John S. Voorhees for complainants. Alan H. Strong, for defendant Edwin Allen. Chas. H. Runyon, for defendant Mapes Formula & Guano Co.
Bill by Gertrude D. Boice and others against Cornelius N. Conover and others to foreclose a chattel mortgage, and for the appointment of a receiver. Receiver appointed, and decree rendered, foreclosing complainants' mortgage, and that of defendant Edwin Allen, set up by cross bill, and determining priorities of mortgages and the claim of the defendant Mapes Formula & Guano Company, as a judgment creditor of the mortgagor.
John S. Voorhees for complainants.
Alan H. Strong, for defendant Edwin Allen.
Chas. H. Runyon, for defendant Mapes Formula & Guano Co.
EMERY, V. C. The dispute in this case relates to the respective priorities of two chattel mortgages, and of a judgment and execution creditor; one chattel mortgage being held by complainants, one by the defendant Edwin Allen, and the execution creditor being the defendant the Mapes Formula & Guano Company. Both chattel mortgages were given by the defendants Cornelius N. Conoverand William Allen, partners as Conover & Allen; the complainants' mortgage being dated on October 21, 1893, and recorded October 25, 1893, subsequent to the defendant Allen's mortgage, which was dated September 8, 1893, and recorded September 9, 1893. The two mortgages cover the same property, and include the partnership stock, horses, wagons, etc., goods and fixtures, and also the books of account, debts, etc., due or to become due to the firm. The judgment of the Mapes, etc., Company, was obtained on December 12, 1893, in the Middlesex circuit court, for $1,090.61 damages, and $33.50 costs, upon an account due from the firm of Conover & Allen, which, as appears from the record of the judgment, was incurred between February 2 and April 10, 1893, and previous to the execution of either of the chattel mortgages. Upon execution issued under this judgment, levy was made upon the goods and chattels covered by the chattel mortgages (but not upon the book accounts and choses in action mortgaged), and also upon the separate interest of Conover, one of the members of the firm, in certain real estate in Middlesex county. Levy was made on the execution before the filing of complainants' bill. On December 28, 1893, complainants filed a bill to foreclose their chattel mortgage, disputing the priority of defendant Allen's mortgage as to $2,000, part of the debt secured by it, on the ground that this portion of the debt secured by Allen's mortgage was the individual debt of William Allen, one of the partners, and was not a firm debt, and the mortgage was therefore charged to be fraudulent and voluntary as to complainants' mortgage, which was given to secure a firm debt or liability. Upon this bill, a receiver of the mortgaged property was appointed, the receiver being Mr. 'C. H. Runyon, the attorney of the Mapes Company, and the mortgaged property (including the book accounts and debts due) has been sold and collected. Out of the proceeds, the receiver has paid to Edwin Allen the sum of $2,017.78, under orders of the court (consented to by complainants), to be applied on that part of the debt secured by Edwin Allen's mortgage which was not disputed by complainants' original bill. Subsequent to this sale and collection by the receiver and to these payments, and in order to reach the funds in court for application on his mortgage, the defendant Edwin Allen (at the suggestion of the court, made when the case was brought to hearing) filed a cross bill upon his mortgage against the complainants and the Mapes, etc., Company, who had not put in any answer to the original bill. In its answer to the cross bill, the Mapes Company attacks the Allen mortgage as void for want of a proper affidavit under the statute relating to chattel mortgages, and also as a voluntary mortgage to the extent of $2,000, in that it was given to this extent by the members of the firm, upon the firm property, to secure an individual debt of one of the partners, and is therefore void as against the judgment creditors of the firm, whose debts existed at the time of the mortgage.
