Crowder v. Allen-West Commission Co.

SANBORN, Circuit Judge

(after stating the facts as above). Counsel for the trustee present three reasons why the decree allowing the claim of the commission company should be reversed or modified: (1) That in August, 1899, it made an agreement with Hawks to loan him the money to pay the 40 per cent, of the claims of his other creditors which was to be paid under the composition agreement, in 'consideration that Hawks'promised to pay his debt for $3,987.57 to :it specified in that agreement in full; (2) that after the mortgage of August, 1899, and pursuant to the terms thereof, the commission company was the principal and Hawks its agent in the purchase and sale of the property and the conduct of the business Hawks handled; and (3) that the commission company conspired with Hawks to defraud his other creditors by concealing his indebtedness to it and sustaining his credit so that they were induced thereby to sell him goods upon credit.

. The lucid and exhaustive opinion of the court below has demonstrated its familiarity with the voluminous evidence in this case and its clear comprehension of the law and the facts which conditioned its decision. In re Hawks, 204 Fed. 309. Reference is made to that opinion for a more extended discussion of the case and citation of the authorities than it is necessary to present here, and this opinion will be confined to an expression of the view of this court upon the conclusions of the court below which the appeal challenges.

[2] An agreement between a debtor and one of several creditors, who are parties to a composition agreement with the debtor, to release him from their claims for a certain percentage thereof, whereby the debtor agrees to pay his preferred creditor in full in consideration of its loan of the funds requested to pay the fixed percentage to the other creditors, is a breach of confidence and good faith which renders the composition voidable. It does not, however, render it void. It is still valid until avoided, not void until validated. The other creditors may successfully resist its enforcement while it is executory. They may rescind it after it is executed, restore what they have received under it, and, if practicable, return to their position before its execution, or they may retain what they have received -under it and affirm it. They have no other remedy; no right of recovery against the preferred creditor. • The debtor may recover back the excess which he has paid to the preferred creditor above the fixed percentage before the composition was made, and the excess he has been compelled to pay thereafter. But he may not recover anything which he has voluntarily paid after the composition was made pursuant to his agreement with the preferred creditor. Batchelder & Lincoln Co. v. Whitmore, 122 Fed. 355, 359, 360, 362, 58 C. C. A. 517.

[1] The trustee in bankruptcy in this case, therefore, may not defeat in whole or in part the claim of this commission company on account of the composition and the agreement of August 10, 1899: First, because he does not represent and cannot act for the creditors who'signed that composition, but may act only for the present creditors of the bankrupt, and but a very small percentage of either class is found in the other; second, because the composition creditors had no remedy, but rescission, and they have never rescinded, but by their retention of 40 per cent, of their claims and acquiescence for 11 years they affirmed the composition; third, because the debtor, by permitting the application of the payments made by him on his indebtedness to the commission company according to law in the order of the accrual of the items of that indebtedness, voluntarily paid the debt for the loan to pay the composition percentages and the debt of $3,987.57 specified in the composition agreement many years before his bankruptcy, and by his repeated acknowledgment and giving of security to pay the Dudgeon note, and his inducement of the commission company thereby to loan him the large amounts of money it subsequently advanced to him, he had estopped himself long before the bankruptcy from any relief at law or in equity on account of the composition or on account of his agreement with the company regarding it. There was consequently no equity in the trustee, either as the representative of the debtor or as the representative of the creditors, to defeat or reduce the claim of the commission company against the estate of the bankrupt in this case on account of the composition agreement, or on account of the agreement between Hawks and the commission company in August, 1899.

