53 N.J.L. 369 | N.J. | 1891
Lead Opinion
The opinion of the court was delivered by
It appears from the facts found by the trial court, and already stated in full, that the contest was between,, as defendant-, a purchaser from one Somerville, and, as plaintiff, a purchaser at a sheriff’s sale of the same property under a levy made upon an execution against one Cunningham.
Somerville had taken a bill of sale from Cunningham previous to the levy under which the sale was made to the plaintiff. If that transfer was good in law, then the title
The counsel for the plaintiff have therefore attacked the legality of the transfer of the property from Cunningham to Somerville.
They insist that, as against creditors of Cunningham not parties to that transfer, it was a nullity.
There are three lines of attack.
First It is insisted that'the transfer made by Cunningham to Somerville is void, because it is in contravention of the act .concerning assignments for the benefit of creditors.
Second. That it is void by force of the statute of frauds.
Third. That it is invalid for want of a legal consideration.
Under the first mentioned head, it is insisted that the transfer of the property from Cunningham to Somerville was an assignment of Cunningham’s estate, in trust to an assignee for the creditors of said Cunningham, within the meaning of >the first section of the Assignment act. It is thereupon •argued that, inasmuch as the assignment is for the benefit of ■some, to the exclusion of other creditors, a preference arises Avhich avoids the entire transaction.
At the outset, I wish to guard against any apparent admission, that if it should be conceded that the transfer attacked is an assignment, t.he result claimed would follow. It has never been adjudged by this court that a preference contained in an assignment operates to avoid the transfer in toto. The case of Garretson v. Brown, 2 Dutcher 425, affirmed in this court (4 Dutcher 644), called for no opinion upon this point.
The query propounded by the facts in that case was, whether a deed and a transfer of notes, made by a debtor previous to an assignment, affected the lawfulness of the assignment itself. It was held that the assignment was valid. Regarding the question as an open one, it seems to me extremely difficult to accord a significance to all parts of the first section of the Assignment act, by the adoption of the construction now claimed for it. The last clause of that section, in express terms, makes void the preferences. The first
But a construction of the act which results in sweeping away the preferences, but compels the assignee to execute his trust for the proportional benefit of all the creditors, conforms to the fundamental rule of statutory construction, that every part of a statute shall have its due effect.
This construction would leave the power of sale conferred upon the assignee unimpaired, and his vendee would acquire a complete title.
This question, however, is not, in my judgment, involved in this case. For I am unable to regard the transfer, now attacked as an assignment, within either the letter or spirit of the Assignment act.
Let us recall the facts. Cunningham was indebted to certain persons, among whom was a corporation existing under the name of Wilkinson, Gaddis & Co. Somerville was the ■secretary of this corporation. On February 27th, officers were in possession of Cunningham’s property, under an execution issued on a judgment entered in an action brought by another creditor. Somerville sought to secure the debt due to the corporation, of which he was an officer. Cunningham agreed to give him a bill of sale. Before the bill of sale was delivered, the company paid off the judgment already mentioned. It promised to pay, through Somerville, and afterward did pay, for a bill of goods that day delivered to Cunningham by Muchmore & Son. The bill of sale was then delivered, for which, in advances and in the debt due, there existed a consideration of over $700.
So far, the complexion of the facts do not furnish a hint ■of an assignment.
But there was a verbal agreement which accompanied the bill of sale. Cunningham imposed upon Somerville the condition, which Somerville accepted, that Somerville should sell
If there was not enough to pay all in full he was to pay them pro rata. If there was more than sufficient to pay them he was to return the balance to Cunningham. Cunningham retained the right to redeem the property, at any time before their sale by Somerville, by the payment of these-advances and debts in full.
From this statement of the character of the transaction, it is transparent that the parties to it had not the faintest suspicion that Cunningham was making a statutory assignment. There were no words employed in the negotiation which were-appropriate to or suggestive of an assignment. There was no-list of creditors nor inventory of property, nor was there any talk of these accompaniments of a statutory assignment. No-, bond of Somerville as assignee; no record of any paper; no proceeding in the Orphans’ Court; no notices; no distribution of dividends under judicial supervision; no filing of claims; no discharge from any claim on account of dividend received; none of these statutory features of an assignment appears, at any moment, to have been contemplated. Further-, words, to show that the transaction was not intended as an.. assignment under the terms of the statute, w'ould be wasted.
But it is insisted that the first section of the act includes-every conveyance of property to a trustee for the benefit of a creditor or of creditors. It is admitted that a debtor may sell, pledge or mortgage his projierty directly to one or more creditors, but it is insisted that the moment he does this not directly, but to another person for the use of such creditors, the statute seizes upon the transaction. The test thus applied is, does a trust arise? If so, it is an assignment.
I am unable to yield my assent to this view.
It is, as a matter of course, true, that an assignment, from its essential character, implies a trust. But the opposite is-
Property may be sold, pledged or mortgaged in trust.
The trustee in each one of these classes of transfers holds a different interest from that of a trustee in another class, and a trustee under the Assignment act an interest differing from all the rest.
Now, I am of the opinion—
First. That the transaction now in question was a mortgage.
Second. That a mortgage is distinguishable from an assign-. ment; and,
Third. That a mortgage to a trustee remains a mortgage and does not become an assignment by reason of the trust.
