Court Opinion

ID: 8270734
Source: CourtListenerOpinion
Date Created: 2022-10-16 19:32:06.22344+00
Date Added: 2024-06-11T16:43:30.331822
License: Public Domain

Beasley, Chief Justice
(dissenting). This controversy respects the legal effect of a voluntary assignment by an insolvent debtor in favor of certain of his creditors.
Eor immediate purposes it will be sufficient to state that the transaction giving rise to the litigation was this: The debtor-in question was insolvent, and he assigned to one Alonzo Somerville, who was not a creditor, all his property, with the exception of his wearing apparel, such property consisting of certain chattels of the admitted value of $1,000, and the moneys due upon his books of account, the value of such accounts not being shown. His debts were about $2,400. The transfer to Somerville was for the following purpose: that he “ should sell the goods and chattels at public or private sale for the best price that he could realize and divide the proceeds, pro rata, among ” certain designated creditors, whose *398■claims in the aggregate amounted to about one-half of the debts due from the debtor, “ and that he would pay the over-plus, if any,” to the said debtor, the latter having reserved to himself the right to redeem the goods at any time before sale. There was no disposition whatever made of the moneys that might be collected on the books of account mentioned in the assignment.
The chattels thus enumerated were subsequently seized under an execution in favor of the plaintiff in error, and in the Circuit Court it was held that the assignment above described was legal and paramount to such process, and that opinion has now been affirmed by this court.
To that view I cannot agree, as it seems to me that the transfer thus validated is void per se, for two reasons—first, because it is inconsistent with the act of this state regulating the assignments of debtors for the benefit of their creditors; and, second, because it is made void by the twelfth section of the act for the prevention of frauds and perjuries.
In considering the first head of this division of the subject, nothing will be said with respect to certain peculiar characteristics of the transaction that will, in the sequel, become the subject of criticism; for my first contention will be, that such a transfer of property as this is, from its general nature, without reference to its particular qualities in this instance, utterly illegal and inefficacious, so far as respects dissenting creditors.
This debtor was desirous of preferring certain of his creditors, and to that end he executed the assignment now before us. That he could have effectuated such purpose by means of a judgment, or a mortgage, or by a direct transfer of property to favored creditors respectively in satisfaction of their claims, no one will dispute. There is a long train of adjudications in this state and elsewhere to that effect, to which it would be idle to refer, for the subject is not open to debate. Certainly the doctrine is not now, in any degree whatever, called in question, and therefore it does not enter in anywise into this discussion, for the theorem that I shall endeavor to prove is, that an insolvent debtor is forbidden by the statute *399of this state to create a preference in favor of one or more creditors through the instrumentality of a trust. In the absence of statutory prohibition, no one would gainsay the right of the creditor to obtain a preference by this method. Many cases can be found in the books maintaining such a doctrine; but with us the question is one relating exclusively to the meaning of our own written law. That law is declared in these words: “ That every conveyance or assignment made by a debtor or debtors, of his, her or their estate, real or personal, or both, in trust to the assignee or assignees, for the creditors of such debtor or debtors, shall be made for their equal benefit in proportion to their several demands to the net amount that shall come to the hands of said assignee or assignees for distribution, and all preferences of one creditor over the other, or whereby any one shall be first paid or have a greater proportion in respect of his, her or their claim than another, shall be deemed fraudulent and void,” &c.
This statutory provision appears to me so precisely applicable to the transaction under consideration, that it does not need, and perhaps does not admit of, elucidation. Assuredly we have in hand au assignment of a debtor of all his property, except his wearing apparel, for certain creditors in exclusion of others, and just as assuredly such assignment is made by way of a trust. That the present disposition is a trust is assumed as unquestionable; for this transfer is to a third person having no interest, the title being thus vested in the confidence that he will apply the property for the benefit of certain specified creditors; the only remedy for the breach of the duty thus imposed being by a subpoena in chancery; so that this is not only a trust, but, in all its characteristics, a typical one.
