National Bank of the Metropolis v. Sprague

| New York Court of Chancery | May 15, 1869

The Chancellor.

The first question presented is that raised by the bill and supplemental bill of the complainants in the original suit; They claim that the title to this property, both real and personal, was put in the name of Mrs. Sprague to delay a,nd hinder the creditors of her husband* and that as against them she must be held to hold the title in trust to pay his debts. Mrs. Sprague claims that the property was bought by her with money furnished to her by her friends, that none was furnished by her husband or his creditors, and that it is her separate property.

The contract for purchase was made by Sprague in his own name, and the first payment was out of his own money. It was made three weeks before the power of attorney, and longer still before the articles of partnership, and I have no doubt at the time of the purchase, it was intended that C. C; Sprague and H. A. Stokes should be the partners. Wool-man Stokes, the vendor, did not know of the intention to change until the last of December. Sprague made the change, and he avowed to A. M. White, that the object was to put it beyond the reach of his creditors; and if his admissions to White are not competent evidence as against other defendants, or White’s testimony is not to be relied upon, the whole history of the transaction shows that such was the object. Mrs. Sprague had no separate estate, had been married over sixteen years, and had never done any business on her own account. Sprague was involved in other large transactions, and was considerably in debt. Hotel keeping was his business; he had been engaged largely in it. He was expected, as Mrs. Sprague testifies, to keep this house. She had at an early day given him a power of attorney to carry it on and do everything connected with it in her name, showing that she expected that he and not herself should keep the hotel and carry it on. She had no distrust of him; there is no assignable reason for the title being in her name, except to avoid his creditors. The lame attempt on her part to assign a reason, when pressed, shows that there was no other. She says that she wanted this large hotel, capable of accommodating nine hundred guests, for a home for herself and her sick child.

The fact that Sprague devoted his tilne to re-building, fitting up, and keeping this hotel, and in a measure abandoned all other business for it, shows that it was intended as his business, not hórs, and that it was in her name to prevent his creditors from reaching it. She had no property in it. For the money borrowed of Klous, and of Klous & Hillburn, even if on her own notes only, he was liable. The act of March 24th, 1862, (Nix. Dig. 548, § 7,) makes the husband and his property liable for all debts contracted by his wife, in business done or purchases made by her. Besides, the earnings and labor1 of a married woman belong to her husband; and although he may no doubt give them to her as against his creditors, when she carries on a sepárate business without his assistance, with her own means, on her own account, yet in all cases where the business is carried on by both, and the labor and skill of the husband are contributed and mixed up with hers, the business will be considered as that of the husband, and not that of the wife, and the proceeds will not be protected for her as against his creditors. These earnings, even of the wife, are not within the terms or intention of the act for the better securing the property of married women; and did that act give her capacity to accept a gift of his property from her husband, she could not retain such gift any more than a stranger could as against his creditors; it would be a fraud on them. This doctrine was declared and applied in this court in the cases of Crane v. Reford, 2 C. E. Green 383, and Quidort’s Administrators v. Pergeaux, 3 C. E. Green 472.

It does not appear when the complainants loaned their money to Sprague; some of it was certainly before the conveyance to her, but if it was all advanced afterwards, yet it is settled that a conveyance to defraud or delay future creditors will be set aside. Beeckman v. Montgomery, 1 McCarter 106; Crane v. Reford, supra; Case v. Phelps, 39 N. Y. R. 164.

On both these grounds, Mrs. Sprague must be decreed to hold this property subject to the claims of the creditors of her husband, in the same manner-as if the conveyance had been made to him, and he had been the partner in the firm of Sprague & Stokes. This must be so held in justice to H. A. Stokes, who, for aught that appears, entered into partnership with Mrs. Sprague, and bought the property jointly with her, in good faith, supposing that she was the real partner, and that she was competent to enter into the contract of partnership, and in justice to the creditors of the firm.

