MR. JUSTICE BROWN, after stating the case, delivered the opinion of the court.
This is a contest between the attaching creditors and the chattel mortgagees of the property of John H. Schwartz, an insolvent debtor formerly engaged in business at Fort Madison and Chariton in the State of Iowa, and at Dallas in the State of Illinois. These two classes of creditors are in reality competitors in a race of diligence, the object of which was to obtain a lien upon and possession of the property in question.
1. As the case was referred by the court to a master to report, not the evidence merely, but the facts of the case, and his conclusions of law thereon, we think that his finding, so far as it involves questions of fact, is attended by a presumption of correctness similar to that in the case of a finding by a referee, the special verdict of a jury, the findings of a Circuit Court in a case tried by the court under Rev. Stat. § 649, or in an admiralty cause appealed to this court. In neither of these cases is the finding absolutely conclusive, as if there be no testimony tending to support it; but so far as it depends upon conflicting testimony, or upon the credibility of witnesses, or so far as there is any testimony consistent with the finding, it must be treated as unassailable. Wiscart v. D'Auchy, 3
The question of the conclusiveness of findings by a master in chancery under a similar order was directly passed upon in Kimberly v. Arms, 129 U.S. 512, in which a distinction is drawn between the findings of a master under the usual order to take and report testimony, and his findings when the case is referred to him by consent of parties, as in this case. While it was held that the court could not, of its motion, or upon the request of one party, abdicate its duty to determine by its own judgment the controversy presented, and devolve that duty upon any of its officers, yet where the parties select and agree upon a special tribunal for the settlement of their controversy, there is no reason why the decision of such tribunal, with respect to the facts, should be treated as of less weight than that of the court itself, where the parties expressly waive a jury, or the law declares that the appellate court shall act upon the finding of a subordinate court. "Its findings," said the court, "like those of an independent tribunal, are to be taken as presumptively correct, subject, indeed, to be reviewed under the reservation contained in the consent and order of the court, when there has been manifest error in the consideration given to the evidence, or in the application of the law, but not otherwise." As the reference in this case was by consent to find the facts, we think the rule in Kimberly v. Arms applies, and as there is nothing to show that the findings of fact were unsupported by the evidence, we think they must be treated as conclusive. To same effect are Crawford v. Neal, 144 U.S. 585, 596; Furrer v. Ferris, 145 U.S. 132.
2. The real question in this case is, whether the mortgages, which were awarded priority of payment by the decree of the court below, were valid securities at the time of the Schwartz failure, or were fraudulent and void as against his general creditors. If they were in fact given bona fide and for a valuable consideration, it is difficult to see why they should not be upheld, notwithstanding they were given for precedent debts, were executed and acknowledged under an impending fear of
The fact that the assignee or the preferred creditor of an insolvent debtor is a relative or intimate friend is doubtless calculated to excite suspicion; yet in reality there is nothing unnatural in a dealer or trader who is in need of credit, or a loan of money to carry on his business, first applying to his relatives for such loans, and if the evidence be undisputed that the money was advanced, the fact that the persons making the loan are relatives ought not to debar them from receiving security. Their rights are neither increased nor diminished by the fact of relationship. Magniac v. Thomson, 7 Pet. 348; Prewit v. Wilson, 103 U.S. 22; Estes v. Gunter, 122 U.S. 450; Bean v. Patterson, 122 U.S. 496; Garner v. Second National Bank, 151 U.S. 420, 432; Aulman v. Aulman, 71 Iowa, 124; Van Patten v. Thompson, (Iowa,) 34 N.W. Rep. 763; In re Alexander, 37 Iowa, 454; Doyle v. McGuire, 38 Iowa, 410. A general assignment to a relative as trustee for the benefit of creditors is open to more suspicion, since such are more often selected as instruments for creating a secret trust in favor of the assignor.
It is also true that the mortgages must have been given for a valuable consideration, and must have been executed and received in good faith and for an honest purpose. It has been the accepted law ever since Twyne's Case, 3 Coke, 80, that good faith as well as a valuable consideration is necessary to support a conveyance as against creditors. In that case Pierce, being indebted to Twyne in 400 pounds, was
In Twyne's case, the facts that the sale was accompanied by a secret trust in favor of the debtor, and that the vendor remained in possession, showed that it was not intended as a bona fide preference to the creditor, but merely as a trick to keep the property away from the other creditors.