Unavoidably, therefore, this case is presented to my mind as standing in this attitude: the statute in explicit terms declares that all preferences created by a debtor through the medium of a trust shall be deemed fraudulent and void, and this court now, just as explicitly, declares that such preferences so created shall be deemed honest and valid.
*400I have most certainly looked, with what seems to me ex-haustive care, through this case, to discover some possible-ground by force of which this seemingly irreconcilable opposition can be, if not fully explained, at least in some degree-accounted for, and I am obliged to confess that I have altogether failed in the endeavor.
The only attempt that has been made to show, by argument,, that the statute in question does not dominate the facts before-us, is to be found in the brief of the counsel of the defendant in error. The reasons there given in this behalf are, in substance, these: that the assignment here used does not purport to be an assignment for the benefit of creditors; that it does-not purport to convey all the debtor’s estate; it does not purport to be in trust for creditors, and that no preferences appear on the face of the paper.
It will appear in the sequel that the transfer thus characterized was by a simple bill of sale, no trust being declared in the instrument. But as it was shown that the assignee had-given nothing whatever for the property so passed to him,, and as such a title could not have stood an instant against the-execution that was levied, the learned counsel himself, in behalf of his clients, these preferred creditors, proved that this naked bill of sale had been accompanied, and as a part of the-transaction, by a parol declaration of trust in favor of his clients, and in this connection he further showed that the-debtor had vested in the trustee the title to everything that he-owned or had a right to; except his wearing apparel.
We, therefore, very obviously, have this posture of things:: if we confine our view to the bill of sale alone, as counsel seems to imply that we ought to do, then, in that event, we have presented to us a transfer of a debtor’s property, withoufr eonsideration, to a third party, to the detriment of a judgment creditor—a transaction which, with respect to these litigants,, would be devoid of the least spark of legality; while, on the-other hand, if we construe the bill of sale, as plainly we must,, in its connection and co-operation with the parol declaration of trust we have an assignment that expressly negatives every *401one of the facts stated by counsel as the basis of his argument; for such assignment does purport to be for the benefit of creditors, and to convey all the debtor’s estate, and to be in trust for creditors and to create preferences.
The only remaining reason urged in the brief referred to in support of this transfer of property is, that the statute under consideration, in its application to an assignment creating preferences, does not avoid the transfer itself, but merely vacates the preferences so given. But this contention is opposed by all our adjudications. The following cases plainly maintain that if a preference be created in one of these assignments, not only such preference, but the entire affair is avoided. Varnum v. Camp, 1 Green 329; Garretson v. Brown, 2 Dutcher 425; Fairchild v. Hunt, 1 McCart. 371.
But this consideration, whatever it may be worth, is out of place in this connection, for, in the present instance, the entire purpose of the assignment is to create these preferences; it has no other force or effect; it does not give the least right or interest to the creditors at large; and if, therefore, this preferred class cannot claim under the trust, the debtor himself will be its sole cestui que trust.
Such considerations as the foregoing do not weigh, in the least degree, with me, and I have referred to them simply because they are the only reasons that have been urged, so far as I can recall, for the exception of this assignment from the operation of the act under discussion.
Hor have I been able to perceive any consideration, founded in public policy or the nature of the subject, that would induce a court to thus circumscribe the force of this statute. There is no necessity for giving to creditors the power to secure their preferences by the creation of trusts. They can effect the same purpose just as effectually by means of a mortgage or judgment, and such devices have, from time immemorial, been resorted to in these cases. For over fifty years the course of legal practice on this subject has been familiar to me, and not a single instance has ever come to my'notice of an attempt to put a creditor on a vantage ground through *402the medium of a trust, and it seems highly probable that the ease now before the court presents the first endeavor of this kind that has ever occurred in this state. But the proceeding is not only a novelty, but will be introductive of much mischief, for as an instrument of fraud it is of unequaled efficacy.
