Court Opinion

ID: 6672805
Source: CourtListenerOpinion
Date Created: 2022-07-20 21:13:43.882886+00
Date Added: 2024-06-11T16:00:36.101160
License: Public Domain

The opinion of the Court was delivered by
Willard, A. J.
The instrument which the decree of the Circuit Court has declared void, as against creditors, is a deed, in two parts, dated May 1, 1867, and recites, among other things, that it was made to enable the assignors, Kerrison & Leiding, “ to resume mercantile trade or business; that it was based upon an arrangement with a majority of their creditors, both in number and amount or value, to take the notes of the assignors, dated December 1, 1866, payable, with interest from June 1, 1865, two and three years after said date, secured by a conveyance, to an approved trustee, of certain real estate thereby conveyed, in trust, for the better securing of the said notes.” It declares that all the other creditors may be disposed to come in upon the footing of the said agreement and security, and, in that event, it is intended to secure to them that right.
The consideration is a nominal pecuniary sum, and the covenant of the trustee.
Certain real estate is bargained and sold to C. Kerrison, his heirs and assigns forever, “ in trust, nevertheless, and to and for and upon the several uses, intents, trusts and purposes, and subject to the several provisoes, conditions and limitations hereinafter expressed *284and declared, of and concerning the same.” It then proceeds to declare the trusts, which are: First. To hold the premises as security for the creditors who had acceded to the terms of the assignment, and to such as, before the 1st-of December, 1867, “ in lieu and satisfaction of their claims, should take and accept the notes of the said Kerrison & Leiding, bearing the same date, 1st December 1866, payable at the same time, (two and three years after date), with interest from the same, (1st June, 1865,) each note for one half the principal due such creditors, as the creditors named in the first section of said schedule have taken and accepted,” &c. Second. If the notes are not previously paid by the assignors, to sell at public auction, or private sale, the premises conveyed, or so much as may be necessary, or “ to raise the sum required by mortgage,” in due time to provide for the payment of the said notes as they shall fall due.
This power of sale was again repeated in less qualified terms, as follows: “or if he, the said Charles Kerrison, should deem it best for the interest of all, then to sell and dispose of the said premises, or any of them, at any time after the execution or delivery of these presents, as he may think proper, for cash, or on such credit as may enable him to meet the said notes at maturity; and if he should so sell for cash, or for cash and credit, before the maturity of the said notes, then, after paying and retaining all proper charges, expenses, and commissions, to pay the clear residue of the cash so received by him to the parties or holders of the said notes in average and proportion to the several and respective amounts due upon the said notes,” &c.
It contains a covenant of warranty, and, also, a covenant relative to procuring a renunciation of dower affecting the premises.
The decree of the Circuit Court adjudges the instrument void as to creditors, for matters appearing on its face. The appellants contend that the decree erroneously applies to this instrument, as a test of its validity, or sufficiency in point of law, the principles and rules of law governing assignments, general and partial, made by debtors, either insolvent or in failing circumstances, for the benefit of their creditors.
They contend that it is to be considered as a mortgage, or security in the nature of a mortgage, and as such is not subject to the objections affecting the validity of assignments for the benefit of creditors.
The cardinal feature distinguishing assignments of this class from *285mortgages, is the nature of the interest remaining in or resulting to the assignor on the one hand, and the mortgagor on the other.
An assignment for the benefit of creditors, in the form most common in practice, is a conveyance to a trustee or trustees creating express trusts in behalf of some or all of the creditors of the assignor. The title to the property assigned, whether consisting of real or personal property, passes wholly out of the assignor, and vests in the assignee, with all the powers incident to the proprietorship of such property, such as the power to sell and convey, subject only to the limitation imposed by the instrument, or incident to the relation of trustee. Its object is to devote the assigned estate to the payment of debts of the assignor, by placing it in the hands of trustees in a course of distribution. The object of interposing trustees between the debtor and his creditors is to withdraw the assigned estate from liability to be subjected to process under the control of individual creditors for the satisfaction of their demands. Ordinarily, the enforced application of a debtor’s property to the satisfaction of his liabilities is left to the operation of remedies taken by individual creditors, without regard to the claims of other creditors, and unaffected by any equities or considerations of natural justice, that may exist as between different creditors, or classes of creditors, in relation to the common fund, to which all must look for satisfaction.
