EMERY, V. C.
Bill in equity by Arthur MacFarlane against Britton Richardson, assignee, etc., and others, to foreclose a chattel mortgage. Decree for complainant.
James Benny, for complainant. James B. Vredenburgh, for defendant Richardson.
John Garrick and Mr. Hughes, for defendants Gerli and others.
EMERY, V. C. The disputes in this cause relate to the priority of a chattel mortgage given to complainant over a subsequent assignment for the benefit of creditors, and over creditors whose debt existed at the time of the mortgage, and who subsequently obtained judgment on their debt, and title to the mortgaged chattels by sale under execution issued upon the judgment. At the argument of the cause two grounds of priority over the chattel mortgage Were relied on bythe judgment creditors: First, that the mortgage is void as against them under the fourth section of the chattel mortgage act of 1885 (2 Gen. St. p. 2113), because it was not recorded immediately, as required by the act; and, second, that the mortgage is fraudulent as against creditors. Neither of these defenses to the mortgage, however, is specially set up in the answer to the bill so as to make an issue thereon in the cause, and the general rule requires that such issues must be made upon the pleadings, in order to justify a decree holding the mortgage invalid upon either of these grounds. In Bank v. Sprague (Err. & App.; 1870) 21 N. J. Eq. 530, a mortgage was held to be fraudulent against creditors under the statute against fraudulent conveyances, but only in favor of those creditors who had raised this issue on the record. As against those creditors who had not by their answers attacked the validity of the mortgage upon this ground, and as against those who had failed to file answers setting up that the mortgage operated to hinder or delay them, the mortgage was sustaired. The reasons given by Mr. Justice Van Syckel in the opinion of the court (pages 542 and 543) are that, the mortgage, which on its face is a prior lien, being made void by statute only in favor of a particular class, the affirmative is on the creditor, and it is incumbent upon him to place himself upon the record as belonging to this class, so that his opponent can be heard. And the rule as to raising the issue specially on the record seems also in this case to have been applied, or at least expressly declared to be applicable, to the case of a chattel mortgage claiming precedence over a mortgage prior in time by reason of the failure to record the latter as directed by the statute. See pages 532, 533. In reference to the execution, delivery, and recording of the present mortgage and its consideration, the issues on the record are as follows: The allegations of the bill are that on or about April 22, 1896, William MacFarlane & Co. were indebted to complainant in the sum of $3,510, and, being so Indebted, made the promissory note bearing date April 22, 1896, for $3,510, payable on demand; that, in order to secure the payment of the note, with interest, the firm executed and delivered to complainant the mortgage in question, bearing date April 22, 1896; that after the execution of the mortgage the same was, on the 22d day of April, 1896, acknowledged by the mortgagors, and on the 25th day of April an affidavit was indorsed thereon by complainant, setting forth its true consideration, and on the 27th of April, 1896, at 10:30 a. m., it was recorded. The bill further alleges that after the execution and delivery of the mortgage to complainant, to wit, on April 27, 1896, the partners made an assignment to the defendant Richardson for the benefit of creditors, according to the statute, which assignment included the mortgaged chattels; and that the assignee took possession of these goods and chattels, together with the other property assigned. The bill then charges that the assignment was made "after the execution and delivery and record of complainant's mortgage," and that the assignee's title is subject to complainant's lien. It is also alleged that the assignee had full and actual notice of complainant's mortgage. As to the judgment creditors, the defendants Gerli & Co., the bill alleges the recovery of their judgment on or about June 4, 1896, the issue of execution, a levy thereunder, and a sale of the mortgaged chattels to the defendant on July 6, 1897, and charges that their title is subject to complainant's mortgage. The answer of defendant Richardson, assignee, denies any knowledge, information, or belief as to the existence of the debt, sets up the assignment to himself on April 27, 1896, alleges that his first knowledge of complainant's mortgage was received in May, 1896, after taking possession, and that he then first learned of the existence of any indebtedness from the mortgagors to complainant. He denies any knowledge or information sufficient to form a belief whether there was any money due from William MacFarlane & Co. to the complainant. The defendants Gerli and others, by their answer, deny knowledge or information of the indebtedness to complainant, or of the making of the chattel mortgage, or of its consideration, and therefore leave complainant to make proof thereof. They deny also knowledge or information as to the date of acknowledgment of the chattel mortgage or of making the affidavit, as set out in the bill, and leave the complainant to make proof thereof, but they admit on information and belief the allegations of the bill as to the time and place of record of the chattel mortgage; and, after setting out their title to the goods under the execution sale on their judgment, and claiming that the assignment to Richardson is fraudulent and void as against them, they claim that they are the owners of the goods purchased at the execution sale under their judgment, "free from any title or claim of said Richardson under the said fraudulent and void assignment so made to him for the benefit of creditors, and subject only to the indebtedness, if any, which the complainant may establish to the satisfaction of this court to be due him from the said Jane MacFarlane and William MacFarlane, and secured to be paid by the complainant's said mortgage."
