In re the Final Accounting of Sisson — 36 N.Y. St. Rep. 290

Majority

p. 290

In the Matter of the Final Accounting of Humphrey Sisson, as Assignee.

(Supreme Court, General Term, Fourth Department,

Filed February 20, 1891.)

Headnote

Assignment fob creditors—Preferences.

Where a debtor prefers creditors in the order of their classes, and the one-third in value applicable to preferred debts, chap. 503, Laws of 1887, is not sufficient to pay- creditors of the first class, they take the whole, although other preferred creditors thereby receive nothing.

Appeal by B. B. & W. W. Taggart, second preferred creditors, from an order which directed full payment to creditors first preferred, such payment exhausting that part of the estate applicable to preferences.

On the 13th day of December, 1888, William W. Herrick and Henry H. Ayres, who constituted the firm of Herrick & Ayres, executed a general assignment for the benefit of their creditors, whereby the assignee was directed : 1st. To pay the expenses of executing the trust; 2d. To pay out of their individual property all wages due employes of each of the assignors individually; 3d. To pay out of the individual assets the individual debts of the assignors; 4th. If any surplus of individual assets remain, to apply the same on the debts of the copartnership; 5th. Out of the proceeds of the copartnership property and the surplus of the individual property to pay all wages due the employes of the firm; 6th. Out of the said proceeds to pay three certain notes amounting to the sum of $2.644.63, which notes were made by the firm in their firm business and were intended to be preferred next to the employes of said firm; 7th. Mext to pay out of said proceeds the amount owing by the firm to Catharine P. Herrick and two notes mentioned amounting to $450, which were endorsed by the appellants; 8th. To' pay all the remaining liabilities of said firm, and, if the assets were insufficient, then to pay the same pro rata; 9th. After payment of said debts in full, to return the residue, if any, to the assignors. The assignment also contained the following statement: “It is not intended by the preference of firm obligations mentioned in this and the last preceding paragraph (being paragraphs five and six) to make preferences to an amount exceeding one-third in value of the assigned estate left after deducting wages or saláries owing by said firm and the costs and expenses of executing this trust.”

The one-third of the estate dedicated to the payment of the preferred creditors was insufficient to pay the claims of the first preferred creditors mentioned in the sixth paragraph of the assignment-. The appellants were in the second class of the preferred creditors mentioned in the seventh paragraph. The court, by the order appealed from, directed that the amount designated for the payment of the preferred creditors should be distributed among the creditors mentioned in the first class and sixth paragraph of said assignment, and held that the second class of preferred creditors were not entitled to participate in said fund, but that because of the insufficiency of said fund to pay the first class in

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full, the second class should be paid dividends as common creditors without preference. From that portion of the order which held that the one-third applicable to preferred debts should be wholly applied to the first class of preferred creditors the appellants appeal.

Hannibal Smith, for app’lts; Watson M. Rogers, for Humphrey Sisson ; Lansing & Lansing, for Jefferson County National Bank.

The only question presented upon this appeal is. whether the court properly ordered the one-third of the estate dedicated to the payment of the preferred creditors of the assignors to be paid to those mentioned in the first class or si^th paragraph of the assignment, or whether it should have directed its payment to those creditors mentioned in the sixth and seventh paragraphs of the assignment pro rata.

After the payment of the employes of • the assignors the creditors preferred were divided into two classes. Out of the one-third of the estate designated for that purpose .those belonging to the first class were to be paid. After they were paid in full those belonging to the second class were to be paid out of the remainder of that portion of the estate. The fund was insufficient to pay the first class in full, and hence, according to the terms of the assignment, there was nothing in the preferred creditors’ fund which, under the provisions of the assignment, was applicable to debts in the second class. Whether the distribution of this fund among the preferred creditors was to be governed by the provisions of the assignment is the real question in this case.

Anterior to the enactment of chap. 508 of Laws 1887, a failing debtor making a general assignment for the benefit of his creditors possessed the right to prefer such of his creditors as he saw fit to the full amount of his estate. While the right to thus prefer creditors was fully established and generally understood, the legislature passed the following statute: “In all general assignments of the estates of debtors for the benefit of creditors hereafter made, any preference created therein (other than for the wages or salaries of employes under chap. 328 of the Laws of 1884, and chap. 283 of the Laws of 1886,) 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 assets of the assignor or assignors be insufficient to pay in full' the preferred 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 fro rata to the amount of each said preferred claims.”

The manifest purpose of this act was to prevent failing debtors from applying more than one-third of their property to the payment of friendly creditors. The mischief which the legislature sought to correct arose from the inclination of debtors to thus apply the whole of their property. We find nothing in this statute to indicate a legislative intent to provide how or in what manner the one-third which may be devoted to that purpose shall be divided between the creditors of the assignor. That right formerly rested in the

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assignor, and we think still remains with him as to the one-third of the estate which he is permitted to apply to the payment of preferred claims. The one-third he is permitted to have applied to the payment of preferred debts he may have applied to such debts as he shall designate and in any order of preference he may indicate by his assignment This right is in no way restricted by the act of 1887.

By the assignment in this case the assignors devoted the one-third applicable to the payment of preferred debts to the payment of the debts mentioned in class one. The whole fund was first, dedicated to that purpose. If it was not sufficient to pay more, then it was dedicated to that purpose alone, and the debts in the second class were not preferred. The preference of the second class was a provisional one, depending wholly upon the sufficiency of the fund to pay the first class, with a surplus. If there was no surplus, then there was no further preference. The fund was insufficient to pay the first class, and hence the contingency upon which a preference was to be extended to the second class did not arise, and the debts mentioned therein were not preferred claims.

The provisions of the statute, that if one-third of the assets should be insufficient to pay in full the preferred claims to which the same were applicable then they should be applied pro rata, obviously relates to such claims as are absolutely preferred by the provisions of the assignment, and to which, under the assignment, the assets are in fact applicable. As there were no assets that were by the terms of the assignment applicable to the payment of claims of the creditors named in the second class, the preference of the claims mentioned therein being conditional, and the condition upon which such preference was based not having ■existed, it follows, we think, that the claims mentioned in the second class were not preferred claims to which such fund was applicable, and the creditors named in that class were not entitled to participate in the fund with the creditors named in the first, class. •

The effect of the statute of 1887 was simply to limit the amount which should be applied to the payment of preferred claims, and an assignor still has the power to designate the manner in which that amount shall be applied. Matter of Tuller, 22 N. Y. State Rep., 242; Matter of Boyd, 35 id., 37.

We are of the opinion that the order appealed from was right and should be affirmed.

Order affirmed, with ten dollars costs and disbursements.

Hardin, P. J., and Merwin, J., concur.