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THE R. LENAHAN

DISTRICT COURT, E.D. PENNSYLVANIA


April 18, 1935

THE R. LENAHAN; THE ALBANY; RUSH
v.
DELAWARE & CHESAPEAKE S.S. CO.

The opinion of the court was delivered by: DICKINSON

DICKINSON, District Judge.

On Motion for Reargument.

Leave was given to reargue the merits of the cause on the argument is support of this motion.

 It is urged upon us that the opinion filed does grave injustice to Stemmler & Co. in that it finds them guilty of bad faith and a purpose to defraud when in truth "they rather than bilking others have themselves been bilked." This is a misunderstanding of our opinion which we hasten to correct. We had no thought of charging them with any intention to defraud others. In fact, we expressly disclaimed any finding upon this feature of the case because we thought if foreign to a ruling upon the real question of whether these mortgages were "preferred mortgages" under the Ship Mortgage Act (46 USCA § 911 et seq.). We characterized Stemmler & Co. as investment bankers of the highest standing who, in doing what they did, had acted in accordance with the standard of bankers, all of whom have a banker's notion of their rights and of the consideration which they owe to others. We did characterize them as bankers, but did so without thought of imputing to them any inquirity by so doing. We do not suppose they resent this. Not that it is of any importance, but merely as evidence that we intended no reflection upon them, we add that for many years, beginning more than half a century ago, we sat at a bankers' board and represented banks as counsel. As a consequence we are sympathetic with them, and add that if there is any class of men who should command the sympathy of all right-minded persons, it is those who have had banking managerial responsibilities during the last six or seven hectic years. No man should be criticized for observing the standards of his own day and generation, and there is nothing more unjust than to judge a man of one generation by the standards of another. We had no more thought of charging the Stemmler Company with an intention to "bilk" others than with an intention to "bilk" themselves. Counsel has said that they have been "bilked," which we do not doubt. It is just as true if they are given a "preferred" status others will be "bilked." This is not because Stemmler & Co. intended or planned either result but both are the consequences of what they did. It is said that injustice is done them by the finding that they were the promoters of the business scheme which is resulting in this loss to all. We expressly found that they were not the originators of it, but as they succeeded to the rights of the others we would treat them as such from the beginning. This was merely for brevity of statement.

 We restate our findings on this branch of the case.

 The project of establishing the line of carrying vessels which was established and the creation of the Delaware & Chesapeake Steamship Company did not originate with Stemmler & Co. They were invited to invest in it. They had as associates a man by the name of Harrison and Ingalls & Co. and others. The Stemmlers expected to invest $15,000. This they were willing to do. They wished of course to safeguard their investment. We are told that they did only what they had "both the legal and moral right to do." We do not assume any judicial duty or power to pass upon the ethics of their conduct. Thus far, however, they were clearly within their legal rights. A sum of at least $30,000 was needed to buy the vessels to start the project going. The plan devised was that Ingalls & Co. and the Stemmlers were to put up $15,000 each. What other moneys were needed were presumedly to be put up by the others. The plan of doing this is in writing. The Steamship Company organized had capital stock of the type known as no par value. There were 3,000 of the shares. This constituted its only free capital and the whole of it. The Stemmlers and their associates stipulated for the control of the company. The plan was spread upon the minutes. It was that they were to be the managing officers of the company and in consideration of the $30,000 capital contribution were to receive the entire issue of the 3,000 shares, the share of the Stemmlers being at that time, 1,502 shares which it will be observed was a controlling interest. The company was to buy the two carrying barges with which this record concerns itself, which could be done for $30,000, $19,000 for one and $11,000 for the other. The only means for paying for this was this $30,000 capital contribution. In addition to the issue of the 3,000 shares of stock, the contributors were to be given two "preferred" mortgages aggregating $60,000, one for $30,000 on each vessel. Mortgages were subsequently given over which this controversy has arisen. This was arranged for at a stockholders' meeting at which the contributors were alone present. In other words, they as the company made the mortgages to themselves as mortgagees. It may be the vessels had already been purchased. The chronological order we have not thought to be of importance enough to verify. Ingalls & Co. were unable to put up their share of this capital contribution. The Stemmlers loaned them $15,000 on the pledge of collateral and a banker's share of their stock holdins for the accommodation. Later the Ingalls dropped out altogether, turning over to the Stemmlers all their stockholdings. The latter put up the $30,000 in purchase of the vessels by paying the purchase price directly to the sellers. Later they advanced in payments for the company $7,500 more, part of which was for the insurance of the mortgaged vessels. Subsequently they claimed to have advanced, and doubtless did, $3,500 more, making their total investment $41,000. For this they held shares of stock in the company and the two mortgages of $30,000 each, and a debt claim of $11,000. Vessels are property and as such may be pledged by mortgage or otherwise for any debt of the owner. Such debts, however, may not arise out of a maritime contract unless bottomry bonds or the like. The acts of Congress provide that they are nullities except as against the mortgagors and those having knowledge of them. The payment of such pledges were not enforced in admiralty because the admiralty courts had no jurisdiction. They might, however, be foreclosed in equity. By the Ship Mortgage Act (43 USCA § 911 et seq.) such contracts were made to be contracts maritime and such mortgages made "preferred mortgages." They were such, however, only when there had been compliance with the provisions of the act. If valid preferred mortgages they may be foreclosed in admiralty.

