White v. Cotzhausen

.Me.' Justice HaelaN delivered the opinion of the court. After stating the case, he continued: Too much stress is laid by the appellee upon the fact that ' Alexander White, Jr., after' qualifying as administrator, was authorized by his mother and sisters to control, in his discretion, both' the real and personal estate of which his father died possessed. The granting of such authority cannot be held to have- created any lien in favor of his creditors, upon their respective interests. Nor can it be said that they surrendered their. right to demand from him an accounting in respect to his management of the property. Upon such accounting, he might become indebted to them; and, to the extent that he was justly so indebted, they would be his creditors, with the sainé right that other unsecured creditors had to obtain satisfaction of their claims. The mode adopted by them to that end, with full knowledge as well of his financial condition as .of the fact that he was being pressed by Cotz-hausen, was to take property.on account of. their respective claims. After he had executed -the conveyances, bill of sale, warrant of attorney and transfers, to which reference has been made, he was left .without anything that could be reached by Cotzhausen.- So completely was he stripped by these transac-. tions of all property that, subsequently, when his deposition was taken, he admitted that he owned .nothing except, the clothing he wore. He recognized his hopelessly insolvent condition, and formed.the purpose of ..yielding to creditors the dominion of his entire estate. And it is too plain to admit of- dispute that in executing to' his mother, sisters and brother the 'conveyances, bill of sale, warrant of attorney and'trans *337 fers in question bis intention was to give them, and their ''intention was to obtain a preference over all other creditors. What was done was in execution of a scheme for the appropriation of his entire estate by his family to the exclusion, of other creditors, thereby avoiding the effect of a formal assignment. The first question, therefore, to be considered is, whether the several writings executed by Alexander White, Jr., for the purpose’of effecting that result, may be regarded as, in le^al effect, one .instrument, designed to evade ort defeat the provisions of the statute of Illinois, known as the Yoluntary Assignment Act, in force July 1, 1877. ■ The first section of that statute provides: “That in all cases of voluntary assignments hereafter made for the benefit of creditor or creditors, the debtor or debtors, shall annex to such assignment an inventory, under oath or affirmation of his, her, or their estate, real and personal, according to the best of his, her, or their knowledge; and also a list of his, her, or their creditors, their residence and place of business, if-known, and the amount of their respective demands; but such inventory shall not be conclusive as to the amount of the debtor’s estate, but such assignment shall vest in the assignee or assignees the title to any other property, not exempt by law, belonging to the debtor or debtors at the time of making the assignment, and comprehended within the general terms of the same. Every assignment shall be duly acknowledged and recorded in the county where the person or persons making the same reside, or where the business in respect of which the same is made has been carried on; arid in case said assignment shall embrace lands, or any interest ’therein, then the sanie shall also be recorded in the county or countie's in which said land may be situated.” Other sections provide for publication of notices to creditors ; for the execution by the assignee of a bond and the filing of an inventory in the County Court; for the report. of a list of all creditors of the assignor; and for exception by any person interested to the claim or demand of any other creditor.. The sixth section provides “that at the first term of the said *338 County Court, after the expiration of three months, as aforesaid, should no exception b.e made to the claim of any creditor, or if exceptions have been made, and the same have been adjudicated and settled by the court, the said court shall order the assignee or assignees to make, from time to time, fair and equal dividends (among the creditors) of the assets in his or their hands, in proportion to their claims,” etc. The eighth section declares that “ no assignment shall be declared fraudulent or void for want of any list or inventory as provided iii the first section.” The thirteenth section is in these words: “Every provision' in any assignment hereafter made in this State providing for the payment of one debt or liability in preference to another shall be vpid, and all de.bts and liabilities within the provisions . of the assignment shall be paid pro rata from the assets thereof.” ■The main object .of this legislation is manifest. ' It is to secure equality of right among the creditors of a debtor who makes a voluntary assignment of his property. It annuls every provision in any assignment giving a preference of one creditor over another. No creditor is to be excluded from participation in the proceeds of the assigned' property because of the failure of the debtor to,make and file the required inventory of. his estate and the list, of his creditors'. Nor, if such a list is filed, is any creditor to be denied his fro rata part of such proceeds ’ because his name is omitted, either by, design or mistake upon the part of the debtor. . The difficulty with the courts