Sunday Creek Coal Co. v. Burnham

Harrison, J. It appears herein, from the allegations of the petition filed, that the plaintiff recovered a judgment in the district court of Lancaster county against Gorham F. Betts and William H. Weaver, partners in business under the name and style of Betts & Weaver, for a sum stated in the petition; that such proceedings were had to collect said judgment, that the defendants appeared in court and made answers as garnishees in regard to property, etc., of the firm of Betts & Weaver in their possession or under their control, which answers were to the plaintiff unsatisfactory, and this suit was instituted for it, the further allegations of the petition being as follows: “That at the time said garnishment summons ivas served upon said defendants and each of them, and at the time said answers were made, said defendants were possessors of and had under their control personal property, money, rights in action, real estate, leases, good-will of the firm of Betts & Weaver and creditors of the said Betts & Weaver, and coal, wood, notes and accounts of the said Betts & Weaver of the value in excess of the amount of plaintiff’s said judgment, and that the said defendants were then and are now owing and indebted to the said Betts & Weaver in the sum of money in excess of said judgment, to-wit, in the sum of $2,500, and said defendants were in possession of said property and credits, cboses in action at the time said summons in garnishment was served upon said defendants and each of them, and acquired said possession and held the same in fraud of the rights of the creditors of Betts & Weaver and of this plaintiff herein, done on the part of Betts & Weaver and on the part of the defendants for the purpose of hindering, delaying, and defrauding the creditors of Betts &¡ — 367 — Weaver.” The answer of defendants contained an admis-. sien of their appearance in court in obedience to a summons in garnishment proceedings, and that they answered that they had neither property nor credits of the firm of Betts & Weaver in their possession or under their control. The further answer was a general denial of the other allegations of the petition. A trial of the issues resulted in a verdict and judgment favorable to defendants. The plaintiff asks a review in this court of the proceedings during the trial. The bill of exceptions containing a transcript of the evidence adduced during the trial was, on motion in this court, having such purpose in view, quashed; hence the evidence is not before us for consideration in connection with any of the alleged errors. The transaction between the defendants and the firm of Betts & Weaver, to the extent we can gather its nature from the pleadings in the action, was a sale, by a debtor to- a creditor, of property, the consideration moving to the debtor being the extinguishment of his pre-existing indebtedness to the purchaser, and which sale was attacked by the plaintiff as fraudulent and void as to the rights of plaintiff and other creditors of the firm-. The trial court in its charge- to the jury stated,that if the sale was made with the intent on the part of the firm of Betts & Weaver to defraud creditors, that such intent existed would not render the sale void unless the intent was shared by or participated in by the creditor to whom the sale was made. To- each paragraph of the charge in which the foregoing proposition was embodied, the plaintiff duly excepted and made a separate assignment of error. For the plaintiff there were prepared and presented several instructions in which was set forth that if it appeared that the debtor in making the sale had a fraudulent intent in reference to the rights of creditors other than the one to whom the sale was made, and the latter had notice or knew of such intent, or had notice of facts which tended to show a fraudulent purpose suffi — 368 — cient to put a person of ordinary prudence on inquiry, then the sale was invalid as to the rights of other creditors. These the court refused to read in the charge to the jury, and its action in regard to these requests is presented here by proper assignments of error. It is well established in this state that a debtor in failing circumstances may prefer any one or several of his creditors to the exclusion of others, if the transaction from which such preference results be bona fide. (Costello v. Chamberlain, 36 Neb., 45.) It has also been decided that “A mortgage taken by a creditor to secure a pre-existing debt will not be held void merely because the creditor, when he took the mortgage, had notice of an intent upon the part of the mortgagor to hinder, delay, or defraud his creditors. In order to avoid such mortgage the creditor must