Wallace, Smuin & Co. v. McLaughlin, 12 Utah 411

12 Utah 411 | Utah | 1895

KING, J.:

Each of the above-named plaintiffs obtained judgment against the defendants on the 1st day of September,' 1893, and instituted proceedings supplemental to execution against the defendants and H. V. Kice, D. C. McLaughlin, and E. C. Williamson; and the court, ordered them to appear before a referee . “ tó answer concerning property, moneys, rights, and credits of the said defendants, F. J. McLaughlin and O. C. Lockhart.” At the hearing before the referee,. the only witnesses called were those against whom the proceedings were instituted. Their testimony, so far as it is necessary to a decision in this case, was substantially as follows: For abont five years prior to June 12, 1893, defendants Lockhart and McLaughlin had been engaged as copartners in a general merchandise business at Park City. On the day last mpntioned, their liabilities amounted to' $25,000. Their assets consisted of merchandise of the value of $18,000, and book accounts aggregating $15,000. They were indebted to the Park City Bank in the sum of $15,000, and to plaintiffs in the sum of $1,625, and $2,500, respectively. The bank, which was the principal creditor, on the 12th day of June, 1892, passed into the hands of an assignee. It was thought that the failure of the bank might precipitate an attachment, and, because of the stringency in the money market, it was felt that a forced sale of the assets would realize but a small part of their value, and most of the creditors would therefore be unpaid. Hoping to avoid this, a corporation was forméd by the co-partners, and all of the assets of the copartnership transferred to the new company. It was designed to place the stock of the corporation with the creditors, as security, and to continue the business, push collections, dispose of the goods as rapidly as possible, and apply all the receipts to the discharge of the partnership obligations. The witness said no fraud was intended, but that they acted in good faith, and for the best interests of their creditors. All the stock in the corporation, except four shares, was held by Lockhart and- F. J. McLaughlin, who assigned their stock as security to the bank for its claim. Subsequently they executed a writing assigning to plaintiffs and other creditors their stock in the corporation, subject to the lien of the bank. The creditors seemed to approve of the action of the partners in organizing a corporation, and plaintiffs continued to sell merchandise to it, receiving payment tberefor. Cash dividends were declared by the corporation, and paid to the bank on its claim.

Later on, some of the creditors of the partnership commenced attachment proceedings, and the Symns Utah Grocer Company, one of the plaintiffs, attached a portion of the merchandise in the possession of the corporation. Thereupon the partners concluded, rather than involve the corporation in legal controversies with partnership creditors, that it would be better to make an assignment for the benefit of their creditors. The corporation was owing but a- few hundred dollars. So, acting upon the advice of their attorneys, the stockholders of the corporation, who were its directors, sold and transferred the merchandise to Lockhart and F. J. McLaughlin; and they immediately executed a deed of assignment conveying all their property, both real and personal, except such as was by the law exempt, to H. V. Bice, for the benefit of their creditors. The bank's claim, amounting to $12,500, was preferred. Immediately upon the assignment being made, representatives of various creditors went to Park City, and threatened to attach the goods in the hands of the assignee; but D. C. McLaughlin, — who had been in the meantime appointed receiver of the bank, upon the death of its assignee, — learning of this fact, insisted upon the assignee’s selling the merchandise to him, as the bank’s claim had been preferred. After some négotiations it was agreed that, if the bank would cancel its claim of $12,500, the assignee would convey the merchandise, valued at from twelve to fourteen thousand dollars, to the receiver. This arrangement was satisfactory to Lockhart and F. J. McLaughlin, and the goods were transferred to the receiver. The treasurer of the corporation, Lockhart, collected about $2,000 from persons to whom merchandise had been sold by the corporation, and at the time of the hearing had it in his possession. Pending the hearing the directors of the corporation hastily met, and declared a dividend covering this amount. It appears this was done so that it could be passed to the creditors of Lockhart and F. J. McLaughlin. Williamson,- one of the garnishees, testified that in June or July, 1893, Lockhart transferred to him, without consideration, 12-9 shares of stock, valued at about $1,290, in a building association.

