Thompson v. Esty

45 A. 566 | N.H. | 1896

In Coburn v. Pickering, 3 N.H. 415, it was held that any trust in favor of the vendor in a sale of chattels is a fraud with respect to creditors; that possession of the chattels retained by the vendor is always prima facie, and, if unexplained, conclusive evidence of a secret trust; and that when the fact appears that there was a trust, fraud is an inference of law, which the court is bound to pronounce in favor of judgment creditors. The doctrine of that case has been applied in numerous cases in this state, and it may be regarded as too firmly established in our jurisprudence to be reversed by judicial action. "It is unnecessary to cite authorities to the point that sale of chattels is invalid as to creditors of the vendor when the property is allowed to remain in his use and possession." Doucet v. Richardson, 67 N.H. 186, 187. Though it is found or admitted that the vendee paid to the vendor the full value of the property, that no actual fraud was intended or committed, and that no creditor was misled, deceived, or injured in any respect by the transaction, the law pronounces it fraudulent and void. It is declared a fraud in law "without any particular reference to its effect upon existing or subsequent creditors." Kendall v. Fitts, 22 N.H. 1, 7. It is a fraud though "neither the dictionary nor morality would give it that name" (1 Par. Cont. 281);. and a creditor by legal process may seize the property for which the innocent vendee has paid an adequate consideration and apply it in satisfaction of his debt. Neither the good faith of the parties, nor the entire absence of injury or inconvenience to others on account of the sale, is material. Indeed, if it could be shown that the insolvent debtor's attachable estate was increased in value by reason of his prudence, shrewdness, or good fortune in making the trade with the vendee, the evidence would be inadmissible; the vendee would still be deprived of his property, and both the debtor and his creditor would be benefited thereby, — the debtor by the liquidation of his indebtedness, and the creditor by the collection of his claim.

To one not profoundly versed in the science of law, the rule that in all cases the vendor's retention for his use of the possession of the chattels sold raises a conclusive presumption of fraud, to be declared by the court as a matter of law, would seem to afford a convenient and effective method by which creditors may accomplish a practical fraud upon innocent third parties. A strenuous effort to guard the interests of attaching creditors, announced as a rule of law, has resulted in depriving innocent purchasers of their property without a return of the purchase price. For no actual fault on their part they are often doubly punished, being compelled to sacrifice the consideration they paid for the property as well as the property itself. The reason assigned for this conclusive presumption of fraud, arising as a matter of law from the debtor's unexplained possession of the chattels, is that such a sale is void, not because any wrong in fact has been perpetrated, — not because the creditors have been injured in the slightest degree or have been actually hindered or delayed in the collection of their debts by the debtor's conditioned sale of the property, — but because the form of the sale is such as might be convenient for perpetrating a fraud upon the debtor's creditors. Such sales "would afford a cover for innumerable frauds against creditors, if they were by law compelled to unravel each transaction and show actual fraud. It would rarely be in their power to do this in the most fraudulent cases. All would be contrived originally by the parties to the fraud to meet the attack; and the fraud would be carefully covered by fortresses impregnable by any evidence which it would be in the power of creditors to bring against them." Coburn v. Pickering, 3 N.H. 415, 428. "The reason why the law denounces as wanting in good faith and fraudulent, a bill of sale purporting an absolute conveyance of property but attended with a secret trust, is that it holds out false colors; that it is evidence to prove the contract to be different from what it is in reality, and is calculated to deceive and mislead creditors and may be used for that purpose. And the law presumes that he who buys goods of a person in debt, and takes evidence of the contract which is in its nature false, intends to use it for the purpose of deception, and to defeat that purpose declares the contract to be void for that cause." Parker v. Pattee, 4 N.H. 176, 178. "It is because such trusts are calculated to deceive and embarrass creditors, because they are not things to which honest debtors can have any occasion to resort in sales of their property, and because they are the means which dishonest debtors commonly and ordinarily use to cheat their creditors, that the law does not permit a debtor to say that he used them for an honest purpose in any case." Winkley v. Hill, 9 N.H. 31, 33. In effect, the argument is that insolvent debtors may sometimes resort to this method of disposing of their property in order to place it beyond the reach of their creditors; hence, the law pronounces all such sales void in favor of attaching creditors.

