Preston v. Spaulding

Bailey, P. J. In this case the question is presented, in limine, whether the court below had jurisdiction, either under the original bill or the cross-bill, to grant the relief prayed for. Spaulding, the complainant in the original bill, seeks relief in two different forms, and dependent upon different principles. First, as to a portion of his transactions with Hair & Odióme, he tiles his bill as a vendor, to obtain a rescission of the contract of sale for fraud, and a restoration to him of the property sold. As to the residue of said transactions, he assumes the attitude of a creditor, seeking to have certain preferences in favor of other creditors of Hair & Odiorne declared to be unlawful and void, and the property or fund thus disposed of surrendered to the assignee under the general assignment for the benefit of creditors. In support of his right to the relief last mentioned, Spaulding alleges a refusal by the assignee to interpose in his own behalf, or to take any steps to assert his title to the property now sought to be reclaimed from the preferred creditors. The original assignee, however, having been removed, his successor in trust subsequently appeared and filed his cross-bill, making substantially the same allegations in relation to said preferences as are made in the original bill, and claiming the property taken by the preferred creditors as a part of the estate vested in him by the assignment. The jurisdiction of courts of equity to decree the rescission of contracts for fraud, and to administer those remedies which are dependent upon such rescission, is well established. Pomeroy’s Eq. Juris., §§ 110, 112. So far, then, as the bill seeks to obtain relief of that character, there can be no question as to the jurisdiction of the court. Upon the other branch of the case, it is urged that Spaulding, not having exhausted his legal remedy by obtaining judgment and having execution returned unsatisfied, is in no position to assail or call in question any disposition his debtors may have made of their property. The rule is, that before a creditor can maintain a creditor’s bill, or a bill in the nature of a creditor’s bill, for the purpose of reaching property fraudulently conveyed or disposed of by his debtor, and subjecting it to the payment of his debt, he must exhaust his legal remedy. This, however, is not a bill of that character. Hair & Odióme, by their general assignment, created a trust in favor of their creditors, and Spaulding, one of the beneficiaries, after the neglect and refusal of the trustee to institute proper proceedings for the protection of the trust property, brought the bill for that purpose in liis own behalf. We sec no ground of objection upon principle to the maizitenanoe of such bill, and the authorities cited by the counsel for the-appellees seem to sustain the jurisdiction of equity in-cases of this character. But it is said that under the statute izi relation to voluntazy assignznents for the benefit of creditors, full and exclusive jurisdiction of all znatters pertaining to the property assigned is vested in the county court. Since the decisions of the Supreme Court in Freydendall v. Baldwin, 103 Ill. 325, and Hanchett v. Waterbury, 17 Chicago Legal News, 412, the rule must be regained as settled, that, in cases of voluntazy assignments, the county court has exclusive jurisdiction to control, administer upon and distribute the trust estate, as well as to control the assignee in the pezionnance of the duties of his trust. But, in our opinion, it does not follow, either from the rules of law established by those decisions or from any provision we are able to find in the statute itself, that the assignee, in his efforts to get the trust fund into his possession, and to subject it to the administrative jurisdiction of the county court, is necessarily confined to suits and proceedings in that court. A rule limiting him to that exclusive forum, would manifestly result in great and often in insurmountable difficulties. It may well be questioned whether the county court, with a common law jurisdiction limited in amount to §1,000, and with no chancery jurisdiction, could entertain suits at law on behalf of the assignee to recover more than §1,000, or suits in chancezy of any character. We find no provision in the statute conferring such jurisdiction. But even if there were, it is difficult to see how parties residing beyond the reach of its process could be sued at all. Jurisdiction of the administration of estates is vested by statute in the county courts, and such jurisdiction may be said to be practically exclusive, but it has never been held that an executor or administrator might not, in collecting the estate, or in litigating adverse claims, bring suit in any court of eom. 2)etent jurisdiction. The right of executors and administrators to resort for these purposes to other judicial tribunals has never been questioned, nor has it been siqqmsed that their doing so trenched in the least-upon the exclusive jurisdiction of county courts over the administration of the estates. In Ilanchett v. Waterbury, it is held that county courts, in exercising the jurisdiction conferred by the statute in relation to voluntary assignments, are closely analogous to courts of bankruptcy, and governed by substantially the same jrrincijfies; but it is well known that although exclusive jurisdiction in cases of bankruptcy was vested in the district courts of the United States, yet jurisdiction of suits brought by assignees in bankruptcy in other courts, both State and Federal, has been uniformly sustained. The eleventh section of the statute in relation to voluntary assignments, expressly authorizes assignees to sue for and recover in their own names, everything