Gardner v. Commercial National Bank, 13 R.I. 155

Durpee, C. J.

The mere fact that an assignment for the benefit of creditors has a tendency to hinder and delay them, or some of them, in the enforcement of their claims, is not decisive against it, for such is the tendency of. such an assignment, even when it is entirely unconditional. It is permissible to frame the assignment so that it will hinder and delay the creditors or some of them to some extent, when it is done for the more effectual accomplishment of the proper purpose of the assignment, namely, the application of the assigned property to the payment in the fullest possible measure of the debts. In such an assignment there is no fraudulent intent, and it is not the mere hindering and delaying, but the fraudulent intent to hinder and delay on the part of the assignor, which makes : the assignment void. It is easy, however, to exceed the allowable limit, and to make an assignment calculated to hinder and delay, for the purpose of securing a benefit to the assignor or some person other than the creditors at their expense. Such an assign ment would be fraudulent and void. For instance, an assignment by a solvent person in order to protect the property from legal process because the times are bad and to hold it for better times, would be fraudulent and void, being an attempt by the assignor to get an advantage for himself at the expense of his creditors. Van Nest v. Yoe et als. 1 Sandf. Ch. 4 ; Planck v. Schermerhorn, 3 Barb. Ch. 644 ; Burt v. McKinstry & Seely, 4 Minn. 204, 215; Gere v. Murray, 6 Minn. 305 ; Vernon v. Morton & Smith, 8 Dana, 247, 263; Ward v. Trotter, 3 T. B. Mon. 1; Phelps v. Curts, 80 Ill. 109; Gardner v. Commercial National Bank, 95 Ill. 298. Creditors are entitled not only to be paid, but to be paid as their claims accrue, and, therefore, in contemplation of law, the debtor has no more right to postpone payment simply for bis own advantage than to defeat it altogether. Nicholson v. Leavitt, 6 N. Y. 510.

We think the assignment here, dated December 5, 1878, must be regarded, primd facie at least, as fraudulent and void under our statute of fraudulent conveyances. It is an assignment by four persons who describe themselves as copartners doing business under the firm name of Sackett, Davis & Co. It conveys all their property, both copartnership and individual, except such as is exempt from attachment by law. The question has been made whether it is for the benefit of copartnership creditors only or for both copartnership and individual creditors. We think it is for the benefit of both classes alike. It states, by way of preamble, that “ the said Sackett, Davis & Co. are indebted and under liability to divers persons in divers sums of money, and their assets, although amounting in value to about three times their said indebtedness, cannot immediately be made available for the payment of the same as their said indebtedness shall from time to time mature.” Literally taken, the statement is that the partnership assets are almost three times as great as the partnership debts. We are inclined to think, however, in view of the assignment as a whole, that the meaning is that the partnership and individual assets are almost three times as great as the partnership and ihdividual debts, and that the partnership is put for the partners as well individually as jointly, because the embarrassment originated in the business of the partnership. The assignment states further, by way of preamble, that “ the best interests of the creditors may require that the jewelry business, in which the said Sackett, Davis & Co. have been hitherto engaged, should be for some period continued by the said trustees, and by them gradually discontinued and closed out.” For these reasons, and “for the purpose of equally securing and paying all their creditors,” the assignment purports to have been made. It confers, very large discretionary powers upon the assignees. It empowers them “to invest, reinvest, and change investments,” and “ to manage, act, and deal ” with the assigned property “ absolutely, in their uncontrolled discretion, as they may judge for the best interests of all the creditors.” It gives them “free, full, and uncontrolled power in their discretion to carry on ” the business “ for such time ” as they may “ deem for the best interests of the creditors, and necessary .for the purpose of preventing shrinkage and loss, and of closing out and liquidating the same to the best advantage.'’’’ It also empowers them to give new notes and indorsements in lieu of the existing notes or indorsements or other debts of the assignors, as well as for their own liabilities contracted in carrying on the business, and to lease the real property assigned “ upon such terms as they may see fit, or to mortgage any and all ” of it, and to “ pledge or mortgage any and all of the personal property.” The only restraint to which the assignment subjects the assignees is that their authority to carry on the business shall forthwith cease and determine whenever a majority in amount of the creditors shall so direct. In view of these powers and of the careful provision made for carrying on the business, it looks very much as if a principal purpose of the assignment was to rescue the business from impending ruin and keep it alive for the benefit of the assignors, meanwhile paying the creditors gradually out of the profits and out of such other property as could be disposed of without seriously crippling the business. It is true that the assignment does contain directions to the effect that whatever is done by the assignees under it shall be done with a view to the best interests of the creditors; but, to say nothing of the numerous minor indications which the assignment contains that these directions were not meant to be im-' perative, the great fact which it recites, that the property was almost three times as much as was necessary to pay the debts, renders it incredible that the assignment was designed to promote not any interest or advantage of the assignors as distinct from that of the creditors, but simply the best interests of the creditors. In Gardner v. Commercial National Bank, 95 Ill. 298, the validity of this assignment was litigated before the Supreme Court of Illinois, and the court held it. to be invalid under the laws of that State, because it appeared on the face of it to have been made not simply for the benefit of the creditors, but to secure an advantage to the assignors, namely, to prevent a sacrifice of the property. We cannot resist the belief that the conclusion of the Supreme Court of Illinois in regard to the purpose of the assignment was correct. And this being so, the assignment is, in our opinion, as invalid under the laws of this State as it was under the laws of Illinois. See the cases above cited.

