Case Name: Peter Johnson, in Behalf of Himself and All Other Judgment Creditors Who Might Come In, Resp't, v. H. H. Rapalyea et al., App'lts
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1896-02-14
Citations: 73 N.Y. St. Rep. 156
Docket Number: 
Parties: Peter Johnson, in Behalf of Himself and All Other Judgment Creditors Who Might Come In, Resp't, v. H. H. Rapalyea et al., App’lts.
Judges: 
Reporter: New York State Reporter
Volume: 73
Pages: 156–172

Head Matter:
Peter Johnson, in Behalf of Himself and All Other Judgment Creditors Who Might Come In, Resp't, v. H. H. Rapalyea et al., App’lts.
(Supreme Court, Appellate Division, First Department,
Filed Febr’y 14, 1896.)
1. Assignment of creditors—Preference.
In order to reach and scale d.own alleged unlawful preference, created by transactions separate and apart from the assignment, but claimed, as matter of law and fact, to constitute a part thereof, it is necessary to prove an intent on the part of the assignors to execute a general assignment, and a knowledge of that intent on the part of the creditor at the time he receives his security which is the subject of attack.
2. Same.
If the transaction is capable of two inferences, one in favor of its integrity and the other to the contrary, the inference in favor of the position that no fraud upon the law was attempted must be the one that should prevail.
3. Same.
The fact that a creditor, when taking security, knows the debtor to be in a failing condition does not render his security a preference in case of an assignment by the debtor.
4. Same.
A party, who takes security from a debtor, knowing that he is about to assign, can only hold such security to an amount which will bring the , preference within one-third of the-assigned estate after the statutory deductions.
6. Same.
A creditor, preferred by security on a general assignment, becomes, after such security is exhausted, a general creditor as to the remainder due him, and may share as such in the remaining two-thirds of the assigned estate.
Appeal from a judgment in favor of plaintiff,
O. E. Miller, for app’lts; Treadwell Cleveland, for resp’t.

Opinion:
VAN BRUNT, P. J.
This action was brought by the plaintiff, as a judgment creditor of the firm of Horace II. Eapalvea & Co., composed of the defendants Horace H. Eapalyea, Prank Nicker-son, and John S. Provost, on behalf of himself and all judgment creditors, similarly situated, who might come in and contribute to the expenses of the action, to set aside an assignment made by said Eapalyea & Co., and certain mortgages given and judgments suffered by them, as being fraudulent and void, and of no effect as against plaintiff and such other judgment creditors, and also to have the preferences sought to be created in and by said assignment, mortgages, and judgments, so far as they exceeded one-third ' in value of the estate sought to be assigned, declared to be invalid and of no effect, as against the plaintiff and such other creditors as aforesaid.
The complaint alleged the copartnership of the firm of Eapalyea & Go.; that the defendant John 0. "Provost was the father of the defendant John S. Provost; that the defendants Prince W. Nickerson and Charles W. Nickerson were copartners, doing business under the firm name of P. W. Nickerson & Co.; and that the defendant Prince W. Nickerson was the father, and the defendant Charles W. Nickerson was the brother, of the defendant Frank Nickerson, who was one of the members of the firm of Eapalyea & Co.' The complaint further alleged the obtaining of a judgment by the plaintiff, against the defendants composing the firm of Eapalyea & Co., on the 9th of July, 1889, the issuing of an execution, and its return unsatisfied; and, further, that on the 16th of January, 1890, the defendant, Frank Nickerson, made and executed, under the firm name of Eapalyea & Co., a certain chattel mortgage and bill of sale to P. W. Nickerson & Go., of a large amount of property belonging to the firm, to secure payment of a large indebtedness of the firm of Eapalyea & Co., to the firm of P. W. Nickerson & Co., in the amount of upward of $42,000 ; and that said Frank Nickerson made and executed such chattel mortgage in the name of said firm of Eapalyea & Co., without the privity, consent, or authority of either of the other members of the firm. The complaint further alleged that said mortgages and hills of sale were voluntary conveyances, and were utterly without any consideration to support the same. The complaint further alleged that, on the 21st of January, 1890, the defendant Frank Nickerson made and executed, in the name of said firm, a certain other chattel mortgage and bill of sale to the defendant John C. Provost, the father of the defendant John S. Provost, of a large amount of property, to secure the payment of a large indebtedness of Eapalyea & Co. to Provost, in the sum of upward of $22,000, and that said mortgage and hill of sale were voluntary conveyances, and utterly without consideration to support the same. The complaint further alleged that, on the 22d of January, 1890, said firm of Eapalyea & Oo. permitted the defendant John C. Provost to obtain two judgments by default against them upon an alleged partnership liability of said firm;' and that, on the 23d of January, the said firm of Eapalyea & Go., being insolvent, aad unable to pay their partnership debts,, duly executed an assignment for the benefit of