Case Name: The First National Bank of Abilene v. D. W. Naill et al.
Court: Kansas Supreme Court
Jurisdiction: Kansas
Decision Date: 1893-07
Citations: 52 Kan. 211
Docket Number: 
Parties: The First National Bank of Abilene v. D. W. Naill et al.
Judges: All the Justices concurring.
Reporter: Kansas Reports
Volume: 52
Pages: 211–217

Head Matter:
The First National Bank of Abilene v. D. W. Naill et al.
1. Chattel Mobtgage, When not Fraudulent. It is not a fraud on other creditors fox one haying a valid claim to obtain security for the amount actually due by chattel mortgage, where no more property is covered than is necessary to secure the debt.
2. Bank, Protecting its Own Interest. A bank having a claim against an insolvent firm, which is consulted by a firm of other creditors with reference to collecting and securing their claim, is not legally bound to disclose the existence of its claim to such firm, but may keep silent and proteot its own interest, provided it is guilty of no fraudulent conduct, and does nothing more than is necessary to its own protection.
Error from Dickinson District Court.
The First National Bank of Abilene, as plaintiff, brought this action against D. W. Naill, as sheriff of Dickinson county, and Lawrence, Manning & Cushing, to recover the value of a stock of boots, shoes, and other merchandise, claiming under a chattel mortgage executed by M. P. Shearer & Co. on the 4th of June, 1888, to secure a note for $4,444, and alleging the wrongful conversion thereof by the defendants. Defendant Naill answered, alleging that the mortgage to plaintiff was given to defraud, hinder and delay the creditors of M. P. Shearer & Co., and that, as sheriff, he had levied six writs of attachment, each having duly come into his hands, on the property in controversy. Lawrence, Manning & Cushing also answered, denying that Shearer & Co. were indebted to the plaintiff, and alleging that Shearer & Co. were indebted to them in about the sum of $1,586.50, and that the bank was, and bad been, their agent for the collection of their claim; that plaintiff, while acting as their agent, had colluded with Shearer & Go. to defraud them, and to hinder and delay them in the collection of their debt; and that they had caused the property to be attached to satisfy their claim. The case was tried with a jury, and a general verdict rendered in favor of the defendants. Three special questions were also answered— one submitted by plaintiff, as follows:
“ What amount did M. P. Shearer & Co. owe the plaintiff on the 4th day of June, A. D. 1888? Ans. $4,444.”
And two by defendants:
“1. Was it a part of the inducement of the plaintiff in taking the mortgage to enable M. P. Shearer & Co. to accomplish a preference of creditors? A. Yes.
“2. Was it part of the inducement of plaintiff in taking the mortgage to enable M. P. Shearer & Co. to place their property beyond the reach of creditor or creditors not sustaining confidential relations with M. P. Shearer & Co.? A. Yes.”
A motion for a new trial was overruled, and judgment entered in favor of the defendants on the verdict. The evidence tends to show that the value of the stock of goods was about $5,000. The plaintiff Bank brings the case here.
Stambaugh & Hurd, for plaintiff in error:
Two questions are presented upon the facts as they appear in this record: First, was the mortgage made to the plaintiff in error by M. P. Shearer & Co. fraudulent as to the creditors of M. P. Shearer & Co. generally? Second, did the plaintiff in error sustain such relation to Lawrence, Manning & Cushing, defendants in error, as would prevent it from securing its own claim to the exclusion of Lawrence, Manning & Cushing? If these questions must be answered in the negative, then the judgment herein should have been for the plaintiff and not for the defendants, and this case should be reversed.