have participated in such intent.” (Jones v. Loree, 37 Neb., 816; see, also, Grosshans v. Gold, 49 Neb., 599.) The question arises: Is the foregoing rule applicable to a transaction of sale between an insolvent or failing debtor and one of his creditors, whereby, in extinguishment of the debt due from the former to the latter, property of the former is sold and transferred to the latter, resulting in his preference as a creditor? The general rule doubtless is that where property is sold with a fraudulent intent, and the purchaser has knowledge of the intent or of sufficient facts to put a person of ordinary prudence upon inquiry, the sale is a fraudulent one. But it might be said that there is an exception to this of which the case at bar furnishes an example, — where the sale is made in payment of a pre-existing debt due the purchaser. A direct purchaser is a stranger, or volunteer, with no pre-existing reason for his purchase, while tlie'creditor has a motive other than the direct purchase of the property, — that of obtaining payment of that which is due him, which light the law accords him, and notwithstanding his grantor or vendor may have a fraudulent purpose in making the sale to the knowledge of the creditor purchaser, the latter is not a party to it and — 369 — charged with its consequences unless he participates in it. The case of Bleiler v. Moore, 69 N. W. Rep. [Wis,], 164, was one in which a son in embarrassed circumstances was indebted to his father and in payment of the indebtedness conveyed his real estate and personal property to the father. Other creditors of the son procured executions to be levied on the personal property as belonging to the son. In an action of replevin by the father to recover possession of the property levied, the issue presented was whether the sale to him by the son was fraudulent and void as against the son’s creditors. In the opinion appears the following: “The appellant complains that the trial court, in substance, instructed the jury ‘that a sale made by a vendor with the intent to hinder, delay, and defraud his creditors is void, if the vendee has knowledge of facts and circumstances such as should put a prudent man upon inquiry, by which he might find out the fraudulent purpose.’ This is alleged to be error. But this really states the rule applicable to a sale made by an insolvent debtor to a stranger with substantial accuracy. The stranger is bound at least to refrain from knowingly obstructing the rights of creditors. But the case is different where a creditor in good faith takes the property of his debtor in payment of his honest debt. He is no mere volunteer or stranger. He is restricted merely to honesty. He may not purposely obstruct other creditors of his debtor, even to come by his own. But it is no fraud upon the other creditors, although he may know or believe that the debtor is giving his debt a preference for the purpose of avoiding the payment of other debts, and that other creditors will thereby fail to realize their claims, provided, always, the purpose of the vendee is bona fide the realization of his debt, and he does not participate in the fraudulent purpose of his debtor; for, in order to avoid such a sale, both parties must participate in the fraudulent design. (Gage v. Chesebro, 49 Wis., 486, 5 N. W. Rep., 881; Plow Co. v. Hanthorn, 71 Wis., 529, 37 — 370 — N. W. Rep., 825; Erdall v. Atwood, 79 Wis., 1, 47 N. W. Rep., 1124; Bannister v. Phelps, 81 Wis., 256, 51 N. W. Rep., 417; Barr v. Church, 82 Wis., 382, 52 N. W. Rep., 591.) David v. Birchard, 53 Wis., 492, 10 N. W. Rep., 557, which decides that ‘Where a mortgage is given to secure an honest debt, but with an intent to hinder, delay, or in any way put off the creditors of the mortgagor, it is void if the mortgagee had knowledge of such intent; and this knowledge need not be actual, but may be inferred from the knowledge of the mortgagee of facts and circumstances sufficient to raise such suspicions as should put him on inquiry,’ — is entirely out of harmony with the decisions of this court, both before and since, and is not to be followed as an authority upon this question. Mere knowledge of the corrupt sentiment in the mind of his debtor, not shared by him, does not deprive the honest creditor of the right to accept the proffered payment or security of his just claim.” The case of Shelley v. Boothe, 73 Mo., 74, 39 Am. Rep. 481, is in point. It was .observed in the opinion: “The third instruction is as follows: ‘If Woy and Smith in making the conveyance of the goods in suit intended to delay J. W. Wood & Co., their creditors, and if the plaintiff either by himself or his agent present at the sale was aware of such intent, then you will find for the defendant.’ There is a class of cases to which the doctrine asserted in the instruction applies; as, if one knowing of judgment and execution against another goes and purchases his goods in order to defeat the execution, or if one knowing that a debtor is selling his property to hinder, delay, or avoid the payment of his debts, buys it and pays the full value of it, thereby enabling the debtor to carry out his fraudulent design, such sales will be adjudged fraudulent because the; purchaser becomes a participant in the iniquitous purpose of the debtor. But cases of this kind should not be confounded with those which only amount to giving a preference of one creditor over another, A debtor may give a preference to a particular — 371 — creditor or set of creditors by a direct payment or assignment, if he does so in payment of his or their just demands and not as a mere screen to secure the property to himself. The pendency of another creditor’s suit is immaterial and the transaction is valid though done to defeat that creditor’s claim. (Kuykendall v. McDonald, 15 Mo., 416; Murray v. Cason, 15 Mo., 415; State v. Benoist, 37 Mo., 500; Bump, Fraudulent Conveyances, 350, 351; Potter v. McDowell, 31 Mo., 74.) The right of a debtor to prefer one creditor over another necessarily implies the right of such creditor to accept such preference. While the effect of such preference must, to the extent that it is made, necessarily be to defer or to hinder or delay other creditors, the mere knowledge of the preferred creditor that such will be its effect, and the debtor intended it should have that effect, will not be sufficient to avoid the transaction as to a creditor not preferred. But if in such case it further appears from' the circumstances attending the transaction that the preferred creditor was not acting from an honest purpose to secure the payment of his own debt, but from a desire to aid the debtor in defeating other creditors, or in covering up his property, or in giving him a secret interest therein, or in locking it up in any way for the debtor’s own use and benefit, he will not be protected, and the sale would be fraudulent as to other creditors, because in such cases the fraud of the debtor becomes the fraud of the preferred creditor because of his participancy therein.” (See, also; Smith v. Whitfield, 2 S. W. Rep. [Tex.], 822; Rice v. Wood, 33 S. W. Rep. [Ark.], 637; Kohn v. Clement, 12 N. W. Rep. [Ia.], 551; Bump, Fraudulent Conveyances [4th ed.], sec. 170, p. 196; 8 Am. & Eng. Ency. of Law, p. 855; Pollock v. Meyer, 11 So. Rep. [Ala.], 386; Bamberger v. Schoolfield, 160 U. S., 149; Cook v. Thornton, 20 So. Rep. [Ala.], 14; Seiler v. Walz, 29 S. W. Rep. [Ky.], 338. The general rule in regard to sales by a failing debtor with a fraudulent intent to parties not creditors was announced and enforced by this court in the cases of Tootle — 372 — v. Dunn, decision reported in 6 Neb., 99; Savage v. Hazard, 11 Neb, 323; Temple v. Smith, 13 Neb., 513; and in Bollman v. Lucas, 22 Neb., 796, cited herein for plaintiff, the same rule was held applicable to a transaction of sale between a debtor and creditor wherein the property was conveyed in payment of the debt. Great respect and weig'h/t are due to the decision of the able and learned judge who wrote the opinion in the case to which we have last referred, but we feel forced to the conclusion that the best reasons and the precedents are opposed to the application of the rule under discussion therein made, and to such extent the opinion in that case must be disapproved. We will further state that the decision in Bollma/n v. Lucas was right on the ground that the value of the property conveyed was largely in excess of the amount of the debt which constituted the consideration for its transfer to the creditor. It is stated in the opinion: “It is quite impossible to arrive at the value of the goods and accounts from the evidence, but it may be assumed that the evidence tends to fix it at nearly twice the amount stated as the consideration of the bill of sale.” It follows from the foregoing views that the rule embodied in the charge of the trial court was the correct one and that the rule as stated in the instructions tendered and refused was not so; hence there was no error in giving the former and refusing to give the latter. There were other assignments of error in relation to' the trial court’s refusal to read certain instructions prepared and requested for plaintiff, but to determine whether such action as to either of them was erroneous would necessarily involve an examination of the evidence. As it is not properly before us this cannot be done and the assignments must fail. The judgment of the district court is Affirmed.