Meherin v. Saunders

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] This is an action by the assignee of an insolvent corporation to recover from the defendants the unpaid balance of the sum bid by the defendant Ambrose for certain real property of the corporation which was sold under execution by the defendant Saunders. In the trial court Saunders made default, but Ambrose defended the action, and he now appeals from a judgment for the plaintiff and from an order denying his motion for a new trial.

The facts involved in several of the points argued by counsel are somewhat complicated, and may be more conveniently stated in detail as the discussion proceeds, but it will be necessary at the outset to indicate the general nature of the case. The defendant Saunders, a constable, in October, 1891, sold under execution certain real property of the California Steamship Company. Defendant Ambrose was the purchaser and the amount of his bid was ten thousand dollars, of which he paid in cash eight hundred and fifty-five dollars. For the balance of nine thousand one hundred and forty-five dollars he gave Saunders his check on Donahue, Kelly Co., and received from him a certificate of sale which he thereafter retained. A duplicate certificate was duly recorded by Saunders. After getting his certificate of sale Ambrose stopped payment of his check and it was never paid, nor was any attempt ever made by Saunders to enforce payment. Within twenty days after said sale the steamship company was adjudged an insolvent, and in due course the plaintiff was appointed and qualified as assignee. Saunders having accounted for only eight hundred and fifty-five dollars of the sum bid at the execution sale the plaintiff commenced an action against him and the sureties on his official bond, in which he recovered a judgment against Saunders for the balance of nine thousand one hundred and forty-five dollars, and against his sureties for one thousand dollars, the full penalty of their bond. That judgment was affirmed by this court, and the opinion there delivered (Meherin v. Saunders, 110 Cal. 463) states the most important facts involved in the present litigation. On the trial of that action, in June, 1894, the plaintiff learned for the first time of the giving of the check by Ambrose to Saunders for the unpaid balance of his bid, of his subsequent stoppage of payment of the check, and of the redelivery of the check by Saunders to Ambrose, by whom it had been destroyed. On the affirmance of the judgment in Meherin v.Saunders, supra, Ambrose paid the one thousand dollars due from the sureties, but nothing more has ever been paid on said judgment. The execution against Saunders was returned unsatisfied, and he was then, and has since continued to be, totally insolvent. In the opinion delivered in Meherin v.Saunders, supra, it was intimated that Saunders had a right of action against Ambrose to recover the balance of his bid at the execution sale, as undoubtedly he had, but he never took any steps to enforce payment, and thereupon the plaintiff commenced this action on September 28, 1895, less than a month prior to the date when an action on the check would have been barred by the statute of limitations. The trial court credited the defendants with one thousand dollars, the amount paid by Ambrose on the judgment against the sureties of Saunders, and rendered a judgment in favor of the plaintiff for eight thousand one hundred and forty-five dollars, and interest from October 24, 1891, the date of the execution sale and of Ambrose's check.

On his appeal from the judgment and order denying a new trial the defendant Ambrose assails both the findings and the conclusions of the superior court, and also contends that the complaint fails to state a cause of action. As to the findings of fact we think they were in every material respect fully sustained by the evidence. The finding that plaintiff was not informed that Ambrose had paid only eight hundred and fifty-five dollars on his bid prior to the trial of Meherin v. Saunders, supra, is contrary to the evidence, for it clearly appears that plaintiff received that information immediately after his appointment as assignee. The fact which first came to his knowledge during the trial ofMeherin v. Saunders, supra, was not that Ambrose had failed to pay any more than eight hundred and fifty-five dollars, but that he had given a check on Donahue, Kelly Co. for the balance of his bid, that he had stopped payment of that check and afterward got it into his possession and destroyed it. As to this matter alone the findings are contrary to the evidence, but the facts found and the actual facts are alike immaterial. In all other particulars there is substantial evidence to support the findings, though as to some matters there is a sharp conflict.

The remaining points urged by appellant will be considered in their logical order.

