CALKINS v. LICHTIG. In re SCHLEGEL, 251 F. 844

HOLLISTER, District Judge (after stating the facts as above).

In view of the facts and the reasonable inferences to be drawn from them, it is idle to urge tiiat a chattel mortgage o f after-acquired property is good in Michigan, that one partner may sell his interest in the partnership to another partner, that filing the mortgage was technical notice to the world of its existence, or, in the absence of further information than the record discloses, that the consideration for the mortgage was valuable, and that there were many' evidences of good faith in the transaction, such as filing the mortgage and notice of dissolution, and changing the name on the sign and on the stationery; for these, though correct statements of the law and important facts tending to show good faith, do not tell the whole story, and when all the facts are considered, must fail to accomplish the fraudulent purpose their appearance of good faith was designed to cover.

In such a case as this, it is not the acts which apparently show good faith that prevail, but the acts which show the want of it; for fraud taints every transaction into which it enters, and the daw protects subsequent creditors against actual fraud on them. Bump on Fraud. Con. (4th Ed.) §§ 290, 291. In dealing with rules of law and with circumstances tending to show good faith under cover of which a fraud was perpetrated, it was said by Judge Hook in Amundson v. Folsom, 219 Fed. 122, 125, 135 C. C.

A. 24, 27: “But all such things, especially when in close consecutive association, are to be considered, with what else appears, in determining whether the result was the consummation of a preconceived purpose to hinder, delay, or defraud creditors. * * * Transactions apparently innocent when separately regarded may take on a different sighification when seen in their true connection with others.

And it is not always safe to venture a prohibited course on a mosaic of sound, but unrelated, rules of law.” While Calkins and Schlegel would have it believed that SchlegeFs want of power of resistance' to the overpersuasive insistence of salesmen was the cause of his extraordinary purchases, yet he had been in the same kind of business for several years, and the record shows he was by no means inexperienced or unsophisticated.

On the contrary, there is much evidence of appreciation on his part of the ways of business and the probable effect of concealing from those with whom he was dealing matters of such importance that, had they been known, creditors would not have fallen into the trap set for them. One of the strongest evidences of his full understanding of what he was about was his expressed opinion that specific notice to creditors of the filing of tide mortgage was not necessary because the filing itself would, be notice to them.

He appreciated that filing the mortgage was a conspicuous badge of good faith, and had a keen sense of its legal effect. ' Filing'a mortgage is, hqwever, only a substitute for the possession which otherwise must accompany the delivery of a - pledge. It is not even a protection in cases in which the mortgage contains fraudulent stipulations. Robinson v. Elliott, 22 Wall. 513, 521, 22 L. Ed. 758. Much less is it a protection against a fraud conceived in secret, in

part consummation of which the mortgage, though valid on its face, is given. Assuming, for the purposes of the issue now before us, that all concerns with whom the old firm had dealt, and all with whom Schlegel had dealings on his own account, knew in contemplation of law of the mortgage and of the dissolution of the partnership, yet they had no notice that he had no real interest in the stock of goods and was hopelessly insolvent when the mortgage was given.

Calkins was careful to keep the credit of the old concern unimpaired, and, by furnishing Schlegel with, the money to pay its creditors, as if coming from Schlegel himself, imparted a further credit to Schlegel to which he was not entitled. This was enough to cause those who had dealt with the old concern to believe on reasonable grounds that they could safely deal with one of the partners who had succeeded to the business. Calkins knew what the effect on the trade would be when he kept the partnership credit good and started liis nephew out with a reputation for paying his debts.

He knew, also, whatever legal implications might be drawn from fding the mortgage, that in fact few, if any, creditors would probably know of it. Knowing this, he did not notify any commercial agency or the concerns with whom the partnership hacl been dealing of his withdrawal from the firm and of his protection through the chattel mortgage, nor did he tell any of them of the fact, unless he was directly questioned by salesmen, and even then lie did not tell them of his nephew’s insolvency, nor advise any of them that he was receiving money from his nephew for the purposes, or any of them, shown by the facts.

