Vilas National Bank v. Newton

Landon, J. : May 20, 1891, John M. Newton and Horace B. Newton, composing the firm of Newton & Co., conveyed and transferred all the firm property, real and personal, to Mary T. Clark, the mother-in-law of John M. Newton, for the consideration, as expressed in the conveyances and transfers, of $12,298, money theretofore loaned by said Mary T. Clark to Newton & Co. Newton & Co. were manufacturers of stove brick and fire linings in the city of Albany. The property transferred consisted of the plant and assets of the firm, and was, perhaps, worth $25,000 over and above the incumbrances thereon and the liabilities of the firm, in the hands of Newton & Co., or of any other capable managers of the business, but probably would not bring enough to pay such incumbrances and liabilities if the business should .be discontinued. The incumbrances amounted to about $58,000. The unsecured liabilities of the firm were about — 64 — $42,000, of which about $13,000 was due the plaintiff; about $8,750 to the wife of Horace B. Newton; about $10,000 to the wife of John M„ Newton, and $6,617 to- Mary T. Clark. The rest of the •amount due her was secured. As-the greater part of the unsecured indebtedness was owing to members of the families of the partners they conceived the idea of transferring the firm property to Mrs. Clark in form, in consideration of the firim's indebtedness to her, and then to organize a corporation of which they should be members and have the control, and, to an extent sufficient for their support, be the beneficiaries. They hoped in this way to keep and manage their property without being pressed or distressed by their creditors outside of their own households.- Newton & Co. probably did not at first intend to defraud the plaintiff outright. They intended, however, to coerce the plaintiff into awaiting their convenience and thus to hinder and delay it in the collection- of its debt. Whether they should really defraud it out of it altogether was a question they probably, did not, squarely face until the plaintiff sued them, and since then they have acted as if they did intend to defraud it. Horace B. Newton and John M. Newton did shortly after the transfer to Mrs. Clark organize the corporation “ Newton & Company, Incorporated,” in which.they,: their respective wives, Mrs. Clark, and a few of their friends were the incorporators, with a capital stock of $125,000. Mrs. Clark conveyed and transferred the assigned property to the corporation for the consideration of $125,000, which was paid by transferring to her the entire capital stock. She distributed such shares of this stock among the household creditors of Newton & Co., and among others as -they directed. ' In the interval between the conveyances and transfers to Mrs. Clark and her conveyances and transfers to “ Newton & Company, Incorporated,” Horace B. Newton and John M. Newton were authorized by Mrs. Clark to carry on the business in the same manner as before under the name of “ Newton & Co., Agents,” and they did so. Upon the organization of the corporation, Horace B. Newton was made chairman of the board of trustees, and John M. Newton president and treasurer of the corporation; each one of them was allowed a salary of $1,500 per year, and they continued the same possession and control of both business' and property as if no assignments or transfers had been made. — 65 — Newton & Co.’s intent must be judged from their acts. Tlieir intent was, if not to defraud the plaintiff, to hinder and delay it of its lawful debt against them. . (Buell v. Rope, 6 App. Div. 113, and cases there cited.) The appellants, however, contend that Mrs. Clark was, to use the language of the statute, “ a purchaser for a valuable consideration,” and that it does not “ appear that such purchaser had previous notice of the fraudulent intent ” of her grantors, and that, therefore, her title to the property was good. (2 R. S. 137, § o.) To take up this evidence item by item, 'and consider each item apart from the body which all the items make, would exhibit Mrs. Clark as an innocent," amiable, elderly lady, a creditor of the firm of which her son-in-law was a member, willing to accept the security he tendered her, and, after she had obtained it, following his advice as to its management and disposition. The learned referee considered the evidence as a whole. So considered, a different aspect is presented, and we think the referee-was right in his conclusions. Newton & Co. wanted a person who would act as they directed and ask no troublesome questions. It was better that such person should be their creditor, for then the transfer to her by them would apparently be for the “ valuable consideration ” which the statute mentions. If such person should ask no questions, she would not obtain “ notice of the fraudulent intent ” of the grantors, and thus wTould be in a position to nullify the legal effect of that intent. She must, in fact, hold the property in trust,, to be disposed of for the use of Newton & Co., as they should-direct. It should not be necessary, however, to tell her this; she must be relied upon to do what Newton & Co. or her son-in-law told her to do. Newton & Co. found such a person in Mrs. Clark. She was their instrument or tool in the fullest sense of the term. Her son-in-law lived with her; the business was done at night in her house and-presence. Horace B. Newton lived at Ballston Spa, forty miles away, and he came by the midnight train to her house to complete the business. She did not ask that any transfers or conveyances be made to her; she did not ask for any further security; she did not wish to embark in the manufacture of stove brick and linings, but — 66 — she was willing to co-operate in bridging the firm over its difficulty. She must have supposed that the