Henry Gassett & Co. v. Wilson & Brown

DOUGLAS, Ch. J. This cause came on for final hearing in the Coúrt below, and was argued by counsel: whereupon it was ordered, adjudged and decreed, that the bill be dismissed, and that the complainants pay the costs, &c. The case has been ably argued in this Court, and the question presented for our consideration, is, whether the Court erred in making that decree. On behalf of the complainants it has been contended in an argument that evinces great labor and research, that the transaction between Joseph W. Brown and Wilson & Brown, was a sale made by said Brown, of his interest in the partnership, to Wilson, for the purpose and intent to delay, hinder and defraud his creditors, and especially the complainants, and is therefore entirely null and void according to the provisions of the statute of 13 Eliz., chap. 5, and our statute in relation to fraudulent conveyances, Thomson’s Digest, page 215, which is almost identical in its provisions with that of 13 Eliz. on that subject. On the other hand, it has been argued with equal zeal and ability, that the transaction was entered into solely for the purpose of giving a preference to certain creditors over others, which Brown had the right (and under the circumstances) it was his duty to do, that Brown had suffered great losses before, and was consequently involved when he commenced business with Wilson — and that there could be no other object on the part of Brown than to add to his resources, to enable him to retrieve his losses — and the circumstance of his connection with Wilson (though embarrassed himself,) being avowed to the world, is proof against any fraud contemplated by such a partnership. That there was also a propriety in this case, in retaining to himself the right to withdraw his capital at any moment. He was in business under the indulgence of his creditors, and if any sought to press, as did complainants, while the others remained indulgent, it would be inequitable to permit the pressing creditor to gain an advantage by obtaining legal priorities. Let us see if this will bear the test of scrutiny. The defendant, J. W. Brown, had been engaged in mercantile business, as a member of the firm ofM. C. & J. W. Brown, previous to the fall of 1843, at Cedar Keys and Port Leon. In 1842, a gale of wind at Cedar Keys destroyed a portion of their effects, and in the month of September, 1843, another storm not only swept away the residue of their property, but all their books and evidences of — 256 — debts duo them, except one day book so much obliterated as to be of little or no value, and left them almost entirely destitute; and it is a part of the history of the country, that it swept away Port Leon itself and left it a desolation. During the period of their prosperity they had become indebted to twelve northern houses, as appears by the record, of whom the complainants are one, all of whom, prompted by that feeling of benevolence and humanity which is always characteristic of a highminded and honorable merchant, or from some other cause, agreed to renew all the notes of the firm of M. C. & J. W. Brown at the rate of fifty cents on the dollar, to be paid in three equal instalments, six, nine, and twelve months from date, with interest after six months — this agreement bearing date the 2d of September, 1844. What the amount of the whole indebtedness was, does not appear — if, however, the other debts respectively, bore any proportion to the one here claimed, it must have been near $30,000, and if it were one third of that sum, no reasonable man could have expected it to be be paid by M. C. & J. W. Brown, out of any business in which they might engage, situated as they were, within the time stipulated ; and it seems not to have been expected by the other creditors, or considered within the spirit and meaning of the compromise, by the defendant, Brown, for he says in his answer (speaking of the old creditors) that these assurances (of indulgence) have been sacredly kept by all, save the complainants. The judgment of complainants was obtained on the 20th May, 1846. The suit must have been commenced immediately after the last payment under said agreement fell due. There is no evidence that the embarrassments of J. W. Brown were concealed ; it is alleged and not denied, that they were well known — it is not to be supposed that Wilson intended to involve himself in them, or that Brown could have obtained credit that would have enabled him to have carried on his business, except upon the assurance to (or at least the expectation on the part of) the new creditors, that they should be paid out of the avails of the goods they sold him. Was there any moral wrong under these circumstances, in his taking means to prevent the appropriation of all his means to these exacting creditors, to the total exclusion of all others, old and new 1 We think not, and are happy to find, upon reference to the brief of the learned counsel who argued this cause for complainants, that he does not — 257 — impute to these defendants actual fraud, or corrupt motives or conduct. He insists most, strongly, however, that the transaction is a fraud in law. But in what does the fraud consist ? Surely not in the payment of bona fide and honest debts. It is said, moreover, that the acceptances of Wilson & Brown, were made to enable J. W. Brown to withdraw his share of the capital and profits of that firm, he declaring it to be his intention thereby to prevent any of his former creditors from getting an advantage over others by means of any suit, or execution and sale of his interest as above stated ; and that, the suit of the complainants', then pending and about to be carried into judgment, was one of the claims moving said Brown to the above course. And from this it is argued that fraud must be inferred, and that if payment of these drafts had followed their drawing, and had been consummated before the levy of complainants’ execution, this avowed purpose