In Dunham v. Waterman, 17 N. Y. 9, the New York Court of Appeals held that a provision in the assignment by an insolvent debtor of all his property, consisting in part of unfinished machinery and materials in process of manufacture, the completion of which was necessary to an advantageous sale, and authorizing the assignees to complete the manufacture and work up the materials at the expense of the assigned fund, as in their judgment vhight he advisable so as to realize the greatest amount of money therefrom, rendered the assignment fraudulent and void on its face. It was urged for the assignees, in that' case, that the powers which were granted to them were merely such as they would have had by implication without grant, and that therefore the grant would not have the effect of making the assignment void. But the court was of opinion that the assignees took under the grant something beyond what would have accrued to them by implication, namely, a discretion in regard to carrying on the business, which, unless it was fraudulently exercised, the court could not terminate or control, and that thus, by virtue of this discretion, the creditors might be kept at bay so long as the assignees might see fit to carry on the business. The New York Court of Appeals probably went further in the case of Dunham v. Waterman than we should be likely to go in a similar case, but the reasoning on which the court rested their decision has great force in it, and it has vastly more force in its application to the assignment here than it had in its application to the New York assignment. For here the power conferred is not simply a power to work up materials on hand and to finish unfinished goods with a view to their more advantageous sale, but it is a power to carry on the business so long as the assignees “ may deem for the best interests of the creditors, and necessary for the purpose of preventing shrinkage and loss, and of closing out and liquidating the same to the best advantage.” Nay more, it is a power to extend the old and to incur new debts, to pledge and mortgage the personal property, and to mortgage the real property, and to lease the real property upon such terms as they may see fit. The business, therefore, may be carried on under the assignment indefinitely, by virtue of a sort of forced loan, unless a majority in amount of the creditors see fit to object, and may be carried on, too, by persons to whom a minority of the creditors would never think of lending their money if they had the option to lend it or not. And even if a majority in amount of the creditors should finally interpose, it may, nevertheless, turn out that prior to their interposition the assignees have, in the exercise of their discretion, leased or mortgaged the property for long terms, and so have put it beyond even their own ability to close out the assignment without great delay. Now can it be held that an assignment which expressly permits and empowers the assignees so to protract the day of settlement, and to subject the creditors to such coercion, and so to burden and tie up the property assigned by new contracts and conveyances, is not fraudulent and void on the face of it, as manifesting an intent to hinder and delay the creditors, for the reason that any hindering or delaying consequent on the execution of the assignment, according to its terms, may be supposed to have been intended simply for the benefit of the creditors, and not with a view to any advantage or benefit to be gained by the assignors at their expense? We think it would be unreasonable, regarding simply the assignment, to hold so.

There is, moreover, a limit to the delay which is permissible in closing out an assignment, even when the purpose of the delay is to insure a fuller payment of the debts, for it is often as important to the creditor to be promptly as to be fully paid. What the limit is depends of course on what is reasonable, considering the character and circumstances of the property assigned. The assignment here does not hold the assignees to any such limit; but on the contrary empowers them to exceed it, even if the assignment does not conclusively demonstrate an intent to have them exceed it. See D'Ivernois v. Leavitt, 23 Barb. S. C. 63.