1. He contends that the complaint shows that no sale of the corporation's property was made. The statute, he says, furnishes the exclusive rule for execution sales, and an essential part of the rule is that every such sale must be for cash, whereas this sale was made, at least in part, upon a credit. This, I think is an objection to the sale which it does not lie in the mouth of the appellant to make, even if it were technically sufficient. But it is not sustained by the allegations of the complaint. They show that the sale was made, as such sales are usually made, and in pursuance of the statutory notice. It was, therefore, a sale for cash, and Ambrose, by his bid, agreed to pay cash. There was no fault in the mode of conducting the sale, but merely a failure on the part of the appellant to perform his promise to pay. It is true that under the statute (Code Civ. Proc., sec. 695), the constable upon the refusal of appellant to pay the full amount of his bid might have resold the property, in which case appellant would have been liable for the costs of the resale, and for any deficiency in the price realized, but the officer was induced by the appellant to forego this course. He accepted a check in lieu of cash upon the implied, if not the express, representation of appellant that it was the equivalent of cash. He issued and recorded a regular certificate of the sale. He applied the cash actually received to the satisfaction of the judgment under which the property was sold and of other judgments, executions upon which he had in his hands. He made his return accordingly and thereby made himself accountable to the steamship company for the full amount of appellant's bid.(Meherin v. Saunders, supra.) Under these circumstances it is too late for the appellant to say that there was no liability upon his part to pay the sum covered by his check. Besides, his liability is not a mere statutory liability, if there were any merit in that contention, but is a common-law liability arising out of an express promise to pay based upon a good and valuable consideration.

2. The second proposition of appellant is that the California Steamship Company is concluded by the return of the constable to the effect that the property was sold for the sum of ten thousand dollars. If this proposition were conceded it is difficult to see what bearing it would have on the present controversy, for the plaintiff, so far from contesting that part of the return is insisting upon it and is seeking only to recover the unpaid balance of the price bid. But I suppose the appellant means to claim that the return is conclusive in his favor that he paid the ten thousand dollars in full. If so, the authorities he cites do not sustain his contention. They are to the effect that the return of an officer upon an execution is, with some important exceptions, conclusive upon the parties until vacated. But appellant was not a party to the action in which the execution issued, and is neither bound by the return nor protected by it. Whether he paid the bid or not is a question to be decided upon evidence aliunde.

3. The proposition is not distinctly advanced by appellant, but he seems to claim that he incurred no liability by his bid, because without his knowledge the property in question had been previously sold to another purchaser on execution under another judgment against the steamship company. It is true the property had been sold a few days prior to the sale to appellant, but under a judgment which was a junior lien, so that the appellant by his subsequent purchase obtained the superior title. It would have made no difference, however, if the first sale had been under a prior lien, for the rule of caveat emptor applies to execution sales, and there would still have remained a right of redemption in the steamship company after the first sale. As it was, the purchaser at the first sale got only a right to redeem from the second sale, and this fact may account in some measure for the full price bid by the appellant.

4. It is contended that there is no privity of contract between the judgment debtor and the purchaser at the execution sale such as is essential to sustain an action by the former to recover from the latter the unpaid surplus of his bid over and above the amount required to satisfy the execution. Upon this point counsel for respondent are challenged by appellant to cite a case in which a judgment debtor has ever recovered such surplus or balance in the absence of an express agreement between the debtor and purchaser. No case exactly in point is cited in response to this challenge, but the principles which support the position of the respondent are unquestionable.

