Hammond v. Carthage Sulphite Pulp & Paper Co., 8 F.2d 35 (2d Cir. 1925)

*36 *37 George E. O'Connor and Thomas O'Connor, both of Waterford, N. Y., for unsecured creditors and Union Iron Works.

Patterson, Eagle, Greenough & Day, of New York City (J. Frederick Eagle and Carroll G. Walter, both of New York City, of counsel), for United States Mortgage, etc., Co.

Francis E. Cullen, of Watertown, N. Y., for C. E. Norris, receiver.

Before ROGERS, HOUGH, and MANTON, Circuit Judges.

HOUGH, Circuit Judge (after stating the facts as above).

The matters at bar are not very closely related logically, so we shall take them up in separate statements of opinion.

1. As to the alleged invalidity in toto of the defendants' mortgage, we think the decision below correct. There is no contention that its from is unusual or that filing was not attended to. Argument is (a) the above-quoted provisions of the mortgage, allowing Carthage Company to sell part of its property without accounting therefor to the mortgagee, are fraudulent and vitiatory of the entire mortgage; and (b) the mortgage operated upon a "stock of merchandise in bulk" or upon "merchandise and fixtures pertaining to the conduct of the business of the mortgagor," but no inventory of the mortgaged goods was given by mortgagor, and no notice was given creditors by the mortgagee, as required by section 230-a of New York Lien Law (Consol. Laws, c. 33, as added by Laws 1921, c. 462, amended by Laws 1922, c. 137).

The first contention is supported by citing cases such as In re Leslie-Judge Co. (C. C. A.) 272 F. 886, certiorari denied, 256 U.S. 704, 41 S. Ct. 625, 65 L. Ed. 1180, Russell v. Winne, 37 N.Y. 597, 97 Am. Dec. 755, and Skilton v. Coddington, 185 N.Y. 80, 77 N.E. 790, 113 Am. St. Rep. 885, which say that a reservation of right in a mortgagor to sell all or a large part of the material sought to be hypothecated under a chattel mortgage, and retain the proceeds thereof, renders the mortgage "fraudulent as matter of law and void in toto."

Whether the phrase "fraudulent as matter of law" is ever anything more than a rather violent way of stating a conclusion of fact may well be doubted, but the use made of the decisions using the phrase is neither persuasive nor reasonable. The cases cited hold that, when the obnoxious provisions are found in a chattel mortgage, the *38 whole chattel mortgage is invalidated, and they cannot be cited beyond that point. The reason for the holding is obvious, the mortgaging (i. e., hypothecation without change of possession of chattels) is strongly repugnant to common-law principles; nothing but a statute validates such mortgages, and, when the mortgagee not only has no possession but bargains away his certain right ever to get it, there is no mortgage in the way of creditors in accordance with any sound legal theory, customary, historical, or statutory. Hence denunciation of such so-called mortgages of personalty.

But when the mortgage is corporate and therefore valid against creditors, under New York law, when affecting both realty and chattels, and filed only as a real estate mortgage, the style of case cited has no application. Such instruments as this at bar contain in truth two mortgages, two schemes of hypothecation, resting on very different schemes of law, and having totally different legal genealogies.

There is no logical reason why a document, bad as a chattel mortgage, for violation of the theory of possession, should be also bad as a mortgage of realty, where the theory of physical possession before default never had any place.

In discussing this point we have assumed that this mortgage wholly fails as a chattel mortgage; but the point is only assumed arguendo; yet with that assumption we think the opinion in Chemung, etc., Bank v. Payne, 164 N.Y. 252, 58 N.E. 101, controlling in favor of validity of this mortgage as to realty. That case was not of a corporate mortgage; there was a total failure to file as a chattel mortgage, and the argument was pressed that, because the instrument was half bad, it must be wholly bad; but ground for decision was that no such rule as was contended for existed; the real inquiry was whether there was that actual fraud that vitiates any transaction and all of it, and, as there was no such fraud, the mortgage was good as to realty. There as here a finding was made by the trial court of freedom from all actual fraud, and the same result follows the decree on this point is affirmed (c. f. Hardin v. Dolge, 46 App. Div. 416, 61 N. Y. S. 753).

2. The taxes upon mortgaged property. The only person who had any property out of which to pay was the receiver. Therefore the underlying question is this: When the trust company has paid these taxes, what is the nature of its claim for reimbursement against the property in the receiver's hands?