Under the operation of the strict rules of the common law, the creditor who first reaches the fund has the superior claim to it.
Bankrupt and insolvent laws take into account the rights and equities of creditors, as a class, as among themselves. They are to be regarded as affording statute remedies of a special character, and as ordinarily only operating within the sphere of the cases brought within the terms of such statutes, and not as repealing or modifying the operation of common law remedies when the peculiar jurisdiction not obtained under them is not operative.
The equities existing among creditors, as a class, are sometimes administered by the Courts of Equity, when the character of assets can be imposed upon the estate of the debtor, in which case these Courts proceed to distribute them, either as legal or equitable assets, as the case may be, having regard to equality as the leading idea of equity, although respecting legal heirs.
But the remedies afforded by bankrupt and insolvent laws, and by Courts of Equity, are to be regarded as exceptional; the rules and principles of the common law are to be looked to, in order to *286measure the right of the debtor to establish principles peculiar to himself as the rule of applying his property to the satisfaction of the demands of his creditors.
The rule of the common law, allowing to execution creditors priority of their respective process, does not profess to cover a principle of distribution of such intrinsic excellence as to exclude all other principles or methods of distribution. It is a mere rule of practice, based on convenience, it has often been said, to put creditors on a race of diligence; but that race is more often won by the hard hearted or the lucky adventurer than by diligence, seasoned with mercy.
Until interfered with by process, the debtor may, within the limits of good faith, make any application of his estate toward the payment of his debts that he may choose.
This is not a right or-privilege that he enjoys as debtor, but results from proprietorship. When, however, insolvent, or in failing circumstances, if he desires to control the application of his estate, he must divest himself of such estate, so that it shall be beyond the reach of process affecting him individually, and, at the same time, impress upon the estate itself, considered as a fund, a law governing its application.
The creation of a trust affords the means of accomplishing these ends. It accordingly follows, that to every assignment by an insolvent debtor, or debtor in failing circumstances, for the benefit of creditors, a two-fold object must be ascribed: first, to remove the assigned estate from liability to the process of creditors; and, second, to devote it to the payment of debts according to a rule prescribed by the assignor.
It is obvious, therefore, that every such assignment must, to some extent, hinder and delay creditors. That effect may result incidentally as a consequence of a lawful effort on the part of the debtor to devote his property to the payment of his' debts, though upon a principle of distribution originating in his own mind. In that case, the creditor whose remedies are defeated, has no right to complain.
On the other hand, that hindrance and delay may be the direct object of the assignment, the motive therefor being some advantage to be gained to the debtor, or injury done to the creditor. In this case the law adjudges the effort to hinder and delay a fraud on the rights of creditors and avoids the instrument.
From the foregoing, it is obvious that provisions in such an as*287signment, whether in the form of reservations or conditions tending to divert the assigned estate from application to the payment of debts, or to clog or embarrass that application, for the benefit or advantage of the assignor, are inconsistent with the object which the law regards as a justification for the incidental hindrance and delay thereby occasioned to creditors.
It also follows that the possession by the assignor of the assigned estate after such assignment, for a longer period than might be necessary in order to place the trustee in possession, and the enjoyment by the assignor of the income and profits of the assigned estate, would be wholly inconsistent with the objects of the assignment.
In case of a mortgage by a debtor to secure a pre-existing debt, the effect of the mortgagor’s retaining possession of the mortgaged premises is very different. In that case the object is security, not distribution.
The power of sale is not absolute, but dependent on condition broken. The mortgagor of land is not only entitled, apart from stipulation to the contrary, to possession of the mortgaged premises, but to enjoy the rents and profits without account until condition broken.
He has an equity of redemption, which is so far considered a legal estate that it may be levied upon and sold under execution.
What the mortgagor has obtained is less than what he would have obtained by a confession of judgment; his priority is not only confined to the mortgaged lands, but cannot ordinarily be made available without a judgment or decree as the foundation of proceedings for the sale of the land.
