Van Clief v. Melville

The opinion of the court was delivered by SWAYZE, J.

The learned vice-chancellor held that the mortgage was invalid as far as it attempted to secure the then existing debts of the amusement company, but that, although the company was insolvent, the mortgage was valid security for the subsequent advances, notwithstanding section 64 of the Corporation act, for the reason that the trustees, particularly Van Clief, who advanced the money, had no notice of the insolvency. He did not consider whether or not the mortgage was invalid under section 12 of our statute of frauds. If we thought it necessary to consider the effect of section 64 of the Corporation act, we should have some difficulty in finding, as the vice-chancellor did, from the facts in the case, that Van Clief was without notice of the insolvency; but it is unnecessary to pass upon that question, for the reason that the case can be disposed of under the twelfth section of the statute of frauds. The above recital of facts suffices to show that as to antecedent creditors the case comes within the rule of Owen v. Arvis, 26 N. J. Law (2 Dutch.) 22, and National Bank of the Metropolis v. Sprague, 21 N. J. Eq. (6 C. E. Gr.) 530. Notwithstanding what Vice-Chancellor Pitney said in Sipley v. Wass, 49 N. J. Eq. (4 Dick.) 463 (at p. 473). the authority of these cases has not been at all shaken by the later decisions of Muchmore v. Budd, 53 N. J. Law (24 Vr.) 369, and Clinton Bank v. Cummins, 39 N. J. Eq. (12 Stew.) 577. Muchmore v. Budd turned upon the question whether the bill of sale amounted to an assignment for the benefit of creditors within the meaning of our statute relating to such assignments, and it was held it did not. If not, the case was an ordinary one of preference of creditors. In neither that case nor in Clinton Bank v. Cummins was the question of fraudulent intent involved. In the present case, it was clearly the intent of the parties to the mortgage that creditors who did not assent should he deprived of any right to share in the security, which covered all the property of the amusement company, so that the effect was that creditors unwilling to assent to the terms proposed -by the debtors were shut out. This was exactly the scheme condemned in National Bank of the Metropolis v. Sprague. The present case *180 differs in that the mortgage secures future advances, and was sustained only to that extent. The reargument was directed upon the point whether a. mortgage had in part because in contravention of the statute of frauds could be sustained in part by a court of equity in view of the plain language of the statute declaring that “a conveyance contrived in fraud, covin or collusion with intent to hinder, delay or defraud creditors of their lawful actions should be utterly void and of no effect.” Upon further consideration, we think we need not pass on that question. The mortgage shows upon its face that the provisions as to future advances were contrived to defraud creditors of their lawful actions. It provides for advances not exceeding $10,000, to be made in installments as the same may be approved by the trustees from time to time for the maintenance of the business, for inn and tavern or restaurant and beer saloon licenses, rent, water taxes and other taxes, wages or arrears thereof, stock in trade, insurance of buildings and the general carrying on and safeguarding of the properties and business between its date and the ensuing 1st of June. . The trustees agree to advance for such purposes at least $5,000 in such installments and at such times as to them and Melville shall seem proper; any sums advanced by them or other persons are to be applied as they direct, and they have full discretion and authority with regard to all such disbursements. These provisions are so broad as to authorize the trustees to advance money and apply it to the payment of pre-existing debts at their discretion. The object of the provision seems, from the testimony, to have been to permit the trustees to pay small creditors who were pressing for payment and annoying the management of the enterprise. Payments of this kind were made. Such a provision, while it may have been at the time intended only for the benefit of small creditors, was susceptible of being used for the benefit of Van Clief himself, and the effect of vesting such discretion in the trustees was to make it possible for them to substitute the first lien which the mortgage gave to the advances, for the inferior lien that favored creditors might otherwise have, merely by using the monejr to pay those creditors. A better scheme to hinder, delay and de *181 fraud creditors of their lawful actions cannot readily be devised. The assenting creditors no doubt thought that the trustees intended that the advances should be used for the purpose of carrying the enterprise through to another season for outdoor amusements, with the hope that it would prove profitable enough to enable the corporation to pay its debts, but the discretion reposed in the trustees was much broader than that. Under Much-more v. Budd this scheme cannot be called a general assignment, but, in substance, it is an arrangement by which the corporation appoints its own receivers, authorizes them to continue the business and create a first lien upon the property prior to the claims of existing creditors and use the proceeds of the new loans for such purpose as they deem best. As to non-assenting creditors such a scheme is illegal, and is within the reason that led the court to condemn the mortgage in National Bank of the Metropolis v. Sprague.

It is urged that the state of the record prevents creditors from profiting by this appeal because a decree pro confesso has been taken against them in the court of chancery. It is conceded that there were creditors who did not assent to this scheme; the receiver represents them; he raised the issues by proper pleading in the court of chancery, and is entitled to press the objections to the mortgage in this court. The fact that some of the creditors, whose counsel signed the brief in behalf of the appellant, assented to the arrangement, is of no moment. The receiver is tile appellant, representing the rights of non-assenting creditors. The question of equities that may have arisen by reason of the assent of-many creditors to the scheme is not now before us. That will naturally arise in the court of chancery upon the distribution of the fund now in the hands of the receiver. ■

For the reasons stated, the decree is reversed and the record remitted to the court of chancery for further proceedings in accordance with this opinion. The decree in favor of the Commonwealth Eoofing Company is affirmed for the reasons stated by the vice-chancellor.

*182 For affirmance—None.

For reversal—The Chief-Justice, Garrison, Swayze, Trenchard, Parker, Bergen,’ Yoori-iees, Kalisci-i, Bogert, Vredenburgii, Congdon, White—12.