If from the nature of the transaction it necessarily followed that the debtor's purpose was fraudulent, and that the vendee engaged to assist him in carrying it out, the legal conclusion or conclusive presumption that the conveyance was fraudulent and void would be supported by sound logic. It would not then be the finding of the fact of intention from evidence reasonably susceptible of more than one explanation. But if it is conceded that the debtor may retain the possession and use of property which he has sold without intending to delay or hinder his creditors, a presumption of law, or a binding charge by the court to the jury, that he did so intend and that the conveyance is therefore void, would seem to be an invasion of the province of the jury. The presumption, though called one of law, is essentially one of fact. Formerly it was held that from the recent unexplained possession of stolen property the law presumed that the possessor was the thief, and the burden of proof was thereby shifted upon the respondent. But in State v. Hodge,50 N.H. 510, this doctrine was repudiated on the ground that the inference or presumption was one of fact for the jury, — not of law for the court. The possession of stolen property may be evidence that the respondent stole it, as the possession by the vendor of the goods sold may be evidence that he had a purpose to conceal them from his creditors; but as the possession of property recently stolen is not inconsistent with innocence on the part of the possessor, and as the vendor's possession and use of the subject of the sale may not be tainted with the least bad faith on his part, the inference to be drawn therefrom is one of fact; and nothing less than legislative action could make it a rule of law. Because it is a question of fact, its determination as a question of law has often resulted in the most evident injustice. If the debtor sells his horse for a hundred dollars, retaining the use and possession of it for a month, and with the money buys another horse of equal or greater value, no sound reason can be suggested why the security which his creditors may obtain should be doubled in consequence of the transaction. As a matter of fact they are not injured; why, as a matter of law, should it be held that they are defrauded? "Existing creditors may of course challenge the good faith of the transaction; but if they cannot disturb an absolute sale when made in good faith, why should they be permitted to challenge a conditional sale if made in like good faith? The fact that fraudulent relations are possible is hardly a sufficient reason for denouncing transactions which are not fraudulent. So, if the question were open, or a new one unaffected by any settled law of the state, we incline to the opinion that the question is not one of law so much as it is one of fact and good faith." Etheridge v. Sperry, 139 U.S. 266, 278. "The law will declare any instrument which contains provisions that are not reconcilable with an honest or legal interest to be void upon its face, because no evidence can change its character. But in all other cases where property is transferred with the alleged intent of hindering or defrauding creditors, this intent cannot be conclusively assumed by the law, but must be determined by the jury upon all the circumstances of the case." 1 Sm. L. C. (6th Am. ed.) 35. "Cases may present themselves where the form of the conveyance and the stipulations of the contracting parties are of such obviously illegal character and purpose, that it may be the duty of the court to pronounce them fraudulent in law, and wholly ineffectual; but in general, whenever the terms and stipulations of a contract are by possibility compatible with good faith, and have upon the face of them the essential elements of a legal contract, the question of fraudulent intent and want of good faith in a contract for the sale of property is to be submitted to the jury." Jones v. Huggeford, 3 Met. 515, 517.

The fundamental difficulty with decisions holding that "the nature of the benefit reserved in the sale is immaterial," and that any "favor to be shown by the vendee" is a fraud in law (Coburn v. Pickering, supra), may be discovered when the distinction between law and fact is carefully observed. In cases of this character the plaintiff asserts, in substance, that the contract of sale has operated as a fraud upon him by depriving him of the power to appropriate the specific property conveyed, in payment of his adjudicated claim against his debtor. In the language of the statute of Elizabeth, he claims that the sale was "devised and contrived of malice, fraud, covin, collusion, or guile, to the end, purpose, and intent to delay, hinder, or defraud creditors." 13 Eliz., c. 5. But instead of proving his case and sustaining the burden he assumes, he finds it is only necessary to ask the judge to rule as a matter of law that the debtor's possession and use of the property sold conclusively proves "the malice, fraud, covin, collusion, or guile" necessary to defeat the sale. This rule, erroneously called a presumption of law, compels the judge to hold in very many cases that the sale was fraudulent when it is plainly apparent that it was attended with the utmost good faith toward the vendor's creditors. It becomes the means, in perhaps a. majority of cases where it is applied, of depriving innocent parties of their property bought at a bona fide sale thereof. Although the evidence before the jury is uncontradicted that the sale was not only fair but made in the interest of the vendor's creditors, they are instructed that they must negative that fact by a presumption announced by the court as a principle of substantive law. That mischief has resulted from such a palpable conversion of a question of fact into one of law is not surprising. If it is conceded that the actual purpose of the vendor is not important, but only the effect of the transaction upon the rights of creditors is to be considered, it is manifest that the question is still one of fact. To hold that the vendor's temporary use of the property is under all circumstances prejudicial to the rights of creditors, is an illogical conclusion which finds no support in the ordinary experience of men. It may, or it may not, be the means of concealing the debtor's property from his creditors; and whether or not it has that effect must depend upon the circumstances of each case, which necessarily differ in variety and importance from those of every other case. Hence the question presented should be one of fact for the jury, and not one of law for the court.

