Frazer & Chalmers v. Colorado Dressing and Smelting Co.

upon the ground that the code of the state gives special proceedings, having in view the same purpose, to reach any property of the judgment debtor, and subject it to execution under the judgment.

As to the first ground, it is enough to say that this is not a bill for discovery only. It may be true as to bills for discovery, and especially where the discovery is sought in aid of an action at law, that there is no reason for entertaining them, since the statute allows parties to be examined, and all persons to be examined as witnesses in the cause. But this is not a bill of that character. It is true it seeks to discover what property and effects the company may have which may be subject to execution. But it also seeks to bring the property into a situation in which it may be reached by the execution. under the judgment, or to subject the property itself, when it shall be found, to the payment of the judgment. The purpose of the bill is something more than mere discovery. It is to reach the property and have it applied to the payment of the judgment. And it is one of the oldest heads of equity jurisdiction in proceedings of this kind, to secure to creditors the payment of their judgments, when the property of a debtor has been put in a situation in which it cannot be reached by execution at law.

Now, as to the statute of the state which gives a remedy for reaching the property and effects of a judgment debtor, the examination of the debtor himself and all persons who may have knowledge as to the disposition of his effects, in a proceeding supplementary to the suit in which the judgment was obtained, it is only necessary to say that it is a special proceeding, which does not in any way affect the equity jurisdiction of this court.

There are many decisions of the supreme court to the effect, generally, that the authority and jurisdiction of the federal courts is not subject to the control of state legislation. And there are two decisions of circuit courts which I regard as directly in point in relation to such statutes as this. The first

Crooks, Assignee, v. Stuart.

of these is the case of Cropper v. Coburn, reported in 2 Curtis Reports, 465. A statute of Massachusetts provided that when an attachment should be levied upon the interest of one of several copartners in the partnership effects, other partners should be at liberty to give to the officer a bond to pay to the attaching creditor the appraised value of the debtor's share of the property attached. Upon bill filed in the circuit court to restrain the officer and the plaintiff in the attachment suit from levying a writ on partnership effects, it was held that the equity jurisdiction of the court was not at all affected by the statute of the state.

And in Byrd v. Badger, McAllister, 443, the precise question here presented arose in the circuit court for the district of California. That was a proceeding in the federal court under the statute of California, supplementary to execution. That statute is similar to our own, if not exactly the same, and it was held upon full consideration that the statute was of no force or effect in the federal courts.

The demurrer to the bill will be overruled.

CROOKS, Assignee, v. STUART et al.

(District of Iowa. May, 1831.)

1. MORTGAGE OF PERSONAL PROPERTY - DELIVERY.- At common law a secret conveyance of personal property, without delivery, was fraudulent and void as to all who should deal with the vendor upon the faith of his ownership.

2. SAME-STATUTE OF IOWA.-The statute of Iowa provides that "no sale or mortgage of personal property, where the vendor or mortgagor retains actual possession thereof, is valid against existing creditors or subsequent purchasers without notice," unless the instrument is executed and recorded as conveyances of real estate are required to be executed and recorded. The ruling of the supreme court of Iowa, that a mortgage of personal property, when recorded, is good as against a creditor of the mortgagor who becomes such after the execution and before the recording of the in

Crooks, Assignee, v. Stuart.

strument, being a decision upon a question of the construction of a state statute, is a rule of decision for this court; but if it were an open question, this statute would be construed as merely declaratory of the common law rule above stated.

8. SAME

DEALING WITH THE MORTGAGED PROPERTY BY MORTGAGOR AS IF IT WERE HIS OWN.- Independently of the statute the law is, that where the mortgagor of a stock of goods remains in possession, and continues to sell, dispose of and deal with the property as if it were his own, the mortgage not being recorded, the same is void as against a creditor of the mortgagor who becomes such without notice of the mortgage. This being a question of general law, this court is bound by the decisions of the supreme court of the United States upon the subject.

Phillips, Goode & Phillips, for complainant.

Barcroft, for respondent.

