Case Name: Solon H. Wilhelm and Sidney S. Wilhelm v. Edwin Byles and Edwin J. Phelps, Assignees of Kellogg, Sawyer & Co., et al.
Court: Michigan Supreme Court
Jurisdiction: Michigan
Decision Date: 1886-04-15
Citations: 60 Mich. 561
Docket Number: 
Parties: Solon H. Wilhelm and Sidney S. Wilhelm v. Edwin Byles and Edwin J. Phelps, Assignees of Kellogg, Sawyer & Co., et al.
Judges: Campbell, C. J. and Morse, J. concurred.
Reporter: Michigan Reports
Volume: 60
Pages: 561–580

Head Matter:
Solon H. Wilhelm and Sidney S. Wilhelm v. Edwin Byles and Edwin J. Phelps, Assignees of Kellogg, Sawyer & Co., et al.
Assignment for the benefit of creditors — Any creditor' may file bill to enforce trust, under How. Slat. secs. 87j.If.-9 — Other creditors not necessary parties — Assignors cannot carry on assigned business — Assignment puis an end to the same — Duty of assignees to convert property into money and apply same to payment of assignor’s debts —Sales on credit — If authorized in assignment, renders it void as to creditors.
1. Under How. Stat. secs. 8744, 8749, it is competent for any creditor to file a bill against the assignees of an insolvent debtor to enforce the prompt and faithful execution of the trust; and to this end other creditors have no opposing interests, and are not necessary defendants; nor need they be joined as complainants, the statute authorizing separate action by any person interested.
3. There is no statute in Michigan authorizing the assignees of an insolvent debtor, by the consent of all or a majority of the creditors, to-continue the assigned business, and, in the absence of statutory provisions, the duty of such assignees, and their conduct and management of the assigned property, are subject to the ordinary rules and principles which apply to trustees in analogous cases.
3. As a general rule, the effect of a general assignment for the benefit of creditors puts an end to the transaction of the debtor’s business, as ordinarily conducted; and i't is the duty of the assignees to convert the property into money without unnecessary delay, and apply the same to the payment of the assignor’s debts.
4. Generally, the assignor cannot, in the deed of assignment, authorize the assignee to continue his business, either for the benefit of creditors or for his own benefit; and such attempts to control the discretion of the assignee, and the disposition of the property, have been condemned as fraudulent and void by the courts.
5. A lumbering firm made a statutory assignment for the benefit of their creditors, and at a meeting of a number of such creditors the assignees were instructed to keep the mill running, and pay the amount due on an outstanding contract for the purchase of pine timber, the creditors present agreeing to give the.assignors an opportunity to effect a compromise, and in case of failure the assignees were to go on and sell the property. Acting under these instructions, the assignees continued to prosecute the business, borrowed money to pay on the land contracts, and made sales of lumber on the usual credit.
Held, in a suit, brought by creditors who had not consented to any such action on the part of the assignees, for the enforcement of the trust, that, in no view of the case, consistent with sound principles, can the action of the creditors and assignees be sustained. That while the arrangement might be carried out with the UTianimous consent of the creditors, any creditor not consenting has the right to have the trust enforced according to its terms and spirit, and a decree was entered for the complainants accordingly.
Held, further, that it is settled law in this State that assignees have no authority to make sales on credit, as has been done in this case.
Appeal from Kalamazoo. (Mills, J.)
Argued February 10, 1886.
Decided April 15, 1886.
Bill to enforce performance of trust by assignees of insolvent debtors. Complainants appeal.
Decree reversed, and one entered according to prayer of bill.
The facts are stated in the opinion.
Charles F. Collier and F. A. Balter, for complainants:
The assignees under a common-law assignment have no power to continue the business of the assignors. This doctrine is so well established that it is hardly necessary to cite authorities to support it. The question has been before the courts in a variety of ways, perhaps most frequently in cases where the assignment itself has given the assignees power to continue the business and to sell on credit, etc.; but the courts have held, with great uniformity, that the assignors are to close up the estate, and not inyolve it in further complications, and that they cannot continue the business, or otherwise use the assignment, to hinder and delay creditors.