But where a person, being lawfully indebted to several creditors, makes a mortgage or other conveyance to one for the open and avowed purpose of preferring him, then in the absence of a law of the forum prohibiting preferences, such mortgage or conveyance is valid, though it may operate to bar other creditors from obtaining satisfaction of their debts. A mortgage which may have the effect of hindering other creditors is not necessarily unlawful, though a mortgage given to defraud them is always so. Stewart v. Dunham, 115 U.S. 61; Estes v. Gunter, 122 U.S. 450; Smith v. Craft, 123 U.S. 436;
In this case the preferred creditors receive no more than they are entitled by law to have, and the fact that they know that other creditors will suffer by their preference does not show a want of good faith. The effect of every mortgage to a creditor as security for the payment of a preëxisting debt is to withdraw the value of the property covered by the security from the assets of the debtor, which would otherwise be available in satisfaction of his other debts. But unless a general bankrupt law, or a law of the particular State makes the preference illegal, it is difficult to see why mortgages given under the circumstances that these were given should be held to be invalid. The fact that they were given at night, under the instant apprehension of legal proceedings, and that their execution was followed by an immediate delivery of possession, only indicates that the insolvent debtor wished, in the selection of his creditors, to prefer his own friends, rather than the plaintiffs, who would have secured to themselves the position of preferred creditors by suing out attachments and levying upon his property. In short, they were attempting to do what the mortgagees themselves successfully carried out. The equities of the latter are at least equal to those of the plaintiffs. We do not understand it to have ever been doubted that a debtor may openly prefer one creditor to the rest, and may transfer property to him or give him security even after others have begun their actions. Holbird v. Anderson, 5 T.R. 235. In that case it was said by Lord Kenyon, p. 238: "The words of the statute, 13 Eliz., do not apply to this case, for this warrant of attorney was given on a good consideration; and the other words in the act, `bona fide,' only apply to those cases where possession is not delivered, or where it is merely colorable." See also Estwick v. Caillaud, 5 T.R. 420.
The fact that the execution of the mortgages was immediately followed by a delivery of possession of the property mortgaged, so far from being a badge of fraud, has rather a contrary tendency, and was evidently resorted to to avoid an implication of fraud from the retention of possession by the
It is also true that, by the law of Iowa respecting assignments for the benefit of creditors, preferences are forbidden; but the authorities in that State hold that a sale or mortgage to pay or secure the payment of preëxisting bona fide debts is not to be considered an assignment within the statute, even when made in contemplation of insolvency, or when the debtor, by the mortgage, intends to hinder other creditors who are about to obtain liens upon his property, unless, at least, the mortgage was intended to operate, not as a security, but as a general assignment for the benefit of creditors, or is made in such connection with a general assignment as to constitute both but one and the same transaction. Farwell v. Howard, 26 Iowa, 381; Southern White Lead Co. v. Haas, 73 Iowa, 399; Gage v. Parry, 69 Iowa, 605; Kohn v. Clement, 58 Iowa, 589; Aulman v. Aulman, 71 Iowa, 124.
It is sometimes difficult to determine whether a particular instrument is a mortgage or an assignment with preferences. The test most frequently applied is whether the conveyance is of all the property of the debtor, and is made to a trustee for the benefit of certain creditors. In such cases it is usually held to be an assignment, but if the conveyance be made directly to the creditor himself, it is ordinarily treated as a chattel mortgage. Jones on Chattel Mortgages, § 352 a; Burrill on Assignments, p. 11.
We do not regard the fact that the property conveyed was nominally more than double in value to the amount of debts secured thereby to be in itself indicative of fraud, since the property conveyed was a stock of goods of somewhat uncertain value, and when sold realized but little more than was necessary to pay off the mortgages. Indeed, this court held directly in Downs v. Kissam, 10 How. 102, 108, that it was not even a badge of fraud that a mortgage was made to cover more property than would secure the debt due.
The case, then, reduces itself to the simple question whether the mortgages were given for bona fide existing debts to the amount expressed upon their faces, and this involves an inquiry into the consideration of each mortgage separately.
3. So far as regards the mortgage to John H. Hellman, which covered only the stock at Fort Madison and the book accounts, both the master to whom the case was referred and the court, agreed in holding it to be valid. In this connection the master found Schwartz to be indebted to Hellman, his wife's father, as evidenced by his notes, for money borrowed, amounting with interest to $22,180.37; that Hellman before leaving Galena had prepared memoranda of these notes, which amounted upon their face to $20,380.98, together with another note for $1000, payable to his son John V. Hellman, in consideration of money loaned to Schwartz. This note had been assigned by the payee to his wife Wenona, but, being afraid that Schwartz was in a bad way financially, it was agreed between the father and son that the former should purchase the note, which was then in his safe; that Wenona should endorse it; that the father should be charged with it on his books, and the son, who was then owing the father to that amount or more, should be credited therewith. But the entry upon the books was not made until after John H. Hellman returned from Fort Madison, and was then entered as of December 29.
4. The mortgage to the German-American Bank, which covered not only the stock at Fort Madison, but that at Chariton, and the book accounts at both places, was given on its face to secure two notes of $5000 and $500 made to the bank, as well as a note for $1500 made to H. Cattermole, president of the bank, and assigned to the bank, together with a note of $1000 to Pauline Schwartz, also assigned to the bank, — these notes aggregating $8000. This mortgage was found by the master to be fraudulent, as against the general creditors, by reason of the inclusion of the Cattermole and Schwartz notes.