The disadvantage to which it will put the unpreferred creditor will be obviously great; for after he shall have obtained his judgment, instead of being able to levy his execution on the property of his debtor subject to the preferred creditor’s judgment or mortgage, as the case may be, he will be obliged to file a bill in equity to reach a similar end. In other respects his position will be one of hardship; the trustee, the agent of the debtor and the preferred creditor, will have the entire possession of the property, and he will sell it at his discretion without notice to the unpreferred creditor. The disastrous effect of such a disposition of the property upon the right of the creditor at large is plainly manifest, when it is compared with a sale made under a judgment or mortgage by a public officer. In general, preferences to creditors by an insolvent debtor are unjust, and are not to be favored, but when they are enforced by the instrumentality of a trust, they become oppressive in the extreme.
Neither do I think that this method, that seems to me of this evil tendency, has any support in any judicial utterance in this state. So far as has been observed, all the indications of. such opinion are in the opposite direction. Over sixty years ago the subject was before the Supreme Court in the case of Tillou v. Britton, 4 Halst. 121, the question being, whether a debtor in failing circumstances could transfer to a particular creditor in payment of his claim a single item of property. The court, in sustaining that transaction, declared, “ that the act to secure creditors an equal and just division of the estate of debtors who convey to assignees for the benefit of creditors,” does not extend-to a solitary transfer of an individual item of property to a creditor in payment of a debt, and the operation of the act must be confined, if not to cases where a *403• trust is created, at least to cases where there is something like •universality in the assignment.
In the instance now in hand there are both a trust and universality in the assignment, so that it would seem unreasonable to doubt, in the light of the judicial view thus expressed, that such a transaction would have been condemned by the court at the time the reported case was in agitation. Nothing can be more significant of the wide scope this act was then supposed to possess than the fact that in this case it •was insisted by some of the ablest counsel of the state, the late Mr. George Wood being one of them, that it prohibited •a transfer by a failing debtor of a single article of his property directly to a particular creditor in payment of a debt due to him.
To the same effect, in Owen v. Arvis, 2 Dutcher 34, Chief Justice Green very plainly expresses the opinion that, in this class of cases, whenever the assignment is in trust, the case falls within the very terms of the act. And in Emerick v. Harlan, 1 Beas. 230, we are afforded a very clear insight into ■the views entertained by Chancellor Williamson on this subject. In the case cited the assignment was deemed an involuntary one, and, on that account, was not affected by the ■regulation in question, but with respect to the proper effect to be ascribed to the act itself, the Chancellor very plainly expresses his judgment. He says: “Erom several cases that have been in this court lately, I am perfectly satisfied, if a ■debtor is permitted to assign the whole or any part of his property in trust to a third person, for the benefit of the whole or part of his creditors, in any other manner than the act prescribes, the beneficial purposes of that act will be completely annulled. There are great frauds practiced under the ■shelter of assignments. The Assignment act is a great protection to creditors, and courts should be very strict in dis•countenancing assignments made in any other manner.”
It will be observed, therefore, that inasmuch as this court in the present case has sustained an assignment by a debtor •of his property in trust to a.third person, for the benefit of *404some of his creditors in exclusion of others, in a manner different from that prescribed by the act, such judicial action, in. the opinion of the very distinguished Chancellor, will have-the effect of completely annulling ^the beneficial purposes of the act. In view of the preceding discussion, it is scarcely necessary for me to say that the opinion thus expressed necessarily has my entire concurrence.
In this connection it is proper to say that it has not been observed that there is even so much-as a dictum in our reports-that lends the least countenance to the proposition, that a-debtor in failing circumstances can transfer his property to a» trustee in order to confer a preference on one or more of his-creditors.