The application of these means of distinguishing the character of the deed in question is affected by the fact, that if that deed is to be regarded as a mortgage, it is not in the form most common, but belongs to a class having, in some respects, peculiar attributes, viz: mortgages to trustees for the security of one or more persons occupying the position of cestui que trust to the estate.
It is enough for the present to say that a trust, as between the several persons formally and beneficially united under the character of mortgagee, does not necessarily affect the relations between the mortgagor and mortgagee as they exist under the. more common form of mortgages.
Looking, then, into the deed in question, we find that the relations established by it, as between the assignor on the one hand, and the trustee and beneficiaries on the other, are not characteristic of a *288mortgage, but are such as to bring the deed within the principles and rules governing assignments by debtors insolvent or in failing circumstances.
In the first place, the deed is not, in form, a mortgage. A mortgage, strictly considered, is a sale and conveyance, subject to a condition or defeasance. It contains, within itself, that which may, on a prescribed contingency, terminate all the rights intended to be created by it. The condition binds the mortgagor to do something of advantage to the mortgagee, in order to divest the mortgagee of the estate and right formally conferred upon him.
The deed in question has no such characteristics. The only condition stipulated is one with which the crediter must comply before he can enter the relation created as between the assignor and trustee. The power of sale conferred upon the trustee is not dependent on condition broken, but is absolute; he may sell and give title at any time after the execution of the assignment at his discretion, if he judges it the best means of insuring the payment of the notes at maturity. Pie is not even allowed to postpone the sale until the renewed notes fall due, but must sell in advance, so as to be ready with the money in hand to pay the notes as they mature.
Neither is it, in substance, a mortgage, or in the nature of a mortgage. The absolute nature of the power of sale is as inconsistent with the substantial rights existing under a mortgage, as with its form as such. It is true that the declared object of the instrument is security, but that is not decisive, for security can be reached by other means than a mortgage, and is always an incidental object in assignments for the benefit of creditors. It is the fact that it is security coupled with a certain amount of right remaining in, and exercisable by the mortgagor, that characterizes the mortgage, while, in the present case, the assignor, if not divested of all title and control over the assigned property by the mere execution and delivery of the assignment, may be so divested at the mere option and discretion of the trustee at any moment.
The right remaining in the assignor, if right it can be regarded, is of too precarious a nature to be regarded in the law as a vendible estate ór equity of redemption.
The power conferred upon the trustee to mortgage the assigned estate is inconsistent with the idea of a mortgage. As mortgagee, the trustee has no capacity to bind the estate by a mortgage. Nor can the power to mortgage be regarded as a naked power, conferring mere authority to act as attorney in fact for and in the name of the *289assignor. In the first place, no such intention is expressed, it being evidently intended that the trustee should convey or mortgage as trustee. Again, the power to mortgage is coupled with the power to sell, and the title is placed in the trustee, clearly designed to be attendant on the exercise of these powers. The conveyance being in form absolute, and the powers conferred requiring an absolute estate to support them, it would be an inadmissible construction to limit the operation of the instrument so as to afford no support to the powers. Especially is this true when the grantee takes as trustee, and a resulting trust may arise to prevent the extension of these powers beyond what is required for a full discharge of the uses and trusts.
On the other hand, the form of the instrument, its substantial provisions, and its objects and intent, as viewed in the light of attending circumstances, clearly define the deed in question as appertaining to the class of assignments under consideration.
The deed is, in form, a deed of trust, by its terms investing the assignee with a fiduciary character.
It devotes a specified fund for the payment of debts. It authorizes the trustee to convert the fund at any time from land into money or credit, without waiting for any default or want of performance on the part of the assignor. It is for the benefit of all creditors who may choose to comply with its terms.
Under the stipulation forming part of the case before us, we are bound to consider as established the fact that the assignors were insolvent at the time of the assignment, that fact being ascertained by the decree of the Circuit Court. The motive of the assignment is declared by that instrument to be to enable the assignors to resume mercantile business.
