Howe v. Warren

Shope, J.: It is insisted by plaintiffs in error, that by the execution of the deed of assignment from Samuel A. Kean to B. F. Jacobs, and the express acceptance thereof by said Jacobs, as assignee, for himself and successors therein, there was created an irrevocable trust, imposed upon all the assigned estate, and which, notwithstanding the order of discontinuance of the assignment, is still subsisting, and enforceable in' equity for the benefit of all of Kean’s creditors; that the order of discontinuance, which, it is conceded, remitted the parties to the same rights and duties existing at the date of the assignment, was ineffectual to destroy the trust in favor of creditors created by the deed, and that the further order of the county court, under and by which the estate of Kean was transferred to the defendant in error Everett M. Warren, was void. On the other hand, it is as strenuously contended that the parties were remitted, by the order of discontinuance, to the same rights that existed at the date of the assignment; that the trust created by the deed of assignment was extinguished, and that Kean, the assignor, had a right to convey the property therein described, and undisposed of by the assignee, to said Warren, and that the county court was authorized by the statute to make an order directing the transfer and conveyance of said property by the assignee, Jacobs, to said Warren, accordingly. In our opinion neither of these contentions can be sustained. The questions presented are of more than ordinary importance, and consideration of them requires a ' construction of section 15, in force July 1, 1879, amendatory of the “Act concerning voluntary assignments,” etc., of 1877. (Hurd’s Stat. 1893, chap. 10.) That section provides that “all proceedings under the act of which this (section) is amendatory, may be discontinued upon the assent, in writing, of such debtor and the majority of his creditors, in number and amount; and in such ca'ses all parties shall be restored to the same rights and duties éxisting at the date of the assignment, except so far as such estate shall have already been administered and disposed of; and the court shall have power to make all needful orders to carry the foregoing provision into effect.” Deeds of assignment, prior to the enactment of the Voluntary Assignment act, were in common use in this - State, and it will be well to consider the nature and effect of such an assignment. In England, deeds of assignment, as it seems, are of two kinds: deeds of assignment or of arrangement with creditors, and voluntary deeds of agency. The former, were executed by the debtor and creditor, and were held to be irrevocable. The latter, to which the creditor is not a party, and which were executed only by the debtor and the trustee to whom the debtor conveys his property, to be applied to the payment of his debts, or otherwise, as the debtor may direct, were held to be revocable or not by the assignor, according to the position in which the estate is, and" the rights of creditors under the assignment,. at the time of the attempted revocation. (McKenna v. Stewart, 20 L. J. Ch. 49.) That is, the doctrine in the British courts appears to be, that where the creditors, under a voluntary deed of agency, on notice thereof from the trustee, have manifested unequivocal assent thereto, and by presenting their ‘Claims to the trustee, or by performing some act by which their position has become materially changed or by which they will be warranted in looking to the fund in the hands of the trustee for the payment of their debts, the deed of, assignment is regarded as irrevocable. (Acton v. Woodgate, 2 M. & K. 492; Siggers v. Evans, 32 Eng. L. & Eq. 139; Brown v. Cavendish, 1 Jones & L. 606; 2 Pomeroy's Eq. Jur. sec. 993.) On the other hand, it seems to have been held that, at any time prior to the rights of the creditors actually attaching under the assignment, the deed, not being signed by the creditors, might be corrected, altered or revoked, at the instance of the assignor. (Girrard v. Lord Lauderdale, 3 Sim. 1; Walwyn v. Coutts, 3 Mer. 707, and 3 Sim. 14; Johns v. James, (L. R.) 8 Ch. Div. 744; Brown v. Cavendish, supra.) But it appears that the holdings are not entirely uniform. In the United States, assignments for the benefit of creditors have generally been of one kind, and required to be executed only by the assignor and accepted by the trustee. As a general rule, the express assent or joinder of the creditors, as parties to the making of the assignment, has not been regarded as essential to its validity. “The prevailing doctrine,” says Burrill, (Law of Assignments, 6th ed. 459, 460,) “was, that an assignment in trust for creditors, executed and delivered by the assignor and accepted by the assignee, creates at once the relation of trustee and cestui que trust between the assignee and the creditors, .and cannot be revoked by the assignor, or by the joint act of the assignor and the assignee. * * * Thus, after the rights of the creditors have once actually attached, or after notice of the assignment to those provided for by it, or after notice by creditors to the assignee of their desire and intention to avail themselves of the assignment, or after they have taken steps to enforce the trust, as by filing a bill praying for the distribution of the fund according to the provisions