Wakeman v. Grover , 4 Paige Ch. 23 ( 1832 )

The Chancellor.

The important question to be considered and decided in these causes is, whether the assignment upon its face is illegal and void, as being in violation of the statute, or as intended to delay, hinder, or defraud the creditors of Grover and Gunn in the collection of their debts. Before I approach this question, however, it is necessary to examine some other points, which have been made by the counsel on the argument! It is alleged in the answers of the defendants that certain other creditors of Grover and Gunn have recovered judgments at law, and that their executions have been returned unsatisfied; and it is now insisted that they should have been made parties. It appears by the answers that there is no real estate on which judgments could be a lien, unless it be the two church pews. So far as respects those, no decree can be made here which can affect the rights of judgment creditors who are not parties to these suits. If the assignment is valid, their judgments are no lien upon any of the property. And if it is set aside as fraudulent, the oldest judgment at law-will have the preference notwithstanding any decree which may be made in a suit to which the owner of that judgment is not a party. He may be interested in the question to be decided here, but cannot be affected by the decree. (See Rundell v. The Marquis of Donegal, Hogan's Rep. 122.) So far as respects the property on which no creditor has obtained a lien by his judgment or execution at law, this court has frequently decided that a creditor whose remedy at law has been exhausted, may file a bill here for his own benefit only, and without making other creditors standing in the same situation parties. (Edmeston v. Lyde, 1 Paige’s Rep. 637.) Another conclusive answer to this objection is, that this allegation of the defendants is not responsive to any thing contained in the bill; and the defendants have introduced no evidence whatever, in either cause, to show that any judgment has been recovered against Grover and Gunn, except that on which the complainants bill is founded. Replications having been filed, no statement in the answers not responsive to the bill can be of any avail to the defendants on the hearing, unless it is established by proof. It is also insisted by the defendants, that all the creditors whose debts are specifically provided for in the assignment are necessary parties to these suits. If the complainants were seeking to carry into effect the assignment, and to obtain their share of the assigned property, it would undoubtedly have been necessary either that they should have made all the creditors parties, or they should have filed their bills in behalf of themselves and all others, who might choose to come in under the decree. But I apprehend the rule is different when the creditor is acting in hostility to the assignment, and is seeking to set it aside on the ground that the assignee is endeavoring to retain the property of the debtor, under an ássignment which is fraudulent and illegal. In such a case the creditor cannot file a bill in behalf of himself, and those whose claims he is opposing. And it would be unreasonable to compel him to be at the expense of making all the creditors whose claims are provided for by the fraudulent assignment parties defendants. If the assignment is illegal, the assignee has no claim to have the other creditors made parties for his benefit; and if it is valid, he is perfectly competent to defend himself without their assistance. The uniform practice in cases of this kind, so far as I have been able to discover from the reports, is to proceed against the fraudulent assignors and assignees, without making the numerous creditors whose debts are provided for in the assignment parties. In the case of Riggs and others v. Murray and others, (2 John. Ch. Rep. 565,) this course was pursued. And much reliance is to be placed on that case as a precedent, "from the fact that C„ S. Riggs, one of the complainants, at the time of the filing of that bill, was considered as standing at the head of the chancery bar in this state. The billpvas filed in the same way in the case, of M’Menomy v. Murray and others, (3 John. Ch. Rep. 435.) In cases of this kind, also, the assignees suing in chancery for the benefit of the trust fund have been considered so far entitled to represent the interest of all the creditors provided for in the assignment, as to be permitted to file a bill in their own names, only, without making those creditors parties; (See Dey v. Dunham, 2 John. Ch. Rep. 182 ; Nicholl v. Mumford, 4 Id. 522 ; Searing v. Brinkerhoff, 5 Id. 329.) The bills in the causes now under consideration are not properly framed to entitle the complainants to any relief, unless they _succeed in showing the assignment illegal and fraudulent as against them. And if that ground of relief can be established, the creditors whose claims are provided form the illegal and void assignment are not necessary parties,