has not been' in recognizing the beneficent objects of this legislation, but in determining whether, in view of the special circumstances attending their execution, particular instruments are to be treated as part of an assignment, within the meaning of the statute. The leading case upon this, subject in the Supreme Court of Illinois is Preston v. Spaulding, 120 Illinois, 208. In that case the members of an insolvent firm, in anticipation of bankruptcy, made,- within a period of less .than thirty days, four conveyances or their individual estate to near relatives, and' Various payments of money to her relatives, on alleged debts. *339 Aftér these conveyances and payments, and with full knowledge of impending failure, the members of the firm held ar conference with their legal advisers before the expiration of said thirty days, respecting the measures to be adopted by them and the shape their failure was to assume. It was determined that they should make a voluntary assignment, but that preference be given to certain creditors by executing to them what, are called judgment notes. The assignment in form was made, but on the same day and before it was executed, the _creditors .to whom the notes were given caused judgment by, confession to be entered, thereon, and immediately, and before-, the de'ed of assignment was or could be filed, caused execution’ to be issued and levied, whereby they took' to themselves the. great bulk, of the debtor’s estate. The trustee, named in the assignment, having refused' to attack the preferences thus secured, a creditor brought suit in equity upon the theory that the giving of the judgment'notes and the making of the deed of assignment were parts of one transaction, and, consequently, the preferences attempted were illegal and void under the statute. The Siipreme Court of Illinois, considering the question .whether the preferential judgments obtained in that case were within the prohibitions of the'act of 1817, said: “The statute is silent, as to the form of the instrument or instruments by which an insolvent debtor may effect, an assignment. ... If, then, these preferences are to;be held to be within the ‘provisions ’ of the assignment or ‘ comprehended within its general terms,’ it must be because they fall.within the intent and-spirit of the act. It will be observed, this act does not assume to interfere, in the slightest degree with the actión of a' debtor, while he retains the dominion of his property.' Notwithstanding this act, he may now, as heretofore, in good faith,.sell his property, mortgage -or pledge i,t to secure a bona fide debt, or create a lien' upon it by operation of law,, as, by confessing a judgment in favor of a bona fide creditor. But when he reaches the point where he is-ready, and determines, to yield the dominion of his property, and makes an assignment' for the benefit of his creditors, Under the statute, this act declares that the effect of such assignment shall be the surrender and *340 conveyance of all his estate, not exempt by law, to his assignee —rendering void all preferences and bringing about the distri-. bution of his whole estate equally among his creditors; and we hold that.it .is within the spirit and intent of the statute, that when- the debtor has formed a determination to voluntarily dispose of his whole estate, and has entered upon that determination, it is immaterial into how many parts the performance or execution of his determination may be broken, — the law will regard all his acts having for their object and effect the disposition of his estate, as parts of a single transaction ; and, on the execution of the formal assignment, it will, under the statute, draw to it, and the -law will regard as embraced within, its provisions, all prior acts of' the debtor having for • their object and purpose the voluntary transfer or disposition of his estate to . or for creditorsand' if 'any preferences are shown to have been made or given by the debtor to one. creditor over another in such disposition of his estate, full effect will be given the assignment, and such preferences will, in a court of equity, be declared void, and set aside as in fraud of' •the statute.” ■ After setting out the details of the plan devised to secure certain creditors a preference in advance of the filing of the deed of -assignment, the court further said: “ It will be observed that all this was strictly in accordance with the forms of law, but will any one deny that a most palpable fraud was, in fact, perpetrated -upon appellee, Spaulding, by the. debtors, or that the acts of the debtors .were in fraud of the statute ? . . . This voluntary assignment act is in its character remedial, and .must, therefore, be liberally construed, and no insol-vént'&ebtor having in view the disposition of his estate, can be pérmittéd-to defeat its operation by effecting unequal distribution of his estate by means of an assignment, and any other shift or artifice- under the forms of law; and whatever obstacles might be encountered, in other courts of this State, . .. . a court of equity, when properly invoked, was bound to look' through and beyond the form, and have regard to the' substance, and Waving done so, to. find and declare these preferential judgments voidj under the statute, and to set them *341 aside.” See also Miner’s National Bank's Appeal, 57 Penn. St. 193, 199; Winner v. Hoyt, 66 Wisconsin, 227, 239; Wilks v. Walker, 22 So. Car. 108, 111. We agree with the Supreme Court of Illinois that this statute, being remedial in its character, must