Case ID: ad_1/html/0077-01.html
Source: Caselaw Access Project
Author: {"author": "Patterson, J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Alfred H. Smith and Others, Appellants, v. John Munroe and Others, Respondents, Impleaded with Daniel H. Wickham and Others.
    
      Assignment for the benefit of creditors—a secret loan to an insolvent firm and a promise to prefer the lender do not constitute a fraud on other creditors.
    
    A failing debtor may make an assignment, preferring one or more creditors who have secretly loaned him money upon his promise to prefer the lenders in the event that the debtor shall be subsequently compelled to make an assignment for the benefit of creditors.
    The complaint in an action alleged that the plaintiffs were judgment creditors of Wickham & Co.; that Wickham & Co., being insolvent, and having been in that condition for a long time, borrowed money on banker’s credits from the defendants, Monroe & Co.; that Monroe & Co. loaned the money with full knowledge that the borrowers were insolvent, and with the understanding that the loans were to be kept secret, and that in case Wickham & Co. should make an assignment Monroe & Co. should be preferred for their claims; that had the plaintiffs known of Wickham & Co.’s insolvency and of the secret arrangement, they would not have sold to them the merchandise represented by the plaintiffs’ judgment. The complaint further alleged that Wickham & Co. subsequently made an assignment to a person named Newwitter, and that in it the claims of Monroe & Co. were preferred, and that they had been paid by the assignee. The complaint did not allege that Wickham & Co. did not intend nor expect to pay for the goods which they purchased of the plaintiffs, or that Wickham & Co. believed, or had reason to believe, that they would not be able to pay for the goods.
    
      Held, that the complaint xvas demurrable;
    That the fact that Monroe & Co. advanced money to Wickham & Co. while that firm was insolvent was not a fraudulent transaction upon the part of the lenders nor upon that of the borrowers;
    That concealment of the transaction was not a fraud, nor was insolvency and the suppression of knowledge of it necessarily fraudulent in Wickham & Co.’s dealings with the plaintiffs;
    That the promise of the borrowers to prefer the lenders, if forced to make an assignment, in a case where the debt was honestly due, was not a legal fraud upon the creditors of the borrowers.
    Appeal by the plaintiffs, Alfred IT. Smith and others, from an interlocutory judgment of the Supreme Court in favor of the defendants, John Munroe and others, entered in the office of the clerk of the county of New York on the 11th day of February, 1895, upon the decision of the court rendered after a trial at the New York Special Term sustaining the demurrer interposed by the ■said defendants to the complaint, and also from the decision of the court entered in said clerk’s office on the 1st day of February, 1895, upon which such interlocutory judgment was entered.
    The complaint alleged that the plaintiffs were judgment creditors ■of the defendants Daniel FI. Wickham, George S. Wickham and Samuel E. Turner, who were co-partners, doing business in New York city under the name of D. H. Wickham & Co., and that exe■cutions issued upon such judgments had been returned unsatisfied.
    That after contracting the debts on which plaintiffs’ judgments were recovered the said defendants Daniel FI. Wickham, George S. Wickham and Samuel E.. Turner executed what purported to be a general assignment for the benefit of their creditors to the defendant Nathan I. Newwitter, by which the defendants John Munroe, Henry Munroe, Edward Kerns and Edgar Lockwood, co-partners, doing business under the firm name of Munroe & Co., were preferred to an amount approximating $28,000, and that the assignee, in accordance with the directions contained in said assignment, had paid such sum to Munroe & Go.
    
    The complaint further alleged that at the time of the making of the assignment, and for some time prior thereto, the defendants Wickham & Oo. had been wholly insolvent, and that knowing the insovent condition of Wickham & Oo. the defendants Munroe & Oo. entered into a secret arrangement with Wickham & Go., whereby it was agreed that they (Munroe & Go.) should loan and advance to Wickham & Oo. moneys or open letters of credit, the consideration thereof (among others) being that the said debts were to be treated •as confidential and secret debts, and that in case of an assignment for the benefit of creditors being executed by Wickham & Go., the defendants Munroe & Oo. were to be preferred creditors.
    That had the fact that Wickham & Co. were insolvent, and had executed the aforesaid agreement been known, it would have affected their credit and prevented them from contracting the debts upon which the plaintiffs’ judgments were recovered, but that by means of keeping the aforesaid agreement secret between the defendants Wickham & Oo. and Munroe & Co., Wickham & Oo. had been enabled to purchase a large quantity of goods from various creditors, including the plaintiffs.
    
      The complaint charged that said preference was collusive and void ■as against the plaintiffs ; that the alleged assignment was null ■and void upon its face, and that the defendant Samuel E. Turner, never consented to the execution of the said assignment, and never ratified the same ; that the said assignment was made with intent to hinder, delay and defraud the creditors of Wickham & Co., and that it was not accompanied by an immediate and continuous change of possession of the property, and demanded judgment:
    
      Fi/rst. That the alleged assignment he declared null and void as against the plaintiffs.
    
