POLLOCK v. JONES, 124 F. 163

SIMONTON, Circuit Judge (after stating the facts as above). There can be no doubt that under the law of South Carolina a sealed note given by one member of a firm creates no obligation against the firm, unless the partner so signing and sealing has authority from his copartner at the time to do the act, or unless when the act is brought to the knowledge of the other partner he acknowledges it or ratifies and confirms it.

The evidence in this case shows that Jones never knew of the execution of the note or of mortgage until after the death of Duff, and that he never acknowledged, assented to, or ratified it, although both Duff and Pollock had frequent opportunity of informing him of the transaction. This act of Duff, being unauthorized, did not bind the firm. Sibley v. Young & Napier, 26 S. C. 415, 2 S. E. 314; Hull v. Young, 30 S. C. 121, 8 S. E. 695, 3 L. R. A. 521.

In the case first quoted the Supreme Court of South Carojina says: “Here the instrument sued upon is a single bill, which the iaw requires shall be executed under seal, and hence the proposition contended for by the appellants cannot be sustained.” That was that the seal being unnecessary it did not affect the transaction. “It is very true that the plaintiffs might have taken a promissory noté to secure the payment of the amount due them by defendants, which Napier would have had authority to give in the name of the firm, but they chose to take a different security, one of such a character as Napier had no authority to give, and when they come to enforce such security they cannot avail themselves of the protection which the law would have afforded them if they had seen fit to take a different, security.

Indeed, if the proposition contended for by appellants should be admitted, we do not see how the question whether a partner could be made liable on a sealed note, the execution of which he had not authorized or ratified, could ever arise; for it might always be said in such a case that the debt secured by the sealed note might have been evidenced by a promissory note, and therefore all the partners should be held liable. The question turns upon what has been done, and not upon what might have been done.

The plaintiffs elected to secure their claim by an instrument of such a character as required a seal, and, under the well-settled law, when they bring their action on such a paper they cannot recover except upon the proof that it was executed by proper authority or has been subsequently ratified.” In South Carolina a sealed note is synonymous with a single bill. In the same case it had been argued that placing the seal on the note was surplusage, and might be disregarded. This the court emphatically denied. This-consideration alone would sustain the conclusion reached below.

But it is a case made under the bankrupt law, and the court below based its conclusion entirely upon the provisions of that law, and this point will now be discussed. When the notes for $2,000 were made, subsequently consolidated into one note, they covered a pre-existing indebtedness of $1,040, and a cash loan of $960, as of the 29th April, 1902. At that time no security was given for the $2,000. Pollock says that a mortgage was promised. He is the only witness to this point.

Apart from the fact that he is detailing occurrences between himself and a party then deceased, in a suit between himself and the assignee in bankruptcy of the party deceased, and so his evidence was incompetent under the statute law of South Carolina in such case made and provided (Code Civ. Proc. S.

C. § 400), we are of the opinion that the bare promise to give security, not expressing in terms the character and subject-matter of the security, could not create either an equitable or a legal mortgage. • So the loan of $2,000 at the date of the mortgage of the 28th of May was for unsecured antecedent debt, both as to the $1,040 and the $960. So the validity of the transaction must be determined as of that date. The referee has found, and his finding is sustained by the court, that at that date Jones and Duff, the mortgagors, were insolvent.

There is no obvious error in the application of the iaw to this fact, and no important mistake in the evidence. This conclusion, coincided in by the referee and the judge, must be accepted. Fisher v. Shropshire, 147 U. S. 146, 13 Sup. Ct. 201, 37 L. Ed. 109; Furrer v. Ferris, 145 U. S. 132, 12 Sup. Ct. 821, 36 L. Ed. 649. It is true that it is said that no good reason existed for supposing that Mr. Pollock knew of this insolvency. It is to be remarked, however, that in getting security Pollock obtained and accepted a mortgage of the entire assets of the firm.

It was said at bar that the words, “all my crop, buggies, wagons, and household goods,” were printed in the mortgage, and that under the act of the Legislature above quoted no chattel mortgage can convey any valid interest in property unless such property mortgaged shall be described in writing or typewriting and not printing. This is true. But this property was included by the mortgagor, accepted by the mortgagee, with knowledge of and in spite of the act. It is no unfair inference to draw that both of them supposed that the circumstances surrounding them required the largest concession in the way of security.

Beside this, Mr. Pollock must have known, and the record seems to show that he did know, that Jones & Duff had other creditors. Yet, by taking this mortgage, covering and controlling their entire stock of goods of every description in their possession, present and future, he practically made the firm at that instant insolvent to the extent, at least, of appropriating all the assets of the firm to the payment of one favored creditor, and if these be required to pay him in full, leaving nothing for other creditors.

Be this as it may, is this mortgage given by an insolvent to one not knowing the insolvency void under the bankrupt law ? It goes without saying that it was a preference, and that it was intended as a preference. Under

section 60a, a person shall be deemed to have given a preference if, being insolvent, he has made a transfer of any of his property, and if the effect of such judgment or transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class. “Transfer includes the sale and every other and different mode of disposing of or parting with property, or the possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift, or security.” Act 1898, c. 1, subd. 25 (Act July 1, 1898, c. 541, 30 Stat. 544, § 1 [U. S. Comp.

St. 1901, p. 3430]). A chattel mortgage transfers property and affords the most efficient mode of obtaining and reducing it into possession.

Section 6je provides “that all conveyances, transfers, assignments or incumbrances of his property, or any part thereof, made or given by a person adjudged a bankrupt under the provisions of this act subsequent to the passage of this act and within four months prior to the filing of the petition, with the intent and purpose on his part to hinder, delay, or defraud his creditors, or any of them, shall be null and void as against the creditors of such debtor.” In this case, without the knowledge or authority of his partner, carefully concealing the fact from his partner, and never, although having full opportunity afterwards, disclosing it, Duff executed a mortgage of all the property of the firm, and of its future stock, to Pollock for this debt.

