Fassett v. Tallmadge ( 1863 )

Sutherland, P. J.

It is plain that this action, and the proceedings and judgment in it, cannot be sustained as the ordinary action of a judgment-creditor, after a fruitless attempt to collect his judgment by execution, to discover and to enforce its payment out of the equitable assets of the judgment-debtor; or as the action of a judgment-creditor to remove a fraudulent obstruction to a levy of his execution upon leviable property of the judgment-debtor.

The property alleged to have been fraudulently disposed of by the judgment-debtors, was all personal property. It can hardly be said that the complaint alleges that an execution has been issued on the plaintiff’s judgment; there is no allegation that an execution had been returned unsatisfied; and I think the inference from the evidence is, that an execution was not issued on the judgment until after the action was commenced. Of course, then, the plaintiff had no right to commence this action simply as a judgment-creditor, upon the equity that he had made a diligent attempt to collect his judgment at law, or upon the equity that he had acquired a lien upon the property alleged to have been fraudulently disposed of, by issuing an execution on his judgment.

But I did not at special term, and do not now regard this action as belonging to either class of actions before mentioned. I did not then, and do not now, look upon the action as brought by the plaintiff, as a judgment-creditor, either to enforce the payment of his judgment out of the equitable assets of the judgment-debtors, or to set aside the alleged fraudulent sale and transfer by the judgment-debtors to,the defendant Samuel W. Tallmadge, so that the property alleged thus to have been fraudulently sold and transferred, might be sold under an execution on the plaintiff’s judgment; or it, or the proceeds of it, might be directly applied by the decree or judgment in this action, to the payment of the plaintiff’s judgment, or to the payment of the plaintiff’s judgment and judgments of other judgment-creditors in like situation.

I regarded the action at special term simply as an action, • calling upon the defendant, Samuel W. Tallmadge, to account as trustee for the property of the insolvent firms, composed of the judgment debtors, the other defendants, which, the complaint charges, was received by the defendant Samuel W. Tallmadge, not only with full knowledge of the insolvency of the firms, and of the equitable right of the plaintiff and other partnership creditors to have the property applied to the payment of their partnership debts, but with the fraudulent intent of keeping the property from the partnership creditors.

The judgment-debtors are made defendants as tlze original debtors composing the insolvent firms, and as parties to the fraud. The insolvency and fraud are set up or alleged in the complaint, to raise the trust, to show that in equity, on the facts stated in the complaint, Samuel W. Tallmadge should be deemed to hold the property, or the proceeds of it, in trust, for all the partnership creditors; and that he should account for the property or its proceeds, as a trustee.

It is a principle of equity, that the partnership property of a firm shall be applied to the payment of the partnership debts to the exclusion of the creditors of the individual members of the firm. (Jackson a. Cornell and others, 1 Sandf. Ch., 348 ; Wilder a. Keeler, 3 Paige, 167; Egberts a. Wood, Ib., 517; Hutchinson a. Smith, 7 Ib., 26 ; Story’s Eq., § 675.) Upon the insolvency of a firm the partnership property is considered, in equity, a trust fund for the payment of the partnership creditors ratably. (Egberts a. Wood, 3 Paige, before cited; Story’s Eq., § 1253.)

Judge Story says (Eq. Juris., § 1253): “The joint creditors are, in case of insolvency (of the firm), substituted in equity to the rights of the partners, as being the ultimate oestuis gue trust of the fund to the extent of the joint debts.” In the same section he says further: “ The creditors, indeed, have no lien, that is, they have a right to sue at law, and, by judgment and execution, to obtain possession of the property ; and in equity they have a right to follow it as a trust into the possession of all persons who have not a superior title.”

Greenwood a. Brodhead (8 Barb., 593), approved in Crippen a. Hudson (3 Kern., 161), was decided right because, if I understand the report of the case, the plaintiffs, as creditors at large merely, by the action sought to obtain the relief which judgment and execution creditors only are entitled to ; but the last sentence which I have quoted from Story’s Equity Jurisprudence, § 1253, was quoted in Greenwood a. Brodhead, I think, with an evident misapprehension of its full meaning and effect. Judge Story did not mean to say that the property of an insolvent firm could not he followed in equity as a trust, in a proper action for the benefit of all the cestuis que trust, or partnership creditors, without such creditors having first obtained judgments and issued executions. He meant that the creditors had a right to sue at law, and by judgment and execution have the property applied to the payment of their debts; or, in equity, upon the distinct principle of a trust, that they might follow the property into the possession of all persons who had not a superior title, by a proper action in behalf of all the creditors, without any judgments or executions at law.

