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The question as to the compliance with either statute, alternative, is a question of fact. There is no testimony tending to show that the mortgage was recorded, and no claim that such was the fact. When we come to consider the other alternative, the question of delivery to, and retention by, the mortgagee is as distinctly a question of fact. After hearing all the testimony, the referee has decided that there was no such open possession and retention of the property by the mortgagee as is sufficient to comply with the statute. I cannot find that he was in error in coming to this conclusion. In Griffith v. Douglas, 73 Me. 532, 40 Am. Rep. 395, the court held that the mortgage, even though recorded, was not valid unless the goods were delivered by the mortgagor to the mortgagee with the intention to ratify the mortgage, and the mortgagee retained open possession of the after-acquired property until the time of the attachment. Chief Justice Appleton, speaking for the court, said:
"The authorities are uniform in requiring that not merely delivery, but retention of the property delivered, is indispensable to the perfection of the mortgagee's title, whether the mortgage purports to convey after-acquired property or should be unrecorded."
See, also, Wright v. Tetlow, 99 Mass. 397; Moors v. Reading, 167 Mass. 322, 45 N. E. 760, 57 Am. St. Rep. 460; Drury v. Moors, 171 Mass. 254, 50 N. E. 618; Haskell v. Merrill, 179 Mass. 120, 60 N. E. 485.
As I have already said, the testimony in the case at bar does not show such open delivery to, and retention by, the mortgagee of the property as would, in my opinion, have prevented a general creditor from attaching it, and holding it as the property of Shaw. Instead of tending to show an open transfer to, and retention by, the mortgagee, the testimony rather leads to the belief that the transfer was intentionally secret, and not intended to be notorious. There is no testimony tending to show that the Keene Leather Company ever asserted any rights under its mortgage, or did anything to vest the title in itself. On the date of its mortgage, then, to the bank, the Keene Leather Company had no title which it could convey. The title remained in Shaw. The only rights against Shaw which passed to the bank by the mortgage from the Keene Leather Company were rights by estoppel, which resulted from Shaw's standing by and assenting to the transfer. This is made the most of by the learned counsel for the bank; but, if the conveyance shall be held to be a conveyance by estoppel from Shaw to the bank, this estoppel can relate only to Shaw, and not to his trustee in bankruptcy. In spite of anything done by way of delivery to, and retention by, the mortgagee, I am of the opinion, as I have already indicated, that an attaching creditor of Shaw could have prevailed in an attachment of the bark, and, therefore, that there passed to this trustee property which might have been levied upon and sold under judicial process against the bankrupt. I think the case at bar presents an instance of a fraud on the policy and objects of the bankrupt law as clear as that contained in Blennerhasset v. Sherman, 105 U. S. 100, 26 L. Ed. 1080, which latter case is cited by the referee in his report.
In Rogers v. Page, 140 Fed. 596, Judge Lurton, speaking for the United States Circuit Court of Appeals in the Sixth Circuit, said:
"The fact that this was a secret lien gave this property the appearance of being unincumbered, and was the moving inducement of some of his existing creditors to grant delay by extension and renewal. The debtor actively represented this land as an available asset, which he was in constant expectation of selling, and that the proceeds would pay all his debts and disincumber his other property. These representations operated to quiet his existing creditors, and to obtain from some of them extensions and renewals of new credit, in at least one proven case. *** The mere fact that a mortgage has by negligence been omitted from registration does not avoid it as between parties. * But there is a distinction between a mere negligent failure to record a mortgage or deed and a deliberate agreement to do so, although the mere fact of an agreement to withhold from record is not of itself such evidence of a fraudulent purpose as to constitute fraud in law. It is, however, a circumstance constituting more or less cogent evidence of a want of good faith, according to the particular situation of the parties and the intent as indicated by all of the facts and circumstances of the particular case."
In the case at bar the testimony tends to show that, at the time of the giving of the mortgage to the bank, Shaw was insolvent, that there was an obvious attempt to make the delivery to the mortgagee secret, rather than open, and that there was a distinct and affirmative understanding that the mortgage was not to be recorded. The case discloses a want of good faith, resulting in an actual fraud upon the general creditors.
I think the referee was correct in his conclusion "that a fraud was attempted upon the creditors of Shaw, and that an allowance of the mortgage to the bank would be a consummation of the fraud."
The finding of the referee in his report is confirmed.
The claim of George A. Gorham, trustee, to the proceeds of the 1,844.27 cords of hemlock bark is affirmed.
UNITED STATES v. MARTINDALE.
(District Court, D. Kansas, First Division. October 12, 1903.)
