Gannon v. Graham

I regret my inability to concur in the opinion of the majority in this case. Many of the cases cited by the majority sustain the conclusion expressed in this dissent. A restatement of some of the matters covered by the opinion will not, however, be out of place.

It has been held in a few jurisdictions that the assignment of an expectancy or mere possibility of an interest in the estate of the ancestor by an heir is void if made without the knowledge or consent of such ancestor. Stevens v. Stevens, 181 Mich. 449 (148 N.W. 229); McClure v. Raben, 125 Ind. 139 (25 N.E. 179); Flatt v.Flatt, 189 Ky. 801 (225 S.W. 1067).

The holding of these cases is in direct conflict with the overwhelming weight of authority. The question arose in this state in Mally v. Mally, 121 Iowa 169, but was not passed upon. As the court found that the evidence was insufficient to establish the oral assignment alleged in that case, it was unnecessary to determine the issue as to the validity thereof. The reasons, largely of public policy, upon which the decisions referred to are rested, are fully stated in the opinion of this court in the Mally case, and do not require repetition. Such assignments may, and no doubt do, frequently result in passing the property of the ancestor to a stranger, to whom he would never have given it. The question was again referred to in Richey v. Rowland, 130 Iowa 523, but not passed upon. It was again mentioned in Aultman Eng. Thresh. Co. v. Greenlee, 134 Iowa 368, without decision. The writer of the opinion in Stennett v. Stennett, 174 Iowa 431, refers to the proposition as an open one in this state. Obviously, however, the contention that the assignment of the interest as an expectant heir by a child in the estate of his ancestor is void unless made with the knowledge and consent of the parent has not met with favor in this state. It must be, therefore, regarded as the settled rule in this jurisdiction that the assignment of a naked possibility or expectancy of an heir apparent to an estate, if made for an adequate consideration, in good faith and without fraud, is valid, and enforcible in equity.Richey v. Rowland, supra; Richey v. Richey, 189 Iowa 1300; Bergv. Shade, 203 Iowa 1352; Lee v. Lee, 207 Iowa 882.

The Bankruptcy Act of the United States (9 United States Comp. Stat. [1916], Section 9651 [d]), provides that:

"Liens given or accepted in good faith and not in contemplation of or in fraud upon this Act, and for a present consideration, which have been recorded according to law, if record thereof was necessary in order to impart notice, shall, to the extent of such present consideration only, not be affected by this Act."