The next question is, whether the purchase money mortgage to W. Stokes, for §29,500, has preference over lion claims. The claim of the lienholders is based upon the eleventh section of the mechanics’ lien law, which declares the lien to be upon the estate which the owner had at or after the commencement of the building, subject to all prior encumbrances, and free from all encumbrances created afterwards. But this, even if it admits of the construction claimed by the counsel for the lienholders, must be considered in connection with the fourth section, which declares that the estate of any owner shall not be subject to a lien for a building erected by a tenant, or other person, unless it be done by the consent of the owner, in writing. And in The Associates v. Davison, 5 Dutcher 415, it was held that a written contract to Convey; did not amount to a consent, in writing, to erect buildings so as to satisfy this requirement. The estate of W. Stokes was not affected by the liens; the equitable estate of Sprague & Stokes was subject to them; and when W. Stokes conveyed to them, the mortgage given at the delivery of the deed prevented the legal estate from vesting in them even for an instant, his estate continued, and even the words of the eleventh section would not affect his title, because it is no part of the estate which Sprague & Stokes had at or after the commencement of the building. The object of the lien law, and every possible right of the lienholders, as well as the rights of the vendors, will be protected by this construction. And otherwise, no vendor could suffer a building to be commenced before the conveyance. The purchase money mortgage of W. Stokes must be held the first encumbrance on this property, in these suits. Of course it is subject to the mortgages upon it before he conveyed, to which it was made subject by his deed, which are no't in question here.

The lien claims, on which judgments have been obtained, are the next encumbrances on the real property, and they must be paid pro rata, according to the amounts really due upon them.

The mortgage to Klous & Hillbürn for $35,000 is the next encumbrance upon the real estate; Some question was made at the hearing as to the amount due on this mortgage, but in their responsive answer to the bill, they state that the whole $35,000 was paid by them, and they state the times and sums in which nearly the whole was paid; They state in their testimony that the full amount was paid; both swear to this; though they do not produce the vouchers, and show how it was paid, and although there is some confusion in their testimony, there is not sufficient to overcome their responsive answer, and their positive evidence. Besides, they are contradicted by no one, so far as this $35,000 is concerned. Mr. and Mrs. Sprague both testify that they advanced on the two mortgages about $55,000, and as it is proved that the deficiency of advances, if any, must be taken from the chattel mortgage, there can be no room to doubt that the full amount of the $35,000, for which this mortgage was given, has been advanced, and is due upon it.

The chattel mortgage to Klous & Hillburn would be a lien upon the chattels, if it were not for the omission to file a copy of it within the time required by law. The act says it shall cease to bo a lien, unless a copy is re-filed within thirty days before the expiration of the year. The words are plain and positive; there is no room for construction. The object indicated is a sensible one. The first filing might have been declared sufficient. But the object is to have a repeated declaration that the mortgage is kept alive, and how much is due on it. If this was not confined to the last month, or some definite time, at any time just before the mortgage was about being paid such copy and statement might be filed, and the mortgage would remain an apparent encumbrance for nearly a year after being paid. But it is not for the courts to find a good reason for every enactment; it is enough for them that it is so clearly enacted. The Supreme Court of New York, in Newell v. Warner, 44, Barb. 258, held that under their act, in precisely the same words, the filing before the thirty days was a nullity,

The possession taken by the attorney of Klous & Hillburn cannot aid them; such possession does not satisfy the object, or comply with the words of the act; they require an actual and continued change of possession; these words would seem to be inserted expressly to provide against such a sham as •this. This mortgage must, therefore, be postponed to the creditors of Sprague & Stokes, and to all subsequent purchasers and mortgagors, but as against Sprague & Stokes, it is good for the amount due on it. If any surplus remains after the judgments against, and mortgages given by the firm are paid, they will be entitled to receive the amount due on it before either partner, or the individual creditors of either. It is given for a firm debt, and the mortgage making it a valid lien against the mortgagors, and every one but the creditors of the firm who have acquired liens before the sale, they will be entitled to such surplus. Swift v. Hart, 12 Barb. 530; Thompson v. Van Vechten, 27 N. Y. R. 582; Herrick v. King, 4 C. E. Green 82.

