Lumbard, Chief Judge, and Friendly and Smith, Circuit Judges.
We have here an appeal and a cross-appeal from a judgment of the District Court for the Southern District of New York in a diversity action for the conversion of racehorses. The judgment, rendered by Judge Graven of the Northern District of Iowa, was based upon a memorandum which carefully set forth his findings of fact and conclusions of law; our gratitude for this, which has facilitated our consideration of the appeals, is not lessened by our disagreement with some of the results.
When the curtain rises in 1959, we find Landers Stables, Inc., a Maine corporation with its place of business in the town of Kittery, owning three horses, Belle Acton, Storm Moraka and Wonderful One, and a half interest, along with one William O'Connell, in a fourth, Esquire Direct. All of the corporation's stock was owned by George Landers and his wife, Irene, both residing in Kittery. The horses raced in meets approved by the United States Trotting Association in New York and various other states, not including Maine; they moved from state to state as occasion demanded but spent most of their time in New York, at a stable operated by William Haughton. They were soon to become the subject of a considerable series of security interests, of little immediate concern to them but now of much to us.
First in time was a chattel mortgage on Belle Acton for $15,000, later reduced to $8,000, as security for a loan from one Jerry Tuccio. This was executed on July 20, 1959, when the mare was sojourning in Meadowdale, Pennsylvania, and was there recorded; along with the mortgage Landers delivered to Tuccio the horse's certificate of registration with the United States Trotting Association, endorsed in blank.
Next came the chattel mortgage whence this action springs. Executed in Maine and given to plaintiff John Susi, also a resident of Kittery, it was dated October 5, 1959, covered the three and a half horses, and was to secure payment of a $12,500 ninety-day promissory note payable at a bank in Maine. It was recorded in Maine on the day of execution and only there, although the horses were then in New York and Pennsylvania. Susi did not know of the mortgage of Belle Acton to Tuccio, which was not yet recorded in Maine. On January 8, 1960, Landers paid Susi $7,000 and the $5,500 balance was extended for sixty days.
In an endeavor to procure funds to take care of this and other obligations, Landers sought the aid of defendant Jack Stahl, a New York racing enthusiast who was owner, along with a brother, of Rona Plastics Corporation, a New York corporation now known as Stahl Liquidating Corporation. Stahl put Landers in touch with Joseph Vogel, also a New York resident, to whom Landers, on March 24, 1960, executed a $15,000 mortgage on Belle Acton, Storm Moraka, and Wonderful One, as well as some other horses not here involved. This mortgage was recorded in New York, Pennsylvania and Maine; Vogel had knowledge of Susi's mortgage. Vogel disbursed $9,500 which Landers apparently used to pay federal taxes, but not the balance of $5,500 which had been intended to enable him to discharge his debt to Susi. Landers did not pay the outstanding $5,500 and, on April 16, 1960, Susi served notice on Landers of his intention to foreclose the chattel mortgage. Under the Maine statute permitting strict foreclosure without sale, Rev.Stat. ch. 178, §§ 4-6 (1954), the right of redemption was automatically forfeited if the debt was not paid within sixty days after notice; the redemption period expired on June 16, 1960 without payment.
While all this was going on, Landers was piling up indebtedness to Haughton for the care of the horses -- an indebtedness for which, as all admit, Haughton had a stableman's lien under § 183 of the New York Lien Law, McKinney's Consol. Laws, c. 33. In May 1960 Tuccio came to Haughton's stable in Nassau County and demanded possession of Belle Acton under his $8,000 chattel mortgage. Haughton paid Tuccio $8,000 and received the horse's certificate of registration. By August 1960 Haughton's lien claim against the horses here involved, including the $8,000 paid to Tuccio, amounted to $32,000.
At this point the defendant Rosenberg, a son-in-law of Stahl, entered the stage. On August 2, 1960, having purchased both O'Connell's and Landers' interests in Esquire Direct the previous month, he entered into an agreement with Haughton and Landers Stables. This recited that Haughton had a lien in excess of $21,000 on the four horses involved in this action and two others; that he had endorsed in blank the certificates of registration of Belle Acton, Storm Moraka, Wonderful One and another horse; and that Rosenberg was desirous of acquiring the certificates of registration and paying the liens, on the terms therein set forth. Rosenberg was to pay Haughton $21,000 in two checks; upon their collection he was to receive the certificates of registration and could demand an assignment of Haughton's lien; Haughton was to retain possession of the horses and agreed not to release this save to Rosenberg or his designee; Landers consented to all the terms of the agreement and warranted that upon payment of the $21,000, the horses would be free and clear of all liens save for the $5,500 owed to Susi and the $9,500 owed to Vogel. Rosenberg paid the $21,000, obtaining the greater part of the money by an unsecured loan from Rona Plastics. The record suggests that the stimulus to this transaction was that Belle Acton, a former champion, after sundry unsuccessful attempts at breeding, was carrying a foal.
Shortly thereafter Belle Acton Stables, Inc., a New York corporation, the directors of which were Rosenberg, his attorney and Landers, was formed. On August 12, 1960, Rosenberg transferred ownership of Belle Acton, Storm Moraka and Wonderful One to the corporation; he kept Esquire Direct in his own name. The horses continued in Haughton's care, being occasionally bred and raced. New certificates of registration were obtained and several of the horses were raced under the name of Belle Acton Stables.
In late February 1961 Susi demanded that Rosenberg and Belle Acton Stables recognize his title to the three and a half horses; no such recognition was given. On February 25 Belle Acton Stables, with Stahl as intermediary, sold Belle Acton for $35,000, reserving the right to the foal she was then carrying; it sold Storm Moraka and Wonderful One for $5,000 and $3,000 respectively. In March 1961 Susi sued Rosenberg and Belle Acton Stables for conversion of the three horses, and Rosenberg for conversion of the half interest in Esquire Direct; he subsequently amended the complaint to add Stahl and Rona Plastics as defendants on both claims on the theory that Rosenberg and Belle Acton Stables had been acting as their agents.
The district judge found that Rosenberg had converted the half interest in Esquire Direct on July 6 and the other three horses on August 2. He entered judgment against Rosenberg and Belle Acton Stables for the value of the horses on those dates, which he found to be $51,250,*fn1 without allowance for Haughton's lien which he held was lost when Haughton transferred the right to possession to Rosenberg. In arriving at this conclusion the judge found against the defendants' claim that Susi's debt had been paid, and we accept this finding as not clearly erroneous. The judge dismissed the claim against Stahl and Rona Plastics. Rosenberg and Belle Acton Stables appeal from the judgment against them, Susi from the failure to award judgment against Stahl and Rona Plastics.
The first problem is to determine who had title to what and subject to what at the time of the August 2 transaction. Susi does not dispute that Tuccio's mortgage on Belle Acton, validly recorded in Pennsylvania, and Haughton's stableman's lien, would both have had priority over his mortgage if proper proceedings had been taken to enforce them, but contends this was ...