1. BANKS AND BANKING-MISAPPLICATION OF FUNDS OF NATIONAL BANK-ELEMENTS OF OFFENSE.
Funds of a national bank are not misapplied by an officer for the purpose of constituting a criminal offense, under Rev. St. § 5209 [U. S. Comp. St. 1901, p. 3497], merely by the drawing of a draft on a fund on deposit in another bank, or by entering a credit to a depositor on the books; but it is necessary that the fund should have been actually withdrawn or converted in some form, so that it is lost to the bank, and such loss must be averred in an indictment for the offense, and the facts set out showing it to have been unlawful.
[Ed. Note.-For cases in point, see vol. 6, Cent. Dig. Banks and Banking, § 964.]
2. SAME-INDICTMENT-DESCRIPTION OF OFFENSE.
An averment in an indictment, under Rev. St. § 5209 [U. S. Comp. St. 1901, p. 34971, charging that defendants, as director and cashier of a national bank, by means of a draft drawn by them or by other stated means misapplied the moneys, funds, and credits "of said association without
the knowledge and consent thereof," is not equivalent to an averment that the act was done without the knowledge and consent of the directors, as required by the statute, and is insufficient.
3. SAME MISJOINDER OF SEPARATE OFFENSES.
Where an officer of a national bank is charged in an indictment with the fraudulent misapplication of its funds in the payment of several and distinct notes, each payment constitutes a separate misapplication, and must be charged in a separate count.
4. SAME INDEFINITENESS.
A count in an indictment, under Rev. St. § 5209 [U. S. Comp. St. 1901, p. 34971, charging that defendant, as a director of a national bank, between certain given dates abstracted and misapplied a stated sum of the moneys, funds, and credits of the bank, without further specification, is insufficient, as too general and indefinite.
[Ed. Note.-For cases in point, see vol. 6, Cent. Dig. Banks and Banking, $973.]
On Motion to Quash Indictment.
John S. Dean, U. S. Atty.
C. B. Graves, L. B. Kellogg, and Frank Hagerman, for defendant.
PHILIPS, District Judge. The defendant, William Martindale, with one D. M. Davis, who has never been arrested, is indicted for alleged violations of the provisions of section 5209 of the national banking laws [U. S. Comp. St. 1901, p. 3497] of the United States. He was vice president of the First National Bank of Emporia, Kan. There are 19 counts in the indictment. The defendant Martindale has filed a motion to quash all the counts of the indictment.
The specifications in the first count are much involved, indefinite, and obscure; so much so, that after much study of its phraseology it is difficult for the court to comprehend it without resorting to implication-an infirmity in criminal pleading that should never be tolerated. Reduced to its substantive effect, it charges that the defendant, Martindale, was vice president and director of said bank. That on or about the 16th day of April, 1899, he and said Davis, who was then the cashier of said bank, misapplied the moneys, funds, and credits "of said association without the knowledge and consent thereof," with the intent then and there to injure and defraud the association, and with intent to convert the same to the use and benefit of the Salina Gas & Electric Light Company, and William Martindale, D. M. Davis, Martindale & Cross, and C. S. Cross, in the sum of $5,150 of the moneys, funds, and credits of said association, in that said William Martindale and D. M. Davis did issue and cause to be issued a certain draft of the First National Bank of Emporia, Kan., drawn on the First National Bank of New York City, payable to the order of G. A. Fernald & Co., in the amount and value of $5,150, of date April 16, 1896. It is then alleged that said draft was drawn for the purpose of paying a certain promissory note, dated October 11, 1895, due April 14, 1896, signed by the Salina Gas & Electric Light Company, payable to the order of Martindale & Cross, and by Martindale & Cross and William Mar
tindale and C. S. Cross indorsed to one Piper, cashier, and by him. indorsed for collection and remittance to Geo. A. Fernald & Co., which said note was payable at the office of the Central Loan & Debenture Co., Kansas City, Mo. That said draft was afterwards, on the 21st day of April, 1896, presented to and paid by the First National Bank of New York City out of the funds, moneys, and credits of the said First National Bank of Emporia, Kan., then on deposit in the First National Bank of New York City. It is then alleged:
"That at the time of the issuance of the draft aforesaid by the said William Martindale and D. M. Davis, vice president and director and cashier, respectively, as aforesaid, on to wit, the 16th day of April, 1896, there was nothing due or owing by the First National Bank of Emporia, Kan., or out of the funds, moneys, and credits thereof, to the said Salina Gas & Electric Light Company, Martindale & Cross, or William Martindale, or C. S. Cross, or D. M. Davis, and the said association had received no consideration for the same." -as they, the said named parties, then and there well knew, and said draft was issued without said banking association receiving any consideration for the same, and was used for the benefit of the said Salina Gas & Electric Light Company, Martindale & Cross, William Martindale, C. S. Cross, and D. M. Davis, and certain other persons than the First National Bank of Emporia, Kan., to the grand jurors unknown, with intent to injure and defraud said bank.