The right of the officer who conducts the sale to sue for the unpaid purchase money is not disputed, but it is claimed that he, and he alone, can maintain the action. Ordinarily, no doubt, the officer is the proper party to bring the action, for it is only by collecting the full purchase price that he can fulfill the commands of the writ. He stands in the position of a trustee as to the proceeds of the sale for all parties interested, for the execution creditors, to the extent of their interest, and for the judgment debtor as to the surplus. He also has an interest in the fund to the extent of his fees and commissions. For these reasons such an action by the sheriff was sustained by the supreme court of Alabama. (Robinson v. Garth, 6 Ala. 204⁸). But in that case the court said (page 209): "We do not doubt that those for whom the sheriff acts and who are interested in the money to be recovered may also maintain the action," etc. The principle of that decision was that the sheriff being the trustee of an express trust could and ought to sue for the benefit of his cestuis, but that his right to sue did not exclude a similar right in the beneficiaries.

In this case the trustee has utterly failed and neglected to sue, and the right of action was about to be barred by the statute when the beneficiary commenced this suit, making the trustee a party defendant and alleging all the facts constituting his equitable right. He shows that the trustee is insolvent; that he has surrendered and permitted the destruction of the written instrument upon which the action could be most clearly sustained; that the liability of his sureties is exhausted, and, in short, that without action on plaintiff's part, a large portion of the price of his insolvent's land will be irrecoverably lost. It cannot be doubted that if Saunders had sued in his own name and recovered the amount of appellant's check he would have held the proceeds as trustee for plaintiff, and that every cent of it would have been assigned to the plaintiff by any insolvency court having jurisdiction of Saunders' estate to the exclusion of his general creditors. It cannot be doubted that if Saunders had commenced an action in his own name, the interest of plaintiff would have entitled him to intervene and take control of the litigation, upon the ground that he was the real party in interest, and more especially by reason of the insolvency of Saunders. These things being so, I cannot understand why, upon showing the neglect of Saunders to sue, the plaintiff could not commence the action himself, making Saunders a party. The result is that the same parties are before the court that would have been before the court if Saunders had done his duty by commencing the action, and plaintiff had exercised his clear legal right by intervening. All the facts were fully disclosed by the pleadings, and the court was in a position to do full and complete justice in the premises. There is another sufficient answer to the technical objection of want of privity. By section 691 of the Code of Civil Procedure it is made the duty of the officer holding the execution, in the absence of other specific direction of the court, to return to the judgment debtor any excess in the proceeds of the sale over the judgment and accruing costs. In this case there was no specific direction as to the surplus which was exactly represented by appellant's check. This check was not cash and the judgment debtor could not have been compelled to take it. But that objection could have been waived, and if waived it would have been the duty of Saunders, under the statute, to transfer the check. It is, indeed, true that the plaintiff never formally demanded a transfer of the check (he never knew of its existence until it had been surrendered and destroyed), and he never waived his right to the cash, but his present action is founded upon the obligation arising out of the nonpayment of that check, and he is entitled to be treated as the equitable assignee. Equity deems that to be done which ought to be done. Saunders ought to have sued on the check or to have assigned it to the plaintiff so that he could sue. Not having sued himself he will be deemed to have assigned his right of action to plaintiff. Of this view he cannot complain, and still less can the appellant complain. The necessary privity of contract in this case is worked out by operation of law.

5. It is contended that the plaintiff cannot maintain this action because he does not show that he is willing or able to procure for the appellant the constable's deed. To sustain this proposition counsel cites Bohall v. Diller, 41 Cal. 532, and similar cases. Such cases have no application here. A purchaser at execution sale must pay when the certificate of sale is delivered. He gets his deed in due course upon demand of the officer. Appellant received his certificate of sale at the date of the sale and the whole amount of his bid was then payable.

6. If we are correct in holding that plaintiff can maintain this action as equitable assignee of plaintiff's check, or as the real party in interest, because of the default of his trustee the plea of the statute of limitations is disposed of. The action was commenced within four years from the date of the check.

