
    Karst v. Gane et al.
    
    
      (Supreme Court, General Term, First Department.
    
    November 13, 1891.)
    1. Unrecorded Chattel Mortgages—Change of Possession—Rights of Creditors.
    3 Rev. St. N. Y. (6th Ed.) p. 143, § 9, (Banks’ 8th Ed. p. Ü508,) invalidating chattel mortgages unaccompanied by change of possession, which shall not have been recorded, “as against creditors of the mortgagor, ” avails as well for the protection of non-existent creditors, at the time of the execution of the mortgage, as for existing creditors.
    
      2. Same—Who are Creditors—Indorsee of Mortgagor.
    An indorsee of commercial paper indorsed by such mortgagor, the liability of the indorsing mortgagor not having become fixed, is not a creditor of the mortgagor within such statute, and the court erred in setting aside an unrecorded chattel mortgage, unaccompanied by change of possession, in favor of such indorsee.
    Appeal from special term, New York county. ¡Reversed.
    Action by Henry Karst against George A. Gane and Robert Dinwiddle, impleaded with others, etc., brought in aid of certain executions on judgments recovered by plaintiff against the firm of Barr & Miller, seeking thereby to remove the lien of two chattel mortgages made by such firm to defendants on property on which plaintiff’s executions were levied. From a judgment for plaintiff defendants appeal.
    Argued before Daniels and Lambert, JJ.
    
      Thomas J. McKee and Robert S. Hudspeth, (Samuel J. Crooks, of counsel,) for appellants. Fred W. Hinrichs, for respondent.
   Daniels, J.

The appeal has been brought upon the judgment roll alone. By the judgment, executions which had been issued upon judgments in favor of the plaintiff and levied upon the personal property of the debtors, were secured a preference over two chattel mortgages executed by the judgment debtors. These mortgages were made on the 25th of September, 1889, but were not filed until the 7th day of the following month of November. Prior to the execution of the chattel mortgages Edward Barr and Herman C. Miller, the mortgagors, made eight promissory notes, payable to the order of H. Miller, who assigned and transferred them to the plaintiff. Five of these notes matured prior to the filing of either of the chattel mortgages, one matured on the same day, and the other two after the filing of the mortgages ; and these notes were included in two judgments recovered by the plaintiff, upon which executions were issued and levied on the property described in the chattel mortgages. The plaintiff also recovered three judgments upon notes made prior to the execution of the mortgages by Belford, Clark & Co., payable to the order of the defendants Edward Barr and Herman G. Miller, and by them indorsed to John Karst, and by him assigned and transferred to the plaintiff. Two of these indorsed notes became due before the filing of the mortgages and four of them afterwards; and executions were issued also upon these judgments, and levied upon the property described in and incumbered by the mortgages. The court held at the trial that these mortgages were void as against all the executions because of the failure of the mortgagees to file them, as that has been required by the statute. Upon this subject it has been provided that every mortgage, or conveyance intended to operate as a mortgage, of goods and chattels, which shall not be accompanied by an immediate delivery, and followed by an actual and continued change of possession of the things mortgaged, shall be absolutely void as against the creditors of the mortgagor and as against subsequent purchasers and mortgagees in good faith, unless the mortgage, or a true copy thereof, shall be filed as directed in the succeeding section of the act. 3 Rev. St. (6th Ed.) p. 143, § 9. But it was objected on behalf of the mortgagees that this section of the statute was designed only for the protection of persons who became creditors of the mortgagors after the execution of the mortgages and prior to the time when they were filed. But the statute clearly has proceeded upon no such distinction, for it has declared the mortgage withheld from the files to be absolutely void as against the creditors of the mortgagor. Not the creditors who should become such between the time of the execution and the filing of the mortgage, but the creditors generally, including all persons sustaining that relation to the mortgagor during the time the mortgage is withheld from the files. If it had been intended to restrict it to those persons who should become creditors after the execution, and before the filing of the mortgage, language to that effect might reasonably be expected to be found in the section. And its entire absence is a decisive circumstance against the construction which the objection taken requires to be given to the section. The legislature were actuated by no such design as the intention appears in the law. But the design and intent was to render the mortgage, or mortgages, absolutely void as against all persons who should be creditors of the mortgagor during the time, whether their debts were created before the execution of the mortgage or afterwards; and that is the effect which has been given to the statute when this view of it has been brought before the courts for consideration. Thompson v. Van Vechten, 27 N. Y. 568, contains a concession that this construction should be given to the statute, and it was acted upon and followed in that form in Fraser v. Gilbert, 11 Hun, 634, and very decidedly in Clark v. Gilbert, 10 Daly, 316. There the mortgage was made on the 1st of April, 1880, and the debt included in the judgment upon which thecreditor’s action was brought was for meat supplied the mortgagor from the 31st of May, 1877, to the 30th of April, 1880, and the judgment was recovered for the balance the 21st of December, 1880, while the mortgage was not filed until March 17, 1881, and it was held that this mortgage was void as against this creditor. The decision in this manner made is a direct authority in favor of the plaintiff in the present action, so far as the judgments of the creditor were recovered upon notes made by the mortgagors, or upon indorsements which matured prior to the time of the filing of the mortgages. And the principle appears to have generally secured the approval of the court in Kellerv. Paine, 107 N. Y. 83, 13 N. E. Rep. 635. There it was declared in very general terms that the omission to file the mortgage would render it void as against existing creditors. These cases conform to and carry out the language of the statute, and so far sustain the judgment from which the appeal has been taken as it proceeds upon notes made by the mortgagors, or indorsements upon which their liability was fixed, prior to the time when the mortgages were filed, on the 7th of November, 1889. And the plaintiffs, having issued executions upon such judgments under which levies were made upon the property incumbered by the mortgages, were entitled to commence and maintain this action to remove them as obstructions from the executions as they, to that extent, stood in their way. Steffin v. Steffin, 4 Civil Proc. R. 179; McElwain v. Willis, 9 Wend. 549.