It is somewhat remarkable that the statute of Elizabeth (13 Eliz., c. 5), which is a highly penal statute, should have been construed as giving authority to the court to pronounce as fraudulent and void, sales of personal property which are admittedly honest and advantageous to the vendor and his creditors. The language of the act does not indicate such a purpose, and no considerations of public policy demand or require such a construction. "It makes one shudder to think that persons who appear, like the defendants, to have acted most honestly should have been in any hazard of being subjected to punishment for having endeavored to procure an equal distribution of their debtor's effects among all his creditors." Grose, J., in Meux v. Howell, 4 East 1, 15. It would seem that an intention to delay and hinder creditors by pretended sale or transfer of property was a material fact to be proved in a prosecution under the statute. It did not declare that the vendor's possession of property sold, if unexplained, or his retention of any benefit to be derived from the use of the property, should make the sale void and subject the parties to a heavy penalty. Hughes v. Cory, 20 Ia. 399, 402. But by judicial construction amounting to legislation, such a meaning has been given to it. "But then such a construction is not to be made in support of creditors as will make third persons sufferers. Therefore, the statute does not militate against any transaction bona fide, and where there is no imagination of fraud." Cadogan v. Kennett, Cowp. 432, 434. It may be open to serious doubt whether the fraud found to exist in Twyne's Case, 3 Co. 80, was declared to exist as a matter of law, and this is regarded as a leading case upon the subject of fraudulent sales. With reference to that case, it is material to note that the trial was upon an information in the star chamber before the judges who were to pass upon the facts as well as the law; and it was not important to draw distinctions between the province of the court and that of the jury. Moreover, the entire argument seems to have been intended to prove that Twyne was guilty of actual fraud, and he "was convicted of fraud, and he and all the others of riot." It is not to be supposed that such a result would have been reached in prosecution against respondents entirely innocent of any sinister purpose, unless it is sound law that criminal intent is to be found by the court as a question of law — a conclusion long since repudiated. State v. Bartlett, 43 N.H. 224; State v. Pike, 49 N.H. 399, 431. One badge of fraud discovered in that case was the statement in the deed that it was made "honestly, truly, and bona fide," but it was not the purpose of the court to lay it down rule of law applicable to all cases that a declaration, by the parties to a sale, of their honesty, was conclusive evidence of their dishonesty. It was a fact which the court thought had some tendency to prove such a purpose, but like the other "badges of fraud" mentioned in the case it did not necessarily preclude explanatory evidence of good faith. A careful examination of the decision in Twyne's Case would undoubtedly show either that a conclusion of fact was stated as a proposition of law, or that there was no intention to annunciate a legal doctrine at variance with the manifest purpose of the statute of Elizabeth. It would also appear that subsequent cases professedly following that case (including Coburn v. Pickering, supra) have failed to consider the evident purpose of the statute in explanation of the meaning of that decision, and have been led to regard as settled law the statement of evidentiary facts.

