McAvoy v. Jennings

Dunbar, J.

On November 19,1903, M. J. Harkins, L. W. Harkins and E. E. Harkins, copartners under the firm name of The Harkins Company, executed with I. H. Jennings, the appellant, herein, a certain agreement in writing. This agreement was to the effect that the Harkinses had been carrying on a general grocery business, and had incurred debts which were enumerated in a list of creditors attached to the agreement, stating that, desiring to pay off such debts, they turned over their property to Jennings on the condition that he should collect the book accounts, sell the property and, after deducting the expenses of such business, apply the proceeds remaining, equally and ratably among the list of creditors, with this provision:

“Provided, however, that each creditor, before being entitled to receive his pro rata under the terms of this agreement, shall deliver to the party of the second part a release of all claims against the said parties of the first part.”

This agreement in full may be found in the case of McAvoy v. Jennings, reported in 39 Wash. 109, 81 Pac. 77. The instrument was signed, sealed and executed by The Harkins Company and by Jennings, and the list of creditors for whose benefit the transfer was made was attached. Immediately upon the execution of this agreement, Jennings took possession of the assets mentioned therein, sold the tangible property, and proceeded with the collection of the book accounts. The American Savings Bank & Trust Company was one of the creditors included in the list attached to the trust deed.

After the transfer to Jennings had been made, the bank assigned its claim to McAvoy, the respondent herein, who commenced an action in the superior court of King county to reduce the claim to judgment against the members of The Harkins Company. In that action McAvoy caused Jennings to be summoned as garnishee. Jennings answered, denying any indebtedness to the defendants, or the possession of any property belonging to them; but by way of further and explanatory answer, set forth fully the trust deed and all other facts above recited, and showed that, at the time of the service of the writ of garnishment upon him, he had in his hands the sum of $850, which he was prepared to pro rate among the creditors in accordance with the terms and conditions of the written agreement, and asked for a discharge. The plaintiff filed an affidavit controverting the answer of the garnishee, in which he admitted all the affirmative facts recited by the garnishee, but alleged that the transaction between The Harkins Company and Jennings -was fraudulent and void as to creditors, because it was without consideration and because there had been no compliance with the sales-in-bulk law. The controverting affidavit further denied that the transfer was made with the consent of all the creditors, or that the plaintiff or his assignor had knowledge of, or consented to, or ratified, the transfer; alleged that the transfer was made to hinder, delay and defraud creditors; and prayed that the garnishee be held upon his answer, and that judgment be rendered against him in favor of plaintiff. Upon this issue a trial was had before the court, but there was no testimony advanced which it is necessary to consider; so that the case must be determined upon the character of the written agreement itself. The court decided in favor of plaintiff and against the garnishee, for the full amount of plaintiff’s judgment against the original defendants. From the judgment entered against the garnishee defendant, this appeal is prosecuted.

Without setting up the findings of fact and conclusions of law, we will proceed at once to discuss the legal propositions involved. It is contended by the appellant that, inasmuch as there is no allegation in the controverting affidavit of the respondent and no proof offered to show that the defendants, The Harkins Company, were insolvent at the time this trust deed was made, the respondent will not be heard to assail the validity of the deed. And unquestionably that has been the uniform holding of this court. This was decided in Wagner v. Law, 3 Wash. 500, 28 Pac. 1109, 29 Pac. 927, 28 Am. St. 56, 15 L. R. A. 784, in which the court quoted approving^ from Pearson v. Maxfield, 51 Iowa 76, 50 N. W. 77, where it was said: ’

“If at the time of the issuance of the execution, the execution debtor had other property out of which the execution could have been satisfied, the plaintiff should have levied upon such property instead of upon the property in question, which could be effectually reached only through the aid of a court of equity.”

This court added:

“Of course, if it is necessary to prove insolvency, it is necessary to allege it, as the defendant has a right to prepare his defense with reference to the allegations of the complaint, . . . we decide that this kind of an action cannot be sustained without an allegation and proof that there was no other property of the judgment debtor at the time of the conveyance out of which the creditor could satisfy his judgment or claim, and that, therefore, the complaint does not state facts sufficient to constitute a cause of action.”

See, also, Hamilton Brown Shoe Co. v. Adams, 5 Wash. 333, 32 Pac. 92, where it was said by this court:

“If this is to be regarded as an action to set aside a fraudulent conveyance, the complaint is plainly insufficient, for it is neither based upon a return of nulla bona, nor an allegation that there was no other property out of which plaintiff’s claim could be satisfied. Courts will not enter into an investigation of the merits or demerits of a conveyance at the instance of any petitioner, until it appears that he has some interest in the determination of that question, and he cannot have any practical interest if the debtor has other property which will respond to his execution. His right is limited to the satisfaction of his claim; it does not extend to enforcing its satisfaction out of some particular property of the debtor.”

