1. A mortgage of his entire estate, executed by an insolvent
mortgagor to a creditor who knows of his insolvency and who, for
the purpose of giving him a fictitious credit, actively conceals
the mortgage, withholds it from record, and represents him as
having a large estate and unlimited credit, by which means he is
enabled to contract other debts which he cannot pay, is void at
common law.
2. A mortgage executed by an insolvent with intent to give a
preference to a creditor, who has reasonable cause to believe him
to be insolvent and knows that it is made in fraud of the
provisions of the Bankrupt Act, and who, for the purpose of evading
them, actively conceals it and withholds it from record for two
months, is void although executed more than two months before the
filing of a petition in bankruptcy by or against the mortgagor.
The bill in this case was filed Jan. 26, 1875. The suit was
brought to foreclose a mortgage executed by Allen lately of the
City of Chicago, in the State of Illinois, to Allen Stephens &
Co., of the City of New York, a firm composed of Allen the
mortgagor, and Stephens and Blennerhassett. The bill of complaint
set out the mortgage in full, as follows:
"NEW YORK, 18 Nov., 1874 -- I hereby acknowledge the receipt of
four hundred and sixty-five thousand four hundred and seventy-six
and 88/100 dollars of advance to the Cook County National Bank, of
Chicago, for my account, same being made by Allen Stephens &
Co. in money, paper, and endorsements. I have arranged with them
for additional advances. In consideration thereof, I hereby grant
and convey to Allen Stephens & Co., by way of mortgage and
security for such advances, all my real estate of every kind and
description, and wherever situated."
"B. F. ALLEN"
This instrument was duly acknowledged by Allen before a notary
public in the City of New York and delivered to the notary public
in the City of Blennerhassett. It was not recorded until Jan. 19,
1875. On that day, it was filed for record in Cook County,
Illinois, and on the next day in Polk County, Iowa.
Page 105 U. S. 101
The bill charged
"That in consideration of said security the complainants had
further advanced to said Allen in money and valuable securities,
and become personally liable by endorsement of securities for said
Allen in the further sum of four hundred and thirty-four thousand
five hundred and twenty-three dollars and twelve cents, making a
total amount of advancements and endorsements on account of said
security of the sum of $900,000, paid and advanced by your orators,
and for which they became liable as endorsers."
The bill then gave a description of the real estate which
complainants claimed was covered by the mortgage, and prayed for an
account of the moneys advanced by the complainants to Allen and the
moneys paid by them on account of the liabilities incurred and the
amounts intended to be secured by the mortgage, and for a
foreclosure of the same, and general relief.
On Feb. 8, 1875, the mortgage mentioned in the bill was assigned
by Allen Stephens & Co. to the Charter Oak Life Insurance
Company of Hartford, Conn. and on April 17 that company, leave of
the court having been obtained allowing it to intervene and become
a party complainant, filed a supplemental bill, in which the
assignment of the mortgage was averred. A petition in bankruptcy
was filed Feb. 23, 1875, against Allen in the United States
District Court for the District of Iowa. He was adjudged a bankrupt
April 22, and on July 1 following Hoyt Sherman was appointed
assignee of his estate.
On Aug. 7, 1875, Stephens and Blennerhassett, and the Charter
Oak Life Insurance Company, filed their bill of review, in which
they prayed that Hoyt Sherman, the assignee of Allen might be made
a party defendant. Allen was retained as a defendant on account of
a claim of homestead which he set up to certain of the property
covered by the mortgage.
In this bill, which is called in the record "a bill of revivor
and consolidated bill," the complainants averred, that prior to the
date of the mortgage, Allen had applied to Stephens and
Blennerhassett, as co-partners in the firm of Allen Stephens &
Co., in behalf of the Cook County National Bank, to make to the
bank, upon his credit and responsibility, certain large
advances
Page 105 U. S. 102
of money, commercial paper, and endorsements, and that in
pursuance of such application, Allen Stephens & Co. did make
such advances to the amount of $465,476 prior to the date of the
mortgage, and that after its date,
"they continued to make advances of money and valuable
securities to the said Cook County National Bank at the request of
said Allen and between the said date of the 18th of November, 1874,
and the date of the suspension of payment by the said Cook County
National Bank, as hereinafter set forth, in addition to the said
sum of four hundred and sixty-five thousand four hundred and
seventy-six 88/100 dollars, ascertained and acknowledged to have
been received at the date of said mortgage, the said Allen Stephens
& Co. advanced in the aggregate the sum of two million seven
hundred and twenty-two thousand two hundred and eighty-four and
29/100 dollars."
"That said Cook County National Bank from time, to time between
said dates, to-wit, between the said eighteenth day of November,
1874, and the eighteenth day of January, 1875, made remittances to
the said firm of Allen Stephens & Co., on account of said
advances, which remittances were made in currency and in bills
receivable, on which currency was realized, and all of which was
applied on account, and was sufficient to extinguish and did
extinguish wholly the amount so advanced prior to the date of the
execution of said mortgage, but was wholly inadequate to pay the
amount advanced subsequent to said date. That the balance due on
account of said advances and in excess of the credits and
remittances aforesaid, on the said eighteenth day of January, 1875,
and still due and unpaid, is the sum of nine hundred thousand
dollars."
