(after stating the facts as above). Counsel for both parties to this suit have, we think correctly, admitted in their briefs that this case turns upon the proposition whether the act of Mr. Hoppe in organizing the Hoppe Hardware Company, a corporation, and in transferring to it his stock of merchandise for a consideration of $10,000 recited in the bill of sale, and having 38 shares of the stock of the corporation issued to his brother-in-law, and 31 shares to his wife in payment of indebtedness due by him to them, when by a collateral secret agreement it was provided
*181
that be should be retained as president and manager of the corporation, and should receive a salary of $40 per month, and that $4,000 of his assets transferred by him to the corporation should . be used in payment of his debts to certain of his creditors, is in law a fraud against W. E. Stapleton, who was one of his creditors at that time, and who did not assent to the transaction. There can be no question that Mr. Hoppe had the right to prefer his wife and Mr. Lockwood to his other creditors, and if his transaction had consisted only in organizing a corporation and in transferring all of his assets to it, and in haying issued certain shares of stock to Mr. Lockwood and Mrs. Hoppe in payment of his debts to them, such act would not have constituted fraud, though it might have' had the effect to hinder, delay, or defeat other honest debts owing by him to other creditors. Section 2778, Wilson’s Rev.
&
Ann. St. 1903;
Brittain-Smith & Co. et al. v. Burnham et al.,
Plaintiff in error contends that the case should have been submitted to the jury to find whether such transaction was made by Mr. Hoppe with fraudulent intent to hinder and delay his creditors ; but it is the well-settled rule that fraud may arise as an inference of law, and that, when a conveyance is made under such circumstances that frau.d exists as an inference of law, then it is the duty of the court to pronounce the conveyance in question void as if the fraudulent intent were directly proved.
Lukins v. Aird,
6 Wall. (U. S.) 78,
In Lukins v. Aird, supra, the facts were that Aird, being indebted and subsequently having failed, conveyed to Spring certain town lots for the sum of $1,200 in money, Spring agreeing at the time that Aird should have the use of two of the lots for one year free, and with the privilege to use them thereafter at $100 per year so long as Spring did not desire to use them. Lukins, one of Aird’s creditors, brought the action alleging the transaction was fraudulent, and praying that the conveyance be set aside and the property subjected to his claim. Mr. Justice Davis, who delivered the opinion of the court, said:
'f * * * A trust thus secretly created, whether so intended or not, is a fraud on creditors, because it places beyond their reach a valuable right — the right of possession — and gives to the debtor the beneficial enjoyment of what rightfully belongs to his creditors. * * * It makes no difference in the legal aspect of this case that the interest reserved was not of great value. It is enough that it was a substantial interest for the benefit of the grantor, re *183 served in a manner which was inconsistent with the provisions of the deed.”
The same justice, in
Robinson v. Elliott, 22
Wall. (U. S.) 523,
"But the creditor must take care in making his contract that it does not contain provisions of no advantage to him, but which benefit the debtor, and were designed to do so, and are injurious to other creditors. The law will not sanction a proceeding of this kind. It will not allow the creditor to make use of his debt for any other purpose than his own indemnity. If he goes beyond this, and puts into the contract stipulations which have the effect to shield the property of his debtor, so that creditors are delayed in the collection of their debts, a court of equity will not lend its aid to enforce the contract.”
In that case the question before the court was whether a certain stipulation in a chattel mortgage by which it was provided that until default in payment of one of the notes secured thereby the mortgagor might remain in possession of the goods,. wares, and merchandise and sell them the same as he had done theretofore, and supply their places with other goods, was fraudulent and vitiated the mortgage. The court held, notwithstanding it was provided by the statute of Indiana where that case arose that the question of fraudulent intent in all cases shall be a question of fact, that the court was the proper party to say-Avhether the mortgage on its face was void.
The same rule is discussed in
Means v. Dowd,
"The prevailing doctrine, however, is unquestionably that which we have stated; and its fundamental essence is that an insolvent debtor making an assignment, even for the benefit of his creditors, cannot reserve to himself any beneficial interest in the property assigned, or interpose any delay, or make provisions which would hinder and delay creditors from their lawful modes of prosecuting their claims.”
In
McDowell v. Steele,
This rule was followed by the same court in the ease of
Stephens v. Regenstein & Co.,
The court held in
Robinson v. McKenna,
21 R. I. 117,
“While we do not question the general .accuracy of this proposition of law, yet it is by no means absolute or without exception; for, while a fraudulent intent in the making of a conveyance is ordinarily a question of fact, yet it is not always so.”
In
McDonald & Co. v. Hoover et al.,
“A secret trust for the benefit of the grantor, whether express upon the face of the conveyance creating the trust, or shown. by proof aliunde, is void as to creditors, and while a debtor has the right to prefer one creditor above another, and thus discriminate in favor of one and against other of his creditors, he cannot delegate this privilege to a third party, and where he makes a conveyance conveying this delegation to his grantee, or where it is proved aliunde, the conveyance will be declared void as to creditors.”