It is difficult to escape the impression, after a careful reading of this count, that it was drawn upon the theory that the offense of misapplication was completed at the time the draft was drawn on the New York bank. It has been expressly ruled by the Court of Appeals of this circuit that to complete the misapplication of the funds of a bank it is necessary that the fund should be withdrawn from the possession or control of the bank, or a conversion thereof in some form should occur, so that the bank loses the same. Dow et al. v. United States, 82 Fed. 904, 27 C. C. A. 140, 49 U. S. App. 605; Mohrenstecher et al. v. Westervelt, 87 Fed. 157, 30 C. C. A. 584, 57 U. S. App. 618. This is so, for the obvious reason that, in respect of a check drawn on a bank, although the drawer may not at the time have any fund on deposit with which to pay it, non constat, he may have when the check is presented for payment; and in respect of the draft issued by the Emporia bank on the New York bank, the drawer might at any time before presentation and payment thereof withdraw it or stop payment.
It is suggested by the District Attorney that this ruling has no application to the count in question for the reason that the draft was drawn payable to a third party (Geo. A. Fernald & Co.), and, eo instanti, the bank thereby became obligated therefor to such third party. This, undoubtedly, is a correct proposition of law as applied to a proper state of facts. If the draft had been placed to the credit of Geo. A. Fernald & Co. in the Emporia bank, it would at once inure to the depositor's benefit, and the funds of the bank, by this credit, would thereby have been lessened. But the draft in question having been drawn on the New York bank at the city of New York, it was the duty of the payee to duly present to the drawee at its place of business the draft for payment, "without unreasonable delay, or the drawer or indorsers will be discharged; for they have an interest in having the
bill accepted immediately, in order to shorten the time of payment, and thus to put a limit to the period of their liability, and also to enable them to protect themselves by other means before it is too late, if the bill is not accepted and paid within the time originally contemplated by them." 4 Am. & Eng. Ency. of Law (2d Ed.) 350. It therefore follows that no loss could have been sustained by the Emporia bank until the draft was presented and paid in New York and charged up to the Emporia bank. It is not even affirmatively alleged in this count that the money thus paid by the New York bank was lost to the Emporia bank. This important fact is left to mere inference, which is vicious pleading in indictments.
Be this as it may, there is a fatal objection to this count in that it does not allege that the transaction in question, out of which the draft was issued, was without the knowledge and approval of the board of directors or the discount committee of the bank. The allegation of the indictment is that it was a misapplication "of the moneys, funds, and credits of said association, without the knowledge and consent thereof." It is to be It is to be spelled out of the loose recitations of the indictment that said note of the Salina Gas & Electric Light Company, indorsed by the defendant and others, was discounted at the bank as the basis for issuing the draft to Fernald & Co. It has been the understanding of the law of pleading in such indictments, ever since the ruling of the Supreme Court in United States v. Britton, 108 U. S. 193–197, 2 Sup. Ct. 526, 27 L. Ed. 701, that it must be alleged that the note, placed in the bank as the basis of the fund drawn out by the check or draft, should have been discounted or received without the knowledge or approval of the board of directors or governing discount committee. The court said:
"One branch of the business of a banking association is the discounting and negotiating of promissory notes, and this is to be done by its board of directors or duly authorized officers or agents. Section 5136, Rev. St. [U. S. Comp. St. 1901, p. 3455]. There is no provision of the statute which forbids the discounting of a note not well secured, or both the maker and indorser of which are insolvent. It is within the discretion of the directors, or the officers or agents lawfully appointed by them, to discount such a note if they see fit, and it might, under certain circumstances, tend to the advantage of the association. This count does not charge that the note of the defendant was discounted at his instance, without the authority of the board of directors. It is not alleged that the discount was procured by any fraudulent means. From all that appears, the board of directors, or the officer or agent by whom the note was discounted, may, upon knowledge of all the facts, in the utmost good faith and for the advantage of the association, have decided to discount the note. The discount may have turned out to be a benefit to the association, for there is no averment that the note was not paid at maturity, or that the association suffered any loss by reason of its discount. But whether the discounting of the note was an advantage to the association or not, and whether the note was paid or not, is immaterial. If an officer of a banking association, being insolvent, subunits his own note. with an insolvent indorser as security, to the board of directors for discount, and they, knowing the facts, order it to be discounted, it would approach the verge of absurdity to say that the use by the officer of the proceeds of the discount for his own purposes, would be a willful misapplication of the funds of the bank, and subject him to a criminal prosecution."
This proposition evidently was present to the mind of Judge Taft in his charge in United States v. Youtsey (C. C.) 91 Fed. 868, 869.