The cross-examination of Mr. Hayes by Mr. Burton traces the indebtedness from its inception to the note for $4,444, and none of this testimony is attempted to be contradicted ; therefore, the fact is that M. P. Shearer & Co. owed the plaintiff bank the money for which this note is given, and for the indebtedness of the firm and on account of the business in which they were engaged. It follows that the debt was a bona ficle debt, and, as to the general creditors of M. P. Shearer & Co., the bank had a right to take the mortgage and secure the debt, if taken in good faith and for such purpose. The bank took the mortgage; it filed the same in the office of the register of deeds; it went into immediate possession of the stock; and there is no attempt to show that there was any agreement, understanding or intention that M. P. Shearer & Co. would be protected or aided in any manner by the taking of the mortgage to the bank. It was an endeavor, pure and simple, to secure the claim of the bank, and no attempt was made upon the trial of this case to show to the contrary. If this is correct, the first question is disposed of.
The second question should not have been submitted. This is answered in the affirmative. It was error to submit this question. It also implies that the plaintiff bank was inducing M. P. Shearer & Co. to make a note and mortgage in this case for the purpose of securing it and other creditors to the exclusion of creditors not sustaining confidential relations with M. P. Shearer & Co. Now, as we have said, if there was no evidence of, and no intention on the part of Shearer or the bank, either to secure any other creditor of M. P. Shearer & Co. than the bank by the mortgage in controversy — and this question implies in its language, and the jury would likely to be misled by such implication, that if it was the intention of the bank in taking this mortgage to enable M. P. Shearer & Co. to prefer the bank to the other creditors of M. P. Shearer & Co. because the bank sustained a confidential relation to M. P. Shearer & Co.— then the mortgage would be void and fraudulent as to these defendants. If this interrogatory is to-be construed, together with its answer, to be what it should have been — simply an inquiry as to whether or not the bank was attempting by the taking of this mortgage to have itself preferred to the other creditors of M. P. Shearer & Co., and M. P. Shearer & Co. were attempting to prefer the bank to the other creditors, and whether or not the bank was able to attain this result by reason of the confidential relations existing between it and M. P. Shearer & Co.— then it is entirely consistent with the legality of the transaction between the bank and M. P. Shearer & Co., and it, as well as the first question propounded by counsel for the defense, and its answer, construed in the light of the facts as they appear in this record and the instructions of the court, are both entirely inconsistent with the general verdict.
Burton & Moore, and J. H. Mahan, for defendants in error:
There was but one issue in this case for the jury, and that issue was, did the bank act in good faith in taking its mortgage at the time and under the circumstances under which it was taken ? It is true it is not necessary under ordinary circumstances for one creditor to disclose to another the nature of his relations to their common debtor; but, in this case, fair dealing and common honesty demanded that Bonebrake and Mosher should disclose their relations to the defendants, or should have at least advised the defendants that their relations were such to their debtor that they could not with propriety act as the representative of the defendants respecting their claim. This they did not do, notwithstanding Manning presented the statement of Shearer to them, that the whole debt of the concern was not more than $3,300, and that the defendants' debt comprised one-half of this amount, which undoubtedly was honestly made by Shearer, yet neither Mosher nor Bonebrake intimated that they knew (which they did know, if their mortgage was just) that such statement was not true, but acted in a manner affirmatively to lead Manning to believe that it was true. See Bump, Fraud. Convey., pp. 223, 224, tit. “Preferences"; 8 Am. & Eng. Encyc. of Law (1st. ed.), pp. 644, 645, and note 1; Young v. Hughes, 32 N. J. Eq.*383.

Opinion:
The opinion of the court was delivered by
Allen, J.:
In order to uphold the judgment in this case under the issues, tried, it must appear either that the plaintiff's mortgage was made for the purpose of hindering, delaying or defrauding other creditors of M. P. Shearer & Co., or that the relations of the plaintiff with Lawrence, Manning & Cushing were such as to preclude it from the right to obtain security of its own claim to the exclusion of Lawrence, Manning & Cushing. The jury settled the question as to the validity of plaintiff's claim by finding that there was an actual indebtedness owing by Shearer & Co. to the bank of the amount mentioned in the mortgage. As the highest estimate placed on the value of the mortgaged stock of goods was about $5,000, it cannot be claimed that more property was covered by the mortgage than was fairly necessary to secure plaintiff's claim. Under this state of facts, although the giving of this mortgage might operate to deprive all other creditors of any opportunity to collect their debts, it still is not fraudulent. In this state a debtor has a right to pay or secure one creditor in preference and to the exclusion of others. (Bliss v. Couch, 46 Kas. 400; Randall v. Shaw, 28 id. 419; Tootle v. Coldwell, 30 id. 125.)