That the transfer was a mortgage seems obvious. As already remarked, the instrument of transmission was an ordinary bill of sale. The parol agreement reserved the right to redeem. A new debt was practically created at the time by the assumption by the corporation to pay the price of the goods delivered by Muchmore. If the company had attempted to hold the goods as absolute owners by virtue of the bill of sale, a court of equity would have transformed it into a security. Had the amount of the advances and debts been tendered to Somerville before he sold, no one would doubt for a moment that he would have been compelled to return the property. Unless it was intended as security, there existed no right to redeem, and, therefore, the reservation of that right manifests the intention of the parties to so regard it.
If it was for security, then it was a chattel mortgage.
Secondly, the statute concerning assignments does not include chattel mortgages within its terms, but deals with a different kind of transfers.
The Assignment act was not designed for the purpose of creating and regulating a new specie of instruments for the transmission of property. Its purpose was to regulate a class
They were employed by persons insolvent, or who thought themselves insolvent, to distribute their property to their creditors through a trustee styled an assignee. The transfer became effective without the assent of the creditors; it conveyed to the trustee an irrevocable power to sell the property and distribute the proceeds, and it stripped the debtor of all interest whatsoever in the property.
It was an instrument sui generis and - the act was passed to compel equality in distribution among creditors whenever the debtor chooses to adopt this particular scheme for the payment of his debts. Until he does so adopt it, he retains the power to sell, pledge or mortgage the last remnant of his property to favored creditors. Garretson v. Brown, 2 Dutcher 425. In the language of Justice Potts, employed in Garretson v. Brown: “ Until the debtor divests himself of the title 4o his property by assignment, his dominion over it is perfect, and he may use it for any lawful and honest purpose. The ■object to be gained by an assignment under the act is to get ■.the benefit of the release which it provides.”
Preferences by means of mortgages are recognized in the Assignment act itself.
The distinction between a mortgage and an assignment exists principally in the interest which the mortgagor retains in the property, namely, his equity of redemption. This can be levied upon under a common law execution, and a judgment creditor or a purchaser can protect his rights by redemption or any other act of which the mortgagor was capable. An assignment is intended as a payment and a mortgage as security. Incidentally there is a power of sale under the latter, and there may be said to be security in the former, but the primary objects are as stated.
The equity of redemption in the one and the want of it in the other is their distinguishing feature of difference. Burrill Ass., §§ 6, 7.
In relation to the other preferred creditors his position was different. But regarding his connection with them as that of a trustee, he was such as mortgagee and not as assignee.
The execution of mortgages, both real and personal, to trustees is the exertion of a legal right.
Mr. Powell discusses this class of mortgages in his authoritative work on this subject.
Any one recalling the frequent exercise of this power by railroad and other corporations, both solvent and crippled, to secure classes of bondholders and other creditors, would be surprised to learn that all these were voluntary assignments. An example of this kind of trust mortgages is afforded by the leading ease of Curtis v. Leavitt, 15 N.Y. 143. And upon this point the following cases are pertinent: Wilson et al. v. Russell et al., 13 Md. 494; Woodruff v. Robb, 19 Ohio 212; Bagg v. Jerome, 7 Mich. 145.
In the case of Chapman v. Hunt, 1 McCart. 149, a chattel mortgage was made by Hunt to secure a debt due to Hunt, and also to secure a debt due to Julia Ann Chapman. Chancellor Green said that it was not void on the ground that it was against the policy of the statute regulating assignments for the benefit of creditors, for, on its face, the instrument purported to be not an assignment of the defendant’s property for the benefit of creditors, but a mortgage for the payment of certain specified debts.
“ It is not essential,” he goes on to say, “ to the validity of' a mortgage that it was to be wholly for the benefit of the-mortgagee, nor will a trust for the benefit of a third party, of' itself, give it the character of an assignment, within the act requiring assignments to comprehend all the property of the-debtor without preferences.”
Indeed, deeds of trusts in the nature of mortgages, while-more similar in form to general assignments, are both in law and equity substantially the same as mortgages, the radical distinction between them and assignments for the benefit of' creditors exists, as in the case of mortgages, in the interest of. which the grantor still retains in the assigned property. Burrill Ass., § 8; Perry Trusts, § 602.
It is apparent, then, that the present transfer of property was not in law an assignment, and it is equally patent that, it was not so intended.
But can this arrangement, although clearly a chattel mortgage, be impeached as an infringement upon the spirit of the Assignment act ? There are cases in our reports where judges-have indicated that a deed or mortgage, or a number of such instruments, although they bore no likeness to an assignment under the statute, were yet void because they contravened the-policy of the statute. Owen v. Arvis, 2 Dutcher 22; Fairchild v. Hunt, 1 McCart. 367; Livermore v. McNair, 7 Stew. Eq. 478.
In each of these cases the affair attacked was held to be-void by force of the provisions of the statute of frauds. I.
In each of the cases mentioned the transaction would have keen held void, upon the same grounds upon which they were nullified, had no statute relative to assignments existed. And ■unless the present transfer is in contravention of the statute ■of frauds, I am of the opinion that it is entirely legal.
