Union Bank of Chicago v. Kansas City Bank

Citations: 136 U.S. 223; 10 S. Ct. 1013; 34 L. Ed. 341; 1890 U.S. LEXIS 2208Docket: 13

Court: Supreme Court of the United States; May 18, 1890; Federal Supreme Court; Federal Appellate Court

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A petition, resembling a bill in equity, was filed by creditors against partners James B. Melone, Richard A. Melone, and Charles H. Benedict, all citizens of Missouri, along with three Missouri banking corporations and Charles Stewart. The creditors, each owed less than $2,500, sought to address the financial mismanagement of the partnership operating as Benedict, Melone & Co. The petition alleged that a deed of trust executed by Richard A. Melone on February 16, 1882, intended to secure debts to the banks, effectively constituted a voluntary assignment of all partnership property for the benefit of its creditors. The deed allowed Stewart, as a second-party, to sell partnership property if debts were unpaid, and upon execution, he was appointed receiver of the partnership's property.

The creditors claimed the partnership was insolvent and that James B. Melone had not authorized the deed, which they argued was a fraudulent attempt by his partners to evade Missouri's statute on voluntary assignments. The petition stated that Stewart, instead of distributing the proceeds from the sale of the partnership's assets proportionally among all creditors, had treated the deed as a valid mortgage, paying off the banks in full and mismanaging the remaining funds. The creditors requested that the court declare the deed a general assignment, mandate proper distribution of the funds, and require the banks to return the amounts received. The defendants demurred, prompting the plaintiffs to request the case be moved to the U.S. Circuit Court.

The court, after a hearing involving a bill, answers, replication, and proofs, dismissed the bill and certified a division of opinion on three key legal questions regarding a 'deed of trust' in the partnership of Benedict, Melone & Co. The primary issues are: 

1. Whether the deed of trust is void due to the lack of consent from partner James B. Melone, who did not agree to the transfer of partnership property to Charles Stewart as trustee.
2. If Melone's prior assent to an assignment for the benefit of creditors renders the deed of trust a general assignment under Missouri law.
3. Whether the simultaneous creation of the deed of trust and the appointment of a receiver, who is the same person as the trustee, constitutes a general assignment benefiting all creditors, thus obligating the receiver to manage the funds accordingly.

A final decree favored the defendants, prompting an appeal from the plaintiffs. The court, led by Mr. Justice Gray, clarified that since each plaintiff's claim was under $5,000, its jurisdiction was limited to the certified legal questions. The court emphasized that Missouri law, particularly section 354 of the Revised Statutes of 1879, governs the case, and historical context is essential for interpretation. It cited prior Missouri rulings affirming a debtor's ability to preferentially assign property to certain creditors, alongside established principles allowing partners to manage partnership property without unanimous consent for business purposes. However, a partner cannot unilaterally assign all partnership property for creditor distribution without retaining any equity.

Missouri statutes regarding voluntary assignments have been interpreted stringently by the state's supreme court. Initially, the law required assignees to file an inventory of assigned property with the circuit court. A 1855 statute prohibited preferential payments among creditors in any assignment, declaring such provisions void, and mandated that debts be paid proportionally from the assigned assets. However, the court clarified that this statute did not invalidate partial assignments benefiting select creditors, maintaining that the legislature would need to address the common law principle allowing debtors to prefer certain creditors. 

In 1864, the law was amended to ensure that all assignments benefit all creditors proportionately. This was reiterated in 1865, specifying that voluntary assignments must serve all creditors according to their claims. In 1878, the supreme court ruled in Crow v. Beardsley that while the statute aimed to prevent creditor preferences through assignments, it did not invalidate deeds of trust resembling mortgages, which were viewed as security for debts rather than absolute appropriations of property. The court distinguished between assignments and deeds of trust, leading to the conclusion that such deeds could not be challenged by non-participating creditors unless fraud was present.

Section 354 of the Revised Statutes of 1879 re-enacted prior legislation applicable to the deed of trust in this case. The primary issue arises from a circuit court decision in Martin v. Hausman (1882), where the court ruled that a deed transferring all stock in trade to an assignee for the benefit of certain creditors was not a mortgage but constituted an assignment for creditors' benefit. Judge Krekel established that a Missouri debtor may prefer certain creditors but cannot convey all property to pay one or more creditors, as such instruments are viewed under assignment laws to benefit all creditors. This interpretation has been upheld in subsequent federal decisions, despite some judges expressing dissent regarding its application. The rule stemming from Crow v. Beardsley has been consistently recognized by Missouri courts, including various appellate decisions, affirming its status as the governing law on the matter.

Missouri's assignment law does not classify as a debtor's act for bankrupt or insolvent individuals. A debtor, whether solvent or not, can legitimately sell, deliver, mortgage, or pledge property to benefit certain creditors over others, even if it delays debt collection. The determination of whether a legal instrument serves as a security or an absolute conveyance must consider the document as a whole and the context of its execution. In a relevant case, a deed of trust was deemed not an absolute assignment but a mechanism to secure debt payment, retaining the grantor's equitable right of redemption despite lacking a defeasance clause. Furthermore, state court interpretations of statutes regulating creditor assignments are authoritative in federal courts, with variations in state interpretations rendering related laws effectively different across jurisdictions. In the current case, a deed of trust secured debts while explicitly granting the grantors a right of redemption, confirming its classification as a mortgage under Missouri law rather than an assignment, with no evidence of fraud presented.

The deed of trust, executed by two of the three partners, is recognized as a valid mortgage rather than an assignment under Missouri law. The third partner's prior authorization for an assignment, which was never executed, does not impact the validity of the deed of trust. Additionally, the appointment of a receiver for the partnership property, initiated by one partner, does not alter the deed's nature or convert it into a voluntary assignment. A receiver's authority comes from the court, not from the parties involved, and his role is limited to managing the property for the benefit of the rightful owner without altering title or possession rights. The three banks received full payments from Stewart as trustee under the mortgage, not as a court-appointed receiver. Consequently, all certified questions are to be answered negatively, affirming the circuit court's dismissal of the case. The Chief Justice and Justice Brewer abstained from participating in the decision.