creditors to the defendants John D. Kurtz, Crook, and Elilm B. Frost of ail their property, with preferences, such assignment being expressly made subject to the lien of the chattel mnrt-' gage made by the defendants to the firm of P. W. Nickerson & Go., 1 and also subject to the lien of the chattel mortgage made by the defendants to the defendant John G. Provost. It further alleged that said mortgages, bills of sale, and assignment were not made in good faith, but, together with the judgments, all constituted and were to be treated as one and the same transaction and plan to hinder, delay, and defraud the plaintiff and other creditors of the firm of Eapalyea & Go.; that the value of the assigned estate attempted to be conveyed by said assignment and mortgages and bills of sale, after deducting the charges for wages and salaries, and the expenses of executing the trust of said assignment, was less than $100,000; that the amount of the preferences made and created in and by said assignment, mortgages, and bills of sale was upward of $80,000, and exceeds by many thousands of dollars the value of said assigned estate; and that said instruments and judgments and said preferences were fraudulent, illegal, and void, as against the plaintiff and the other creditors of Eapalyea & Go. The complaint then further alleges that the defendant Samuel D Coykendall claimed to be the purchaser and assignee, from the mortgagees therein named, of said mortgages hereinbefore referred to, and that the assignees in said assignment have been requested, on behalf of the creditors of the concern, to commence an action, . as such assignees, against the owners and holders of such mortgages, bills of sale, and judgments, for the purpose of invalidating the same, and obtaining a judicial declaration that said mortgages, bills of sale, and judgments were intended to, and did, create an unlawful preference, as against the other creditors of said firm of Eapalyea & Go., and that, as such, they were fraudulent and void; but that, although thereunto duly requested, said assignees distinctly and finally refused to commence such an action, but, on the contrary, expressly stated that it was their purpose and intention to recognize said mortgages, bills of sale, and judgments as debts of said firm, and that it was their intention to pay the same out of the assets of said firm. And the complaint further alleged that, in March, 1890, the firm of P. W. Nickerson & Oo. made an assignment to the defendants Caleb W. Knevals and Elihu B. Frost. The defendants answered, admitting the allegations in regard to copartnership, the execution of the various instruments stated in the complaint, and the recovery of the judgments, but denied that they were without consideration, or made with any fraudulent intent, or that the mortgages were executed and judgments obtained in contemplation of an assignment by the firm oi Eapalyea & Go.
Upon the trial of this action the court held that the execution of the mortgages, the suffering of the judgments, and the execution of the assignment were all one transaction, and created invalid preferences in excess of the amount of one-third of the value of the assigned estate, and that such preferences most be reduced and scaled down to conform to the statutory limit of one-third in value of the assigned estate, after making the statutory deduction, which amount of one-third in value of the assigned estate was alone applicable to the payment of said preferences, and that an accounting be had, as in the decree provided. The court did not find that either of the instruments or judgments in question was fraudulént in fact, and therefore void. From the interlocutory judgment entered upon this decision, this appeal is taken.
It is conceded, upon the part of the respondent, that, in order to reach and scale down alleged unlawful preferences created by transactions separate and apart from the assignment, but claimed, as matter of law and fact, to constitute a part thereof, it is necessary to prove an intent on the part of the assignors to execute a general assignment, and a knowledge of that intent on the part of the creditor at the time he receives the security which is the subject of attack. The claim urged upon the part of the appellants is that there is no evidence which justified the court in finding that the execution of these mortgages, the suffering of the judgments, and the execution of the general assignment were one and the same transaction, or that, at the time the mortgagees received their securities, and the actions were commenced which resulted in the judgments, they had no reason to know or believe that 'their debtors would shortly thereafter make an assignment. For the determination of this question, it will be necessary to consider briefly the testimony on this point. We must first bear in mind the chronological order of events, and then consider the relations of the parties, and what was done, and what inferences must be drawn therefrom. And it seems to me that, if the transaction is capable of two inferences, one in favor of its integrity, and the other to the contrary, the inference in favor of the position that no fraud upon the law was attempted must be the one that should prevail. This is certainly the rule in regard to fraud in fact (Morris v. Talcott, 96 N. Y. 100), and I can see no reason why it should not prevail in respect to fraud upon the law.