Sherman, the assignee, filed his answer to this bill in which he
averred that the advances made by Allen Stephens & Co. prior to
the date of the mortgage were made to Allen on his own individual
account and for his own use, and not to the Cook County National
Bank, but denied that such advances amounted to the sum of
$465,476, "or anything like that amount." He admitted the execution
of the mortgage, but charged that on and prior to its date Allen
was largely indebted to persons and banks in New York City and to
the Cook County National Bank; that he was insolvent, his
liabilities
Page 105 U. S. 103
were more than $1,500,000, and exceeded his assets by at least
$600,000; that the Cook County National Bank was embarrassed and
unable to pay its debts, and that all these facts were then well
known to Stephens and Blennerhassett. That they, desiring to take
advantage of the necessities of Allen and desiring to extort from
him a mortgage on his real estate in Iowa and elsewhere, in fraud
of his other creditors, falsely represented to him that he was
largely indebted to the firm of Allen Stephens & Co., for
advances theretofore made to the Cook County National Bank for his
account,
"and that if he, Allen would execute to said firm an agreement
or mortgage as hereinbefore mentioned, said firm of Allen Stephens
& Co. would advance or procure to be advanced to him an amount
that would be sufficient to enable him and the said Cook County
National Bank to go on with their business, and that they would
continue to make such advances till he and the said bank had gotten
over their crippled financial condition, and were able to go on
with their business without such assistance, and that if he, the
said Allen would do so, that the same should not be put upon
record, and should not in any manner be uttered or published; that
it should be held by said Stephens and Blennerhassett, and should
be kept from the knowledge of all the general creditors of said
Allen and of said Allen Stephens & Co.; that the only use they
would make of it would be as a justification to their depositors
for making such advances to said Allen, and then only in case any
question should be made with them, the said Stephens and
Blennerhassett, by such depositors in regard thereto, and that it
should in no way or manner have any force or validity, even between
the said parties thereunto, unless the said Allen Stephens &
Co. should advance to said Allen funds sufficient to enable him and
the said Cook County National Bank to go on with their business, as
above stated, and then that it should be held by them, the said
Stephens and Blennerhassett, and in no way used without the consent
of the said Allen."
"They further declared to Allen that if he refused to execute
said mortgage, they would at once cease to make advances to him or
the Cook County National Bank, and would take no steps to protect
the drafts drawn by the Cook County National
Page 105 U. S. 104
Bank on New York, which would cause its suspension. That Allen
being in great need of money, and relying on the representations of
Stephens and Blennerhassett, and believing that if he could procure
the aid which they promised, he could sustain the Cook County
National Bank and pay off his debts, and fearing lest Stephens and
Blennerhassett would carry out their threats, executed said
mortgage."
The answer averred that Allen Stephens & Co., on and before
Jan. 18, 1875, refused to make the advances, upon the making of
which alone said mortgage was to have any validity or effect, even
between the parties thereto, and said firm in other respects failed
to comply with the promises made, upon the faith of which the said
mortgage was executed. That in consequence of the refusal and
failure of Stephens and Blennerhassett to comply with their
promises, Allen and the Cook County National Bank were compelled to
and did suspend payment, and to quit business and go into
liquidation, and so it was averred that the said mortgage became
null and void.
The answer denied that after the execution of the mortgage,
Allen Stephens & Co. continued to make advances to the Cook
County National Bank; denied that there was due from Allen or the
Cook County National Bank to Allen Stephens & Co. the sum of
$900,000, and averred that Allen and the Cook County National Bank
had paid and delivered to Allen Stephens & Co., in money and
securities, sufficient to satisfy all the advances of said firm to
Allen and the Cook County National Bank, if any such were made.
It was further averred in the answer as follows:
"That on and prior to the eighteenth day of November, 1874, the
date of said pretended mortgage, the said Allen and the said Cook
County National Bank was each insolvent and unable to pay their
debts; that said firm of Allen Stephens & Co., as well as the
several members thereof, had at and prior to such date, reasonable
cause to believe said Allen and said bank were each insolvent; that
said firm fraudulently procured said Allen to execute and deliver
said pretended mortgage, knowing it was made to and would give said
firm a preference over the other creditors of said Allen and that
it was made in fraud of the provisions of the bankrupt
Page 105 U. S. 105
law, and the more effectually to perpetrate such fraud on the
general creditors of said Allen at the time said mortgage was
executed and delivered, and said Stephens and Blennerhassett, for
themselves and said firm, agreed to conceal the same, not to
publish the same or put the same on record, and in pursuance of
such agreement they did, with intent to defraud the general
creditors of said Allen keep the same in their possession for two
months after it was executed, and until the nineteenth day of
January, 1875, and until they had positive knowledge that the said
Allen and the said Cook County Bank would be compelled to suspend,
when said pretended mortgage, or a copy thereof, was fraudulently,
and for the purpose of creating an illegal preference in their
favor, filed for record in the recorders' offices in the different
counties in Iowa and Illinois wherein the real estate of said Allen
is situated. That while said mortgage was, as aforesaid, secretly
kept by said Stephens and Blennerhassett, it had no effect or
validity as against the other creditors of said Allen and that as
to them (if valid between the parties to it, which this respondent
denies), it only took effect at and from the time the same was
filed for record, which was within the two months next prior to the
filing of the petition in bankruptcy against the said Allen and on
which he was adjudged a bankrupt as aforesaid, and that the same is
fraudulent and void under and by virtue of the provisions of the
national bankrupt law and the amendments thereto, and that the same
is now a cloud upon the said real estate then owned by said Allen
the title of which has passed to your orator as the assignee of
said bankrupt, and it ought by the decree of this honorable court
to be so declared, and said cloud removed."
