Court Opinion

ID: 8796329
Source: CourtListenerOpinion
Date Created: 2022-11-26 14:12:08.761732+00
Date Added: 2024-06-11T17:03:38.909628
License: Public Domain

REED, District Judge
(dissenting). I am unable to concur in the conclusion reached in -the foregoing opinion.
By the agreement of April 14th, the bankrupts agreed on completion of the sale to give the defendants a chattel mortgage upon the stock of merchandise purchased by them from the defendants as security for the purchase price thereof, and to keep such stock insured in the sum of $5,000 for the benefit of the defendants. April 26th, a mortgage was made pursuant to that agreement in which, however, some changes were made in regard to sales to be made by the bankrupts in the ordinary course of their business, satisfactory to the parties and presumably for their mutual benefit. The agreement to keep the property insured was not carried into the mortgage, and does not require that it shall be. The bankrupts took possession of the property upon the execution of the mortgage and began and continued the sale thereof at retail in the ordinary course of their business as agreed, adding to the stock by the purchase of other merchandise from time to time as it was reduced by such sales, until May 3, 1910, when the property was destroyed by fire. When the chattel mortgage was made the bankrupts were solvent; it was made in good faith to secure the indebtedness of the bankrupts to the defendants for the purchase price of the property. After the mortgage was made, the bankrupts, as they had agreed in the contract of April 14th, insured the property in an amount in excess of $5,000 but took the policies in their own name. In due time the loss was adjusted and the bankrupts gave to the defendants an order upon the insurance companies for some $3,300 of the insurance money to apply upon their indebtedness to the defendants for the purchase price of the merchandise, which amount was paid to the defendants by the insurance companies July 16, 1910. November 15, 1910, an involuntary petition in bankruptcy was filed against the mortgagors upon which they were in due time adjudicated bankrupts, and the plaintiff Huntington appointed as their trustee, who brought this suit and was permitted to recover from the defendants the amount of the insurance so received by them, upon the alleged ground that it was a voidable *855preference under the Bankruptcy Act of July 1, 1898, c. 541, 30 Stat. 544.
The transaction between the defendants and the bankrupts arose prior to the amendment of the Bankruptcy Act on June 25, 1910 (Act June 25, 1910, c. 412, 36 Stat. 839). No actual fraud is alleged and none was attempted to be proven. Prior to that amendment it had been frequently held by the Supreme Court that trustees in bankruptcy succeed only to the rights of the bankrupt in the property of his estate in cases unaffected by fraud. Thompson v. Fairbanks, 196 U. S. 516, 25 Sup. Ct. 306, 49 L. Ed. 577; Humphrey v. Tatman, 198 U. S. 91, 95, 25 Sup. Ct. 567, 49 L. Ed. 956; York Manufacturing Co. v. Cassell, 201 U. S. 344, 26 Sup. Ct. 481, 50 L. Ed. 782. In Thompson v. Fairbanks, the court, at page 526 of 196 U. S., at page 310 of 25 Sup. Ct. (49 L. Ed. 577), said :
“Under the present Bankrupt Act, the trustee takes the property of the bankrupt, in eases unafl'ecled by fraud, in the same plight and condition that the bankrupt himself held it, and subject to all.the equities impressed upon it'in the hands of the bankrupt, except in eases where there has been a conveyance or incumbrance of the property which is void as against the trustee by some positive provision of the act.”
See Mitchell v. Winslow, 2 Story, 630, 17 Fed. Cas. 527, No. 9673, appljdng this rule to an insurance policy.
Under the agreement of April 14th, upon the completion of the sale and the execution and recording of the chattel mortgage the defendants acquired not only a valid lien upon the mortgaged property, but also under the statute of South Dakota, and the settled principles of equity, an equitable lien upon the insurance on the mortgaged property.
The Civil Code of South Dakota (1903) provides as follows:
“Sec. 2022. A lion is created: (1) By contract of the parties; or (2) by operation of law. * * * ”
“Sec. 202-1. An agreement may be made to create a lien upon property not yet acquired by the party agreeing to give the lien, or not yet in existence. In such ease the lien agreed for attaches from the time when the party agreeing to give it acquires an interest in the thing to the extent of such interest.