The complainants contend that the assignment is valid according to Rhode Island precedent, which is less exacting than that of many other States. Dockray v. Dockray, 2 R. I. 547; Spencer & Pierce v. Jackson, 2 R. I. 35; Nightingale v. Harris & Lippitt, 6 R. I. 321. We do not intend to question the authority of these cases, which, however, went confessedly to the very verge of what is permissible under our statute of fraudulent conveyances. The only one of them which can be supposed to be much in point is Nightingale v. Harris & Lippitt. There the assignor had made two assignments. Certain of his creditors released him for the chance of a dividend under his first assignment. After they had released him, he acquired by inheritance a considerable estate, which he assigned for the benefit of his creditors, putting the releasing on a par with the non-releasing creditors. The court held that the provision for the releasing creditors, though null and void in itself, being separable, did not vitiate the entire assignment. The ground of the decision was that the provision did not originate in any fraudulent intent on the part of the assignor, but rather in an honest but unwarranted design to apply a portion of his newly acquired property to his debts of moral as well as to his debts of legal obligation. The doctrine of the case is that under our statute an assignment which is claimed to hinder and defraud will not be avoided unless there is an actual fraudulent intent. The decision is not entirely self-consistent; for while it insists upon actual fraud as .the fatal element'and acquits the assignor of any actual fraud, it nevertheless annuls the provision in favor of the releasing creditors, because the provision, being separable, can be annulled without annulling the entire deed. It follows that if the illegality had infected the entire deed, so as not to be separable, the entire deed would have had to be annulled without any actual fraudulent intent, which is what the court say, in its opinion, is not according to the statute.

The opinion contains some expressions which seem to imply that what the court mean by an actual fraudulent intent is a consciously dishonest intent. If this be the meaning, it would follow that no assignment could be set aside, whatever its provisions, if the assignor supposed he had a right to make it. We think, however, that the expressions referred to were unguarded, and cannot be taken to import all that they seem to import; for it is assumed elsewhere in the opinion that an assignment containing reservations for the assignor or his family, or for a mere volunteer, would be unquestionably fraudulent and void. But if an assignment .is void on account of such reservations, why is it not equally void if it is made with the intent to secure a resulting surplus for the assignor, or to increase such surplus, by holding the creditors at bay until such time as they can be paid without sacrificing his property? We know of no reason why it is not. The object is essentially the same in both cases, and therefore the intent to accomplish the object, if actually entertained, is legally as fraudulent in the one case as in the other. It is an intent on the part of the assignor to hinder and delay his creditors by putting his property out of their reach for his own advantage simply, and such an intent is necessarily fraudulent, however the assignor may regard it.

After the assignment of December 5, 1878, and after a large portion of the assigned property had been attached by the defendants as creditors of the assignors, under claim that the assignment was as to them fraudulent and void, the assignors, severally and individually, and also jointly and as copartners, executed to the complainants, who were assignees under the assignment of December 5,1878, new and unconditional assignments of all their property not exempt from attachment by law for the equal benefit of all their creditors, in proportion to their respective claims. The complainants contend that if the former assignment was invalid, the latter assignments are valid and effectual, under Pub. Laws R. I. cap. 723, § 1, of June 20, 1878, to carry the property ' conveyed by said former assignment, and to dissolve the attachments made by the defendants.

Previous to the enactment of chapter 723, it was well settled that an assignment or other conveyance, invalid as to creditors, because made to hinder, delay, or defraud them, was nevertheless valid as between the parties to it and as against everybody except creditors and bond fide purchasers for value. Bean v. Smith, 2 Mason, 252, 274; Randall v. Phillips, 8 Mason, 378, 388; Porter v. Williams Clark, 9 N. Y. 142; Brownell v. Curtis, 10 Paige, 210, 211; Chapin v. Pease, 10 Conn. 69; Maiders v. Culver’s Assignee, 1 Duv. 164. There are some cases which even, go so far as to hold that an assignment or conveyance to a creditor by a debtor who has previously assigned or conveyed his property in fraud of his creditors is ineffectual, the debtor no longer having any title which he can so convey. Fox v. Willis, 1 Mich. 321; Grimsley v. Hooker, 3 Jones Eq. 4; Barton v. Vanheythuysen, 11 Hare, 126; 23 Eng. Law & Eq. 491; Tate v. Liggat, 2 Leigh, 84. It follows, of course, under the law as it existed previous to the enactment of chapter 723, that the assignees under the earlier assignment, when they accepted that assignment, took all the property which the assignors then had to assign, except what was exempt from attachment, to be held by them upon the trusts declared in the assignment, and consequently that they could acquire no new title to that property under the later assignments. The whole effect of the later assignments would be to pass property afterwards acquired, or which, being previously acquired, had afterwards become attachable, or which might accrue to the assignors as a resulting surplus under the earlier assignment. Griffin v. Marquardt, 17 N. Y. 28; Van Heusen & Charles v. Radcliff, 17 N. Y. 580; Holland v. Cruft, 20 Pick. 821, 328 ; Knowles v. Lord, 4 Whart. 500, 507; Pierson v. Manning, 2 Mich. 445, 453; Frow v. Downman, 11 Ala. 880, 885; Luckenbach v. Brickenstein, 5 W. & S. 145; Maas v. Goodman, 2 Hilt. 275.