7. At the date of the execution sale the California Steamship Company was indebted to the appellant in about the sum of twenty-seven thousand dollars, upon which the appellant had commenced an action and issued attachments which he had caused to be levied on the property which he afterward purchased. The subsequent adjudication of the company's insolvency made within thirty days after the commencement of that suit dissolved the attachment, and appellant thereupon proved up his claim for the full amount in the insolvency court. This was done subsequent to his purchase at the execution sale and after he had stopped payment of his check. In proving his claim in the insolvency proceedings he made no deduction on account of the unpaid balance of his bid at the execution sale but asked and obtained the allowance of the whole of his original claim undiminished, and when a dividend was declared by the assignee he claimed and received the sum apportionable to the full amount of his original demands. The dividend was only a fraction over four per cent of the company's indebtedness, however, and the amount still due the appellant is largely in excess of the unpaid portion of his bid at the execution sale. Upon these facts the appellant contends that the trial court erred in refusing to set off his claim upon the insolvent company against the present claim of plaintiff. To this assignment of error the respondent makes three answers: 1. That Ambrose never had a right to set off his claim against the steamship company; 2. That if such right ever existed he waived it at the time he should have exercised it; and 3. That he is estopped to claim a right of setoff by his claim and acceptance of the dividend in the insolvency proceeding on the whole amount of the original indebtedness of the steamship company. I think the position of the respondent must be sustained on every point.

This case presents a question very different from that which arises in the ordinary case of cross-demands or mutual credits. The real question is not whether cross-demands may be compensated by setting off one against the other, but is rather a question whether a creditor of an insolvent can by his unlawful act defeat the clear and undoubted policy of the insolvency laws and give himself a preference over other creditors; whether, in other words, he can against the will of the insolvent debtor, and in violation of his legal rights, secure a preference which could not be secured by their voluntary and concurrent action.

Under the provisions of section 55 of the Insolvent Act it is perfectly clear that if a debtor in contemplation of insolvency should make over to one of his creditors a valuable asset in consideration of the release of his demand — the creditor having reason to know the debtor's condition — the transaction would be set aside as a fraud upon the other creditors. And if this is so, if the insolvent cannot give a preference when he desires to do so by a voluntary transfer of his property, it certainly must be allowed that the creditor cannot secure the same preference by unlawfully taking or withholding the property, and offering to credit its value. This, however, is precisely what Ambrose is seeking to do in this action. The steamship company did not make a voluntary sale of its property on credit to Ambrose, or to anyone. The property was seized upon by an officer of the law who was empowered to sell enough of it to satisfy his execution, or to sell the whole of it for cash, and after satisfying the execution, to return the surplus to the owner. If this course — the course enjoined by the law — had been pursued, the constable would not have taken Ambrose's check for nine thousand one hundred and forty-five dollars in lieu of cash, but would have taken the cash itself and paid it over to the company, by whom it would have been turned over to its assignee as a part of the fund for the satisfaction of the claims of its general creditors, including Ambrose. By imposing upon the constable, and violating the right of the steamship company to receive the cash, Ambrose seeks to put himself in the attitude of a debtor of the corporation with a right to extinguish his indebtedness by a setoff, dollar for dollar, where other creditors must be content with a modest dividend. To sustain him in this position is to allow him to take advantage of his own wrong and to hold that the policy and plain directions of the law can be defeated by a violation of the law. The doctrine of setoff is pre-eminently an equitable doctrine, and is none the less so by reason of its embodiment in our statutes. Upon a claim of setoff equity will work out the result that would have followed if that had been done which ought to have been done. If Ambrose had paid the full amount of his bid as he ought to have done, the plaintiff as assignee of the insolvent corporation would have had nine thousand one hundred and forty-five dollars to divide evenly between him and the other creditors. The result of this judgment is to bring about exactly that condition, while to allow the claim of setoff which he asserts would be to give him the whole nine thousand one hundred and forty-five dollars and leave the other creditors no part of it.

But even if it were conceded that a right of setoff could exist under such circumstances, it is certain that the time to exercise it was when Ambrose proved his claim in the insolvency proceedings. If the cross-demands were of such a nature that one compensated the other he had no valid claim for more than the balance. But he claimed and was allowed the whole of his original demands undiminished, and this allowance of his claim was like a similar allowance in probate proceedings, the equivalent of a judgment — a judgment to be paid in due course of administration.