The defendant Edwin Allen alleges that the entire indebtedness secured, or intended to be secured, by his mortgage, was a partnership debt or liability; and, as against the execution creditor, defendant also alleges that the real estate of Conover, one of the defendants in execution, is sufficient to satisfy the execution, and claims that this must be first sold before resorting to the goods and chattels of the firm. The Allen mortgage was given to secure the payment of $4,800 on demand, with interest from the date of the mortgage (September 8, 1893); and, in his affidavit annexed to the mortgage, Edwin Allen, the mortgagee, swears that "the true consideration of the said mortgage is as follows, viz. the sum of four thousand eight hundred dollars, cash money loaned by this deponent to said Cornelius N. Conover and William Allen, partners, trading as Conover & Allen, at their request, and before the execution hereof, and now due and owing from them to this deponent; and the deponent further says that there is due on said mortgage the sum of forty-eight hundred dollars, besides lawful interest thereon from the 8th day of September, 1893." It is admitted by the answer and the cross bill of Edwin Allen, and is undisputed on the evidence, that, at the time of giving the mortgage, neither the firm nor William Allen owed Edwin Allen more than $2,000, and that the $2,800 additional included in the mortgage represented notes to that amount which Edwin Allen had indorsed for the accommodation of the firm, and on which he was liable as indorser, but which were not then due; so that to this extent the true state of the indebtedness and the true consideration of the mortgage were not disclosed by the mortgage or affidavit. The execution creditor insists that this failure to disclose the true consideration of the mortgage avoids the mortgage as to it under the statute, and also that the affidavit that any of the $2,000 indebtedness was due or to become due from the firm was false in fact; this being a debt due solely from William Allen for the capital advanced by William Allen to the firm. The disputed question of fact in the case is whether the $2,000 was an indebtedness due from the firm, or only from William Allen; and, upon the whole evidence, I reach the conclusion that the debt was not a firm debt, but was due to Edwin Allen from his son William alone, and not from the firm. Edwin Allen had no dealings whatever with Conover, the other partner, in relation to the advance of the $2,000; and this money was at different times between June 20, 1892, and August 3, 1892, paid or advanced by Edwin Allen to his son William, the evidence of Indebtedness in each case being notes signed by William Allen alone, which were delivered by him to his father, and were renewed when due by the son's obligations alone By the agreement between the partners, each was tocontribute $2,500 capital; and, in the books of the firm, which were kept by William Allen, he entered the moneys received by him from his father as part of the credit to his account as a partner. So far as William is concerned, this and the other evidence in the case (showing that, up to the time of giving the mortgage, these advances from his father had not been treated as a partnership liability) is conclusive, and entirely overcomes his present statement that the money was originally advanced as a loan to the firm. William Allen's statement that the advances from his father were put in his account, "so that it could be either way, that I owed it to him or the firm owed it to him," is of itself sufficient to discredit his present evidence. As to Edwin Allen's evidence on this point, it appears that he knew that it would require about $5,000 or $6,000 to buy the stock or business which the firm proposed to take, and that, before the partnership was formed, he promised his son to let them have $2,000. $1,000 of the amount was advanced June 20, 1892, on a note for one year, signed only by his son; $300, on July 15, 1892, on a similar note. These two notes were renewed on falling due, June 20, 1893, and July 15, 1893, by other notes of the son alone, for one year. On July 23, 1892, there was another advance by Edwin Allen to his son of $500, for which he took his son's note, probably at one year; and on August 3, 1892, the fourth and last advance, of $150, on William's note for one year. The former was renewed on July 23, 1893, by a note of six months, and the latter on August 3, 1893, by a note at one year. These notes make up $1,950, and are all the evidences of indebtedness produced in relation to the advances, and Edwin Allen still retained all these renewed notes up to the time of hearing. His explanation of the notes being signed by his son, and not by the firm, is that "he wasn't near the firm's place of business, and, when he gave me these, I didn't have any idea of trouble ahead. I was careless in taking them in that way." This explanation, given when "trouble" had arisen, and his advance to his son is put in jeopardy, is not sufficient to overcome the effect of the written evidence agreed on by the parties at the time of the advances, by taking the securities of his son alone. The time for repayment fixed by the notes is an additional indication that the advances were not temporary loans to the firm, which were to be repaid by them, but that they were advances to the son alone. The money advanced undoubtedly went to the use of the firm, but this is not sufficient to constitute the lender a creditor of the firm (Bannister v. Miller [N. J. Ch.; Oct, 1895] 32 Atl. 1066, Reed, V. C); and the question is whether Edwin Allen advanced the money to his son, or whether he advanced it to the firm. Considering the situation and the relationship of the parties, the security given (being notes of the son alone), and the time for repayment, and the whole aspect of the case, it seems to me that there is no evidence which will justify me in holding that the real transaction was not the one which was evidenced by the writings agreed on by the parties at the time.
