Nightingale v. Harris Lippitt Another , 6 R.I. 321 ( 1859 )

An assignment by an insolvent debtor in trust for the benefit of his creditors, with preferences upon condition of a release, has always been regarded in Rhode Island as a valid and subsisting trust; and by statutory enactment, long in force, this court has been vested with summary powers, which for years past it has frequently exercised, to guard and enforce the rights of the creditors, as cestuis que trust under such a conveyance. Rev. Stats. ch. 164, §§ 12-17. We cannot, therefore, doubt our general power and duty as a court of equity, to enjoin those who without right seek to harass or obstruct a trustee in the performance of his duties under such a trust as this, or, by sale of the trust property upon an execution unlawfully levied upon it, to cast a cloud upon the trustee's title, and embarrass the creditors in electing whether they will, within the time reasonably appointed by the assignor, come in under and accept the terms of the trust. Our jurisdiction in this respect is as clear as, upon the proper call of the assignee, to construe the trust deed, and instruct him in the performance of his duties by virtue of it.

In answer to the assignee's claim for protection in this case, it is, however, objected, that this assignment is void: —

First, because, although it does not upon its face purport to convey all the assignor's property, but only certain property to which he recently succeeded upon the death of one of his sisters, it gives, by way of preference, to the first two classes of creditors as they are arranged in the instrument, certain percentages only upon their debts, upon condition of a release in full, leaving the surplus, if any, to go to the assignor's non-releasing creditors; and,

Second, because it prefers, by way of a percentage, certain former creditors of the assignor, who have already released him in consideration of a right of dividend under his first general assignment.

It is said that for these causes this assignment is rendered void by our statute against fraudulent conveyances, which, amongst other things, enacts, that every conveyance of lands or chattels "had, or made, or contrived of fraud, covin, collusion, or guile, to the intent or purpose to delay, or hinder, or defraud creditors of their just and lawful actions, suits, debts, accounts, damages, or just demands of what nature soever," shall be deemed and taken, "as against said person or persons, his, her, or their heirs, successors, executors, administrators, or assigns, and every of them, whose debts, suits, demands, c., by such guileful and covinous devices and practices as aforesaid, shall or might be in any wise injured, disturbed, hindered, delayed, or defrauded, to be clearly and utterly void; any pretence, color, feigned consideration, expressing of use, or any other matter or thing, to the contrary notwithstanding." Rev. Stats. ch. 259, § 1; Supplement to Rev. Stats. of 1857.

Without doubt, an assignment for the benefit of creditors may contain a clause so plainly indicative of the fraudulent intent pointed at by this statute, as to carry its death-wound upon its face; such as a gratuitous provision out of the assigned property for the insolvent assignor or his family. Except, however, in such glaring cases, incapable of any just or honest explanation, we should be departing far from the usage of well-instructed courts of any sort, and especially of courts of equity, if we should attempt to pronounce upon the intent of the maker of any instrument without the aid of all those facts relating to the subjects and objects of his conveyance, which, by placing us in the precise point of view from which he contemplated his act, will enable us to ascertain what he intended by the language he used, and, consistently with that language, why he intended it.

It certainly is not honest for a debtor to endeavor to extort from his creditors a full release, upon a partial cession of his property; especially when, as in the case of Stewart et al. v.Spencer et al. 1 Curtis, C.C.R. 157, referred to in the argument, he secretly runs away with the most available portion of his assets, and leaves an assignment behind him of the balance only of his property, stipulating for a release, as the means by which he may secure himself in the enjoyment of his dishonest reservation. But once grant that the policy of the law admits, as ours does, that an insolvent debtor may provide in his assignment that his creditors shall release him in order to take any benefit under it, and we apprehend that the fact that the assignment does not purport, upon its face, to convey all his property, is rather a badge of fraud than conclusive evidence of it; and that if it shall be shown by proof, as it may be consistently with the deed, and as, in this case, it is, that in truth the assignment does convey all the debtor's property, this badge of fraud will be completely torn off, and the case stand before us precisely as if the assignor had made the strongest professions in his deed, that the assigned property was all that he had. On the other hand, however strong might be his professions in this respect, if the fact was, that whilst concealing a substantial portion of his property, he was exacting by his assignment a full discharge of his partially paid debts, it would more clearly condemn him, from its very inconsistency with what he avowed.

The same line of remark applies to the other branch of the first objection to this assignment: that it gives to the first two classes of creditors under it but thirty and fifteen per cent. respectively upon their claims, and the balance of the proceeds of the assigned property over to the non-releasing creditors; so that, for aught that the court can know from the assignment, a large amount of property may result to the assignor from his obtaining releases in full from the first two classes of his creditors upon partial payment only. It is certain that the court can rarely, if ever, know from the assignment itself the value of the assigned property, or the amount of the debts in each class, or in whole; and so, what percentage on their claims the different classes of creditors, as they are arranged under it, will receive, and whether there will be anything after satisfying the trust, to result to the creator of it. But it can know all this from proof; and is bound thus to ascertain it before coming to the conclusion that the assignor designed to make, or has made, a conveyance, which may force any of his creditors to release him upon condition of receiving a portion only of their debts, when the assigned property is sufficient to pay them in full. It would be strange indeed, if a court of equity should insist upon arriving at a conclusion so unfavorable to the design or effect of a trust presented for its protection, upon surmise only, when, consistently with the rules of evidence, it could have, and in fact easily obtain, proof of the relative amount of the property and debts, and thereby ascertain the probable design of the assignor by knowing the precise application which through his assignment he has made of his property.