The complainants filed the general replication to this
answer.
Afterwards, on Jan. 17, 1876, an amendment was filed to the said
"consolidated bill," in which it was averred that, by the
application of money collected by Allen Stephens & Co. from
collateral securities held by them to secure the amount due them
from the Cook County National Bank, the amount of such indebtedness
had been reduced to the sum of $784,000, by reason whereof the said
firm of Allen Stephens & Co. had no longer any beneficial
interest in said mortgage, but the
Page 105 U. S. 106
entire and absolute interest in and ownership of said mortgage
was held and owned by the Charter Oak Life Insurance Company.
Sherman, as assignee of Allen filed his cross-bill against
Stephens, Blennerhassett, and the Charter Oak Life Insurance
Company, alleging the invalidity of said mortgage on substantially
the same grounds as those set up in the answer and praying that the
mortgage mentioned in the original bill might be declared
fraudulent and void, and that the cloud upon the title to the real
estate of the bankrupt, Allen created by the registry of the same,
might be removed. The defendants to the cross-bill filed their
answer thereto, to which Sherman, the assignee, filed the general
replication.
It is unnecessary to state the pleadings in greater detail.
Proofs were taken, and upon final hearing the circuit court
dismissed the original bill and made a decree in accordance with
the prayer of the cross-bill, declaring the mortgage to be null and
void and canceling the same. The appeal of the complainants brings
up this decree for our consideration.
The defendants in the court below contended that the mortgage
was void, because:
First, it was procured by fraud and used without the
consent of Allen and was given and received to hinder, delay, and
defraud his creditors.
Second, it was concealed and kept from the records from
its date until Jan. 19, 1875, and until after Allen failed, and
that such concealment gave him and the Cook County National Bank a
delusive and fictitious credit, thereby enabling him, under the
semblance of being the owner of a large amount of unencumbered real
estate, to deceive and mislead other persons to give him credit
which would otherwise have been withheld, by reason of which he did
contract debts after the giving of this mortgage, now remaining
unpaid, of a greater amount than the value of the real estate
covered by this mortgage. Many of these debts were contracted by
Allen Stephens & Co. upon the representations of W. A. Stephens
and H. Blennerhassett, members of said firm, while they held this
mortgage in concealment; that his real estate was a vast property
and was unencumbered.
Page 105 U. S. 107
Third, this mortgage was a fraudulent preference under
the provisions of secs. 5128, 5129, and 5130a of the Revised
Statutes of the United States, under the title of bankruptcy then
in force.
Fourth, if the instrument was valid, it was given to
secure a debt of Allen and not a debt of the Cook County National
Bank, and that he did not then, nor does he now, owe Allen Stephens
& Co. anything.
Fifth, if the advances were made by Allen Stephens
& Co. to the Cook County National Bank, such advances would
create no valid debt against the said bank under sec. 5202 of the
Revised Statutes of the United States, and being no debt there can
be no mortgage.
Sixth, the instrument is not a legal mortgage for the
reason that it describes neither debt nor real estate.
MR. JUSTICE WOODS, after stating the case, delivered the opinion
of the Court.
After an attentive consideration of the evidence in this case,
much of which is conflicting and irreconcilable, we have reached
the conclusion that the mortgage, which is the basis of the suit,
is fraudulent and void at common law because it was accepted by
Allen Stephens & Co. and used by them to hinder, delay, and
defraud the creditors of Allen the mortgagor, and that it is also
void under that section of the Bankrupt Act now embodied in the
Revised Statutes of the United States as sec. 5128.
We shall state the grounds of our conclusion as succinctly as
the case will admit. We are relieved from any discussion of the
question of the insolvency of Allen, the mortgagor, by the
admissions of counsel for the appellants. They concede, and in our
judgment the evidence abundantly shows, that he was insolvent not
only at the date of the mortgage on Nov. 18, 1874, but also at the
date of its registration, on Jan. 19, 1875. It is conceded that at
the same dates, the Cook County National Bank was also insolvent.
We may add to this concession,
Page 105 U. S. 108
what is perfectly clear from the evidence, that the insolvency
of both Allen and the bank was actual and absolute; that their
assets were largely insufficient to pay their debts.
In order to a clear understanding of the controversy between the
parties, it will be necessary to state generally the financial
history of Allen and of the firm of Allen Stephens & Co., of
which he was the senior member prior to the date of the
mortgage.
Allen commenced business as a private banker in Des Moines,
Iowa, in 1856, and soon began dealing in Iowa lands. He bought
claims, made entries, and located them mainly in Polk County, Iowa.
The real estate of which he was seised at the date of this mortgage
had cost him $242,616, and that of which he was seised on Jan. 18,
1875, had cost him $240,794.
He continued his business as a banker in Des Moines up to a
short time before the proceedings in bankruptcy were instituted
against him. On Oct. 31, 1867, he was appointed by the Circuit
Court of the United States for the District of Iowa receiver in the
case of
Mark Howard v. The City of Davenport, then pending
in that court, and as such there came into his hands five hundred
and forty-one bonds of $1,000 each of the Chicago, Rock Island
& Pacific Railroad Company, and between $90,000 and $100,000 in
cash. The bonds bore seven percent interest per annum, which Allen
collected as it fell due, amounting to $37,870 per annum. He
continued the custodian of this entire fund until May, 1873.