Before leaving this branch of my subject I would further-remark, that I have entirely failed even to conjecture what spark of vitality will hereafter be discovered to exist in the-statute under discussion. If a debtor, as in this case, cam lawfully transfer his entire property in trust for the sole purpose of creating preferences, in what possible juncture is he-to be prohibited from so doing? Most assuredly, it will hardly be said that he is so prohibited only when his act is-done with a fraudulent design ; for such an assumption would' operate at once as an interpolation of the statute, and as am abrogation of it, for the statute says that all preferences created in this mode shall be “ deemed fraudulent and void,”' and this is the direct opposite of saying they shall be void only when fraudulent. And so, if they are in fact fraudulent,, they are void at common law, and the statute is not needed to-make them so. In my apprehension nothing is, or can be, more demonstrably certain than the fact, that it was the legislative design to prohibit, in the most absolute form, the giving-of preferences in assignments of this nature, and that without the least respect to the consideration whether the intention leading to such favoritism was good or bad. This statute is not aimed at frauds; its title expresses its purpose very clearly in these words, viz.: “An act to secure to creditors an equal and just division of the estates of debtors who convey *405to assignees for the benefit of creditors.” And in conformity to the purpose thus stated, the first section declares that ■“every assignment” in trust for creditors “shall be made for their equal benefit in proportion to their several demands,” “and that all preferences of one creditor over the other, &o., shall be deemed fraudulent and void.”
In the presence of such clear statutory language as this, it is not surprising that our courts, up to the present time, have uniformly held that an assignment of this kind is absolutely void if any of its essential provisions be inconsistent with the directions of the act, and this without regard to the moral nature of the transaction. Thus the first resolution declared by the court in Garretson v. Brown, 2 Dutcher 437, is in these words, viz.: “ That if a deed of assignment contains upon its face a preference or preferences of one creditor over another (except as hereinafter mentioned), the deed itself is void and inoperative, as being in contravention of the statute; and the preferences, of course, fall with the deed.”
It would seem that the proposition cannot be more clearly stated: the preference per se vitiates the assignment, no matter . whether the purpose of the maker of it be fair or fraudulent.
Equally explicit and to the purpose are the expressions of <the bench upon this subject in Varnurn v. Camp, 1 Green 326, 329, the language of the opinion being this: “ It follows, then, •that were an assignment not made for the equal benefit of the ■creditors, but whereby a preference is sought to be given to any one not a creditor, by mortgage or judgment, over another, ■is, in contemplation of law, fraudulent and void. However ■clear, then, it may be of moral turpitude, or actual fraud, it ■can no more, than if thus tainted, prevail against an execution •creditor.” And in Knight v. Parker, 1 Beas. 219, the Chan■cellor, criticising one of these trusts, says: “ Whether the •debtor executed it with a fraudulent intent or not, it is in violation of the rights of creditors. It delays them in the -collection of their debts, and must be regarded, in equity, as xa legal fraud, and as such declared void as against them.”
*406It is not too much to say, that, until the present occasion,, the language of this act on this subject has never been considered to be open to any doubt whatever,-and that every judge in every court to whom it has been presented for construction-has held that it avoids, proprio vigore, and irrespectively of' extrinsic circumstances, every trust of this kind that creates-preferences. These views, as I understand the inevitable effect of the decision made in the present case, are now rejected by this court, and hereafter assignments may be made-in trust with preferences for particular creditors. That result-raises the question, what hereafter will be the force of the-statutory prohibition in question, and to what situation is it to be applied ?
That inquiry must be elucidated by somebody else; for my part, I shall be compelled to wait for instruction on the subject.
The second head of the discussion relates to the particular form in which the present assignment was cast. That form, was this-: by a bill of sale, under hand and seal, the debtor put in this man, Alonzo Somerville, the title to all his prop^ erty, consisting of goods, chattels and his books of account. This. instrument is strictly formal, and purports to sell the-property described. for the sum of $1,050.38, and for. which consideration a receipt is expressed in the paper. Somervilleis not described, as trustee, nor is there the .faintest allusion to-the existence of any trust. As the. instrument reads, Somerville.stands as the absolute owner of the property on which it. operates, and as having paid full and fair consideration for it,, even to the last penny. The creditors who are interested in upholding the transaction themselves showed, by their testimony, that the statements of this bill of sale were untrue in-every important respect; that Somerville was not a purchaser,, that he had not paid any part of the sum for which a receipt was given, that he was a mere trustee, that he was.to convert, the chattels into cash and distribute it pro rata among the preferred creditors, and that no trust was declared touching-*407the accounts, and therefore the moneys arising therefrom would belong to the debtor himself.