The first objection which is made to the validity of the assignment is, that it directs the proceeds of the property and effects of an insolvent partnership to be applied to the payment of some of the separate debts of the individual partners ; to the exclusion of, or in preference to the joint debts due to these complainants and other creditors of the firm. It appears from the schedule A., annexed to the assignment, that some of the preferred debts specified as belonging to class No. 1, are for endorsements for Grover only.. In the body of the assignment, also, it appears that it was intended to provide for the payment of the debts due from both, or either of the partners -out of the assigned property. The debt which is declared to have á "preference over all others, is a demand in favor of J. H. #" T' * a.= the endorsers of Grover’s note, for the benefit of Trotter & Douglass. It is stated in the answer, in reference to this debt, that it was in a judgment at the time nf the assignment, and that an execution had been issued thereon and levied upon the goods of Grover and Gunn. It is not stated, however, that the judgment was for a partnership debt, or indeed that it was a judgment obtained against both the partners. If it was against Grover only, although the execution was levied on the partnership effects, nothing but the interest of Grover, subject to the payment of the partnership debts, could be sold on the execution; and as this firm was manifestly insolvent, the execution was not a lien upon any tiling. Even if the language of the answer is to be taken as a positive allegation that it was a judgment against both, it -cannot avail the defendants, as no proof has been introduced to show that any such judgment and execution ever existed. This part of the answers not being responsive to the bill, can-mot be used by the defendants to support the assignment The question presented by this point of the complainants, is one of great importance to the commercial community, and must, I presume, sooner or later, be brought before the court of dernier resort I therefore prefer that it should be decided in a case where there can be no dispute about the facts, and where it may form the main point in the cause. The conclusion at which I have arrived on other objections to this assignment, renders it unnecessary for me to pass upon that question here.

The next objection to this assignment is, that Grover and Gunn, knowing themselves to be insolvent, have, without the concurrence of their creditors, made a voluntary assignment of their property to trustees of their own choosing, and have excluded a certain portion of the creditors from any participation in the assigned property, unless such creditors will consent to come in and take their share of the surplus, after paying the preferred creditors, and will discharge the assignors ■from all further liability, whether their debts are paid or not. It is supposed by the defendants’ counsel that the creditors of class No. 2, are not absolutely excluded from participating in the assigned property, although they should refuse to discharge the assignors from the whole of their debts, and that they may come in under the terms “ all other debts justly due and oW<* . ing from the parties of the first part, to be proven to the satisfaction of the said parties of the second part.” Even if they are correct in this construction, I doubt whether it can alter the rights of the assignees under the assignment. I confess I can see very little difference in principle, whether the debtor reserves to himself a small surplus, if certain of his creditors will not receive it in the full discharge of their debts, or whether he frames his assignment in such a manner as to obtain the benefit of a discharge of the whole debt upon the .payment of a part only, by any other species of coercion which he may attempt to exercise over his creditor. It is settled that the insolvent has the right, while his property remains in his own hands, to apply the same to the payment of one creditor in - preference to another, notwithstanding the principle of this court is that equality among creditors is equity. ' This right, however, is founded upon the supposition that there may be creditors who have peculiar claims upon the property of the debtor, and of which he is the most competent to judge. But if the debtor uses the power of preference which the law has . thus given him, without reference to any supposed equitable claims on the part of the creditors preferred, and with the sole view of securing future benefit to himself, either by obtaining a general discharge from his debts, or otherwise, it is,, to say the "least, an unconscientious exercise of a legal right. And where the debtor makes a voluntary assignment to a third person without the concurrence of his .creditors, and upon the face of the assignment avows his intention to make the benefit which shall thereafter be derived to himself the sole grounds of preference, and thus to compel the whole or any portion of his creditors to submit to his terms ; such an unconscientious exercise of power ought not to be sustained in a court of equity. I do not think this case depends solely upon that question, or that the construction contended for by the defendants’ counsel is the fair construction of this instrument. The assignors, in the first place, provide for the payment of the debts of two different classes of creditors, on certain conditions as to the second class, and then direct the payment of-two creditors named in class number three, and all other creditors. And to show what they meant by other debts justly due and owing, from them they required that such other debts should be proved to the satisfaction of the assignees. If the debts mentioned in class number two were the debts intended to be covered by the last clause, it could not be necessary to require them to be proved. By other debts, the assignors evidently meant debts other than those specified in the schedule.