The next question is, whether the present transaction is ■void because it contravenes the statute of 13 Elizabeth. In 'treating of this phase of the case, it is essential that the ■condition of the record before us be kept in mind. The cause was tried in the Circuit Court without a jury. Certain facts were found, upon which facts, in connection with the bill of ■sale, the court directed judgment to be entered for the defend.ant. By the finding, the transfer was adjudged to be legal. It must be assumed that any question of fact in the case was resolved in favor of the bona fides of the transfer. This •.finding on writ of error, like the verdict of a jury, is conclusive that there existed no actual fraudulent intent to hinder or delay creditors.
The only question is, whether, upon the facts found, the 'transfer was fraudulent per se, so that the justice, upon these .facts being conclusively proved before a jury, would have ■been compelled to direct a verdict in favor of the plaintiff.
The first query is respecting the effect of the contemporaneous verbal understanding, taken in connection with the written bill of sale; Hoes the fact that the written bill of sale was accompanied by a verbal understanding that it should operate only as a mortgage for third parties, affect the transfer in respect of creditors, and, if so, to what degree?
It is, I think, undeniable, that the whole transaction might 'have been the subject of verbal arrangement. ' Nothing in •the statute of frauds required it to be proved by writing. And as possession of the property immediately passed, the ■sale, considered as a chattel mortgage, was valid without
The effect of such an agreement upon the attempt to transmit an interest in property has been the subject matter of considerable contrariety of opinion. It is generally regarded as a badge of fraud. But upon the point whether it carries with its presence an unexplainable inference of fraud, the courts have divided. My conclusion is, that each case must stand upon its own footing, and that no doctrine of fraud per se applicable to all cases alike ought to be laid down.
The rule which permits each case to be dealt with according to its individual character leaves to the court the privilege-of discriminating between different kinds of reservations. The courts are always inclined to do this to meet the equity of each cause.
This is apparent in comparing two cases in the federal courts, namely, Lukins v. Aird, 6 Wall. 78, and Gaffney’s Assignee v. Signaigo, 1 Dill. 158. In the first case, Aird, being indebted and insolvent, made a conveyance of certain lots to Spring, a creditor, who agreed that Aird should have-the use of the lots for one year’s rent free, with- a privilege, so long as Spring did not desire to make any use of them, himself or to sell them, of renting them at $100 a year.
The consideration for the deed was less on account of this-agreement.
Justice Davis, in the Supreme Court, held that the conveyance was void, and that the fraud was an inference of law.
In the latter case Gaffney made an absolute deed of conveyance, but on a bill filed to set it aside for fraud, the facts were-proved to be that it was made to secure certaiu moneys-advanced to Gaffney by the grantee. Judge Dillon, in the-
He says that the case is unlike Lukins v. Aird, supra, where a valuable right—rthat of possession—was secretly reserved to the failing debtor contrary to the terms of the deed. Here, he goes on to say, there was no absolute sale in fact, and no attempt to reserve a right at the expense of his creditors.
Thus, it is perceived, that when each case is left to be determined by its own circumstances, the facts presented in one may show such incontrovertible evidence of a fraudulent effect upon the creditors, that no other inference but that of fraud could be drawn, while the facts in another case, while showing a technical reservation dehors the writing, is still entirely free from any possibility of harm to creditors, or of any intention to harm them. A conspicuous example of such a difference is presented when considering, on the one hand, a deed designed for record, accompanied by a secret trust of great value to the debtor, as in Lukins v. Aird, and, on the-other hand, a bill of sale of personalty not designed for record, accompanied by a parol reservation of a worthless equity of redemption.
I think the weight of authority is accordant with this view.
A secret trust inconsistent with the terms of the sale of property is evidence, of fraud, but it is not conclusive evidence of fraud. This is the rule laid down in Massachusetts, in respect of conveyance of both real and personal property, in the case of The Oriental Bank v. Hoskins, 3 Metc. 332.
It is the rule adopted in Maine, in the case of Emmons v. Bradley, 56 Me. 333, and in Vermont, in the case of Smith v. Onion, 19 Vt. 427. Other cases for and against this view are cited by Mr. Wait in his work on Fraudulent Conveyances, § 238, who gives the view now expressed his approval as-being in accord with the weight of authority and with reason.
This view also appears to be in line with what, I think, has-been the general understanding of the courts of this state, in respect of the effect of the retention of possession by a vendor.
Indeed, it is impossible for me to conceive how the point now under discussion can be regarded as an open question in this court, since the decision of the case of Terhune v. Demarest, 3 C. E. Gr. 532. The facts in that case were, that one Gr.' Terhune and his wife made an absolute conveyance of land to one A. Gr. Terhune, and the consideration named in the deed was "$3,000. A creditor of Gr. Terhune filed a bill to set aside this deed as voluntary and made to hinder and ■defraud creditors. This court held that it was, in a degree, voluntary, and, as against creditors, could not be sustained as a deed. But there was parol testimony introduced to show the character of the consideration and the circumstances which surrounded the execution o.f the deed. In summing up the result of this parol testimony, the learned Chief Justice remarked: “ From this series of facts, it seems to me to be plainly consistent with sound reason and good sense to infer that the debtor executed the conveyance in question to his principal creditor with an understanding, if not clearly expressed, at least tacit, that the latter should sell the property and thus indemnify himself for the moneys due him.”
The decree was, that the amount which was actually due from the grantor to the grantee be declared a lien upon the property; that the property should be sold, and after the pay- ' ment of this amount, with interest and the costs of the suit, the surplus should be paid upon the judgment of the attacking creditor.
