Chadwick v. Burrows

Bradley, J.: The action is in the nature of a creditor’s bill to set aside the sales made by the firm of Burrows & Lane, and by Burrows to the defendant Potts, upon the charge that they were fraudulent as against the plaintiff, a creditor of the firm. The trial court found and determined that the allegations of fraud were not supported and dismissed the complaint. The value of.the property of the firm transferred to Potts is not, nor is the amount of its ‘liabilities, found by the court. The evidence on those subjects was mainly that of the. plaintiff, and, in view of his relation to the action, it did not conclusively establish the facts to which he testified. The court was not requested to find on those propositions of fact; and, inasmuch as no finding was made in those respects, no question of the comparative amount in value of the property and of the liabilities of the firm is presented on this review to the prejudice of the result given by the decision of the trial court. The inquiry, therefore, arises whether the legal effect of the sale of the firm property to Potts, in view of the purpose and consideration, was such as to charge the parties to it with the intent to [42] hinder and delay the plaintiff in the collection of his debí, and thus render it fraudulent as against him. The one member of the firm had the right to sell the partnership property and apply the avails on the debts of the firm. (Mabbett v. White, 12 N. Y., 442; Graser v. Stellwagen, 25 id., 315.) The sale to Potts was absolute in terms. There was no reservation in the property or proceeds to inure to the benefit of the debtor firms in any event, other than that derived from the payment by Potts upon its debts, in performance of the consideration of the sale to Inin, unless an advantage may be found to have been reserved in the fact, as found by the court, that Potts “agreed to pay each of the creditors of the said firm of Burrows & Lane forty per cent of the indebtedness of each creditor in full of such debt.” If an assignment had been made to him, in trust for the creditors, and it had required them to satisfy their claims as a condition of receiving respectively stated sums, less than the full amount of their debts, the instrument would have been fraudulent and void, as against any creditors who had not consented to such a disposition of property. (Hyslop v. Clarke, 14 Johns., 458; Grover v. Wakeman, 11 Wend., 187; Armstrong v. Byrne, 1 Edw. Ch., 79 ; Spaulding v. Strang, 37 N. Y., 139.) The validity of an assignment, in trust for the benefit of creditors, requires that the assignor part with all control over the property assigned, and that it be unqualifiedly devoted to the payment of his debts, without any reservation for his own advantage. This is the condition on which lie is permitted to withdraw it from the ordinary process of the law. Although the sale here was in terms absolute, it was made under an arrangement that the vendee should apply the purchase-price upon the debts of. the vendors, and if such application was by the agreement, without the consent of the creditors, made to depend upon the condition that the creditors should discharge the entire debts due them on receipt of the prescribed rate of forty per cent of their respective amounts, it would seem to be a stipulation for the advantage of the vendor in the agreement of sale, which might not legally be sanctioned. The debtor firm was at liberty to sell its property for an'adequate consideration, and direct the payment of the purchase-money on a portion only of the debts, and in that manner give a preference to creditors. The consideration to be paid for the property here was the amount of the par [43] ticular percentage of all the debts to be paid by the purchaser to the creditors. So far the agreement was valid. And so far as the agreement to pay that amount in full satisfaction of the debts applied to those creditors who had consented to such arrangement, it was also valid. In view of the circumstances a fair construction of the agreement makes it in that respect applicable only to those creditors who, by their consent, adopted it. It certainly would not affect or apply to any others. This arrangement was brought about at a meeting of nearly all of the creditors, and made pursuant to their request. They were willing to take forty per cent in satisfaction of their claims. It was in view of the arrangement by and with them that the sale' and purchase were made. And Burrows was probably induced to make the transfer by reason of the understanding thus made with such creditors, so far as they could do it, that the firm property should go in satisfaction of the partnership liabilities. The title passed to Potts, and he assumed the obligation to pay for it by paying to all the creditors pro rata, a sum equal to such percentage of their debts against the firm. This would seem to give to the plaintiff the right to the stipulated rate to apply on his claim without any undertaking on his part to discharge the residue of his demand. The expectation (if it existed) of Burrows that the discharge of all the debts could be produced by such payments, and the arrangement in that respect in the agreement of sale, could not affect the liability of Potts to make the payments which he undertook to make. The evidence tends to prove that the creditors or some of them, who received such amount, assigned their claims to Potts. This evidently was done to carry out such arrangement to discharge the debts. The defendant Potts was not a trustee, and the payments required of him were not m&de in the execution of a power, but in the performance of an original obligation to pay his own debt created by his purchase. This liability of Potts was property within the reach of the several creditors to the extent of their rights, respectively, to appropriate it to the payment of their claims, and is distinguished from a power arising out of a trust, in its legal effect as against the creditors of the' vendor, if free from fraud in fact. The finding of the trial court that the sale and purchase of the firm property, and the conveyance by Burrows to Potts of the [44] Canada property, and his interest in the house and lot at Tonawanda, were without any intent to hinder, delay or defraud the creditors of the firm, seems to be supported. The view thus taken here leads to the conclusion that the disposition, made of the case in that respect at Special Term was not error. But the rights of the plaintiff may properly be settled by the judgment in this action, and they should be, in view of the difficulty which may otherwise arise elsewhere, so as to declare his right to the pro rata sum of the proceeds of the sale of the firm property, by way of the abatement to that extent of the amount of his claim. The matter of the construction, before mentioned as to him, of the agreement and purchase and for the payment to the creditors, may not be so clear as to obviate discussion, but his right as a creditor to that portion of the purchase-money (as it remains unpaid), whether pursuant to the agreement to pay him forty per cent, or as a fund arising out of liability to pay for firm property purchased, seems clear. The complaint contains allegations which would have permitted the Special Term to treat the case as within the statute providing for creditors’ actions not resting in fraudulent disposition of property as well as the common law creditors’ action founded upon the latter, and the court may have given such relief. (Code Civil Pro., § 1871.) This has taken the place of 2 Revised Statutes (173, § 38), and it is very likely that this relief would have been given if the attention of the court had- been specifically called to it, which the record does not show was in any manner done. The judgment should be so modified as to direct the payment by the defendant Potts to the plaintiff of the portion of the purchase-price of the firm property which he undertook to pay on account of the debt due to the plaintiff, that is to say, forty per cent of such debt, to be applied in abatement thereof to the extent only of such payment, and as so modified affirmed, without costs to any party. Smith, P. J., Barker and Haight, JJ., concurred. Judgment modified so as to direct the payment by the defendant Potts to the plaintiff of the portion of the purchase-price of the firm property which he undertook to pay on account of the debt due the plaintiff, that is, forty per cent of such debt, to be applied in abatement of such debt to the extent of such payment only, and [45] further modified by striking out the award of costs to the defendant, and as so modified affirmed, without costs of this appeal to either party.