belonging or appertaining to the estates assigned. It can scarcely he doubted that the legislative intention here expressed is, to give assignees the right to institute suits in their .own names in any court of competent j urisdiction, .for the recovery of any 2Dortion of the estate vested in them by the assignment. Such suits are not. in derogation of the jurisdiction of the county court, but ancillary to it. We are of the ojfinion, therefore, that the circuit court, sitting as a court of chancery, had jurisdiction of the hill and-cross-bill in this case. Is the decree warranted by the evidence? Let us first consider that branch of the case which relates to the question of rescission. S[Paulding, in the original bill, puays for a decree rescinding the sale of all the lumber delivered subsequent to the date of the contract of May 5, 1882. This relief was denied except as to the lumber delivered on or subsequent to September 30, 1882. As to that portion of the lumber sold, a rescission was decreed, and the' receiver was ordered to pay over to Spaulding the proceeds of so much of the lumber delivered on or subsequent to September 30, 1882, as came to the hands of the sheriff. The rescission, so far as it is granted by the decree, is assigned for error by the defendants, and the refusal of the court to decree a rescission to the extent prayed for in the bill is assigned for error by Spaulding, he having filed cross-errors. Spaulding claims the right to - rescind the contract of May 6, 1882, on account of false and fraudulent representations made by Hair & Odiorne to him, prior to that time, in relation to their financial condition and circumstances. The representations made by Hair & Odiorne prior to the execution of the contract are contained in the statements of their assets and liabilities made by them to Spaulding February 1, 1882, and April 1, 1882. These statements, so far as they relate to the debts and liabilities of Hair & Odiorne, disclose no indebtedness beyond that owing to Spaulding, except that the February statement mentions a small sum due other lumber yards. That they were owing large sums of money to other parties for borrowed money at the time these statements were made seems to be conceded, and to that extent the statements were unquestionably false. The evidence of the circumstances under which these statements, especially the one of February 1st, were made, is conflicting. Spaulding gave evidence tending to show that he had no notice or information in relation to the omitted indebtedness, but supposed that said statements made a true and complete disclosure of the assets and liabilities of Hair & Odiorne, and that he believed and relied upon them as such. The evidence adduced bv the defendants tended to 'show, on the other - hand, that the statement of February 1st was accompanied by a letter from Hair & Odiorne expressly notifying Spaulding that it was only a partial statement of their indebtedness, and that they had been borrowing money from other parties, and also, that Spaulding, at the time both statements were made, had notice from other sources that they had incurred and were incurring liabilities to other parties for borrowed money. Without attempting to review the evidence on these questions in detail, it will be sufficient to say that, in our opinion, it fairly warranted the conclusion to which the court below seems to have arrived, viz., that the delivery of said letter to Spaulding at the time of the malting of the February statement was not proved, but that at the time the contract was made, Spaulding had notice that Hair & Odiorne were borrowing money of other parties to some extent. It may well be doubted whether, under the circumstances, Spaulding would have been authorized to rescind the contract, even if he had acted promptly. Having notice that Hair & Odiorne were borrowing money at one or more of the banks, the most ordinary prudence would have prompted him to make inquiries upon that subject and ascertain the extent of the liabilities thus incurred, before entering hito a contract to sell and deliver to them wholly on credit, nearly §200,000 worth of lumber. The relations between these parties were exceptional. For several years prior to the execution of said contract, Spaulding had been a large manufacturer of lumber. Hair & Odióme, though possessed of relatively a very limited capital, had, during that time, been extensively engaged in the lumber trade, their entire stock of lumber, substantially, being furnished them by Spaulding on credit, the same constituting, at least, much the larger portion of the product of Spaulding’s mills. The term of the credit was sufficiently long, as the parties seem to have contemplated, to enable Hair & Odiorne to sell the lumber and convert it into cash, before their payments to Spaulding should become due. In form, Hair & Odiorne were purchasers of Spaulding’s lumber. In substance their relations to him had features bearing a strong resemblance to that of brokers employed by him to dispose of the. product of his mills in the Chicago market. It is clear that Spaulding was all the time in a position where it was not only his right but his duty to keep himself fully informed of the pecuniary circumstances of Hair & Odiorne. His relations to them were such as would have justified him at any time in addressing to them the most searching and minute inquiries. His own interests were so largely involved in the question of their solvency that he could not, without the imputation of negligence, omit to investigate any fact coming to his knowledge having an apparent bearing upon that subject. Beyond this we think that, under the peculiar circumstances of the case, he owed a like duty to the commercial public, who were