So, here was a writing purporting to be an absolute deed, but accompanied by a verbal understanding which changed its entire character, but which deed, in the absence of a fraudulent intent, was held valid as a mortgage against creditors.
There is a second ground upon which, under the statute 13 Elizabeth, the invalidity of this transfer is asserted. This •ground is not that of a secret trust existing, but it is, that any reservation of an interest, openly or secretly, by an insolvent debtor, who assigns property to a trustee for the payment of selected creditors, is void. This insistance is rested upon the ¡authority of a line of cases nearly all confined to the courts ■of the State of New York. Goodrich v. Downs, 6 Hill 438; Strong v. Skinner, 4 Barb. 546; Lansing v. Woodsworth, 1 Sandf. Ch. 43; Barney v. Griffin, 2 N. Y. 365; Collomb v. Caldwell, 16 Id. 484.
The rule which is supposed to control this case had its first •expression in Goodrich v. Downs, supra, decided by the New York Supreme Court. The contest in that case was between ■one, who, at a sale, made on an execution against Goodrich, .had bought some wood, and a person to whom Goodrich had, before the levy of the execution, made an assignment of the wood. , ■
The facts were, that Goodrich, being insolvent, had assigned ■the wood, together with nearly all his other property, to his •son, in trust, to sell and convert the same into money and apply the proceeds to the payment of four of his creditors. The assignment provided that if any surplus remained after •paying the specified debts it should be paid over to Goodrich, fhe assignor. The trial judge held that the assignment was •void and non-suited the plaintiff, who was the assignee.
Judge Bronson, in the Supreme Court, held that the clause ■directing that the surplus, if any, after paying the four creditors, should be returned to the assignor, was a trust for the ■use of the assignor. The judge also held that the non-suit was right, because there was no question to leave to the jury.
But it is important to remark the ground upon which the ■conclusive character of the fraud was placed. The judge admitted that if the question presented had been whether the assignment violated that section of the statute 13 Elizabeth,
But the judge put the conclusiveness of the fraud upon the-words of another section of the statute of frauds. It is that section, re-enacted in the State of New York, and appearing also in our revision as section 11 of our Frauds and Perjury act. It provides that all conveyances of goods, chattels, &c., made in trust for the use of the person making the same, shall be void, &c. The judge held' that under this section actual intent cut no figure, and that the presence of the reservation of a right to receive any surplus was a trust, and ipso factothe deed was void.
Five years later the same judge delivered the opinion of the Court of Appeals in the case of Barney v. Griffin, 2 N. Y. 365. The facts were, that a conveyance of real estate to three persons was made upon trusts to pay certain creditors-in different ways, and, finally, to convey so. much of the real estate as should be left. Upon the authority of the preceding case, it was held a void transaction, regardless of the fact that there might be no surplus to return.
The ground upon which these cases were decided' was overruled in the case of Curtis v. Leavitt, 15 N. Y. 9, 124.
In that case a corporation had made a deed of trust conveying certain bonds and mortgages to trustees to secure certain debts of the company, existing as bonds, which the company had issued.
In the deed there was expressed a trust. The trustees were to repay such surplus money and restore such securities as might remain after the final payment of the bonds. This deed was held to be a legal instrument. The court repudiated the doctrine laid down in Goodrich v. Down, that every reservation of a surplus was a trust for the use of the assignor. Opinion of Comstock, J., 114 et seq.
It is true that the same court, in the subsequent case of Collomb v. Caldwell, 16 N. Y. 485, followed Barney v. Griffin in a case involving exactly identical facts. The court
But the court was driven to new ground for a rule of decision. They held that the reservation of a surplus was com elusive proof of actual fraud.
Now, whether such a reservation, when there is a surplus,, is fraudulent, is not now the question. It is not fraudulent if the subject matter of "the assignment is of equitable cognizance only. For in that case nothing would be put beyond the reach of a common law execution which had before been within its reach. Leitch, v. Hollister, 4 N. Y. 211.
This question is not important, for the weakness of the doctrine thus adopted in Collomb v. Caldwell lies in the rule of evidence laid down respecting the effect to be given to the reservation of a surplus.
Under this rule it would not matter if it was demonstrated that no surplus could exist, or that the parties had no notion that it would exist., The answer is, you reserved it.
In my judgment, the rule is an arbitrary one, for I cannot conceive why the assignment of a person who happens to include in it a customary reservation of a surplus, when in fact the value of the property transferred is less than the amount of debts, should be held to be constructively fraudulent.
Chancellor Walworth announced no such doctrine in Beck v. Burdett, 1 Paige 305. He held, that inasmuch as it was doubtful whether the property assigned was sufficient to pay the debts, a mere hypothetical reservation of .the surplus would not vitiate the assignment.
The Supreme Court of Pennsylvania, in Rahn v. McElrath, 6 Watts. 151, took the view of Chancellor Walworth. The court say that the proper limitation upon the right to assign property to preferred creditors is, that the amount assigned bear a reasonable proportion to the debt provided for’, a defect in which would be evidence of fraud in fact, which, however, is not the subject of legal direction.
In Dana v. The Bank of the United States, 3 Watts & S.
