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National Park Bank v. Whitmore

104 N.Y. 297 Court N.Y. Decision date 1887-02-11 English

Judges All concur.

Delivered by Earl, J.

Contents

Majority

p. 297
The National Park Bank of New York, Respondent, v. James D. Whitmore et al., Appellants.

Headnote

An agreement, made at the time of the purchase of goods on credit, between the vendor and purchaser, that in case of the insolvency of the latter, or of an assignment becoming necessary, he will protect the former by a preference to the amount of the goods sold and unpaid for, is not in law a fraud upon other creditors, nor is it so far conclusive evidence of fraud as to avoid a preferential assignment made in pursuance thereof.
The affidavits upon which an attachment was issued set forth the making of such an agreement by the defendants with W., another creditor. The following facts also appeared on motion to vacate the attachment. A few days before the assignment was made defendants reported that they were entirely solvent and could pay all their debts in full, and made a statement of their affairs showing a large surplus of assets over liabilities, soon after this claiming they could not pay their debts in full and were insolvent, they proposed to their creditors a compromise, and threatened, unless their offer was accepted, to make an assignment preferring W., stating that then the other creditors would get little or nothing. The assignment was made to a foreign assignee two days after the attachment was issued. The evidence tended to shew that the assignors had been engaged in a prosperous business, and they gave no satisfactory or intelligible explanation of their sudden alleged insolvency. After the assignment was made defendants and the assignee co-operated apparently to coerce a compromise, and offered to “fix it up ” with a creditor if he would consent thereto. Held, the facts justified a finding that the assignment was threatened and made by defendants, while not actually insolvent, to coerce a favorable compromise and thus secure a benefit to themselves; aj least there was sufficient to give the court below jurisdiction to award the attachment, and its exercise was not reviewable here.
(Argued December 7, 1883;
decided February 11, 1887.)
Appeal from order of the General Term of the Supreme Court in the first judicial department made June 1, 18S6, which reversed an order of Special Term vacating an attachment issued herein. (Reported below, 40 Hun, 499 .)
The material facts are stated in the opinion.
Edward W. Sheldon for appellants.
The agreement by the defendants to prefer the Whiting Paper Company was
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lawful, and did not justify an attachment, on the ground that it furnished evidence that they were about to assign and dispose of their property with intent to defraud their creditors. (Code Civ. Proc. § 636; Bk. of Leavenworth v. Hunt, 11 Wall. 391 ; Jordan v. Shoe and Leather Bk., 74 N. Y. 467 , 473; Clarke v. White, 12 Pet. 178 , 200; Tompkins v. Wheeler, 16 id. 106; Spaulding v. Strang, 37 N. Y. 135 ; S. C. 38 id. 1; Haydock v. Coope, 53 id. 68; Low v. Graydon, 50 Barb. 415 ; Powers v. Graydon, 10 Bosw. 630 ; Burrill on Assignments, 246, Smith v. Craft, 11 Biss. 340 ; S. C. 12 Fed. Rep. 856 ; S. C. 17 id. 705; Grover v. Wakeman, 11 Wend. 195 ; Riggs v. Murray, 2 Johns. Ch. 564 ; Anderson v. Lachs, 59 Miss. 111 ; Walker v. Adair, 1 Bond, U. S. Cir. Ct. 158.) The original affidavits of De Baun and McCarthy being, so far as material facts are concerned, made upon information and belief, should be ignored. (Steuben Co. Bk. v. Alberger, 78 N. Y. 252 .) The intent to defraud by the disposition of the property must be a fair and logical sequence from the facts shown, and these facts must appear by affidavit. (St. Armand v. De Beixcedon, 2 Sandf. 