The question therefore is presented, whether an assignment in favor of specified creditors can be made of the property of the insolvent debtor by means of' an absolute bill of sale,' accompanied by a parol declaration of trust to which no allusion is made in the written instrument, and with the. state-; ments of which it is inconsistent ? ■ , ,
My conclusion is, that such a disposition of property-is absolutely void, as opposed to the spirit>of the statutory provision already considered, and to the ordinary principles o.f jurisprudence. Why should the debtor when he makes one of these assignments be permitted to give to the transaction- -a- false semblance? The creditors certainly have the right to know what has become of his property, and it seems altogether intolerable that he can hold before them a bill of sale that -falsely states that he has made-an absolute sale of-everything possessed by him for a full consideration which has been paid to himJ It is obvious how admirably such a device is adapted to the purposes of the fraud-doer, and it is equally evident that it can subserve 'no other interest. - -
■' Such proceedings appear to -have been universally condemned whenever judicial attention has been called to them. -The inevitable effect of bills of sale of-this -character is to mislead and embarrass creditors, and those'who. use them are therefore chargeable with a-design to effect such-result; and it is on this account that, so far as has been observed, these secret reservations or limitations in absolute bills of sale have been pronounced agáinst. In McCulloch v. Hutchinson, 7 Watts 434, the transaction involved a preference given to a creditor by force of an absolute bill of sale, modified by a parol trust. With respect- to this latter feature of the affair, this is the judicial expression, viz.“It is the secrecy of this trust, a trust incompatible with that which appears on the face of this transaction, that- constitutes its illegality. When the trust openly constitutes a part of a verbal assignment, or -is apparent on this face of a written instrument,-no harm is done. *408The creditor is informed of the nature of the conveyance and of the destination of the property, so that he can, with full information, avail himself of his legal remedies for a resort to that surplus. * * * A preference may be given by a debtor, though insolvent, to an honest creditor. A sale may be made by such debtor at a specified price. But honesty and fair dealing require that the truth of the .transaction should concur with its appearances,” &c.
Very much in the same strain is the stricture of the court of Missouri (Smith v. Lowell, 6 Mo. 67) upon an attempt to dispose of property by this method. The court said: “ The law does not permit debts to be secured in this manner. If the conveyance was intended only to secure the debt, that intent should have appeared in some writing made at the time. If courts should give the least countenance to the securing of debts by absolute conveyance alone, there would be no end to the embarrassments in which creditors would be involved to secure their debts.”
And, again, in Curtis v. Leavitt, 15 N. Y. 120, it is said: “ Secret trusts attending conveyances absolute in terms have always been regarded as a badge of fraud since the celebrated Case of Twynue.” See, also, Burrill (3d ed.), § 209; 1 Am. Lead. Cas. 71.
Not a single reason presents itself to my mind in favor of sustaining a proceeding of this kind. It would seem the dictate of common justice and public policy to require the debtor to declare in the instrument executed by him the whole of the disposition made of his effects. If he be acting honestly, he can have no motive for withholding such disclosure; if he be acting dishonestly, nothing can be more serviceable to his fraud than the absence of the trust from the written document. Such omission leaves the unpreferred creditor in utter darkness. How is he- to discover what the trust in reality is, or who are its beneficiaries ? His only remedy would seem to be a bill in chancery. To say to such creditor that he can set aside such a transaction as this when he shall have proved it to be tainted with fraud, is, in substance, in most cases, to inform *409■him that he has no available remedy. How can he prove a fraud with such a slender chance for investigation ? He looks at the bill of sale, and it informs him that he has no further 'interest in the debtor’s estate; he finds himself face to face with a bona fide purchaser who has paid full value for the property. ■In the present case the consideration that is receipted is minutely described as being so many dollars and so many ■cents. Why should the creditor, unless he has special information, look beyond such an instrument as this ? Why should he suppose that a secret trust exists as a pendant to the instrument of sale? And if he does imagine the existence of ••such a trust, how is he to ascertain its dispositions ? It seems ■to me manifest that an assignment constituted by an absolute bill of sale, attended by a parol trust, in the nature of things, '.and without reference to the intention of the debtor, must be a hinderance to the unpreferred creditors in the legal pursuit ■of their claims. To say the very least in disparagement of •such dispositions, they certainly put the transaction out of •sight, and have all the ill effect of purposed concealment. As ■this is the natural effect of the contrivance resorted to by the ••debtor and the preferred creditors, they are to be charged with the purpose to produce such effect and consequently, such a "transfer is void by force of the act relating to frauds and perjuries.
