Danner & Co. v. Brewer & Co. , 69 Ala. 191 ( 1881 )

BRICKELL, C. J.

Assignments for the benefit of creditors, their validity and operation prior to the adoption of the Code, have been the subject of much contention, and frequent judicial decision. It was regarded'as settled that a debtor, though in failing circumstances, or involved, could convey the whole or a part of his property, by assignment, or by any form of conveyance or transfer, operating, or intended to operate as a security, to pay the whole or a part of his creditors in unequal proportions; and the only qualification of the right and power of the debtor, was that the uses must have been distinctly declared, and without th'e reservation of any benefit to himself, the property must have been in good faith devoted. and apS’opriated to the payment of the prescribed debts.- — 1 Brick. ig. 128, §§ 75-8. The Code wrought, and was intended to-work a radical change in the right and power of the debtor in the transfer of his property for the payment or security of his creditors. It was first provided that “every deed of trust, mortgage or other security hereafter made to secure any preexisting debt, whether such debt is due or not, or absolute or conditional, is fraudulent and void as to the creditors of the grantor, when any creditor provided for thereby is required to make any release, or to do any other act, impairing his existing rights, before participating in, or receiving the securities therein provided for him.” — Code of 1876, § 2125. This statute abrogated, and was intended to abrogate, the rule announced in an early decision of this court, and subsequently though reluctantly adhered to, that assignments, mortgages or deeds of trust, for the security of debts, were valid, though stipulating for the release of the debtor, as the condition on which the creditor could take - the benefit of the security — in other words, making it a condition that the creditors should accept the provisions of .the security in full satisfaction of their demands. — Robinson v. Rapelye, 2 Stew. 86; Ashurst v. Martin, 9 Port. 566; Gazzam v. Payntz, 4 Ala. 374; Grimshaw v. Walker, 12 Ala. 101; West v. Snodgrass, 17 Ala. 549.

The preference of particular creditors by the debtor making a general assignment of his property’, a conveyance or transfer of all or substantially all of his property, for the security or payment of debts, was also, as we have seen, recognized. The Code declared : “ Every general assignment, made by a debtor, b_y which a preference or priority of payment is given to one or more creditors, over the remaining creditors of the grantor, shall be and enure to the benefit of all the creditors of the grantor equally.” — Code of 1876, § 2126. The object and purpose of this section is unlike that of the preceding section. It does not annul as fraudulent a general assignment creating preferences or priorities, not exacting conditions from creditors claiming or accepting its provisions. The assignment is preserved, and it is declared that it “ shall be and enure to the benefit of all the creditors of the grantor equally.” The preferences or priorities are blotted out, are annulled, and the assignment is read, and effect given to it, as if the statute were incorporated into it — as if instead of-the preference or priority, a security for the benefit of all creditors equally, was expressed. — Price v. Mazange, 31 Ala. 701; Rapier v. Gulf City Paper Co., 64 Ala. 330. The purpose of the statute is to prohibit a debtor, making a transfer of substantially all of his. property as a security for the payment of his debts, from discriminating between his creditors. Such transfers are but seldom, if ever made, except in the presence of actual insolvency, or under the pressure of apprehensions of it. If it is not an open confession of the debtor’s inability to pay his debts fully, it is at least a confession that of it there is so much doubt, that it is necessary for the protection of the preferred creditor that security enuring to his exclusive benefit should be given. The policy of the statute is the promotion of equality among creditors — the withdrawal from the debtor of the power to make distinctions, giving preferences among them, a power often most capriciously exercised; and generally in favor of confidential creditors, as they are termed; creditors who have furnished the failing debtor with the means of obtaining credit to which he was not entitled, involving in loss the unsuspecting and fair dealing creditor.

The form or character of the instrument creating the preference or priority is not important. Whether it falls within the influence of the statute is not determined by the inquiry,, whether it is technically an assignment, or a mortgage, or a deed of trust, or other form of security for the payment of debts. The statute is directed against substance, against things, not against forms or names. Whatever may be the form of the instrument, if it is a transfer of substantially all of the property of the debtor, subject to the payment of debts — if in its operation and effect according to its terms, there is an appropriation of the property for the security, or for the payment of one or more creditors to the exclusion of all others — or, giving preference or priority to one or more creditors — if the property is redeemable on payment of the debts — if by express terms, or by implication of law a trust-results to the debtor of any surplus which may remain after satisfying the debts, the instrument falls within the statute, all preference or priority of payment or security appointed by it, by the intervention of the statute, is.annulled, and it enures to. the benefit of all creditors equally.— Warren v. Lee, 32 Ala. 440; Longmire v. Goode, 38 Ala. 577; Perry Ins. and Trust Co. v. Foster, 58 Ala. 502; Rapier v. Gulf City Paper Co., 64 Ala. 344; DuBose v. Carlisle, 51 Ala. 590. The statute is. intended to operate upon conveyances or transfers of all the debtor’s property for the security of debts, as distinguished from a conveyance or transfer of parts of it for that purpose. The conveyance or transfer of all of the debtor’s property having as an incident the .redeemable quality, or from which a. trust of the surplus remaining after the payment of the debts. intended to be secured results, is witliin the purview of the statute, and a general assignment. A conveyance or transfer of a part of the debtor’s property for the security of debts, is a pai'tidl, not a general assignment, and not within the operation of the statute. Yet, if when the partial assignment is executed, other and successive transfers or conveyances are contemplated, covering all the debtor’s property, the several conveyances, when executed, will be taken together and will form a general assignment, upon which the statute will operate. — Holt v. Bancroft, 30 Ala. 93; Burrill on Assignments (3d Ed.) § 128.

