Source: https://supreme.justia.com/cases/federal/us/221/333/
Timestamp: 2019-04-24 00:41:53+00:00

Document:
Both courts below having found that no actual fraud was intended in this case, this Court considered only the question of constructive fraud.
Where, as in the District of Columbia, the assignment of a chose in action does not have to be recorded and there is no way in which constructive notice can be given, the assignment, if valid upon its face, is ineffective only in case of actual bad faith established by the facts.
Knowledge of one's own insolvency, except in cases provided by statute, does not render it illegal or criminal to prefer one creditor above another. Huntley v. Kingman, 152 U. S. 527.
The fact that the amount alleged to be due on an unliquidated chose in action is greater than the amount of the debt in payment of which it is assigned is not necessarily evidence of fraud against other creditors, and where the amount actually recovered is less than the amount of the debt, this Court will not disturb the finding of both courts below that there was no fraud.
at the expense of creditor and a prime purpose of the conveyance. Section 1120, Code of the District of Columbia.
The assignment of a mere chose in action, not subject to legal process and of uncertain value, given to secure an honest debt will not be set aside by this Court as fraudulent in law because the surplus, if any (there actually being a deficit), was reserved to the assignor by a separate instrument, for the recording of which there was no provision, after two courts have held that the assignment was not made with intent to hinder and defraud creditors and as matter of law had no such result.
This is a bill filed by a creditor of the defendant Hensey, attacking as fraudulent an assignment by him of a certain cause of action against the defendant the Mercantile Trust Company. The, bill upon final hearing, was dismissed by the trial court, and this judgment was affirmed in the Court of Appeals of the District of Columbia. From that decree an appeal has been perfected to this Court.
"Washington, D.C. October 21, 1903 "
"For value received, I hereby sell, assign, transfer, and set over to Frederick Mertens and Park Agnew my cause of action in the above-entitled suit, and all the proceeds which may be derived from the prosecution thereof from any judgment that may be obtained. I further authorize and empower the said assignees to continue the prosecution of said cause in my name, to which end I constitute them my lawful attorneys in fact."
"In witness whereof, I have hereunto set my hand, this twenty-first day of October, 1903."
"(Signed) Melville D. Hensey "
"This agreement, entered into this 21st day of October, 1903, between Frederick Mertens and Park Agnew, parties of the first part, and Melville D. Hensey, party of the second part."
"Whereas, the party of the second part has this day executed an assignment of his cause of action against the Mercantile Trust Company at law No. 44,822, in the Supreme Court of the District of Columbia:"
"Now therefore it is agreed and understood between the parties that from the proceeds of any judgment that may be recovered against the Mercantile Trust Company in said suit, or any other suit involving the same, that there shall first be paid costs and attorneys' fees, secondly the claim of Mertens and Agnew against Melville D. Hensey, and any balance then remaining over to the said Hensey."
"Witness the signatures and seals of the parties, this twenty-first day of October, 1903."
The assignment was filed with the clerk of the court, and the defeasance was delivered to Messrs. Birney & Woodard, the attorneys conducting the action for Hensey.
assignment was to secure the payment of a just indebtedness to the assignees, the defendants Mertens and Agnew. After paying the attorneys' fees and court costs, the surplus is not enough to pay the debt secured in full.
In view, therefore, of the concurrence of both courts in finding that no actual fraud was intended, we shall pass at once to the question of constructive fraud.
Fraud in law is predicated upon the fact that the assignor took from the assignees the agreement above set out, and did not file it with the clerk of the court, as he did the assignment itself.
It has been argued that the assignment was misleading, as not indicating the consideration or purpose, and because not accompanied by the defeasance. But the assignment of a chose in action was not required to be recorded, and there was no way in which constructive notice might be given. The filing with the clerk was, of course, not constructive notice; the obvious purpose being to protect the assignees against the dismissal of the suit by the assignor, or the payment of the proceeds of the suit to him. Indeed, on the day before, the clerk was directed to "enter the case as to the use of Mertens and Agnew."
at the time insolvent and intended to prefer the assignees, and that they knew it. This would be effective if bankruptcy, had ensued within four months, and the trustee had sought to set it aside as a preference, but that, on one side, it is neither immoral nor illegal for a failing debtor to prefer one creditor over another. Huntley v. Kingman & Co., 152 U. S. 527.