In the case of Hyslop v. Clarke, (14 John. R. 458,) it was decided that such an assignment was fraudulent and void. Judge Van Ness, who delivered the opinion of the court in that case, admits the right of the debtor to give a preference to particular creditors. But he said the assignment in that case did not actually give the preference, and that it was fraudulent and void, because it was an attempt to retain the right to give a preference at a future period, and to compel the creditors to acquiesce in the terms offered to them. That case also decides that an assignment which is void in part as against the provisions of the statute, is void in toto ; and that no interest whatever passes under it to the assignee, as against the creditors who do not assent to it. This principle was again recognized and acted upon in the case of Austin v. Bell, (20 John. R. 442.) In Searing v. Brinkerhoff, (5 John. Ch. R. 329,) Chancellor Kent recognized the principle ; but he supposed it might have made some difference, if it had appeared that the assignment embraced fill the property of the debtors of every description. The same difficulty that existed in the case of Searing v. Brinkerhoff, however, exists here. It does not appear that the property assigned embraced all the property of the debtors. On the contrary, it appears from the schedule C, annexed to the answer, that there was at that time, in the hands of J. E. & J. Mowatt, securities to the amount of $15,000, which had been assigned to them by Grover and Gunn to secure the payment of $6500; and that they were to account for the surplus. The debt to the Mowatts was more than the amount thus secured, but it is evident from that assignment that they had other securities for a part of that debt. If it was material for the defendants to show that they actually assigned all their property, both individual as well as joint, to sustain such a provision as was inserted in this assignment, they should have stated that fact in their answers, and sustained it by proof; as the assignment itself does not profess to convey the whole. I apprehend, however, that it would make no difference, even if the assignment actually conveyed the whole. The law of this state does not recognize any right on the part of an insolvent debtor to an absolute discharge from his debts, although he may honestly and fairly make a cession of all his property to his creditors, to be applied to the payment of his debts equally or rateably. Much less does it recognize the right or the justice of such a discharge, when he has singled out favorite creditors and devoted the mass of his property to the payment of the whole of their debts, leaving the rest of his creditors to come in for a share of the residue. In such a case, he is barred from all relief under our insolvent laws, even if two thirds of his creditors consent to his discharge. And without such consent, his future earnings are in all cases liable for the payment of the balance of the debts, after his property has been fairly distributed among the creditors. It frequently happens that the whole of the property of a poor but honest creditor, and upon which perhaps he is dependent for the support of a large helpless family, consists in his claim upon the future acquisitions of an improvident debtor, who has wasted the hard earnings of the creditor by extravagance, or in gambling speculations. In such cases it would be the height of injustice to require the creditor to relinquish his claim upon the future acquisitions of his debtor. The principle, therefore, which would authorize the debtor to claim such a discharge as a right in all cases, or to use his property in such a manner as to coerce his creditors to grant such discharge, cannot be sound. Although I consider it as settled in this state, that the debtor cannot be permitted to assign his property in the manner contemplated in the assignment under consideration, I am aware that Judge Story has held that the law was settled the other way elsewhere ; although he admits the inclination of his own mind is against the validity of such assignments. (Halsey v. Whitney, 4 Mason’s Rep. 230.) The cases upon which he relies as having settled the law on this subject, are Lippincott v. Barker, (2 Binney’s Rep. 174,) The King v. Walton, (3 Price’s R. 6,) and a note of a manuscript case decided by Judge Washington. (Whart. Dig. Deed, 1 pl. 72.) In the case of Lippincott v. Barker there was an assignment by the debtor of all his property for the payment of all his creditors, rateably, who should come in and execute a general release to the debtor within four months from the date of the assignmet. The assignment, however, remained in the hands of the assignors until after a meeting of the creditors was called, and nearly every one of them was present and assented to the assignment. After that, it was delivered to the assignees, who took possession of the property. Under such circumstances, two of the judges in Pennsylvania held that the assignment having been accepted by a portion of the creditors at the time of its delivery, was valid. Justice Yates considered the fact that it proposed to put all the creditors upon terms of perfect equality, as a strong circumstace in favor of the validity of the assignment; in analogy to the general principles of the bankrupt law, which was in force at the time the debts were contracted, Brackenridge, J., however, considered the assignment illegal and void, both by the common law and by statute. He says, “ It is not simply the surrender of his property as satisfaction pro rata of his debts that the insovent here has in view. He couples an interest for himself, in obtaining a discharge from that proportion of the respective debts which may remain unsatisfied. It is taking an undue advantage of the situation of a creditor to impose this condition. It is immoral to exact it. Volenti non fit injuria, if the creditor accepts; but it is making a volunteer by compulsion, and is in fact a robbery. One enlightened on the principles of moral honesty would never think-of it. He would give what he had, to one or more, or to the whole of his creditors; but he would never think of annexing a condition precedent or subsequent to such surrender.” It must also be borne in mind that the court of errors in Pennsylvania had before that time, in the case of Burd v. Fitzsimmons, (4 Dall. 76,) decided that an assignment to trustees named by the debtors, without the assent of the creditors, and containing such a clause, was void. And it was not the intention of the court in Lippincott v. Barker to overrule that decision. In the case of The King v. Watson the creditors were made parties to the assignment; and those who had actually executed it had debts due to them exceeding the full value of the assigned property. It was therefore a fair devotion of his whole property to the payment of those particular creditors, whether any others' came in and signed the deed within the limited time or otherwise. In this respect, therefore, it was like the case of Lippincott v. Barker. The manuscript opinion of Judge Washington has since been published, (Pierpont & Lord v. Graham, 4 Wash. C. C. Rep. 232,) and as far as I can understand the same, it is in favor of the principle which Judge Story considered settled in such a manner as to induce him to yield- his own opinion to what he considered the weight of authority. On a question of this kind, I should consider ■the opinion of Judge Story as entitled to equal weight with that of the late Judge Washington; and if the case in Price could be considered as an authority in point, I should think the opinions of Chancellor Kent and Chief Justice Spencer alone, to say nothing of the other judges of the supreme court of this state who have concurred with them in opinion on this question, as more than overbalancing the opinions of the judges who occupied the bench of the English court of exchequer at the time the case of The King v. Watson was decided. In addition to this, we have the case of Ingraham v. Wheeler, (6 Conn. Rep. 277,) which was not published, and was therefore unknown to Judge Story at that time; in which the principle adopted in the case of Hyslop v. Clarke is fully sustained.