The evidence showed that, from the spring of 1887 until the filing of said general assignment by said firm on January 24, 1890, the firm of Rapalyea& Co. had been doing business in the cities of New York and Long Island City. Their capital, when the partnership was formed, consisted of $10,000 in cash and $10,000 in buildings, material and merchandise. This latter was transferred to the firm by John C. Provost, as the' contribution of his son John S. Provost; and the $10,000 in cash was furnished by Prince W. Nickerson, as a loan to his son Frank Nickerson, and as the contribution of said Frank Nicker-son to the capital of the firm of Rapalyea & Co. The defendants Prince W. Nickerson and Charles W. Nickerson were, at the times of the various transactions mentioned, and until they executed their general assignment on the 17th of March, 1890, copartners,, doing business under the firm name of P. W. Nicker-son & Co. Frank Nickerson was the financial manager of the firm of Rapalyea & Co. John 0. Provost and the firm of P. W. Nickerson & Co. were in the habit of aiding the firm of Rapalyea & Co. with loans, and for a considerable time prior to their failure the firm of Rapalyea & Co. were largely indebted to the said John C. Provost and P. W. Nickerson & Co., and without this accommodation Rapalyea & Co. would not have been able to have continued their business; certainly, not upon the scale on which it was carried on. In fact, the defendant Prince W. Nickerson testified that he had been carrying them for three years. On the 2d of October, 1889, the defendant John 0. Provost began an action against the firm of Rapalyea & Co. for the sum of $5,-375.37, upon certain checks, drafts and notes which said John C. Provost held, and which had not been paid, by the service of a summons, with notice, upon the defendant John S. Provost. On the 16th of December following said John C. Provost commenced another action against Rapalyea & Co. to recover, judgment for the sum of $8,625, with interest from the 15th of July, 1889, upon certain promissory notes held by him which were unpaid, by the service of a summons and notice upon the defendant John S. Provost. On the 20th of December, 1889, the defendant Rap- . alyea admitted due service of the summons above mentioned, and appeared m person in the action, waiving all further service of papers upon him. The defendants did not answer, and no judgments were entered in these actions until the 22d of January, when judgment rolls were filed in the office of the clerk of Queens county at four o'clock on that day. Some time prior to the 16th of January, 1890, the firm of P. W. Nicker-son & Co. had been in the habit of having discounted at their bank, to a considerable amount, the notes of Rapalyea & Co. which they held. At or about this time the president of the bank declined to make any further discounts unless Nickerson & Co. had some security from Rapalyea & Co. for the large amount which was owing to them; and on said 16th day of January, Frank Nickerson, without the knowledge of his partners, executed a chattel mortgage to his father to secure the sum of $42,000, or thereabouts, which was filed in the office of the clerk of Queens county on the following day. This mortgage was prepared and executed at the house of Mr. Frost, who was the counsel for Nickerson & Co. and Rapalyea & Co., on the night of the 16th of January; all the Nickersons, Mr. Frost and his son, and Nickerson's bookkeeper being present There was some testimony tending to show that the subject of this mortgage had been under discussion for three or four days prior to its actual execution. At and prior to this time, negotiations had been going on for the sale of an interest in the firm of Rapalyea & Co. to the defendant John C. Provost, and a meeting was had at the office of one Andrew J. Provost, in reference to that matter, on the 20th or 21st of January, 1890, and there were present at that interview John C. Provost, John S. Provost, Frank Nickerson, one Jones, and Eapalyea. The conversation at this time was with reference to the purchase by John C. Provost of Frank Nickerson's interest, and. after it had proceeded to a certain point Frank Nickerson asked them to adjourn to the office of Mr. Calvin Frost, the attorney who had drawn the mortgage. Mr. Frank Nickerson then stated, in Frost's presence, that John C. Provost proposed buying out his interest. Upon hearing this Mr. Frost stated that this would be impossible under the circumstances, and then said that Frank Nickerson had given to his father and brother a chattel mortgage. This was the first intimation that the other members of the firm of Eapalyea & Co. had of the existence of the mortgage. Upon the discovery of this chattel mortgage, John 0. Provost asked Frank Nickerson what he was going to do to protect him. Nickerson replied that he would give him a mortgage, the same as he had his father and brother. That mortgage was prepared about the same time, as Mr. Eapalyea thought, by Mr. Andrew J. Provost, on or about the same day. The suggestion about the chattel mortgage to John 0. Provost was made late in the interview. The defendant Eapalyea swore that the necessity of making an assignment was not discussed at that interview; that upon the next day they had another interview at Mr. Frost's office, when the circumstances were fully discussed, and it was finally determined that, for the protection of their creditors, it would be best for them to make an assignment. The witness further stated that he thought Mr. Frost suggested the necessity of a general assignment,—that he could see nothing better for them to do. And the witness thought that, ' with that mortgage outstanding, it was absolutely necessary to make an assignment. Upon further examination of this witness, he stated that it was possible that all the transactions which had spread over a period of two or three days, might have taken place within two days, the first interview on one day, the second interview on the following day, and the assignment executed on that day. Executions were issued on the morning of the 23d of January upon the Provost judgments, and the assignment of Eapalyea & Co. was executed on that day, and duly filed on the 24th of January, 1890.