But it is said that the value of the claim assigned was far beyond the amount of the debt secured. Here again we find both lower courts disagreeing with this contention.
The thing assigned was of uncertain value. It was an action for damages upon an indemnity bond. The plaintiff made a large claim and doubtless had some of the enthusiasm usual to plaintiffs seeking damages. One jury said he should have $18,000. The court said it was too much, and set the verdict aside. Another jury said he would be compensated by a little more than $8,000. The defendant thought this a monstrous sum, and carried the case first to the Court of Appeals of the District and then to this Court before the judgment stuck. The costs, attorneys' fees, and interest upon the debt due the assignees more than consumed the whole, and the only question now is whether the assignees shall get a part of their debt or none.
But it is said that they have agreed to pay back any surplus, if any there should be after paying their debt, and that this is a reservation by the assignor of an interest in the subject assigned, which operates not as a circumstance of fraud, but as that kind of indubitable evidence which makes fraud in law.
surplus, what then? If nothing had been agreed about the surplus, is there any doubt that the law would have implied a promise to account to the assignor for that surplus? Is it, then, the law that a promise made to do that which, without the promise, the law would have compelled the assignee to do, constitutes such evidence of fraud as to be fraud in law?
therefore neither delayed, hindered, or defrauded in any legal sense."
"Whatever may be the rule with regard to general assignments for the benefit of creditors, there can be no doubt that, in cases of chattel mortgages (and the instrument in question, by whatever name it may be called, is in reality a chattel mortgage), the reservation of a surplus to the mortgagor is only an expression of what the law would imply without a reservation, and is no evidence of a fraudulent intent. This was the ruling of the Court of Appeals of New York in Leitch v. Hollister, 4 N.Y. 211, 216, where the assignment was to the creditors themselves for the purpose of securing their demands. 'A trust,' said the court,"
assignment. Whether expressed in the instrument or left to implication is immaterial. The assignee does not acquire the entire legal and equitable interest in the property conveyed, subject to the trust, but a specific lien upon it. The residuary interest of the assignor may, according to its nature, or that of the property, be reached by execution or by bill in equity."
The reservation which the law pronounces fraudulent is of some pecuniary benefit at the expense of creditors, especially when secretly secured -- such benefit to the assignor being presumed a prime purpose of the conveyance. Lukins v. Aird, 6 Wall. 79. Other cases are considered and reviewed in Huntley v. Kingman & Co. supra.
Section 1120 of the District of Columbia Code provides that in suits to set aside transfers or assignments as made with intent to hinder, delay, or defraud creditors, "the question of fraudulent intent shall be deemed a question of fact, and not of law."
Counsel have argued, as courts have ruled, that no amount of evidence will assign to an instrument an operation which the law does not assign to it. Thus, a mere deed of gift which actually deprives existing creditors of property which was subject to their claims, or a transfer of property grossly disproportioned to a debt secured under a conveyance apparently absolute, but subject to a secret agreement that the surplus should be held for the assignor, could not be saved, for the necessary legal effect would be to hinder, delay, or defraud creditors, and the law could but assign to such conveyance the intent which must indubitably appear from the facts. Edgell v. Hart, 9 N.Y. 213, 217.
one, and the security was of uncertain value and character, involving great expense and delay in collection. The fact that the reservation of any surplus after paying the debt secured was not disclosed in the assignment itself was a circumstance of suspicious character, but not, as matter of law, inconsistent with an honest intent. Two courts have held that, under all the circumstances, the assignment was not made to hinder, delay, or defraud creditors, and as matter of law had no such result.
We are content to affirm this judgment.

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