of the deed, or after any of the trusts have been actually executed, it is too late to revoke the assignment.” And this seems to be the general doctrine, and has received the approval of this court in Gibson v. Rees, 50 Ill. 383, where it was held, that where the trust, under a deed of assignment for the benefit of creditors, “is accepted and the trustee enters upon the discharge of the trust, so long as it remains in force, or where the creditors are parties to the instrqment, or have presented their claims to the trustee and given him notice that they look to the fund for payment, it is binding upon all parties in interest, and a court of equity will entertain jurisdiction and carry the trust into effect.” And it was there said, that “a power created by a deed of this character may be revoked and the trust destroyed by an arrangement between the grantor and the trustee. * * * But to be effectual it must occur before the creditors have manifested their assent by presenting their claims to the trustee, or in some manner manifest their assent, or do some act entitling them to rely upon the fund for the payment of their claims.” See, also, 2 Pomeroy’s Eq. Jur. sec. 994; 2 Lewin on Trusts, *515, and cases cited. It seems clear that prior to the passage of section 15, before quoted, and its becoming part of the act of 1877, the law- in this State was, generally, that a deed of assignment for the benefit of creditors, executed in the usual form by the assignor, was subject to revocation and change by the assignor and assignee at any time before the rights of creditors attached thereunder. On the other hand, if by any of the modes indicated, or their equivalent, the rights of creditors had attached, the deed was binding upon all the parties, and irrevocable. (Wilson v. Pearson, 20 Ill. 81.) In such cases, it is manifest that it would require the assent of all the creditors to set aside the deed of assignment and restore the property to the debtor. We need not call attention to the fact that in a vast number of cases, where a majority of creditors deemed it to the interest of the estate and were willing to again trust the assignor with his property, it would be advantageous to all concerned, and beneficial to the creditors as well as the debtor, that the latter should again be put in control of his estate and entrusted with its management and disposition. The evident purpose of section 15 was to enable a majority of creditors, in number and amount, to join with the assignor in a revocation of the deed of assignment, and thus restore the assignor to his unadministered estate, with all the rights, obligations and duties resting upon him prior to the assignment becoming effective, and restoring the creditors to all their rights as they existed at the date of the assignment. There can be no question as to the propriety or the advantage, both to the community at large and the persons directly interested, of releasing the estates held under deeds of assignment as. soon as was practicable. To this end, if no other, the legislature, presumably recognizing the law as it theretofore existed, enacted section 15, and provided a mode by which assignment proceedings might be terminated, and necessarily rendering such assignments, at any stage of the proceedings, revocable, and again possessing the debtor of his estate, and leaving the matter of the adjustment of his debts with him and his creditors, except so far as the application of his estate had been made under the assignment as it existed before the assignment had been made. The right of the debtor to make an assignment of his estate for the benefit of creditors exists independently of the statute, for while the English bankruptcy and insolvency laws do not seem to have been adopted by the early settlers of this country, suitable insolvency laws have always existed, and for voluntary assignment for the benefit of creditors, and the principles which govern them are, in many particulars, at least, the product and growth of American common law. (3 Parsons on Contracts, *432; Burrill on Assignments, secs. 1, 2; Hanchett v. Waterbury, 115 Ill. 220.) The purpose and effect of the Voluntary Assignment act are to control the assignment and distribution of the estate to and among creditors. It declares all provisions therein by which preferences are given shall be void, and provides for the administration of the estate by and under the direction of the county courts, and all voluntary assignments made in this State are to be administered under and in accordance with its provisions. The act confers upon county courts original jurisdiction, in all cases of voluntary assignments, to administer and control the trust, to allow and adjust the claims of creditors, and to distribute the funds derived from the estate equitably among all creditors who shall prove their claims in accordance with the provisions of that act. (Preston v. Spaulding, 120 Ill. 208; Farwell v. Cohen, 138 id. 216, and cases supra.) And in proceedings under that act the jurisdiction of the county court is exclusive, and after jurisdiction of the assigned estate has attached no other court will interfere, except where the circumstances are such as to require the interposition of a court of equity to prevent an absolute failure of justice. Hanchett v. Waterbury, supra; Preston v. Spaulding, supra; Field v. Ridgely, 116 Ill. 