Spellman v. Friedman — 27 N.Y. St. Rep. 392

Majority

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Timothy M. Spellman et al., Resp’ts, v. Moritz Friedman et al., Impleaded, App’lts.

(Supreme Court, General Term, First Department,

Filed November 7, 1889.)

Headnote

1. Assignment for creditors—Action in aid of may be brought by-general CREDITOR.

A general creditor may maintain an action to set aside transfers made in fraud of a general assignment, and secure the property for general distribution, where the assignee refuses to bring such action.

2. Same—Fraudulent transfers.

Immediately prior to making a general assignment, and while it was in-contemplation, the assignee confessed judgment for an amount greater than one-third of his asssets Held, that an action to set aside such judgment as in fraud of the assignment could be maintained.

Appeal from interlocutory judgment overruling demurrers to- • complaint.

A. B lumenstiel, for app’lts; J. W. Boothby, for resp’ts.

This action is brought to set aside a judgment and execution entered and issued in favor of the above-named defendants upon the ground that the judgment was a violation of chapter 503 of the Laws of 1887 in reference to assignments for the-benefit of creditors. The plaintiffs are general creditors having-no judgments or liens of any kind.

The plaintiffs on the 14th of May, 1888, were as already-suggested creditors of the defendants. On that day the defendant Sowsman made an assignment of all her property to the defendant Phelps for the benefit of her creditors in-, dueling the plaintiffs. On the same day, immediately prior to the-execution of the assignment, in which they were also preferred,, and while it was in contemplation, she gave to the defendants E. S. Jaffray & Co., Sigismund and Friedman Bros., judgments by confession amounting together to the sum of $6,996.95, which, was greater than the one-third of the assets of the assignor.

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Executions were issued on these judgments to the sheriff who .made a levy under them on the entire stock and property of the defendant, the assignor, just before the delivery of the general assignment and proceeded to advertise the stock so levied upon for sale. The plaintiffs claim that these judgments, and the proceedings taken to enforce them, were for the purpose of preferring the judgment creditors named in them out of the assignor’s assets, for more than one-third thereof, after the assignment had been determined upon, and for the purpose of preferring such persons out of her property in fraud of the assignment, and to prevent its assets from going into the hands of the assignee, and being distributed to the plaintiffs and other creditors pursuant to the statute.

It- is also alleged that the plaintiffs notified the defendant assignee of these facts, and requested him to bring an action as such to set aside the judgments, executions and levies, and that he refused, and they asked on behalf of themselves and other creditors, that the judgments, executions and levies be set aside, that the property levied upon in the hands of the sheriff be directed to-be paid over to the assignee for distribution to the creditors of the defendant Sowsman, including the plaintiffs pursuant to the-directions of the assignment.

It is objected that the plaintiffs, not being judgment creditors, have no lien upon the property seized, and cannot therefore maintain this action.

It will be observed that the plaintiffs claim no special advantage for themselves, but that the property levied upon was to beseemed for the assignee and to be distributed under the terms of the assignment. It is not a creditor’s bill seeking the application of property to the plaintiff’s debt exclusively, and the right to-maintain such an action as this, the object of which is to secure the appropriation of the property according to the assignment to the creditors generally, has been declared in several cases.

In the case of Dewey v. Moyer, 72 N. Y., 78 , which was an action brought to set aside a fraudulent conveyance of a bankrupt, made prior to his bankruptcy, the court said: “If the assignee should refuse or neglect to sue for and reclaim property fraudulently transferred, it is abundantly established that the creditors may commence an action to reach the property, making theassignee the debtor and his transferees parties defendant; and in such an action the property will be administered directly for the benefit of the creditors,” citing a number of cases to sustain the-proposition, and the same doctrine was reiterated in Crouse v. Frothingham, 97 N. Y., 113 .

In such an action as this the object is to secure for general distribution property fraudulently disposed of by the assignor and place it in the hands of the assignee, that it may be distributed according^ to the general provisions of the assignment. Such a right, if it did not exist by adjudication, should be established and pronounced, not only as very reasonable, having all the attributes of a common sense view, but as important to the administration of justice.

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The plaintiffs having the right to establish their assertion that the judgments were fraudulently executed, as in contravention of ■ the Laws of 1887, as already suggested, the question is whether that proposition is maintained.

Section SO of chapter 503 of the Laws of 1887, amending the act in relation to assignments, is as follows:

“ In all general assignments of the estates of the debtors for the benefit of creditors hereafter made, any preference created therein, other than for wages, etc., shall not be valid except to the amount of one-third in value of the assigned estate left after deducting such wages or salaries, and the costs and expenses of executing such trust, and should said one-third of the estate of the assignor, or assignors, be insufficient to pay in full the preferredi claims to which, under the provisions of this section, the same are applicable, then said assets shall be applied to the payment of the same pro rata to the amount of each of said preferred claims.”