It is next contended by the complainants and the judgment creditors, that the mortgage to the trustees is void, for two reasons : First, because it operates to delay and hinder creditors; and secondly, because being a mortgage of all or nearly all of the property of the firm to the trustees, and not being for the equal benefit of all the creditors, it is against the express provision of the assignment act. It is settled by a series of decisions had for years in this state, that a debtor, although insolvent, has the right to prefer creditors by payments of money, transfers of property, giving mortgages, and confessing judgments. This was so held by the Supreme Court in Garretson v. Brown, 2 Dutcher 425, affirmed in the Court of Errors, 3 Dutcher 644; and although such preference may delay and hinder other creditors, if not done for that purpose, but to secure or pay bona fide debts, it is lawful.

This mortgage was made to secure such creditors as were willing to accept the bonds as payment of, or security for their debts. It was optional with them to accept or not; it did not dispose of or assign all their property, but left the equity of redemption of the whole in the debtors, so that any creditor who did not choose to accept of the bonds could bring suit and levy on the equity of redemption. The sale was not delayed by the mortgage; only such creditors as should take bonds would have the prior lien. Such is the case wherever a mortgage is given to any creditor; he is preferred by priority of security, but doforred in time of payment. In tills respect, a mortgage is entirely different from an assignment. If a series of mortgages had been given to the twenty bondholders, either making them liens successive to each other, according to the time when given, or making them all concurrent liens, no one would have disputed their legality. There is no difference in the operation of the security or in principle, because the mortgage is executed to trustees, so that all the bonds may come in equally. This is simply a mortgage to twenty creditors, to secure $100,000 due to them. If the debt to the complainants had been due from the firm, a mortgage on the same property to them for $65,000 would have been valid. This is not less valid because to twenty creditors, and for a somewhat greater sum. The mortgage is a valid lien in the hands of the trustees, so far as it secures debts duo by the firm. The mortgage does not include all the property; no debts duo to the firm are included, and there certainly must have been debts duo at the close of the season for board and on other accounts; and much personal property included in other mortgages is not included in this.

So far as these bonds are voluntary gifts, they are not good as against creditors. At the time this mortgage was given, the firm was no doubt insolvent; it could not have paid its debts if it had been called upon so to do, and been compelled to dispose of its property for that purpose. Another season, if it should prove prosperous, might enable it to pay its pressing debts, and to secure the others, and insure eventual success. The hope of this, no doubt, led to. the effort by the mortgage. But, in this situation, the firm, had no right to give away its property, or to give a mortgage or bond to any one without consideration. All bonds, given without sufficient legal consideration, are, as against creditors, invalid. The bonds given to creditors for amounts larger than their debts are only good for the amount of the debts really due by the firm; and those given to Mitchell & Allen are good only for the amount legally due to them respectively, at the time.

The question also arises, whether the ten bonds given to Klous to secure the advances made by him to Mrs. Sprague, which is her individual debt, and -the fifteen bonds given to W. Stokes to secure the note of H. A. Stokes to him, which is his individual debt, are valid as against the creditors of the firm. As between the partners, the transaction is just and right; each would have his whole contribution to the partnership paid out of the partnership effects, and the amount paid for each would be equal. But as against creditors of the firm, this would seem unjust; they are entitled te have the whole partnership assets, including the amount contributed by each partner, appropriated to pay the debts of the firm. The rule in equity and in bankruptcy, when the partnership assets are administered there, is, that the partnership debts must first be paid out of the partnership .assets before any part can be appropriated for the partners, •or to pay their individual debts. But in this case the property is ¡not being administered under the direction of this court. The partners have created liens upon the property before it came into the court, and my only power is to settle the validity and priority of the liens so placed upon the property. The partners, while the partnership property is •still .under their control, have the power to appropriate it to pay or .secare their individual debts; as against them, the mortgage i.s good. These claims are for debts fairly due by ¡them individually, and I do not think that the mere preference of .individual debts over partnership debts is such a fraud upon partnership creditors that after it has been done it will be .set aside by a court of equity. It certainly will not be set aside, unless in case of insolvency, or when done in .contemplation of insolvency, to give an improper preference. And it, is by no means clear to me that the firm, in October, 18-68, was insolvent, unless forced to pay all debts immediately; on the contrary, I suppose that by the operation of this mortgage, they expected to be relieved from their embarrassments, and to retrieve their fortunes by a successful season the next year. It was not done in contemplation of insolvency.