"Were the relations of the bank to Lawrence, Manning & Cushing such as to preclude it from the right to secure its claim to their exclusion? It appears from the evidence that the claims of Lawrence, Manning & Cushing against Shearer A Co. had been sent to the bank for collection. On April 23, 1888, the cashier of the bank, Mosher, wrote for instructions to hand to an attorney, saying, "It is hardly in our line to assume the functions that would seem necessary in such case," referring to the taking of security for the claim. It appears that Mr. Manning was in Abilene on the 11th and 12th of April, 1888, for the purpose of securing their claim, which had ail been included in notes before that time. Shearer & Co. made a statement showing their entire indebtedness to be $3,300, which included the claim of Lawrence, Manning & Cushing, and only about $100 or $200 to the bank. Manning testified that this statement was shown by him to Mr. Mosher, who, in answer to the question, " What do you think of it?" said, "I guess it is right. Of course, I have no means of knowing Martin's indebtedness, but, from what I know of him, I think he would give you a correct statement, and 1 should judge that statement is nearly correct." Manning was endeavoring at that time to obtain security for their claim, but failed to get it. After this, and on April 23, Mosher wrote the letter above mentioned. Manning returned to Ot-tumwa, Iowa, where his firm is located, and, on the 31st of May following, again went to Abilene to look after this claim. He had frequent conversations with officers of the bank about it. He also employed án attorney, and his attorney talked with the vice president and attorney of the bank in reference to obtaining security. During all these conversations, from first to last, the existence of the bank's claim against Shearer & Co. was never disclosed by any officer of the bank to Lawrence, Manning & Cushing, or their attorney. The conduct of the officers of the bank in this respect may perhaps be inconsistent with good morals, but we cannot declare as a matter of law that the plaintiff was bound to disclose to another creditor the existence and amount of its claim. To do so might jeopardize its own interests. In this connection, we might say that Lawrence, Manning & Cushing are not claiming that the chattel mortgage which the bank took inured to their benefit because of the fiduciary relations existing between them, but are attacking the validity of the mortgage itself, and are claiming, not through the title acquired by the plaintiff, but adversely to it. They were on the ground with an attorney for the purpose of protecting their rights. The fact that the bank kept silent as to its own claim and protected its own interest in preference to theirs A A cannot be held to be fraud. Nor is the claim that they were relying on the bank to protect their interests supported by their own evidence. While it it true that they coun seled and advised with the officers of the bank, Mr. Manning, one of the firm, was there, and was certainly free at all times to act on his own judgment. The answer does not allege any action or declaration on the part of the plaintiff constituting an estoppel against the assertion of its claim, nor do the facts disclosed by the evidence show that the defendants parted with any property or made any contract on the faith of information received from the officers of the bank, or of their statements or conduct in relation to these matters.
There is evidence in the record tending to impeach the validity of plaintiff's claim against Shearer & Co., but the jury settled all that controversy in favor of the plaintiff, having found that the plaintiff had a valid claim for $4,444, the exact amount for which it took security. We are unable to find evidence in the record showing that it sustained any such relation to other creditors as to preclude it from protecting its own interests.
It will be observed that the verdict and judgment are in favor of all the defendants, thus not merely sustaining the attachment of Lawrence, Manning & Cushing, but also exempting the defendant Naill from all liability on account of the seizure of the stock of goods, and in effect sustaining the attachments in favor of the other parties named in the sheriff's answer, to whom it is not claimed that the plaintiff sustained any peculiar or fiduciary relations.
The judgment must by reversed, and a new trial ordered.
All the Justices concurring.