Means v. Dowd

Me. Justice Millee, after stating the case, delivered the opinion of the court. We are of the opinion that, whether the case be decided upon the face of the instrument itself, or in view of the testimony as to„ the conduct of the parties, the decree should be in. favor of the complainant. The principles, if not the exact language of the statute of 13 Eliz., have been accepted in the equitable jurisprudence of nearly all the States of common-law origin, and they are the law of North Carolina, with a modification which is attempted to be applied to this case. That is, that where the question of the validity of an instrument of this kind, or any other conveyance of property depends upon its fraudulent character, it must be shown that the grahtee participated in the fraud, and the fact that the *281 grantor alone is guilty of it is not sufficient to invalidate the instrument. Conceding this to be the doctrine of the State of North Carolina, w.e are of opinion that it can have no important application to the case before us, because the fraud here is one in law as distinguished from actual fraud; that is to say, that while the parties to this transaction, either grantors or grantees, probably never had in view the ultimate loss of the debts of the unsecured creditors by their acts, and may really have supposed that they were taking the best means to insure payment to them all, yet the law has said that the means which they took is to be regarded as a fraud in law, by necessary implication. All experience has shown how very common it is for failing or insolvent debtors, who have any considerable means on hand, and especially in cases where a mercantile business of considerable value is still going on, to delude themselves with the idea that if they can get time they Can pay their debts; that if their creditors will delay until they can make,such arrangements as they believe themselves capable of, they will be able to pay everybody, and even to save a very considerable surplus out of their business. This delusion leads them to undertake to obtain this delay by means which the law does not sanction. If the creditors refuse to extend time on their obligations, and thus give them the delay which they deem necessary, or if they fear to expose their condition to , their creditors, they adopt, in many instances, the principle of making an absolute sale to certain friends, who will settle up their affairs and return to them any surplus, or they make assignments or deeds of trust, conveying the title to all their property to some trustee or assignee and vesting it in,them, thus opposing an obstruction to" the efforts of creditors at law to collect the amounts which may be due to them. In this manner they frequently take the kvw into their own hands, and attempt to secure that delay which can only be obtained by the consent of-the creditors, or by such a conveyance as leaves the creditors.in no worse condition than they were before. It has always been held that whatever transfer of this char *282 acter, that is, of the title, to property by a failing or insolvent ,. debtor, may be Valid, any instrument which secures to the assignor an interest in or an unlimited control over the property conveyed, and which has the effect of hindering or delaying creditors, is void as being a fraud upon those creditors. A very similar case to the one before us was that of Griswold v. Sheldon, 4 N. Y. (4 Comst.) 580, in which the court 'decided that the mortgage which, besides permitting the mortgagor by its terms to retain possession of the goods, and on its-face conferred on him the power to sell and dispose of them as his own,, was, therefore, fraudulent and void in law as to ' creditors. '. Another decision of like character was made -in Nicholson v. Leavitt, 6 N. Y. (2 Seld.) 510, the head note of which correctly expresses what-was decided in-the following words: “An assignment by insolvent debtors of their property to trustees for the benefit of their creditors, authorizing the trustees to sell the assigned property upon credit, is fraudulent and void as against the creditors of the assignors-.” . This is founded upon the ground that such a provision has the effect of hindering and delaying creditors. A very instructive case, and very' like the one before us, is' that of Davis v. Ransom, 18 Illinois, 396. A chattel mortgage of a stock of goods had been made, reciting the indebtedness of the mortgagor, but with an agreement that he should keep possession of the goods and sell them in the usual course of trade. Out of the proceeds he was to pay certain preferred creditors, dividing the remainder pro rata among the others, with the right in the mortgagee to take possession of the property under certain contingencies. This mortgage was held void upon the principles already cited. To the same effect is the case of Bank v. Hunt, 11 Wall. 391, which cites with approval the case of Griswold v. Sheldon, supra. B^ut this whole subject has been so frequently discussed in thd American courts that it would be an immense labor to go‘ very extensively into the authorities. The prevailing doctrine, however, is unquestionably that which we have stated, *283 and its fundamental essence is, that an insolvent debtor making an assignment, even for the benefit of his creditors cannot • reserve to himself any beneficial interest in the property as-; signed, or interpose any delay, or make provisions which would hinder and delay creditors from their lawful modes of •prosecuting their claims. ■ In the case before us the whole face of the instrument has the obvious purpose of enabling the insolvent debtors who made it to continue in their business unmolested by judicial process, and to withdraw everything they had from the effect of a judgment against them; for it is shown that,'except the goods in this place of business transferred by the conveyance, they had nothing of value but one or two pieces of real estate encumbered by mortgage for all they were worth. It specifically provides that the grantors shall remain in possession of the said property and choses in action, with the right to continue to sell the goods and collect the debts under the control and direction of the grantees. The collections were to be deposited weekly in the Commercial National Bank of Charlotte, N. C., and applied, under the direction of the assignees,. “ to replenish the stock by such small bills as may be agreed upon, and to the payment of the debts of the said firm,” specifically mentioned therein, being principally notes held by the banks, indorsed by the grantees, Davidson and Dowd. It