The leading object of the assignment is to secure forbearance upon the existing demands of their creditors. The basis of the transaction is a contract previously made tvith a majority of their creditors, by which they agree to cancel and discharge the existing obligations, and to take notes for the principal, with interest from a date fixed by the agreement, independently of the date from which such debts originally carried interest, and to give an extension of two and three years. The provisions made by the assignment are not limited to securing the obligations contemplated by this agreement, but are extended to all creditors who may choose to become parties thereto. Mortgaging the land to secure the creditors who had already become parties to the agreement, though a majority in *290interest, it must be assumed, would not have accomplished the professed object of the instrument, namely, enabling the assignors to resume mercantile business. It is obvious that it was considered that all, or nearly all, should become parties to the arrangement, to accomplish that object, and the deed, in its present form, must be regarded as presenting a motive to those who had not already acceded to the arrangement to do so. The character of that motive, and its effect upon the validity of the assignment, is to be considered in another connection.
It is clear that the object of the transaction called for something more than a mortgage could afford, and taken in connection with the situation of the parties, stamps the instrument as an insolvent assignment for the benefit of creditors.
It only remains to consider the objections made to the decree as to the validity of the assignment, as such. The fact pressed by the appellants that this, if regarded as an assignment, is a partial, and not general, assignment, is immaterial under the view of the case that is regarded as decisive o'f its merits.
The important objection to the validity of the assignment is, that it has, as a leading object, the securing of a benefit to the debtor at the expense of his creditors. It seeks time and the settlement, favorable for the debtor, of a question of difference between the debtor and his creditors, or at least of some of them, as to whether interest ran on interest-bearing accounts as between debtors resident within, and creditors residing without the Confederated States during the late war of rebellion.
The questions arise: first, whether an insolvent assignment is avoided by stipulations for the benefit of the debtor, at the expense of his creditors; and, second, whether such benefits are stipulated for in the instrument in question.
In Jacob vs. Corbett, (Chev. Eq., 71,) Chancellor Dunkin, whose opinion was adopted by the Appeal Court, quotes with approbation the language of Judge Van Ness, in Hyslop vs. Clark, (14 John. R., 458,) as follows: “ An insolvent debtor has no right to place his joroperty in such a situation as to prevent his creditors from taking it under the process of a Court of law, and to drive them into a Court of Equity, where they must encounter great expense and delay, unless it be under very special circumstances, and for the purpose of honestly giving a preference to some of his creditors, or to cause a just distribution to be made amongst them all.” This language has the merit of disclosing the true principles that *291should be made the test of the validity of an insolvent assignment.
The deductions from it are, that to justify the hinderance and delay necessarily incident to placing the estate in the hands of trustees, it must appear to have in view one or the other of the objects indicated, either to secure a preference, or to cause a just distribution among them all. Is this a correct expression of the law of this State, as settled by judicial authority, or as a consequence of principles applied by the Courts ?
In Jacot vs. Corbett, Chev. Eq., 71, the assignment had a two-fold object: first, the preferring of certain creditors who were to be paid in full ; and, second, the payment to all other creditors of forty per cent, of their demands, who would accept that amount and release their demands, any surplus that remained to be paid to the assignors. This assignment was held void.
This decision is in entire conformity to the principles drawn from the language of Judge Yan Ness, for, although the first object, a preference of certain creditors, was allowed, yet the second object embraced neither the principle of a lawful preference nor that of equal distribution. In order to have limited the authority of the case to merely giving effect to the language quoted, it would have been sufficient to have held that the assignment lacked an element necessary to its validity, namely : the principle of equal distribution when assuming to apply the assigned estate to creditors who were not intended to be preferred. But the decision in that case was not placed on merely negative grounds alone, but upon the distinct ground that the assignor had reserved to himself that which the general creditors failed to secure byreleasing, and thereby rendered the assignment void.
The language of Judge Spencer, in Austin vs. Bell, 20 John. R., 448, is quoted in Jacot vs. Corbett, as follows: “ I am bound to say that a deed which does not fairly devote the property of a person overwhelmed with debt to the payment of his creditors, but reserves a portion of it to himself, unless the creditors assent to such terms as he shall prescribe, is in law fraudulent and void as against the statute of frauds, being made with intent to hinder, delay and defraud creditors of their just and legal actions.” It will be observed, that in this language the want of devotion to the payment of creditors is recognized as the basis of invalidity, although particular stress is laid on the case of a reservation for the benefit of the assignor.
