Marks, Rothenberg & Co. v. N. H. & R. L. Bradley

Cooper, J.,

delivered the opinion of the court.

On the twenty-fifth day of February, 1891, N. Ii. & B. L. Bradley, a commercial firm, made an assignment of the partnership assets for the payment of partnership creditors, with preferences. The conveyance purports to convey all the partnership property. The present bill was exhibited by certain creditors of the firm, attacking the assignment as fraudulent. These facts are relied upon to invalidate it: Some weeks prior to the assignment the firm was indebted to James, Lawson & Gordon in about the sum of $4,000. These creditors held as collateral security certain notes and accounts, but were pressing for other security. In this condition of affairs it was agreed that Mrs. A.'ll. Bradley should execute her note to James, Lawson & Gordon, and secure the same by a mortgage of her farm, and that the firm of N. II. & B. L. Bradley should indorse the note. This was intended only as a temporary security, and Mrs. Bradley and her property were to be released as soon as other financial arrangements could be made by the firm. A few weeks after this the store of N. H. & B. L. Bradley, at Flora, with its contents, was destroyed by fire. The property was insured, and some $3,000 was collected from the insurance policies; and the firm, failing to make any satisfactory arrangements, determined to make an assignment.

About the twentieth of February B. L. Bradley drew from the bank in which it had been deposited the insurance money, and sent by express to A. II. Bradley the sum of $3,090. A. H. Bradley, acting for his wife, went to James, Lawson & Gordon with the money and arranged with this firm for the discharge of the firm of N. II. & B. L. Bradley by agreeing that his wife would assume the payment of the debt absolutely, and thatu her property, which had been mortgaged, should stand as security therefor. James, Lawson & Gordon thereupon surrendered to the firm of N. II. & B. L. Bradley the collaterals which they had held for the debt, erased the names of these parties from the note of Mrs. A. II. Bradley, and agreed to *8 look solely to her for the payment of the debt. This transaction furnishes one of the grounds upon which the validity of the deed is assailed.

Of the debts mentioned in the assignment, among the preferred claims, is one to R. J. Harding for about $294. The evidence discloses that the greater part'of this claim arose in this way: The members of the firm of N. H. & R. L. Bradley owned certain lands and personal property, upon which taxes for the year 1890 were due and unpaid. Some weeks before the assignment was made the firm wrote to Mr. Harding, who was the sheriff and tax-collector of Hinds county, directing him to draw upon it for these taxes. In accordance with this request, the sheriff' drew upon the firm and attached the tax receipts to the draft. The draft was presented and payment refused, and thereupon the draft and receipts were returned to Harding, who destroyed them and advertised the property for sale. It does not appear that the assignors knew that the lands had been so advertised, or that there remained sufficient time for the sheriff' to do so. The supposed debt to Harding arising from these facts was, as we have stated, among those preferred.

Another attack arises from these facts: The store at Flora, in which the firm transacted business, was the individual property of N. H. Bradley. It was insured in the name of the firm and the premiums paid by it. In making proofs of loss it was stated that the firm owned the store, but before the policy was paid the adjuster of the insurance company discovered the fact that the title was in N. H. Bradley. The company, however, waived defense on this ground, and paid the amount of the policy to the firm. A portion of the insurance money arising from the policy on the store was used in discharging the debt to James, Lawson & Gordon, but there remained of it about $290, which was in hand at the time of the execution of the assignment. Because of the ownership of the building by him, this fund was treated as the property of N. H. Bradley, and the money remaining on *9 hand arising from the policy was handed to him' by R. L. Bradley, and was by N. H. Bradley kept and not delivered to the assignee. These are the principal facts upon which the assignment is sought to be annulled.

It is sufficient to say, in reference to the transaction between the firm of James, Lawson & Gordon and Mrs. A. IT. Bradley, that nothing appears from which an inference of fraud is fairly to be drawn. The money was applied in the discharge of a debt due by the firm, and the fact that it was not actually paid over to James, Lawson & Gordon, and by them returned to Mrs. Bradley, is immaterial. The result is the same, and since the thing done was lawful, no injury could accrue to any creditor by reason of the method pursued.

The effect of the preference given to R. J. Harding for the payment of the taxes upon the property of the members of the firm, and of the retention by N. IT. Bradley of a part of the insurance money, may be considered together; they are of like character, being in the one case an appropriation of firm assets to the payment of the debts of the individual members, and in the other a retention by one of the assignors of a part of the firm assets.