likely to be induced to trust Hair & Odiorne on the faith of the apparent ownership of the lumber put into their possession by him. But even if Spaulding originally had a right to rescind said contract, such right, at least as against creditors, was lost by his negligence in failing to acquaint himself seasonably with the facts in relation to Hah1 & Odiorue’s indebtedness. Beyond receiving from them an incomplete statement of their assets and liabilities on the first day of June, he is not shown to have used the slightest diligence, or to have made the slightest effort to ascertain their financial condition until their failure. At that time their indebtedness for borrowed money exceeded $90,000, of which nearly $14,000 was borrowed from the bank at which Spaulding usually did his banking business. His whole conduct evinced a, most extraordinary confidence in Hair & Odiorne, and a singular omissi&n of that care and vigilance which ordinary business prudence would dictate. Under these circumstances he is hardly in a position to invoke the aid of equity to cancel his contract and restore to him the property delivered under it. As to the lumber delivered on or after September 30,1882, the facts are different and call for the application of different rules. That lumber, in the first place, does not appear to have been delivered under the contract of May 5, 1882. Had it been a part of the lumber embraced in that contract, the right to rescind would be determined by the state of things at the time the contract was entered into, and would not be affected by the subsequent turn of events, except so far as such events might tend to show that there was no ground for rescission. Bigelow on Frauds, 406. By the contract of May 5, 1882, Spaulding agreed to sell and deliver, to Hair & Odiorne 10,000,000 feet of lumber, hut reserved an option, which he had a right to exercise or not, as he pleased, to deliver, in addition to that amount, the residue of his product for the season. The last cargo delivered prion1 to September 30th, completed an aggregate of over 12,000,000 feet. At that time Spaulding was under no contract obligation to deliver any more. His original contract was more than filled ; and although Hair & Odiorne then claimed and insisted that he had agreed to deliver to them a larger amount, no such agreement is shown by the evidence. At then1 solicitation, however, Spaulding, while denying that he had previously agreed so to do, did deliver to them ten cargoes of lumber during the month of October. It follows from the rule above stated, that Spaulding’s right to a rescission of the October sales must depend upon the facts as they existed at the time he agreed to make them. The evidence shows that as early as September 30th, and perhaps earlier, Hair & Odiorne had become aware of their inevitable insolvency, and began to adjust their affairs with reference to that event. In doing so, they commenced about the last of September to pay, in money and property, various debts owing to their relatives and personal friends, and that being accomplished, their entire and disastrous failure speedily followed. The facts scarcely leave room for doubt, that when they applied to Spaulding for the lumber delivered to them in October, they were fully aware that they were insolvent, and could have no expectation of paying for said lumber, and so formed the plan of getting the lumber into then1 possession with a preconceived intention of not paying for it, but of cheating Spaulding out of it. These facts gave Spaulding a clear right of rescission, and as he elected to rescind in due time after becoming aware of the fraud, we think the rescission was properly decreed. It remains to consider that portion of the decree which relates to the lien of the judgments by confession. The evidence is undisputed that the warrants of attorney, by virtue of which said judgments were confessed, were executed by Hair & Odiorne without solicitation by the creditors to whom they were given, and without any previous agreement or arrangement with them, said creditors being in fact mere, passive participants in the transaction. No intimation of any kind was given to them of Hair & Odiorne’s intention to execute to them said warrants of attorney until a member of that firm, acconqianied by one of his attorneys, presented himself at their respective business offices on the morning of November 1, 1882, and delivered to them said instruments, merely saying that they were to take the place of the paper said creditors then held against said firm, but with no other comment or explanation. The evidence also shows beyond controversy that the execution of the warrants of attorney was a part of a plan previously determined, upon by Hair & Odiorne to dispose of all their property for the benefit of their creditors, and to give preference in so doing to the creditors named in the warrants, and that said plan was, on the same day and but a few minutes after the last of said judgments had been entered up, fully carried out by the execution by Hair & Odiorne of a voluntary assignment under the statute. Under these circumstances, it is consonant both with reason and authority to hold that the warrants of attorney and the assignment were but parts of the same transaction: and that they together constituted the assignment of the debtor’s property within the meaning of the statute in relation to voluntary assignments for the benefit of creditors. Berry v. Cutts, 42 Maine, 445; Perry v. Holden, 22 Pick. 269; Holt v. Bancroft, 30 Ala, 193; Van Patten v. Barr, 52 Iowa, 518 ; Livermore v. McNair, 34 N. J. Eq. 478; Kellogg v. Root, 23 Fed. Rep. 525; Hahn v. Salmon, 20 Id. 801; U. S. v. Griswold, 8 Id. 496 ; Doggett v. Herman, 5 McCrary, 269; Burrows