Matter of Garver

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] The banks which are respondents herein were judgment creditors of J.B. Brewster Co., a corporation which made a general assignment for the benefit of creditors, with preferences. An action was brought by one in behalf of all in aid of their outstanding executions, praying that as against plaintiff the assignment and all preferences therein should be declared null and void as to leviable property. Judgment was granted for the relief asked for in the complaint and a receiver was appointed, and was authorized to and did take control of the property from the assignee.

Subsequently the greater part of the leviable property was sold and the avails thereof devoted in the main to the payment of employees — who were entitled to be paid first by statute — and in paying a premium loan of $16,000 on a policy of $50,000 upon the life of J.B. Brewster, obtained for the benefit of the corporation, the policy being subject to that lien when assigned to one Cone. The assignment to Cone was, by the judgment to which we have referred, set aside, and it became necessary to pay the moneys advanced by Cone in order to secure the benefit of the policy to the creditors of the corporation. The proceeds of this policy, collected upon the death of J.B. Brewster, constituted all the assets of the estate that remained for distribution among the judgment creditors.

The Appellate Division modified the judgment by striking out the appointment of a receiver, and requiring him to turn over the moneys in his hands to the general assignee; but in all other respects the judgment was affirmed. The effect of this modification — after the personal property had been sold, and the avails disposed of, as pointed out — was to prevent the banks from receiving anything on account of their executions, for there was no longer any leviable property.

By this blunder in procedure the leviable property had been disposed of for the benefit of the assigned estate, and hence the only way open to the banks, which had prosecuted the litigation resulting in a fund to be distributed among the creditors, where otherwise there would have been none, was to present their claims to the assignee. But the assignee seemed to think they ought not to share with the general creditors — the beneficiaries of the banks' vigilance in prosecuting an action resulting in the setting aside of the assignment to Cone, and making necessary the distribution of the net proceeds of the policy. So the assignee took steps under the statute to have the court determine whether the judgments of the banks should be admitted as claims against the assigned estate.

The assignee made no question about the validity of those claims as against J.B. Brewster Co. He could not well have done so, for they were established by judgments. Nor did he claim that they had been wholly or partly paid, nor that it was inequitable that the banks should share in the distribution of money which, but for their action, would not have been available for distribution. Instead the assignee claimed there was a rule of law which, applied to the facts detailed, would prevent the banks from obtaining an equitable share of the remaining assets.

The doctrine of election of remedies was invoked to work out the result the assignee seemed to desire. And if it be true that when the general assignment was made it became necessary for the banks to determine whether they would take under the assignment or in hostility to it, then the assignee's objection was well founded, for the banks, promptly discovering that their claims would not be paid under the general assignment, made an attack upon it to the extent, at least, that it transferred the leviable property to the assignee.

Now whatever may be the rule in other jurisdictions it is not the law in this state that the commencement of an action to attack the validity of an assignment operates to deprive the party commencing such action from sharing with other general creditors in the proceeds of the assigned estate in the event that such action shall prove fruitless in result.

That question was before this court and carefully considered inMills v. Parkhurst (126 N.Y. 89), in which case certain judgment creditors of an insolvent debtor brought an action to set aside as fraudulent his assignment for benefit of creditors, in which they were eventually defeated. While an appeal was pending in this court from a judgment dismissing the complaint proceedings were taken to distribute the assigned estate, and objection was made by other creditors to the allowance of the claims of those judgment creditors upon the ground that they were proceeding in hostility to the assignment in prosecuting their action. The trial court and the General Term were persuaded that the doctrine of election of remedies was applicable to the situation, and refused to allow the judgment creditors to share in the estate; but in this court it was held that the doctrine had no application. The kernel of the very careful and somewhat elaborate reasoning by which the conclusion was logically established was that the doctrine of election of remedies applies to cases where there is by law or by contract a choice between two remedies which proceed on opposite and irreconcilable claims of right; in such a case, a party having resort to one remedy is bound by his first election, and hence barred from the prosecution of the other. But an assignment for the benefit of creditors is in no sense a contract between the debtor and his creditors, and does not depend for its validity in law upon their assent; where a debtor has acted without fraud in fact or in law, and has complied with the requirements of the statute, the assignment will stand notwithstanding the opposition of a creditor, and by such opposition the latter is not deprived of his right to a distributive share under it. And it is undoubtedly true, as the learned judge said who wrote the opinion, that a contrary rule "would come so near to lending aid and encouragement to attempts at fraudulent assignments as to render its adoption impossible." The discussion of the court in that case is alike applicable to this one, and the decision is in point and controlling.

It is suggested, however, that it is possible to found a different ruling in this case from the one made in Mills' case upon the fact that in Mills' case plaintiffs were unsuccessful, while in this case plaintiff succeeded. In other words, that where a judgment creditor elects, without justification, to attack the general assignment upon the ground that the assignor intended to cheat and defraud creditors, his claim may share in the estate after the judgment has gone against him, but if a judgment creditor successfully attacks a general assignment on the same ground he may not share in the distribution of a fund which may be the result of such litigation.