[3] Was the commission company the principal and Hawks its agent in the purchase and sale of the merchandise and other property and the conduct of the business which Hawks handled between August 31, 1899, and his adjudication in bankruptcy in 1910? The argument for an affirmative answer to this question rests on the stipulations in the mortgage of August 31, 1899, that Hawks’ property therein described was then conveyed and surrendered to the commission company; that Hawks was to act as the agent of the company in the gathering and marketing of the crops mortgaged, in the sale of the mortgaged stock of merchandise on hand and to be purchased; that in everything pertaining to the business or connected therewith he was the agent and representative of the company; that he was to ship the cotton picked and received to the company to- be sold by it on account; and that he would make statements of the business as requested by the company. The argument is supported by the facts that Hawks did make to the company reports and statements of the business and of the property in his hands frequently and whenever requested by the company; that he shipped the cotton which he collected to it; that the company conducted a voluminous correspondence with him; that it tried to keep intimately acquainted with the business and the property which he was handling; that it advised and requested him,frequently and insistently to contract his operations, dictated his letter to it concerning the business and disposition of the property in case of his death or his .failure; and that the commission company paid all the drafts which Hawks drew upon it upon any account from August, 1899, to December, 1910. If these were the only facts relevant to this issue, the question under consideration might well be answered as counsel for the trustee contend it should be. But the instrument of August 31, 1899, was not a mere power of attorney to Hawks to act as agent for the company, although it contains the stipulations regarding his agency which have been recited. Nor was it a mere agreement of sale or conveyance of the property it described. On the other hand, it was a complete mortgage which recited that it was made to secure the present and future indebtedness of Hawks to the company, and that was its main purpose to which the stipulations regarding its agency were but auxiliary. It contained the usual condition of a mortgage that, if the debt specified was paid by the 1st day of January, 1900, the instrument should be void, but that, if Hawks failed to fulfill his promises and. covénants in the mortgage, the company should have the right to take possession of the property, sell it, and apply the proceeds to pay the debt of Hawks to the company, and return the remainder to him. This last stipulation is inconsistent with the theory that the property and the business was already the commission company’s and in its possession by the possession of its agent. And when it is considered that at the time this mortgage was made it was the law of Arkansas, where the property and business were situated, that a mortgage of a stock of merchandise in use in retail trade left in the possession of the mortgagor without a provision that he should conduct its sale as the agent of the mortgagee and should account to him for and apply to the payment of his claim the net proceeds of such sale was void, while with such a provision it was valid (Adler-Goldman Commission Co. v. Phillips, 63 Ark. 40, 52, 53, 37 S. W. 297), it is probable that the intention of the parties to this instrument' was to assure the validity of the mortgage by the stipulations therein regarding agency and not to transform the commission company from creditor to owner and Hawks from owner and debtor to the agent of the owner of the property and business described. The correspondence between the parties, the reports and statements of Hawks to the company, its requests for them, its endeavor to keep familiar with the business and property he was handling and to secure control of it in case of his death or failure, its advice and request that he curtail his operations and pay his debts are as consistent with the relation of creditor and debtor as with that of principal and agent. Moreover, the account books of the parties, their letters, the mortgages of 1899, 1908, and 1910, which were promptly spread upon the proper public records so that all who wished might know the relation of these parties, treated of them as creditor and debtor, not as principal and agent. The testimony of the witnesses is that they were such, and an examination and consideration of all the evidence has forced the conviction upon our minds that there was no mistake in the finding of the'court below that the relation of these pai-ties to each other under the mortgage of August, 1899, and throughout the entire 11 years until the adjudication in bankruptcy in December, 1910, was not that of principal and agent but was that of creditor and debtor, and that Hawks, and not the commission company, was the owner of the property and the business he handled.