Even on the assumption that the stock, fixtures, etc., were worth as much as they were inventoried, he nevertheless immediately caused the assets to be depleted by about the same sum Schlegel’s equity appeared to be worth. In fact, however, he did this with the knowledge that the inventoried values were far in excess of the actual values of the property. In the item of fixtures alone there was an overvaluation of $1,126.

When Calkins saw that, within three months after he had withdrawn, his nephew had in the store as much as $11,000 worth of goods bought on credit, and had been assured that he need not worry, because the stock was there, he went to California for the winter, his inind easy in the comfortable belief that the loss he had incurred while in a losing business with his nephew would be made good through the scheme his nephew was carrying out, so admirably safeguarded, as it was, by appearances of fair dealing and rules of law established to protect those who act in good faith.

One w'onders what thought consistent with honest purpose prompted the injunction to Schlegel not to lie if any one asked him about the mortgage. What Calkins in effect said was: “Do not voluntarily tell anything about it; but, if any one asks, don’t lie.” Evidently Calkins resolved to tell the truth himself about the mortgage, if any one inquired; but he does not say that he ever told anybody that Schlegel was insolvent. If Schlegel told “lots” of salesmen that his equity was worth about $300, the statement was false in itself.

That he informed any salesmen of his insolvency is not believable, for the reason, among others, that no salesman, however limited his authority, would sell his employer’s goods on such a slender factor of safety. Explanation of the policy of truth-telling is found in the danger to be apprehended from discovered falsehood; but that policy did not go so far aa to include the whole truth, and stopped at those half-truths which answer the purpose of falsehoods. Schlegel’s conduct, from whatever standpoint it may he viewed, does not give the impression of good faith.

One would expect a young man of the proper sort, just starting out in business for himself, with good credit and in debt more than the value of his goods, would be jealous of every expenditure and cautious in contracting debts, and particularly careful about his personal conduct. The purchase of more than $19,000 in stock on credit for a business in a town of 600 people, and which had been a losing enterprise froni the beginning, is, under the circumstances, evidence of intentional fraud.

In a highly optirfiistic mind there could be no hope, in the limited field in which Schlegel operated, of disposing within a reasonable time of the .large amount of goods he was buying before the persons whom he owed for them would close in on him. He knew the field, and was conscious that, if he and Calkins had made no money in it, he could not dispose of the goods he had bought in time to pay for them on reasonable terms of credit. When he went into bankruptcy in May, he had on hand in merchandise considerably upwards of $17,-000, and was owing nearly that sum to unsecured creditors.

In the absence of any evidences of extravagant purchases by Schlegel prior to liis going into business on his own account, the conclusion is irresistible that the reason given by Calkins for terminating the partnership, that Schlegel was “a little bit heavy on the buy,” had no existence in fact, and affords a not even' plausible explanation of Schlegel’s extraordinary purchases on credit. Assuming that Calkins discounted farmers’ notes with Schlegel, how is it that Calkins, needing money, was dealing in this way with him, without asking for the weekly payments promised in the note ?

From all the circumstances it fairly appears that Calkins, realizing that the business was unsuccessful and that the future held out no hope for it, had an understanding with Schlegel involving the sale and mortgage, the payment of the debts of the firm (for which he was liable in any event) in Schlegel’s name as a basis of credit, and the purchase by Schlegel of large quantities of goods on credit, which would make Calkins good at the expense of Schlegel’s creditors when the crash came. What was done amounted to intentional, fraud on those creditors, participated in by both parties.

In Michigan it is enough that such fraud be established by a preponderance of the evidence. Dorrington v. Carpenter, 171 Mich. 652, 655, 137 N. W. 538. From all of these considerations, it follows that the decree of District Court was right. It will therefore be affirmed, at appellant’s costs.