There are, howevei-, two other provisions in this assignment, which render it still more objectionable than the simple clause excluding those creditors who should not come in within a limited time and give their debtors a general discharge. In the first place, no time is limited within which the creditors of the second class are to come in to entitle themselves to a share of the surplus; but each is to come in within three months after the assignees may think proper to give him a written notice to accept or decline the offer held out to him by the assignment. Suppose the assignees should think proper to give one of the creditors a written notice to release his debtors within three month, or to forfeit all claims under the assignment: if he executes the release, he has no security ¡¿hat the other creditors will be called on in the same way, within any reasonable time. His remedy even for a share of his debt may therefore be delayed for years, if the friendly assignees named by the debtor himself think proper to delay the call upon other creditors. And it is no answer to this objection that the creditor may obtain relief by simply subjecting himself to the trouble and expense of a chancery suit, to compel the assignees to give notice to the other creditors to make their election. The question is not whether there is not a remedy for the creditors, but whether the debtor has not deprived them of any remedy for the recovery of their debts, unless they resort to a court of equity to counteract the illegal effect of the arrangement which has been made. In the case of Pierpont & Lord v. Graham, Judge Washington admits that if no time is fixed by the assignment within which the creditors may come in, or a very distant period is named, the assignment must be considered as fraudulent. And certainly it cannot be better, where it is left entirely in the power of the debtor, or the trustees of his own choosing, to fix that time for themselves, without the consent of the creditors.