As a general rule, the effect of a general assignment of a debtor’s property is to put an end to the transaction of his business, as ordinarily conducted, and to the ordinary operations of purchase, manufacture, and sale: Burrill on Assignments (4th Ed.) § 396, p. 600.
A trust of assets or property for creditors of itself suggests specific and well-defined obligations on the trustees. They are to hold and take care of, sell and dispose, the property, so as to convert it with convenient speed into money, and distribute and pay the proceeds to those entitled: Forbes v. Scannell, 13 Cal. 287; Dunham v. Waterman, 17 N. Y. 9; Duffy v. Logan, 35 Id. 187; In the Matter of the Accounting of Dean, 86 Id. 398 ; Hitchcock v. Cadmus, 2 Barb. 381.
An assignment authorizing the sale of the assigned property on credit, is void as to creditors: Nicholson v. Leavitt, 2 Seld. 510; Burdick v. Post, Id. 522; 52 Md. 211; Richardson v. Margueze, 59 Miss. 80; Sutton v. Hanford, 11 Mich. 513; Ryerson v. Eldred, 18 Id. 12-15; Richardson v. Rogers, 45 Id. 591.
The position we take in this case has been quite recently sustained in a case in Illinois, and another in Rhode Island, involving the same assignment. We call attention to the opinions in these cases, and the authorities cited : Gardner v. Com. Nat. Bank, 95 Ill. 298 ; Gardner v. Com. Nat. Bank, 13 R. I. 155.
There are no statutory provisions in this State changing the common-law rule and authorizing the continuance of the business. The assignment law of 1879 is not a law to provide for assignments for the benefit of creditors, but merely regulates common-law assignments for that purpose; and where no provision is made by the act, the common law still governs. The act of 1879 is not an insolvent or bankrupt act like that of 1883, which was held invalid by the Supreme Court: Risser v. Hoyt, 53 Mich. 185.
The other creditors of the assignors are not necessary parties to the bill. The statute authorizes any person interested to file his bill for the enforcement of the trust “ in case there shall be any fraud in the matter of the assignment, or in the execution of the trust,” etc. How. Stat. §§ 8744, 8749, gives the circuit court in chancery supervisory power, etc.
Edwards & Stewart, for defendants:
The bill of complaint is fatally defective, for want of necessary parties defendant, to enable the court to make a decree upon the subject-matter of the litigation; and a proper time to urge this objection is upon the hearing, and it need not be presented by plea or demurrer: Story Eq. Pl. § 75. Eor an elucidation of the principle applicable to the question of who are necessary parties where numerous persons are interested in the subject-matter of litigation as creditors and as trustees, see Richardson v. Larpent, 2 Younge & Coll. New R. 507, 512, 514, citing Story’s Eq. Pl. note to § 135b.
The rule in equity is elementary that all persons materially interested in the subject-matter of the litigation should be before the court: Story’s Eq. Pl. §§ 72, 102, 149, 157, 207, 216; Hallett v. Hallett, 2 Paige, 15; Egberts v. Wood, 3 Id. 517 ; Wakeman v. Grover, 4 Id. 23; Adams Equity, 312 and note; 1 Daniell’s Ch. Pr. 229, 230, and note.
Where an assignor is conducting a manufacturing business, with a large amount of material on hand to be manufactured., the assignees can carry on the business: Burrill on Assignments (2d Ed.) 490-1; Woodward v. Marshall, 22 Pick. 468 ; and the assignees may continue the business, with the express consent or approval of the creditors: Mussey v. Noyes, 26 Vt. 462; Burrill on Assignments (2d Ed.) 491.
The employment of the assignors at a salary to assist in conducting the business, was proper: Baldwin v. Buckland, 11 Mich. 389; Clark v. Craig, 29 Id. 401.

Opinion:
Champlin, J.
Kellogg, Sawyer & Go. were engaged in the business of manufacturing and selling lumber. They owned a saw-mill, tram-way, a logging railway, and the necessary plant and appliances for sawing logs. They also held, under land contracts, fifty or sixty millions feet of pine stand, ing timber, for which they owed upwards of $130,000.
Being embarrassed, and unable to meet their commercial paper and other obligations, the firm, on the ninth day of November, 1883, made a common-law assignment of all their property for the benefit of their creditors.