MCCRARY, Circuit Judge. The complainant, as assignee in bankruptcy of A. J. Nutter, bankrupt, and as representing the creditors of the bankrupt estate, brings this bill to set aside two certain mortgages executed by the bankrupt upon a stock of merchandise, and to subject the same to the payment of the debts of the estate.

The mortgages are assailed upon the ground that the mortgagor retained the possession of the goods mortgaged, and used and disposed of the same as his own; and upon the further ground that the mortgage was not recorded until after the debts, represented by complainant, were contracted.

One of the mortgages expressly provided that the mortgagor might dispose of the goods in the usual course of business; the other contained no such provision, but it appears that there was in fact no change of possession, and that the mortgagor, after the execution of both mortgages, and with the assent of the mortgagees, retained the possession and continued to carry on the business, buying and selling in the usual course of trade, for about one year before the mortgages were recorded, and for a little more than a year before possession was taken under them.

The debts represented by the complainant were contracted

Crooks, Assignee, v. Stuart.

while the mortgagor was in possession and before the recording of the mortgages, and the creditors had no notice of any incumbrance upon the property.

The statute of Iowa provides as follows: "No sale or mortgage of personal property, where the vendor or mortgagor retains actual possession thereof, is valid against existing creditors or subsequent purchasers without notice, unless a written instrument conveying the same is executed, acknowledged, like conveyance of real estate, and filed for record with the recorder of the county where the holder of the property resides." Code 1873, sec. 1923.

Two questions have been elaborately discussed by counsel, to wit:

First. Whether, under the statute, a mortgage of personal property, not recorded, is valid as against a subsequent creditor who becomes such without notice of such mortgage?

Second. Whether, independently of the statute, a mortgage of personal property, where the mortgagor retains the possession and deals with the property as his own, is valid as against a creditor of the mortgagor who becomes such without notice of the mortgage?

The first of these, being a question as to the true construction of a statute of the state of Iowa, we are constrained to follow the decisions of the supreme court of the state, however much we may doubt the soundness of those decisions.

Were this an original question we should hold, without hesitation, that the statute was enacted to prevent the perpetration of fraud by the sale or mortgage of personal property, without the delivery of the possession, and without notice to persons subsequently dealing with the vendor or mortgagor.

Independently of any statutory provision, a manual delivery. of the mortgaged property to the mortgagee would be necessary to the validity of the instrument.

This rule of the common law had its foundation in the doctrine that possession of personal property is prima facie evi

Crooks, Assignee, v. Stuart.

dence of ownership. To allow the owner of such property to transfer the title by a secret conveyance, while retaining the possession and assuming to act as the owner, was regarded at common law as permitting a fraud upon all who should deal with him upon the faith of his ownership.

His possession and apparent ownership, it was believed, gave him credit and afforded him the means of defrauding others. The purpose of the legislature in enacting this statute was not, in our judgment, to set aside this wholesome doctrine, and thus enable dishonest persons to commit fraud by means of secret chattel mortgages; it was only to substitute recording for delivery.

If thus construed, the statute affords a protection against fraud quite as effectual as that given by the common law; but if we hold that a secret unrecorded sale or mortgage may be enforced as against a creditor who deals with the vendor or mortgagor in ignorance of its existence, unless such creditor shall, by attachment or otherwise, obtain a lien before having notice of the instrument, it seems to us that the door for fraud is left wide open.

One who gives credit to a merchant in the open and exclusive possession of a stock of merchandise upon which there is no recorded lien, has a right to assume that he is dealing with the owner of such stock, and to rely upon such ownership in extending credit. If he is to be affected by any secret lien upon such stock, which may be recorded before he secures a lien by levy or otherwise, it will generally happen that the first notice to him upon which he can make an affidavit for attachment will be the recording of the lien, so that the circumstance that gives him the right cuts off the remedy.

If, therefore, we were at liberty to construe the statute for ourselves, we should unhesitatingly hold the mortgages in question in this case to be void under the statute. But the supreme court of Iowa, whose decisions upon the construction of state statutes are rules of decision in this court, have reached, upon this question, a different conclusion.