424. By the amendatory section now under consideration, authority is given to enter an order discontinuing assignment proceedings in the county court at any time, upon the assent, in writing, of the debtor and of a majority of the creditors, in number and amount. The legislature evidently contemplated that the assent of a majority of the creditors, in number and amount, would be sufficient warrant for assuming that the debtor, upon being restored to his property, would faithfully and honestly administer it, and that the interests of the debtor and creditors alike would be promoted by the restoration of the estate to the debtor, and that otherwise a majority of the creditors would withhold their consent. As we have seen, prior to the passage of this section, if the creditors had proved their claims, or otherwise indicated a clear intention to look to the fund for the payment of their claims, the assent of all was required to enable the assignee and assignor to revoke the deed. By this section the legislature has made the assignment, in effect, revocable by the assent of a majority, in number and amount, of the creditors who may have proved their claims in accordance with the provisions of the statute. Before, a single creditor could have prevented the revocation ; now, a minority of the creditors, in number and amount, must submit to a restoration to the debtor of his estate, and to be themselves remitted .to their rights as they existed at the date of the assignment, if the assignor and a majority of the creditors, in number and amount, assent to the discontinuance of the proceedings under the assignment. Analogous provisions are made in various of the acts providing for public parks, driveways and boulevards in the cities of the State, by which park commissioners are authorized to take possession of streets of the city, etc., upon consent of the city and a majority of the owners of frontage upon the streets sought to be taken. But it is obvious that the purpose of the discontinuance was to restore the unadministered property to the debtor, leaving it liable for the payment of claims of the creditors as it was at the date of the assignment, and that the assent required was to the restoration of the estate to the debtor, leaving all the creditors upon an equality, both so far as the estate had been administered and in respect of that portion of it restored to the debtor. It is expressly provided that all preferences provided for by the deed of assignment shall be void, and the controlling principle of the act is, that the creditors shall be upon an equality, and that the estate shall be distributed among all the creditors upon that basis. This has been so repeatedly held that citation of cases will be unnecessary. And it follows, necessarily, that the assent of a majority of the creditors, in number and amount, should be voluntary,' and that the estate unadministered shall be restored to the debtor, and not that it shall be exhausted in procuring such assent, otherwise the manifest purpose of the statute would be defeated. If a debtor may make an assignment, and then use his estate to buy up the claims of the majority of his creditors, in number and amount, and thereby procure a discontinuance, the effect is to give a preference to such creditors, in direct violation of the spirit and letter of the statute. The provisions of the act are perverted to the perpetration of a fraud upon the minority creditors, and the whole estate given to such preferential creditors as the debtor may select, provided, only, that they are a majority in number and in the amount of their claims. Under the law all preferences are to be declared void, and the estate distributed by the assignee, under the orders of the county court, to all the creditors, in proportion to the amount of their claims proved. The assignee proceeds, in the collection and distribution of the estate, under the orders of the court. When a majority of the creditors, in number and-amount, have assented to a discontinuance of the proceedings in the county court, the estate not administered is to be restored to the debtor, — that is, all of the parties, the assignor and the creditors, are remitted to their rights and duties as they existed at the date of the assignment. It is too clear for argument that any scheme or device by which the unadministered estate of the debtor is disposed of in procuring the assent of a majority of creditors is in direct violation of the spirit and letter of the statute, and a fraud upon the minority creditors. The plain meaning and intention of the section under consideration are, that whenever a majority of the creditors, in number and amount, deem it to the best interests of the creditors that the assignment proceedings shall be discontinued, they may assent thereto, and the discontinuance, with the assent of the assignor, may be had. It does not mean, nor will it bear the construction, that the estate may be exhausted, or any portion of it, in procuring such assent; and upon the discontinuance it is clearly contemplated that all creditors of the estate shall stand upon the same footing, and it must be held that any arrangement, scheme or device by which the estate, or any portion of it, is used to procure such assent, and the rights of all the creditors as they existed at the date of the assignment are not restored, is fraudulent and