The referee made elaborate findings, and declared 'that the transfers made by the corporation and by the copart-ners were fraudulent and void, including the sale of the merchandise to the receiver of the bank, and also declared 'that said merchandise was subject to the claims of plaintiffs, and ordered that it should be sold to discharge their judgments. Orders were also made commanding the treasurer of the corporation to pay into court the $2,000 above referred to, and requiring Williamson to endorse and assign the stock of the building association to the United States marshal, by whom it was to be sold. The order further stated that the proceeds arising therefrom, together with the $2,000, should be applied to the satisfaction of plaintiffs’ judgments. The report and orders of the referee were adopted and approved by the court, and judgments duly entered in conformity therewith. Subsequently, upon motion of defendants, the judgments were set aside by the court; but later, upon plaintiffs’ application, the court found, after a submission of the testimony taken by the referee, that the $2,000 in the possession of Lockhart was the property of defendants, and that the stock of the building association was the property of Lockhart; also, that the merchandise conveyed to the receiver was the property of defendants. The court ordered the building stock held by Williamson to be sold, and the $2,000 to be applied in payment of plaintiffs’ judgments; and plaintiffs were authorized to commence suits against the receiver for the recovery of the merchandise, or the amount resulting from the sales thereof, and the receiver was required to make no disposition of the moneys arising from sales of goods until “ said action can be commenced, and prosecuted to judgment.”

The points involved in these cases are the same, and both were brought into this court on a joint record. They will therefore be considered together. The garnishees •contend that in supplemental proceedings the court is limited by the statute as to the order which it may enter, and that it was error, in such proceedings, to try the question as to the right of possession and title to property which was not acknowledged to belong to defendants, and that the judgments appealed from are void. Plaintiffs insist, that there are no conflicting claims, in good faith, to the property in question, and that there is no real but a simulated controversy regarding its ownership, and therefore •the court had jurisdiction to adjudge the property to belong to defendants, and order its application to the discharge of plaintiffs’ judgment, without compelling them to .litigate the questions involved in another action.

Sections 3455, 3457, and 3458 of the Compiled Laws of Utah provide: “After the issuing or return of an execution against property of the judgment debtor, or of any one •of several debtors, in the same judgment, and upon proof by affidavit or otherwise, to the satisfaction of the judge, •that any person or corporation has property of such judg.ment debtor, or is indebted to him in an amount exceeding fifty dollars, the judge may, by an order require such' person or corporation, or any officer or member thereof, to appear at a specified time and place before him, or a referee appointed by .him, and answer concerning the same. The judge, or referee, may order any property of the judgment debtor not exempt from- execution, in the hands of .such debtor, or any other person, or due to the judgment debtor, to be applied towards the satisfaction of the judg-meat. If it appears that a person or corporation, alleged to have property of the judgment debtor, or to be indebted to him, claims an interest in the property adverse to him, or denies the debt, the court or jndge may authorize by an order made to that effect, the judgment creditor to institute an action against such person, or corporation for the recovery of such interest or debt; and the court or judge, may by order, forbid a transfer, or other disposition of such interest or debt until an action can be commenced and prosecuted to judgment/'’ It seems clear to us that under this provision the court exceeded its jurisdiction in rendering the judgments above referred to without having the corporation before it, and without granting it a hearing. It is practically saying and deciding that it has no existence, or, if so, that it and any property rights it may possess may be extinguished by means of these proceedings. Without pleadings, except the affidavit upon which the order was issued, grave and important issues of fact respecting property rights and the bona fides of transactions of various persons are. determined. Without allegations that the transfer of merchandise by the corporation to defendants was fraudulent, and without pleadings-declaring that the assignment by defendants for the benefit of their creditors was fraudulently made, these issues of fact are determined. The receiver of the bank testifies that, in good faith, he purchased the goods from the assignee. Without having the bank before it, or the receiver, as such, a judgment is rendered which, in effect, declares the sale fraudulent, and the assignment of stock made by defendants to the bank invalid; and it is no answer to say that Lockhart and F. J. McLaughlin, the principal stockholders of the corporation, were before the court. They had been garnished, not as representatives of the corporation, but in their individual capacity. Nor can it be said that the receiver of the bank was before the court. D. C. McLaughlin, as an individual, and not as receiver, was garnished.

How is it possible, in this summary way, without an opportunity to be heard, and in the absence of some of the parties, without issues, for the court or referee to determine the questions of fact which ought to be heard only in regular actions, and perhaps before a jury? It is clear from the record that “persons and corporations claimed an interest in the property adverse to the judgment debtors.” That being true, the court had no authority to determine the conflicting claims. And the rule is not different where the property is in the hands of the judgment debtor. The purpose of the statute referred to is to aid the judgment creditor in discovering property or assets'belonging to the judgment debtor, and to secure the application of the same to the satisfaction of his claim, without delay or an independent suit; and it would be a gross perversion of the statute to hold that in supplemental proceedings the court can exercise all the powers •of a court of equity, and pass upon questions of fact, the determination of which, under our system of jurisprudence, rests with a jury. Under a similar statute, the supreme court of Nevada state: “When these various sections are construed together, it seems perfectly plain that the judge or referee can only order property to be applied to the satisfaction of the judgment when the title thereto is clear and undisputed. * * * If there is any dispute as to the ownership of the property, or if the person proceeded against in good faith denies the debt, neither the judge nor the referee has any power or authority whatever, in these proceedings, to decide the disputed questions, and order the property delivered, or money adjudged to be due to be paid over,' in satisfaction of the judgment.” Hagerman v. Tong Lee, 12 Nev. 336. But we are referred to tbe second volume of Freeman on Excutions (sec. 405), where it is stated that “ neither the mere denial of a debt, nor mere pretense of an adverse claim, will prevent the court from making an order requiring the debt to be paid, or the property delivered.” And it is argued that the adverse claims of the receiver, Williamson, and the corporation, to the property in controversy, are mere pretenses.