In 1868, according to his evidence, which is corroborated by his
books, his assets amounted to $1,641,017, and his liabilities,
including his indebtedness as receiver, amounted to $1,466,131,
leaving an excess of assets over liabilities of $174,886. Of these
assets, $150,000 were invested in his house and furniture, in
addition to the cost of the land, one hundred and thirty acres, on
which his house stood.
It is therefore apparent that at the time mentioned, he had
little or no available capital of his own with which to carry on
business. This state of his affairs caused him to succumb to the
temptation to use the trust assets in his possession as receiver.
Towards the close of the year 1868, he had deposited
Page 105 U. S. 109
a part of the Chicago, Rock Island & Pacific Railroad bonds
(which we shall call, for the sake of brevity, Rock Island bonds),
which belonged to this trust fund, with Gilman Son & Co.,
bankers in the City of New York, and borrowed upon them, as
collateral security, the sum of $55,000. At this time,
Blennerhassett was the confidential clerk of Gilman Son &
Co.
On Nov. 2, 1868, Blennerhassett left that firm and became a
partner in the banking house of George Opdyke & Co., in which
Stephens was already a partner. At the solicitation of
Blennerhassett, Allen on Dec. 19, 1868, changed his account from
Gilman Son & Co. to George Opdyke & Co. During the years
1869, 1870, and 1871, it is made clear by the letters of Allen to
Opdyke & Co., which appear in the record, that he was pressed
for money and embarrassed. During this time, he was speculating
largely in the stock of the Chicago, Rock Island & Pacific
Railroad Company, and had used through Opdyke & Co. a large
part of the Rock Island bonds, which belonged to the receiver fund
in his possession.
In the fall of 1871, Stephens and Blennerhassett began
negotiations with Allen with a view to a partnership between the
three to carry on the business of banking in the City of New York,
which resulted in the creation of the partnership of Allen Stephens
& Co., which began business on Jan. 1, 1872.
It was agreed that Allen should furnish the capital on which the
partnership was to do business. The amount named was $50,000.
At this time, Allen was largely insolvent, and neither Stephens
nor Blennerhassett had any means. Allen never contributed any money
or property to the partnership capital. Stephens and Blennerhassett
were not required by the partnership articles to pay anything, and
they paid nothing. The firm therefore started without any capital
whatever; two of the partners had no property, and the other owed
more than he could pay.
The complainant, the Charter Oak Life Insurance Company at once
made a large deposit with the new firm, and in a few days their
deposits amounted to more than $200,000. With the funds thus placed
in their hands they paid the overdrafts
Page 105 U. S. 110
of Allen on Gilman Son & Co., and received from them the
securities which had been deposited with them by Allen, namely 168
Rock Island bonds of $1,000 each, certificates of 3,050 shares of
stock of National State Bank of Des Moines, and of 960 shares of
First National Bank of Des Moines.
It is unnecessary to trace minutely the shifts and devices to
which Allen resorted to keep afloat. They are fully shown by the
record. On Oct. 7, 1872, it appears from a letter addressed to him
by Stephens for the firm of Allen Stephens & Co., that he was
indebted to the firm in the sum of $379,000, and the security held
by the firm was 416 Rock Island bonds. That these were the bonds
which belonged to the fund of which he was receiver the record
leaves no doubt. He so testifies, and there is no conflicting
testimony, and his possession of so large an amount of these bonds
is not otherwise accounted for.
He at various times pledged all the bonds which belonged to the
receiver fund. They all passed through the hands of New York
brokers as collateral security for loans made to him. In January,
1873, all the Rock Island bonds held by him as receiver were in the
hands of a broker in New York, held by him as security for advances
made to Allen. This broker continued to borrow upon them for Allen
until July 1, 1873, when he commenced selling, and continued to
sell them until October, 1873, before which nearly all were
disposed of, some of them at quite low prices.
During the months of February, March, and April, 1873, Allen
paid the broker who negotiated these loans for him the sum of
$43,000 extra interest over and above seven percent on the
loans.
Before May, 1873, it fairly appears from the evidence that
Allen's losses had entirely consumed the receiver fund. In the
month just mentioned, he was ordered to pay into court by the
middle of July the 541 bonds of $1,000 each, which had come into
his hands as receiver, or their equivalent in money. The residue of
the fund, amounting to about $300,000, was to be paid in May of the
following year. He was in a desperate strait, and resorted to
desperate means to save himself. On May 30, 1873, he purchased
$275,000 of the stock of the Cook County National Bank of Chicago,
Illinois, which gave him the
Page 105 U. S. 111
control of the bank. He paid for a large part of this stock by
his checks on the bank, and the residue by a check on Allen
Stephens & Co.
Having thus obtained the control of the Cook County Bank, which
had a deposit of $1,300,000, he paid the $541,000 demanded of him
as a part of the receiver fund, mainly by his checks on the bank.
At this time, the larger part of the receiver's bonds had been sold
and their proceeds applied to the payment of moneys borrowed by him
in New York on the pledge of the bonds.
In the fall of 1873, he bought an interest in the New York State
Loan and Trust Company. His purchases of stock in that institution
amounted to nearly $200,000. He paid for this stock by giving his
notes and a check on the Cook County Bank. His object in making
this purchase, as he states it, was to get control of the
institution and be enabled thereby "to carry his assets until he
could realize on them." In other words, he bought the stock on
credit with a view to get in his hands the cash assets of the Trust
Company.
