U.S. Supreme Court
Blennerhassett v. Sherman, 105 U.S. 100 (1881)
Blennerhassett v. Sherman
105 U.S. 100
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. chanroblesvirtualawlibrarychanroblesvirtualawlibrary
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 chanroblesvirtualawlibrarychanroblesvirtualawlibrary
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 chanroblesvirtualawlibrarychanroblesvirtualawlibrary
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 adrrassed and unable to pay its debts, and that all these facts were then well known to Stephens and Blennerhassett. That they, desiring to take adrrassed 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
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
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 chanroblesvirtualawlibrarychanroblesvirtualawlibrary
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. chanroblesvirtualawlibrarychanroblesvirtualawlibrary
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.