It is argued by the appellees’ counsel that no objection can be taken to the assignment on its face; that, so far as thereby appears, no fraud is shown nor any thing condemned by law; that the objectionable facts are shown by evidence dehors the instrument; and that, under such circumstances, the question is whether there was a fraudulent intent in fact on the part of the assignors, which is to be determined by a consideration of all the circumstances under which the assignment was made; and that an honest mistake of law or of fact so shown ought not to vitiate the deed. In other words, that where the' court is not confined to a mere inspection and construction of the deed, its validity is to be determined by the existence or non-existence of a fraudulent purpose on the part of the grantors, and that a merely unlawful provision disclosed by evidence aliunde the deed should not affect it as *10 a whole, but that it should be upheld save as to such provision.

Two questions are presented by the inquiry. First, whether the intent which is the subject of investigation is the personal intent of the assignor or the technical intent of the statute against fraudulent conveyances; and, second, whether the intent, if found as matter of fact by evidence outside the deed, is in any respect different from the intent discovered by an inspection of the deed itself.

Mr. Bigelow, in his work, on Frauds, vol. 2, page 374, in discussing the question whether it is necessary to show a personal fraudulent purpose of the debtor to invalidate a conveyance the necessary effect of which is to hinder, delay, or defraud creditors, says: “ The truth appears to be that to have taken the statute literally would in most cases have nullified the law, and accordingly, in all the great range and number of cases relating to the statutes against fraudulent conveyances there is hardly to be found, apart from oue or two well-defined situations, a single specific authority which would be generally considered as of weight for the proposition that the ‘intent’ of the statute is a personal intent. It is true, indeed, that proof of such intent will always make a case under the statute; and it is every-day practice for the courts to receive evidence for and against such intent. But in most cases the effect, whatever the purpose, of evidence of a personal intention to defraud is only to strengthen a case that, if sustained, might have been made without such evidence.”

Mr. Burrill, on the other hand, contends that the true rule of construction is such that, “in order to bring an assignment by a debtor within the statute of fraudulent conveyances (at least in its original and unabridged form, and in reference to its professed title) .on the ground of an intent to hinder and delay, there must be an intent to delay and hinder actually entertained by the debtor, and not only an actual intent, but a covinous and fraudulent one. But there is a *11 class of cases establishing a very different rule of construction of the statute in some states, and constituting there the law of the land.”

In this state, in a line of decisions beginning with the Farmers’ Bank v. Douglass, 11 S. & M., 469 , it has uniformly been held that where, upon the face of an instrument, an unlawful purpose appears, the law will impute to the grantor a fraudulent intent and avoid the deed, upon the maxim that one must be held to have intended the consequeuces of an act done by him. It is admitted by counsel for appellees that if, upon the face of the instrument, it appeared that the assignors had devoted the partnership property to the payment of their individual debts, or that a part of the property purporting to have been conveyed by’it was in fact reserved, the assignment would be annulled. But it is argued that this result would follow because the law would impute, under such circumstances, to the assignors, from the face of the instrument, a covinous and fraudulent intent. In other words, that the personal intent is that which, in all cases, must be discovered, and that it must be a fraudulent one to avoid the deed. We do not so understand the decisions. An act otherwise lawful may be invalidated because of the fraudulent personal intent of the party ; but an act in and of itself unlawful, cannot be made lawful because of the absence of an actual fraudulent intent on the part of the actor. Where the intent is a fraudulent one, and the consequences of the act injurious, the fraudulent intent avoids it; where the act is unlawful, though the actual fraudulent intent is absent, it is avoided because it is unlawful.

Nightingale v. Harris, 6 R. I., 321, the case often referred to as supporting the proposition-that the fraud which will vitiate an assignment must be the intentional fraud of the assignor, has been practically overruled in the more recent case of Gardner v. Bank, 13 R. I., 155.

It is evident that the nature and effect of an act cannot be changed or controlled by the character of the evidence by *12 which it is proved. An unlawful act proved by the face of the deed, is merely an unlawful act; an unlawful purpose proved by extraneous evidence, is not the less unlawful. The question is not how the fact shall be proved, but it is, what effect does it have when proved ? And so are the authorities. Southard v. Benner, 72 N. Y., 424 ; Gere v. Murray, 6 Minn., 305 ; Sturdivant v. Davis, Ired., Law, 65 ; Ranlett v. Blodgett, 17 N. H., 298; Gardner v. McEwen, 19 N. Y., 123 ; Coolidge v. Melvin, 42 N. H., 510; Clow v. Woods, 5 S. & R., 275; Gibson v. Love, 4 Fla., 217 ; Putnam v. Osgood, 52 N. H., 148; Orton v. Orton, 7 Or., 478 .