be liberally construed ; that is, construed “ largely and beneficially, so as to suppress the mischief and advance the remedy.” That court said in Chicago, &c. Railroad v. Dunn, 52 Illinois, 260, 263: “ The rule in construing remedial statutes, though it may be in derogation of the common law is, that everything is to be done in advancement of the remedy that can be done consistently with any fair construction that can be put upon it.” See also Johnes v. Johnes, 3 Dow, 1, 15. If, then,- we avoid over-strict construction,- and regard substance rather than form; if effect be-given to this legislation, as against mere devices that will defeat the object of .its enactment, the several writings executed by Alexander White, Jr., all about the same time, to his mother, sisters and brother, whereby, in contemplation of his bankruptcy, and according to a plan previously formed, he surrendered his entire estate for their benefit, to the exclusion of all other creditors, must be deemed a single instrument, expressing the purposes of the parties in consummating one transaction, and operating as an assignment or transfer under which the appellee, Cotzhausen, may claim equality of right with the creditors so preferred. It is true there was not here, as in Preston v. Spaulding, a formal deed of assignment by the debtor under the statute. But .of what-avail will the statute be in securing equality among the creditors of a debtor who, being insolvent, has determined to yield the dominion of his entire estate, and surrender it for the benefit of creditors* if some of them can be preferred by the simple device of not making a formal assignment, and permitting them, under the ■cover or by means of conveyances, bills of sale or written transfers, to take his whole estate on account of their respective debts, to the exclusion of other creditors ? If Alexander. White, Jr., intending to surrender all his property for the benefit of his creditors, and to stop business, had excepted from the conveyances, bill of sale and transfers executed to *342 bis mother, sisters and brother, a relatively small amount of property, and had shortly thereafter made a general assignment under the- statute, it could not be doubted, under the decision in Preston v. Spaulding, and in view of the facts here, disclosed, that such conveyances,' bill of sale and transfers would have been held void as giving forbidden preferences to particular creditors; and his assignment .would have been held, at. the suit of other creditors, to embrace not simply the property owned by him when it was made, but all that he previously conveyed, sold and transferred to his mother, sisters' and brother. But can he, having- .the intention to quit business and surrender his entire estate-to creditors, be permitted to defeat any such result by simply omitting to make a formal assignment, and by including the whole of his property in conveyances, bills of- sale, and transfers to the particular creditors whom he desires to prefer? Shall a failing debtor be allowed to. employ indirect means to.accomplish that which the law prohibits to ■ be done directly ? These questions must be answered in the negative; They could not be answered otherwise without 'suggesting an easy mode by which the entire object of this legislation may be defeated. Wé would not be understood as contravening the general principle, so distinctly announced by the Supreme'Court of Illinois, that a debtor, even when financially embarrassed, may in good.faith Compromise his liabilities, sell or transfer property in payment of debts, or mortgage or pledge it as security for debts, or create a lien upon it by means even of a judgment confessed in favor of his creditor. Preston v. Spaulding, ubi supra; Field v. Geoghegan, 125 Illinois, 70. Such transactions often take place in the ordinary course of business, when the debtor has no purpose, .in the near.future, of discontinuing business or of going into bankruptcy and surrendering control of all his property. A debtor is not bound to succumb under temporary reverses in his affairs,.and has the -right, acting in good, faith, to use his property in any mode he chooses, in order to avoid a general assignment for the benefit of his creditors. We only mean, by what has-been said, that when an insolvent debtor recognizes the fact that he can no longer go on in busi-' *343 ness, and determines to yield the dominion of his entire estate, and in execution of that purpose, or with an intent to evade the statute, transfers, all, or substantially all, his property to a part of his creditors, in order to provide for them in preference to* other creditors, the instrument or instruments by which such transfers are made and that result is .reached, whatever their form, will be held to operate as an assignment, the benefits of which may be claimed by any creditor not so preferred,, who will take appropriate steps in a court of equity to enforce the equality contemplated by the statute. Such we think is the necessary result of the decisions in the highest court of the State. The views we have expressed find some support in adjudged cases in the Eighth Circuit, where- the courts have construed the statute of Missouri providing that “every assignment of lands, tenements, goods, chattels, effects and credits made by a debtor to any person .in trust for his creditors, shall be for the benefit of all the creditors of the. assignor in proportion to' their respective claims.” • Referring to that statute, Krekel, J., said, in Kellog v. Richardson, 19 Fed. Rep. 