If, therefore, it were conceded that a lien upon the expectant interest of appellee in his father's estate arose immediately and attached thereto upon the execution of the assignment, such lien would in no wise be affected by the discharge in bankruptcy. No such lien immediately attached to the property. The mere possibility of an interest is assignable only in equity, and whatever right appellant has, or may at any time have had, is purely equitable. The discharge of appellee in bankruptcy became immediately effective on the date when he was adjudged a bankrupt. This was prior to the death of the ancestor. The property was then under the absolute control of the father, who might dispose of it in any manner that he saw fit. No immediate interest therein vested in the assignee at the time, or by virtue, of the assignment. Whatever its quality may have been, that which passed to the assignee was contractual in character. The effect of the discharge in bankruptcy was not to destroy the technical relation between appellee and the holder of the notes executed to the bank. The discharge went only to the remedy, and did not destroy the debt. The moral obligation remained, and constituted a sufficient consideration for a new promise to pay. Fierce v.Fleming, 205 Iowa 1281; Shively v. Globe Mfg. Co., 205 Iowa 1233;Federal Nat. Bank v. Koppel, 253 Mass. 157 (148 N.E. 379). The effect of the discharge of a debtor in bankruptcy is analogous to that of the statute of limitations. Mallin v. Wenham, 209 Ill. 252 (70 N.E. 564, 65 L.R.A. 602). There remained, therefore, the moral obligation of appellee to pay the debt, but the legal remedy to enforce was taken away. The contract of assignment is fair on its face, and provides only for the payment of the indebtedness out of the share of appellee in his father's estate, if and when the same becomes vested. The assignment, however, transferred an equitable right or interest ultimately enforcible in that forum: that is, when the possibility of an inheritance became a reality. The whole purpose of the assignment was to secure the indebtedness, the validity of which is not questioned. The interest created was in the nature of a trust. In the absence of the discharge in bankruptcy, the right to the income from the 90-acre tract which passed to appellee under the will of his father immediately upon the father's death vested in and was held by appellee in trust for the benefit of the holder of the notes. It is true that no such interest in the property itself had vested, either in appellee as trustee, or in the bank as assignee, at the time of the bankruptcy proceedings, which could have been the subject of adjudication by the bankruptcy court. The only American case cited in the briefs of counsel, or that has come to our attention, in which the exact question here involved was presented and decided, is Bridge v. Kedon, 163 Cal. 493 (126 P. 149). A question perhaps somewhat analogous has, however, arisen in some of the intermediate Federal courts, and in a few state jurisdictions. Mallin v. Wenham, supra; Thorntonv. Louch, 297 Ill. 204 (130 N.E. 467); Citizens Loan Assn. v.Boston Maine Railroad, 196 Mass. 528 (82 N.E. 696); Johnson v.Donohue, 113 Tenn. 446 (83 S.W. 360; Walker v. Rich, 79 Cal. App. 139 (249 P. 56). The question has apparently not yet reached the Supreme Court of the United States. The reasoning of the court in Bridge v. Kedon, supra, is so clear and forceful that I prefer to set out a liberal quotation therefrom rather than to restate the doctrine therein announced:

"When we look to the reasoning by which the rule is upheld, it is obvious that a discharge in bankruptcy does not invalidate the charge or lien which equity imposes upon the property. Mr. Pomeroy, in explaining the general doctrine on the subject, and referring to assignments of expectancies, as well as other interests, says: `The assignee of an expectancy, possibility, or contingency acquired at once a present equitable right over the future proceeds of the expectancy, possibility, or contingency, which was of such a certain and fixed nature that it was sure to ripen into an ordinary equitable property right over those proceeds as soon as they came into existence, by a transformation of the possibility or contingency into an interest in possession. There was an equitable ownership of property in abeyance, so to speak, which finally changed into an absolute property, upon the happening of the future event.' (3 Pomeroy's Equity Jurisprudence, Sec. 1271.) And with regard to bankruptcy, in Section 1291 he says: `According to the general doctrine of equity, established beyond any doubt by the highest judicial authority, the equitable assignment or the equitable lien upon the property to be acquired in the future is valid and enforceable, not only against the contracting party himself, but also against subsequent judgment creditors, assignees in bankruptcy, and all other volunteers holding or claiming under him, and against subsequent purchasers from him with notice of the assignment of lien.' As we understand the theory, as stated in Section 1271 aforesaid, it is that, as soon as the assignment is executed, the assignee becomes vested of an equitable right to receive the property ultimately, a right which, by the rules of equity, is sure to become an ordinary vested property right when the event occurs by which the possibility is realized as a certainty. He does not mean to say that the possibility by which the estate becomes an estate of the heir in possession is sure to happen, but that, if it does happen, the equitable right is then sure to ripen into an ordinary property right. The language has been criticized in some cases, which attribute to this passage the contrary meaning: that it was the possibility which was sure to ripen into an ordinary property right in the assignee. (McCallv. Hampton, 98 Ky. 166 [56 Am. St. Rep. 335, 33 L.R.A. 266, 32 S.W. 406].) In the case of a loan, according to these principles, there is created by the assignment a present equitable charge on the property, which equity recognizes as vested, although it is neither vested nor valid at law, and which, when the descent is cast, at once ripens into a lien upon the property for the security of the money loaned. This being the nature of the equitable right created by the assignment, it would follow, in analogy to the rule concerning ordinary liens, that the discharge in bankruptcy did not divest Bridge of his then existing equitable right to Kedon's prospective inheritance. The general rule is well established that an assignment invalid at law, but good in equity, is valid in equity against the assignor in bankruptcy, whether the thing is assigned absolutely or only as security for a debt. In the latter case, the discharge in bankruptcy terminates the legal personal obligation to pay the debt, and the right granted or assigned is limited to the enforcement of the payment of the money loaned, with interest, out of the property which is the subject of the grant or assignment. (3 Pomeroy's Equity Jurisprudence, Sec. 1291; 5 Am. Eng. Encyc. of Law Prac., p. 963.) The assignment is treated in equity as a present contract to convey the future interest, a contract which creates a trust as soon as the interest becomes absolute; and this is a present existing right by contract, which the discharge in bankruptcy does not avoid or terminate. The continued existence of the debt as a personal obligation to pay money is unnecessary to the enforcement of an equitable charge or lien upon specific property."