void as to such creditors. The provision is, that upon the discontinuance, “all parties,” — that is, parties having rights under deed of assignment, — “shall be restored to the same rights and duties existing at the date of assignment, except so far as such estate shall have already been administered and disposed of.” So far as the estate has been administered and disposed of it is to be regarded as settled. That portion of the estate has been applied as in the manner contemplated by the statute, and so far the parties are bound, and no farther. Upon the discontinuance the duties of the assignee necessarily cease, except so far as may be necessary to remit the parties to their rights as they existed before the assignment, in respect of the residuum of the estate. Upon this being done, the debtor again has his estate, except so far as administered, liable to be taken iú satisfaction of his indebtedness, precisely as if no assignment had been made, and each creditor stands upon the same footing of right to proceed against such estate as such right existed when the assignment was made. Ho inconsiderable portion of the briefs is devoted to a discussion of the meaning of the phrase, “at the date of the assignment.” We do not regard this of controlling importance, for whatever construction may be given it,— that is, whether it means “before,” “after” or “at the time of” the assignment, — the same result will necessarily follow. It is, however, insisted, that “at the date of the assignment” means “after” the date of the assignment. This construction is, in our judgment, not admissible. In its customary acceptation, the word “at” is generally understood to mean “at the time of,” — not before or after,— and expresses the relation of presence and nearness in either place or time. “At the date of the assignment” would necessarily mean at the time when it was in condition to become, but had not in fact become, effective as an assignment under the statute. We are of opinion that it means the rights and duties as they existed when the assignment was made, and that would necessarily mean prior to or up to the date of the assignment becoming operative. This has been the generally accepted construction both by the bench and bar. It is contended by plaintiffs in error, as before stated, that the discontinuance remitted the parties to the same rights and duties existing immediately after execution of the deed of assignment, and that although the administration of the estate in the county court ceased upon the entry of the order of discontinuance, the trust remained unrevoked, and enforcible in equity. We are not prepared to concur in this view. If this were so, an assignment for the benefit of creditors could not in fact be discontinued and the trust dissolved. Although legally discontinued in the court having exclusive jurisdiction thereof, in full compliance with the statute, it would remain subject to be enforced in another fórum by any creditor who might be dissatisfied, and thereby the evident intention and purpose of the legislature in remitting the residuum of the estate to the debtor, and restoring all of the parties to their rights as debtor and creditor, would be thwarted. Upon the discontinuance being lawfully entered, the parties are restored to their rights and duties as the same existed when the assignment was made. The debtor has the estate remaining, and when reconveyed to him under order of the court he would have the possession and jus disponendi of the property, and the creditors have their claims, with right of action thereon, precisely as if no assignment had been made. In other words, the effect of the discontinuance is to destroy the trust upon which the property was held, so far as it remained unadministered, and a majority of the creditors having assented, can claim no further right under the assignment. Undoubtedly cases may arise which would justify the interposition of a court of equity to enforce a trust arising collaterally. But we are of the opinion that the ground of equitable jurisdiction cannot, in this case, be placed upon the necessity of enforcing the trust created" by the deed of assignment. In our opinion there is in this case, however, ample authority for the interference of a court of equity. By the order of the county court, entered upon the petitions of the assignee and assignor and a majority of the creditors, in number and amount, the assignment proceedings were discontinued, and the court having found that the estate unadministered had been transferred by Kean to Warren, ordered the assignee, Jacobs, at once to transfer, convey and assign to Warren all of such residue of the estate'. It is alleged, in effect, that under and by certain contracts entered into between said Kean and said Warren, of date of July 3, 1891, as shown in the foregoing statement, a scheme was entered into, by and with the knowledge and collusion of the assignee, Jacobs, whereby Warren obligated himself, in consideration of the payment to him of $25,000 and reimbursement of all moneys expended by him in furtherance of the scheme, to buy up, between the date of the contract and November 1, 1891, at the rate of thirty-five per cent of their face value, claims of creditors proved in the county court, amounting at least to $262,500, and not to exceed in amount $367,500. Warren succeeded in procuring the claims of 