From the foregoing facts it undoubtedly appears that Nicker son & Co., Eapalyea & Co., and John C. Provost knew that, if the support which the firm of Eapalyea & Go. had been receiving from Nickerson & Co. and John C. Provost was withdrawn, and the overdue claims held by Nickerson & Co. and John C. Provost should be pressed for payment, the firm was insolvent, and that it would be unable to meet its liabilities, and that this had been the condition of the firm for a long period of time. It was the undoubted intention of Nickerson & Co. and John C. Provost, in the commencement of the suits and the obtaining of the mortgages in question, to get some security for the advances which they had been making to the firm of Rapalyea & Co. And it was undoubtedly Provost's intention, in the commencement of the suits in October and December, not to enter judgments upon these suits until some necessity arose for his protection, and it was a great surprise to him when, on the 20th or 21st of January, he learned the fact that Nickerson & Co. had stolen a march upon him, and secured a mortgage from Frank Nickerson for $42,000 upon the assets of the firm of Rapalyea & Co. We must necessarily conclude that the firm of Nickerson & Go. were influenced by their knowledge of the condition of Rapalyea & Co. in attempting to get security for the apiount of their claim against said firm, and that the mortgage was not entirely the result of an effort to please the officer's of the-bank which was discounting the obligations of Rapalyea & Co. for the firm of Nickerson & Co. But it does not seem to me that Nickerson & Co., at the time of accepting this mortgage, either knew or believed that the firm of Rapalyea & Co., in a few days thereafter, would make an assignment containing preferences, or that, at the time of the giving of that mortgage, it was the intention of the firm of Rapalyea & Co., or of any one of its members, to make such an assignment, and that the necessity of such action in the immediate future was not present to the minds of the parties who participated in that transaction. In order to invalidate the security which was received by Nickerson & Co., it is not only necessary to show insolvency upon the part of the mortgagors, but also that the mortgage was made in anticipation of the making of an assignment, and that the party receiving the mortgage knew that that was the intention of the mortgagors. In respect to this mortgage to Nickerson & Co., it seems to me that the case is barren of evidence from which such deduction must be drawn. I do not know that it is an inevitable conclusion that the simple fact of knowledge that a firm must fail necessitates also knowledge of the fact that such firm will make an assignment, as the court may, perhaps, take judicial notice of the fact that firms do fail, and do not make assignments^ It therefore seems to me, upon a consideration of the evidence on this question, that no sufficient foundation was laid for the conclusion of the learned court below that the mortgage to Nickerson & Co. was part and parcel of the scheme and plan which resulted in the making of the assignment executed on the 22d of January following.
In respect to the judgments obtained by John C. Provost, there does not seem to be any ground for prohibiting a creditor from bringing an action upon a claim which is due. And ,1 know of no penalty which he incurs by his failure to enter a judgment as soon as he is entitled to do so, nor of any penalty which any party may incur by reason of the failure to defend an action to which no defense exists. And, unless some such penalty can be imposed, it is difficult to see how these judgments, which were not entered by Provost until after he knew that Rapalyea & Co. were going to make an assignment, can be attacked. The consent of Rapalyea & Co. was not necessary to the entry of these judgments. A party has the right to avail himself of the ordinary processes of she law for securing a lien apon his debtor's property; and as the bringing of the suits was not part and parcel of the scheme and plan winch resulted in the assignment, 1 can see no ground upon which Provost can be deprived of the lien which he has thus acquired.
In respect to the mortgage which was executed to John 0. Provost, under the circumstances stated, I think that the conclusion must necessarily be drawn that it was executed at a time when all the parties knew that Bapalyea & Co. would make the assignment which was executed on the 22d of January,. 1890. It appears that that mortgage to Provost was suggested when he learned of the mortgage which Nickerson.& Co. had received, and that Bapalyea & Co. seemed to have at once discussed the question of making an assignment. It is true that Mr. Bapalyea, states it to have been the next day, but it seems to me that the fair inference to be drawn is that that question was discussed at the interview had upon the day upon which it was decided to make an assignment. Provost was familiar with all that was going on, and undoubtedly knew that the assignment was to follow. This being the condition of affairs, he would seem to be within the rule that a party taking' security from a debtor, knowing that this debtor is about to assign, can only hold such security to an amount which will bring the preferences within one-third of the assigned estate after the statutory deductions.
It follows, therefore, that the judgment must be modified, dismissing the complaint as to P. W. Nickerson & Co., and holding valid the judgments obtained by John S. Provost, and scaling down the mortgage to John 0. Provost and the preferences contained in the assignment; and the provision prohibiting the preferred creditors from participating in any part of the assigned estate must also be modified, as such preferred creditors become general creditors in respect to that portion of their claim for which they had not received payment.
Judgment ordered accordingly, without costs to either party.
BITMSEY, PATTEESON, and O'BBIEN, JJ., concur.