During the panic of September, 1873, the Cook County Bank lost
$100,000 by the purchase of worthless drafts drawn by one Badger.
The bank suspended a short time, but soon resumed.
During the fall of 1873, the private bank of Allen at Des
Moines, and the National State Bank of Des Moines, in which he was
a large stockholder, were both overdrawn with the house of Allen
Stephens & Co. They were both hard pressed for money.
In January, 1874, Allen sold, through the house of Allen
Stephens & Co., to the Charter Oak Life Insurance Company,
bills receivable, "in the shape of mortgages," drawn from his
private bank in Des Moines, to the amount of $114,000. This money
all passed through the books of his private bank at Des Moines.
In May, 1874, the house of Allen Stephens & Co. made a loan
of $400,000 to two men of the name of Hussey and Gisbourne, and
took for security a deed of trust to Stephens upon a silver mine,
called the Mono mine, in Utah Territory. The Charter Oak Life
Insurance Company took one-third of this
Page 105 U. S. 112
loan off the hands of Allen Stephens & Co. The mine proved
worthless, and the entire loan was a total loss, taking from Allen
Stephens & Co. $266,666. This largely exceeded all the profits
made by the firm since it commenced business, and left it
insolvent.
In October, 1874, it was arranged between Allen and the Charter
Oak Life Insurance Company, the negotiation therefor having been
carried on through Allen Stephens & Co., that he should make
his twelve notes for $25,000, payable in five years from date, and
deliver the same to the company, and secure the same by pledge of
mortgage notes, stocks, and bonds. The company was to advance to
Allen $300,000 on the notes so secured. Allen on Oct. 24, 1874,
made his notes accordingly, and delivered them to Allen Stephens
& Co., for the company, and the company sent $300,000 of its
paper to Allen Stephens & Co. to be used for his benefit. His
notes were secured by the pledge of mortgage notes, amounting to
$277,041; by Cook County Bank stock, $70,000; New York State Loan
and Trust Company stock, $100,000; National State Bank of Des
Moines stock, $30,000, and county bonds, $500; amounting in all to
$478,000.
On the same day, Allen, for himself, executed to Allen Stephens
& Co. a paper writing, in which he authorized them, in case he
became indebted to them for loans or advances or liabilities
assumed by them for him, to sell, without notice to him, any
property, things in action, collateral securities belonging to him
and held by them, or to hypothecate the same and use their proceeds
toward the payment of such indebtedness and the interest. On the
same day, he, as president of the Cook County Bank, executed and
delivered to Allen Stephens & Co. a similar paper.
Between the date of his appointment as receiver, and Oct. 24,
1874, Allen had sustained great losses. In 1871 he had lost by
stock speculations in New York City $200,000. He had lost $50,000
by a subscription to the Canada Southern Railroad. He built for a
church society at Des Moines a church edifice, in which was tied up
the sum of $60,000, and which afterwards resulted in a loss of
$50,000. In 1873 and 1874 he had lost $200,000 as a member of the
firm of B. F. Murphy &
Page 105 U. S. 113
Co., and $75,000 as a member of the firm of H. M. Bush &
Co., and $30,000 in the firm of Lewis & Stephens. In swamp,
coal, and mountain lands he lost $61,000. He lost in corn
speculations in Chicago and in property in the towns of South
Evanston, Ill., and Sheffield, Ind. $92,000. He sunk $35,000 in the
stock of the Toledo, Wabash, and Western Railroad Company, and lost
$30,000 in the firm of A. T. Andreas & Co., and $10,000
invested in the Grand Pacific Hotel in Chicago. Besides his
residence and furniture at Des Moines, which cost him $150,000, he
had invested in a residence in Chicago $50,000. His actual losses
amounted to over a million dollars, and he had $200,000 invested in
unproductive real estate. It is true so inveterate a speculator
sometimes made a fortunate venture, but his losses were greatly in
excess of his gains.
The mortgage on which this suit is founded was given on Nov. 18,
1874. On that day, the firm of Allen Stephens & Co. was
insolvent, and Stephens and Blennerhassett must have known it.
Their profits since Jan. 1, 1872, when the partnership was formed,
had not exceeded $200,000. They began with no capital. Both
Stephens and Blennerhassett had drawn out their share of the
profits. Allen's share remained, which was one-third and amounted
to about $66,000. The loss of the firm in the Mono mine loan was
$266,000, leaving a deficit of $200,000. As already stated, it is
conceded that at the date of the mortgage both Allen and the Cook
County Bank were insolvent. But they were not merely insolvent, but
irretrievably so.
On that day, Allen owed the depositors in his private bank at
Des Moines $736,783, he owed the Cook County Bank $557,943, the
Charter Oak Life Insurance Company $300,000, the Newark Savings
Institution of Newark, N.J. $200,000, making an aggregate of
$1,794,726. At the same time, placing a liberal estimate on the
value of his assets, they did not exceed $800,000, leaving a
deficit of $994,727, which other smaller items of indebtedness
shown by the record would swell to more than a million dollars, the
excess of his liabilities above his assets. The condition of the
Cook County Bank on the same day may be approximately
ascertained
Page 105 U. S. 114
from the following facts: on Nov. 18, 1874, its books showed its
indebtedness to be $1,891,620. The receiver of the bank, testifying
on Aug. 26, 1876, said that he had admitted and given certificates
for claims against the bank to the amount of $803,035, that other
claims had been presented to the amount of $915,000, for which
receiver's certificates had not been given, and that the amount
collected from its assets was $92,000. The cash on hand when the
receiver took possession was $4,000.