It is to be observed that this provision has reference to preferences in general assignments, the language being “ in all general .assignments of the estates of debtors for the benefit of creditors hereafter made, any preference created therein,” etc.

Here the alleged violation of the statutes is not in anything in the assignment, but relates to confessions of judgment made prior to the execution and delivery of the assignment.

A great many cases have been cited by the respective counsel in reference to the provisions in different states relative to general assignments, and great industry has been displayed in the collation of them bearing upon the subject But the proposition advanced on behalf of the appellant seems to be established, namely, that while in many states of the union there are provisions prohibiting preferences in general assignments, nevertheless, it has ■been held that confessions of judgment and other securities given prior to their execution and in contemplation thereof, are not violations of the provisions of the statutes. For example, In re Gallagher's Appeal, 7 Atlantic Reporter, 237, the assignment was executed on the morning of the 17th of March, 1885. On the day prior, and probably in anticipation thereof, the assignor confessed two judgments in favor of two firms, aggregating about $40,000, .and the court held, although ‘by the laws of Pennsylvania the debtor had no right to prefer any creditor in the deed of assignment, this did not preclude him from preferring a creditor prior to its execution while he still retained dominion of his property, and the decision of the case rests upon that doctrine. See, also, Lake Shore Banking Co. v. Fuller, 1 Cent. Rep., 109 ; Gallagher's Ap peal, 5 id., 725; 114 Pa. St., 353 , Gage v. Parry, 69 Iowa, 605 ; Gilbert v. McCorkle, 8 West. Rep. (Ind.), 816, Gummersell v. Hanbloom, 1 West. Rep. (Mo), 717; Blakey's Appeal, 7 Pa. St., 449 ; Hutchinson v. McClure, 20 id., 63; Wilmer v. Benjamin, id., 167; Garretson v. Brown, 26 N. J. L., 425 ; Bates v. Coe, 10 Conn., 280 ; Perry v. Holden, 22 Pick., 269 ; Fairbanks v. Haynes, 23 id., 323 ; Lampson v. Arnold, 19 Iowa, 479 ; Van Patten v. Burr, 52 id., 518 .

On the other hand, however, m the case, of Preston v. Spaulding, 120 Ill., 208 , where a kindred question was considered and dis

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posed of, it must be said that a different conclusion is arrived at by the court, although it seems to have been based chiefly upon the ground that the statute was silent as to the form of the instrument or instruments by which the insolvent debtor might effectuate an assignment The court, however, said in discussing the statute: “ It will be observed that this act does not assume to interfere in the slightest degree with the action 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 it to secure a Iona 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 conveyance of all his estate not exempt by law to his assignee, rendering void all preferences, and bringing about the distribution of his whole estate equally among his bona fide creditors; ” and the court held that it was within the spirit and intent of the statute that when the debtor has formed the 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 this case is referred to White v. Cotzhausen, 129 U. S., 343 , with approbation.

And in the consideration of the statutes of other states prohibiting assignments containing preferences and acts kindred to those charged against the assignor in this case, it has been held that the statute was violated, and the reasoning of Preston v. Spaulding seems to have commended itself as the more convincing upon the subject than that contained in the Gallagher case. See Clapp v. Nordmeyer, 25 Fed. Rep., Mo., 71; Berry v. Cutts, 42 Me., 445 ; Holt v. Bancroft, 30 Ala., 195 ; Van Patten v. Burr, 52 Iowa, 518 ; Fuller v. Hasbrouck, 46 Mich., 81 ; Heineman v. Hart, 20 N. W. Rep., 792 -798, Perry v. Holden, 39 Mass., 277 ; Livermore v. McNair, 34 N. J. Eq., 478 .

Our statute, however, is different from those of other states for -the reason that it allows a preference to the amount of one-third in value of the assigned estate, after deducting certain things enumerated, thus recognizing but limiting the right which existed before the prohibitory statute was passed, of a debtor’s appropriating his property by preference if he chose to do so. But it was ■evidently the intention of the legislature that if a general assignment for the benefit of creditors were contemplated, it should embrace the disposition of all the debtor’s property at the time of the formation of the determination to make the assignment, and that it should not, in its broad and general effects, be anticipated by a partial and preferential distribution of his estate. The right to the preference, in other words, must be exercised in the assignment and not otherwise. This would place the whole estate in the

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hands of the assignee, subject to the preferences expressed, and would enable him to make a better disposition of it than could be accomplished by a sale under j udgment and execution, and would thus carry out the design of the legislature and effectuate the legal purpose of the assignor in making his assignment. The defendants are not deprived of their interest under the statute in the proceeds of the estate by reason of their attempt to obtain an illegal preference. They can still participate in such proceeds to the extent to which they are entitled by the legal terms of the assignment relative to them or the provisions of the statute. White v. Cotzhausen, supra.

For these reasons the judgment should be affirmed, with costs. •

Van Brunt, P. J., and Daniels, J., concur.