An absolute sale, unconditional, free from all reservation, in payment or satisfaction of antecedent debts, is not within the statute. — Crawford v. Kirksey, 55 Ala. 382, S. C. 50 Ala. 590. Though sales are often denominated assignments, yet between them and the transactions to which the statute refers, there is a broad and manifest distinction. By a sale the vendor strips himself irrevocably and absolutely of all right, title and interest, present or future, 'in the subject-matter of the sale.' There is no right of redemption remaining in him — no trust resulting 'to liimln any event. An assignment, whatever may be its form, has these incidents and qualities. It is subject to the uses and trusts declared in-it, and which must be distinctly declared, or it will be void as to creditors. The satisfaction or extinguishment of these uses and trusts results in a divesture of the title the assignment creates ; or results in a trust of the residue of the property or its proceeds, unappropriated after the satisfaction of the uses and trusts. The sale operates an immediate satisfaction of the debts taken in payment — the assignment does not of itself pay or satisfy debts ; it simply provides for, or secures payment. — Burrill on Assignments (3d Ed.), § 6; York County Bank v. Carter, 38 Penn. St. 446; Johnson v. McGrew, 11 Iowa, 151.

"When a general assignment is executed, the operation of the statute is to engraft upon it, whatever may be its form, or its terms, a trust for the benefit of all creditors. The trust, at their election, is capable of enforcement in a court of equity, though they have not established their debts by judgments at law — though they have not resorted to or exhausted legal'remedies. —Holt v. Bancroft, 30 Ala. 193; Crawford v. Kirksey, 50 Ala. 590.

It is not denied that, if the -mortgage executed by Dees on the 18th February, 1880, had been a security for the payment -of antecedent debts only, it would have been a general assignment, which under the statute enures to the benefit of all the creditors of the mortgagor equally. The proposition is, that as the time of payment of the debt due from Dees, tlié mortgagor, to Danner & Co., the mortgagees, was extended, and Danner & Co. bound themselves to make, and did make future advance's to Dees in consideration of the mortgage, and upon the faith of its security, the mortgage is not within the operation of the statute ; that it is only assignments of which preexisting debts form the consideration and not assignments for which there is a new and present consideration, constituting the assignee a Iona fide purchaser, protecting him against outstanding equities of which he had no notice, to which the statute refers. This .proposition was suggested, but was not passed upon in Holt v. Bancroft, supra, the court saying: “ Such a preference could not be maintained in favor of one not a purchaser for value; whether it could in favor of such a purchaser, is a question outside of this case, and we do not decide it.” In the recent case of Shirley v. Teal, 61 Ala. 449, the question was directly presented, and directly decided. We said: “ The purpose of the statute is to prohibit a debtor from exercising the right which he had at common law to prefer one creditor to another, where he seeks to do so by disposing of all of his property by mortgage or other like security. Its policy is similar in nature and design to that of all bankrupt laws, which is to secure a pro rata disposition of the assets of insolvent debtors equally among all their creditors. The fact that all of the grantor’s property, or substantially all, is included in the conveyance, seems, in such cases, conclusive of the fact of his insolvency . . . The statute prohibits the giving by a debtor of a preference or priority of payment, by general assignment, to one or more creditors. It makes no distinction between the creditor of a day and one of au hour. The age of the debt is not material.” When the statute is taken and read, as it must be, in connection with the law as it had existed, its purposes and objects seem plain. When the debtor is parting with substantially all of his property to secure the payment of debts, the statute intervenes. It does not strip the debtor of the power to assign or transfer his property in any appropriate form-, for the payment or security of his debts. Of its own force, it does not annul any and all preferences or priorities of payment, he creates. Such preferences or priorities, at the election of existing creditors, he is deprived of the power of creating, if he is parting with all his property in any mode as a security for the payment of debts. The statute is directed against the power of the debtor — it is intended to deprive him of a recognized power at common law —the power of preferring his creditors by a general assignment. It would be of frequent and easy evasion if the preferences could be created for the payment of debts presently created, or for the security of antecedent debts into which a new consideration is introduced. This statute interdicts the creation of such preferences or priorities, and it is doubtless a part of its policy, to interdict them in general assignments founded upon a new or contemporaneous consideration, most often given at the expense of creditors generally, by embarrassed debtors struggling to continue business, or to maintain credit. There is not in the words of the statute, nor in its purposes or objects, as we ascertain them by a comparison of the statute with the prevailing law, the mischief which it was intended to cure, any room for excepting from its operation general assignments made upon a new or present consideration.