A purchaser or alienee, without notice of the equities of the partnership creditors, of the insolvency of the firms, and the trust, would be deemed a bona fide purchaser or alienee, and as such would be deemed to have a superior title. (Story’s Eq. Juris., §§ 675, 1253.)

It is an elementary principle of equity, that one who fraudulently obtains, or comes into the possession of money or chattels belonging to another, as to such money or chattels shall be deemed the trustee of the defrauded party, and liable in equity to account for the same as such, in all cases where there is no remedy at law, and in some cases where there is a concurrent remedy at law.

It is another elementary principle of equity, that if a trustee, in violation of his trust, transfers the trust property or fund to another, and the latter takes or receives it with notice or knowledge of such breach of trust, that he shall be deemed in equity a trustee of such property or fund, and accountable for it as such to the cestuis que trust.

It is another principle of equity, that in cases of implied trusts for the benefit of creditors, and of express trusts, if not otherwise expressly forbidden, if one of the creditors comes into a court of equity to enforce the execution of the trust, the court will act upon the principle that equality is equity ; except in cases where such creditor has acquired a specific lien upon the fund by his superior vigilance, or where he is entitled to a legal preference. (Egberts a. Wood, 3 Paige, before cited.)

It is also a rule or principle of equity practice, that when several creditors or legatees are entitled to a ratable proportion of a common fund, insufficient for the payment of all their debts or legacies, that all the creditors or legatees should be made parties to a bill filed for the distribution of the fund, or the bill should be filed by one or more of the creditors or legatees in behalf of himself or themselves, and of all others entitled to share in such distribution. (Egberts a. Wood, before cited; Cunningham a. Freeborn, 11 Wend., 258; opinion of Judge Nelson; Hutchinson a. Smith, 7 Paige, 26; conclusion of the chancellor’s opinion, Wilder a. Chapman, 4 Edward's Ch., 670; S. C., 2 Barb. Ch., 149; Thompson a. Brown, 4 Johns. Ch., 619 ; Brooks a. Gibbons, 4 Paige, 374.)

For the distinction between an action or bill in equity by a judgment-creditor, or by two or more judgment-creditors, or by a judgment-creditor in behalf of himself and other judgment-creditors only, claiming a preference founded on superior diligence or on the ground of a specific lien, and an action or bill by a creditor as a cestui gue trust for an account and distribution of a trust fund equitably among all the creditors or cestuis gue trust, entitled to share in the fund, founded on the conceded jurisdiction of Courts of Equity over trusts and trustees; see further, Judge Willard’s opinion in Conro a. Port Henry Iron Co. (12 Barb., 58-61), where the distinction is well stated; see also, Edmonston a. Lyde (1 Paige, 637); Parmelee a. Egan (7 Ib., 610); explained in Cook a. Smith (3 Sandf. Ch., 333, 338); Dias a. Bouchaud (10 Paige, 457); Kirby a. Schoonmaker (3 Barb. Ch., 48); Sandy and others a. Codwise and others (4 Johns., 536); Hitchins a. Congreve (4 Russel Ch., 562).

If a creditor has got a judgment and has issued an execution and has acquired a specific lien upon, or a right to priority of payment of his debt, out of a trust fund arising from, or created by a fraudulent transfer of his debtor’s property, surely a court of equity will not force him to insist upon such lien or right to priority of payment—surely he may waive such lien or right, and ask to have the trust fund distributed ratably among all the creditors, including simple contract creditors, entitled to share in the fund.

A creditor’s action, or bill, for relief as a cestmi gue trust, is not only founded and proceeds upon a principle or ground of equitable relief entirely different or distinct from the ordinary judgment-creditor’s action or bill; but the relief asked by it is different, it asks for a distribution of the trust fund, among all the creditors entitled to share in it; not limiting the relief to a particular judgment-creditor, or class of judgment-creditors.

If the action and proceedings in the principal case cannot be sustained on the principles of equity and cases above referred to, as.an action by a cestui que trust, for an account and distribution of a trust fund, they cannot be sustained at all. If the plaintiff had a right to bring this action with a judgment, he had a right to bring it as a simple contract creditor without any judgment.

A slight examination of the complaint and proceedings in the action will show, I think, that the court below regarded, and rightfully regarded, the action as an action by the plaintiff not as a judgment creditor, but as a oestui que trust, the trust being implied from the alleged insolvency of the firms, composed of the defendants, other than the defendant, Samuel W. Tallmadge, and from the alleged fraudulent transaction by which the defendant, Samuel W. Tallmadge, came into the possession of the partnership property.