It might be sufficient for the disposition of this case to say that the reservation by N. II. Bradley of a part of the proceeds of the policy of insurance, which was the property of the firm, was sufficient to avoid the assignment, because it was an act done at the time and as part of the assignment, the necessary consequence of which was to prevent the assignment from operating upon the property according to its professed purpose. But we are also of opinion that the preference to Harding for the taxes due upon the property of individual members of the firm was a reservation of a benefit to them in the assigned property, and would alone have the same effect. ,

In truth, the assignors owed Harding nothing, and unless it be that this preference was a reservation of a benefit to the members of .the firm, it was the preferring of a fictitious debt, and that also would avoid the deed.

Bump on Fraudulent Conveyances, page 376, states the law to be “that an appropriation of the property to the payment of debts not owing by the assignor, nor contracted on his account, or for a larger sum than is due, to the prejudice of his creditors, is evidence of fraud. This will not, however, make the assignment void, uuless the assignee participates in the fraud. No creditor is concluded by taking under-the assignment from impeaching any of the debts attempted to be secured by it, and showing fraud and collusion *13 in such of them as may stand in his way, aud the payment of which would operate to his prejudice.- The impeached claim is extinguished by the fraud, and the share that would otherwise have been appropriated to its payment sinks into the residuum, for the benefit of those who are entitled to the residuum by the terms of the deed.” For this statement of the law he cites McIntosh v. Corner, 33 Md., 598 ; Hempstead v. Johnston, 18 Ark., 123; Hardcastle v. Fisher, 24 Mo., 70 ; Harris v. DeGraffenreid, 11 Ired., 89 ; Pinneo v. Hart, 30 Mo., 561 ; Nightingale v. Harris , 6 R. I., 321; Starr v. Dugan, 22 Md., 58 ; Woodward v. Marshall, 22 Pick., 468 .

Mr. Waite, in his work on Fraudulent Conveyances, § 228, makes a similar statement, relying upon some of these cases, as does, also, Burrill on Assignment, § 355, citing in addition the cases from Alabama. The Missouri court holds in 'accordance with the text of these writers. Maryland aud Massachusetts have statutes on the subject by which their decisions seem to be controlled. We have been unable to find the statutes of these states, but in Woodward v. Marshall, 22 Pick., 468 , it is held that “ fraud on the part of an assignor, not participated in by the assignee, would not defeat the rights of the creditors to have the trust fund administered according to the statute,” the court saying it is “not one of thé grounds mentioned in the statute for invalidating the discharge of the debtor.” In Arkansas and Alabama it is also held that an assignment, though fraudulently made, is not void unless the assignee participated in the fraud. Hill v. Shrygley, 51 Ark., 56; Trust v. Davidson, 90 Ala., 359 .

Harris v. DeGraffenreid , 11 Iredell, Law, was a controversy between a creditor and a bona fide purchaser from a trustee holding under a fraudulent deed, the fraud not appearing on the face of the instrument, and it was held that the purchaser got title. This case consists with our own. decision of Covington v. Mayers, 62 Miss., 730 .

In Stone v. Marshall , 7 Jones, Law (N. C.), it was held that the insertion of a fictitious debt avoided the assignment, upon *14 the ground that the debts intended to be paid by the assignment formed the consideration for the conveyance, and that where a part of the consideration of a deed is against law the whole is void.

Stone v. Marshall was overruled in Morris v. Pearson, 79 N. C., 253 , upon the ground that the debts mentioned in an assignment for the payment of which it is made do not form the consideration of the conveyance, but that the-'nominal consideration recited in the instrument is its real consideration. On the other hand, it is held in Pennsylvania, New York, Kansas, Tennessee, and probably Kentucky, that the insertion of a simulated claim avoids the deed. Irwin v. Keen, 3 Wharton, 347 ; Bank v. Wood, 45 Hun., 411 ; Jacobs v. Remsen, 36 N. Y., 668 ; Livermore v. Northrop, 44 N. Y., 107 ; Kayser v. Heavenrich, 5 Kansas, 324; Lockhard v. Brodie, 1 Tenn. Ch., 384; Peacock v. Tompkins, Meigs, 317; Gibbs v. Thompson, 7 Humph., 179 ; Lehmer v. Herr, 1 Duvall, 360.

