Stockgrowers' State Bank of Mountain Home v. Corker

GILBERT, Circuit Judge (after stating the facts as above). [1] The appellants contend that the court below erred in decreeing that the mortgage to the Stockgrowers’ Bank was a fraudulent preference. We find no ground for disturbing the conclusion of the court below that the bankrupt was insolvent at the time when the mortgage was made, that the effect of the mortgage was to enable the First National Bank, a creditor of the bankrupt, to obtain a greater percentage on its debt than any other creditor of the same class, and that at the time of taking the mortgage the defendants had reasonable cause to believe that the enforcement thereof would effect a preference within the meaning of the Bankruptcy Act. The record shows that, in addition to the debt which was at that time owing to the First National Bank and the claims which were represented by Wolfe, Trathen had outstanding debts of a large amount, and that the cashier of the First National Bank had directed the attention of his directors to the fact that there were unpaid drafts against Trathen, and that he testified that he considered the Trathen account unsatisfactory, because he had made demand for accrued interest,- and it was not forthcoming. In Loveland on Bankruptcy, § 508, the law is thus stated: *616 “Constructive notice is sufficient, upon the ground that, when a party is about to perform an act by which he has reason to believe that the rights of a third party may be affected, an inquiry as to-the facts is a moral duty and diligence, and an act of justice. Whatever fairly puts a party upon inquiry is sufficient notice where the means of knowledge are at hand, and if the party under such circumstances omits to inquire and proceeds to receive the transfer or conveyance, he does so at his peril, as he is chargeable of knowledge and of all the facts, which by a proper inquiry he might have ascertained.” Austin testified: “I imagine X had investigated his assets, and knew practically what they consisted of. I presume I advised the board of directors as to what his property consisted of, though I cannot say positively.” [2] The principal contention of the appellants is that, notwithstanding the circumstances under which the mortgage was given to the Stockgrowers’ Bank, it was good to the amount of $1,700; that being the amount for which, on April 12, 1909, Trathen had executed his mortgage on the same property to Evans and Owens to secure them as indorsers on his note for $1,700 to the bank, and which mortgage was transferred to the First National Bank a month prior to the execution of the mortgage to the Stockgrowers’ Bank. But the mortgage to Evans and Owens covered Trathen’s stock of merchandise as it was in April, 1909. During the 2 years and 3 months that elapsed between that date and the date of the mortgage to the Stockgrowers’ Bank, the stock of merchandise was being disposed of daily, in the ordinary course of business, and was replenished by other goods from time to time. The appellants introduced no evidence whatever to show that any of the goods originally mortgaged to Evans and Owens remained in stock at the time of the execution of the mortgage to the Stockgrowers’ Bank. In Ryan v. Rogers, 14 Idaho, 309 , 94 Pac. 427 , it was held that where the mortgagor of a stock of merchandise, constituting his stock in. trade,, remains in possession of the chattels mortgaged, and with the knowledge and consent of the mortgagee continues to sell and dispose of the same without applying the proceeds of the sales to the reduction of the mortgage debt, the mortgage is thereby invalidated as against creditors and other interested third parties, although such a mortgage would be good as between the mortgagor and the mortgagee as to all property not so disposed of, and also held that if the mortgagee took possession of the mortgaged property prior to the assertion. of right or acquisition óf claim against the property by a creditor’s attachment or execution, or other lien, the mortgagee will be protected to the extent of his claim. In the case at bar the mortgage made no provision for the application of the proceeds of the sales to the mortgage indebtedness, and possession of that merchandise was never at any time taken by the mortgagees or by the First National Bank. It follows that mortgage did not create a lien superior to the rights of the bankrupt’s creditors. The recent decision of the Supreme Court of Idaho in Cauthorn v. Burley State Bank, 144 Pac. 1108 , is not inconsistent with this construction of the law of the state. Appellants suggest that, if we take the view that the First National Bank entered into an arrangement with the Stockgrowers' Bank *617 whereby the latter made the loan, but really for the other bank, the latter would not have changed its position throughout the transaction, since its new mortgage would be but a renewal of the old. But even in that view the last mortgage would still be affected by the infirmity of the first mortgage, since it could cover only the property originally mortgaged, and, as we have pointed out, there is no evidence to show that at the time when the last mortgage was taken any of the stock of merchandise included in the first mortgage remained in the possession of the mortgagor. The decree is affirmed.