The complaint expressly states that the action is brought by the plaintiff in behalf of himself and of all other creditors of the insolvent firms, who might be entitled to share in the assets referred to in the complaint, and who might come in and contribute to the expenses of the action.

It then alleges the indebtedness of the firms to the plaintiff and to others; the insolvency of the firms; the recovery by the plaintiff of a judgment for his debt; a sale or assignment by the defendants, composing the insolvent firms, to the other defendant, Samuel W. Tallmadge, of all the property and assets of the firms. It also alleges that this sale or assignment was made to defraud the creditors of the firms, and that it was understood by and between the parties thereto, that the sale or assignment was made to defraud the creditors of the firms. It asks for a receiver, and for judgment that the sale or assignment be declared void as to the plaintiff and all other creditors of the insolvent firms ; that the property and assets of the firms in the hands of the defendant, Samuel W. Tallmadge, or the proceeds and avails thereof, be adjudged assets in his hands, for the benefit of the plaintiff and such other creditors as might come in and contribute to the expenses of the action. It then asks for judgment, that the plaintiff’s judgment, together with his costs in this action, be paid in full out of the property and ' assets, or that the property be equitably distributed among the creditors of the insolvent firms who might come in and contribute to the expense of the action, or are similarly situated with the plaintiff. The first part of this alternative prayer for judgment is inconsistent with the latter part, if there was an insufficiency of the fund or assets to pay all the creditors in full; and inconsistent with the whole theory of the complaint; but that could not affect the right or propriety of making the decree which was made, distributing the fund pro rata among all the creditors.

I think it plain from the allegations and features of the complaint, that on the principles of equity, and authorities before referred to, the court below had a right to regard the„ action as brought by the plaintiff as a cestui que trust for a distribution of a trust fund among all the cestuis que trust.

That the court below did so regard it is evident from the proceedings and judgment in the action.

It does not distinctly appear from the report of Crippen a. Hudson (3 Kern., 161), that the bill, in that case, was filed in behalf of the plaintiff and all the other creditors, but I assume that it was. The case made by the complaint was that the defendants, C. Bigelow & Wright, composing the insolvent firm, had assigned the partnership property to secure certain individual creditors in fraud of the plaintiff and other copartnership creditors. There was no allegation in the complaint that the individual creditors thus secured were not bona fide individual creditors. The court held that a creditor of an insolvent firm must acquire a legal or equitable lien upon the property of the firm to authorize him to invoke the equitable powers of the court in its administration; that is, to invoke the equitable powers of the court, in its administration, on the ground of lien. In substance, the court held that the mere insolvency of the firm did not create a lien in favor of the copartnership creditors, which enabled the plaintiff to maintain the action on the ground of lien, without a judgment and execution returned. If the copartnership creditors had no lien on the copartnership property, on the ground of the insolvency of the firm, then there was no fraud alleged in the complaint in Crippen a. Hudson; for how could the assignment of the copartnership property to secure bona fide individual debts be a fraud on the copartnership creditors, unless such copartnership creditors had a preferable lien on it ? Crippen a. Hudson, then, merely confirmed (as to the point we are considering), the doctrine of Kirby a. Schoonmaker (3 Barb. Ch., 46), and other cases, and what, I suppose, was generally understood to be the result of the cases in this State, before Wilson a. Robinson (21 N. Y., 587), viz., that the mere insolvency of a firm did not give the firm-creditors a lien on the firm-property, which enabled them in equity to reach it in the hands of bona fide individual creditors.

How far the decision in Wilson a. Robinson should be deemed to have changed or modified this doctrine, it is not necessary now to inquire. It is not necessary to rest the equity of the principal case on the principle of lien, nor on the fraud alleged and found, alone; but, I think, the equity of the case may be safely put on the fraud alleged and found, and on the additional ground, that the relief asked for and decreed could not have been granted by a court of law, viz., a ratable and equitable distribution of the proceeds of the partnership property, which had been fraudulently disposed of, among all the partnership creditors; this relief involving an equitable accounting, and the appointment of a receiver.

In Loomis a. Tift (15 Barb. S. C., 541), Spear a. Wardell (1 Comst., 44), and Hogan a. Walker (14 How. U. S., 33), it was held that the court had jurisdiction to grant the relief asked, upon the ground of fraud. In the first case, the plaintiff was a simple contract creditor; in the second, the plaintiffs had judgment, but had issued no execution; and in the third, the plaintiff had a judgment and had issued an execution, which had been returned nulla bona, but the equity of the bill was not put upon that ground. In all the cases the relief sought was the payment of the individual debts of the plaintiffs only.

