Dearing v. . McKinnon Dash Hardware Co.

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[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] According to the law of the state of Michigan, which was duly proved upon the trial, the instrument in question is a trust mortgage upon chattels, because the transfer was not absolute, but conditional, and passed neither title nor right to possession until after breach of the condition. (Cluett v. Rosenthal,100 Mich. 193; Nat. Bank of Oshkosh v. First Nat. Bank ofIronwood, 100 Mich. 485; Austin v. First Nat. Bank ofKalamazoo, 100 Mich. 613; Warner v. Littlefield, 89 Mich. 329. ) If the transfer had been absolute, with the right to take immediate possession, it would, under the laws of Michigan, have been a general assignment and void, because a statute of that state prohibits preferences in documents of that character. (Pettibone v. Byrne, 97 Mich. 85; Atkinson v. Weidner,79 Mich. 575; Kendall v. Bishop, 76 Mich. 634; 2 Howell's Annotated Statutes of Michigan, §§ 6184, 6193, 6194, 6203 and 8739.) Although it was given to a trustee for the benefit of creditors, according to the law of the state where it was executed, it was as valid as if it had been given directly to the creditors themselves. (Adams v. Niemann, 46 Mich. 135, 137.)

Whether the coercive clause, the provisions relating to the filing of a schedule of creditors by the mortgagor and the effect thereof, those permitting a continuance of the business with purchases and sales by the mortgagor, and those allowing the trustee wide latitude in selling, were established by evidence as valid by the law of the domicile of the mortgagor, we do not feel called upon to express an opinion. (Albion Malleable Iron Co. v. First Nat. Bank of Albion, 116 Mich. 218.) Judicial comity does not require us to enforce any clause of the instrument, which, even if valid under the lex domicilii, conflicts with the policy of our state relating to property within its borders, or impairs the rights or remedies of domestic creditors. (Keller v. Paine, 107 N.Y. 83, 89; Warner v. Jaffray,96 N.Y. 248, 255.) A transfer in another state, although valid there, which would be void as to creditors if made here, does not confer title to personal property situated here that is good as against a resident of this state armed with legal process to collect a debt. (Guillander v. Howell, 35 N.Y. 657.) To this extent, in nearly all jurisdictions, the rule of comity yields to the policy of the state with reference to the collection of debts due to its own citizens, out of property within its boundaries and protected by its laws. (Hallgarten v. Oldham,135 Mass. 1, 7; Green v. Van Buskirk, 72 U.S. 307, 312; S.C.,74 U.S. 139, 150.)

The coercive clause of the mortgage in question required all creditors, before they could take any benefit therefrom, to come in under it and accept its terms, and, if their debts became due before the mortgage, to so extend the time of payment that they could not be enforced until after the mortgage matured. It not only withdrew from the trustee the power of paying any creditor who did not comply with these conditions, but also provided that after he had paid the creditors "in full who accept of this security and assent thereto," he was to pay the surplus to the mortgagor. The instrument was to "only operate in favor of those" so assenting, and the direction to pay was limited in the same manner. After payment, "in the manner aforesaid, and in the order aforesaid," the remainder was to go to the mortgagor, "its successors and assigns." Thus, no creditor could derive any benefit from the mortgage unless he agreed to waive the remedies provided by law for the collection of debts, and if he refused to so agree all the property of the mortgagor was placed beyond his reach for an indefinite period. If his debt was due and he brought suit within the ninety days he was shut out from participation in the assets. If the mortgagor failed to include him in the schedule of creditors, which, although it was to be furnished at some undefined time after the execution of the mortgage, was, when furnished, to become a part of the instrument; or understated the amount of his claim; or it was disputed by some other creditor or by the trustee, he could not establish it "by lawful suit," as provided by law, without running the risk of serious loss. He might wait until the ninety-day period had expired, or even until his demand had outlawed, and then find that he was not on the list.

The forced extension of the term of credit involved an abandonment, under compulsion, of all legal remedies for the collection of claims during the period of extension. This was an unreasonable exaction, in conflict with the policy and laws of our state, which opens the doors of its courts to enable creditors to collect their debts as soon as they fall due. A failing debtor in another state cannot compel a resident of this state to forego his right to the remedies afforded by our laws. He cannot by an agreement with a third party, made outside of this state, withdraw his property from the reach of legal process in this state, "in order to compel his creditors, under the apprehension of losing all their claims, to comply with a law of his own enactment." (Marsh v. Bennett, 5 McLean, 117, 126.) He cannot thus play upon the fears of his creditors in order to "coerce them into his own terms." (Grover v. Wakeman, 11 Wend. 187, 201; Hyslop v. Clarke, 14 Johns. 458.) While in the cases cited the coercive condition required a release of the debt in order to share in the fund, the principle is the same where the creditor is compelled to extend the time of payment, which is virtually a covenant not to sue, or be shut out entirely, for a debtor cannot constrain his creditor to forego, by affirmative action, a right provided by law.