What I consider a still more objectionable feature in this assignment, is the provision which authorizes the asssignees to compound with all or any of the creditors, in such manner and upon such terms as they shall deem proper, provided It does not interfere with the order of preference thereby established. The order of preference is to pay.the debt due to the Beaches in the first place; then the creditors of the first cltfts ; then .those of the second who shall have agreed to discharge the debtors; and then those of the third class, together with other creditors not named, if any there are. And if I understand the meaning of this provision, it has placed it in the power of the assignees to compound with any one of the creditors of each class, and to pay him a gross sum^i lieu of his debt, whether such sum be more or less than he would otherwise be entitled to under the assignment- The effect of this provision, therefore, is to perpetuate the right of giving preferences, by vesting in the assignees an arbitrary power in relation to these several classes of creditors, and of compounding with any one upon such temas as they may think proper. If all the creditors of the second class should come in and consent to the terms of the assignment, the assignees are at" liberty to pay any one of them a gross sum in lieu of his share of the fund, in advance, although it may be either more or less than he might be entitled to on a final settlement of the trust. And those who might not be willing- to come in and discharge the debtors on any other terms, may be induced to accede to the assignment under a promise of a liberal compromise. I do not believe that the respectable gentlemen who are named as assignees in this case, would allow themselves to use the power conferred on them in this way. But it might be used in that way by friendly assignees named by the debtor. It is therefore to the principle of such a provision that I must enter my dissent. If it can be sanctioned in this case, it would be equally valid in an assignment to a trustee who would not be restrainedffrom exercising the power by any very nice scruples on the subject.

Upon the whole, I am constrained to say that this assignment does upon its face contain provisions which render it illegal and void as against these complainants, and it must therefore be set aside.

I agree, however, with the suggestion in the answer of the assignees, that they are not to be holden accountable for that part of the proceeds of the assigned property which had been paid over by them to the preferred creditors previous to the commencement of these suits. If the pews are not exempted from sale on execution, the complainant who has the oldest judgment at law, may now take out a new execution and have them sold thereon to satisfy his debt, as far as it will go; Yut as to the other part of the property, I do not understand thavany of it was remaining when the executions were issued on the judgments. The complainants have therefore acquired no lien upon any of the property or effects of Grover and Gunn, or the proceeds thereof, which had been appropriated for the payment of other creditors, at the time these suits were commenced. It is the filing of the bill in this court, And not the return of the execution unsatisfied, that gives the creditor a specific hen upon property which was not liable to be sold on the execution at law at the time that execution was issued, or at any time afterwards.

There must be a decree in each of these causes, setting aside the assignment as fraudulent and void as against the complainant. And there must be a reference to the injunction master of the seventh circuit, in the first of these causes, to take an account of the proceeds of the assigned property and effects in the hands of the defendants, Garrów, Miller and Dill, after allowing them for all payments made to the creditors of Grover and Gunn, pursuant to the provisions of the assignment, previous to the filing of the bill, and their necessary expenses and disbursements in collecting or converting the assigned property into money; and the master is to allow interest as shall be just. The master is also to ascertain and report the amount due to the complainant for principal and interest on his judgment. And a similar account is to be taken in the second suit, unless the parties therein agree to abide by the account to be taken in the first suit. But in case of such agreement, then the master is also to compute the amount due to the complainant in the last suit for the principal and interest due on his judgment; and the counsel for such complainant is also in that case to be permitted to attend the master, upon the talcing of the account in the first suit. If the parties cannot agree to take the account in one suit only, then the accounts in both suits must be taken at the same time, and the causes must proceed pari passu ; so that the defendants may not be subjected to any unnecessary expense or trouble upon the taking of such accounts. And the master is to have the usual power to examine the parties on oath, and to compel the production of books and papers. The assignees are also to be at liberty to pay into court, to be invested, the balance of the proceeds of the assigned property admitted to be in their hands; which shall discharge them from all claim for interest or losses on such balance from the time it is so paid into court.

All further questions and directions are to be reserved until the coining in of the master’s report, or until the further order r ' of the court. (a)

p (a) The assignment in the case of De Caters v. Le Ray De Chaumont, (2 Paige’s Rep. 490,) contained a similar provision. But as all parties were seeking to affirm that assignment, and the creditors who were complainants asked the benefit thereof, there was nothing to prevent its being carried into ef. feet; although the creditors might have proceeded in a different manner to reach the property.