■ It is further to be noted, that this assignment which is here validated has certain other qualities which, of themselves, ■would have led me to repudiate it on legal grounds.
It is the common language of the authorities, that any substantial use or benefit reserved or provided for in the assign- ' ment for the benefit of the assignor himself renders it void. ‘The assignment in the present instance-contains three provisions of this nature—-first, the overplus, if any, of moneys arising from the sale of the goods and chattels, after the payment of the specified debts, is to be paid to the assignor; ■second, that he may redeem the said goods and chattels at any •time before the sale and disposal thereof; and, in the third •place, all the moneys then due, or to grow due, to himself or *410to a firm of which he had lately been a member were transferred to the assignee, and no trust was declared with respect to them.
. With reference to the reservation of the surplus after the payment of the designated claims, it is not necessary to pause, for the question is a debatable one, and has been variously decided, and. is one of very minor importance in the present discussion.
But the second right reserved is of a, more material character—it is the right to redeem the goods before sale. Such a power of reclamation should not be permitted, as it can readily be used to the oppression of such of the creditors as are unpreferred. If the debtor be entitled to redeem, he can, without prejudice to himself, divest himself of the title to his property, and thus wrong and hinder creditors at large during the interim between thus putting.the ownership in the assignee and the debtor’s redemption of his goods or land, and such interval of time iptay in some cases be of considerable length. “ The effect of a valid assignment,” says a book of deserved repute, “ is to vest the assigned estate in the assignee, so as to-put it out of the reach * * * ■ even of the assignor himself.” 1 Am. & Eng. Encyc., p. 871.
In my opinion,, and in view of the .authorities, this assignment, if otherwise unobjectionable, should not receive the sanction of the court by reason of this right of, redemption being, reserved to the debtor.
And so the third of the benefits reserved in the trust would lead me to a similar, result. This debtor divested himself of the title to these moneys due on the books of account, and made no further disposition of them; the consequence being that the assignment, with respect to part of the property,, is for the benefit of the preferred creditors, and with regard to the other part of it, is for his own benefit. No principle in this-branch of the law seems to be more universally, recognized than the rule, that if the debtor reserves in the assignment made by him any substantial interest or advantage, the entire transaction. becomes ipso facto void. Numerous de*411cisions attest that doctrine. It is not alone the objectionable feature in the disposition of the property that is annulled, but the entire assignment itself. The reason of the' rule is, that to permit such a practice would embarrass creditors by enabling debtors to conceal their property, and that to avoid such trusts only so far as such vicious reservations were concerned, would rather encourage than repress the evil. In every case in which á forbidden ingredient of this kind has been discovered, the judicial action has been to declare the whole assignment a nullity.
The foregoing are the principal considerations that have led me to vote to reverse the present judgment.
It will be observed that my conclusion is founded on reasons that may be thus summarized:
First. I cannot agree that a failing- debtor can assign his property in trust by way of preference to certain enumerated creditors. Such a construction of the act seems to me to be opposed to its language, its spirit and its purpose, and, also, to all former judicial expressions of opinion.
Second. I cannot agree to the doctrine that such an assignment can be made, in part, by a written bill of sale, and in part by a parol disposition that contradicts the written instrument in essential particulars.
Third. Hor that the debtor, in such an assignment, can reserve the right to revoke his transfer on any condition whatever.
Fourth. And lastly, that such an assignment cannot put property in trust for creditors and other property in trust for the debtor himself.
I vote to reverse this judgment.
For affirmance—Dixon, Garrison, Magie, Reel, Clement, Smith, Whitaker. 7.
For reversal—The Chancellor, Chief Justice, Scueeer, Yan Syckel, Brown. 5.