So far as concerns the Cattermole note, the finding is that McConn, the cashier of the bank, who acted for it at the Sunday evening meeting at Schwartz's house, demanded not only security for the bank, but for Cattermole himself. As Cattermole was not present, no transfer of the note could have then been made by him, and there is no pretence that it was then transferred. The note was not produced at the time, and McConn knew that there was no entry upon the books of the bank to show that the bank owned the note. It appears that the bank afterwards became the owner of the note by giving therefor its own note in exchange, although it is not certain when this took place, since the books of the bank show no entry whatever of the transaction, either to charge the bank with the liability or to credit it with the Cattermole note as an asset. But putting a construction upon this transaction most favorable to the plaintiffs, it only appears that the bank did not actually own
The mortgage of $1000 to Pauline Schwartz was sold and delivered by John H. Schwartz to McConn for about two-thirds its face value and interest. It seems that the money represented by this note had been sent, in 1879, in the form of a draft, by Hellman to his daughter Pauline, who was the wife of John H. Schwartz, as a Christmas present. Schwartz appears to have used the money himself, and given his note therefor, dated December 27, 1879. When the mortgage was given, he turned it over to the bank for its face value upon his wife's request that he should realize upon it for her. No entry was made upon the books of the bank because, as McConn explained, "it was a small matter, and we thought it would be adjusted in a few days, and we did not want any more of John H. Schwartz's matters mixed up." The money to pay for the note was taken from an envelope in the bank by McConn. This was undoubtedly outside of the usual course of banking business and was open to some suspicion; but there is nothing to impeach the consideration for which the note is said to have been given, and nothing but the somewhat unusual nature of the transaction to contradict McConn's story with reference to this purchase by the bank.
Of both these notes it may be said that whether they were actually owned by the bank or not, there is nothing to indicate that they were not just debts of John H. Schwartz. It would also seem that McConn's inclusion of these notes in the mortgage to the bank was made in good faith, supposing that he had the right to cover them by the same security he was taking in favor of the bank. While the fact that a mortgage is given for a larger amount than is due, is doubtless a suspicious circumstance, raising a presumption of fraud, and may, under certain circumstances, avoid the whole mortgage, (Wood
In all such cases the question of good faith is one of fact, and a mere error of judgment will not be imputed as a fraud. The fact that the debt so included was a bona fide debt, and that the act of the mortgagee in so including it was subsequently affirmed by the creditors interested, will be strong evidence that no actual fraud was intended. Shirras v. Caig, 7 Cranch, 34; Lombard v. Dows, 66 Iowa, 243; Davenport v. Cummings, 15 Iowa, 219; Miller v. Lockwood, 32 N.Y. 293; Frost v. Warren, 42 N.Y. 204; Goff v. Rogers, 71 Indiana, 459, 461; Barkow v. Sanger, 47 Wisconsin, 500, 505; Van Patten v. Thompson, (Iowa,) 34 N.W. Rep. 763.
5. The mortgage to Catharine Schwartz was given to secure one note for $2296.35; another for $500; a note for $5000, payable to Katie Kraft, Schwartz's sister, upon which Catharine Schwartz was surety; a note for $318, payable to A.S. Gage & Co., upon which Catharine was surety, and which had been paid by her; and also the sum of $2382.97 due upon an open account for goods and merchandise, and cash advanced and owing by John H. Schwartz. This mortgage is assailed as fraudulent, upon the ground that the last item consisted of merchandise and cash advanced to John H. Schwartz from another store in Fort Madison, the business of which was solely conducted by Joseph C. Schwartz in the name of his mother, Catharine. It seems that when the business began she loaned to Joseph $8000, which composed the capital of the concern, which loan was secured by note. He bought and sold the goods, paying all the bills, and not accounting to her, save to pay the interest due upon the note, and took the profits to himself. It thus appears that the debt really belonged to Joseph C. Schwartz and not to Catharine, although the three
Upon the whole, we think the court below was correct in sustaining this mortgage.
6. The mortgage to Frank B. Kent covered the property both at Fort Madison and Chariton, and was given to secure the payment of a note for $2500, executed by Schwartz, March 1, 1884, and payable one year after date. His decree was for $3601.42.
In this connection a motion was made by Kent to dismiss the appeal from the allowance of his claim, upon the ground that the requisite amount is not involved to give jurisdiction
As it is clear in this case that the validity of each mortgage depended upon its own consideration, independent of the others, and the decree in favor of each mortgagee was several and distinct, the motion to dismiss must be granted.
And as we agree that there was no error in the court below holding the other mortgages to be valid securities, and entitled to preference as against the attaching creditors,
The appeal as to Kent must be dismissed, and as to the others the decree of the Circuit Court must be affirmed.