The assignment enures, however, only to the benefit of creditors whose claims or demands are in existence when it is made. These only have then an equitable claim upon the property of the debtor, the statute is intended to preserve and enforce. Subsequent creditors are not within its scope or purview. Under the statute all existing creditors are let in as the beneficiaries of a general assignment. If the assignment were so written, if the creditors were specially named, the statute would not be offended and there would be no reason or equity in the claim of subsequent creditors to participate in its benefit. Such is the legal effect and operation of the assignment, though expressed to be for the security of a single creditor, and the rights of existing creditors who may intervene and claim its benefits can not be diminished by the claim of participation preferred by subsequent creditors.

The rights of creditors attaching at the time of the execution of the assignment, it follows they can not be divested or affected by any subsequent act of the assignee and the assignor, had and done without notice to them and without their assent. The law' intervenes and declares the uses and trusts, and converts the assignee into a trustee for their execution. The assignment may be,. and most often is, executed without the-knowledge of the creditors generally — the creditors to whom the statute extends its benefits. Trusts are frequently created for the-benefit of persons who have no knowledge of them, yet they have the unqualified right to affirm them, wdien informed of their creation.— Cumberland v. Codrington, 3 Johns. Ch. 229; Shepherd v. McEvers, 4 Johns. Ch. 136; Brooks v. Marbury, 11 Wheat. 78; 2 Story’s Eq. § 1036 a. What would be the consequence, if the creditors generally, having notice of the assignment, did not in a reasonable time manifest an intention'to claim its benefits, or if having notice of it, they suffered its trusts to be executed without objection, or wdthout intervening to claim under it, is not a question we are now required to-consider. By the terms of the mortgage, if there was default in the payment of the secured debts, the foreclosure was to be had by the execution of the power of sale. The sale was to be public, made after the giving of twenty days notice by advertisement. Instead of a foreclosure, the mortgagees entered into a new contract with the mortgagor, by which they became-the purchasers of the property, within a short time after default in the payment of the mortgage debt, and after the prescribed time of foreclosure by sale. ' As to the creditors entitled equally with the mortgagees to the security of the mortgage, this transaction is without effect. Their rights could not be impaired or destroyed by the acts of the mortgagor and mortgagees, of which they did not have notice, and.to which they did not assent.

It is this last transaction which is claimed by the creditors-whose debts were not in existence when the mortgage was executed, to have the effect of a general assignment. But it was-a sale, absolute, unconditional, not having any of the incidents- or qualities of an assignment, and is not within the influence-of the statute.

The statute is in abrogation of the common law — is introduetive of a new principle, giving to the assignments to which it refers an operation and construction different from that which the common law attached to them. The presumption is, the-common law prevails in Mississippi, where a part of the lands-embraced in the mortgage is situate. The law of Mississippi, not the law of Alabama, must determine the nature and extent of the estate, and interest, legal or equitable, passing by the mortgage in and to the lands there situate. — Story, Con. Laws, §445; Nelson v. Goree, 34 Ala. 565. The principle is quite - universal, that real estate, as to its enjoyment and transmission,, is governed by the law of the place where it is situated..

The hill by its averments does not show affirmatively, that-the debts of any of the complainants, except Prudhomme and ’Wollner, Ilirshberg & Co., were existing at the time the mortgage was executed. The averment is, that of the débt owingILaralson & Co., “a large portion of the debt existed prior to the 18th February, 1880,” the day the mortgage was executed. The averment is. too vague and uncertain. If it were confessed the court could not with safety decree, that as to any part these complainants were entitled to participate in the security of the-mortgage.

The result is, the chancellor erred in not sustaining the demurrer, so far as it was directed to such parts of the bill as-claimed relief in respect to the lands situate in Mississippi, and to the claim of relief by all the complainants, except Prudhomme and Wollner, Hirshberg & Co. In all other respects, the demurrer was properly overruled. The decree of the chancellor is consequently reversed, and the cause remaded for further proceedings in conformity to this opinion.