703 ; Elliston v. Bernstein, 60 How. 145 .) Neither the making of an assignment for the benefit of creditors nor a threat to make such an assignment, with or without preferences, is ground for the granting of an attachment. (Millikin v. Darl, 26 Hun, 24 ; Thurber v. Blanck, 50 N. Y. 80 ; Anthony v. Wood, 96 id. 180 ; Smith v. Longmire, 24 Hun, 257 ; Castle v. Lewis, 78 N. Y. 131 ; McConnell v. Sherwood, 58 How. Pr. 453 ; Work v. Ellis, 50 Barb. 512 ; Wilson v. Britton, 26 Barb. 562 ; Anthony v. Stype, 19 Hun, 265 ; Evans v. Warner, 21 id. 574; Dickerson v. Benham, 20 How. Pr. 189 ; Farwell v. Brown, 1 Fed Rep. 128 .) The evidence of the indebtedness of the defendants is not sufficiently alleged in the affidavits upon which the attachment was granted. (Code, § 636; People v. Sutherland, 81 N. Y. 1 ; Ex parte Bk. of Monroe, 7 Hill, 177 ; Ex parte Shumway, 4 Den. 258 ; Payne v. Young, 8 N. Y. 158 ; Marine Nat. Bk. v. Ward, 35 Hun, 399 ; Gribbon v. Back, id. 541 ; Cribben v. Schillinger, 30 id.
p. 299
248.) The non-residence of one of the defendant partners, as alleged in the affidavit on which the attachment was granted, affords no justification for the attachment. (McKinlay v. Fowler, 67 How. 388 .) The non-residence of the assignee is not proof of a fraudulent intent in making an assignment. (Blackington v. Goldsmith, 3 How. Pr. [N. S.] 77.) The right to an attachment having been conferred by statute, is limited to a strict compliance with the provisions of the statute. (Blossom v. Estes, 22 Hun, 472 ; Drake on Attachments, §§ 85, 86.) Where the evidence is capable of an interpretation which makes it as consistent with an innocent as with a fraudulent intent, that meaning must be ascribed to it which accords with innocence. (Morris v. Talcott, 96 N. Y. 100 ; Stringfield v. Fields, 7 Civ. Proc. Rep. 360.)
Charles W. Wetmore for respondent.
An agreement between a debtor and one of his creditors that if the creditor will loan money, he will in case of his insolvency prefer such creditor, is in the nature of a secret lien, which is a fraud on the creditors, who subsequently deal with the debtor without any knowledge thereof, and which will render as to them a subsequent transfer of all the debtor’s property in accordance with such agreement void. (Smith v. Craft, 2 Biss. 340 , 345, 348.) A promise, upon sufficient consideration, to indemnify or to secure another, by the giving of the lien by way of chattel mortgage or otherwise upon property, left in the possession of the promisor, creates an equitable lien upon such property, valid as against the promisor, and enforceable against the property, in the hands of an assignee for the benefit of the creditors of the promisor, (Hale v. Omaha Nat. B'k, 49 N. Y. 626 , 633; Story Eq. Jur. § 717; Husted v. Ingraham, 75 N. Y. 251 , 257, 258; Arnold v. Morris, 7 Daly, 498 , 503-506; Chase v. Peck, 21 N. Y. 581 ; Robinson v. Williams, 22 id. 380; Payne v. Wilson, 74 id. 348.) A chattel mortgage, or an agreement to give a chattel mortgage, or any other form of lien or right to the property of the mortgagor or promisor, which contem
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plates, either by express provision in the instrument or by necessary implication from its terms, or by agreement or understanding, written or verbal, outside the instrument, that the mortgagor or promisor, besides retaining possession of the property, may deal with it m all respects as his own, is fraudulent in law against the other creditors of the mortgagor or promisor. ( Wood v. Lowry, 17 Wend. 492 , 494, 495; Edgell v. Hart, 9 N. Y. 213 , 216, 217; Southard v. Pinckney, 5 Abb. [N. C.] 184, 196, 197; Potts v. Hart, 99 N. Y. 168 , 172, 173; Fowler v. Haynes, 91 id. 346.) It cannot be material Avliat the secret intention or animus in the minds of Whiting and the defendants