It has been argued that while in the first case it can no longer be said in this state that there was an election of remedies because Mills' case has so decided, it may, nevertheless, be said in the latter case, because in Mills' case plaintiffs failed to show the fraud, while in this case plaintiff succeeded. But argument — if any there be to offer — in support of such position is fully met by authority, though it would hardly seem that authority is necessary to support the proposition that whether there has been an election of remedies is not determinable by the result of the suit, but is by its commencement.

In Moller v. Tuska (87 N.Y. 166) plaintiffs sold and delivered a quantity of sugar to parties who immediately transferred it to defendants, and then went into voluntary bankruptcy. Plaintiffs immediately brought action to recover possession of the goods on the ground of fraud, but while the action was pending proved a claim in bankruptcy as for goods sold and received from the assignee in bankruptcy a dividend thereon. Later the register in bankruptcy expunged the claim from the record on the ground that the action brought by plaintiffs was in disaffirmance of the sale, and thereafter demanded and received back the dividend. Subsequently in the action brought against the transferee to recover possession of the goods, a motion was made to dismiss the complaint on the ground that by proving the claim in bankruptcy and taking the dividend plaintiff affirmed the sale and had no longer any right to the goods. The motion was granted, but the General Term and this court were of a different opinion, the ground of the decision being that as plaintiffs had on discovery of the fraud an election of remedies — either to disaffirm the sale and recover the property or to sue for the principal — they manifested their election by bringing theaction to recover the possession of the goods, and were bound by such election, and while they subsequently presented their claim to the assignee, who accepted it and paid a dividend thereon, nevertheless, because of the election necessarily made by plaintiffs in the commencing of their action, there was no debt on the part of the estate in bankruptcy to them, and the assignee was without power by his acceptance of the claim and payment of a dividend to create a debt where none existed, and hence could not affect the estate by an attempt to assent to a rescission of the election.

It is, therefore, the settled law of this court that an election of remedies is determined by the commencement of an action, and not by the result of it, and Mills' Case (supra) requires the holding that the commencement of an action to set aside an assignment on the ground of fraud does not constitute an election to take in hostility to an assignment, within the doctrine of election of remedies, and hence a creditor may take under the assignment notwithstanding his attack upon it.

Since the foregoing was written it has been suggested for the first time that it is not after all the doctrine of election of remedies that has been invoked, but a remedy without a name that works out the same result. It is conceded that this new remedy could not be applied in Mills' Case (supra), and it should be conceded that if it could not be applied in that case it should not be in this, for very obvious reasons. The only difference between that case and this is, that in that one the action failed, in this it succeeded — which means that in that case the assignor was not guilty of fraud, while in this case the assignor was adjudged guilty of fraud. But in the first case the court pointed out that the creditor should not be deprived of his share of the assets for bringing an unsuccessful litigation, because to do so would lend "encouragement to attempts at fraudulent assignments." It is safe to say that that reason is certainly as applicable to a case where the fraud both exists and is proved. Otherwise the legal situation would be: It is well to bring an unsuccessful action at great cost to the fund in order to discourage fraud; but it is not well to discourage fraud too much, so be careful not to establish it, for a penalty is visited upon one who brings such an action and succeeds.

It is said that the doctrine of res adjudicata has application to this situation, and will so operate as to deprive plaintiff of its share of the fund that would have no existence but for its litigation.

There have been two adjudications prior to this one. In the first place it was adjudicated between J.B. Brewster Co. (before the assignment) and the Home Bank that J.B. Brewster Co. was indebted to it. The judgment into which that litigation ripened stands. Its validity as an adjudication is not challenged, and cannot be; and it has never been paid. That being so, the court has no power to deprive the plaintiff in that judgment of its share in the general assets of J.B. Brewster Co., for the judgment establishes the claim, and carries upon its face the right to share with other claims in the assigned estate.

The second adjudication was made in an action brought by the Home Bank against the assignor, J.B. Brewster Co. and the assignee, and it adjudges that the assignor was guilty of fraud which rendered the assignment void as to the bank, and set aside a transfer of a policy of insurance, a part of the proceeds of which constitute the entire assets now to be distributed. While the court adjudged necessarily that the bank had the right to pursue the remedy which it did, it did not attempt to determine that the bank had no other remedy, and that should it fail to secure money enough by that proceeding to satisfy its claim, it could not resort to other proceedings to reach the property, if any should be discovered, of the assignor, and to share in the distribution of the assigned estate; and that being so, it is difficult to see how it can be said that the judgment in that action affects in any way the valid judgments which the bank now properly insists should share in the distribution of the fund among the general creditors.

The order should be affirmed, with costs.