We think it clear that, so far as the taxes levied before the appointment of the receiver are concerned, the trust company is merely a general creditor; the claim arising out of breach of covenant by Carthage Company. But, so far as taxes levied while the mortgaged property was in possession of the receiver are concerned, there can be no default by Carthage Company, which was inhibited from paying; and the amount paid by the trust company cannot give rise to a claim for breach of contract against Carthage Company. Consequently we consider taxes levied against the property while in the hands of the receiver as expenses of the receivership. Therefore the receiver should reimburse the trust company for the taxes of 1924 out of whatever funds he may ultimately have to pay receivership charges. Union Trust Co. v. Great Eastern Co., 248 F. 46, 160 C. C. A. 186; Atkinson v. Aldrich, etc., Co. (D. C.) 248 F. 134.

3. The claim in suit and against Northern New York Coal Company. As found below, this demand for damages for breach of contract arose in 1918, and was in existence when the mortgage was executed. Such a demand was and is a chose in action; it was plainly assigned by the first portion of the above-quoted habendum clause, and not excluded by the proviso, for such a demand is not included in "accounts, notes or bills receivable, cash, obligations or securities." Chose in action is the only applicable term employed in the mortgage and covering this item, and such a chose is not a chattel. Had the assignment been unrecorded, it would have been good against creditors. Greey v. Dockendorf, 231 U.S. 513, 34 S. Ct. 166, 58 L. Ed. 339; In re Michigan Furniture Co. (D. C.) 249 F. 978. It was therefore error to refuse trust company's demand to sell this chose in action in foreclosure.

4. The Canadian Lands. As pointed out above, the Carthage Company never had title to this realty; that was held by a natural person who had made a private unrecorded declaration of trust in favor of the company. Argument is that the future property clause of the mortgage covers; it is as follows:

"It being intended that all property, real, personal and mixed, of any and every kind and character, which the corporation now owns, and all property which it may hereafter acquire, and howsoever acquired, shall be subject to the lien of this indenture, with like tenor and effect as though now owned by the corporation and as though covered *39 and conveyed hereby by specific and apt descriptions."

Especially is it urged that the clause covers because this Canadian land is after-acquired realty. Undoubtedly the land was an "immovable," the nearest equivalent of "realty" to be found in Quebec legal language; but we do not find it necessary to inquire whether there is any difference between realty and personalty in the application of the after-acquired property clause in this mortgage. These interests in foreign realty were never real estate owned by Carthage Company; another person owned them, as trustee to be sure, but an interest as cestui que trust in land can never be called realty in the cestui.

Again, underneath and controlling all construction of this mortgage, is an ascertainment of the intent of parties, derived from a study of what they wrote, in this instance the language of the mortgage.

We hold (1) that what the mortgagor ever owned in this Canadian land was never land or realty in mortgagor; therefore being after acquired, the mortgage did not apply, under New York law (Zartman v. First National Bank, 189 N.Y. 267, 82 N.E. 127, 12 L. R. A. [N. S.] 1083; Titusville v. City of New York, 207 N.Y. 203, 100 N.E. 806; In re Marine, etc., Co., 144 F. 699, 75 C. C. A. 451); and (2) that there is no evidence of any intent on the part of either mortgagor or mortgagee to subject land in Quebec directly or indirectly to the lien of this New York mortgage. In this regard the decree below was correct.

5. The bonds of the Quebec-Saguenay Company. When the mortgage was executed, the mortgagor had possession of these bonds as pledges to secure a debt due it by the Quebec Company. This debt was certainly either an account, or a bill receivable, and therefore excluded from the mortgage by the above-quoted proviso of the habendum, and, if the bonds stand in the place of the account or bill, they are excluded still. But if the bonds take position according to their own nature, then they are both after acquired, and were never deposited with the trustee, as bonds were required to be by article III of mortgage, supra. As to this item the decree below was correct.

6. The boilers bought from Union Iron Works. These chattels were all delivered at Carthage Company's works before the execution of the mortgage. The relation of parties is wholly governed by the Personal Property Law of New York as it stood in 1921 (Consol. Laws, N. Y. c. 41) when the mortgage was executed. At that time the said statute (section 62) provided that, if the conditional sale was of chattels to be attached to a building, it would be void against "subsequent bona fide purchasers or incumbrances of the premises on which said building stands," and as to them the sale should be absolute, unless before "the date of the delivery" of the chattels at the building the sales contract was filed and indexed. Under such a statute the condition in the sale was void as against a mortgagee whose freedom from all fraud has been specifically found below. The decision below in this regard was correct.

Let the decree below be modified as above indicated; the trust company will recover against the appellant creditors one bill of costs; no other costs in this court.