It is not often that the law results in palpable injustice and wrong. Its purpose is the accomplishment of justice. If, in its, practical application, it as often produces wrong as it promotes. right, a critical examination of its history and development is demanded for the discovery and correction of the error; for in such a case it is safe to assume that error in some form and at some stage of its growth has distorted the law and deprived it of some essential attribute. To hold that under no circumstances can a vendor retain the possession and use of the subject of the sale, with the assent of the vendee, is to state a proposition of law which, in a majority of cases where it is applied, results gross injustice to innocent vendees. The purpose of the law is, not attained. "In my long experience I have had occasion observe the mischievous operation of the rule; for, under its application, I have found myself compelled, as a judge, to pronounce transactions to be fraudulent and void as to creditors, which were known to be perfectly fair and bona fide, and were not intended or calculated to delay, hinder, or defraud creditors." Cabell, P., in Davis v. Turner, 4 Grat. 422, 470. Manifestly, a rule of law, though adhered to for years, which is so repugnant natural justice, ought not to be extended beyond the bounds indicated by former decisions. Albee v. Webster,16 N.H. 362, 371, 372. Fraudulent sales within the principle now under consideration are only voidable at the election of the the vendor's judgment creditors. As between the parties and their representatives, they are valid. The title passes to the vendee and is good against subsequent bona fide purchaser of the vendor who retains possession. Stevens v. Morse,47 N.H. 532, 535; Quimby v. Williams, 67 N.H. 489, 493. Such sales are valid against the claims of all the creditors of the vendor, except those only who by attachment or levy seize the identical property conveyed. Jones v. Bryant, 13 N.H. 53; Hill v. Bank, 45 N.H. 300, 310; Heywood v. Brooks, 47 N.H. 231, 234; Leavitt v. Leavitt, 47 N.H. 329, 333, 334; Ritchie v. Glover, 56 N.H. 510,511; Owen v. Dixon, 17 Conn. 492, 498.

While an administrator, as the representative of the creditors, may cause the intestate's fraudulent conveyance to be set aside (Kingsbury v. Wild,3 N.H. 30; Janvrin v. Curtis, 63 N.H. 312), it is believed that his remedy in this respect has been confined to cases where the creditors defrauded would otherwise suffer actual loss. If the intestate has sold personal property for a full consideration, by a sale unimpeachable except for his retention of the possession, the administrator, however insolvent the estate may be, cannot appropriate the property to the payment of the debts, but on the contrary is bound to deliver them to the vendee; for the creditors of the estate have been in no wise injured by the transaction. "In the case now before us a full consideration was paid to Edson, by means of which his estate was benefited to that amount; and it is the same thing as if it had been paid to his administrator. It is not to be presumed that the intestate has wasted his estate, but rather that the consideration paid has gone to increase his assets. If we were to decree against the defendant, it would in effect give the estate the benefit of receiving a second time the full value of this property and inflict a penalty upon the defendant. This would be inequitable, and is a sufficient reason why chancery will not lend its aid the administrator." Allen v. Mower,17 Vt. 61, 68. If the deceased has conveyed his property to a stranger without receiving an equivalent for it, the inference might be irresistible that he had diminished his assets to that extent and, in effect, defrauded his creditors. Abbott v. Tenney, 18 N.H. 109; Cross v. Brown, 51 N.H. 486; Preston v. Cutter, 64 N.H. 461,469. But if it does not appear that the assets in the hands of the administrator were diminished by the transaction, — ordinarily a question of fact, — justice would not require him to institute proceedings to set it aside. Substantially all the property of the vested in him for the benefit of the creditors, and no creditor can insist that any specific property shall be appropriated to the payment of his debt (P.S., c. 191, s. 7), as he might have done by an attachment and levy during the lifetime of the deceased. Hence the only ground on which he can insist that the administrator shall repudiate the deceased's conveyance that the assets of the estate for the payment of the debts have been materially decreased thereby. If that is not the fact, it would be difficult to suggest a reason why an innocent vendee of the deceased, who for a proper purpose allowed the goods to remain in the latter's possession, should be compelled to contribute to the enrichment of the estate. Badger v. Story, 16 N.H. 168, 174.