Such proof, in the shape of affidavits, is now before us; and places it beyond doubt that so far from there being anything out of the assigned property to result to the assignor, after paying the percentages provided for the creditors in the first class and the other debts of the assignor, not a dollar will probably reach even the creditors in the second class; leaving debts of the assignor to the amount of about $154,000 to intervene between him and any such resulting interest as has been imagined for the sake of the argument. In such a state of facts it may be seen at once how improbable it is, that the assignor, by ordering the first class of claims to be paid in part only out of the assigned estate, designed thereby that any benefit should result to himself. The truth is, that this provision amounts, and was intended to amount, to a distribution of the assigned property, in certain proportions, between the creditors whose claims were arranged in the first class; the balance being turned over to the creditors of the second class and to the general creditors of the assignor, to prevent the possibility that any interest in the assigned estate should result to him.

The second and last general objection to the validity of this assignment, that it prefers over the general creditors of the assignor, certain creditors who have already released him for the chance of dividend under his first and general assignment, remains to be considered. This provision, which, as we see from the accompanying affidavits, can practically operate only in favor of releasing creditors who have received for their releases no dividend under the first assignment, is conceived in the spirit of moral justice; and had the assignor been dealing with property which was beneficially his own, does no more for the wholly unpaid or even partially paid creditors of this class, than, as a matter of general equity, ought to have been done. The fact of a release of debts under such circumstances does not discharge their moral obligation; and every honest man feels, that, in case of future acquisitions by the debtor, releasing creditors, so far as they are unpaid, ought to be placed by him, if he has the power, upon the same footing with those who have retained the power to enforce against him their claims. We are clear, however, that a right of preference can be exercised by an insolvent debtor only between valid, subsisting debts; and does not extend to those which have been discharged by act of party, as in this case, no matter how harsh, in general justice, the consequences may be. A mere moral obligation is not sufficient, as the consideration of a promise, to enable it to be legally enforced against the promisor himself; and still less to place such a promise, or an application of property in favor of such an obligation, upon an equal footing with claims against the person promising or applying which have the sanction of law.

Is, however, such an undisguised attempt in an assignment to do general justice between his releasing and non-releasing creditors, so "had or contrived of fraud, covin, collusion, and guile, to the intent or purpose to delay, or hinder, or defraud creditors of their just and lawful actions, suits, debts," c., as by bringing it within the range of our statute against fraudulent conveyances, renders the assignment, "clearly and utterly void?" It is likened in this respect to preferences of fictitious debts, — to reservations of property in favor of the assignor or his family, which have been adjudged, as indicative of a fraudulent design upon the rights of creditors, to have such an effect. No precedent can be found, however, which has applied the harsh and sweeping remedy of the statute to such a case as this; and our common sense recognizes a plain distinction between honest things which one may be incompetent to do, and dishonest things which no one ought to do, — between a secret, or even an open, attempt of a debtor to deprive his creditors of what is justly theirs in favor of himself or his, and an effort on his part in applying all his property to their benefit, to endeavor to do general equity between them, by placing those who have released him in the hope of payment, and are unpaid, upon the same footing with those who have neither released nor been paid.

At the argument it was urged upon us as decided, that any attempt whatsoever on the part of an insolvent assignor, though made without disguise in his assignment, to apply a portion of his property to the benefit of others, no matter whom, so that they were not in a legal sense his creditors, made the whole assignment fraudulent and void. Without doubt, general expressions may be found in some of the cases which will bear this construction, if, as we have no right to do, we divorce the phrases of a judge from the connection in which he uses them, and do not, according to the received rule, limit their meaning by the state of facts of which he is speaking. Such phrases are quite satisfied by applying them to reservations of property for the benefit of the assignor, or of his family, or of some mere volunteer to whom in no sense could he suppose himself indebted, without pressing them so far as to embrace cases of open and honest excess of power in adjusting the relative claims of those who were the assignor's creditors when he first went into insolvency. But if this were otherwise, the astuteness of judges of other states to find fraud in, and avoid, because contrary to the general policy of their law, assignments with preferences made by insolvent debtors, would furnish no guide to us, when the policy of our law sanctions and upholds such instruments. Our statute of fraudulent conveyances was plainly designed, looking at the terms which it uses, to apply only to cases of actual covin and deceit, and not to that large class of constructive frauds with which, as a court of equity, we may deal in a very different manner from that which the statute, when it applies, permits us to do. The root and branch work which the statute makes, in the former class of cases, differs very materially from the pruning and paring process of equity, in the latter. If other courts choose to ignore this distinction, or so to construe their statutes of fraudulent conveyances as to bring within them cases of constructive as well as of actual fraud, we nevertheless feel at perfect liberty to recognize it, and construe our statute according to the obvious intent of the legislature. There is a wide difference between an honest excess of power and fraud, which no casuistry can confound. The clauses of an instrument which are impotent, for the former reason, may, if fairly separable from the rest, be cut out as dead, and the living parts be left in undiminished vigor; but fraud, in any part, taints and corrupts the whole conveyance, and by force of the statute renders it "clearly and utterly void."

We do not regard the objectionable feature in this assignment, which we are considering, as indicating that the instrument, or any part of it, was contrived of fraud, covin, collusion, or guile, to defeat or hinder the creditors of the assignor in the collection of their debts, but, rather, as indicating an honest but unwarranted design on the part of the assignor, to apply a portion of his new succession towards his debts of moral obligation, along with, and as if they were debts also of legal obligation. We will not be the first to bring such a case within the range of the statute against fraudulent conveyances; but whilst we hold the application to be void for want of power in the assignor to make it, shall hold the assignment, which in other respects is accordant with the policy of our law, to be valid, as free from all taint or suspicion of "covin, collusion, or guile."

The result is, that we grant the motion that the defendants be restrained from further prosecuting their levy upon the trust property, and instruct the assignee to apply no portion of the trust funds to the payment of claims which have been released by act of the claimants.

Decree accordingly.