There must be either an allegation of insolvency or an allegation of the issuance of an execution and return of nulla bona, which implies insolvency.

But, lest the action should be commenced again and these allegations made, we think it best to determine the main question in the case, viz., was the agreement above set forth void by reason of the proviso therein that each creditor before being entitled to receive his pro rata should deliver to the party of the second part a release of all his claims? Upon this question there is a hopeless division of authority; but while this particular question has never been decided by this court, we have decided uniformly that an insolvent debtor had a right to prefer creditors. This rule was first laid down in Turner v. Iowa Nat. Bank, 2 Wash. 192, 26 Pac. 256, where it was decided that, under the laws of this state, a debtor in failing circumstances could mortgage his entire property to secure bona fide debts to a portion of his creditors, and leave the debts due other creditors unsatisfied, the court in the course of its remarks saying:

“There is no law in this state to prevent a debtor, even though he be in failing circumstances, from paying or securing a portion of his creditors, so long as he does so in good faith, although he should dispose of his entire property in that way, and leave other debts unsatisfied.”

There is no question raised in this case that the debts which were sought to be paid were not honest debts, or that there was any attempt to defraud any other creditors by the payments of dishonest debts; but the sole contention is that the debtor had no right to stipulate that the creditor,.as a condition of receiving his pro rata, deliver to the debtor a release of all claims against him. To the effect that the debtor had the power in this state to prefer his creditors, see, also. Ephraim v. Kelleher. 4 Wash, 243, 29 Pac. 985, 18 L. R. A. 604; Benham v. Ham, 5 Wash. 128, 31 Pac. 459, 34 Am. St. 851; Furth v. Snell, 6 Wash. 542, 33 Pac. 830; Samuel v. Kittenger, 6 Wash. 261, 33 Pac. 509. And this same doctrine was reannounced in Vietor v. Glover, 17 Wash. 37, 48 Pac. 788, 40 L. R. A. 297, in a case where practically the same transaction was had as in the case at bar. There it was again said:

“It is the established law of this state that an individual, although insolvent or in failing circumstances, may pay or secure one or more creditors to the exclusion of others equally meritorious, even if by so doing he exhau'sts the whole of his property.”

It was also said that the manner of giving the preference was immaterial; that it might be given by deed or in any mode which effects a legal transfer of the property, and that partners had the same right that individuals have, citing Bump on Fraudulent Conveyances (3d ed.), page 186. It was further said:

“The right to prefer manifestly involves the right to designate the creditors, or class of creditors, to be preferred; and it therefore follows that the only ground on which the unpreferred creditors can justly complain is that the claims of the preferred creditors are not bona fide and real.”

Then, if an insolvent debtor has a right to prefer one class of creditors to the extent of the absolute exclusion of another class, by a diversion of the funds of the estate by payments made to the preferred class which exhausts such funds, it must follow that he has a right to mate such payments upon such terms as he sees fit to impose. If the terms are not agreed to by the creditor, the only result is that he will not become a preferred creditor. In this instance, if the respondent’s assignor, the bank, had not been incorporated in the agreement by being placed upon the list of creditors to whom the payments should be made, he could not have complained under the law which has been announced by this court. He certainly is not in any better position by reason of his having been placed among the creditors. The right, in the absence of a fraud upon the creditors by payment of claims which are not bona fide, to make such payments as the debtor sees fit to make, it seems to us must logically carry with it the right to make the agreement which is the basis of this action.

The contention that the transfer was void by reason of its being in contravention of what is termed the “sales-in-bulk” law, chapter 109, page 222, Laws of 1901, is untenable, for the reason that this was not a sale within the contemplation of that act. The object of that law was to prevent the vendor, generally a retail merchant, from escaping his responsibilities to his creditors by disposing of all his stock, pocketing the proceeds, and leaving his creditors without redress. But in this case Jennings did not purchase the stock and, under the terms of the agreement, was not to pay any portion of the value of the stock, of which he took possession, to the owners. But he simply acted as a trustee, so far as the goods assigned to him went, for the benefit of the creditors. Even if the transaction could be construed to fall within the scope and intention of that act, the fact that it failed to comply with all of the provisions of the act would not render all of the proceeds available to the respondent to the exclusion or injury of all the other creditors; for, under such circumstances, the purchaser would simply be held to be a trustee for the benefit of all the creditors. Fitz Henry v. Munter, 33 Wash. 629, 74 Pac. 1003; Kohn v. Fishbach, 36 Wash. 69, 78 Pac. 199, 104 Am. St. 941. The other minor objections raised to the validity of the agreement we think are without force.

This judgment must be reversed and the respondent will be allowed, if he sees fit, to receive his pro rata distribution of the estate under the terms of the agreement.

Mount, C. J., Crow, Hadley, and Fullerton, JJ., concur.