[4] Did the commission company conspire with Hawks to defraud his other creditors by concealing his indebtedness to it and sustaining his credit' so that they were thereby induced to sell him their goods upon credit? Hawks was insolvent from August, 1899, until his adjudication a bankrupt in December, 1910. Counsel for the trustee contend, and for the purpose of this decision it is conceded, that the commission company knew that he was insolvent' during all this time. The record, however, persuades that during all this time, up to the first days of December, that company hoped and believed that he was an honest, industrious, and energetic business man operating in a favorable locality, and that by loaning him more money it could make his business so large and prosperous that he could and ivould pay off his debts. There is no other rational deduction from the controlling fact that this company increased its loan to him and enabled hita to enlarge and carry on his business and pay his other creditors year by year until, after'crediting all the security for its indebtedness. which it obtained, that indebtedness rose from $7,730 on September 1, 1900, to $238,835.40 in December, 1910. Meanwhile, it is true, it did not tell inquiring creditors of Hawks, commercial agencies, or other parties, how much he owed it or what its estimate of his financial worth or standing was. It never denied, however, but when questioned always admitted that he owed it money, and it never made any false statement about his indebtedness or financial standing, and it kept spread upon the public records from one to three mortgages, each securing all Hawks’ indebtedness to it past, present, and future. Is this course of action such a fraud upon other creditors of Hawks who gave him credit on his false statements of his financial condition, his large business operations, and the acts and silence of the commission company which have been detailed as makes it inequitable for the company to share in the distribution of its debtor’s property? In the absence of other evidence than the proof of the claims of all these creditors, the commission company, the largest creditor, would be entitled to share pro rata with the others. The equitable principle upon which it is sought to exclude it is that “he who has done iniquity shall not have equity.” But in what way has the company done iniquity ? Counsel for the trustee answer: By deceiving the other creditors into the belief that Hawks was solvent and thereby inducing them to give him credit to their damage. But an intent to deceive one to his injury, or knowledge of the falsity of the misrepresentation, or a reckless misrepresentation made in ignorance of -the fact is indispensable to actionable deceit or fraud. Union Pacific Ry. Co. v. Barnes, 64 Fed. 80, 83, 12 C. C. A. 48, 51; Western Union Telegraph Co. v. Schriver, 141 Fed. 538, 541, 72 C. C. A. 596, 599, 4 L. R. A. (N. S.) 678; Kahl v. Love, 37 N. J. Law, 5, 6, 7; Polhill v. Walter, 3 Barn. & Adolph. 114, 124.

[5] A creditor must have been guilty of some moral turpitude or some breach of duty by which other creditors were deceived, to their damage, to constitute such a fraud as will estop him from sharing with them in the distribution of the proceeds of the estate of his debtor in bankruptcy. A willful intent to deceive or such gross negligence as is tantamount thereto is an essential element of such an estoppel. Henshaw v. Bissell, 18 Wall. 255, 271, 21 L. Ed. 835; New York Life Ins. Co. v. McMaster, 87 Fed. 63, 67, 30 C. C. A. 532, 536; Daniels v. Benedict, 97 Fed. 367, 380, 38 C. C. A. 592, 605; Farmers’ & Merchants’ Bank v. Farwell, 58 Fed. 633, 639, 7 C. C.. A. 391, 397.

[6] A creditor of an insolvent debtor is a competitor of all his other creditors. He stands in no fiduciary or contractual relation to them and owes them no duty to inform them of his debtor’s financial condition, his insolvency, or of the amount of his indebtedness to him. Foster v. McAlester, 114 Fed. 145, 151, 52 C. C. A. 107, 113. There was therefore no fraud or breach of duty in the failure of the commission company to inform the other creditors in this regard. It never made any false statement respecting these matters; whatever it stated was the truth, and no duty rested upon it to state even that, much less to state more of the truth. It did not use its knowledge to induce other creditors during these 11 years to sell goods to the debtor that from the proceeds of them it might secure a payment of a portion of its claim. On the other hand, it constantly increased its loan and enabled its debtor for 10 years to pay its other creditors with its money, and ceased this course only when it learned that Hawks had incurred a large indebtedness to others when it had supposed and believed that he owed little to any one but itself. A careful review of all the evidence in this case and of all the facts and circumstances which it discloses has satisfied this court, as it did the court below, that the commission company was guilty of no breach of duty to, deceit of, or fraud upon any of the other creditors of Hawks which can or 'ought to estop it from' sharing with the 'other unsecured creditors in the proceeds of his estate.

The decree below must therefore be affirmed.

And it is so ordered.