Complainants claim that under the decision in Uhler v. Browning (1859) 28 N. J. Law, 79, 82, parol evidence is not admissible to contradict the written evidence furnished by the notes themselves, or to show that the notes were debts of the firm. But without resting the decision upon this point, I find that, as matter of fact, upon all the evidence, it appears that $2,000 of the indebtedness included in the Allen mortgage was not for cash money loaned by Edwin Allen to the partners at their request, and before the execution of the mortgage, as stated in the affidavit, but was in fact for money advanced to William Allen alone, and the payment of which was assumed by the firm for the first time by the chattel mortgage itself; this assumption by the firm being subsequent to the creation of the debts of the complainants and of the Mapes Company.
It is claimed on behalf of defendant Allen that the indebtedness to complainants was purely voluntary, and arose subsequent to the execution of the Allen mortgage; this claim being based on the facts that the complainants' mortgage was given only to secure them against liability as indorsers for accommodation on a note of Conover & Allen for $1,500; that the complainant Gertrude Boice was a married woman, and therefore not bound by the indorsement; and that her subsequent payment of the note to the bank which had discounted it was purely voluntary on her part and not sufficient to constitute her an existing creditor of the firm. The fault in this contention is that it overlooks the fact that the real creditor of the firm upon these notes was the bank, and that the complainant Mrs. Boice, on paying the notes, as she had a right to do, and perhaps was morally bound to do, was substituted for the bank as the creditor of the firm, and therefore, so far as relates to the time when the complainants' debt was created, occupies the position of the bank, as a creditor of the firm existing at the time of the Allen mortgage. Cramer v. Reford, 17 N. J. Eq. 367, 380, 384. The real question of difficulty in relation to complainants' case against the Allen mortgage is not whether the complainants were existing creditors at the time of the Allen mortgage, but whether, having taken a mortgage to secure their debt, they are now simply subsequent mortgagees or purchasers from the firm, and not creditors standing in their rights as creditors for an existing debt or liability which was the consideration of the mortgage.
The attack upon the validity of the Allen mortgage is made from two different standpoints: First, under the chattel mortgage act; and, secondly, as a voluntary conveyance made by a firm to secure the individual indebtedness of one of the partners, and thereforefraudulent and void against creditors of the firm. The Mapes Company, insists upon both of these objections. The complainants have, on the record, only relied upon the latter objection.
As to the first objection: The fourth section of the chattel mortgage act of May 2, 1895 (Supp. Revision, p. 491), provides "that every mortgage of goods and chattels * * * shall be absolutely void as against the creditors of the mortgagor, and as against subsequent purchasers and mortgagees in good faith, unless the mortgage have annexed thereto an affidavit stating the consideration of said mortgage, and as nearly as possible the amount due and to grow due thereon." The affidavit annexed to the Allen mortgage failed altogether to disclose its true consideration. For $2,800 of it, the mortgagee was only liable as indorser. For the other $2,000, the money had been advanced, as I have found, to William Allen, and not to the firm. The status of the indebtedness disclosed in the affidavit diverges so widely from the true state of facts that it seems impossible to deny that this affidavit did not, either in respect to the $2,800 or the $2,000, comply with the letter or the spirit of the statute, and the suppression of the true consideration was manifestly material. Mr. Allen's counsel claims that this misstatement was the result of an honest mistake, but the question is one of the construction of a statute, which defines what the affidavit must contain, and makes no exception or allowance for mistakes. As was said in Kennard v. Gray, 58 N. H. 51 (a case arising on an affidavit under a somewhat similar law), the statute condemns such securities, because their natural tendency is to deceive and defraud creditors, however honest the intention of the parties. And as was held by Mr. Justice Dixon in Fletcher v. Bonnet (Err. & App.; 1893) 51 N. J. Eq. 615, 618, 28 Atl. 601, the validity of the chattel mortgage depends on the correctness of the Information in the affidavit, and not on the knowledge of the affiant of its truth. Neither, as it seems to me, can the validity of the mortgage depend on the honesty of an affiant in making an affidavit which is substantially untrue. I hold, therefore, that as against the Mapes, etc, Company, judgment creditors of the firm, the Allen mortgage is void under the chattel mortgage statute.