“Sec. 2025. A lien may be created by contract, to take immediate effect, as security for the performance of obligations not then in existence.” Iverson v. Soo Elevator Co., 22 S. D. 638, 119 N. W. 1006; Grand Forks Nat. Bank v. Minneapolis, etc., Elevator Co., 6 Dak. 357, 43 N. W. 806; Wheeler v. Insurance Co., 101 U. S. 439, 25 L. Ed. 1055; Ketchum v. St. Louis, 101 U. S. 306, 318, et seq., 25 L. Ed. 999; Walker v. Brown, 165 U. S. 654, 17 Sup. Ct. 453, 41 L. Ed. 865; Hurley v. Atchison, T. & S. F. Ry. Co., 213 U. S. 126, 29 Sup. Ct. 466, 53 L. Ed. 729; Sexton v. Kessler, 225 U. S. 90, 32 Sup. Ct. 657, 56 L. Ed. 995; In re Ozark Cooperage Co., 180 Fed. 105, 103 C. C. A. 603 (this court); In re Sturtevant, 188 Fed. 196, 110 C. C. A. 68 (C. C. A. 7th Circuit) In re Bird (D. C.) 180 Fed. 229; Miller v. Aldrich, 31 Mich. 408; Cromwell v. Brooklyn Ins. Co., 44 N. Y. 42, 4 Am. Rep. 641.
And such lien or equity is not impaired by the amendment of June 25, 1910, to section 47a (2) of the Bankruptcy Act, giving to the trustee “as to all property coming into the custody of the court of bankruptcy, the rights of a creditor holding a lien.” Holt v. Henley, 232 U. S. 637, 34 Sup. Ct. 459, 58. L. Ed. 767.
The property in controversy herein, the insurance fund, never came into the custody of the court of bankruptcy.
*856In Wheeler v. Insurance Co., above (101 U. S. 439, 25 L. Ed. 1055), it appears that Johnson & Goodrich, commission merchants, being creditors of one Green for advances made to him, suggested to him that he should authorize them to effect insurance upon his buildings and other property for their better security. Green accordingly wrote them, authorizing them to effect such insurance, and they did procure from the defendant Insurance company a policy in their own names for $5,500. Before the expiration of the policy, the property was destroyed by ñre, and Johnson & Goodrich took measures to recover the insurance, which amounted to some $3,500 in excess of the amount due upon their advances. Wheeler & Co. intervened, and in equity claimed the insurance money as against the insurance company, Green, and Johnson & Goodrich. The defendants severally answered, and upon the hearing the court dismissed the bill, from which decree Wheeler & Co. appealed. It appeared upon the hearing that prior to the employment by Green of Johnson & Goodrich as his commission merchants, he had employed the firm of Foster & Gwyn as such, had become largely indebted to them, and gave them his notes secured by mortgages upon the same property mortgaged to Johnson & Goodrich, with an agreement in some of the mortgages to insure the buildings and machinery, and to transfer the policies to the mortgagees for their better security, or in default of doing this that the mortgagees and all subsequent holders of the notes secured by those mortgages should have the right to effect such insurance at his expense. These mortgages were all given and recorded before Johnson & Goodrich procured their insurance upon the property. Foster & Gwyn under the reserved right contained in their mortgage effected insurance for one year upon the buildings and machinery, but did not renew the same, and after it had expired the property was destroyed. Foster & Gwyn being largely indebted to Wheeler & Co. transferred to them the notes and mortgages by way of collateral security, and upon this security Wheeler & Co. made their claim for the insurance money upon two grounds: (1) That the insurance was effected in the name of Johnson & Goodrich, merely as agents of Green; and (2) upon the ground that when the insurance in question was about to be renewed by Foster & Gwyn they were assured by Green and by Johnson & Goodrich that the Johnson & Goodrich insurance was effected for their (Foster & Gwyn’s) benefit. The Supreme Court held against Wheeler & Co. upon each of these grounds; but Mr. Justice Bradley, speaking for the court, said at page 442 of 101 U. S. (25 E. Ed. 1055):
“But as the debt due to Johnson & Goodrich will not exhaust the whole amount of the insurance/and as the balance rightfully belongs to Green, the question arises whether, as to that balance, the claim of the appellants is not maintainable. It is undoubtedly the general rule that a mortgagee has no right to the benefit of a policy taken by the mortgagor, unless it is assigned to him. * * * But it is settled by many decisions in this country that, if the mortgagor is bound by covenant or otherwise to insure the mortgaged premises for the better security of the mortgagee, the latter will have an equitable lien upon the money due on a policy taken out by the mortgagor to the extent of the mortgagee’s interest in the property destroyed. (Citing the cases.) And this equity exists, although the contract, provides that in case of *857the mortgagor’s failing to procure and assign such insurance, the mortgagee may procure it at the mortgagor’s expense.”
In Cromwell v. Brooklyn Insurance Co., above (44 N. Y. 42, 4 Am. Rep. 641), it appeared that Cromwell was the assignee of a contract for the purchase of the lot in question from one Chesley. Chesley by the terms of the agreement was to build a house on the lot and convey it to one Eichenlaube, who was to insure the house for the benefit of Chesley. He did at first procure insurance in his name, which by the terms of the policy was payable to Chesley. When that policy expired the company refused for some reason to renew it. Eichenlaube then took out another policy in his own name, which contained no specifications that the loss, if any, was payable to Chesley or the plaintiff. The court said:
“But, in the absence of any proof to the contrary, it must be inferred that lie made the insurance in pursuance of his agreement, and for the benefit of his vendor. And such, undoubtedly, would have been the legal Inference, no matter what may have been his secret intention when he effected the insurance, provided he did it while in possession of the premises, and while the agreement between him and Chesley was binding, either in law or equity.”
