Messick v. . Fries , 128 N.C. 450 ( 1901 )

The defendant Giersh in 1892 was indebted to the other defendant Fries in the sum of about $14,000, evidenced by three promissory notes, two of which were executed in 1887, and the other in the sum of $8,600, the consideration of the last mentioned one being the purchase money agreed to be paid to Fries for the interest of Fries in the stock of goods and merchandise belonging to a partnership of which the defendants were members, the purchase having been made on the day of the execution of the note for the purchase money, 15 July, 1892. To secure all three of the notes, Giersh executed a mortgage to Fries on 15 July, 1892, on the entire stock of goods, his own interest and that purchased by (451) him from Fries, in Fries' storehouse in Salem, and all book accounts, notes and other evidences of debt due to late firm of Fries, Giersh Senseman. It was stipulated in mortgage that monthly payments were to be made by Giersh to Fries on the indebtedness, and a calculation shows that several years would have elapsed before the indebtedness could have been paid if the payments agreed upon should be promptly met. There was a further provision in the mortgage by which the possession of the goods was to be left in Giersh, it being contemplated that Giersh was to continue the business in his own name and for his own account. The following is the language of the mortgage on that point: "This mortgage is also to cover all goods hereafter bought to keep up the stock, and such goods when bought are to be substituted for their sales as long as anything remains due to H. W. Fries and secured by this mortgage."

The plaintiffs are judgment creditors of Giersh, the indebtedness, however, having arisen since the execution of the mortgage and the consideration of which being for goods and merchandise sold to Giersh to replenish and keep up his stock, and they have brought this action to have the mortgage declared fraudulent and void. If the plaintiffs had been creditors of Giersh at the time of the execution of the mortgage, a strong presumption would have been raised as to its fraudulency; and if the deed had shown on its face that there were other creditors of Giersh, and that all of his property was embraced, the fraudulent intent would be irrebuttable — the deed would be void on its face. Cheatham v. Hawkins, 76 N.C. 335. The decision in the last mentioned case is greatly shaken, if not overruled, by the case of Kreth v. Rogers, 101 N.C. 263, but it is not necessary to the decision of the present case to undertake a reconciliation between those two cases, for they concerned existing creditors, while in the matter now before us the creditors are subsequent ones to the execution of the mortgage. We find inconsistencies on the same subject in the opinions of the Supreme Court of the United States. InRobinson v. Elliott, 89 U.S. 758, in reference to (452) existing creditors, it was decided (1874) that a mortgage of a stock of goods to two of several creditors, in which the possession of the goods was left with the mortgagor to sell and supply the place of those goods sold with other goods purchased, the substituted goods to be subject to the lien of the mortgage, was void on its face and was so declared by the Court, and that, notwithstanding the mortgage had been duly registered. On the last point the Court said: "Manifestly it was executed to enable the mortgagors to continue their business and appear to the world as the absolute owners of the goods and enjoying all the advantages resulting therefrom. It is idle to say that a resort to the record would have shown the existence of the mortgage, for men get credit for what they apparently own and possess, and this ownership and possession had existed without interruption for ten years. There was nothing to put creditors on their guard." In the later cases in the same Court, Bank v.Bates, 120 U.S. 556, and Etheridge v. Sperry, 139 U.S. 266, the doctrine held in Robinson v. Elliott, supra, is overruled, though not expressly so. In the last mentioned case, the mortgagor was left in possession of the stock of goods with a verbal agreement that he might use the proceeds of his daily sales for the support of himself and to keep up the stock, the whole of the surplus to be applied to the payment of the debt; and the Court held that the matter of alleged fraud in the execution of the mortgage was a matter of fact and not one of law. The Court said: "Why should a transaction like this be condemned, if made in good faith and to secure an honest debt? The owner of a stock of goods may make an absolute sale, why not a conditional sale with such conditions as he and his creditor agree upon? As between the parties, no Court would question this right or refuse to enforce the conditions. The interest of (453) the general public is not prejudiced by any such transaction between debtor and creditor. Indeed, they are rather promoted by any arrangement by which the mortgagor can continue in business, for in ninety-nine cases out of a hundred the taking of possession by a creditor results in closing the business and turning the debtor out of employment. The only parties who can claim to be injuriously affected are unsecured creditors. But they are notified by the record of the exact relations between the mortgagor and mortgagee; and surely subsequent creditors have no right to complain, if they deal with the mortgagor with full knowledge of such relations. Existing creditors may, of course, challenge the good faith of the transaction, but if they can not disturb an absolute sale when made in good faith, why should they be permitted to challenge a conditional sale, if made in good faith? The fact that fraudulent relations are possible is hardly a sufficient reason for denouncing transactions which are not fraudulent."

But the plaintiffs were not creditors of Giersh at the time of the execution of the mortgage, their debts having been contracted by Giersh since its execution. Is the mortgage presumptively fraudulent as to subsequent creditors, the plaintiffs? The same rules can not apply to the rights of these two classes of creditors. The character of the evidence must vary, and so must the measure of relief. In voluntary conveyances, where subsequent creditors are concerned the touchstone of fraud is the intent with which they are made; and that is not a matter of law, but is to be passed upon by the jury. Clement v. Cozart, 109 N.C. 173; Cook v.Johnson, 12 N.J. Eq., 54; 72 Am. Dec., 381; Payne v. Stanton, 59 Mo., 159; Wait Fraudulent Conveyances, 201.

It was decided in Etheridge v. Sperry, supra, that in case of a mortgage to secure a debt, an instrument that can not be called a voluntary conveyance, subsequent creditors have no right to complain if they deal with a mortgagor with full (454) knowledge (by constructive knowledge from registration of mortgage) of such facts as were set out in the mortgage. Inclining to the correctness of the view of the Court in that case, nevertheless, if the mortgage in the present case be treated, for the sake of argument, as a voluntary conveyance (which it is not), the question of fraud would be a question of fact and not of law. There was no evidence in this case that there was any fraud in the execution of the mortgage at or before the time of its execution. But the subsequent acts of the parties may be submitted to the jury, as they "may reflect light back upon the original intent," and help to characterize and discern it more correctly. Wait on Fraudulent Conveyances, supra. Fraud must be proved to be in the inception of the matter, but the after conduct of the parties is evidence going to explain the motives which controlled the actions in the beginning, and give point to the original purpose.

Upon a most careful review of the evidence, we find none that ought to have been submitted to the jury to show fraud in the transaction. The debts secured were admitted to be bona fide; no attempt was made to keep secret the mortgage; it was on the registration books. The debt of $8,600 had been paid; no act of the mortgagor or mortgagee was brought out in the evidence in the least calculated to show a fraudulent purpose in the execution of the mortgage. That the bank of which the mortgagee was a director tried to help the debtor in his financial difficulties is not evidence of fraud. They misled no creditor. No misapplication of the proceeds of sale with the consent and knowledge of the mortgagee was shown; neither was there any evidence that the mortgagor was using the profits of the business for his own case and advantage in fraud of his creditors, and with the knowledge of the mortgagee.

The other exceptions of the plaintiff are without merit (455) and do not justify a discussion.

His Honor was right in holding that there was no fit evidence to be submitted to the jury to prove fraud, and he properly dismissed the action upon the motion to nonsuit the plaintiffs.

No error.