In foreign attachment it has been held that the doctrine of Coburn v. Pickering, so far as it authorizes a conclusive, legal presumption of fraud contrary to the fact, is not applicable. In Boardman v. Cushing,12 N.H. 105, 112, 113, 114, the court say: "We are of opinion that the broad principle of Coburn v. Pickering, and other cases cited, however proper it may be in the case of attachment, . . . cannot be applied in a suit where the party who contests the sale as fraudulent summons the vendee as trustee of the vendor, and has an opportunity, if he sees fit, to examine him on oath relative to the terms, conditions, and circumstances attending the sale. . . . If placing upon the record absolute conveyance of the seven sixteenths of the ship might, have a tendency to mislead creditors, and if it might therefore be objectionable on that account in case the ship had been attached, in which case no evidence could have been derived from the vendees, in a suit by them to recover the property, — it may be true, notwithstanding, that this conveyance was taken with no design to defraud, but on a supposition that it would more effectually secure their rights. This form of process is regarded as an equitable action; and it would not consist with equity to deprive the party of a mortgage security by reason of a mere mistake in the mode of taking it." This is an unequivocal recognition of the rights of creditors to set aside a presumptively fraudulent conveyance upon an attachment of the property, but the opinion also contains the equally emphatic assertion that the enforcement of such rights, without regard to the actual intention of the parties or the resulting injury, is not to be extended to cases requiring the application of equitable principles. To charge trustee in foreign attachment on account of a fraudulent sale of property, fraud must be proved as a fact from all the relevant circumstances of the case; and not declared as a matter of law from a few circumstances which as evidence might indicate fraudulent purpose. Hutchins v. Sprague, 4 N.H. 469; Pittsfield Bank v. Clough, 43 N.H. 178; Heywood v. Brooks, 47 N.H. 231; Gutterson v. Morse, 58 N.H. 529; Robinson v. Mitchell, 62 N.H. 529.

The doctrine of fraud conclusively presumed to exist in the sale of personal property, when the vendor retains the possession and use of it, has been confined to cases of the litigation of the title between the vendee and a creditor of the vendor, who has levied upon the identical property as the property of the vendor. There has been little disposition to extend its operation to other cases involving the interests of creditors. In Clark v. Morse, 10 N.H. 236, 239, the court, referring to the rule announced in Coburn v. Pickering, say that it may, "in some instances, have operated to the loss of a purchaser, who had actually paid a full consideration for property which he had incautiously left in the possession of the vendor; but we are satisfied that it is sustained on sufficient authority, and that its general operation is salutary in preserving good faith in sales of personal property, and in preventing litigation upon questions which would otherwise arise respecting sales of that character unaccompanied with possession. But while we adhere to that decision, we have no disposition to extend the principle of that case, so that a vendee can never safely permit the vendor to have the possession and use of the property after he has parted with the title." In other. words, the mischief resulting from the rule was a reason for its non-extension; and this declaration of the duty of the court has hitherto been strictly observed. The doctrine of Coburn v. Pickering never has been extended either in its scope or application. It has been confined strictly within its original limits, and an examination of the cases in which it has been applied shows that it ought not to be extended. In more than one half of them it is either expressly found or distinctly appears that there was no fraud in fact, and that no creditor was injured or in any way misled by the transaction. Parker v. Pattee,4 N.H. 176; Paul v. Crooker, 8 N.H. 288; Towle v. Hoit, 14 N.H. 61; Ladd v. Wiggin, 35 N.H. 421; Pinkerton v. Railroad, 42 N.H. 424; Shaw v. Thompson,43 N.H. 130; Lang v. Stockwell, 55 N.H. 561; Cutting v. Jackson,56 N.H. 253; Plaisted v. Holmes, 58 N.H. 293; Flagg v. Pierce, 58 N.H. 348; Parker v. Marvell, 60 N.H. 30. The vendee's property in these cases was seized and applied in satisfaction of the vendor's debt, not by reason of any actual fraud or wrongdoing on his part, not because the vendor had any purpose to conceal his property from his creditors, but because by an innocent and perfectly harmless mistake they became subject to the operation of a rule of law designed to prevent fraudulent, transfers of property. A rule of law established by decision which produces more mischief than it prevents, if not overruled, should not, by analogy, be applied to cases easily distinguished from the authorities which have announced and established the rule. If it has nothing but the force of authority to sustain it, justice does not require its unnecessary extension; and if it has become established as a rule of property and cannot be abrogated except by legislation (Bellows v. Parsons, 13 N.H. 256,261; 1 Kent *476), it should be kept within the bounds indicated by the precedents.

