allow the plaintiffs to apply" the money as they seek to do, would be permitting them, with full knowledge of Hopkins' insolvency, to do what the law' prohibits both him and them from doing. This would be a preference as clearly in violation of the spirit of the 35th section of the bankrupt law as a voluntary preference made by the bankrupt himself would be. It would equally defeat, the purpose of the law, which is an equal distribution of the bankrupt's estate among his creditors.
Having no right to appropriate the money otherwise than in payment of the note, when the rights of the assignees attached, but being held by the plaintiffs without such application, the court did not err to their prejudice in adjudging the money to be paid to the assignees, and in leaving 'them to their remedy on their unsatisfied mortgages.
It follows that the judgment of the superior court must be affirmed.
Johnson, J., concurs with the majority in affirming the judgment, though notin some of the reasons given therefor.