Such was the condition of the firm of Allen Stephens & Co.,
Allen and the Cook County Bank when the mortgage in suit was
executed.
There are several propositions of fact which, in our opinion,
the evidence satisfactorily shows. A statement and discussion of
the evidence which sustains them would extend this opinion beyond
reasonable limits, and would not be profitable.
First, Allen when he gave the mortgage, and Stephens
and Blennerhassett when they took it, knew that both he and the
Cook County Bank were insolvent. A large part of the correspondence
between Stephens and Blennerhassett and the firm of Allen Stephens
& Co. on the one hand, and Allen on the other, commencing
before the partnership of Allen Stephens & Co. was formed, down
to the date of the mortgage, is to be found in the record. The
record also contains the correspondence between the firm and the
Cook County Bank, and many letters written by the firm, in the
interest of Allen and much correspondence between Stephens and
Blennerhassett. This evidence shows that both he and the Cook
County Bank were on the verge of suspension from the time when he
was compelled to replace the bonds entrusted to him as receiver,
down to the date of the mortgage in November, 1874, and the
suspension of payment by him and the bank in January, 1875. It also
brings home to Stephens and Blennerhassett the knowledge of the
desperate shifts and devices to which he and the bank were driven
to meet their engagements and keep the fact of their utter
bankruptcy from the knowledge of the public. It is impossible that
men of much less business experience and intelligence than they are
shown to be should know what they did of the resources and
practices of Allen and the
Page 105 U. S. 115
Cook County Bank, and not have known of the insolvency of
both.
Notice of his insolvency was also brought home to Stephens and
Blennerhassett by their knowledge of the fact that he had
appropriated to his own schemes and speculations a fund which,
principal and interest, amounted to over $800,000, committed to his
custody as a trustee and receiver. The evidence that they knew of
the fact of his appointment as receiver, the amount of the fund
which came to his hands, and the appropriation of the fund to his
own uses is conclusive.
During the sixty days which elapsed between the date of the
mortgage and its registration, the proofs of the insolvency of
Allen and the Cook County Bank accumulated, and Stephens and
Blennerhassett knew that the insolvency was hopeless and
irretrievable.
Second, the record shows that the mortgage covered all
the property of Allen. H is personal property had long been
exhausted, and his real estate was all that remained which was not
pledged for his debts.
Third, in order that the credit of Allen and the Cook
County Bank might not be impaired, the mortgage was purposely
withheld from record, and actively concealed by Stephens and
Blennerhassett until after the suspension of both Allen and the
Cook County Bank on Jan. 18, 1875.
Blennerhassett testifies that after its execution he disposed of
the mortgage as follows:
"I put it in our safe, and kept it there until December 1, when
I gave it in a sealed parcel to A. N. Denman. I said to Denman
something like this:"
" Here is a sealed package which contains instructions and
valuable documents; you will go to Chicago, take quarters at some
hotel there, and remain there, never leaving the hotel for any
great length of time, and should a telegram come, you are to open
that parcel and obey instructions."
The instructions directed Denman, when ordered by telegram to
act, to have the mortgage recorded in Chicago, and then catch the
first train for Des Moines, Iowa, and have it recorded there
&c.
On Jan. 18, 1875, Allen and the Cook County Bank both suspended.
On the next day Allen Stephens & Co. sent a
Page 105 U. S. 116
telegram to Denman at Chicago, as follows: "Open your
instructions and act." Denman opened his instructions and followed
them. He filed the mortgage for record in Chicago on January 19,
and in Des Moines on January 20.
Fourth, while the mortgage was thus kept from the
record and from public knowledge, Stephens and Blennerhassett were
busily engaged in sustaining the credit of Allen and the Cook
County Bank, and, to accomplish their end, falsely and fraudulently
represented him to be a man worth over a million of dollars, and of
unlimited credit, and the Cook County Bank to be sound and
good.
Fifth, that by means of these representations of
Stephens and Blennerhassett, and the concealment of the mortgage,
and the withholding of it from the record, the creditors of Allen
and the Cook County Bank were misled and deceived, and in
consequence thereof they did, between the date and the registration
of the mortgage, deposit large sums of money in Allen's private
bank at Des Moines, and in the Cook County Bank, and at the
instance of Stephens and Blennerhassett, discounted the paper of
Allen and the Cook County Bank to a large amount, and that such
deposits and discounts, though due, still remain unpaid.
Sixth, that the mortgage was made by Allen who was
insolvent, with a view to give a preference to the firm of Allen
Stephens & Co., the firm being a creditor of Allen
individually, and the firm and all its members having reasonable
cause to believe him to be insolvent, and knowing that the mortgage
was made in fraud of the provisions of the Bankrupt Act, and it was
withheld from the record and actively concealed for the period of
two months preceding the failure of Allen and the filing of the
petition in bankruptcy against him, for the purpose of protecting
it from assault as a preference void under the provisions of the
Bankrupt Act.
