Court Opinion

ID: 5509224
Source: CourtListenerOpinion
Date Created: 2022-01-10 03:29:40.354896+00
Date Added: 2024-06-11T08:34:07.449723
License: Public Domain

BROWN, P. J.
The trial court decided that the provision in the mortgage relating to after-acquired property rendered it, as to such property, void against the assignee. He found, however, that the execution and delivery of the mortgage was an honest transaction, and held the mortgage to be a valid lien upon such of the mortgaged property as was transferred to the assignee; and the question presented upon this appeal is whether this latter ruling can be sustained, in view of the undisputed agreement between the parties relating to the mortgagor’s power to sell the property. The rule has been settled by numerous authorities that an agreement between the mortgagee and mortgagor that the latter may sell the mortgaged property for his own benefit will render the mortgage void as to the mortgagor’s creditors, and it is immaterial whether the agreement is expressed in the mortgage itself or exists by tacit understanding and arrangement between the parties. Mandeville v. Avery, 124 N. Y. 376, 26 N. E. 951; Reynolds v. Ellis, 103 N. Y. 115, 8 N. E. 392; Potts v. Hart, 99 N. Y. 168, 1 N. E. 605; Southard v. Benner, 72 N. Y. 424; Robinson v. Elliott, 22 Wall. 524. There is nothing in Brackett v. Harvey, 91 N. Y. 214, which is in conflict with this rule. That case decided that a chattel mortgage was not rendered void by an agreement by which the mortgagor was permitted to sell the mortgaged property and apply the proceeds to the payment of the mortgage debt, and, as subsidiary thereto, an agreement by the mortgagee to take and apply on the debt good business paper given to the mortgagor on sales made on credit, and that the mortgagors might use a part of the avails of such sales tq replenish their stock, the substituted property being placed under the lien of the mortgage by monthly renewals thereof. The rule that agreements which permit a mortgagor to sell for his own benefit are necessarily fraudulent was distinctly recognized by the court. Such agreements, it was said, “strip the mortgage of its whole force as a security to the holder, and make it merely a shield to the debtor.” *55In this case it is a necessary conclusion from the provision of the mortgage, the note, and the written agreement between the parties for the purchase and sale of the store, that the mortgagor was to sell the stock in the usual way of a retail store, and out of the profits of the business pay to the mortgagee $50 a month, or more or less, according as the profits warranted a larger or smaller payment. Such an agreement we think was necessarily fraudulent. The provision for the payment of $50 from “the profits” implies an agreement that the mortgagor may, out of the proceeds of the sale of the mortgaged property, pay the rent of the store and the expenses of the business. This was a provision for him to use the property for his own benefit. However, there was no restriction as to sales on credit, and bad debts contracted from sales so made would necessarily be considered at some time before the maturity of the mortgage in determining the profits of the business. The mortgagor was at liberty to have sold out the whole of the mortgaged property on credit. The accounts of such sales would not, under the agreement between the parties, be transferred to the mortgagee and applied upon his debt, but would be collected by the mortgagor and paid over to the mortgagee only in case the “profits” of the whole business warranted it. That an agreement which would permit such results is fraudulent as to creditors of the mortgagor is beyond question. Jones, Chat. Mortg. (4th Ed.) § 401; Bank v. Westbury, 16 Hun, 458. It tends to mislead, delay, and hinder creditors in collecting their debts, and, as was said in Brackett v. Harvey, supra, “opens the door to fraud and permits the mortgagor to use the property for his own benefit, utilizing the mortgage as a shield against creditors.”
The judgment must be reversed, and, as a new trial would be useless, the complaint is dismissed, with costs. All concur.