also contained a provision for the renewal of these notes, without limitation as to time, and authorizing the trustees, “ if any of the said debts or any renewal or substitution .of them, or any of them, shall not be paid when the same shall become due, or if, for any other cause, the parties of the second part may so elect, then and in that case it shall be lawful for the parties of the second part, and they are hereby expressly authorized, to take possession of the said goods and merchandise,, and all the property and choses in action conveyed herein,- and dispose of the same at public or private sale, as they may deem best, applying the proceeds as hereinbefore directed.” It is difficult to imagine, a scheme more artfully devised between insolvent debtors and their preferred creditors to enable the former to continue in business, at the same time withdraw *284 ing their property used' in its prosecution from the claims of other creditors which might- be asserted according to the usual .forms of law. So long as these debtors were able to pay the interest, and keep the trustees satisfied that they were not, going to lose anything by the delay, the business could go on and the property of the insolvent firm be safe from execution, and attachment. The interest paid on these renewals was twelve per cent, and as the indorsers on the notes were officers of the banks who held the paper, as well as trustees under this assignment, to -ay nothing of the fact that they were closely related to the bankrupt debtors, it is easy to be seen that, as long as they had security, they would be willing to renew these notes and indorse them on each renewal. So that by the mere expedient of oaying the interest on this indebtedness Montgomery & Dowd had it in their power to continue in their business, whether profitable or otherwise, with a large stock of goods on their shelves, and defy the creditors who were not protected. The authority to take possession of the goods, even when the trustees should' deem such action proper, is accompanied by no direction for an immediate sale or winding up of the business; but, on the contrary, their discretion, as to whether they shall take possession or not, and as to how or upon what terms they shall sell, seems to be absolute, and intended even then to be controlled for their own benefit and that of the debtors, without regard to the unsecured creditors. The case before us is almost precisely like that of Robinson v. Elliott, 22 Wall. 513. In that action it appeared that John and Seth Coolidge were partners in the retail dry goods trade in Evansville, Indiana; that they owed the First National Bank $7600, and a Mrs. Sloan $3174, for money previously borrowed of her to aid them in their business. To secure to Mrs. Sloan the payment of what was .due her, and to indemnify Kobinson, who wab an indorser, they made to them a chattel mortgage upon their stock of goods then in a rented store. The mortgage, after reciting the liability of the firm to Eobinson 'on the notes indorsed by him, stated that it was contemplated that it might become necessary to renew the *285 notes or to discount other notes. It was also stated that the note to Mrs. Sloan might be renewed at maturity if it was not convenient for the firm to pay it. The mortgage then proceeded in the following language : “ And it is hereby expressly agreed that until default shall be made in the payment of some one of said notes, or some paper in renewal thereof, the parties of the first part may remain in possession of' said goods, wares and merchandise, and may sell the same as heretofore and supply their places with other goods, and the goods substituted by purchase for those sold shall, upon being put into said store, or any other store in said city, where the sanie may be put for sale by said parties of the first part, be subjected to the lien of this mortgage.” Although the mortgage was duly recorded, it was held by this court to be void under the statute of frauds of Indiana: Section 10 of that act declared that no such assignment or mortgage should be valid unless acknowledged “ as provided in cases of deeds of conveyance, and recorded in the recorder’s office of the county where the mortgagor resides, within ten days after the execution thereof.” Section 21 makes the fur-r ther provisions: “The question of fraudulent intent in all cases arising under the provisions of this act shall be deemed a question of fact, nor shall any conveyance or charge be adjudged fraudulent as against creditors or purchasers' solely' upon the ground that it was not founded on a valuable consideration.” This court, in a lengthy review of the effect ,of recording, acts, and of the doctrine of the statute of 13 Eliz., held that .the recording of the mortgage contemplated by the statute was intended as a substitute for possession, but' “ was hot. meant to be a protection for all the other stipulations cójatai ned in it.” It was also held that the court was the proper party to say whether on its face the mortgage was void,, and that it was so void. It was argued in that case that there could be no such thing, as constructive fraud, because under this statute the question of fraudulent intent was one of fact; but this court, following the Supreme Court of Indiana, said that those provisions of" *286 the statute of that State had. not changed the law on the subject, and that the court must in the first instance determine upon the legal effect of the written instrument, and if that be to delay creditors, it must be rejected. In the opinion the court said, p. 524': “ But there are features engrafted on this mortgage which are not only to the prejudice of creditors, but which show that other considerations than the security of the mortgagees, or their accommodation even, entered into the contract. Both the possession and right of disposition remain with the mortgagors. They are to deal with the property as their own, sell it at retail, and use the money thus obtained to replenish their stock. There is no covenant to account with the mortgagees, nor any recognition that the property is sold for their benefit. Instead of the mortgage being directed solely to the bona fide security of the debts then existing, and their payment at maturity, it is based on the idea that they may be indefinitely prolonged. As long as the bank paper could be renewed, Robinson consented to be bound, and in Mrs. Sloan’s case it was not expected that the debt would be paid at maturity, but that it would be renewed from- time to time, as the parties might agree. It is very clear that the instrument was executed