As to complainants' mortgage the situation is different. It is proved by one of the complainants' witnesses that the complainant Mrs. Boice and her attorney, who drew their mortgage, had actual knowledge of the Allen mortgage at the time of taking their mortgage; and, if the complainants' rights rest solely on their mortgage, she is not protected by the statute, which only covers mortgagees in good faith,—that is, without notice. But complainants claim that they are creditors of the firm and that, inasmuch as the mortgage given to Edwin Allen was to secure a debt of the individual partner, she is entitled to set it aside as fraudulent against her, under the statute relating to fraudulent conveyances. As to judgment creditors of the firm, the mortgage would be set aside (Bannister v. Miller [N. J. Ch.; 1895] 32 Atl. 1066, Reed, V. C); but the question is whether, as mortgagees, the complainants are not to be considered as purchasers, under the statute of frauds, rather than creditors. The complainants are not standing here upon their original debt and upon the rights which the common law and statute both gave them as creditors, to set aside any conveyance made by their debtor to others in fraud of their rights as creditors; but, so far as relates to their lien on the mortgaged property, they stand solely upon a mortgage voluntarily made to them by their debtors of the debtors' rights in personal property, which property had previously been subjected by their grantors to the payment of a voluntary charge in favor of Edwin Allen. Under the statutes relating to fraudulent conveyances, mortgagees of real estate have always been held to be purchasers, and entitled to the protection of 27 Eliz., relating to subsequent purchasers, re-enacted substantially in our statute of frauds and perjuries (Revision, p. 446, § 13). Lavalette v. Thompson (1861; Green, C.) 13 N. J. Eq. 274, 1 Smith, Lead. Cas. (8th Ed.) p. 28. And judgment creditors are not purchasers, within 27 Eliz., so as to avoid voluntary conveyances. Beavan v. Lord Oxford, 2 Jur. (N. S.) 121. This section 13 of our statute extends in terms only to the purchasers of real estate, and 27 Eliz. has been construed not to embrace chattels. 2 Bigelow, Frauds, p. 526, § 2. And it has been held in a late English case (Barton v. Vanheythuysen [45 Eng. Ch.] 11 Hare, *126) that it did not extend to chattels, and that a mortgagee of chattels could not, under his mortgage, attack a previous voluntary conveyance by his mortgagor, although he might have set it aside had he stood simply upon the rights which the law gave him as creditor. See, also, Bill v. Cureton, 2 Mylne & K. (7 Eng. Ch.) 503, 512. Perrine v. Bank, 55 N. J. Law, 402, 27 Atl. 640, decides that, where a mortgage is declared to be subject to a prior mortgage, this will prevent the mortgagee, as mortgagee, from contesting the validity of the former mortgage as a fraud on creditors. And, although there was no such provision in complainants' mortgage, it seems to me that, so long as the complainants stand on their rights as mortgagees of goods and chattels under a mortgage given to secure a pre-existing debt or liability, they must accept the mortgage as a mortgage only to the extent of the mortgagors' then interest in the property mortgaged, and cannot, as mortgagees, claim to set aside the previous voluntary mortgage, as a fraud upon them, considered in the light of creditors under the statute. In other words, a mortgagee of a fraudulent grantor cannot attack a fraudulent cenveyance,on the basis of being a creditor, for the debt which was the consideration of the mortgage; and the reason is that the rights to attack a fraudulent conveyance, given by the common law and statute to creditors, are rights which proceed from the law only, and are given by the law alone to creditors purely as creditors, and having a lien, as such creditors, on the property conveyed. If the debtor, by his voluntary act, intervenes to secure such creditor by mortgage or deed, subsequent to the fraudulent conveyance, the creditor then becomes a purchaser succeeding to his grantor's rights, as they were at the time of the conveyance, and protected only as such purchaser is protected from previous fraudulent conveyances. He is certainly a purchaser, and cannot be at once both creditor and purchaser. This view of the effect of taking a mortgage or conveyance by a creditor is confirmed by the following cases: 1 Hil. Mortg. p. 625, §§ 9, 10, citing Sprague v. Graham, 29 Me. 160; Fox v. Clark, Walk. (Mich.) 535, a leading case. Upon this branch of the case, therefore, I conclude that the Allen mortgage is not invalid against the complainants, either under the chattel mortgage act or as a conveyance in fraud of the creditors of the firm.