The question then is whether the later assignments can carry the property previously assigned by force of chapter 728. That chapter does not purport to give to an assignment, made according to its provisions, any new efficacy as a conveyance; but it merely enacts that if the property of the assignor has been attached or levied upon, such an assignment, duly executed and recorded within sixty days after the attachment or levy, shall suspend it, and, at the expiration of thirty days thereafter, dis solve it, unless the Supreme Court otherwise directs. If, then, the assignment under chapter 723 acquires any new efficacy, it acquires it, not by force of any express language, but by construction or operation of law. It is contended that such an assignment is to be regarded, not as a mere voluntary assignment, but as- in the nature of an assignment in bankruptcy, under which the assignee represents the creditors, and is entitled, in behalf of the creditors, to treat any conveyance previously executed by the assignor in' fraud of them as void. The chapter, it is argued, establishes a new system, which, unless the chapter is so construed, cannot be successfully carried into effect. There is a good deal of force in the argument that the assignee ought to be regarded as representing the creditors, but it is derived mainly from considerations which are not dependent on, and which are but slightly strengthened by, chapter 723. Under.the influence of these considerations the law has been changed in this particular in some States by statute. Perhaps it would have been good policy for our General Assembly to have done the same thing. We cannot, however, do it by construction, merely because we think it would be good policy to have it done, unless we find something in the language of the statute which warrants the construction. We do not find anything. The assignment contemplated by thd statute is the voluntary act of the debtor. It is optional with him to make it or not. And if he makes it, the assignee is an assignee of his own choice, and is not imposed upon him either by his creditors, or by any legal tribunal acting in their behalf. We think it must be construed to be in law, as it is in fact, a voluntary assignment.

It has been suggested that the later assignments are effectual to carry the property previously assigned by operation of law. The argument is, that the earlier assignment, though valid between the parties, was invalid as to the creditors, and that the defendants annulled it when they attached, and so revested the property, or otherwise they would have attached nothing; and consequently, that the property being revested, passed by the later assignments, subject at first to the attachments, but after-wards, the attachments being dissolved under the statute,-released from them. We do not think this argument is sound. The at tacliments did not revest the property, for, as against dissenting creditors making the attachments it never passed, the earlier assignment being utterly void as against- them. Thomason v. Neeley, 50 Miss. 310. But inasmuch as the earlier assignment, though invalid as against them, was valid as against all persons but them, and as against the assignors, it is a necessary logical consequence that the later assignments could have no effect upon any portion of the property previously assigned except the resulting surplus ; and if the property attached were sold on execution, and sold for more than enough to satisfy the attaching creditors, the surplus would belong, not to the debtors, nor to their assignees, as they are assignees under the later assignments, but to them as they are assignees under the earlier, unless, meanwhile, some of the other creditors should have interposed. Taylor v. Williams, 1 Ired. 249; Williams v. Avent, 5 Ired. Eq. 47 ; Ward v. Enders, 29 Ill. 519 ; Waterbury v. Westervelt, 9 N. Y. 598; Bostwick v. Menck, 40 N. Y. 383; Burtch v. Elliott, 3 Ind. 99 ; Freeman v. Burnham, 36 Conn. 469.

The only question remaining for consideration is, whether the attachments made by the defendants, having been made after the earlier and before the later assignments, were dissolved under chapter 723, § 1, by the later assignments, be they effectual or not to carry the property attached. • The obvious purpose of the statute was to induce the debtor to make an assignment which would convey the attached property, as well as other property belonging to the debtor, to the assignee for the benefit of the creditors generally in proportion to their respective claims. This purpose, of course, is not accomplished if the assignment is ineffectual to carry the attached property, because the debtor has previously conveyed it away by a fraudulent deed. We think, therefore, that it is but reasonable to hold that by the words “ the property of any debtor,” the statute means property which the debtor still holds and can dispose of as his own, and does not mean property which he has fraudulently conveyed away and which is only in him for his creditors. Indeed, to hold otherwise would be to bring chapter 723 into a sort of conflict with the statute of fraudulent conveyances, by putting it in the power of the debtor to deprive the creditors of their ordinary remedy, with out any compensating benefit to them. We decide, therefore, that the attachments were not dissolved.

The demurrer raises simply the questions, whether the earlier assignment, taken simply by itself, without explanatory allegations or proofs, is to be regarded as valid, and, if not, whether the later assignments were effectual to pass the property previously assigned, or to dissolve the attachments previously made. We answer the questions in the negative, and consequently sustain the demurrer. Demurrer sustained.

Case Details

Case Name: Gardner v. Commercial National Bank

Court Name: Supreme Court of Rhode Island

Date Published: Dec 18, 1880

Citations: 13 R.I. 155; 1880 R.I. LEXIS 71

Court Abbreviation: R.I.