It is unnecessary to decide whether the decision announced in Coburn v. Pickering and followed in numerous cases during the last seventy years can be overruled. The question to be determined is whether the legislature, by the language used in the insolvency law (P.S., c. 201, s. 26), intended to give the assignee the same power to avoid a sale by the debtor, on account of fraud presumed by law contrary to the fact, that a creditor acquires by attachment and levy. The words of the statute are that "all pledges, payments, mortgages, sales, and transfers, whenever made, if fraudulent as to creditors, shall be void." The meaning of the words "fraudulent as to creditors" is not free from doubt. Do they refer to transactions that are held to be fraudulent as a matter of law, though they may result in no damage to a single creditor, as well as to transactions that are tainted with actual fraud and that produce actual loss or damage? No one would doubt that the language used is sufficient to include sales that operate as a fraud in fact upon creditors; and that is the meaning men in general would attach to them. They are not technical words and do not appear to have been used in a technical sense. No reason is suggested why they should have one meaning in law and another meaning in ordinary speech. With rare exceptions, this phrase when it occurs in law books relates to fraud in fact, unless the context indicates a different meaning. In the chapter relating to insolvency proceedings (P. S., c. 201), it is provided that "the judge may summon any person suspected of having fraudulently received, concealed, embezzled, or conveyed away any of the estate of the debtor . . . to appear and submit to an examination" (s. 27); that the debtor shall make oath that he has not disposed of any of his property in order to defraud his creditors (s. 34); that "debts created by the debtor's fraud . . . shall not be discharged" (s. 37); that a discharge shall not be granted "if he has fraudulently concealed any part of his estate, . . . or has made any fraudulent payment, gift, transfer, conveyance, or assignment of any part of his property" (s. 40); and that the president of a corporation in insolvency, or other proper officer, shall make oath that no part of the estate has been "disposed of in any manner in fraud of the laws relating to insolvency or of the creditors of the corporation" (s. 49). Questions of fraud arising under these sections, it is safe to assume, would not be determined by presumptions of law inconsistent with the proven or admitted facts. A transfer of property which might be evidence of fraud would not be declared to be such in the face of a reasonable explanation. And if the words "fraud" "defraud" "fraudulent," and "fraudulently," as used in these sections, relate to actual fraud alone, it would be difficult to explain why the legislature in another section of the same chapter used the word "fraudulent" to include fraud in law. If that had been the legislative purpose, some unequivocal indication of it would be expected.

The claim is advanced that the expression "fraudulent as to creditors" has acquired in law a "peculiar and appropriate meaning" (P.S., c. 2, s. 2) which the court must adopt in giving it a construction; and the "peculiar and appropriate meaning," it is said, is that it relates to harmless sales of property which creditors may set aside as fraudulent in law, as well as to sales that are fraudulent in fact. But the argument proves too much; for if the expression is to be construed in view of the doctrine of Coburn v. Pickering and the cases based upon that authority, it should read "fraudulent as to attaching creditors who have obtained a lien upon the property." If there are no creditors of that description, this clause would have no application in the case of an assignment in insolvency. If the legislature merely desired to preserve the rights of creditors as defined in cases relating to their title obtained by a levy on property fraudulently conveyed, — if that is the meaning of the statute, — the language used must be qualified as above suggested, and only judgment creditors who have obtained a lien on the property are protected by the statute.

"If a plaintiff seeks relief in equity in regard to personal estate, he must show an execution giving him a lien on the goods and chattels, which he has pursued to every available extent at law before he can resort to equity for relief." Dodge v. Griswold, 8 N.H. 425, 427. "The general principle deducible from the authorities applicable to this case, is that where property is subject to execution, and a creditor seeks to have a fraudulent conveyance or obstruction to a levy or sale removed, he may file a bill as soon as he has obtained a specific lien upon the property, whether the lien be obtained by attachment, judgment, or the issuing of an execution. But if the property is not subject to levy or sale, or if the creditor has obtained no lien, he must show his remedy at law exhausted, by an actual return upon his execution that no goods or estate can be found (which is pursuing his remedy at law to every available extent), before can file a bill to reach the equitable property of the debtor." Tappan v. Evans, 11 N.H. 311, 327.