He could devise no better mode of hindering, delaying, and defrauding his creditors, nor could he better disclose intent to prefer Pollock to their disadvantage. Counsel for appellant lay great stress upon the finding of the court below that there is no good reason to believe that Mr. Pollock was aware of the insolvency of the firm when he took the mortgage. He argues that Pollock thus comes within the provisions of

section 6ob, in which it would appear that the party obtaining a preference must have reasonable cause to believe that it was thereby intended. For this position he relies upon Pirie v. Chicago, etc., Co., 182 U. S. 438, 21 Sup. Ct. 906, 45 L. Ed. 1171. This case simply decides that when a creditor, in the course of business, receives payments on account from his debtor, not knowing that they were intended as a preference, he cannot prove for the remainder of his claim without surrendering the payments he has received. If he does not prove his claim, he may retain that which he has received innocently.

Preferences are abhorrent to the bankrupt law, and contrary to its entire spirit and purposes. Yet if a creditor, in the course of business, receives payments in money, not knowing that they, in fact, constituted a preference, he may retain them, provided that he seek nothing further from the bankrupt’s estate In other words, he retains his preference at the cost of the rest of his claim. If he seeks further aid from the bankrupt’s estate, he must surrender his preference.

It would seem that there is a great difference in the attitude of a creditor who has actually received in possession, without knowledge of a preference, money or property of his debtor who is afterwards adjudicated a bankrupt, and that of a creditor who has received such a preference which only can be secured to him upon application to the court of bankruptcy, and who applies to that court to put him in possession. In the first case he may retain what he has received, losing all claim for any balance of his debt; in the latter case he can get no relief withput surrendering his preference.

In the Pirie Case it was found as a matter of fact that when the payments were made Pirie did not have reasonable cause to believe that the bankrupt, by said payments, intended thereby to give a preference Nor did the bankrupt, by such payments, intend thereby to give a preference.

In the case at bar, when Pollock received this chattel mortgage covering all the property of the mortgagee, and when Duff gave the mortgage practically clothing Pollock with a legal title to all the property of the firm, it is impossible to say that the one' did not know that he got a preference and that the other was unaware that he gave a preference. The appellant also relies upon the case of McIntyre v. McNair (C. C. A.) 113 Fed. 113, as applicable to this case.

The facts found in that case were that when the mortgage of Sanderlin, who afterwards became a bankrupt, was executed it was intended in good faith, neither Sanderlin nor his mortgagee having any knowledge that he was insolvent. Nor is there anything in the record showing that Sanderlin was then insolvent.

Section 6yd. Concluding the discussion of this branch of the case, the language of the Circuit Court of Appeals by Sanborn, Circuit Judge, in Swarts v. Fourth Nat. Bank, 117 Fed. 1, 54 C. C. A. 389, is not without force: “The two dominant purposes of the framers of that act were:

(1) The protection and discharge of the bankrupt; and (2) the distribution of the unexempt property which the bankrupt owned four months before the filing of the petition in bankruptcy against him, share and share alike, among his creditors. All the earlier sections of the act are devoted to the security and relief of the bankrúpt, and when the distribution of his property is reached the provisions relating to it are all drawn from the standpoint of the insolvent, and not from that of his creditors.

The rights and privileges of the bankrupt, and the equal distribution of his property, dominate every provision, while the rights, wrongs, benefits, and injuries of his creditors are always incidental and secondary to these controlling purposes.

Section 60a contains the legal and controlling definition of the preference specified in

section 57g and the other parts of the bankrupt act. But this definition of a preference was not written from the station of the creditor, but from that of the debtor. It is not the act of the creditor, but the act of the debtor, which gives it — which produces it. The controlling thought is not the benefit or injury to the creditor, but the equal distribution of the property of the bankrupt among the holders of the provable claims against him.” There is yet another point of view from which we can test the validity of this claim. The bankrupt when insolvent gave to A. H.

Pollock a mortgage of his entire stock in trade and other property to secure this debt of $2,000. In South Carolina it is declared that assignments by an insolvent debtor, giving priority or preference, are null and void. Civ. Code S. C., § 2647. Construing this act, the Supreme Court of the state has held that an instrument, although in form of a mortgage, if it disposes of the whole of the grantor’s estate for the purpose of securing a creditor, is in fact an assignment for creditors, to be construed and controlled as such. Stewart v. Kerrison, 3 S. C. 266. In Wilks v. Walker, 22 S. C. 180, 53 Am.

Rep. 706, the debtor gave a chattel mortgage to his grantor covering nearly all of his property to secure his debt. It was held that this was an assignment for the benefit of creditors under the statute on that subject, and void under that statute. In Austin v. Morris, 23 S. C. 393, a merchant gave certain of his creditors a chattel mortgage of all his stock in trade to secure certain notes, with the usual 'power of sale. It was held that this was, in contemplation of law, an assignment for the benefit of creditors and void. In Wilks v.

Walker, supra, the court says: “The manifest object of the act is to prevent an insolvent debtor from transferring or assigning his property for the benefit of one or more of his creditors to the exclusion of all others, and whether this object is sought to be effected by a formal deed of assignment or in any other mode can make no difference.

Any other view, it seems to us, would sacrifice substance to mere form, and enable insolvent debtors, by evasion, to effect a purpose declared by statute to be unlawful.” We are of the opinion that, both under the statute law of South Carolina and the provisions of the bankrupt law, A. H. Pollock cannot claim under this mortgage against the estate of the bankrupt. The decree of the court below is affirmed.