The Allen mortgage, which is the first in point of time, being thus valid against the complainants' mortgage, the second security in time, and invalid as against the execution creditor, the third security, and the complainants' mortgage being admittedly valid as against the execution creditor, these three incumbrances, so far as relates to the proceeds of sale of the goods and chattels which they all cover, would regularly be marshaled under the rule settled in Hoag v. Sayre (Err. & App.; 1881) 33 N. J. Eq. 552. This rule is that the execution creditor shall first be paid out of the proceeds, so far as the amount due on the first mortgage extends; then the first mortgagee shall receive from the proceeds the balance of the amount for which his mortgage is prior to the second mortgage; then the second mortgagee is to be paid in full; and then the residue to the first mortgagee. The defendant Allen insists, however, that there must be a further marshaling of securities in his favor, and that the execution creditor must first exhaust the separate real estate of Cornelius N. Conover, which has been levied on, and not yet sold. If the execution creditor were now here simply as a creditor, seeking, as a complainant, to set aside a fraudulent conveyance, made by the judgment debtors, then, under the rule settled in Wales v. Lawrence (1882; Van Fleet, V. C.) 36 N. J. Law, 207, it might be necessary to sell the separate real estate of any of the debtors before the property fraudulently conveyed could be reached. But the execution creditor in this case is a defendant, and rests on his levy made on the goods and chattels of his debtors, and upon his statutory rights under the chattel mortgage act to have the mortgage of complainants on these chattels declared void as to him. His status as defendant, claiming the benefit of the chattel mortgage act, is different from that of a creditor, as complainant, attacking a fraudulent conveyance under the act relating to fraudulent conveyances; and the fact that the execution creditor has not exhausted his rights against the separate real estate under the excution is no reason for denying him the right, given by the statute, to have the goods and chattels levied on first applied to the payment of his debt, if he so chooses. And, indeed, the sale of the goods and chattels, which was prevented by the appointment of a receiver under a prior mortgage, would otherwise regularly have taken place under the statute, prior to a sale of any of the lands.