In the case at bar the transaction by which Mr. Hoppe preferred his brother-in-law and wife resulted, not only in accomplishing such preference by him, but by the agreement secretly made between them it resiilted in giving to him a profitable employment, and, if such transaction is valid, also in placing $4,000 worth of his assets in the possession of the newly formed corporation, to be distributed for the benefit of Mr. Hoppe in the payment of certain of his creditors. The effect of the transaction was that Mr. Hoppe applied approximately $7,000 of his assets in making preferred payments to his wife and brother-in-law, and placed the remainder of his assets in the sum of about $4,000 in the possession of the corporation beyond the reach of his other credit *186 ors. If the corporation, with or without collusion with Mr. Hoppe, had refused to pay out this $4,000 worth of assets to Mr. Hoppe’s creditors, and this contract were valid, the effect would have been to have enabled Mr. Hoppe to have still retained in his control and possession said amount of property beyond the reach of his creditors, thereby hindering and'delaying them. At the very time this transaction occurred Mr. Stapleton was urging him to pay the balance on his note, and no doubt -Mr. Hoppe thought that by this transaction, as admitted by him in his cross-examination, his property would be protected to a certain extent, but whether he so thought or not is immaterial. The question in this case is not what he may have intended, but what is the result of his deliberate acts? If they resulted in hindering and delaying his creditors, and by secret agreement a beneficial interest in his property was reserved to him, the presumption conclusively arises that such illegal object furnished one of the motives for his making the contract, and it should be held .to be fraudulent.
Plaintiff in error has cited Gardner v. Haines, 19 S. D. 514, 104 N. W. 244, as being in point. In that case John C. Haines, who had been engaged in business for some time, on the 18th day of October, 1895, organized a corporation to be known as “John C. Haines, Incorporated,” the incorporators of which were John C. Haines, May Haines, his wife, and H. C. Loveland, his mother-in-law. The capital stock was $50,000, divided into 500 shares, 445 shares of which were taken and held by John C. Haines. 50 shares were issued to May Haines, his wife, as payment of a debt due by him to her, and 5 shares were issued to PI. C. Loveland, his mother-in-law, without any money consideration. Haines conveyed all his assets to the corporation. On the 28th day of January, 1894, prior to the time the corporation was organized, Haines became liable to O. L. Snyder on assignee’s bond. Snyder obtained judgment against Haines on the bond in December, 1897. Haines had in 1889 become indebted to John T. Potter for the sum of $12,500. In 1896 Haines gave Potter ’a new note for said indebtedness, which at that time, including *187 interest, amounted to $23,000. In 1896, a year after the corpor ation was organized, Haines borrowed from Marshall Field & Go. the sum oí $25,000 with which he took up the Potter note, and assigned to Marshall Field- & Co. as collateral' his 445 shares of the capital stock of the corporation. About six months thereafter Marshall Field & Co. received from Haines 440 of said shares of capital stock in full payment of their note. Haines in 1898 filed his' petition in bankruptcy. As' was said by the court in its opinion in that case, it appears that the corporation was organized and the property conveyed to -it by Haines two years or more before thé judgment of Snyder was obtained against him, and that the petition in bankruptcy was filed three years after the organization of the corporation. It does not appear that in the formation of the corporation there was any agreement between Haines and the other stockholders that he should be retained at a salary of $100 per month, nor was there any agreement by which a portion of the assets were to be taken by the corporation and paid out by the debtor to his creditors. Having issued to his 'wife 50 shares of the capital stock, he thereby preferred her as one of his creditors, and in delivering to Marshall Field & Co. 440 shares of the stock he preferred that company. This he had a right to do; but in making these preferences nothing appears in the record to the effect that any beneficial interest was retained by secret agreement either in the stock thus transferred or relative to the management of the business. The court in its opinion sets forth the seven different contentions made by counsel for the creditor who was assailing the good faith of the transaction, but no contention is made that in any of these transactions there was any secret or public agreement by which Haines retained a beneficial interest in the property transferred, and that case cannot control'in the case at bar.
The same is true-of
McNerry v. Hubbard,
We" have not overlooked the other authorities cited by counsel for plaintiff in error in his able and exhaustive brief, but, after an examination of the same, we are of the opinion that the rule of law that a debtor who prefers certain of his creditors cannot in doing so retain a beneficial interest by the transaction by a secret agreement is applicable to the case at bar, and is supported by the overwhelming weight of authorities of the American courts, and is in consonance with the utterances of the Supreme Court of the territory of Oklahoma in
Little Co. v.
Burnham,
“The intention of the parties may have been absolutely fair and honest. The mortgagee may have believed that his mortgagor would appropriate the proceeds to the payment of the mortgage debt. The mortgagor may have honestly intended to do so. But the mortgage was void as a matter of law. The conclusion here arrived at is not based upon what the parties may have intended to do, but is based upon what the mortgage does, in fact, concede to the mortgagor the privilege to do. * * * The decisions of the courts of this country have condemned them with almost entire unanimity, and the instrument itself has been as uniformly held to be fraudulent and void as a matter of law, irrespective of the question as to whether any fraudulent intent did in fact exist.”
And in
Bank of Perry v. Cooke et al.,
“It does not matter whether such agreement is oral or in writing, contained within the mortgage or without, if such an agreement was had, the mortgage is fraudulent and void as to creditors.”
Mr. Hoppe may have intended no wrong by his transactions, but the effect of his transactions, accompanied with the agreement *189 that he should be retained as president and manager at a salary of $40 per mQnth, and that $4,000 of his assets transferred by him to the corporation should be applied in payment of his debts to certain creditors, reserved to him a beneficial interest, and these conditions were not made a part of the articles of incorporation, nor a part of the bill of sale executed by him and placed upon record. Mrs. Hoppe had actual notice of the debt of Mr. Staple-ton, and while there is no evidence that Lockwood had notice of Stapleton’s debt, he does admit that he knew of all the indebtedness of Mr. Hoppe to the wholesale houses and the bank, and that he was surety on notes to other persons whose names he did not know, which was sufficient notice to him that" Mr. Hoppe had other creditors than himself and Mrs. Hoppe; and it is therefore our opinion that the transfer by Mr. Hoppe of his property to the Hoppe Hardware Company was fraudulent and void, and that the judgment of the lower court should be affirmed, and it is so ordered.