Avas. They must be presumed to have intended the natural and inevitable consequences of their own agreement and acts. (Coleman v. Burr, 93 N. Y. 17 , 31; Potts v. Hart, supra.) A provision in the assignment itself, that the assignee may compromise Avith the creditors, upon such terms as he may deem to the advantage of the creditors and asssignor, or the giving of a preference, conditional upon the creditors to be preferred, releasing the unpaid residue of their debts, or an actual intent to accomplish similar ends, proved by evidence independent of the instrument, render an assignment fraudulent and void. (Work v. Ellis, 50 Barb. 512 , 573; McConnell v. Sherwood, 58 How. Pr. 453 , 460, 461; S. C., 84 N. Y. 522 , 530; Hyslop v. Clark, 14 Johns. 458 ; Grover v. Wakeman, 11 Wend. 187 ; Gasherie v. Apple, 14 Abb. 68 ; Livermore v. Rhodes, 27 How. 506 ; Anthony v. Stype, 19 Hun. 265 .) In England, agreements to give security for advances made, when the actual execution of the instrument affecting the security is to be postponed until the- lender has lost confidence in the debtor, or until the debtor becomes insolvent, are fraudulent as against creditors. (Ex parte Fisher, 7 L. R. [Ch. App. Cas.] 636, 644; In re Gibson, 8 L. R. [Ch. Div.] 230; Ex parte Kilner, 13 id. 245, 247, 248; Ex parte Burton, id. 102, 108.) Here the obligation to be secured was incurred with the understanding that it should not be made known until the' necessities of the debtors’ condition
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should so require for the protection of the creditor. (Hilliard v. Cagle, 46 Miss. 309 , 337, 345.) Inference of fraudulent intent can be drawn from threats to make a preferential assignment, if sued, or if an offered compromise is rejected. (White v. Leszynsky, 14 Cal. 165 , 167; Newman v. Krain, 34 La. [Ann.] 910; Curry v. Hart, 2 Sandf. Ch. 353 , 417; Cram v. Mitchell, 1 id. 251; Anderson v. Sachs, 59 Miss. 111 .)
W. IF. Macfarland for William Whiting, assignee, etc.
Neither the promise to prefer nor the assignment of the defendants was evidence of an intention to assign and dispose of property fraudulently and with a view to hinder, delay and defraud creditors. (Candee v. Lord, 2 Comst. 269; Bronson v. R. R. Co., 2 Black. 524 ; Underwood v. Lachs, 59 Miss. 111 ; Spaulding v. Strang, 38 N. Y. 1 .) The question raised and decided below cannot be raised on a motion to vacate an attachment. (Thurber v. Blank, 50 N. Y. 80 ; Anthony v. Wood, 96 id. 180 ; Bishop on Assignments, 245; Casler v. Shipman, 35 N. Y. 533 .) The affidavits on which the warrant of attachment was granted were wanting in both the quality and quantity of proof required by law. (Ex parte Haines, 18 Wend. 611 ; Hall v. Bond, 27 How. Pr. 272 ; Ackroyd v. Ackroyd, 11 Abb. Pr. 342 ; Brewer v. Tucker, 13 id. 76; Willard v. Denton, 17 How. Pr. 480 ; Genin v. Tompkins, 12 Barb. 273 ; Fitzgerald v. Belden, 49 How. 225 ; In re Bliss, 7 Hill, 187 ; In re Faulkner, 4 id. 598; Morris v. Talcott, 96 N. Y. 107 ; Stringfield v. Fields, 7 N. Y. Civ. Pro. R. 360; 3 Greenl. Ev., §§ 381, 385.) Facts must be stated necessarily leading to the presumption of fraudulent intent. (Morris v. Talcott, 96 N. Y. 104 , 107.) The facts must necessarily tend to establish an intent of guilt. (Stringfield v. Fields, supra.) The right to a warrant of attachment rests solely on statute and being in derogation of the common law, every statutory condition must be shown to exist in order to confer jurisdiction or authorize the exercise of judicial discretion. (Drake on Attachments, §§ 106, 107; Blossom v. Estes, 84 N.Y. 614 ; Start-well v. Field, 68 id. 341; Hall v. Bond, 22 How. 272 ; Shultz
p. 302
v. Hoagland, 85 N. Y. 463 ; Steuben County Bank v. Alberger, 78 id. 258; Wilson v. Britton, 26 Barb. 562 ; Livermore v. Northup, 44 N. Y. 109 ; Ogden v. Peters, 21 id. 23.)