See, in this connection, In re Lind, 1 Ch. Div. (1915) 744; Inre Lind, 2 Ch. Div. (1915) 345.

The possibly analogous cases referred to involved assignments of wages to be earned in the future. It is held in these cases that an assignment of future earnings which may accrue under an existing contract of employment is a fair contract, which creates rights which may be enforced in equity. It was further held in each of the cases that the right or interest of the assignee of wages to be earned in the future under an existing contract was not affected by a discharge of the debtor in bankruptcy; but, as already indicated, the authorities are not in harmony on this point. As holding to the contrary, see In reWest, 128 Fed. 205; In re Lineberry, 183 Fed. 338; ProgressiveBldg. L. Co. v. Hall, 135 C.C.A. 613 (220 Fed. 45); In reHarrington, 200 Fed. 1010; Rate v. American S. R. Co., 56 Mont. 277 (184 P. 478); Blake v. Alswager, 55 N.D. 776 (215 N.W. 549); Leitch v. Northern Pac. R. Co., 95 Minn. 35 (103 N.W. 704).

In each of the foregoing cases, it was held that the discharge of the debtor in bankruptcy prior to the time the wages were actually earned operated to release and set at naught the respective assignments involved. Discussing the question from the standpoint of wages, the Supreme Judicial Court of Massachusetts, in Citizens Loan Assn. v. Boston Maine Railroad, 196 Mass. 528 (82 N.E. 696), said:

"They proceed upon considerations as to the effect of an assignment of wages and the rights vesting thereunder in the assignee, as well as public policy pointed out in the latter case, which are inconsistent with what we conceive to be sound reasoning, and opposed to the numerous decisions of this court above cited concerning rights acquired under assignments of wages. In the absence of a decision to the same effect by the Supreme Court of the United States, we cannot accede to them as authoritative."

By way of further analogy, it has been held in some jurisdictions that a conveyance of a mere expectancy is as binding upon judgment creditors of the grantor as it is upon himself, if it is made without intent to defraud. Hale v. Hollon,90 Tex. 427 (39 S.W. 287, 36 L.R.A. 75). Also, that a covenant by warranty in an ordinary deed which is co-extensive with the grant operates as an estoppel against the grantor if and when he becomes vested with an interest in the property of the ancestor as an heir at law. Ayer v. Philadelphia Boston F.B. Co.,159 Mass. 84 (34 N.E. 177). This court has in at least two cases recognized and enforced a lien in favor of a creditor upon the interest of an heir when the same became vested upon the death of the ancestor. Klingensmith v. Klingensmith, 193 Iowa 350;Richey v. Richey, supra.

It seems to the writer that the contractual right created by the assignment enforcible in equity, if the possibility upon which it is based becomes a reality, is one that was not in any way affected by the discharge in bankruptcy. It was given as security for the debt, for the enforcement of which, as a debt, the remedy has been taken away. The equitable right conferred partakes of the nature of an assignment of collateral security, independent of the debt itself. The equitable right remains, and is enforcible in equity as a lien upon the interest in the estate when the title thereto has vested. I would reverse.

I am authorized to say that Mr. Justice Kindig joins me in this dissent.