*292Had the assignment in Jacot vs. Corbett, instead of providing for retaining to the assignor the balance remaining in the hands of the assignee in consequence of the refusal of the general creditors to release on the acceptance of part of their demands, directed that such balance should be paid to a public charity, it is evident that that circumstance, while it might have changed the language of the case and the class of illustrations resorted to, would not have changed the principles of the case nor the result of their application to the assignment. It is not the fact that the assignor secures a benefit to himself, but the fact that the fund which ought to go to creditors is diverted from, that application, that works prejudice to the creditors.
Jacot vs. Corbett clearly rests on this idea. It is from this idea of diversion also that the principles laid down by Judge Van Ness are deduced. An insolvent assignment that divests a debtor of leviable property, except for the purpose of applying it to the payment of creditors, either on the principle of preference or of equality, must be regarded as a diversion of the fund from its legitimate uses, and when that diversion is coupled with a benefit intended for the debtor, the impropriety of the transaction is made clear to the ordinary sense of justice.
Jacot vs. Corbett also holds that where any one of several purposes or objects disclosed by the assignment is inadmissible, the whole assignment is avoided.
A debtor, though insolvent, may convert his lands or his goods into cash, or even into credits or choses, and one dealing with him, in this respect, in good faith, is entitled to protection as a bona fide purchaser for value, so he may part with it to a creditor, either directly or through the medium of a trustee, and, in so doing, he may prefer one creditor to another. As was said in Smith vs. Henry, (1 Hill, 16,) “ this is giving latitude enough, but it will not allow him to secure an advantage to himself, at the expense of creditors, as the price of such preference.”
In the case last named it was held, that when a debtor transferred property to a creditor by way of preference, and the creditor allowed the property to remain in the possession of the debtor, the law raised an implication that could not be rebutted, that the preference conferred was upon the condition that the debtor should be allowed to remain in possession for a time, and that such a stipulation rendered the transaction void as to creditors.
The discussion of the question by Judge Harper discloses principles in entire harmony with the views of Judge Van Ness. The *293result of the reasoning is, that the only advantage, personal to himself, that the debtor has a right to secure, even when dealing with his creditors directly, is what is properly embraced within a fair exercise of the power of preferment. When the dealing with the creditor is through the medium of a trustee, this rule is equally applicable. This is, in effect, limiting the power of an insolvent debtor in assigning his property for the benefit of creditors, to either a preference of certain creditors, or equal distribution among them all, or to a preference of some and equal distribution among the rest.
The same conclusion was arrived at in Anderson vs. Fuller, (McM. Eq., 27.) That was, also, the case of a preferred creditor, suffering part of the property to remain in the possession of the debtor. Ch. Dunkin holds, in that case, that if, in preferring a creditor, the debtor secures “any advantage or control to himself, this provision invalidates the deed.” Again, he says: “The circumstance of leaving the debtor in possession of the property supplies the place of a provision to that effect.” The law presumes an understanding between the parties; infers the existence of a secret trust, and, so far as the rights of creditors are affected, the deed is void. On appeal, the views of Ch. Dunkin were approved.
The New York cases have generally adhered to the doctrine advanced by Judge Van Ness. Judge Sutherland, in Grover vs. Wakeman, (11 Wen., 187,) shows that it has been sanctioned by many of the ablest jurists of the country.
Previous to Grover vs. Wakeman, the principles upon which the Courts of this State, and those of the State of New York, administered this branch of the law, were substantially identical. Hyslop vs. Clarke, (14 John. R., 458,) Leaving vs. Brinckerhoff, (5 John. Ch., 329,) and Austin vs. Bell, (20 John. R., 442,) are clear expositions of the principles recognized and applied by our own Courts.
