Martin v. Adams — 38 N.Y. St. Rep. 397

Majority

p. 397

Louis F. Martin et al., App’lts, v. Eliza Jane Adams et al., Ex’rs, Resp’ts.

(Supreme Court, General Term, First Department,

Filed May 15, 1891.)

Headnote

Compromise—Fraud—Advantages given to one creditor.

An insolvent firm made a composition agreement with their creditors by which the latter accepted notes for 55 per cent secured by a mortgage, and one of the firm agreed to pay to each creditor one year after the payment of said notes the net profits of the business of any firm of which he should become a member, not exceeding 10 per cent of their claims and interest thereon from the date of the mortgage. Prior to the making of such agreement the son of said member of the firm, with the knowledge of his father, entered into an agreement with one of the creditors to purchase its interest in the net profits of the business referred to in the composition agreement upon the completion of the composition deed and give his notes therefor, guaranteed by his father. This agreement was unknown to the other creditors. Held, that the agreement made by the son gave to the creditor receiving it an advantage not secured to the other unsecured creditors and rendered the composition agreement void.

Appeal from a judgment recovered on the report of a referee.

Sutherland Tenney, for app’lts ; Hugh Porter, for resp’ts.

This action was brought to set aside a composition agreement made with the members of the firm of R. H. Adams, consisting of Henry Adams and Peter Horne, with their unsecured creditors, because of special advantages alleged to have been extended to particular creditors. They had made a general assignment of their property for the benefit of their creditors; and after that an adjustment, or compromise, was effected by which these creditors agreed to accept and receive in satisfaction of the debts owing them fifty-five per cent thereof in the notes of their debtors, endorsed by Robert Adams, and secured by a mortgage upon property

p. 398

situated at Paterson, in the state of New Jersey, and payable in five equal annual payments, with interest And the debtor Henry Adams also agreed to ¡Day each of these creditors at the-expiration of one year after the payment of the notes, the net-profits or earnings of the business of any firm of which he should then be a member, that the books should show him then entitled to, but not exceeding ten per cent of the principal of the respective claims of the creditors, and interest on the ten per cent at the rate of six per cent from the date of the mortgage given to secure-the fifty-five per cent and interest

Before the compromise was completed, and on the 17th of April, 1883, William Adams, who is a son of the debtor Henry Adams, made and entered into a further agreement unknown to-the other creditors with the Second National Bank of Fall River in these words and figures :

“ This agreement witnesseth that, for value received, I, William Adams, do hereby covenant and agree that on the completion of a composition deed now proposed by R & H. Adams with their creditors, or other settlement had, I will purchase the interest of the Second National Bank of Fall River, Mass., which holds note-of the said R & H. Adams for $5,000, due October 17, 1882, in-so much and such part of the interest of said creditor in the net. profits or earnings of the business as is provided in said composition deed, in addition to the fifty-five per cent to be paid, and that I will give therefor my notes aggregating ten per cent of said claim; that is, one note for five per cent of said claim, payable in one year, and another note for five per cent payable in two years, dated on the day of the completion of the above mentioned composition deed, or other settlement And these presents shall bind my heirs, executors and administrators. And I covenant and agree and. hereby promise to give my notes as aforesaid and complete said purchase, and, in the event of my failure to give such notes, I hereby agree to and with each of said creditors to pay them ten per cent in cash on the amount of their respective claims.

“ Witness my hand and seal, at the city of New York, this 17th day of April, 1883.

“(Signed) William Adams.

“ In presence of

“E. W. Orvis.”

And on the same day, and apparently on account of this additional agreement, the bank became a party to the compromise-agreement And after that received the notes mentioned in each of these agreements. And the evidence supports the conclusion that the debtor, Henry Adams, at the time of the execution of the-agreements, understood that this second instrument was made and delivered by William Adams to the person who, as agent for the-bank, acted for it in this business. For he then, with his initials,, subscribed, or attested, the correctness of this instrument:

“April 17, 1883.

“ Henry Adams says he will see that the notes given by Will

p. 399

iam Adams, in settlement of the affairs of R & H Adams, will be paid at maturity.

“H. A.” “0. E. 0.”

It is not necessary to determine the controverted point, whether this created a legal obligation on the part of Henry Adams, binding him to the payment of the notes. For if the notes given by "William Adams secured to the bank a pecuniary advantage beyond that provided for the other unsecured creditors, that rendered the .composition agreement fraudulent, and entitled the plaintiffs to have it set aside.

It has been objected that these plaintiffs were not such unsecured creditors. But the fact is clearly otherwise. It was so alleged in the complaint, and the answer of the defendant answering stated them to be such. And the fact that they became parties to the composition agreement supports that statemenL And so does the omission to present this objection upon the trial. The question is, therefore, in the case whether a greater and further advantage was in this manner secured to the Fall River Bank than that which was provided for the other creditors.

And that there was seems to result from that part of the composition agreement relating to .the additional ten per cent. For there was no absolute obligation on the part of Henry Adams to pay the ten per cent. But at the most it was to depend upon the fact that he should become entitled to the amount as the profits or earnings of a business in which he should become a member. If he did not, then there was no obligation whatsoever to pay the ten per cent, or any part of it; whether it ever should be payable depended upon two contingencies. And they were that he should afterwards become interested in or connected with a business of some firm, and that he should become entitled to so much of the net profits or earnings of that business. These contingencies were intended to be avoided by the notes of William Adams. And they were avoided in form at least when the notes were given, as they were with the others for the fifty-five per cenL That William Adams was not at the time a responsible person does not change the effect of the transaction.

For the notes were offered as preferable to the uncertainty of the realization of the ten per cent, and were so accepted and re- , ceived. They were regarded as the most valuable, inasmuch as there was a probability that the circumstances of the maker would improve, ana their payment could be enforced against him when they should mature and become due. They gave the creditor receiving them the chances of an advantage not secured to the other unsecured creditors. And that was a fraud upon these other creditors, entitling them to avoid the composition agreement. Solinger v. Earle, 82 N. Y, 393 ; Zoebisch v. Von Minden, 47 Hun, 213 ; 13 N. Y. State Rep., 349 ; White v. Kuntz, 107 N. Y., 518 ; 12 N. Y. State Rep., 297. The judgment should therefore be reversed and a new trial ordered, with costs to the plaintiffs to abide the result.

Van Brunt, P. J., and Lawrence, J., concur. _