To make this claim and secure its allowance was, therefore, a solemn admission on his part that he had no right to set off the unpaid balance of his bid at the execution sale but that he must discharge that liability in full and content himself with the dividend apportionable to the full amount of his original demands. I think it clear that he was well advised in making this admission and pursuing the course that he did. But whether well or ill advised in this matter he certainly went too far to recede when he claimed and accepted a dividend on the whole amount of his original demands. If the right of setoff existed and the two claims compensated each other he was entitled to a dividend on a balance of only about twenty thousand dollars, but he claimed and accepted a dividend on over twenty-nine thousand dollars; that is to say, about one-third of what he received was money to which he had no right, and it was money of which the other creditors were wrongfully deprived. For the purpose of drawing a dividend in the insolvency proceeding he acts upon the theory that there is no setoff and that the cross-demands are uncompensated. Having in this way appropriated to himself money that on his present theory belonged to other creditors, can he be allowed now to shift his ground and upon a totally inconsistent theory withhold the fund out of which the other creditors would receive a dividend? It is to my mind clear that he cannot. He is estopped.

These views are, I think, amply sustained by authority and even by the letter of our statutes.

A counterclaim capable of being set off in an action must be in itself an existing cause of action. Was appellant's claim against the steamship company an existing cause of action when he sought to avail himself of it as a counterclaim? Section 45 of the Insolvent Act furnishes the answer to this question: "No creditor proving his debt or claim shall be allowed to maintain any suit at law or in equity therefor against the debtor, but shall be deemed to have waived all right of action and suit," etc.

The case of Brown v. Farmers' Bank, 6 Bush, 198, is on all feurs with this case. I quote the following from the opinion of the court of appeals: "And to the setoff so pleaded the plaintiff filed a reply, setting forth that before he brought this action the defendant had, in the proper proceedings which were pending in bankruptcy, presented and proved and verified for adjudication and allowance against the estate of each of said bankrupts the whole amount of each of said debts, without giving or allowing any credit on either of them for the two hundred dollars and four cents in controversy, and that said debts, having been proved in bankruptcy, were beyond the defendant's control. . . . . In our opinion, proving the entire debts in the proceedings in bankruptcy, without offering to abate the claims by the amount of said deposit, was a waiver of the right to do so, and an election to proceed on said claims alone in the proceedings in bankruptcy; and that the subsequent assertion of part of the same debts by plea of setoff in this action was equivalent to the prosecution of an original suit upon the claims against the prohibition of the bankrupt law."

Russell v. Owen, 61 Mo. 186, is a case of the same complexion, and this is from the opinion of the court: "The chief question for determination in this case is, whether a creditor who is making proof of his claim before the register in bankruptcy omits to show that the bankrupt has an unsatisfied claim against him, can, when sued by the assignee for the amount of such unsatisfied and omitted claim plead as a setoff the amount allowed by the register as a balance due to him. The question must receive a reply in the negative. . . . . When a party defendant pleads a setoff, he in effect brings an action for the amount of that setoff, but by presenting and proving his claim before the register, the creditor is to be deemed as waiving all right of action on suit against the bankrupt. It would be clearly contrary, therefore, to the evident intent of the above recited section to allow a creditor to do that indirectly which the law precludes him from doing directly; to accomplish by way of setoff that which he would be debarred from asserting in a direct action. The same view of this point is taken elsewhere. (Brown v. Farmers' Bank,supra.)" (And see notes to section 21 of James' Bankrupt Law; Bump on Bankruptcy, 9th ed., 684, 11th ed., 491.)

The superior court did not err in denying the right of setoff.

Judgment and order affirmed.

Van Dyke, J., Temple, J., and Henshaw, J., concurred.

⁸ 41 Am. Dec. 47.