unsolicited conveyances and transfers to her were for that purpose. At the firm’s request she used them for that purpose; that is, to enable them, through her, to transfer all their property to the corporation which they contemplated organizing and soon after organized. She permitted them to retain possession of the firm property, and to carry on the firm business as “ Newton & Go., Agents,” until the members of the firm were ready; through her co-operation, to carry it on as “ Newton & Company Incorporated.” If Mrs. Clark’s intention had been to buy the property absolutely for full value, and she had paid for it such full value by the release of her antecedent debt,- it may. be conceded that she would not be chargeable with inquiry; that actual notice of the fraudulent intent of her grantors, or knowledge of facts equivalent to such .notice, would have been necessary. (Steams v. Gage, 79 N. Y. 102; Parker v. Conner, 93 id. 118; Anderson v. Blood, 152 id. 285.) But Mrs. Clark, having blindly lent herself to the furtherance of the scheme of Newton & Co., is not entitled to invoke the rules which protect those who are acting at arm’s length with .their grantors. She was a co-actor with them, and, if she did not know their intent, it was because she did not want to know the effect of her co-operation. ■ Judging her intent by her acts,.we must conclude that she took the conveyances and transfers upon the secret trust for the use and benefit of Newton & Co. to dispose of the property transferred to’ her to their use as they should direct, and as this would operate as a fraud upon- the plaintiff, that she was chargeable with the intent that it should so operate. Before she transferred the property to Newton.& Company,. Incorporated, she held it in trust for the use of Newton & Co.' This the statute (2 R. S. 135, § 1) forbids as to personal property, if necessary for the protection of creditors, and as its effect was to hinder and delay Newton & Co.’s creditors, the statute (2 R. S. 131, § 1) forbids it as to both real and personal property. As Mrs. Clark was chargeable with participation in the fraud she can take no benefit through it to the prejudice of creditors. (Baldwin v. Short, 125 N. Y. 553.) ■ The grantors of Mrs. Clark were permitted to testify that they — 67 — did not convey and transfer to Mrs. Clark with the intent to hinder, delay or defraud their creditors. They were not permitted to answer the question, “ What was your intention * * * in executing those papers ? ” The authorities permit the first form of inquiry, but we are cited to none permitting the second where the question sharply arises. The first goes to the very issue; the second, if permitted, might open up matters foreign to it — that is, lead to false issues. The first has been criticised as an inquiry where none can follow the witness. We do not think it was error to sustain the objection as the question was here presented. The declarations of John M. and Horace B. Newton, made to the plaintiff after the transfer to Mrs. Clark, were received against Mrs. Clark as well as against the declarants. The conveyances and transfers were made May 20, 1891; the conveyances and transfers by Mrs. Clark to “Newton & Company, Incorporated,” June 12,1891. Both transactions form part of the same scheme. The consummation of the scheme would coerce the plaintiff and hinder and delay it, and was so intended. Pending its consummation it was within the control of the two Newtons. Their declarations were • made to reconcile the plaintiff to the scheme, or to so conciliate the plaintiff that it would not interpose and thwart the. scheme, and were, thereforej part of the res gestee by which the scheme to which Mrs. Clark lent her co-operation was effected. The letters written by the Newtons to plaintiff after the transfer of the property to “ Newton & Company, Incorporated,” seem to promise payment of their demand, but as its validity was established by judgment these letters do not appear to be prejudicial to the defendants. The president of the plaintiff testified to declarations of William N. Newton, a son of one of the defendants. The witness was uncertain whether the declarations were contained in a letter of the defendants Newton, of which William was the bearer, or his declarations apart from the letter. Upon defendants’ objection, the learned referee received the declarations subject to the plaintiff’s producing the letter or making proof of William’s agency. It was a question of the order of proof. The plaintiff did not produce either the letter or proof of William’s agency. However it might be before a jury, we must assume that the learned referee, having in his discre — 68 — tion heard the testimony subject to the condition that it should be received if 'made competent, did not receive it. The same witness, having been examined by the' plaintiff and cross-examined by defendants, was subsequently recalled, and testified to a material fact which he had not before referred to. Being pressed to explain,. upon cross-examination, why he had omitted it upon his first _ direct examination, he answered: “ I can’t think of any other reason except I forgot it, and I saw it in the minutes I swore to before.” The minutes he referred to were of his examination in. supplementary proceedings taken by plaintiff against the defendants Newton. The plaintiff was permitted to introduce the part of said minutes showing, that he then so testified. We think this was competent. The inculpation implied by the cross-examination was that, if the testimony was true, the witness would have stated it before, and by producing his former testimony he met the implied charge.' There are no other exceptions which seem to-require discussion. The judgment should be affirmed, with costs. All concurred. Judgment affirmed, with costs.