The facts before us do not bring these cases within this rule. While there are disclosures in the record before us which do not relieve the transactions from suspicions of legal, if not moral, fraud, yet we cannot say that the adverse claims to such property are mere pretenses. Of course, where it is clearly apparent to the court that there is a simulated controversy, and that there is absolutely no foundation for an adverse claim to the property in controversy, and. where the assertion of such a claim would be so clearly a pretense and evidence of fraud as to be tantamount to a disclaimer of interest, then the court can order its application to the judgment creditors’ demand. We adopted this statute from California, and the supreme court of that state, in construing its provisions, say: “Under a similar statute in New York, the same ruling was made in Town v. Insurance Co., 4 Bosw. 683, and the court held ‘that if property was in possession of the garnishee, claiming title to it, no matter how fraudulent the transfer, no order can be made to compel him to deliver the property, and therefore no question can be put to the debtor or a witness to discover or prove fraud. * * * The remedy of the creditor is by direct action against the fraudulent assignee, when the -good faith of the assignment is in issue.’ There can be no question but that this is the proper construction of the statute, and it results that when the garnishees explicitly denied, in their examination, their indebtedness to the judgment debtor, neither the court nor the referee had the power to compel them to pay over to the sheriff the amount of the alleged indebtedness.” Hartman v. Olvara, 51 Cal. 501; Rodman v. Henry, 17 N. Y. 482; Sherwood v. Railway Co., 12 How. Prac. 136; Teller v. Randall, 40 Barb. 242; McDowell v. Bell, 86 Cal. 615, 25 Pac. 128; Bank v. Pugsley, 47 N. Y., 368.

But it is claimed by plaintiffs that there can be no dispute regarding the building Stock transferred by Lockhart to Williamson. We have no hesitancy in saying that the record seems to establish that the transfer was fraudulent; and it is held by many courts that an assignee has no interest in the property of the assignor previously conveyed, where it was fraudulently done. We do not desire to pass upon this question, or to determine what, if any, rights the assignee of Lockhart and McLaughlin has in this building stock. We think, whatever interests either of the parties to these proceedings may have therein, they should be determined in another form of action. If Lockhart had any interest in the stock at the time of executing the deed of assignment to Rice, such interest passed to the- assignee, providing the deed of assignment is valid; and the validity of this assignment, we think, cannot be determined in these supplemental proceedings.

Respondents contend that, even under the views herein announced, the judgment of the court as to the 82,000 in the hands of Lockhart was proper; that the stock of defendants in the corporation was assigned to the bank, but that prior to the general assignment by defendants this stock was assigned to plaintiffs, subject to the bank's claim, but that the receiver of the bank took the goods in full payment of defendant's-demands, and therefore they are entitled to the stock, and consequently to the money which is a dividend thereon.

There are two objections to this contention: First. Plaintiffs base tbeir right tp the §2,000 upon the judgment of the court, and not in virtue of any interest in the corporation stock. In other words, they repudiate the assignment, and do not claim under it. Second. The stock was assigned subject to the bank’s claim, for the benefit of plaintiffs and other creditors. When this stock was fully discharged from the lien of the bank, it was subject to the claim of other creditors, including the plaintiffs, but the record nowhere indicates the proportion to which each creditor is entitled; and, even if the court had power to partition the stock and prorate the dividend, there was no evidence before it upon which to base such action. Without expressing any opinion as to the interest acquired in said stock by plain tiffs and other creditors of defendants, we think there was a sufficient “adverse claim” by the assignee, Rice, and the creditors named in the assignment, to preclude the court from making the order in the premises. If the stock passed to plaintiffs and other creditors by the special assignment, they were entitled to the dividends, if they recognize the validity of the transfer. If they do not recognize its validity, then the stock passes to the assignee, Rice, by the general assignment; and, if it is valid, he would be entitled to the dividends for disbursement to defendant’s creditors. We think the court erred in entering the judgments appealed from. Each of the judgments is reversed, and the cases remanded, with directions for the lower court to enter such orders, in conformity with the views herein expressed, as may be proper.

Baetch, J., concurs.