The conflict in these authorities springs somewhat from the different points of view in which they are considered by the courts. If the assignee in the deed of assignment for the benefit of creditors is a purchaser- for value, or, if because of the debts due to creditors for the payment of which the assignment is made, their rights only are to be considered, it would seem that fraud of the grantor, not participated in or known by them, should not affect the validity of the conveyance, and if one or more of the claims to be paid are fraudulent, the assignment should be upheld in favor of those whose debts are just. But with us the assignee is considered as a volunteer. He pays nothing for the conveyance, nor is the condition of any creditor changed by reason of its execution. If the conveyance is upheld, their claims are to be paid out of the property assigned, but if it is avoided they occupy no worse position than before. They lose nothing by reason of the attempt to prefer them. The whole effect of annulling an assignment is to disappoint the will of the assignor, which ought not to be effectuated if his purpose is an unlawful one. *15 The conveyance is in any event valid so far as he is concerned, and cannot be assailed by him. But creditors who do not assent to it ought not to be precluded from pursuing their legal remedy, and subjecting th,e property assigned as the property of their debtor, unless some right superior to theirs has intervened. Assignments with preferences do not commend themselves to the courts, because of the inequality produced among a class of persons each having an equal equity to a participation in the estate of the debtor. But since the law, by reason of the right of the debtor to control his own property, permits him to prefer one creditor to another, this inequality alone is not sufficient to condemn an assignment. "Where, however, the power is exercised, it must be confined within legal limits, and no infringement upon the rights of creditors can be permitted. It is to be noted that the authorities cited by the text-writers in support of the proposition that the insertion of a simulated claim does not avoid the deed, are by courts in states in which either by statute or by decision it is held that the fraud of the assignor alone does not avoid the deed, only North Carolina and Missouri holding that the assignee is not a bona fide purchaser, and yet that a simulated claim is not ground of invalidating the assignment. We cannot assent to the correctness of these decisions.

A creditor whose claim is not preferred, should not be subjected to the additional burden of disproving the validity of preferred claims recognized by the assignor before he can reach the property or participate in its proceeds. The law gives and must preserve to a creditor the right of proceeding against his debtor to subject his property to the debt. He is not concerned about the claims of other creditors, and their existence interposes no obstacle to his subjecting the debtors estate. The mere interposition by the debtor of a false claim, to which priority of right is by his act given over a real creditor, operates necessarily to hinder and delay them, and probably to defraud them. They must, in any event, *16 turn aside from the pursuit of the debtor or his estate and litigate with the fictitious creditor, and are thereby hindered and delayed, or must submit to the unlawful apprppriation by the debtor of a part of his estate to such simulated debt, by which they would be defrauded.

An insolvent debtor, for the reason that he is the owner of his property notwithstanding his indebtedness, may appropriate his estate to the payment of any just debts due by him, and, since each creditor is justly entitled to the whole sum due him, no legal wrong is done to any creditor by the payment in full of the demands of others to the exclusion of his own, if the debtor’s estate is insufficient to pay all he owes. It is upon this principle that the right of an insolvent to make a preferential assignment rests. But the debtor may not pass beyond the limit fixed by law, and apply his estate to the benefit of himself or of others whom he does not owe, to the injury of creditors; for this is, in and of itself, a fraud upon them regardless of the secret purpose of the debtor. Much of the apparent inconsistency in judicial utterances arises from the fact that the word “fraud” is sometimes used as though applicable only to an act done with a corrupt or covinous intent, whereas in legal terminology it has a much broader meaning and application. Voluntary conveyances have been in very many cases held to be fraudulent as against creditors where there was an absence of any other evidence of a fraudulent intent on the part of the grantor than the fact and character of the conveyance and his insolvency. No case can be found in which the absence of a personal fraudulent purpose has given validity to a voluntary conveyance by an insolvent debtor of his whole estate, and it would be manifestly immaterial whether the character of the conveyance appeared on its face or should be proved to be voluntary by evidence dehors the instrument.

It is unnecessary to express any opinion as to what would be the effect, where by honest mistake of facts reasonably occurring, the debtor has unintentionally included as a rec *17 ognized claim against him one having no existence. It will be time enough to consider of that when presented. In any event the courts could not relieve against such mistake save under such circumstances as would warrant reformation of the instrument according to the practice in chancery. Authority, however, is not wanting for the proposition that where a mistake is made in such an assignment, which under other circumstances would be corrected by a court of equity, the court will not interfere to correct it because of the strong equity of the general creditors, but will leave it tb stand or fall as executed by the party. Hunt v. Rousmaniere, 1 Pet., 1 ; Anderson v. Tydings, 8 Md., 427 .

Reversed and remanded.