Court Opinion

ID: 4893187
Source: CourtListenerOpinion
Date Created: 2021-09-02 23:53:14.155586+00
Date Added: 2024-06-11T08:09:48.191491
License: Public Domain

Bonner, Associate Justice.
The lien claimed by the plaintiff below, A. B. Peticolas, must arise from his mortgage, and not from the sequestration, which is merely a judicial deposit. (Bowler v. Stonum, 6 Tex., 72.)
The principal question necessary for the decision of this case involves the legal effect, as to third parties, of a mortgage upon a stock of goods, where the mortgagor retains possession, and, with the knowledge and consent of the mort-' gagee, sells them in the usual course of trade and applies the proceeds to rejffeuish the stock and not to the payment of the debt.
This feature of the case as presented is one of first impression in this court, and we have endeavored to give it that careful consideration and patient investigation of the author- • ities which its great practical importance demands.
The difficulty is not so much in finding numerous adjudications of the highest courts of last resort upon the question, but in adopting that line of decisions which seems most in consonance with public policy, reason, and justice.
At least ever since the celebrated Twyne’s ease, 3 Coke, 80, no subject, perhaps, has occasioned more discussion and diversity of judicial opinion than the questions,—What consti*645tute badges of fraud sufficient to avoid the conveyance of a debtor? and whether they are conclusive presumptions of law to be decided by the court, or are mere prima-facic presumptions of fact to he considered by the jury ?
As has been said, the conflicting decisions upon these questions cannot be reconciled by any process of reasoning or on any principle of law. We have neither the time nor inclination to enter fully into the contest upon this great battle-field of judicial strife, but shall content ourselves to adhere to the tendency of our own decisions, so far as they may be analogous, and, where we have not this aid, to adopt that-line of decisions which seems best to comport with sound public policy.
One of the main points decided in Twyne’s case was to make it a badge of fraud for the debtor to continue in possession of the property and use it as his own, as by reason thereof he could trade and traffic 'with others and defraud and deceive them.
Our statute of frauds contains a" provision for registration which in its legal effect is equivalent to notice of the conveyance which possession by the mortgagee would give, and thus virtually closes the door to an avenue which formerly occasioned much litigation. As said by a learned court in speaking of a similar statute, it16 is a substitute for, and takes the place of and repeals, all those imputations of fraud which would arise from the retention of possession by the grantor.” (Bullock v. Williams, 16 Dick., 33, as quoted with other authorities in Hughes v. Cory, 20 Iowa, 403.) In this last-named case it is held that mere .retention of possession, where the instrument is recorded, is no longer either per se fraudulent or a badge of fraud in law. It may be a circumstance, with others, to prove fraud in fact.
This would apply with additional force in cases óf mortgages, as the possession remaining with the mortgagor is consistent with the purposes of the instrument.
But, as held, by the Supreme Court of the United States in *646Robinson v. Elliott, 22 Wall., 513, and by several State courts, the effect of the statute is not to make a recorded mortgage prima-facie valid which, prior to the statute, would have been held fraudulent in law; and it does not protect a mortgage from those stipulations which at common law would otherwise be deemed fraudulent.
One of these stipulations, would be the right of the mortgagor to remain in possession of goods and sell them in the usual course of trade.
It is believed that there should be a marked and well-defined distinction, upon reason and public policy, drawn between a mortgage with power simply to retain possession, and one with power to retain possession and dispose of the property as though the absolute title and right of disposition still belonged to the mortgagor.
It is not claimed—and the high character of the parties to the contract would repel the presumption—that in the transaction under consideration any fraud in fact was intended, and the case will be disposed of under the legal presumptions of fraud arising under the testimony.
Fraud in law, or constructive fraud, is defined to be “such acts or contracts as, although not originating in any actual evil design or contrivance to perpetrate a positive fraud or injury upon other persons, are yet, by their tendency to deceive or mislead other persons, or to violate private or public confidence, or to impair or injure the public interests, deemed equally reprehensible with positive fraud, and, therefore, are prohibited by law as within the same reason and mischief as acts and contracts done malo animo.” (1 Story’s Eq. Jur., sec. 258; McKibbin v. Martin, 64 Penn. St., 356.)
The decisions of this court under our statute, which requires questions of fact to be submitted solely to the jury, leave all questions of fraud in fact to their determination. (Bryant v. Kelton, 1 Tex., 415; Briscoe v. Bronaugh, 1 Tex., 326; Kerr v. Hutchins, 46 Tex., 384.)
When, however, well-defined legal fraud is shown upon *647the face of the instrument itself without a resort to extrinsic testimony, then, as in any other contract which is expressly illegal or contrary to public policy, it is the duty of the court to construe and declare its legal effect. (Baldwin v. Peet, 22 Tex., 708; Bailey v. Mills, 27 Tex., 484; Robinson v. Elliott, 22 Wall., 513; Collins v. Myers, 16 Ohio St., 547.)