by both parties “to delay and defeat” creditors, would in equity render them liable to reclamation. Without pausing to inquire how far this proposition may have been true, had these drafts been handed over to a person or persons standing in a new relationship to the said J. W. Brown, or indeed to any one else without any valuable consideration, it is sufficient to say that it appears by the proofs (and so the master has reported) that they were passed over to three creditors of said Brown, and intended as part payment of debts, fairly and justly due by him, and that these creditors were among those from whom he had made, or who aided him in making, his late purchases, or in paying therefor. Again it has been urged that the holders of these drafts have not called for payment, and that a secret trust for the benefit of Brown must therefore be presumed; but this does not follow. They may abstain from feelings of kindness towards Brown, or from motives of policy, he being a customer, and we do not see that the complainants have any cause to complain because other creditors are not as exacting as themselves. It would work no injury to them, were payment never to be demanded. This transaction has been treated by the learned counsel for the complainants as a sale by Brown of Ms interest in the partnership to Wilson, but it was not so; it was a withdrawal of it under the original articles of partnership. After this withdrawal, he had no interest in the firm, until the new articles were made ; and it was withdrawn for the purpose of giving prefer — 258 — ence to the creditors to whom the drafts were passed over, which the defendant, Brown, might lawfully do. In the case of Holsey, et al. vs. Whitney, et al., 4 Mason’s C. C. R., 206, (which was a contest between an attaching creditor and a trustee under a general assignment for the benefit of all creditors,) Judge Story held that a general assignment is good, notwithstanding it does not purpose to convey all the debtor’s property, and yet requires a general release ; or does not fully enumerate all the debts due, or describes the property generally, or gives a preference to certain classes of creditors. A general assignment, said Lord Ellen-borough, in Peckstock vs. Lyster, 3 Maule & Sel., 371, is to be referred to, as an act of duty and not of fraud, when no purpose of fraud is proved, and Justice Le Blanck added in the same case, “ to hold such a deed fraudulent, would be contrary to Holbird vs. Anderson, 5 T. R., 325, and to all the cases which have decided that a party independent of the bankrupt laws, may convey away his property for the benefit of all his creditors.” Justice Bailey gave full assent to the doctrine, emphatically observing “ that this conveyance, so far from being fraudulent, was the most honest act the party could do.” This doctrine was asserted in a case where the very object of the conveyance was to prevent a judgment creditor from obtaining satisfaction out of the property on execution.” But the Court decided that it was not sufficient that the creditor was delayed and defeated by such a conveyance of his remedy under the execution ; but the act must be fraudulent. Nor (said Judge Story, in Holsey, et al., vs. Whitney, et al., above cited) was there anything new in this doctrine. “ It may be clearly gathered from prior cases, and especially from Estwick vs. Caillaud, 5 T. R., 420, Holbird vs. Anderson, 5 T. R., 235, Minx vs. Howell, 4 East. R., 528, and has since been confirmed even as against the crown in the King vs. Watson, 3 Price, Ex. Rep., 6. 1 Cond. Eng. Ex. R., 265 to 271. “ It would indeed,” says Judge Story, “ be somewhat strange if a-debtor might bona fide prefer one creditor to another in the distribution of his property, and was not at liberty to prefer all his creditors-to one,” — Ibid, 211. “ The law allows the debtor to give a preference to one creditor (and I think to all creditors also) by a bona fide conveyance.” Ibid, 213. In Estwick vs. Caillaud, 5 T. R., 278, it was held that “ if a. person having several creditors, convey by — 259 — deed the legal interest in part of his real and personal property to a trustee in trust (after deducting expenses respecting the trust) out of the rents and profits, to pay half the surplus to the grantor for his own use, and the residue among certain creditors named in the schedule, such deed was valid.” Lord Kenyon said there was nothing fraudulent either in the construction of the deed or the manner of carrying it into execution. It was neither illegal nor immoral to prefer one set of creditors to another. Ashurst said there is nothing illegal on the face of the deed, for there is no objection to a debtor’s preferring one set of creditors to another. Ibid, 221. Indeed the right of a debtor to give a preference by a bona fide payment or transfer of effects to any one creditor, when no bankrupt law intervenes to change the relations and rights of the parties, was admitted by the learned counsel for the complainants in the argument, and he attempted to show that the transaction in this case was malafides, relying in proof of that position, upon the statements of the defendants, that it was intended to prevent the complainants from obtaining a priority by their execution. But the case of Peckstock vs. Lyster, 3 M. & S., above cited by Judge Story in Holsey, et al., vs. Whitney, et al., 4 Mason, 211, is an authority against that position, and so is Holberd vs. Anderson, 5 T. R., 235. In the last case, the facts are as follows: In Easter Term, 1791, Shepherd obtained a judgment against Charter, who brought a writ of error and delayed execution until Easter Term, 1792, when judgment was affirmed in Exchequer Chamber. On the 7th of May, the costs in that suit were taxed, and on the 8th of May, Charter, knowing Shepherd’s intention to take out execution which he was entitled to sue out on that day, went to the plaintiff, Hólbird, who was a creditor of his, informed him of his situation, and