O'Shea v. Collier White Lead & Oil Co.

Wagner, Judge, delivered the opinion of the court. Champion & Co., being in failing circumstances, and in fact insolvent, made a proposal to their creditors for a composition, for the completion of which the consent of all the creditors was necessary. They assigned all their property to certain trustees, who were, as speedily as possible, to turn the property into available assets and pay off the debts and distribute the assets in the manner designated in the deed of assignment. The agreement for the composition was signed with the express understanding and upon the condition that all the creditors should assent thereto. The Collier White Lead and Oil Company and other creditors had previously taken out attachments and levied the same upon the property of Champion & Co. Nothing could be done toward perfecting the arrangements for a composition between the creditors till these attachments were dismissed. Finally the Collier White Lead Company, who had for some time refused, acceded to the agreement and dismissed their attachment, and the other attaching creditors also dismissed theirs, and the whole scheme was consummated. Before, however, the company gave their consent and dismissed their suit for attachment, they procured from the partnership fund of Champion & Co. collateral security to fully indemnify and make secure their claim, and thus gained a preference over the other creditors. The evidence is conflicting as to the secrecy with which this transaction was entered into, but it fully appears that but a small portion o£ the creditors were cognizant of it. This suit was brought to enjoin the company from selling the real estate, on which they had a deed of trust to secure them in their preference over the other creditors. The court below having given a decree dissolving the injunction and dismissing the suit, the cause is now here on appeal. There is but a single point to be passed on, and that is, did the taking the additional security by the Collier White Lead Company operate as a fraud on the other creditors and render the security void ? Between the parties to the arrangement there may be no actual fraud, but the tendency is to defraud the other creditors; and therefore, on grounds of public policy, it is [404] held to he constructively fraudulent, and condemned both at law and in equity. The purport of a composition is that the property of the debtor shall be assigned to trustees, and shall be collected and distributed by them among the creditors according to the order and terms prescribed in the deed itself. In all transactions of this description the utmost good faith is required, as each one signs the deed and comes into the agreement on the understanding that they will share mutually, or according to the terms embodied in the instrument. But if the signatures of some of the creditors have been obtained by secret bargains or obligations granting them more favorable terms than the general scope and provisions of the composition deed will warrant, a gross deception is practiced on the other creditors, and both law and equity adjudge the transaction void. (1 Story’s Eq. § 378; Willard’s Eq. 209.) Every creditor has a direct interest that the agreement should be fairly performed. And where any creditor, unknown to the others, has obtained any benefit beyond what the others have obtained, the others are cheated and imposed upon, and the private contract entered into is a fraud on the arrangement, and any security given in pursuance of such contract is absolutely void, even against the debtor who may have given such security. (Cockshott v. Bennett, 2 T. R. 765; Eastabrook v. Scott, 3 Ves. 460; Mawson v. Stock, 6 Ves. 301; Ex parte Sadler, 15 Ves. 55; Leicester v. Rose, 4 East. 379; Jackson v. Davison, 4 Barn. & Ald. 695; Pendlebury v. Walker, 4 Young & Col. 424.) The cases generally proceed on the ground that the transaction complained of was secret and unknown to the other creditors; but an instrument creating an obligation of preference may be valid if it form part of the original transaction and be communicated to the other creditors and they do not object. In Jackman v. Mitchell, 13 Ves. 581, Lord Chancellor Eldon said: “I remember the case of a person named Hebblewaite, who had made a composition with his creditors and secured the deficiency to one creditor by a bond, and that was held good in this court by Lord Thurlow; and it was part of the transaction that that dealing should not be kept secret, but should be communicated to the other [405] creditors ; and as they did not object, Lord Thurlow held it good.” In that case the matter was brought home to all the other creditors, and, as they made no objection, their assent was presumed. In the present case no such acquiescence appears. Many of the creditors or their representatives, swear positively that they knew nothing about the arrangement, and there is no evidence tending to show that more than a very small minority of them had any knowledge of it. That a few had an understanding or impression of its existence cannot change the rules" of law. Their claims may have been insignificant, or from other reasons they might have been satisfied, whilst the others would have interposed a decided objection. We are not at liberty to speculate by arithmetical calculation as to the probable effect the consent of a part would have in determining the fairness of the transaction or the rights of the parties. Besides the unbroken current of decisions in England, the American cases all support the views above indicated. (Yeomans v. Chatterton, 9 Johns. 295; Payne v. Eden, 3 Carnes, 213; Wiggins v. Bush, 12 Johns. 306; Tuxbury v. Miller 19 Johns. 311.) The case of Case v. Gerrish, 15 Pick. 49, is almost, precisely parallel with this ; and Shaw, C. J., seems to regard the rule as too clearly settled to require any argument. The authorities cited by the respondents furnish no aid to their view of the law. In Lee v. Lockhart, 3 My. & Cr. 302, where the creditor had the benefit of his security, there was no contract or common purpose between the mortgagees and other creditors. There was, besides, an indorsement on the deed reserving to the creditor his right under his -security, which was evidence of bona Jides and of all absence of concealment. In Clark et al. v. White, 12 Pet. 199, the court enunciated the very doctrine above laid down and enforced, and expressly says: “ If, upon failure or insolvency, one creditor goes into a contract •of general composition common to the others, at the same time having an underhand agreement with the debtor to receive a larger per cent., such agreement is fraudulent and void, and cannot be enforced against the debtor or any surety to it.” The agreement entered into in this case, by winch the respond? [406] ents obtained additional security and gained an advantage over the other creditors, is against public policy — such an one as the law deems constructively fraudulent — and must therefore be held incapable of enforcement. The judgment.will be reversed and the cause remanded. The other judges concur.*