In the case of Floyd & Co. v. Smith, 9 Ohio St. 546, the ■court referred to, and expressly disapproved of, the rule laid down in Goodrich v. Downs, supra, and Barney v. Griffin, supra, and hold that the reservation of a surplus, after paying certain debts, by a person contemplating insolvency, is not a conclusive badge of fraud.
In Ely v. Hair et al., 16 B. Monr. 230, the facts in which case presented the very question decided in the two New York cases, there is a discussion of the rule in them promulgated, and these cases are disapproved.
In Richards et al. v. Levin, 16 Mo. 596, the decision is staled to be, that where a debtor in insolvent- circumstances assigns all his property for the benefit of certain preferred creditors, directing the surplus, if any, to be paid to the grantor, this does not make the deed fraudulent, where it is ■admitted that the whole property is insufficient to pay even the preferred debts.
In Miller v. Stetson & Co., 32 Ala. 161, the case of Goodrich v. Downs was under discussion and the court refused to recognize it. The court held that the reservation of a surplus in that case was not fraudulent.
Involving substantially the same question is the case of Andrews v. Ludlow, 5 Pick. 28, where there was an assignment by an insolvent debtor of property to such of his creditors as should, withi'n a certain time, become parties to the assignment, with a reservation to the assignor of the dividends that would have gone to such creditors as failed to come in. Here, in a different form, was the same trust that was held to be so calculated to baffle creditors, in Goodrich v. Downs, as to be conclusively fraudulent. The court said that the agreement to pay over the surplus could have no effect, because the ■debts greatly exceeded the value of the property. Other
In the present case, the property subject to execution was-less in value than the amount of the debts. There is no-evidence that the accounts had any value. There is no proof, therefore, that any property was put beyond the reach of' creditors fraudulently.
But a conclusive answer to this point of attack is, that the-transfer was a mortgage. As soon as that is admitted, then, by reason of the equity of redemption remaining in the-assignor, which is subject to a common law execution, the surplus is put within reach of an execution creditor without resorting to equity. Leitch v. Hollister, 4 N. Y. 211.
In regard to the objection raised that there was no consideration for the assignment, little need be said. The point could only have substance when the transfer was regarded as-an absolute bill of sale. Viewing it either as a mortgage or a trust, all question in respect to the consideration disappears,, as the debts intended to be secured were admittedly existing.
I think the judgment ordered by the Circuit Court should: be affirmed.
Dissenting Opinion
(dissenting). This controversy respects the legal effect of a voluntary assignment by an insolvent debtor in favor of certain of his creditors.
Eor immediate purposes it will be sufficient to state that the transaction giving rise to the litigation was this: The debtor-in question was insolvent, and he assigned to one Alonzo Somerville, who was not a creditor, all his property, with the exception of his wearing apparel, such property consisting of certain chattels of the admitted value of $1,000, and the moneys due upon his books of account, the value of such accounts not being shown. His debts were about $2,400. The transfer to Somerville was for the following purpose: that he “ should sell the goods and chattels at public or private sale for the best price that he could realize and divide the proceeds, pro rata, among ” certain designated creditors, whose
The chattels thus enumerated were subsequently seized under an execution in favor of the plaintiff in error, and in the Circuit Court it was held that the assignment above described was legal and paramount to such process, and that opinion has now been affirmed by this court.
To that view I cannot agree, as it seems to me that the transfer thus validated is void per se, for two reasons—first, because it is inconsistent with the act of this state regulating the assignments of debtors for the benefit of their creditors; and, second, because it is made void by the twelfth section of the act for the prevention of frauds and perjuries.
In considering the first head of this division of the subject, nothing will be said with respect to certain peculiar characteristics of the transaction that will, in the sequel, become the subject of criticism; for my first contention will be, that such a transfer of property as this is, from its general nature, without reference to its particular qualities in this instance, utterly illegal and inefficacious, so far as respects dissenting creditors.
This debtor was desirous of preferring certain of his creditors, and to that end he executed the assignment now before us. That he could have effectuated such purpose by means of a judgment, or a mortgage, or by a direct transfer of property to favored creditors respectively in satisfaction of their claims, no one will dispute. There is a long train of adjudications in this state and elsewhere to that effect, to which it would be idle to refer, for the subject is not open to debate. Certainly the doctrine is not now, in any degree whatever, called in question, and therefore it does not enter in anywise into this discussion, for the theorem that I shall endeavor to prove is, that an insolvent debtor is forbidden by the statute
This statutory provision appears to me so precisely applicable to the transaction under consideration, that it does not need, and perhaps does not admit of, elucidation. Assuredly we have in hand au assignment of a debtor of all his property, except his wearing apparel, for certain creditors in exclusion of others, and just as assuredly such assignment is made by way of a trust. That the present disposition is a trust is assumed as unquestionable; for this transfer is to a third person having no interest, the title being thus vested in the confidence that he will apply the property for the benefit of certain specified creditors; the only remedy for the breach of the duty thus imposed being by a subpoena in chancery; so that this is not only a trust, but, in all its characteristics, a typical one.
Unavoidably, therefore, this case is presented to my mind as standing in this attitude: the statute in explicit terms declares that all preferences created by a debtor through the medium of a trust shall be deemed fraudulent and void, and this court now, just as explicitly, declares that such preferences so created shall be deemed honest and valid.
