Opinion
October, 1905.
James O. Sebring, for the appellant.
O.P. Hurd and John M. Roe, for the respondent.
These mortgages were fraudulent as to creditors. In Brackett v. Harvey ( 91 N.Y. 214) the head note in part reads: "A chattel mortgage is not rendered void, as to creditors of the mortgagor by a provision authorizing him to sell the mortgaged property and apply the proceeds of sales toward the payment of the mortgage debt. * * * But an agreement, although outside of the mortgage and oral simply, that the mortgagor may use a portion of the proceeds of sales for his own benefit, avoids the mortgage." In the case at bar the authority was given to sell and the mortgagor was required to account to the mortgagee only for a part of the sale price, to wit, such part thereof as represented the purchase price at which the property was sold by the mortgagee to the mortgagor. If that purchase price had been named in the mortgage, the mortgage might well be deemed to have been one upon the specific articles to the extent only of the purchase price. That purchase price, however, nowhere appears in the mortgage and is only found in an inventory which is not attached to the mortgage or filed therewith, and which is accessible to the mortgagor and mortgagee only. Such a mortgage would have in it every vice which inheres in a mortgage giving authority to sell without accounting to the mortgagee for any part of the proceeds of the sale. It is a mere cover of property which is being sold in general trade obnoxious to every principle of fair dealing with creditors.
These mortgages being void, existing creditors had the right to compel the mortgagee to account for the value of the property taken thereunder, and this although the property was taken thereunder by the mortgagee before the creditors were in position to enforce their claims. ( Mandeville v. Avery, 124 N.Y. 376; Stephens v. Perrine, 143 id. 476.)
This plaintiff, as trustee in bankruptcy, succeeds under the letter of the statute to the rights of these creditors. In subdivision e of section 70 of the Bankruptcy Law (30 U.S. Stat. at Large, 566) it is provided: "The trustee may avoid any transfer by the bankrupt of his property which any creditor of such bankrupt might have avoided, and may recover the property so transferred, or its value, from the person to whom it was transferred unless he was a bona fide holder for value prior to the date of the adjudication. Such property may be recovered or its value collected from whoever may have received it except a bona fide holder for value."
In this view of the case it matters little whether the adjudication of bankruptcy established the insolvency of the bankrupt prior to the date of the petition or whether the defendant be bound thereby. The fact that the plaintiff is the legal trustee of the bankrupt is not here questioned, and the right of the trustee to recover the value of this property does not rest upon the fact of insolvency at the time of the giving of these mortgages.
But the learned judge at Special Term has dismissed this complaint apparently upon the theory that the action was not proper in form. He has cited the case of Houghton v. Stiner ( 92 App. Div. 171) as holding that an action at law was not maintainable to recover the value of this property and has apparently for this reason in part dismissed this complaint. In that case an action in equity was brought to recover certain property transferred by a bankrupt to a creditor within four months of the filing of the petition in bankruptcy as an illegal intended preference. The complaint was demurred to upon the ground that the plaintiff had an adequate remedy at law. All that was there held was that plaintiff might proceed in equity and that the complaint stated a good cause of action. In the complaint in the case at bar the facts are fully stated. The relief asked for is that authorized by the statute. The case was tried before the judge without a jury upon stipulation of the parties. If upon the pleadings and proof, therefore, the plaintiff was entitled to any relief, we are unable to find anything in the authority cited by the learned judge at Special Term which would forbid the granting of such relief.
Upon the proofs, then, we are of the opinion that the plaintiff has established a cause of action, and that the judgment dismissing his complaint was erroneous and should be reversed.
All concurred, except CHESTER and HOUGHTON, JJ., dissenting.
Judgment reversed upon law and facts and new trial granted, with costs to appellant to abide event.