But it is said that because the agreement of April 14th, to keep the property insured for the benefit of the defendants, was not incorporated in the chattel mortgage, it was waived by the parties. The testimony shows, however, without any dispute, that the bankrupts procured the insurance upon the mortgaged property intending it for the benefit of the defendants; for after the mortgage was made the defendants inquired of the bankrupts if they had procured the insurance, and were informed by them that they had; and upon the adjustment of the loss the right of the defendants to the insurance money was clearly recognized by the bankrupts giving to them an order or orders upon the insurance companies for the amount of the insurance received by the defendants; and the bankrupts testified that they gave the defendants such orders because by their agreement to keep the property insured they understood the defendants were entitled thereto to the extent of their indebtedness against the bankrupts. If there was any doubt of the intention of the parties that the defendants were to have the benefit of the insurance to the extent of their indebtedness, the order given by the bankrupts upon the insurance companies therefor seems conclusive o f the understanding of the parties, and the interpretation by them of their agreement should not he disturbed at the instance of the trustee, who stands only in the shoes of the bankrupts that he may recover this amount of this insurance for other creditors.
In Metropolitan National Bank v. Benedict Co., 74 Fed. 182, page 185, 20 C. C. A. 377, page 379, Judge Caldwell, speaking for this court, said:
“Moreover, parties have tlie undoubted right to make their own contracts, and to put their own construction upon them, and to regulate their rights and liabilities thereunder. If the court ‘leaves the parties to be governed by their understanding of their own language, it, in effect, enforces the contract as a ctually made. That they should be so permitted to construe their own agreement accords with every principle of reason and justice.’ * * * And when *858both parties to a contract, acting in good faith, are agreed as to its meaning and their rights under it, a stranger having no interest in the subject-matter of the contract cannot insist that a different interpretation shall be put upon it, or compel the parties to put that interpretation upon it which will benefit him.”
In Hubachek v. Brown’s Estate, 126 Minn. 359, 148 N. W. 121, cited by the majority, the agreement involved was by its plain terms a condition precedent to the completion of the purchase. The acceptance of the deed without exacting a compliance with such condition was necessarily a waiver thereof by the grantee. The ruling of the court in that case, as stated in the opinion, applies only to stipulations that are expressly made conditions precedent to the performance of the contract, and does not necessarily apply to stipulations or agreements that are not conditions precedent, citing Taylor v. Railroad Co., 27 S. D. 528, 132 N. W. 152; and see De Rue v. McIntosh, 26 S. D. 42, 127 N. W. 532, and cases there cited, and McDonald v. Daskam, 116 Fed. 276, 53 C. C. A. 554.
The insurance agreement in this case is in no sense a condition precedent to the completion of the contract of April 14th, but is an independent collateral agreement to insure the property for the defendants’ benefit; is not required to be in writing and is in no way inconsistent with the terms of the sale or of the chattel mortgage. Upon taking out the insurance policies, some time prior to the fire, an equitable lien at once attached thereunder to the insurance upon the property, which entitled the defendants to the insurance money to the extent of their interest in the property immediately upon its destruction by fire, which was May 3, 1910. McDonald v. Daskam, 116 Fed. 276, 53 C. C. A. 554; Grand Forks National Bank v. Minneapolis, etc., Elevator Co., 6 Dak. 357, 43 N. W. 806. As this was more than four months prior to the bankruptcy, the defendants are entitled to the insurance money received by them as against the plaintiff. McDonald v. Daskam, 116 Fed. 276, 53 C. C. A. 554, above.
Some question is made in the argument in behalf of the plaintiff that, as the mortgage covered after-acquired property which is not a part of the contract of April 14th, the insurance will not attach to such property. But the insurance company did not object to this and it is not for the plaintiff to do so. The question of the validity of a chattel mortgage covering after-acquired property is not open to discussion under the statute of South Dakota. Iverson v. Soo Elevator Co., 22 S. D. 638, 119 N. W. 1006; Grand Forks National Bank v. Minneapolis, etc., Elevator, 6 Dak. 357, 43 N. W. 806, above. And see Mitchell v. Winslow, 2 Story, 630, 17 Fed. Cas. 527, No. 9673.
This case upon its facts is so materially different from Long v. Farmers’ Bank, 147 Fed. 360, 77 C. C. A. 538, 9 L. R. A. (N. S.) 585, and In re Great Western Manufacturing Co., 152 Fed. 123, 81 C. C. A. 341, that the decision in those cases is not applicable here.
I reach the conclusion that the judgment of the District Court should have been for the defendants, and as it was not it should be reversed.