executed a warrant of attorney to confess a judgment, on which, judgment was immediately entered up and execution sued out, and delivered to the sheriff two hours before Shepherd’s execution reached sheriff’s office. The sherifflevied under Shepherd’s writ and returned nulla bona to the plaintiff’s. On this evidence it was contended on the part of the defendants, that the plaintiff was not entitled to recover, inasmuch as this was an undue preference given by Charter to the plaintiff for the purpose of defeating Shepherd’s execution, and that the warrant of attorney given to plaintiff was fraudulent and void by the statute 13 E., C. 5. But Lord Kenyon being of opinion that there was no undue — 260 — preference, the plaintiff had a verdict, to set which aside, Gibbs obtained a rule to show cause, which was fully argued ; when Lord Kenyon, Ch. J., said “ there was no fraud in this case — the plaintiff was preferred by his debtor, Charter, not with a view of any benefit to the latter, but merely to secure the payment of a just debt to the former, in which I see no illegality or injustice. The words of the statute, 13 Eliz., do not apply to this case, for the warrant of attorney was given on good consideration, and the other words in the act “ bona fide,” only apply to those cases where possession is not delivered or is only colorable ; of the former kind, was Twyne’s case, where the vendor continued in possession, and of the latter, Hodgson vs. Newman, where (as far as I recollect) the goods were removed from the vendor’s houses and his wife continued in possession of them.” Ashurst, J., and Buller, J., concurred, and the rule was discharged. We have cited this case very much at length, because it is a leading one, and identical in principle with the case at bar. And the doctrine contained in it is fully sustained by the opinion oí the Supreme Court pronounced by Ch. Justice Marshal in the case of Marbury vs. Brooks, 7 Wheat. Rep., 556, 5 Peters Cond. Rep., 356, in which that Court says “ that a debtor has a right to prefer one creditor to another cannot be denied, and that his private motives for giving this preference, provided the creditor has done nothing improper, cannot annul this right, is equally certain. On the other hand it will also bo admitted, that any unlawful consideration moving from the preferred creditor, to induce this preference, may avoid the deed which gives it.” There is no evidence in the case.before us, of any such unlawful consideration moving from the creditors, to whom the drafts above mentioned were transferred, to induce the preference given. The case of Brooks vs. Marbury came again before the Supreme Court in 11 Wheat., 78. 6 Peters’ Condensed Reports, 223 to 236. Chief Justice Marshal again pronounced the opinion, and at page 227 said : “ The preference of creditors of a particular description over-others, being one which a debtor has a right to make, the sale of Ms property, and the payment of the proceeds to such favored creditors, being an act which the debtor may perform by himself, or his agent, we cannot conceive that the motives which may have induced the preference, although communicated to the agent, can in reason affect — 261 — the transaction, provided nothing has occurred on the part of the creditors, which is in any degree exceptionable, either in law or justice.” Nothing exceptionable appears on the part of the creditors here — nothing complained of, only that they have not pressed their claims on Wilson & Brown for the payment of the drafts, which works no injury to the complainants, and may have resulted from the cause suggested by the master, who says “ the delay of payment appears to have been in consequence of the failure on the part of defendant, Wilson, to realize and collect a large sum of the accounts then (on the 31st July, 1846,) due, and supposed to be good, but which have since proved to be on parties in failing circumstances, or wholly insolvent.” Now, while it is not denied that valid transactions between the parties may be fraudulent, by reason of the covin, collusion, or confederacy, to injure a third person, as held in Woolley vs. De Mattos, 1 Burrows, 474, where “ if a man, knowing that a creditor has obtained judgment against his debtor, buy the defendant’s goods for a full price, to enable him to defeat the creditor’s execution, it is fraudulent,” is instanced as cited by the solicitor for the complainants; and that fraud will vitiate any transaction, “ though the principal do not take any part in it, if his agent do, because the principal is civilly responsible for the acts of his agent,” as was held in Doe ex. dem., Willis vs. Martin, 4 Term Rep., 39, also cited, we do not perceive that the principles there asserted touch this case. In the first, the purchaser was an indifferent person, not a creditor purchasing with a view to secure the payment of a fair and bona fide debt; and the latter does not seem to be applicable, unless we are to counsider Wilson the agent of the holder of these bills, and engaged in a fraudulent transaction. But we do not look upon him as their agent — he was the partner of Brown, associated with him under articles, by one of which, Brown had a right, at any time, to withdraw his portion of the capital invested. The complainants are pressing Brown; he prefers others, whose claims are equally meritorious, and who, indeed, have stronger claims to these funds, from the fact that they had aided him to raise them ; he draws for the amount of his portion of his capital stock to pay them. What right had Wilson to say aught against it ? The law does not forbid it — the soundest principles of morality justify it. Wilson, if he could be consid — 262 — ered in the light of an agent in this matter, was only aiding his principal to secure the payment of just and honest claims. Upon a full review of the whole case, therefore, we perceive no error in the decree of the Court below, and it is, therefore, affirmed. Per totarn curiam.