The defendant Allen further insists that, upon the principle of marshaling securities, the execution creditor, having two funds, must first resort to the one not covered by Allen's mortgage. But these rules are not applicable. In the first place, there clearly can be no enforced marshaling of securities, unless the securities to be marshaled are all valid as against the creditor whose security is marshaled. To require the creditor in this case first to exhaust the separate real estate would be to compel him to relieve, by his good security, the mortgage which is void against him, and, in effect, would be indirectly holding it valid against him. But, secondly and most important, the doctrine of marshaling does not apply as between creditors of different persons. 14 Am. & Eng. Enc. Law, p. 699, and cases cited; 1 Story, Eq. Jur. §§ 642-645. Mr. Justice Story says: "Where a creditor has a right to resort to two persons, who are his joint and several debtors, he is not compellable to yield up his remedy against either, since he has the right to stand upon the letter and spirit of his contract, unless some supervening equity changes or modifies his rights. If each debtor is equally bound in equity and justice for the debt, as in the case of joint debtors or partners, where both have had the full benefit of the debt, the interference of a court of equity to change the responsibility from both partners or debtors to one would seem to be utterly without any principle to support it, unless there was a duty in one of the debtors or partners to pay the debt in discharge of the other." See, also, Dorr v. Shaw, 4 Johns. Ch. 17, 20, and Ex parte Kendall, 17 Ves. 520. In the latter case, Lord Eldon says that there might be an opposite equity,—that of compelling the creditor to go first against the property of surviving partners, primarily liable, before resorting to the separate estate of a deceased partner. In our courts the rule is recognized that the firm assets must be exhausted before the separate estate of a deceased partner can be charged with the firm debts. Buckingham v. Ludlom (1883; Van Fleet, V. C.) 37 N. J. Eq. 137, 148, affirmed 41 N. 3. Eq. 348, 7 Atl. 851. There has beenno issue on the record or suggestion on the evidence in this case that, as between the partners, Conover & Allen, Conover is equitably liable to pay complainants' debt in discharge of the firm assets; and evidently such an issue could not be determined without taking an account between the partners, nor without bringing in all who are interested in Conover's separate real estate levied on. No equitable duty is charged or appears imposing on the partner Conover the duty of discharging the execution for the firm debt from his individual property before exhausting the firm assets, and the judgment will therefore be first paid from the proceeds of the sale of the firm property levied on.
A single question remains for consideration. It relates to the effect of the orders made in the cause directing the receiver, out of the moneys in his hands, to pay the sum amounting to $2,000 towards payment of the note of that amount indorsed by Edwin Allen, for the accommodation of the firm of Conover & Allen. On March 6, 1894, and before the time of the Mapes Company to answer had expired, an order was made directing that the receiver apply $750 of the moneys in his hands for that purpose towards the payment of the note then due and held by the National Bank of New Jersey, the said note forming part of the consideration of Allen's mortgage. This order was made upon a written waiver of notice signed by complainants' solicitor, and their written statement, annexed to the order, that no objection was made to granting the same. No notice was given to the Mapes Company. On May 18, 1894, another like order was made, directing the receiver to pay the balance due on the note out of the moneys in his hands so far as they extended. This order was made upon the written consent of the complainants' solicitors, annexed to the order, and also without any notice to the Mapes Company. The receiver made the payments directed by these orders, on March 10, 1894, $750, and on May 26, 1894, $1,267.78, —in all, $2,017.78. The funds in the hands of the receiver consisted of proceeds of sale of the mortgaged goods and chattels embraced in the levy, and also of accounts collected which were included in both mortgages, but were not covered by the levy. The payments were made without the consent of the execution creditor, for, although the receiver was the attorney for the execution creditors, the payments made by him as receiver under orders of the court, and without notice to the execution creditor, cannot be considered as consented to by them. These payments, therefore, must be considered as made out of the proceeds of the accounts collected, as to which the chattel mortgage act does not apply, and as to which the consenting parties also had the authority to consent. They cannot be considered as effective against the execution creditor in relation to the proceeds of sale of the goods and chattels covered by his execution. The execution creditor will therefore be paid out of the proceeds of sale of the goods levied on, and, if the amounts paid as above exceed the proceeds of accounts collected, the defendant Edwin Allen must return the excess to the receiver, so far as it represents goods levied on for the purpose of satisfying the execution.
The receiver is the officer of the court, appointed by it, to convert the property for the benefit of the persons ultimately entitled; and, for the purposes of paying out in the suit, the money in the receiver's hands must be treated as money in the court. Regularly, money in court can only be paid out on notice to all parties to the suit, or, at least, to all the parties appearing on the record to be interested in the proceeds. Where a fund is improperly paid out of court, without providing for a payment due on it, the court will order the person who has received it to pay the amount. 2 Daniell, Ch. Prac. *1805. The same course is pursued where the fund has been paid out in consequence of fraudulent misrepresentations. Id *1814. The payment to Edwin Allen in this case must be considered as having been made subject to the rights of the parties who had no notice of the order, and did not consent to it, and subject to any direction on final decree for reimbursement in their favor. The accounts of the receiver will be settled before final decree, if necessary to carry out these directions, and the form of decree settled, on notice to all parties.