v. Lehndorff, 8 Iowa, 96. As said by Chief Justice Shaw in Perry v. Holden, supra, “Instruments made at the same time, between the same parties, to accomplish one and the same object, shall be construed and taken together as one transaction, and the same is held as to deeds between different parties.” The rule is well stated by the Supreme Court of Maine in Berry v. Cutts, supra, as follows: “ When a debtor, in contemplation of an assignment under the act, shall determine upon a distribution of his estate among his creditors, and in execution of such contemplated assignment and determination, and for the purpose of giving a preference to one chiss of creditors over another class, shall transfer to such preferred class distinct portions of his estate, and then assign the residue thereof to his general creditors, though the different instruments may not bear the same date or be executed at the same point of time, if they are executed in pursuance of an original design contemplated and determined upon in the beginning, they will be deemed in law one transaction, a transaction consisting of a series of acts intended to produce one result, to wit, the distribution of the debtor’s estate among his creditors.” It is strenuously insisted, however, that before the rights of these judgment creditors can be affected by the subsequent execution by Hair & Odiorne of the assignment, it should be shown that they knew or were chargeable with notice of the fraudulent intention on the part of Hair & Odiorne to evade the provision of the statute. We have considered with attention the very able argument presented by the counsel for the appellants in supjiort of this proposition, but are unable to adopt their conclusions as applicable to the facts in this case. Had the warrants of attorney been executed in pursuance of a previous contract with said creditors, or if they had been executed at their instance and on their application, so as to have rendered them in any proper sense moving parties in the transaction, it may well be doubted whether the rights thus acquired by them could be affected by any secret intention on the part of their debtors, of which they had no notice, and in which they did not participate. Here, however, they were merely passive. The execution of the warrants of attorney was the mere voluntary, unsolicited act of their debtors, and we are unable to see that their position, in the view of a court of equity, should be held to be at all different from what it would have been, if the preference had been embodied in the assignment itself. This view- was adopted by the Circuit Court of the United States for the Western District of Michigan, in Kellogg v. Root, supra. In that case an insolvent debtor, at his own instance, gave certain of his creditors security by way of a mortgage, and shortly afterward made an assignment, the circumstances justifying the inference that the mortgage and assignment were executed in pursuance of the same plan so as to be deemed in law but one transaction. The court, in holding the preference to be void, discusses the question under consideration here as follows: “ It does not change the views expressed that the mortgagees had no notice or knowledge of the contemplated assignment at the time the mortgages were signed or placed on file, for the reason that they were not actors or participants in the giving of'the instrument of security. They were intended as preferences by the only party who had to do with their creation, or who had any intention concerning them, and this party’s purpose then and there was to give preferences by means of the mortgages, and follow them by a general assignment in the near future. They were fraudulent and void at their inception as against other creditors and could not be thereafter delivered as valid instruments. * * * The case at bar was not one where a diligent creditor was present and pressing for security from his insolvent debtor. I do - not question, in view of the decisions of the Supreme Court of Michigan, the right of a creditor to take security by mortgage or otherwise from his insolvent debtor, with knowledge of his financial weakness, so long as the creditor has no notice or knowledge that the debtor contemplates making an assignment; but the security must be given at the instance of the creditor, be duly delivered, and he must have no notice or knowledge of any fraudulent purpose, within the meaning of the statute.” Among the numerous authorities cited by counsel, we are able to find none which, when properly understood, is in conflict with the views above expressed. We have neither the time nor space to notice said authorities in detail, but we find none, where the preference is the voluntary, unsolicited act of the debtor, in which-it is held that in order - to defeat the preference, it is necessary to prove knowledge or notice to the preferred creditor of the intention on the part of his debtor to create such preference in violation of the statute. The thirteenth section of the statute in relation to voluntary assignments for the benefit of creditors, declares that every provision of any assignment for the payment of one debt or liability in preference to another shall be void, and that all debts and liabilities within the provisions of the assignment, shall be paid pro rata from the assets assigned. It follows that the warrants of attorney and the judgments entered thereon are void by force of:.the statute, and that all the estate of the debtors, including that seized under" said judgments and the executions issued thereon, passed by the assignment to the assignee. The conclusions we have thus reached are in entire harmony with the decree of the court below, and said decree will accordingly be affirmed. Decree affirmed.