 Such are the cases before us, and the question is: Are they such preferred mortgages? The only bearing the conduct of the mortgagees, in their contacts with the other libelants, has in upon the question of actual notice to the latter of these mortgages. To this we restricted our findings and comments. Stemmler testified that he had so notified at least one of the libelants. We found the fact to be otherwise, and that he was mistaken in this, but that he and Ingalls had carefully refrained from giving this information and had withheld it. We did use the phrase that this would give rise to at least a suspicion that, as it was to their interest that the vessels be given the credit asked to be extended and as knowledge of the mortgages would have destroyed that credit, this information was purposely withheld. We were careful to add, however, that they were placed by the inquiries in a delicate position. They as bankers would feel that they had no right to disclose the existence of the mortgages to the possible prejudice of their debtors. They were careful not to say there were no mortgages, but they did say in effect that the Steamship Company was worthy of credit because among other things it owned these vessels, not disclosing that they held mortgages against them for more than the vessels were worth. This is what we meant by the comment that this was in accord with the banking standard of the consideration they are bound to show to others. The very device of mortgaging each vessel for $30,000 was effective in holding off other creditors. If either of them was libeled, the libel would be behind the mortgage if a valid preferred lien.

 We do not find this was intended to hinder creditors because the Ship Mortgage Act (46 USCA § 922) requires an affidavit to be filed denying any such purpose, and counsel probably had advised what was done. Although we do not find this to have been the intent, such was the effect. We based our ruling, not upon a finding of fraud upon which we expressly refrained from making a finding, but upon the legal ground of a failure to comply with the requirements of the act. One of the requirements is that the mortgage must have been recorded in the home port of the mortgaged vessel. If it was so recorded, there has not only been a compliance with the act, but this recording is constructive notice to all dealing with the mortgaged vessel and every one is conclusively presumed to know of the existence of the mortgage. The home port is defined by the acts of Congrees. The enrollment and registry shall be at the port nearest to the residence of the owner. The home port may be "fixed" by the owner, but this determination is subject to the approval of the Commissioner of Navigation. These mortgages were not recorded in the home port of the vessels. They were recorded in New York and this had not been made the home port at that time. It is true that it was afterwards made the home port with the approval of the Commissioner. Was this a compliance with the act?

 We have had cited to us the case of The Fort Orange (D.C.) reported in 5 F. Supp. 833, in which the opinion was delivered by Judge Knox. This case was among many cited to us on the first argument. We made no reference to the opinion. This calls for a word of explanation. It is needless to say that we share the high esteem in which Judge Knox is held by all as a jurist. We did not refer to his opinion for the simple reason that it escaped our attention. This was again because the point upon which we ruled the case was not made at the first argument. It was casually mentioned by the proctors for the mortgagees but merely as one of the features of the act, with all of which they claimed to have complied. The opinion of Judge Knox is necessarily a very lengthy one. The report of the case takes up fifteen closely printed pages. This is because the case before Judge Knox was very complex requiring him to deal with a number of controverted questions. His discussion, as is true of all his opinions, is exceptionally lucid and thorough going.

 The same point raised in the instant case was raised in The Fort Orange Case. Judge Knox ruled in that case that the filing of the formal approval of the Commissioner need not precede the recording of the mortgage, if this was done, as in his case it was, within three days after the recording. His opinion, however, contains this significant language: "In this case the Commissioner had orally approved the choice of a home port for the vessels prior to the recordation of the papers. His written approval was forthcoming within three days thereafter." He had previously discussed a similar point made respecting the documentation of the vessel there concerned in order to make it "capable of being denominated 'a vessel of the United States.'" There the papers had all been filed the same day with an interval of minutes only between them. There was no requirement that the time of filing be noted. The case was in consequence within the doctrine that the law, unless there is a reason for holding otherwise, regards a day as a unit of time, and that a paper filed on the last minute is filed as soon as one on the first minute. The act of Congress does not require the approval of the Commissioner to be in any prescribed form, written or otherwise. There had in his case been such approval, in fact, before the recording of the mortgage, and Judge Knox held that to be sufficient. Here there was no such approval in fact until after the recording. We can appreciate the advantage to mortgagees of the rule contended for that the approval is a "condition subsequent" and may be procured at any time. The truth remains, however, that we are dealing with constructive notice as a substitute for actual notice. The law is well settled, as Judge Knox himself shows, and as the cases cited in our former opinion abundantly establish that there can be no constructive notice except such as the law prescribes. The Ship Mortgage Act (46 USCA § 921) requires that the mortgage shall be recorded in the home port of the vessel, and the place of record here was not such home port. The complaint of the mortgagee is that if the recording of the mortgage awaited the designation of the home port that supply or repair libelants might secure a lien which would have priority to the recorded mortgage. So indeed they might. The remedy is to have the home port first fixed and then mortgage the vessel. Assume a claim which acquired a lien in the interval between the recording of the mortgage and the approval of the designation of the home port. Would such a libelant have constructive notice of such a mortgage? It is difficult to understand that he would. We would then have a mortgage which was a preferred mortgage as against some libelants but not as against others.

 The motion for a reargument is denied.

19350418

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