70, 72 — following the previous case of Martin v. Hausman, 14 Fed. Rep. 160 — “a merchant may give a mortgage ora deed of trust in part or all' of his property, to secure one or more of his creditors, thus preferring them, but he cannot convey the whole of his prop-, erty to one or more creditors, and Stop doing business. Such turning over and - virtually declaring insolvency brings the instrument or act .by which it is done within the assignment law of Missouri, which requires a distribution of the property of the failing debtor for- the benefit of all the creditors in pro-" portion to their respective claims: . Such is-the declared'policy of the law; it places all creditors upon an- equal footing.” So in Kerbs v. Ewing, 22 Fed. Rep. 693, where Judge McCrary, referring to the Missonri statute, said: “No matter what'the form of the instrument, where a debtor, being insolvent, con-' veys all his property to a third party, to pay one. or more creditors, to the exclusion of others,- such a conveyance will be construed' to be an assignment for the benefit of all the creditors ; the preference being in contravention of the assignment *344 laws of this State,” Again, in Freund v. Yaegerman, 26 Fed. Rep. 812, 814, it 'was said by Treat, J., that the conclusion reached by Mr. Justice Miller and Judges McCrary, Krekel, and himself, was, “that under the statute of the State of Missouri concerning voluntary^ass i gnm ents, when property was disposed of in entirety or substantially — that is, the entire property of the debtor, he being insolvent — it fell within the provisions of the assignment law. The very purpose of the law was that no. preference should be given. No matter by what name the end is sought to be effected, it is in violation of that statute. You may call it a mortgage, or you may make a confession of judgment, or use any other contrivance, by whatever name known, if the purpose is to dispose of an insolvent debtor’s estate, whereby a preference is to be effected, it is in violation of the statute.” See also Perry v. Corby, 21 Fed. Rep. 737; Clapp v. Dittman, 21 Fed. Rep. 15; Clapp v. Nordmeyer, 25 Fed. Rep. 71. If Alexander White, Jr.,' had made a' formal assignment of his entire property in trust for the benefit, primarily or exclusively, of his mother, sisters and brother, as creditors, its illegality would have been so apparent that other creditors would have been allowed to participate in the proceeds of sale. By the conveyances, bill of sale, confession of judgment and transfers, all made about the same time, and pursuant to an understanding previously reached, he has effected precisely the same result as would have been reached by a formal assignment to a trustee for the exclusive benefit of his mother, brother and sisters. The latter is forbidden by the letter of the statute, and the former is equally forbidden by its spirit. Surely, the mere name of the. particular instruments by v'hich the illegal result is reached, ought not to be permitted to stand in the way of giving tile relief contemplated by the* statute. Court's of equity .aré not to be misled by mere devices, nor baffled by mere fortús. It remains-only to consider the effect of these views upon the decree below. We»have already seen that the Circuit. Court proceeded upon the ground that the conveyances, bill of sale, confession of judgment and transfers by Alexander *345 White, Jr., were made without adequate consideration, and with intent to hinder, delay and defraud the appellee. TJpon these grounds it gave him a prior right in the distribution of the property. We are not able to assent to this determination of the rights of the parties; for the mother, sisters and brother of Alexander White, Jr., were his creditors,'and, so far as the’ record discloses, they only .sought to obtain a preference. over other creditors. But their attempt to obtain such illegal preference ought not to have the effect of depriving them of their interest, under the statute, in the proceeds of the property in question, or justify a decree giving a prior right to the appellee. It was not intended, by the statute, to give priority of right to the creditors who are not preferred. All that the appellee can claim is to participate-in such proceeds upon terms of equality with other creditors. , v It results that the decree below is erroneous, so tar as it directs the property, rights and interests therein described to be sold in satisfaction primarily of the sums found by the decree to be due from Alexander White, Jr., to the appellee.' The case should go to a master to ascertain the amount of all the debts owing by Alexander White, Jr., at the date of said conveyances, bill of sale and transfers. In respect to the amounts due fro«i him to his mother, sisters and brother, respectively, it is not necessary, at this time, .to express any opinion, further than that the accounting in the Probate Court between them is not conclusive against the appellee. It will be for the court be]ow to determine, under all evidence, what amounts are justly due from Alexander White, Jr., to his mother, sisters and brother, taking into consideration all the circumstances attending his management of the property, formerly owned by his father, whether real or personal. To the extent we have indicated, the' decree is reversed, each side paying on e-ha,If the costs in this court; and (he 6ause is remanded, with a direction for further proceedings riot inconsistent with this opinion. The Chief Justice did not sit in this case or narticipate in its decision.