McConihe v. Derby

Learned, P. J. This is an appeal by the plaintiff from a judgment in favor of the defendants. The action was brought by a judgment creditor to set aside a bill of sale of personal property as fraudulent and void. The case came on for trial at a circuit court, and a jury was impaneled. The court submitted to the jury the question whether the bill of sale was made with intent to defraud creditors. The jury answered in the negative, and the court adopted the finding and found other facts. Charles and Frank Derby were carrying on an hotel on the 10th of July, 1886, and were in possession of goods 475 and chattels consisting generally of the Iiotel-furniture, table articles, liquors, cigars, provisions, horses, and wagons, worth about $1,400. They owed the plaintiff about $252, and their father, George M. Derby, about $400, and he was their indorser for about $1,000. At this time they were threatened with insolvency, and they executed to their father a bill of sale of all the said goods and chattels, and gave him a mortgage on real estate for $500. At the time of executing said bill of sale it was agreed between George M. and said Charles and Frank that they (Charles and Frank) should remain in possession and management of said property, and sell and dispose of it at their pleasure, and continue the hotel business, and from the avails of sales and profits of the hotel business they should pay on their indebtedness other than such as they owed said George M. The said Charles and Frank did continue in possession of this present property, handling it as part of the hotel business, down to the time of the auction sale in October, and sold to whom they chose any part of it. This was with consent of George M. George M. took the bill of sale as security, and because he was afraid his sons could not pull through, as he states. He made no assertion of ownership until the time of the auction sale. On August 6, 1886, Frank sold out to Charles, and Charles continued the business until the auction sale. On the 6th of October, 1886, George M. took possession of the property, or such of it as remained, and caused it, or the principal part of it, to be sold at auction. According to the testimony of Charles, everything was sold at the auction sale except the whisky, the cigars, and the horse. In one part of his testimony he says also that the pool-table was not sold at the auction; but evidently George M. took possession of everything which remained. The whisky was rolled over to Mr. Stackpole’s store, on storage, after the auction, and some of it was after-wards taken from that place by Charles. The plaintiff recovered a judgment against Charles and Frank, January 22, 1888, for the aforesaid indebtedness, existing at the time of the bill of sale, and issued execution thereon, which was returned unsatisfied June 9,1888. We suppose the principle is settled that where, at the time of the execution of a chattel mortgage, it is agreed between the parties that the mortgagor may go on and sell the stock and use the proceeds generally in his business, the transaction is fraudulent in law as against creditors of the mortgagor. Southard v. Benner, 72 N. Y. 424. And such an agreement may be inferred from the acts of mortgagor in selling the property and applying the avails to his use with knowledge of mortgagee. Potts v. Hart, 99 N. Y. 168, 1 N. E. Rep. 605. It is true, as held in Brackett v. Harvey, 91 N. Y. 214, that an agreement that the mortgagor may sell the property and apply the avails on the mortgage debt is valid. But that was not the agreement in this case. It was not understood that the avails of the goods sold should be applied on George M. Derby’s debt. If that had been the agreement, then such avails would have been deemed to have been received by the mortgagee, and would be applied on his debt, although they were not actually paid over to him. Conkling v. Shelley, 28 N. Y. 360, and Brackett v. Harvey, ut supra. But where the agreement is that the mortgagors shall go on with their business, selling as they choose, and paying debts as they choose, there, plainly, the transaction is a fraud on creditors. And in this case there is the additional fact that there was no change of possession, but Charles and Frank continued to manage and control the business as before. In this case, the defendants claim that the bill of sale was valid, because the agreement was that the vendors should sell the property in their ordinary business, and pay debts other than that of the vendors. But that agreement cannot be upheld. If the agreement had been that the avails of sales were to be applied on the debts of George M., then every sale would have reduced his debt so much, whether lie had received the avails or not. Conkling v. Shelley, ut supra. But not so as t.o other creditors. They had not made the vendors their agents to sell 476 the property. And this bill of sale''prevented these creditors from collecting their debts out of the property. In fact, it was a complete scheme to permit Charles and Frank to do business without paying their debts, and to put their property where no creditor could reach it, whether or not the parties understood its effect. Defendants claim that plaintiff cannot recover, because he did not show that some of the property or its proceeds was in the possession of George M. when plaintiff recovered judgment. They rely on the principle that when there has been a sale, fraudulent as to creditors, the vendee may return to the vendor the property, and thus escape any liability thereafter. Cramer v. Blood, 57 Barb. 155. The case of Murphy v. Briggs, 89 N. Y. 449, turns largely on the recording statute. There may be cases where this principle and others analogous will apply; for instance, if a general assignment for the benefit of creditors is declared fraudulent, the assignee would be credited for payments made by him prior to the action in which the fraud is declared. But the present case is quite different. Here there was no change of possession. The bill of sale is therefore presumed fraudulent. On the facts proven it must be held that that presumption was not overcome. 2 Rev. St. p. 136, § 5; Southard v. Benner, ut supra. The creditors include all persons who are creditors at any time while the goods were in the assign- or’s possession. 2 Rev¡ St. p. 136, § 6. But such creditors cannot bring an action to set aside the bill of sale until after judgment and execution. Therefore this plaintiff is a defrauded creditor, and may pursue this property. George M. Derby was a party to the fraud. He has never relinquished the rights he claimed to get by the bill of sale. He has never rescinded that bill of sale, or surrendered to the vendors his rights under it. He took possession of the residue of the property by virtue of such bill of sale, and sold part of it by the same authority. He applied the avails on his own debt owing from Charles and Frank, or in payment of money borrowed by him and lent to them. He cannot be permitted to retain the benefit of his illegal transaction. Stimson v. Wrigley, 86 N. Y. 337; Dutcher v. Swortwood, 15 Hun, 34; Goold Co. v. Maheady, 38 Hun, 294; Murtha v. Curley, 90 N. Y. 372; Loos v. Wilkinson, 113 N. Y. 485, 21 N. E. Rep. 392. There are some articles which it is said that Charles and Frank did not own because they were purchased conditionally, and had not been paid for; and it is stated that these were taken by the persons who sold them. If this is so, of course George M. would not be liable for these. But as to all the property of Charles and Frank of which George M. took possession about the time of the auction sale, we think he is liable, and should account, whether he has sold the same or not. Judgment reversed, new trial granted, costs to abide event. All concur.