Utley v. Smith

Ellsworth, J. . The important question, presented in this case, is whether the two deeds of Andrew Coe to Henry D. Smith, of the 5th and 13th of December, 1854, are, or are not, fraudulent and void, as contrary to the provisions of the statute of 1853, for the relief of insolvent debtors. The plaintiffs insist that they are ; that the deeds were made by an insolvent person, with a view to insolvency, and were not within the seventh section of the act, and particularly that they operate, by way of preference among creditors, and must, of course, be held to be void and of no effect. The defendants, on the other hand, insist that mere insolvency, which is subsequently developed, does not make the deeds of the debtor fraudulent and void ; and that, even if the deeds do not come within the exceptions in the seventh section, they are not bad, unless they were made with a view to insolvency. The question is one of more than ordinary interest, since it is important in itself, and this is the first time the court has been called upon to construe this statute. — 310 — "We do not, however, hesitate as to the determination to which we should come. Three things are necessary in order to make the deed of an insolvent debtor, fraudulent and void under the statute of 1853. 1. The grantor must be in failing circumstances; 2. the deed must be made with a view to insolvency; 3. the deed must be made with intent to prefer one creditor to another. The words “ failing circumstances,” as used in the statute, mean more than actual insolvency, for that is consistent with an honest belief of the insolvent debtor, of his wealth and prosperity; the words would seem to imply that the insolvent is about failing, and closing his affairs, from an inability to continue in business, and to meet his payments ; to hold that a debtor, honestly pursuing his business, believing he is solvent, or if embarrassed, hoping to extricate himself by continued efforts, and with that view, buying and selling in ■the usual course of business ;—to hold such a person to be a bankrupt within this statute, and that all, who deal with him, deal with him at their peril, if it should turn out he was really insolvent at the time, would interrupt all business, and create great and general alarm. We construe the words of the statute in a more specific sense, to wit, the closing of business by an avowed and deliberate failure. So Judge Story construed the word bankrupt, under the bankrupt law of the United States, in Arnold el al. v. Maynard, 2 Sto. R.., 358. He says, it describes one acting in contemplation of actually stopping his business, because he is insolvent, and utterly incapable of carrying it on. But not to enlarge on this point, we pass to the second, which, in our view, is entirely decisive of the case. We mean the words, “ in view of insolvency.” What meaning shall we attach to these words ? They appear to be very plain and pointed, and we can not doubt that they are important, and that they fully disclose the object which the legislature had in view, in the law. No debtor, actually failing, shall — 311 — be allowed to convey away his property, to make preferences among his creditors. Any such conveyance, made with a view to insolvency, is contrary to the statute, and is utterly void. This is what these words mean, and they mean no more. Actual insolvency is not enough, for this does not necessarily prove any particular view of the insolvent in an ordinary sale, or mortgage; his insolvency may have nothing at all to do with it, and be neither the cause nor the occasion of it. It is but a circumstance to be taken into the account in weighing motives, and although it may work a kind of preference, yet if this was not intended by the parties, if the quo animo was wanting, and the conveyance was bona fide, and in the usual course of business, the conveyance is not contrary to the language, or spirit, of the statute. It has been claimed that a conveyance to a bona fide grantee is liable to be declared void, if made by an insolvent, in view of his failure, and if it does not come within the cases, excepted in the seventh section of the act. This is a point, however, upon which it is unnecessary to express an opinion in this case. What we have said is confirmed by decisions under the late bankrupt law of the United States, and the entire later decisions in England, under their bankrupt law. In Janes v. Howland and al, 8 Met., 377, the question arose under the late bankrupt law of the United States, which contains this clause: “ all conveyances or transfers of property in contemplation of bankruptcy, and for the purpose of giving any creditor, &c., any preference, or priority, &c., shall be deemed utterly void, and a fraud upon this act;” the court held, that if a party who fears, or believes, himself insolvent, but does not contemplate stoppage or failure, and intends to keep on, and make his payments, and transact his business, hoping that his affairs may be thereafter retrieved, and in that state of mind makes a sale or payment, without intending to give a preference, and as a measure connected with going on with — 312 — his business, and not as a measure preparatory to, or connected with, a stoppage in business, such sale or payment is not void, as made in contemplation of bankruptcy, within the meaning of the bankrupt act of the United States. Hubbard, J., in giving the opinion of the court, after reviewing the cases, says, “ in view of all the authorities, we hold the law to be this, that though insolvency in fact exists, yet if the debtor honestly believes he shall be able to go on in his business, and with such belief pays a just debt, without a design to give a preference, such payment is not fraudulent, though bankruptcy should afterward ensue. And on the other hand, if the debtor, being insolvent and knowing his situation, and expecting to stop payment, shall then make a payment, or give security to a creditor for a just debt, with a view to giving him a preference over the general creditors, such payment or giving security, is fraudulent as against the creditors, and property that is transferred in making such payment, or giving the security, may be recovered by his assignee. The whole rests upon the intent with which the act was done, and the intent is to be proved, as a fact. In Tidgrove v. Sharp, 5 Taun., 541, Gibbs, Ch. J., says, “ the cases in which the doctrine of contemplation, in cases of bankruptcy, was introduced, make it depend on the quo animo. In Morgan v. Brundrett, 5 Bar. and Aid., 289, Patterson, J., says, “ a man may be insolvent, but yet not contemplate bankruptcy; ” and Parks, J., says, “ the meaning of the words, ‘ in contemplation of bankruptcy,’ I take to be, that the payment, or delivery, must be with intent to prevent the general distribution of effects which takes place under a commission of bankruptcy.” From the English cases, which are all collected and commented upon by Hubbard, J., we derive this rule, and we think it is the true one, that the quo cmimo is the important and decisive characteristic. In the matter of Alonzo Pearce, in the district court of the district of Vermont, reported in 6 Law Rep., 261, Prentiss, J., says, in speaking of a conveyance by a bankrupt, “ I think it must — 313 — appear, that the debtor, in making the transfer, though he did it voluntarily, and while in fact insolvent, acted in contemplation of bankruptcy, i. e., in anticipation of breaking, or failing, in his business, of committing an act of bankruptcy, or of being declared a bankrupt, on his own instance, on the ground of inability to pay his debts, and intending to defeat the general distribution of effects which takes place under a proceeding in bankruptcy.” It was contended by the plaintiffs, that a man must be supposed to know the state of his affairs, and to have acted with reference to his insolvency, however really ignorant of the fact, if subsequent developments make it manifest, that, at the time, he was in fact insolvent. Hence it is said, that when Coe mortgaged his property to Smith, he did it in view of his insolvency and failure, and with intent to prefer Smith to his other creditors, or, at least, that this must be held to be true, however untrue in fact. We cannot give an assent to this course of reasoning. The committee expressly find that the parties had no knowledge or belief of the insolvency of Coe, and that his deeds to Smith were bona fide, and not made in view of failing and stopping, but with a view to the continuance and extending of business, in a new partnership connection. Were the intention of Coe otherwise, and not bona fide, as the committee find, but to prefer Smith above the general creditors, or if the question of intention were open for our review, and we were decided what the intention of the parties was, in forming a new company to carry on this business, we might possibly come to a different conclusion from the committee. But we are not permitted to do this, although it was claimed, on the argument, that we could, and so we are concluded upon the question of quo animo, and therefore can not, as matter of law, against the finding, pronounce the deeds to be void as a fraud on the insolvent law of this state. The third thing, which will make void the deed, or assignment, of an insolvent debtor, wherever it is found, is the — 314 — intent of the grantor, or assignor, to make a preference among creditors, and prevent an equal distribution of assets. This is too clear to admit of any question whatever. Equality among creditors is the great thing aimed at by the legislature ; not to interfere with sales and payments in the ordinary course of business, nor to prevent debtors from paying, or securing, their creditors, with a view of continuing business. Now we look in vain for any such purpose, or intent, accompanying the mortgages of Coe to Smith, and hence those instruments are not void in view of the statute. It was said, on the argument, that those deeds are fraudulent and void, under our general law of fraudulent conveyances, for the want of possession, taken by the mortgagee. Assuming, as we must, under the finding of the committee, that the mortgages were bona fide, and free from the objections already commented upon ; that there was no covert design in forming the company of Smith, Coe & Co., and that the company took possession of the property, and with the avails of it paid company debts, and assumed company liabilities, we do not see any force in the objection to their fairness and validity. The fact of Coe’s being a member of the new company, can not make any difference, since he could, and did, part with his possession, to them, and has given the creditors of the company a good and valid lien on the property for their debts. There was no possession left in Coe, upon which to raise a presumption of fraud, under the general statute of fraudulent conveyances. Another claim made is, that the deeds are void under our registry act, because the debts are not well described in the condition of the deeds. Were this an original question, it would be difficult, we think, to sustain the deeds against this objection, but it is not; and although our early decisions would hold them void, for vagueness, our decisions for the last ten and fifteen years, have gone further, and established the law to be liberal enough to sustain mortgages, quite as indefinite and vague as the present. Of course — 315 — debts, not paid, or assumed, before the general assignment of Coe, would not be secured; nor any debts exceeding the sum stated in the condition. From the report, it appears, that William R. Smith, who was a partner in the company of Smith, Coe & Co., received, as such, from the personal estate conveyed to the company, fifty-six hundred and forty dollars, seven cents. The company had a good title to this property, if the views already expressed are to be considered as correct, and hence, William R. Smith is liable to account for it as a partner, only for the benefit of the creditors of Smith, Coe & Co. Upon the foregoing premises, it is agreed, that he is entitled to charge that fund with twenty-nine hundred and three dollars, seven cents, and we think he may charge the further sum of twenty-two hundred and seventy-eight dollars, forty cents, for company debts paid, and four hundred dollars for his services, and may retain company property, or effects, to the amount of one hundred and fifty-eight dollars more, for company debts yet unpaid. We advise that the accounts be settled on these principles. Other questions have been made, and argued at much length, which we pass over, as not material to the final disposition of the case. In this opinion, the other judges, Storrs and Hinman, concurred.