First Nat. Bank v. Skidmore

The contention of appellant must be overruled, we conclude, that the conveyance from L. W. Ward to J. C. Stiles was in fraud of creditors. He placed all his interest in the land beyond the reach of ordinary process in legal action to the prejudice of the rights of existing creditors, and under circumstances, when all of them are considered, sufficient to show the object and effect to hinder and delay or defeat creditors. At least the circumstances are of sufficient probative force to make an issue of fact for decision by the jury as to the alienation of the unexempt part of the land being an act made with intention to hinder and defraud creditors. The evidence shows, too, that J. C. Stiles, the grantee, knew and participated in the object and purposes of his grantor. Further, the circumstances are sufficient to support the special finding of the jury that the bank had notice at the time it became the pledgee of the vendor's lien notes of the purpose and intent of Ward to hinder and delay the appellee Skidmore in the collection of his debt.

In giving effect to the jury finding that the conveyance was fraudulent, the court determined that the conveyance was an absolute nullity for all purposes as against appellee Skidmore, and allowed him a foreclosure, as the judgment purports to do, of his prior judgment lien on all the land owned by L. W. Ward undertaken to be passed by the deed. The appellant bank claims, in effect, that this decision was error under the facts, and to the extent, at least, of the 200-acre homestead. At the time the conveyance in suit was executed, on November 30, 1920, the debt of appellee Skidmore was due, but had not been reduced to judgment. J. P. Skidmore reduced his debt to a judgment against L. W. Ward on November 2, 1922, and filed an abstract of it for record on May 11, 1922. The bank became the pledgee of the vendor's lien notes, as collateral security for its debt, on January 25, 1921. The deed from Ward to Stiles passed all of L. W. Ward's undivided half interest in the land. He had only a one-half interest in all the land. It is conclusively shown that a part of the land was occupied as a homestead by L. W. Ward and his family at the time of the conveyance, and that it had been his homestead continually for 30 years. Therefore the conveyance, as admittedly shown, included L. W. Ward's homestead of 200 acres as well as his excess over the homestead right. The general rule is well settled that, where a fraudulent conveyance is set aside in a suit by a creditor, such annulment only restores to him and to the grantor, as against each other, their respective rights as they existed before the deed was executed. Redmond v. Hayes, 116 Minn. 403, 133 N.W. 1016. The rights of neither can be enlarged by the cancellation of the deed. The fraudulent conveyance remains as between the parties thereto, and the title to the land vests in the grantee, subject only to the rights of creditors to have the grant annulled as to them. 27 C.J. p. 467; Stevens v. Cobern, 109 Tex. 574,213 S.W. 925; and other cases. Applying the rule that the appellee Skidmore could enforce such legal rights he had as if no conveyance had been made, he had the legal right to look to all the unexempt property of L. W. Ward for satisfaction of his debt. He would have no cause of action against any other property. Manifestly he did not have the legal right to resort to the homestead, protected by law. Article 3785, Rev. Stat.; Const. art. 16, § 50. And according to the great weight of authority a conveyance of a homestead is not a fraud on creditors and furnishes them no ground for complaint, even though it is made with actual intent to defraud general creditors. 27 C.J. p. 441; 12 R.C.L. p. 505; Beard v. Blum, 64 Tex. 59; Wood v. Chambers, 20 Tex. 254, 70 Am.Dec. 382; Martel v. Somers, 26 Tex. 560; Baines v. Baker, 60 Tex. 140. For the creditor is not injured by a conveyance of property which he cannot legally subject to his debt. Since the creditor is affected only to the extent of property subject to the debt under ordinary execution, where a conveyance includes both property which is exempt as a homestead and property not so exempt, the creditor is entitled to reach the property not exempt, if the conveyance is fraudulent as to him. This, however, is the extent of his right on setting aside the conveyance, and he can recover nothing beyond the excess over the homestead right. McNair v. Moore, 64 S.C. 82,41 S.E. 829; Thysell v. McDonald, 134 Minn. 400, 159 N.W. 958, Ann.Cas. 1917C, 1015; Kennedy v. Bank, 107 Ala. 170, 18 So. 396, 36 L.R.A. 308.

A conveyance fraudulent in part, and therefore void as to that part, is not necessarily void in whole, but may be sustained as to the part which is free from legal fraud. 12 R.C.L. § 8, p. 475. The bank, a lienholder, setting up the defense that the sale of the homestead was valid between the parties and not fraudulent as to creditors, would, in the facts, be entitled to foreclose the vendor's lien against the homestead to the extent of the value of the 200 acres, and the appellee Skidmore would not have the legal right to participate in the proceeds thereof. As between L. W. Ward, J. C. Stiles, and the bank, the bank acquired a valid claim to a debt against J. C. Stiles, the maker of the notes, and a valid lien against the homestead especially. J. C. Stiles' notes, although executed for the accommodation of L. W. Ward, were, in the hands of the bank, binding obligations, at least to the extent of the debt pledged, and L. W. Ward had transferred and indorsed the notes to the bank. Skidmore v. Bank (Tex.Civ.App.) 261 S.W. 552. It is, in the facts, immaterial that the homestead exemption ceased when Ward acquired a homestead in Hidalgo county, for by the conveyance the title passed to J. C. Stiles and did not remain in Ward. Miller v. Menke, 56 Tex. 559; Inge v. Cain, 65 Tex. 81; Hargadene v. Whitfield, 71 Tex. 488, 9 S.W. 475. However, in view of the jury finding and the evidence, the bank would not be entitled to priority over the appellee Skidmore in the excess of the land above the homestead exemption. The bank's lien would be subordinate to the lien of appellee Skidmore in the excess above the homestead. The bank knew, as the jury found, of the purpose and intent of L. W. Ward to defraud appellee at the time it took the vendor's lien against all the land. The bank at the time was well secured with collateral security to pay its debt, and in exchanging and substituting the collateral acted purely for the accommodation of L. W. Ward, and not in its own interest, operating to hinder other creditors.