In' making the assignment the parties observed the provision of " An act to provide for the regulation and enforcement of assignments for the benefit of creditors," approved May 13, 1879 (2 How. Stat. p. 2137).
A meeting of the creditors was held on January 23, 1884, at which quite a number of them attended, and it was voted " that the assignees should keep the mill running, and keep up signs of life at the mill; that they should pay the amount due on the Reed contract; that they should give Kellogg, Sawyer & Co. time to see what they could do in the way of effecting a compromise, and, in case they failed, we [the assignees] were to go on and try to sell the property."
The complainants have not consented to the carrying on of the business by the assignees. After, the meeting of creditors the assignees made efforts to sell the property, and addressed circulars to persons whom they supposed might be willing to buy such property, but without avail. No meet ing of creditors has since been held. The assignees have ever since continued the business substantially as carried on by the assignors before the assignment. They borrowed $30,-000 to make payments on the land contracts, and have made other loans, the whole aggregating $37,500, the same being due from them for money borrowed. They have also found it necessary to contract other indebtedness in purchasing merchandise, supplies, and property needed in the conduct of the business, and the total indebtedness of the assignees, June 30, 1885, was $59,185.31, as shown by a report furnished by the assignees on the hearing of this cause and by the testimony of Mr. Phelps.
The assignees have also found it necessary in selling the lumber manufactured by them to make sales on credit, usually receiving 90-day paper, as is customary in the lumber trade.
The amount of credit so extended to purchasers by the assignees, and outstanding June 30, 1885, was $25,189.95 in ledger accounts and $27,326.53 in bills receivable, of which $13,088.79 had been discounted at banks.
It appears that the assignees have cut between one-third and one-half of the standing pine timber, and that they intend continuing their logging and sawing operations until they cut all the timber and manufacture it into lumber. They expect to complete the work in 1887.
It appears that there is no other pine timber tributary to this saw-mill, and when the timber belonging to the estate is consumed the mill will have to be dismantled, and the machinery and material disposed of for what it will bring. It is evident that it will take a year or more to close up the estate, after the assignees have ceased manufacturing lumber. The assignees claim that they are making a profit on the lumber they are manufacturing, and that creditors will realize more by having the business continued to the end than they would if it was closed out at once.
The complainants are creditors, who file their bill, setting up the facts, and asking that the assignees be perpetually enjoined and restrained from carrying on the business of cut ting, logging, and manufacturing into lumber the standing timber belonging to the estate of Kellogg, Sawyer & Co., and from carrying on and operating the saw-mill belonging to the estate ; also from carrying on the dry-goods business; and from continuing the mercantile business of Kellogg, Sawyer & Co.; and from carrying on the farm belonging to-the estate of Kellogg, Sawyer & Co.; and that the assignees be directed to sell and dispose of all the real and personal-property of said estate without delay, and to convert the same into money, and pay the same to the creditors of said estate with all convenient speed.
The defendants answered the bill, and claimed that they were acting for the best interests of the creditors in carrying on the business, and with the approval of a large majority of them; that the property could not be disposed of without great sacrifice in the condition it was in when it came to the hands of the assignees ; and they insisted that all of the creditors were necessary parties to a bill to enforce the trusts of the assignment.
Proofs were taken, and a decree entered in the court below dismissing the bill of complaint.
The point that the proper parties are not before the court is not well taken.
. Section 8744 of Howell's Statutes, relating to assignments, enacts:
" In case there shall be any fraud in the matter of said assignment, or in the execution of said trust, or if the assignee shall fail to comply with any of the provisions of this act, or fail or neglect to promptly and faithfully execute said trust, any person interested therein may file his bill in the circuit court in chancery of the proper county for the enforcement of said .trust; and the court, in its discretion, may appoint a receiver therein."
And section 8749 provides that,
" The circuit court in chancery of the proper county shall have supervisory power of all matters, questions, and disputes arising under such assignments, except as otherwise provided in this act, and may, on the application of the assignee or any person interested, make all necessary and proper orders for the management and disposition of the assigned property, the distribution of the assets and avails," etc.