A sale "fraudulent as to creditors" is not fraudulent as to all creditors. It cannot be attacked or set aside by a creditor who has done nothing toward securing his claim. As to him it is not fraudulent. The mere sale of property attended with a secret trust in favor of the vendor does not alone show that his creditors have been defrauded, or that they have been hindered or obstructed in the collection of their debts. An unsuccessful attempt to make the collection by legal process must be shown before it can be said that the sale was "fraudulent as to creditors." In other words, it was fraudulent only as to such creditors as failed to secure their debts by legal process. Hence, some of the debtor's creditors may be defrauded by the transaction, while others are held in law to have suffered no injury. The former class can prove a case of fraud, the latter cannot.

Upon a creditor's bill (P.S., c. 205, s. 7) it is necessary for him to show that an "execution has been issued and returned unsatisfied" before he can have the assistance of equitable procedure to reach property "conveyed by the debtor in fraud of his creditors." If he does not prove that an unsatisfied execution has been returned, he is not one of the creditors who has been defrauded by the debtor's conveyance, though attended by "secret trust." The conveyance is not fraudulent as to him. But the assignee in this case, representing all the creditors, none of whom have prosecuted their claims to judgment, insists, in effect, that he is entitled to prosecute a creditor's bill without complying with statutory provisions which are essential in proceedings of that character. The creditors whom he represents, could not have successfully taken that position before the insolvency proceedings were begun. Why should they be granted that indulgence through the medium of their representative or trustee? He is entitled to set aside sales of the debtor that are "fraudulent as to creditors," that is, the debtor's creditors.

But if that expression is to be regarded as a technical phrase which has "acquired a peculiar and appropriate meaning in law" it is plain that it relates to a fraud, either in fact or law, upon judgment creditors. But such a construction would render that expression in the insolvency law practically meaningless, since it would be an extremely exceptional case in which the assignee could even attack a conveyance which was fraudulent in fact. The provision in the insolvency law that sales "fraudulent as to creditors" are void can only be used in its popular meaning, which authorizes the assignee to set them aside without regard to the question whether the creditors, or any of them, might have appropriated the property conveyed, at the date of the assignment. It is to be presumed that the legislature intended to confer some power upon assignees such cases. The technical construction, if carried to its logical result, deprives the statute of any practical effect; while the natural and usual construction attached to the language by men in general makes it a potent means of frustrating and defeating sales and conveyances which were designedly intended to cheat and defraud the debtor's creditors, or which necessarily have that. effect.

If the word "fraudulent" has acquired a peculiar meaning, the word "creditors," for the same reason, cannot be used in popular sense. Decisions which have declared an act to be fraud, which in ordinary language would be called an honest sale, have also declared that only judgment creditors of the vendor shall be allowed to say that they were defrauded by the harmless act. To hold that an assignee in insolvency under our statute may set aside his debtor's honest sales of property, which result in no diminution of the estate, because under other circumstances they might be deemed fraudulent in law as to certain creditors, would be to extend the doctrine of Coburn v. Pickering in favor of all the creditors, and to give a novel and unnecessary meaning to the language of the statute. The expression "fraudulent as to creditors" would receive neither its "peculiar and appropriate meaning," as defined by the authorities, nor its ordinary and natural meaning, as interpreted by men in general. It is, therefore, apparent that this method of construction cannot be adopted. The legislative purpose is not ascertained from evidence so doubtful and ambiguous.

The language of the statute is to be understood in its popular and usual sense, and when so construed it results in no injustice and does not compel the court to denounce as fraudulent and void transactions that are on all theories of morality honest and valid. It has been regarded as a useful rule that when a statute is capable of two constructions, one of which leads absurd, irrational, or unjust results, and the other to reasonable and just results, the latter is to be adopted as an expression of the legislative intention. Smith v. Burley, 9 N.H. 423, 427; Atherton v. McQuesten, 46 N.H. 205, 211, 212; Telephone Co. v. State,63 N.H. 167, 168, 169; Opinion of the Justices, 66 N.H. 629,650, 651, 658, 659; Middlebrook v. French, 4 Conn. 1; Church v. United States, 143 U.S. 457, 459-461; Perry v. Skinner, 2 M. W. 471; Camp v. Rogers, 44 Conn. 291; People v. Jaehne, 103 N.Y. 182, 197. In such a case the court is bound to presume as a matter of reasonable evidence that the statute was not intended to subject an innocent person to loss or injury, either in his person or property.