      Second. That the preferences credited by and under said alleged assignment be declared null and void as against the plaintiffs.
    
      Third. That an injunction issue against the assignee, restraining him from disposing of any of the property received by him under the alleged assignment.
    
      Fourth. That a receiver of the property and effects of the defendants Wickham & Co. be appointed.
    
      Fifth. That the defendants Munroe & Co. be adjudged to account for all the property received by them from the defendant Hewwitter under the preference created by the alleged assignment.
    The defendant interposed a demurrer upon the ground (among ■others) that the complaint did not state facts sufficient to constitute a cause of action.
    The case coming on to be heard, the court decided in favor of the defendants, and directed the entry of an interlocutory judgment sustaining the demurrer on that ground, with costs. From this judgment plaintiffs appeal.
    
      Franhlin Bieri, for the appellants.
    
      George A. Strong, for the respondents.
   Patterson, J.:

The general assignment of Wickham & Co. to Hewwitter was valid as between the assignor and assignee. Before it was attacked by ■creditors the preferred indebtedness of Munroe & Co-, was paid. It was an honest debt actually due, and, as said before, the trust to pay which was fully performed before the assignment was challenged. Ordinarily that would suffice to protect creditors situated as Munroe & Co. were. (Knower v. Central Nat. Bank, 124 N. Y. 560.) But it is claimed by the plaintiffs that circumstances intervene to render the doctrine of the case cited inapplicable here. It is alleged in the complaint that Wickham & Co., the assignors, being insol vent, and having been so for a long time, borrowed sums of money on bankers’ credits from the defendants Munroe & Co.; that these amounts were loaned by Munroe & Co. with full knowledge of such insolvency; that such loans were to be kept secret; that in case Wickham & Co. should make an assignment Munroe & Co. should be preferred for their claims; that had the plaintiffs (judgment creditors seeking to avoid the assignment) known of their debtors’ insolvency and of the secret arrangement they would not have sold the merchandise to the assignors, and on these allegations, coupled with the averments necessary to a standing in court to attack the assignment, the plaintiffs claim they have presented rima facie case entitling them to relief against the defendants Munroe & Go. to compel them to make restitution of the money paid them by the assignee. On demurrer to the complaint it was held at Special Term that facts sufficient to constitute a cause of action were .not pleaded, and in this conclusion we concur. The advancing of money to Wickham & Go. while that firm was insolvent was not fraudulent on the part of either the borrower or lender; that very transaction may have been resorted to to extricate the borrower from insolvency. Concealment of the transaction was not a fraud because its divulgence might have precipitated disaster and prevented the object of the loan. Hor were insolvency and suppression of knowledge thereof necessarily fraudulent in Wickham & Co.’s dealings with the plaintiffs. (Nichols v. Pinner, 18 N. Y. 295.) Something more is required to render them so. The complaint fails to allege that Wickham & Co. neither intended nor expected to pay for the goods bought of the plaintiffs, or believed, or had reason to believe, that they would not be able to pay for them. Thus far, then, for all that appears in the complaint, Wickham & Co., being insolvent, applied for loans of money to Munroe & Co. to aid them in their business ; these 1Ians were made and they were kept secret. But something more took place. The borrowers promised to prefer the lenders in the event of their being compelled to make an assignment for the benefit of creditors. Even this superadded fact does does not make Munroe & Co. liable in equity to the plaintiffs. The conditional agreement was not a fraud on creditors. As was said in National Park Bank v. Whitmore (104 N. Y. 304): “ A failing debtor may make an assignment preferring one or more creditors, because he is under a legal, equitable or moral obligation to do so, or he may do it from mere caprice or fancy, and the law will uphold such an assignment honestly made. If he may make such an assignment without any antecedent promise, why may he not make it after, and in pursuance of such a promise ? How can an act otherwise legal be invalidated, because made in pursuance of a valid or invalid agreement honestly made ? In Smith v. Croft (11 Bissell, 340), Judge Gresham held that such a conditional agree, ment for a future preference was a fraud upon creditors. But in ‘the same case (17 Fed. Rep. 705), upon a rehearing, Judge Woods held that the same agreement was not fraudulent, and in a very satisfactory opinion showed that such an agreement as we have here, for a future preference in case of insolvency, is not a legal fraud upon creditors.” (See, also, Walker v. Adair, 1 Bond [U. S. Cir. Ct.], 158 ; Anderson v. Lachs, 59 Miss. 111; Spaulding v. Strang, 37 N. Y. 135; S. C., 38 id. 9; Haydock v. Coope, 53 id. 68.)

Hone of the acts complained of, segregated or aggregated, constituted a cause of action against Munroe & Co., and the interlocutory judgment sustaining the demurrer should be affirmed, with costs and disbursements.

Van Brunt, P. J., Williams and O’Brien, JJ., concurred.

Judgment affirmed, with costs.