Under this statute it is competent for any creditor to file a bill against the assignees to enforce the prompt and faithful execution of the trust. To this end other creditors have no opposing interests. It is not necessary, therefore, to make them defendants. The statute authorizes separate action by any person interested to compel performance of the trusts, and therefore other creditors need not be made parties complainant.
This brings us to the main question in controversy in this case, and that is, can the assignees, in their own discretion, or against the wish of creditors who do not assent thereto, continue and carry on the business in which the assignors were engaged ?
In this State there is no statute authorizing the assignees, by the consent of the creditors or a majority thereof, to continue the business of the assignor; and, in the absence of statutory provisions, the duty of the assignees, and their conduct in their management of the assigned property, are subject to the ordinary rules and principles which apply to trustees in analogous cases.
As a general rule, the effect of a general assignment by a debtor of his property for the benefit of his creditors is to put an end to the transaction of his business, as ordinarily conducted, and to the ordinary operations of purchase, manufacture, and sale, as effectually as if the assignor were dead, and his property had passed to his administrator by operation of law, or to his executor by force of his last will.
It is obviously the duty of the assignees to proceed without unnecessary delay to convert the property assigned into money, and apply the proceeds to the payment of the debts. In the management and care of the property they are bound to use the same care, and exercise the same degree of prudence and caution, that a prudent man would with his own property.
As a general proposition, the assignor cannot, in the deed of assignment, authorize his assignees to continue and carry on the business, either for the benefit of creditors or for his own benefit; and such attempts to control the discretion of the assignee and the disposition of the property have generally been condemned as fraudulent and void by the courts ; for if held valid, then the courts must enforce them, and the spectacle might occur of a debtor holding his creditors at bay indefinitely, while subjecting his property to the risks of business, and placing it in position where the whole estate might be lost in the attempt to continue and carry on the business. The law ought not to tolerate any such interference in the management and disposition of assigned property by the debtor.
And if it cannot be done by the direct act of the party in the instrument of assignment, much less can it be done in the absence of any such provision. The assignee cannot substitute his discretion for that of the assignor, and hinder and delay creditors while he carries on the business, a.nd specu(lates upon the chances of making or losing in the conduct of the business in which his assignor failed, at the expense and risk of the creditors. ITis duty is to apply the assets to the payment of the debts, not to the purchase of new material, or paying the expenses of a going enterprise, or pledging the property for the payment of liabilities incurred by himself.
The necessities of the case, where property comes to his hands in such condition that, in order to preserve it from destruction, — as, if a tannery were assigned and hides were in vats in process of tanning, or where articles are in process of manufacture, and only a comparatively small amount of work will prepare them for the market and render them salable, — will authorize the assignee, where it is manifestly for the benefit and advantage of the creditors and those interested in the estate that it should be done, to carry on the business for a limited time for the purpose of completing the manufacture of articles which, in their unfinished condition, have no salable value. This is within the ordinary duty of an assignee, and is no more than a prudent man would do in the management of his own property.
But such was not the case here. The pine timber had a market value as standing pine. The saw-mill and other property can be sold in connection with, or separately from, the pine timber. The assignors have been and are employed in the running and management of the business at good salaries. The property of the insolvents which the assignees hold, or which was conveyed to them, for the purpose of paying the indebtedness, has been mortgaged to secure a loan of $30,000 to pay certain contract creditors who have sold pine lands to the assignors, thus securing a preference to them by incumbering the assets which ought to be applied in payment of all creditors ratably.
The manufacture of lumber requires that such lumber be sold. In the common course of the lumbering business such sales are made upon credit, and the assignees have sold upon credit to the amount of several thousand dollars.
It is settled law in this State that assignees have no such authority, and yet to carry on the business in which the assignors were engaged it is necessary that such sales should be made upon credit, in order to realize a profit in business.
There is no view which can be taken of this case, consistent with sound principles, which will authorize the assignees to continue and carry on the business. If the unanimous consent of the creditors was obtained it might be done, because none could complain ; but any creditor not consenting has a right to have the trust enforced according to its terms and spirit.
The decree of the circuit court must be reversed, with costs, and a decree entered hero in accordance with the prayer of the bill.
Campbell, C. J. and Morse, J. concurred.