It is insisted that since the object of the insolvency law is the equitable distribution of the debtor's property among his creditors, and since only such attachments in suits against the debtor are dissolved by insolvency proceedings as exist upon property that passes to the assignee, a creditor attaching property sold under a sale fraudulent in law would be a preferred creditor, and that the question of his preference would depend only upon his diligence and expedition in securing the attachment; and it is argued that the legislature could not have intended such result. But this argument has little legitimate bearing upon the question. The great weight of the competent evidence. shows that it was not the purpose of the legislature to distribute among the debtor's creditors property which an innocent stranger had honestly bought and paid for. To say that the creditor in the case supposed is a preferred creditor is not accurate. He does not acquire a preference to the assets belonging to the debtor's estate, but merely a right to insist upon his legal title to property belonging to a third party in satisfaction of his claim. Such an advantage is no more a preference, prohibited by the insolvency statutes, than is a creditor's attachment and levy upon land conveyed by the debtor under unrecorded deed of which the plaintiff has no notice. In such case the land does not pass to the subsequent assignee in insolvency (Smythe v. Sprague, 149 Mass. 310; Low v. Welch, 139 Mass. 33; Adams v. Lee, 64 N.H. 421), though a sufficiently active creditor without notice may appropriate it in satisfaction his debt and thereby obtain an advantage which other creditors of the same class cannot secure. Why should a rule of law announced by the court, that honest conveyances of property attended by a trust in favor of the debtor shall be void against judgment creditors, give an assignee in insolvency any greater rights to the property than a rule of law enacted by the legislature, that an unrecorded deed shall not be valid "against any person but the grantor and his heirs only" (P.S., c. 137, s. 4)? The aliened property in either case does not belong to the debtor's estate, and if an attaching creditor may obtain a lien upon it by force of a recognized legal right, it cannot be claimed that the purpose of an equitable distribution of the debtor's property under the insolvency law is defeated. "The satisfaction of a creditor's demand against an insolvent debtor by the operation of the law of this state . . . or of any other state, without the debtor's co-operation or consent, cannot be a wrongful preference or payment. The exercise of a right which the law gives cannot be unlawful." Thompson v. Tetley, 68 N.H. 481, 482.

Cases that hold that an assignee in insolvency may appropriate property which the debtor has conveyed for a full consideration, by a sale free from fraud in fact, cannot be followed. In some of the cases it is assumed that the assignee is a creditor and bona fide purchaser, as in Swift v. Thompson, 9 Conn. 63, a holding in conflict with principle and expressly repudiated in Adams v. Lee, 64 N.H. 421. Subsequent cases in Connecticut (Chamberlain v. Thompson, 10 Conn. 243, 254; Rood v. Welch, 28 Conn. 157,163, 164; Shipman v. Insurance Co., 29 Conn. 240, 253, 254; Gaylor v. Harding, 37 Conn. 508, 517, 518) have followed the decision in Swift v. Thompson, without further examination into the merits of the question. In other cases (Allen v. Massey, 1 Dill. 40; S.C., 17 Wall. 351; Edmondson v. Hyde, 2 Saw. 205) the question received no adequate consideration.

In the present case it appears that Esty paid the company $4,000 for the property. It must be assumed that that money or its equivalent is now in the hands of the plaintiff, which he is holding for the benefit of the company's creditors. If that sum, in his opinion, is less than the fair value of the property, he was at liberty under the contract of sale to reclaim the property upon return of the money paid, with interest. But he cannot keep the money and recover the property or its value from the innocent vendee. The fact that the market value of the property was $4,207.62 is immaterial, in the absence of a finding of actual fraud. Upon that question, it might have been competent evidence for the plaintiff.

The defendant's motion that a verdict be directed in his favor should have been granted.

Judgment for the defendant.

PARSONS, J., did not sit: CHASE and PIKE, JJ., dissented: the others concurred.

Case Details

Case Name: Thompson v. Esty

Court Name: Supreme Court of New Hampshire

Date Published: Dec 5, 1896

Citation: 45 A. 566

Court Abbreviation: N.H.