filed its petition for an arrangement under Chapter XI of the Bankruptcy Act.
The so-called loan from Goldsmith to Atlas was actually of no benefit to Atlas whatsoever. Simultaneously with the deposit of the money in the bank account of Atlas, Ehrlich and Goldinger, owning all of the stock of Goldsmith, the purchaser corporation, caused Atlas to repay to Goldsmith the $ 250,000 which had been ostensibly loaned by the latter to the former, and further reduced the bank account of Atlas from $ 284,390.67 to $ 25,587.08 by withdrawing and repaying to the New York factors a substantial sum on account of the $ 400,000 which they had advanced toward the aggregate of the purchase price. Although the bankrupt's insolvency did not occur until after the mortgage was executed, delivered and assigned, the obligation of the mortgage was fraudulent as to existing creditors and as to other persons who became creditors during the subsequent continuance of the business of the corporation because (a) the ostensible consideration which Atlas received was not a 'fair' consideration; and (b) the end result of the transactions, of which that involving the mortgage was an inseparable part, left in the hands of Atlas an unreasonably small capital for the business in which it was about to engage after the abstraction of cash from its account by the officers of the stock purchaser. 11 U.S.C.A. §§ 107, sub. d(1)(d); 107, sub. d(1)(e)(1); 107, sub. d(2)(b). To a similar effect, N.J.S. 25:2-9; 25:2-11. Whether therefore, the validity of the mortgage is to be determined by the Bankruptcy Act, or by the statutory law of the State of New Jersey in which the mortgaged premises are located and the transactions reviewed took place, a similar conclusion of invalidity of the mortgage is inescapable.
While it may be argued that the Bornsteins may not have intended that the Atlas bank account should be reduced to as low a balance as that previously mentioned, they were fully cognizant of all of the transactions which necessarily accompanied the sale of their stock at the expense of their own corporation. In such circumstances, one who takes a mortgage executed for a fraudulent purpose, with knowledge of the purpose and to aid in the execution of the purpose, may not prevail against those who are defrauded thereby. Moore v. Williamson, 1888, 44 N.J.Eq. 496, 505, 15 A. 587, 1 L.R.A. 336. Concluding, as we must, that the mortgage here in question was born in fraud, the ostensible legal form of the mortgage and of its assignment will not suffice to cloak the fraud with immunity. Catabene v. Wallner, App.Div.1951, 16 N.J.Super. 597, 602, 85 A.2d 300. The Referee was, therefore, amply justified in the evidence to infer, as he did, that the Bornsteins knew that they could not obtain the $ 250,000 on account of the price for which they were selling their stock except by means of the mortgage from which Atlas would not and did not derive any ultimate benefit. There is ample basis in the evidence for concluding that the Bornsteins expected, and therefore intended, that Atlas would not derive any ultimate benefit from its receipt of the $ 250,000 loan and they may not be heard to avoid responsibility for the consequences by closing their eyes to certain phases of the transactions which would have been apparent had their eyes remained open; for 'A man cannot successfully claim that he is acting honestly when he wilfully shuts his eyes for fear that leaving them open will reveal unpleasant facts.' Chorost v. Grand Rapids Factory Showrooms, Inc., 3 Cir., 1949, 172 F.2d 327, 329; Matthews v. Pope, 1923, 95 N.J.Eq. 76, 121 A. 746; Horton v. Bamford, 1911, 79 N.J.Eq. 356, 81 A. 761; Moore v. Williamson, supra.
The second question posed by the Referee respecting the effect of the execution of an agreement extending the mortgage, in the proceeding for an arrangement under Chapter XI of the Bankruptcy Act, as an estoppel against an attack upon the validity of the mortgage does not arise upon the facts as this Court finds them to be. Estoppel, whether equitable or in pais, arises upon the doctrine 'that one shall not be permitted to repudiate an act done or position assumed where that course would work injustice to another who, having the right to do so, has relied thereon.' New Jersey Suburban Water Co. v. Harrison, E. & A.1939, 122 N.J.L. 189, 194, 3 A.2d 623, 626. The Bornsteins were not harmed by any acts of the bankrupt or of its Trustee in the Chapter XI proceedings, not only because those proceedings could not reach the Bornsteins as secured creditors, but also because they were full cognizant of the infirmities of the mortgage obligation and were actually benefited by the interval of time during which they received payments on account of the mortgage. In fine, the statutory jurisdiction under Chapter XI did not extend to the Bornsteins. 11 U.S.C.A. § 706(1); S.E.C. v. United States Realty & Improvement Co., 1940, 310 U.S. 434, 60 S. Ct. 952, 84 L. Ed. 1293. I, therefore, find no basis in the evidence in this case for concluding that the Trustee has been estopped to assert the invalidity of the subject mortgage at this time. That mortgage not being a valid lien against the bankrupt's real estate, it follows that no lien in favor of the petitioners exists against the proceeds of sale of the mortgaged property.
The decision of the Referee is affirmed, and an order may be presented in conformity with the conclusions herein set forth.
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