There is no room in this case for the doctrine contended for by the complainants’ counsel, that as the money of complainants was used for the benefit of the firm, their claim may be made a debt of the partnership and recovered out of its property. The complainants, if the facts were as contended for, might, on that doctrine, have recovered a judgment agains't the partners at law; but where the advance is made on his credit to one partner in money, as it was in this case, the decided weight of authority is against the position. Collyer on Part., §§ 477 and 504, and note; Story on Part., §§ 134 and 140; 3 Kent’s Com. 41 and 42, and authorities there cited.

But they have not sued the firm; they have elected, after they knew all the facts, to enter a judgment for this debt against Sprague, as his individual debt. The debt is merged in that judgment, and cannot now be recovered against the firm as a partnership debt, either at law or in equity, and for this case it must be considered an individual debt. The execution, which is the foundation of the complainants’ standing in this court, is against O. C. Sprague, and the levy is upon his interest in the firm and the partnership; and, in such caso, the interest affected by the levy, and which will pass by the sale, is the interest of the partner in the firm, that is, his one-half of the assets, after all the debts of the partnership are paid. This is the settled doctrine in equity, and the principle upon which relief is granted there, although there may still be some question at law, whether the levy and sale does not make the purchaser a tenant in common with the other partner in the property and goods sold. Story on Part., §§ 260 and 264; Collyer on Part., §§ 822 to 832, and notes.

On the other hand, an execution on a judgment against the partners, for a partnership debt, may be levied upon the individual property of either partner, without regard to the partnership property being sufficient to make the debt. The real estate, in this case, must be treated as partnership property, although the title was in' the partners, as tenants in common. It was purchased with the funds put in by the two partners, as their share of the capital, and it was purchased for the business for which the partnership was formed, which was to keep a hotel upon it; and the greater part of the money for which the firm is in debt was expended upon it.

The only interest, then, which the complainants can take in the property, by virtue of their judgment and execution, is the interest of Sprague, which is one-half of the property, after the partnership debts are paid.

The amount due on the mortgage to A. Y. Conover must be paid out of the proceeds of the real estate, after the amount due on the purchase money mortgage to W. Stokes, and the amount due on the lien judgments, and the amount due on the trustee bonds have been paid; and next, the amount due for debt and costs on the several general judgments against the firm, in the order of their priority of record.

The mortgage to the trustees has priority over the chattel mortgage to W. Stokes upon the chattels included in both, and both have priority over the chattel mortgage to Klous & Hillburn.

The amount due on the chattel mortgage to Klous & Hill-burn being for a partnership debt, and the mortgage being valid, as against the partners, must be preferred to the judgments of the complainants and of Butterworth.

The general judgment creditors of the firm must be preferred, in- the proceeds of the chattels, to the chattel mortgage of Klous & Hillburn, and must be preferred, in this fund, according to the priority of the time of delivering the executions to the sheriff.

It must be referred to a master, to compute the amounts due on the mortgage to Woolman Stokes for $29,500, and on the mortgage to Klous & Hillburn for $35,000, and on the mortgage to A. V. Conover, and on the several judgments against the firm, whether for liens or otherwise, and upon the judgments of the complainants, and of Butterworth against C. O. Sprague; and to ascertain the amount due upon the chattel mortgage to Klous & Hillburn, and upon the bonds issued under the mortgage to the trustees.

And, in taking such account, the master must ascertain the amount received by 'Woolman Stokes, and Klous & Hill-burn, or either of them, as the net proceeds of the business done at the hotel in the years 1867 and 1868, and must credit the same on the securities held by them, respectively, either as individuals or partners, unless they shall have paid the same upon other debts of Sprague & Stokes, hereby declared to be valid, and which shall be entitled to be paid according to the order of priority established.