Clearly, no issue is made by either of these answers as to the invalidity of the mortgage by reason of the failure to record it immediately, and the first reference on the record to this objection was when the mortgage was offered in evidence by the complainant, and objected to by the defendants "on the ground that it does not comply with the statute in not having been recorded immediately after being executed." This objection to evidence is not sufficient to create an issue not made by the pleadings. This claim, therefore, not havingto base a conclusion on the fact in dispute, unless an inference from failure to produce evidence is to some extent relied on; and the duty to produce this evidence could only arise by reason of an issue upon the record of which the party had notice. The case on this point seems to me to be one where the general rule as to the necessity of setting up the statutory objection to the chattel mortgage applies with special force, and that I must, therefore, overrule this objection on the ground that it was not set up by the answers.
As to the second objection to complainant's mortgage,—that it was made in fraud of creditors,—the case stands in a different situation, although this objection is not formally made in the answer, as required by the general rule. On the bill and answer an issue is made as to the consideration of complainant's mortgage, and the indebtedness of the firm to him, and he is put upon his proof of the indebtedness, which is thereby made an issue. The main reason urged by defendants against the validity of the mortgage upon the evidence is that nothing was due to the complainant, and that the alleged indebtedness was a claim created for the purpose of defeating creditors. This question, therefore, as to the indebtedness of the complainant, is fairly an issue, and should be decided. Upon this question I reach the conclusion that the claim of the complainant is sustained by the evidence, which shows, in my judgment, that the note secured by the mortgage was based upon a bona fide settlement, made at the time of giving the note between the complainant and the firm, for an indebtedness then existing in complainant's favor for wages as the manager or superintendent of their factory. These services had been performed since the complainant came of age, on June 16, 1891, and under an express agreement for compensation, the money payment being $60 per month; and, in view of the nature of the services rendered, and of the proof as to the usual rate for such services, there would seem to be no basis for concluding that the claim was a fraudulent claim. The most serious objection to the claim, in my judgment, is the delay of its adjustment by complainant until the firm became embarrassed, when, its adjustment and security preferred complainant over the other creditors. But this delay is satisfactorily accounted for by the fact that under the agreement as originally made between complainant and his mother the money for his salary was not to be drawn out by complainant, but was to remain with the firm, in which, at the time of the agreement, it. was further contemplated that at some future time he should become a partner. No agreement of partnership was made, however, either then or subsequently. The circumstance that no payments on the claim were made in the meantime to complainant, which would ordinarily tend to cast doubt upon its bona fide existence, is also satisfactorily explained. While under age the complainant had lived with his mother, and had worked in the factory without compensation other than his board and clothing; and after coming of age and making the agreement for compensation he still continued to live with her, receiving his board without charge, and money for clothing, and also receiving for himself only small amounts for incidental expenses, which were charged to his mother's personal account, or advanced by her. The complainant, becoming uneasy about his claim, in February or March, 1896, by reason of the failure of a large customer of the firm, which might threaten its solvency, pressed for a settlement and security, and the note and mortgage were thereupon given. In view of the whole circumstances of the case as disclosed by the evidence, this settlement and adjustment of complainant's claim for wages then arrived at was made fairly and in good faith, and the amount of the note secured by the mortgage must be held to be due. I will therefore advise a decree that complainant's mortgage is a lien prior to the defendants' claim, and must be first paid out of the proceeds of sale.
The defendant Richardson, as assignee, has filed a cross bill against the defendants Gerli & Co., but at the argument the questions arising on the cross bill were not presented by counsel, and the decree therefore will go no further than establishing the complainant's rights as against the defendants.