There is a large mass of evidence in the record which in our
opinion establishes the truth of the foregoing propositions beyond
controversy. The new debts which were contracted by Allen and the
Cook County Bank, after the date of the mortgage and before its
registration, on the strength of the representations of Stephens
and Blennerhassett, and the fact
Page 105 U. S. 117
that Allen's property appeared to be unencumbered, amounted to a
larger sum than the value of the real estate covered by the
mortgage.
By the aid of the means thus obtained, Stephens and
Blennerhassett were able to stave off the suspension of Allen and
the Cook County Bank for a period of exactly two months after the
date of the mortgage. They doubtless supposed this lapse of time
would render the mortgage proof against any attack by an assignee
in bankruptcy of his estate. He and the bank were then allowed to
fail, and the mortgage was placed on record.
Upon this state of facts, we are of opinion that the mortgaged
was a fraud upon the creditors of Allen and therefore void at
common law and without regard to the provisions of the Bankrupt
Act.
It is not to be disputed that except as forbidden by the
bankrupt law, a debtor has the right to prefer one creditor over
another, and that the vigilant creditor is entitled to the
advantage secured by his watchfulness and attention to his own
interests. Neither can it be denied that the mere failure to record
a mortgage is not a ground for setting it aside for the benefit of
subsequent creditors who have acquired no specific lien on the
property described in the mortgage.
But where a mortgagee, knowing that his mortgagor is insolvent,
for the purpose of giving him a fictitious credit, actively
conceals the mortgage which covers his entire estate and withholds
it from the record, and while so concealing it represents the
mortgagor as having a large estate and unlimited credit, and by
these means others are induced to give him credit, and he fails and
is unable to pay the debts thus contracted, the mortgage will be
declared fraudulent and void at common law, whether the motive of
the mortgagee be gain to himself or advantage to his mortgagor.
It is not enough, in order to support a settlement against
creditors, that it be made for a valuable consideration. It must be
also
bona fide. If it be made with intent to hinder,
delay, or defraud them, it is void as against them, although there
may be in the strictest sense a valuable or even an adequate
consideration.
Twyne's Case, 3 Rep. 80;
Holmes
v.
Page 105 U. S. 118
Penney, 3 Kay & J. 90;
Gragg v. Martin, 12
Allen (Mass.) 498;
Brady v. Briscoe, 2 J. J. Marsh. (Ky.)
212;
Bozman v. Draughan, 3 Stew. (Ala.) 243;
Farmers'
Bank v. Douglass, 11 Smed. & M. (Miss.) 469;
Bunn v.
Ahl, 29 Penn.St. 387;
Root v. Reynolds, 32 Vt. 139;
Kempner v.
Churchill, 8 Wall. 362; Kerr on Fraud and Mistake,
200.
As long ago as the case of
Hungerford v. Earle, 2 Vern.
261, it was held that "a deed not at first fraudulent may
afterwards become so by being concealed or not pursued, by which
means creditors are drawn in to lend their money." This docrine has
been repeatedly reaffirmed.
Hildreth v. Sands, 2 Johns.
(N.Y.) Ch. 35;
Scrivenor v. Scrivenor, 7 B.Mon. (Ky.) 374;
Bank of the United States v. Housman, 6 Paige (N.Y.)
526.
In
Coates v. Gerlach, 44 Penn.St. 43, a deed of land
had been made directly by a husband to his wife. The deed bore date
March 23, 1857, but was not filed for record until Dec. 2, 1857. On
Jan. 21, 1858, the husband, professing to act for his wife, sold
the land to a third party. The creditors of the husband attached
the unpaid part of the purchase money in the hands of the vendees,
and between them and the wife a contest arose on the question which
had the better right to the proceeds of the sale. Touching this
controversy, Mr. Justice Strong, delivering the opinion of the
court, said:
"There is another aspect of the case not at all favorable to the
wife. It is that she withheld the deed of her husband from record
until Dec. 2, 1857. In asking that a deed void at law should be
sustained in equity, she is met with the fact that she asserted no
right under it, in fact concealed its existence until after her
husband had contracted the debts against which she now seeks to set
it up. There appears to have been no abandonment of possession by
the husband. Even if the deed was delivered on the day of its date,
the supineness of the wife gave to the husband a false credit, and
equity will not aid her at the expense of those who have been
misled by her laches."
So in
Hilliard v. Cagle, 46 Miss. 309, it was held that
a deed of trust in the nature of a mortgage, valid on its face and
not made or received with any intent to defeat existing or future
creditors, may nevertheless be held to be fraudulent and void
Page 105 U. S. 119
as to all creditors, existing and future, by evidence
aliunde showing the conduct of the parties in their
dealings in reference to the deed. The principal circumstance
relied on in this case to avoid the deed was the fact that the
grantor retained possession of the property and the deed was
withheld from record, and the mortgagor was thereby enabled to
contract debts upon the presumption that the property was
unencumbered. The court declared that
"the natural and logical effect of the agreement and assignment,
and the conduct of the parties thereto, was to mislead and deceive
the public, and induce credit to be given to the mortgagor, which
he could not have obtained if the truth had been known, and
therefore the whole scheme was fraudulent as to subsequent
creditors, as much so as if it had been contrived from that motive
and for that object."
In the case of
Gill v. Griffith & Schley, 2 Md.Ch.