This attachment was granted on the 31st day of December, 1885, on the ground that the defendants were about to assign their property with intent to defraud the plaintiff and their other creditors. On the 2d day of January thereafter, the defendants executed to William Whiting, of Holyoke, Mass., a general assignment for the benefit of their creditors, in which they preferred him for upwards of $23,000. Upon motion made by the defendants at Special Term, the attachment was vacated, as appears by the opinion there pronounced, upon the ground that the affidavits upon which the attachment was based did not sufficiently establish the fraudulent intent alleged. From the decision of the Special Term, the plaintiff appealed to the General Term, and there the order of the Special Term was reversed, as appears by the opinion pronounced, on the ground that the defendants had agreed with Whiting, at the time of the sale of certain goods to them, that in case of their insolvency or of an assignment becoming necessary he should be protected by a preference to the amount of the goods so sold to them and unpaid for. It was held that such an agreement was in law a fraud upon other creditors and rendered an assignment giving a preference in pursuance thereof fraudulent and void. From the order of the General Term the defendants have brought this appeal.

We have frequently held that we cannot look at the opinion pronounced below in a case like this for the grounds upon which the decision proceeded, and hence if we find in this record any ground upon which the General Term could, in the exercise of its jurisdiction, have reversed the order of the Special Term and thus sustained the attachment, its order must be affirmed although we do not agree with its opinion.

We do not think that the promise of the defendants to make a preferential assignment in favor of Whiting was in

p. 303
law a fraud upon other creditors or that, it was so far conclusive evidence of fraud as to avoid the assignment made in pursuance thereof.

The property which the defendants obtained by their agreement with Whiting added to their visible assets, and all their assets remained liable to the legal remedies of their creditors until the assignment was made. By adding $23,000 to their assets by goods thus obtained of Whiting, and then preferring him for the same amount in their assignment, no harm was done to or fraud committed upon their other creditors.

It is said, however, that this sale under a secret promise of a future preference gave the defendants a delusive appearance of prosperity and solvency, and thus enabled them to obtain credit which they otherwise could not have obtained, and that thus the agreement necessarily operated as a fraud upon other creditors. But it cannot be maintained that an agreement is fraudulent which simply adds to a debtor’s assets, gives him the appearance of solvency which he does not in fact possess, enables him to obtain credit and continue his business, and thus postpones impending failure. A debtor may obtain credit by a promise to pay in the future, either in cash or in property, or by promising to give his check or an indorsed note, or a confession of judgment. Neither such a promise, nor its performance, is a legal fraud upon any one ; and why may he not promise to give security upon the property purchased, or other property % Such a promise, honest in fact, has never been held to be a fraud or to work a fraud upon creditors. Security, honestly given in pursuance of such a promise, relates back to the date of the promise, and, except as to intervening rights, is just as good and effectual as if given at the date of the promise; and it has generally been so held, even in bankruptcy proceedings. ' (Bump’s Bankruptcy [10th ed.], 821; Forbes v. Howe, 102 Mass. 427 ; Bank of Leavenworth v. Hunt, 11 Wallace, 391; Burdick v. Jackson, 7 Hun, 488 ; Ex parte Ames, 1 Lowell’s Dec. 561; Ex parte Fisher, 7 Ch. App. Cas. L. R. 636; Ex parte Kilner, 13 L. R. Ch. Div. 245; Mercer v. Peterson, 2 Ex. L. R. 304; S.