The only attempt that has been made to show, by argument,, that the statute in question does not dominate the facts before-us, is to be found in the brief of the counsel of the defendant in error. The reasons there given in this behalf are, in substance, these: that the assignment here used does not purport to be an assignment for the benefit of creditors; that it does-not purport to convey all the debtor’s estate; it does not purport to be in trust for creditors, and that no preferences appear on the face of the paper.
It will appear in the sequel that the transfer thus characterized was by a simple bill of sale, no trust being declared in the instrument. But as it was shown that the assignee had-given nothing whatever for the property so passed to him,, and as such a title could not have stood an instant against the-execution that was levied, the learned counsel himself, in behalf of his clients, these preferred creditors, proved that this naked bill of sale had been accompanied, and as a part of the-transaction, by a parol declaration of trust in favor of his clients, and in this connection he further showed that the-debtor had vested in the trustee the title to everything that he-owned or had a right to; except his wearing apparel.
We, therefore, very obviously, have this posture of things:: if we confine our view to the bill of sale alone, as counsel seems to imply that we ought to do, then, in that event, we have presented to us a transfer of a debtor’s property, withoufr eonsideration, to a third party, to the detriment of a judgment creditor—a transaction which, with respect to these litigants,, would be devoid of the least spark of legality; while, on the-other hand, if we construe the bill of sale, as plainly we must,, in its connection and co-operation with the parol declaration of trust we have an assignment that expressly negatives every
The only remaining reason urged in the brief referred to in support of this transfer of property is, that the statute under consideration, in its application to an assignment creating preferences, does not avoid the transfer itself, but merely vacates the preferences so given. But this contention is opposed by all our adjudications. The following cases plainly maintain that if a preference be created in one of these assignments, not only such preference, but the entire affair is avoided. Varnum v. Camp, 1 Green 329; Garretson v. Brown, 2 Dutcher 425; Fairchild v. Hunt, 1 McCart. 371.
But this consideration, whatever it may be worth, is out of place in this connection, for, in the present instance, the entire purpose of the assignment is to create these preferences; it has no other force or effect; it does not give the least right or interest to the creditors at large; and if, therefore, this preferred class cannot claim under the trust, the debtor himself will be its sole cestui que trust.
Such considerations as the foregoing do not weigh, in the least degree, with me, and I have referred to them simply because they are the only reasons that have been urged, so far as I can recall, for the exception of this assignment from the operation of the act under discussion.
Hor have I been able to perceive any consideration, founded in public policy or the nature of the subject, that would induce a court to thus circumscribe the force of this statute. There is no necessity for giving to creditors the power to secure their preferences by the creation of trusts. They can effect the same purpose just as effectually by means of a mortgage or judgment, and such devices have, from time immemorial, been resorted to in these cases. For over fifty years the course of legal practice on this subject has been familiar to me, and not a single instance has ever come to my'notice of an attempt to put a creditor on a vantage ground through
The disadvantage to which it will put the unpreferred creditor will be obviously great; for after he shall have obtained his judgment, instead of being able to levy his execution on the property of his debtor subject to the preferred creditor’s judgment or mortgage, as the case may be, he will be obliged to file a bill in equity to reach a similar end. In other respects his position will be one of hardship; the trustee, the agent of the debtor and the preferred creditor, will have the entire possession of the property, and he will sell it at his discretion without notice to the unpreferred creditor. The disastrous effect of such a disposition of the property upon the right of the creditor at large is plainly manifest, when it is compared with a sale made under a judgment or mortgage by a public officer. In general, preferences to creditors by an insolvent debtor are unjust, and are not to be favored, but when they are enforced by the instrumentality of a trust, they become oppressive in the extreme.
Neither do I think that this method, that seems to me of this evil tendency, has any support in any judicial utterance in this state. So far as has been observed, all the indications of. such opinion are in the opposite direction. Over sixty years ago the subject was before the Supreme Court in the case of Tillou v. Britton, 4 Halst. 121, the question being, whether a debtor in failing circumstances could transfer to a particular creditor in payment of his claim a single item of property. The court, in sustaining that transaction, declared, “ that the act to secure creditors an equal and just division of the estate of debtors who convey to assignees for the benefit of creditors,” does not extend-to a solitary transfer of an individual item of property to a creditor in payment of a debt, and the operation of the act must be confined, if not to cases where a
In the instance now in hand there are both a trust and universality in the assignment, so that it would seem unreasonable to doubt, in the light of the judicial view thus expressed, that such a transaction would have been condemned by the court at the time the reported case was in agitation. Nothing can be more significant of the wide scope this act was then supposed to possess than the fact that in this case it •was insisted by some of the ablest counsel of the state, the late Mr. George Wood being one of them, that it prohibited •a transfer by a failing debtor of a single article of his property directly to a particular creditor in payment of a debt due to him.
To the same effect, in Owen v. Arvis, 2 Dutcher 34, Chief Justice Green very plainly expresses the opinion that, in this class of cases, whenever the assignment is in trust, the case falls within the very terms of the act. And in Emerick v. Harlan, 1 Beas. 230, we are afforded a very clear insight into ■the views entertained by Chancellor Williamson on this subject. In the case cited the assignment was deemed an involuntary one, and, on that account, was not affected by the ■regulation in question, but with respect to the proper effect to be ascribed to the act itself, the Chancellor very plainly expresses his judgment. He says: “Erom several cases that have been in this court lately, I am perfectly satisfied, if a ■debtor is permitted to assign the whole or any part of his property in trust to a third person, for the benefit of the whole or part of his creditors, in any other manner than the act prescribes, the beneficial purposes of that act will be completely annulled. There are great frauds practiced under the ■shelter of assignments. The Assignment act is a great protection to creditors, and courts should be very strict in dis•countenancing assignments made in any other manner.”