270, the court decided that a party cannot be permitted to take a
bill of sale or mortgage of chattels from another for his own
security, leave the mortgagor in possession and ostensibly the
owner, and at his request and to keep the public from a knowledge
of its existence withhold it from record for an indefinite period,
renewing it periodically, and then receive the benefit of it by
placing the last renewal upon record, to the prejudice of others
whom the possession and ostensible ownership of that very property
by the mortgagor have induced to confide in him. The mortgage which
was in controversy in this case was therefore declared void. Upon
appeal, the Court of Appeals affirmed the decree for the reasons
assigned by the Chancellor.
See note of the reporter at
the end or the case.
So in the case of
Hafner v. Irwin, 1 Iredell (N.C.) L.
490, which grew out of the making of a deed of trust by one Dwight
to the plaintiff Hafner, to secure certain creditors named thereon,
it was said:
"There was evidence tending to show that it was a condition of
this instrument, and as understood between the parties thereto,
that it should not be registered nor put in use, but kept a secret
from the world until after the 20th of February ensuing the date. .
. . There was also evidence tending to
Page 105 U. S. 120
show that it was a further part of the agreement between the
parties that the transaction should be kept secret at all events
until the debtor should escape beyond the reach of the process of
his creditors. . . . We need not and cannot lay down as a rule of
law that those who take securities from a debtor about to abscond
must apprise creditors of his intention to place himself beyond
their reach, under penalty of forfeiting such securities; but we
feel ourselves justified in holding that when secrecy is part of
the consideration of such securities, the securities are
contaminated thereby, and ought not to be regarded as given
bona fide."
In
Hildeburn v. Brown, 17 B.Mon. (Ky.) 779, a mortgage
was executed by one Sherrod to the plaintiffs, which they withheld
from record. Commenting on that fact, the court said:
"The petition of appellants avows that the arrangement between
their agents and Sherrod was to withhold the mortgage from
registration for the purpose of sustaining the latter in business,
and 'not to record the same unless there was danger of Sherrod's
failure.' . . . The effect of the arrangement, though it may not
have originated in any actual fraudulent or evil purpose, was to
secrete from the public eye the true condition of the debtor and
thereby enable him, under the semblance of being the owner of
unencumbered real estate, to deceive and mislead other persons by
inducing them, upon the faith of his supposed unembarrassed
condition, to give him credit which would otherwise have been
withheld. Such contrivances or acts, though not designed to
perpetrate an actual fraud upon other persons, have an inevitable
tendency that way, and are obviously opposed to the general policy
of the law requiring the public registration of all liens and
encumbrances upon property permitted to be retained and claimed by
debtors."
"If not directly within that class of acts which the law
denominates constructive frauds, it approximates so nearly to it
that the party avowing himself a participant in such transaction
ought not to receive the countenance or aid of the Chancellor in
enforcing any lien or claim growing out of it as against a third
person. "
Page 105 U. S. 121
Neslin v. Wells, 104 U. S. 428,
arose in the Territory of Utah, where the law permitted, but did
not require, the registration of mortgages, but where there was a
general custom to record such instruments. Neslin, the vendor of
land, took from Smith, his vendee, a mortgage to secure a part of
the purchase money, but did not file it for record until after a
subsequent mortgage executed by the vendee on the same land, to one
Kerr, had been filed for record, Kerr having no notice, actual or
constructive, of the prior mortgage to Neslin. It was held by the
Court, MR. JUSTICE MATTHEWS delivering its opinion, that
"under the circumstances of the case, there arose a duty on the
part of Neslin, the vendor, to record his purchases money mortgage,
toward all who might become subsequent purchasers for value in good
faith, a breach of which in respect to Kerr, the subsequent
mortgagee, without notice, constituted such negligence and laches
as in equity requires that the loss which in consequence thereof
must fall on one of the two, shall be borne by him by whose fault
it was occasioned."
See also Worseley v. De Mattos, 1 Burr. 467, and
Tarback v. Marbury, 2 Vernon 510.
The principles upon which these decisions are based are, in our
opinion, conclusive of this case. None of the cases cited discloses
such a premeditated and contrived purpose to deceive and defraud
other creditors of the mortgagor as appears in this. We are of
opinion, therefore, that the mortgage executed by Allen to Allen
Stephens & Co., on Nov. 18, 1874, which the complainants in
this case seek to foreclose, is a fraud upon the creditors of Allen
and void at common law.
We further declare that a mortgage executed by an insolvent
debtor, with intent to give a preference to his creditor, who has
reasonable cause to believe him to be insolvent and knows it to be
made in fraud of the provisions of the Bankrupt Act and who, for
the purpose of evading the provisions of that act, actively
conceals and withholds it from record for two months, is void under
the Bankrupt Act notwithstanding the fact that it was executed more
than two months before the filing of a petition in bankruptcy by or
against the mortgagor.
If the mortgage had been executed within the period of two
Page 105 U. S. 122
months next before the filing of the petition in bankruptcy, it
would have been void under the letter of the Bankrupt Act. Where
all the other circumstances necessary to render it void concur, the
device of concealing it until the two months have elapsed cannot
save it. It is, notwithstanding the lapse of time, a fraud on the
policy and objects of the bankrupt law, and is void as against its
spirit.
The conduct of the mortgagees in this case shows them to be
without claim to the consideration of a court of equity. On the
contrary, it clearly appears to be the duty of the court to take
care that they shall not reap the fruits of their fraudulent
practices. Their assignee of the mortgage, the Charter Oak Life
Insurance Company, stands in no stronger position.
Decree affirmed.
MR. JUSTICE GRAY did not sit in this case nor take any part in
deciding it.