p. 304
But here the agreement was to make the preferential assignment in case it became necessary to protect the creditor; and it is further claimed that such a conditional agreement is a fraud upon other creditors. A failing debtor may make an assignment preferring one or more creditors because he is under a legal, equitable or moral obligation to do so, or he may do it from mere caprice or fancy, and the law will uphold such an assignment honestly made. If he may make such an assignment without any antecedent promise, why may he not make it after and in pursuance of such a promise ? How can an act otherwise legal be invalidated because made in pursuance of a valid or invalid agreement honestly made? In Smith v. Croft ( 11 Bissell, 340 ), Judge Gresham .held that such a conditional agreement. for a future preference was a fraud upon creditors. But in the same case ( 17 Fed. Rep. 705 ), upon a rehearing, Judge Woods held that the same agreement was not fraudulent, and in a very satisfactory opinion showed that such an agreement, as we have here, for a future preference in case of insolvency is not a legal fraud upon creditors. (See, also, Walker v. Adair, 1 Bond [U. S. Cir. Ct.], 158; Anderson v. Lachs, 59 Miss. 111 ; Spaulding v. Strang, 37 N. Y. 135 ; S. C. 38 N. Y. 1 ; Haydock v. Coope, 53 N. Y. 68 .)

This1 agreement did not create any lien, legal or equitable, upon the property of the defendants. It was not an agreement for a future lien upon the specific property, which is sometimes held to create an equitable lien which may be enforced in equity. It was not an agreement for any lien at all. It was simply an agreement, in case of an assignment by the defendants, to prefer Whiting. The agreement did not bind defendants’ property, nor encumber it, but left it subject to all the remedies of their creditors, and it neither hindered nor delayed those creditors. They could have made the same assignment without a previous agreement and it is impossible to perceive how the agreement worked any legal harm to any one.

It is not important to determine whether this was an agreement of which a court of equity would enforce specific

p. 305
performance, but we do not believe it was, and think it must stand both in law and equity like an agreement to pay at a future day.

But we think there were sufficient facts set forth in the affidavits to give the court jurisdiction to determine whether or not the defendants in threatening to make, and in making the assignment, were actuated by a fraudulent intent. A few days before the assignment was made the defendants reported that they were entirely solvent and could pay all their debts in full, and they made a statement of their affairs showing a large surplus of assets over liabilities. Soon after these representations, they claimed that they could not pay their debts in full and that they were insolvent, and proposed to their creditors a compromise of fifty cents on the dollar, payable in nine, twelve and fifteen months without security. The evidence tended to show that they had been engaged in a prosperous business yielding them large profits, and they gave no satisfactory or intelligible explanation of their sudden alleged insolvency. They threatened that unless their offer of compromise was accepted they would make an assignment preferring Whiting and that then the rest of their creditors would get little or nothing. The efforts of the defendants, with the co-operation of their assignee after the assignment, apparently to coerce a compromise at twenty-five cents on the dollar, their offer “ to fix it up ” with a creditor afterward if he would assent to the compromise, their selection of a foreign assignee, the relations between him and them, and the secret promise of a future preference are also pertinent facts.

The court at General Term, looking at no one fact, but at all the facts before and after the assignment, could, we think, find that the assignment was threatened and made by the assignors, not solely for the honest purpose of devoting their assets to the payment of their just debts, but, while not actually insolvent, to coerce a favorable compromise from their creditors and thus secure a benefit to themselves.

The proof of the fraudulent intent alleged may not have been very cogent, but it was sufficient to give the court below

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jurisdiction to award the attachment, and hence we are bound by its decision and have no jurisdiction to interfere therewith. The appeal should therefore be dismissed with costs.

All concur.

Appeal dismissed.

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