These were special cases, and I do not cite them to show that the plaintiff, in the principal case, could have maintained the action without showing an execution on his judgment returned, mewing it as an action to procure the payment of his debt alone, but these cases show that fraud alone gives a court of equity jurisdiction in behalf of creditors; and cases cited previously show, I think, that a court of equity will not decline to entertain this jurisdiction on the technical ground that no efforts had been made at law to collect the debts by judgment and execution, when the bill is properly framed, and the relief asked is the ratable and equitable distribution of property among numerous defrauded creditors.

There is no reason why, in such a case, the defrauded creditors should be forced to bring numerous useless suits at law, when they can all prove their debts in the one suit in equity, and through the extraordinary powers of a court of equity can all obtain an equitable and common relief, which can be granted only by a court of equity.

It is said, in Chatauque County Bank a. White (2 Seld., 252), that the provisions of 2 Rev. Stat., §§ 38, 39, apply to creditors’ bills, strictly so called, and that they leave untouched the common law powers of the court of Chancery in reference to fraudulent trusts and conveyances.

The complaint in this case was not certainly artistically drawn. Perhaps it should have expressly alleged, not only the insolvency of the firms, but also the individual insolvency of the members of them; but the transaction to defraud the partnership creditors, charged in the complaint, is hardly consistent with the idea that the members of the firms were individually solvent. Besides, the defendant Tallmadge did not demur, but answered ; and there being nothing in his answer, and no evidence showing that the members of the firms were individually solvent, I do not think he can urge for the first time this technical defect of the complaint on his appeal from the final judgment.

I have examined the question of jurisdiction as though the defendant Tallmadge had demurred to the complaint; but I doubt whether his general exception to the denial of his motion to dismiss the complaint, after a protracted trial on the question of fraud, authorizes him to raise the question of jurisdiction on his appeal.

The pleadings admit and the proofs show, that the property alleged to have been fraudulently sold or assigned to the defendant Samuel W. Tallmadge, was in fact all the assets and effects of the firms of R. L. Howell & Co., and Bowers, Tallmadge & Co., and all the interest, property, and claims of said firms in or to the assets and effects of the firm of Bowers, Isaacs & Co. The pleadings and proofs also show, that the two firms first named were composed of the same individuals, viz., the defendants John J. Tallmadge, Ralph L. Howell, and Henry C. Bowers; and the proofs show that the same defendants, with one Isaacs, composed the firm of Bowers, Isaacs & Co.

Though it is probable that the sale or assignment was in substance and effect a sale or assignment of all the property, assets, and effects of all three firms, it may have been a technical or formal error for the interlocutory decree to regard- it as such; but I cannot see how the defendant Samuel "W. Tallmadge was, or could be, prejudiced thereby. The only person, it appears to me, that could possibly be prejudiced by thus treating the assignment, would be Isaacs. The creditors of Bowers, Isaacs & Co., could not complain, for they were permitted to come in, and did come in before the referee, and prove their debts. The defendant Samuel W. Tallmadge could not be prejudiced; for he did not set up or pretend that he had any right in or to the assets or effects of Bowers, Isaacs & Co., except by or under the alleged fraudulent sale or assignment; and it must be presumed that the property and assets of the firm of Bowers, Isaacs & Co., for which he was called upon to account, and with which lie was charged by the referee, were received by him under the alleged fraudulent assignment. If he was called upon to account for only such property and assets of Bowers, Isaacs & Co., as came into his hands under the alleged fraudulent assignment, I do not see how he could have been injured by formally treating the assignment as an assignment of all the property and assets of the three firms. The creditors of Bowers, Isaacs & Co., were entitled to be first paid out of the property and assets of that firm, and they were permitted to come in, and did come in, and prove their debts. I do not see what right the defendant Samuel W. Tallmadge had to take exception to this, or to the claimed insufficiency of the proofs of Palmer’s debt on the accounting.

The verbal error of both the interlocutory and final decrees, in stating the alleged fraudulent assignment to have been made by the three firms, may be disregarded; or considered as amended, according to the fact admitted by the pleadings, and established by the proofs, upon the whole, if the finding at the special term, upon the question of fraud, was correct. I see no error or exception which should reverse the judgment; and as I see no principle or ground upon which we should reverse that finding, I think the judgment should be affirmed, with costs.

Ingbaham, J., concurred.