The claim of the attaching creditor became due about forty-five days before the mortgage, which was to run for ninety days. That creditor did not see fit to accept the privilege afforded by the mortgage upon the conditions imposed, and the necessary effect upon it and others similarly situated was that all the assets of the insolvent debtor would be converted into money and paid over to such creditors only as accepted the terms exacted, and whatever remained would be restored to the mortgagor. The hindrance and delay thus caused is precisely what the statute relating to fraudulent conveyances aims to prevent. A more adroit and dangerous method of evading that statute and violating its provisions has seldom been devised. An insolvent corporation, under the protection of this ingenious instrument, is permitted to keep possession of all its property, to continue its business, to buy, manufacture and sell "in the usual course of trade," which admits of sales on credit, and the creditors, whether preferred or unpreferred, unless they are willing to let this condition of affairs continue for ninety days, and tie their own hands by an extension of time for the payment of their debts, must lose all benefit from the mortgage and every chance of having their debts paid out of the assets of the mortgagor until a surplus, after paying all assenting creditors, should come back into its possession. There was not even a promise by the mortgagor to pay the proceeds of sales to the trustee, although the latter was "authorized and empowered to receive" them. Thus the mortgagor could keep its creditors at bay for ninety days, and continue in the possession and use of its property during that period. The inevitable result would be to hinder and delay creditors in violation of law.

The mortgage was void upon its face on account of the coercive provisions which it contained. Independent of those provisions, the peculiar circumstances presented a question of fact as to actual and intentional fraud on the part of the mortgagor. The device was clever, but the exceptional and extraordinary facts laid the honesty of the debtor's purpose open to the judgment of a jury, who might find dishonesty and fraud, notwithstanding, as stated in an old statute, the "show of words and sentences, as though the same were made bona fide for good causes and upon just and lawful considerations." (27 Eliz. c. 4; 2 R.S. 137, § 4; Russell v. Winne, 37 N.Y. 591; Smith v.Acker, 23 Wend. 653; Wood v. Lowry, 17 Wend. 492.)

It is, however, claimed that the statute relied upon by the defendants affords them no protection, because they did not specifically plead it in their answer. This statute, commonly called the Statute of Frauds, but not so entitled, consists of chapter 7, part second of the Revised Statutes, entitled "of fraudulent conveyances and contracts relative to real and personal property." The provisions concerning fraudulent conveyances, which apply to every kind of property, are a re-enactment, with changes, of an ancient act, which is frequently, but not accurately, called the Statute of Frauds. (1 R.S. part II, ch. VII, vol. II, p. 133 [9th ed. p. 1883]; 13 Eliz. c. 5.) Those regulating the evidence necessary to establish certain contracts are a re-enactment, with changes, of a later "act for the prevention of frauds and perjuries," which is properly called the Statute of Frauds. (29 Car. II, c. 3.) The two statutes, which differ widely in origin and object, are now blended into one. The earlier was little more than a codification of the common law with reference to transfers of property in fraud of creditors, while the later made a radical innovation upon the common law by establishing a new rule of evidence.

The established practice does not require a pleader to specifically refer to the provisions relating to fraudulent conveyances in an answer justifying the seizure of goods under legal process. It is sufficient to allege that the goods levied upon were the property of the person against whom the process was issued, or that he had a leviable or attachable interest therein. Such is the form of the answer in the case before us, which we regard as sufficient without specific reference to the statute. Those portions of the statute that are waived unless pleaded, relate to contracts which, "although previously capable of valid proof by parol evidence," are declared to be void unless in writing. This, as it is held, creates a new defense, which must generally be pleaded, or the protection of the statute will be lost. The cases relied upon by the appellant are all of that class, and have no application to this appeal. (Crane v.Powell, 139 N.Y. 379; Matthews v. Matthews, 154 N.Y. 288;Sanger v. French, 157 N.Y. 213, 234.)

The order of the Appellate Division should be affirmed and judgment absolute rendered against the appellant, in accordance with his stipulation, with costs in all courts.

PARKER, Ch. J., GRAY, BARTLETT, MARTIN, CULLEN and WERNER, JJ., concur.

Order affirmed, etc.