But as to the indorsements upon which the liability of the judgment debtors had not become fixed at the time when the mortgages were filed a different principle is required to be applied. The case is not one where an actual intent to defraud existed in the disposition of property, which might very well be held to include the indorsee of commercial paper before an absolute liability became fixed, but it is that of a legislative principle applied to declare and define the effect of the omission to file the mortgages, as that was provided for and required by another section of the statute. The neglect to file would not necessarily involve bad faith, or a fraudulent intent, but it was an omission to comply with the directions contained in the statute; and for that omission the law declared the property included in the mortgage to be liable to the outstanding demands of other creditors. But an indorsee of commercial paper, where the liability of the indorsers has not become fixed, is not, in the sense in which this term “creditor” has been used in this statute, a creditor of the mortgagor; for until the maker of the paper is in default no obligation is created by it against the indorser. The utmost effect of his contract is that he will pay the debt mentioned in the paper in case the maker fails to pay when it shall mature, and a proper demand shall be made upon him for payment, and notice of such demand and failure shall be given to the indorser. And it is only from the time when the paper shall become dishonored, and the liability of the indorser fixed in this manner, that he can, within the significance of this term as it is contained in this section of the statute, be held to be a creditor of the mortgagor. As to this term “creditor, ” it was by the supreme court considered to include the case of a guarantor prior to the time of a default under its terms in Jackson v. Seward, 5 Cow. 67. That was a case where the judgment debtor had conveyed his property by what was alleged to have been a voluntary conveyance. Prior to the conveyance the grantor had entered into a guaranty that a certain judgment by him assigned was collectible. But after the conveyance executions were issued upon the judgment which failed to realize the amount recovered by it; and for that reason a judgment for the deficiency was finally recovered against the grantor in the conveyance, and an action brought by the creditor to set aside the deed as a voluntary conveyance. In the supreme court it was considered that this guaranty invested the party in whose favor it was created with the rights of a creditor prior to the delivery of the deed; and in the course of the opinion in that court it was said by the judge delivering it that “the question of creditor, or not, cannot turn on the ground of contingent liability when considering this act. If it should, all indorsees and sureties would be deprived of its protection.” Id. 71. This proceeded very much upon the authority of the case of Jackson v. Myers, 18 Johns. 425. But the judgment in that case was recovered for a wrong, and by its recovery established the existence of the claim made by the plaintiff at the time when the wrong itself was perpetrated, while no such retroactive effect can result from the dishonored indorsement of commercial paper, but the liability of the indorser is created then, and not prior to that time. The case already referred to was appealed, after the decision made by the supreme court, to the court of errors, and it was there held, as'oneof the grounds for the reversal of the judgment, that the party to whom the guaranty was delivered was not a creditor of the grantor in the deed at the time when it was made and delivered, but that he first became so when it turned out that the judgment could not be wholly collected by the executions and sales of property made to satisfy it. Seward v. Jackson, 8 Cow. 406. And that certainly is an authority directly supporting the position that an indorsee under a statute of this description does not become a creditor of the indorsers until the paper indorsed is dishonored by the maker. It was conceded there, as it has already been suggested, that, where an actual intent to defraud existed, a different principle could well be applied. But neither in that case, nor in the present, was that intent proved to be present as an element in the transaction. So far, therefore, as this judgment has proceeded upon the notes indorsed by the judgment debtors, one of which became due on the 20th of November, another on the 17th of December, 1889, and another on the 30th of December, 1889, it has been erroneously directed. But as to the residue of the judgments the right of the plaintiff to maintain this action is well sustained by the statute and the authorities which have already been referred to. The judgment, consequently, should be reversed, and a new trial ordered, with costs to the defendants to abide the event, unless within 20 days after notice of this decision the plaintiff stipulates to deduct the amount of these notes, with the interest upon them, from the judgment which has been recovered, and, in case of the service of such a stipulation, then the judgment as modified should be affirmed, without, costs to either party.  