534 creditors who had proved their claims in the county court, amounting to $301,326.68, and constituting a majority, in number and amount, of the creditors who had proved their claims, and also procured their consent to a discontinuance of the proceedings. Whether the creditors were in fact paid does not clearly appear by the bill, but the allegation is, that the contract was that they were to be paid at the rate of thirty-five per cent of their claims. It was further stipulated and agreed among said parties entering into said combination that the estate should be conveyed to Warren for the purpose of paying him his $25,000 compensation for carrying it out, to reimburse Mm for his expenditure, etc., and that the residue, if any, shouM be conveyed by him to certain designated persons. It is also clear that these proceedings were carried on surreptitiously, and that the effect was to divert the estate from the hands of the assignee into the hands of Warren, for the purpose, first, of paying Warren $25,000 for his services; second, of repaying the money advanced by him in buying up the claims of a majority of the creditors, in number and amount; and third, for the conveyance of the residue of the estate to parties and corporations designated by the assignor, and thereby disposing of the entire estate. It might be remarked that no attempt had been made in the interim to administer or close up the estate in the hands of the assignee, and the effect is, if this gigantic scheme shall be permitted to prevail, that 497 of the creditors of Kean who had proved their claims in the county court iu the assignment proceedings, and aggregating $223,326.68, are, under what is claimed to be in the form of law, defrauded of all participation in the estate, and thereby property aggregating many hundred thousand dollars has been, by the fraudulent conduct of the assignor and assignee, diverted from the just and equitable distribution contemplated by the statute, to the payment of certain creditors, and for the benefit of certain beneficiaries designated by the assignor. Of the 497 creditors who are actually defeated of any participation in the estate, and upon whose claims not one cent has been paid, none had actual notice of the proceedings in the county court by which the estate was thus diverted. By the contract between Warren and Kean, the performance of which on the part of Warren seemed to have been guaranteed by the American Trust and Savings Bank, as before mentioned, the estate, of every kind and description, was to be assigned and transferred to Warren, he to dispose of sufficient thereof to reimburse him the sums expended by him in the purchase of the claims of creditors and to pay himself his compensation of $25,000, and then to transfer, by appropriate instruments of writing, all of the remainder of the estate to the persons designated, or the survivors of them, or, in their discretion, to retain possession of the estate and dispose of it as they should direct. Said contract, together with certain conveyances, and the written consent and petition of Kean for the discontinuance of the proceedings in the county court, the petition of Kean consenting to the resignation by Jacobs as assignee, and requesting in his stead the appointment of the Am erican Trust and Savings Bank, and a petition by Kean asking for the transferring of all of the assets of the estate to Warren by the assignee, the written resignation of Jacobs as assignee, the written consent of Jacobs to the discontinuance of the proceedings, and other papers, were delivered to Hutchinson in escrow, to be delivered to Warren when he had purchased $262,500 worth of proved claims against the estate, the purpose being that he should purchase in enough of the claims to procure the order of discontinuance. The conveyance of the property to Warren was without consideration, other than the contract on his part before mentioned. Upon procuring the requisite amount of indebtedness, the papers before mentioned as having been placed in escrow were delivered to Warren. It is alleged in the bill that immediately upon the entry of the order of discontinuance in the county court, and the order directing the assignee, Jacobs, to transfer and convey all the assets of the estate to Warren, the said Jacobs, as such assignee, did make such transfer and conveyance to Warren, and that the latter entered into possession thereof, and that almost immediately thereafter Warren assigned and conveyed the property to the American Trust and Savings Bank, and Gilbert B. Shaw, its president, and to others unknown to the complainants. Prom what has preceded it is apparent we are of the opinion that the order of the county court authorizing the conveyance by the assignee to Warren, for the purpose set out in said agreement of July 3, 1891, was improperly made. While the court is authorized, by the section of the statute under consideration, to make all such orders as may be necessary or proper to remit the parties to their rights and duties as they existed at the assignment, it was powerless to make an order the purpose and effect of which were to divert the property to the benefit of particular creditors or of strangers. Be this as it may, without extending this opinion by further discussion of the frauds practiced, they furnish ample grounds for interposition of a court of equity. That the consent by which the orders of court were obtained was fraudulent as against the complainants, if the allegations of this bill be true, cannot admit of question, and it is too familiar to require the citation of authority or extend the discussion, that a court of equity will interpose its power to prevent the consummation of fraud upon persons appealing to its jurisdiction. Every conveyance of property, by whatever means it is done, is in equity vitiated by fraud, and it cannot avail that relief may exist at law, if the remedy in equity is more adequate and complete. (Babcock v. McCamant, 53 Ill. 214; Wampler v. Wampler, 30 Gratt. 