It is held by the Supreme Court of the United States, in the above case of Robinson v. Elliott, and by numerous well-considered decisions of the State courts, that the retention of possession of a stock of goods by a mortgagor, though the instrument be recorded, with power in him to sell the same in the usual course of trade without applying the proceeds to the mortgage debt, but to substitute other goods, is fraudulent in law, without regard to the good faith in fact of the transaction. (Bump on Fraud. Con., 123-130; Herm. on Chat. Mort., chap. 10, and numerous authorities cited in notes; 2 South. Law Rev., (N. S.,) 731.)
These decisions are based upon the propositions that such instruments are void as being against public policy and inconsistent with the true purposes of a mortgage, which, either before or after condition broken, is but a mere security for the debt, and which is intended for the ultimate benefit of the creditor, and not of the debtor; and that a mortgage with such power of sale is but a reservation for the use and benefit of the debtor, and but a mere expression of confidence, as there can be no real security where there is no certain lien.
Perhaps the most pointed reasoning to sustain this proposition is found in Collins v. Myers, 16 Ohio St., 547, from the able opinion in which case we quote:
“The object of a mortgage is to obtain a security beyond a simple reliance on the honesty and ability of the debtor to pay, and to guard against the risk of all the property of the debtor being swept off by other creditors, by fastening a specific lien upon that covered by the mortgage. But a mortgage with possession and power of disposition in the mortgagor, is nothing at last hut a reliance upon the honesty *648of the mortgagor, and in fact is no security, as it is within the power of the mortgagor, at. any moment, to defeat the mortgage lien by an entire disposition of the whole property covered by the mortgage. Such a mortgage, then, is no security so far as the debtor is concerned, and is of no benefit except as a ward to keep off other creditors. The very nature of a mortgage is to fasten a lien upon specific property; and the courts have gone far enough when they have permitted an honest possession in the mortgagor. * * * But in this case there is no specific lien, but a floating mortgage, which attaches, swells, and contracts as the stock in trade changes, increases, and diminishes, or may wholly expire by entire sale and disposition, at the will of the mortgagor. Such a mortgage is no certain security' upon specific property.
“In such case the whole right to dispose of the property to pay a debt depends upon the will of the debtor, not affected by the rights of the mortgagee; and what reason is there in permitting the will of the debtor to determine whether property shall legally go to pay a debt or not ? If it be the wall of the debtor to appropriate the mortgaged property to pay the debt, it is binding as against the mortgagee; but if it be not the will of the debtor, and the property is seized upon execution, the rights of the mortgagee fasten upon the property and take it away from the execution creditor. Then the property is not held by the mortgage, but by the will of the debtor; because if the debtor sees proper to dispose of it, he has the power under the mortgage. He may dispose of the property, defeat the mortgage, and put the money in his own pocket; but if he refuses to pay a debt, and you seize the property in execution against his will, the mortgage steps in and restores it to the. debtor. The whole matter, then, appears to rest upon the option of the debtor to appropriate the mortgaged property to the payment of his debts or not, and not upon'the mortgage. Ho reasoning will change this result if a mortgagor retains possession and the full power of disposition over the mortgaged property.
*649“ A mortgage upon a specific article, with possession and power of disposition left in the mortgagor, is in truth no mortgage at all; it is no certain lien. The power to hold possession and dispose of the property is inconsistent with the very nature of a mortgage. It, indeed, would not, perhaps, be going too far to say that such an instrument was a nullity.
“As to all the world, except as to the parties themselves, such a mortgage will be held void, as against the policy of the law.”
On the other hand, -it is contended that there are no conclusive presumptions of fraud, except such as are expressly so made by statute, or where the act is necessarily a fraud upon creditors; as, where an insolvent debtor gives away his estate.
After mature consideration, we have reached the conclusion that the weight of authority and sounder reason is with those decisions which hold such mortgages, although recorded, to be void, except as between the parties thereto, irrespective of the good faith in fact of the transaction; that it should be so declared by the court if the intent and purpose of the parties to make such a mortgage are manifest from the terms of the instrument itself, or by the jury if not so manifest,-but clearly shown by uncontradicted testimony. The principle is the same, the only difference being as to the character of the evidence and mode by which it is established.
It does not become necessary to decide whether such power to sell was, by necessary implication, given by the terms of the instrument now under consideration. The cause was submitted to the court without a jury, and the agreed ■ statement of facts in the record shows that it was expected by the plaintiff below himself, that. Carpenter would sell in the usual course of trade, and with the proceeds replenish the stock; and that he knew that Carpenter was thus disposing of the mortgaged stock. Under this testimony, as applied to the law, we think the court erred in holding the mortgage valid *650as against the plaintiffs in error, and that had a jury so found under the evidence the verdict should have been set aside. For this error the judgment below should be reversed.
Another very important question presented by the record is that of the legal effect of a mortgage, as to third parties, upon after-acquired goods added to the mortgaged stock in trade.
In the opinion of the court, this and the remaining questions are not necessary to a proper decision of the case under the conclusion to which we have come, and as it is also a new question in this court, the determination of which might seriously affect important rights, we do not wish, without further argument and an exhaustive review of the authorities, and in a case in which it is necessarily involved, to decide it; hence no opinion is given upon this branch of the case.
Judgment reversed.
Judgment reversed.