It will be observed, therefore, that inasmuch as this court in the present case has sustained an assignment by a debtor •of his property in trust to a.third person, for the benefit of
In this connection it is proper to say that it has not been observed that there is even so much-as a dictum in our reports-that lends the least countenance to the proposition, that a-debtor in failing circumstances can transfer his property to a» trustee in order to confer a preference on one or more of his-creditors.
Before leaving this branch of my subject I would further-remark, that I have entirely failed even to conjecture what spark of vitality will hereafter be discovered to exist in the-statute under discussion. If a debtor, as in this case, cam lawfully transfer his entire property in trust for the sole purpose of creating preferences, in what possible juncture is he-to be prohibited from so doing? Most assuredly, it will hardly be said that he is so prohibited only when his act is-done with a fraudulent design ; for such an assumption would' operate at once as an interpolation of the statute, and as am abrogation of it, for the statute says that all preferences created in this mode shall be “ deemed fraudulent and void,”' and this is the direct opposite of saying they shall be void only when fraudulent. And so, if they are in fact fraudulent,, they are void at common law, and the statute is not needed to-make them so. In my apprehension nothing is, or can be, more demonstrably certain than the fact, that it was the legislative design to prohibit, in the most absolute form, the giving-of preferences in assignments of this nature, and that without the least respect to the consideration whether the intention leading to such favoritism was good or bad. This statute is not aimed at frauds; its title expresses its purpose very clearly in these words, viz.: “An act to secure to creditors an equal and just division of the estates of debtors who convey
In the presence of such clear statutory language as this, it is not surprising that our courts, up to the present time, have uniformly held that an assignment of this kind is absolutely void if any of its essential provisions be inconsistent with the directions of the act, and this without regard to the moral nature of the transaction. Thus the first resolution declared by the court in Garretson v. Brown, 2 Dutcher 437, is in these words, viz.: “ That if a deed of assignment contains upon its face a preference or preferences of one creditor over another (except as hereinafter mentioned), the deed itself is void and inoperative, as being in contravention of the statute; and the preferences, of course, fall with the deed.”
It would seem that the proposition cannot be more clearly stated: the preference per se vitiates the assignment, no matter . whether the purpose of the maker of it be fair or fraudulent.
Equally explicit and to the purpose are the expressions of <the bench upon this subject in Varnurn v. Camp, 1 Green 326, 329, the language of the opinion being this: “ It follows, then, •that were an assignment not made for the equal benefit of the ■creditors, but whereby a preference is sought to be given to any one not a creditor, by mortgage or judgment, over another, ■is, in contemplation of law, fraudulent and void. However ■clear, then, it may be of moral turpitude, or actual fraud, it ■can no more, than if thus tainted, prevail against an execution •creditor.” And in Knight v. Parker, 1 Beas. 219, the Chan■cellor, criticising one of these trusts, says: “ Whether the •debtor executed it with a fraudulent intent or not, it is in violation of the rights of creditors. It delays them in the -collection of their debts, and must be regarded, in equity, as xa legal fraud, and as such declared void as against them.”
That inquiry must be elucidated by somebody else; for my part, I shall be compelled to wait for instruction on the subject.
The second head of the discussion relates to the particular form in which the present assignment was cast. That form, was this-: by a bill of sale, under hand and seal, the debtor put in this man, Alonzo Somerville, the title to all his prop^ erty, consisting of goods, chattels and his books of account. This. instrument is strictly formal, and purports to sell the-property described. for the sum of $1,050.38, and for. which consideration a receipt is expressed in the paper. Somervilleis not described, as trustee, nor is there the .faintest allusion to-the existence of any trust. As the. instrument reads, Somerville.stands as the absolute owner of the property on which it. operates, and as having paid full and fair consideration for it,, even to the last penny. The creditors who are interested in upholding the transaction themselves showed, by their testimony, that the statements of this bill of sale were untrue in-every important respect; that Somerville was not a purchaser,, that he had not paid any part of the sum for which a receipt was given, that he was a mere trustee, that he was.to convert, the chattels into cash and distribute it pro rata among the preferred creditors, and that no trust was declared touching-
The question therefore is presented, whether an assignment in favor of specified creditors can be made of the property of the insolvent debtor by means of' an absolute bill of sale,' accompanied by a parol declaration of trust to which no allusion is made in the written instrument, and with the. state-; ments of which it is inconsistent ? ■ , ,
My conclusion is, that such a disposition of property-is absolutely void, as opposed to the spirit>of the statutory provision already considered, and to the ordinary principles o.f jurisprudence. Why should the debtor when he makes one of these assignments be permitted to give to the transaction- -a- false semblance? The creditors certainly have the right to know what has become of his property, and it seems altogether intolerable that he can hold before them a bill of sale that -falsely states that he has made-an absolute sale of-everything possessed by him for a full consideration which has been paid to himJ It is obvious how admirably such a device is adapted to the purposes of the fraud-doer, and it is equally evident that it can subserve 'no other interest. - -
■' Such proceedings appear to -have been universally condemned whenever judicial attention has been called to them. -The inevitable effect of bills of sale of-this -character is to mislead and embarrass creditors, and those'who. use them are therefore chargeable with a-design to effect such-result; and it is on this account that, so far as has been observed, these secret reservations or limitations in absolute bills of sale have been pronounced agáinst. In McCulloch v. Hutchinson, 7 Watts 434, the transaction involved a preference given to a creditor by force of an absolute bill of sale, modified by a parol trust. With respect- to this latter feature of the affair, this is the judicial expression, viz.“It is the secrecy of this trust, a trust incompatible with that which appears on the face of this transaction, that- constitutes its illegality. When the trust openly constitutes a part of a verbal assignment, or -is apparent on this face of a written instrument,-no harm is done.