459; 2 Pomeroy’s Eq. Jur. 919.) The latter author says : “The equitable jurisdiction to cancel and set aside, or to resist judgments and decrees of any court which have been obtained by fraud practiced upon the court and the losing party, is well settled and familiar.” Sec. 919, note 3; Preston v. Spaulding, 120 Ill. 208. No reason exists why a court of equity will not interfere to prevent a failure of justice in a case where fraud has been perpetrated in procuring a discontinuance of the assignment. A court of equity in this case will, because of the fraud upon the court and upon the minority of creditors, intervene, and set aside the order authoriz- / ing the conveyance of the property to Warren, and, if need be, the order of discontinuance as well, and remit the parties to an administration of the estate in the county court, or, having obtained jurisdiction for one purpose, will proceed, as in Preston v. Spaulding, to collect and distribute the fund according to equitable principles, ■ — and especially in a case where the assignee and assignor have contributed to the fraud would the latter be the better practice. If the allegations of this bill are proved, a court of equity should not hesitate to set aside the transfer of the property to Warren and others and require them to account therefor. Kean, being a debtor in failing circumstances, could not give away his estate to the prejudice of his creditors; and the contract under and by which Warren was to receive $25,000 for his services out of the estate being, as we have seen, fraudulent as to complainants and other of the minority creditors, he could take nothing by virtue of this contract, and would, in equity, be required to account for the amount coming to his hands. And if it be true and the court shall find that any of the creditors of said Kean have compromised and settled their claims against his estate, they and their assigns, whether at law or in equity, would be bound by such settlement, and be entitled to no further interest or share in said estate. It is not necessary here to determine whether Warren, in his accounting for the properties and moneys coming to his hand, should be entitled to credit for the sums advanced by him or not. It may well be that he, being a mere intermeddler and a participator in the fraud, would not be entitled to such credit, or only entitled to it after payment of the minority creditors. In the present state of the record it is unnecessary, and we refrain from expressing an opinion in respect thereof. It is also insisted that this court has no jurisdiction on direct appeal. This is a misapprehension. The effect of the order entered in accordance with the prayer of this bill would be to divest Warren, and those claiming by, through or under him, of the title to the realty transferred by the assignee to said Warren. It is, we think, clear that a freehold is shown by this bill to be involved. We are of opinion that the contract entered into between said S. A. Kean and Everett M. Warren ; the purchase thereunder by the latter of a majority of the claims of creditors, in number and amount, and his compensation therefor and payment therefor out of the estate ; the procurement of the order discontinuing the assignment proceedings, the assent of Kean as assignor, Jacobs as assignee, and of the majority of the creditors thereto, and the further order directing the transfer, etc., by the assignee, of the estate undisposed of, to Warren; the further transfer, etc., by Warren to the American Trust and Savings Bank and Gilbert B. Shaw, its president, and the transfer of any part of said estate or the assets to any of the defendants named, or to others chargeable with notice of the fraud, — are all fraudulent and void, and that a court of chancery has ample and complete power and jurisdiction, if, upon the final hearing, the facts alleged are found to be sustained by the proofs, to restore the estate to its proper place under and as contemplated by the Assignment act, for the benefit of creditors, except those found by the court to have been already paid, or the court of equity may require an accounting therein by each and every of the defendants, and others who may be properly made defendants, in respect of any property or assets of the estate coming into their hands by or through said Warren, and may appoint a receiver of the property, assets, etc., of said estate, and administer and distribute the proceeds of the same among creditors, according to equitable principles. The decree of the court below sustaining the demurrers and dismissing the bill and amendment will accordingly be reversed, and the cause remanded to that court for further proceedings not inconsistent with this opinion. Reversed cmd remanded.