On the question as to what should be deemed a legitimate exercise of the power of preference, Grover vs. Wakeman assumed the position that conditions annexed to a preference that the creditor should release, avoided the deed upon the ground that it was a stipulation for the benefit of the debtor that might be employed to coerce creditors. Our Courts, from Molin vs. Douglass, (2 Hill Ch., 448,) have adopted the opposite view. The inclination of the New York Courts, beginning with Grover vs. Wakeman, has been to reduce insolvent assignments to close approximation to one unvarying form. Thus, in Barney vs. Griffin, (2 N. Y., 365,) it was *294held that when a preference had been created, but no disposition of the residue made for other creditors, the assignment was void, and, also, that authority conferred on the assignee to sell on credit, or to receive a fixed commission, avoided the deed.
This inclination was developed while the highest Court of that State consisted, in part, of the members of the upper branch of the Legislature, a circumstance that, doubtless, weighed in a question that involved the handling of a delicate legal question with legislative freedom.
Molin vs. Douglass, 2 Hill Ch., 448, allowed the condition of releasing to be annexed to the preference. Gadsden vs. Carson, 9 Rich. Eq., 252, limits this right of exacting a release as the condition of preference to the case of an assignment by a debtor of all his property. In the New York Courts the discussion of this question turned chiefly on the impolicy of leaving in the hands of the debtor a power so susceptible of abuse; while in our Courts it was discussed from the standpoint that inasmuch as a debtor had a right to prefer or not to prefer, he had the constructive right to attach to its exercise such conditions as in themselves did not disclose a fraudulent intent. It may, perhaps, be safe to say, that the question of the propriety of allowing such a condition was influenced by the idea that there is a propriety in the demand of a debtor to be released on the surrender of his whole estate ; a principle that is certainly recognized in most bankrupt laws.
While the debtor would be permitted to withdraw his property from an unpreferred creditor upon any such grounds, it might be said that there was sufficient force in it to warrant his making it the condition of a preference purely voluntary on his part, especially as unpreferred creditors could'not possibly be prejudiced by it.
In Molin vs. Douglass, no provision was made for general creditors, and yet the assignment was held not to be invalidated on this ground.
That assignment was supported by preferences, held to be legitimate. It was held to be no objection to the assignment that a trust might result to the assignor before the payment of all debts, inasmuch as the remedy of unpaid creditors is to be let into an account of the surplus in the trustees’ hands. This decision is certainly in closer conformity to the rule laid down by Judge Van Ness, than the opposite decision in Barney vs. Griffin. That rule sustains the assignment if either of the objects enumerated is the purpose of the assignment. Now, the assignment in Molin vs. Douglass contained *295already one of those objects, and, therefore, was good under the rule in question. Barney vs. Griffin has to be tested by some other standard than that afforded by Judge Van Ness’ rule. In point of fact, the resulting trust can be regarded in no other light than asan incidental consequence, brought about by the rules of equity, of an act done by the debtor which he had a right to do, namely, prefer certain creditors. In Vaughn vs. Evans, 1 Hill. Ch., 414, it was held that power to sell on credit did not vitiate the assignment. The conclusion from our own decisions, supported in great measure by those of New York, especially by the earlier decisions of that State, is that an assignment by an insolvent debtor, or by one in failing circumstances, whether general or partial, is to be regarded as tending to hinder, delay and defraud creditors, unless its whole purpose is either preferring certain creditors, or an equal distribution among all; that a reservation for the benefit of the assignor of any interest in, or control over the assigned estate, or the income or profits thereof, avoids the assignment; that if the assignor is allowed to remain in the possession or control of any substantial part of the assigned estate, after the assignment, the law infers a secret trust for the benefit of the assignor, which cannot be rebutted, and avoids the assignment. Tested by these rules, the assignment is clearly void.
Its object is not the preference of certain creditors, for its benefits and provisions apply equally to all; nor does it seek equal distribution among all, for the right of the creditor to participate depends upon his assent to an alteration of the character and terms of his demand as a condition of enjoying such participation; it stipulates an advantage for the assignor to the detriment of the creditors. Finally, it is to be regarded as covering a secret trust for the benefit of the assignors, evidenced by the fact that the assignors were allowed to remain in possession and control of the assigned premises, and to enjoy the rents and profits thereof. The appeal should be dismissed, and the decree of the Circuit Court affirmed.
Moses, C. J., and Wright, A. J., concurred in the result.