Very much in the same strain is the stricture of the court of Missouri (Smith v. Lowell, 6 Mo. 67) upon an attempt to dispose of property by this method. The court said: “ The law does not permit debts to be secured in this manner. If the conveyance was intended only to secure the debt, that intent should have appeared in some writing made at the time. If courts should give the least countenance to the securing of debts by absolute conveyance alone, there would be no end to the embarrassments in which creditors would be involved to secure their debts.”
And, again, in Curtis v. Leavitt, 15 N. Y. 120, it is said: “ Secret trusts attending conveyances absolute in terms have always been regarded as a badge of fraud since the celebrated Case of Twynue.” See, also, Burrill (3d ed.), § 209; 1 Am. Lead. Cas. 71.
Not a single reason presents itself to my mind in favor of sustaining a proceeding of this kind. It would seem the dictate of common justice and public policy to require the debtor to declare in the instrument executed by him the whole of the disposition made of his effects. If he be acting honestly, he can have no motive for withholding such disclosure; if he be acting dishonestly, nothing can be more serviceable to his fraud than the absence of the trust from the written document. Such omission leaves the unpreferred creditor in utter darkness. How is he- to discover what the trust in reality is, or who are its beneficiaries ? His only remedy would seem to be a bill in chancery. To say to such creditor that he can set aside such a transaction as this when he shall have proved it to be tainted with fraud, is, in substance, in most cases, to inform
■ It is further to be noted, that this assignment which is here validated has certain other qualities which, of themselves, ■would have led me to repudiate it on legal grounds.
It is the common language of the authorities, that any substantial use or benefit reserved or provided for in the assign- ' ment for the benefit of the assignor himself renders it void. ‘The assignment in the present instance-contains three provisions of this nature—-first, the overplus, if any, of moneys arising from the sale of the goods and chattels, after the payment of the specified debts, is to be paid to the assignor; ■second, that he may redeem the said goods and chattels at any •time before the sale and disposal thereof; and, in the third •place, all the moneys then due, or to grow due, to himself or
. With reference to the reservation of the surplus after the payment of the designated claims, it is not necessary to pause, for the question is a debatable one, and has been variously decided, and. is one of very minor importance in the present discussion.
But the second right reserved is of a, more material character—it is the right to redeem the goods before sale. Such a power of reclamation should not be permitted, as it can readily be used to the oppression of such of the creditors as are unpreferred. If the debtor be entitled to redeem, he can, without prejudice to himself, divest himself of the title to his property, and thus wrong and hinder creditors at large during the interim between thus putting.the ownership in the assignee and the debtor’s redemption of his goods or land, and such interval of time iptay in some cases be of considerable length. “ The effect of a valid assignment,” says a book of deserved repute, “ is to vest the assigned estate in the assignee, so as to-put it out of the reach * * * ■ even of the assignor himself.” 1 Am. & Eng. Encyc., p. 871.
In my opinion,, and in view of the .authorities, this assignment, if otherwise unobjectionable, should not receive the sanction of the court by reason of this right of, redemption being, reserved to the debtor.
And so the third of the benefits reserved in the trust would lead me to a similar, result. This debtor divested himself of the title to these moneys due on the books of account, and made no further disposition of them; the consequence being that the assignment, with respect to part of the property,, is for the benefit of the preferred creditors, and with regard to the other part of it, is for his own benefit. No principle in this-branch of the law seems to be more universally, recognized than the rule, that if the debtor reserves in the assignment made by him any substantial interest or advantage, the entire transaction. becomes ipso facto void. Numerous de
The foregoing are the principal considerations that have led me to vote to reverse the present judgment.
It will be observed that my conclusion is founded on reasons that may be thus summarized:
First. I cannot agree that a failing- debtor can assign his property in trust by way of preference to certain enumerated creditors. Such a construction of the act seems to me to be opposed to its language, its spirit and its purpose, and, also, to all former judicial expressions of opinion.
Second. I cannot agree to the doctrine that such an assignment can be made, in part, by a written bill of sale, and in part by a parol disposition that contradicts the written instrument in essential particulars.
Third. Hor that the debtor, in such an assignment, can reserve the right to revoke his transfer on any condition whatever.
Fourth. And lastly, that such an assignment cannot put property in trust for creditors and other property in trust for the debtor himself.
I vote to reverse this judgment.
For affirmance—Dixon, Garrison, Magie, Reel, Clement, Smith, Whitaker. 7.
For reversal—The Chancellor, Chief Justice, Scueeer, Yan Syckel, Brown. 5.