on the theory that.the business could be carried on as formerly by the continued indorsement of Robinson, and that Mrs. Sloan was indifferent about prompt payment. The correctness of this theory is proved by the subsequent conduct of the parties, for the mortgagees remained in possession of the property, and bought and sold and traded in the manner of retail dry-goods merchants from July 7th, 1871, to August 7th, 1873. . . .' It hajrdly need be said that a mortgage which, by its very terms, authorizes the parties to accomplish such objects is, to say the least of it, constructively fraudulent. Manifestly it wa,s executed to enable the mortgagors to continue their business, and appear to the world as the absolute owners of the goods, and enjoy all the advantages resulting therefrom. . . . This conduct is the- result of trust and confidence, which, as Lord Coke télls us, are ever found to constitute the apparel and cover of fraud. . . . Whatever may have been the motive which actuated *287 the parties to this instrument, it is manifest that the necessary result of what they did do was to allow the mortgagors, under cover of the mortgage, to sell the goods as their own, and appropriate the proceeds to their own purposes; and this, too, for an indefinite length of time. A mortgage which, in its very terms, contemplates such results, besides being no security to the mortgagees, operates in the most effectual manner to ward off other creditors: and where the- instrument on i ts face shows that the legal effect of it is to delay creditors, the law imputes to it a fraudulent purpose. The views we .have 'taken of this case harmonize- with the English common-law doctrine, and are sustained by a number of American decisions.” Other' authorities sustain this view of the subject, and the instrument now under consideration, in the opinion of the court, contains all the elements denounced in the case above quoted of Robinson v. Elliott as proof of constructive fraud. If we examine-into the acts of the parties in connection 'with this transfer, we shall -see that they were in accordance with this purpose of hindering and- delaying creditors. There was but one witness to the instrument and he was the confidential bookkeeper of the bankrupts. He states that he put his name to it as a witness on the day that it bears date, but that he did not read it, nor was he informed of its contents, and although it is said by some witness that the conveyance was delivered at or about the time it is dated, the grantees were not present when this witness put his name to it. The law of North Carolina, like that of all other States, provides for the recording of such instruments as this, arid that until so recorded they are not valid as against creditors and purchasers without notice. In the present case it was. kept from record from the time of its date, the 24th of April, until the 11th day of July thereafter. This was undoubtedly the act of the grantees in the deed, the parties whose obligations for the bankrupts were secured by it, and who were the trustees appointed by it for its execution. The period it was thus kept secret was' as long as it could be with safety to the purpose of hindering and delaying creditors; for as soon *288 as it was known that Calvin Chestnut was about to procure a judgment, which, eithér by virtue of the judgment itself, or by . a levy of an execution upon the goods, would become a lien, the paper was recorded for the undoubted purpose of preventing this result. The bankrupts were permitted for several months to continue in the possession and control of these goods, and to deal with them as their own, and even when- the trustees- did seein to consider it necessary to interpose and take the matter into their own hands, the manner in which they did it is open to animadversion. It does not appear that they went in person to the building and took possession of it or of the goods. On the contrary they made no change in its appearance, or in the manner, of conducting the business. No sign was. put .up indicating that any change of 'ownership had taken place. The ’ same books were currently kept by the the same bookkeeper, and entries were made in the same manner as before. The two bankrupts were • also employed by the assignees .to conduct the business, at a salary of $100 per month each, and . they continued it in precisely the same manner as it had been previously, with the exception of depositing the moneys arising therefrom, as they allege, in bank according to the direc- . tions of the trustees. In fact, so far as the outside public was - concerned, the whole affair was conducted before the recording of this assignment, and until the appointment of the assignee -,in bankruptcy, in the same manner that it had always been before the conveyance was executed. Then it seemed to occur to the'trustees that the time had come to wind up this business, and although- it was not done with any extraordinary expedition, it is not necessary to hold that there was anything actually fraudulent in the manner- in which it was finally accomplished. These are circumstances whi.ch, taken in connection with the provisions of the deed itself, show very clearly that, in the minds of the assignors and the assignees, one of the effects of this instrument, and of the operations conducted under it, \vas undoubtedly to hinder and delay creditors. Indeed, it is; impossible to believe that this effect was not intended by all the parties to the deed. *289 The suit in this case is not sustainable under the provision of the bankrupt act against a preference of creditors in fraud of the law, because the bankruptcy proceedings were not brought within the time prescribed by that act as necessary to avoid such preference. But a right is shown to relief on the ground that, the instrument was made to hinder and delay creditors. The decree of the Circuit Court is, therefore, reversed, <md the case remanded to that court, with instructions to refer the case to a master, before whom the defendants, the trustees, must account for the property conveyed to them by the instrument. In this accounting all the creditors, secured and unsecured, must be brought into a concourse and held to an egual ■ right in, distribution of the funds arising from the sale of the goods and the choses in action assigned to the trustees. But in accoxmtimg with the trustees they must be credited with what they have paid to any of the creditors, so far as those creditors would be entitled on am egual and pro rata distribution among all the creditors of all the assets conveyed to them by the deed of trust.