The appellant, as grounds for priority in the excess above the homestead value, seeks to apply the doctrine that a debtor in failing circumstances has a right to prefer one creditor over another for the purpose of securing a bona fide debt. The facts do not warrant the application of the doctrine. The facts conclusively show that the bank did not take the vendor's lien notes solely for the purpose of securing its debt, and that there was no need to make the exchange. The bank already had sufficient "gilt edge security" for its debt, and solely for the accommodation of L. W. Ward, knowing at the time of his purpose and intent, as the jury found, surrendered the "gilt edge security" and took over the vendor's lien notes in lieu thereof. The effect is that the bank was not the holder of the vendor's lien notes, to the extent of the excess above the homestead value in the land, in good faith, unaffected with an act on its part of participation in and furtherance of the purpose and intent of L. W. Ward of hindering or delaying other creditors. 12 R.C.L. § 96, p. 577.

In accordance with the conclusions reached, the judgment of the trial court is modified to the extent of establishing a judgment lien in favor of appellee Skidmore on all the undivided interest of L. W. Ward in the land only in excess above the 200 acres as a homestead, and with foreclosure of such lien in priority and full satisfaction of his debt to the debt of the bank, and adjudging a foreclosure of the vendor's lien held by the appellant bank in favor of the bank to the value of the 200 acres exempt as a homestead. As modified, the judgment is then in all things affirmed. The costs of appeal are taxed against the appellee J. P. Skidmore.

Modified and affirmed.

On Motion for Rehearing. In the motion for rehearing the appellee insists that he should be allowed a foreclosure on all of the land undertaken to be passed by the deed to J. C. Stiles on November 30, 1920, such conveyance being fraudulent as to creditors, as determined by the jury. Aside from the precise propositions relied on in the motion, we have reached the conclusion, upon a reconsideration of the evidence, that we erred in deciding that the judgment of the trial court should be modified so as to allow the appellant bank a foreclosure of its lien in priority of appellee's lien on a part of the land to the extent of 200 acres. The judgment should be affirmed instead of modified as previously determined.

The appellant bank proved that a part of the 656-acre tract of land was occupied as a homestead by L. W. Ward and his family at the time of the conveyance to J. C. Stiles, and that it had been his homestead continuously for 30 years. But there is no evidence as to what part of the land was occupied or used by L. W. Ward as homestead. And the facts do not show that L. W. Ward had made any statutory designation of homestead in the land, or had made selection of any defined 200 acres before the conveyance to J. C. Stiles, or that selection of such exemption was made in the conveyance to J. C. Stiles. The facts stand simply in this way: That L. W. Ward, entitled to a homestead claim, and having more land than is exempt by the law, conveyed the entire tract in fraud of his creditors, as determined by the jury, and made no claim of his exemption out of the whole, by designation, selection, or otherwise. The bank was the holder of vendor's lien notes against the whole tract, and not against certain premises selected or defined as the homestead of L. W. Ward. If the bank had the right, as a lienholder, to assert, as against a judgment lienholder, that a part of the land constituted a homestead, and that the judgment lien did not attach to the homestead, the bank has nevertheless failed to put the court in a position to separate the exempt from the nonexempt property. The burden of proof was upon the bank, in the circumstances, to prove, as a part of its affirmative defense, not only that a part of the land was exempt as a homestead at the time of the conveyance to J. C. Stiles, but what part of the land was the homestead at the time. The bank was seeking affirmative relief in that respect, that it was entitled to at least priority in certain premises to the extent of 200 acres as homestead of L. W. Ward. The appellee, a judgment creditor, was not called upon to negative homestead exemption or identify the part of the tract that was homestead. And the court, in the circumstances, cannot make the selection of a homestead out of the larger tract for L. W. Ward, in the absence of proof of some designation or selection of a particular part of the land by L. W. Ward. For the right of making designation or selection rested primarily in L. W. Ward, the head of a family. And a creditor or lienholder cannot set up the claim to a particular part of the tract as homestead except in right of a designation or selection by the homesteader, existing at the time of the conveyance. If the bank had shown that L. W. Ward had made a statutory designation, or had made a selection in the deed to J. C. Stiles, or that a particular part of the land was used and occupied as a homestead, or if the conveyance to J. C. Stiles had been only for a tract consisting of 200 acres or less, then in either event a designation or selection of the homestead by the person legally authorized to do so, and entitled to make the selection, would be apparent and proven. The bank then would be holding a lien on certain defined premises as a homestead and could assert the claim as well as the selection of homestead in defense of its legal rights thereunder.

We do not think that reversible error is shown in the record. The judgment heretofore rendered by this court is set aside, and the judgment of the trial court is in all things affirmed.