Smith v. Wise — 43 N.Y. St. Rep. 719

Majority

p. 719

Martin V. B. Smith et al., Resp’ts, v. Charles Wise et al., App’lts.^[1]

(Court of Appeals, Second Division,

Filed March 15, 1892.)

Headnote

1. Assignment for creditors—Fraud.

An assignment was made under an arrangement, which was carried out, that the assignee should sell the stock to H. for money furnished by a preferred creditor, and that H. should carry on the business for the benefit of assignor and said creditor in his own name. Held, that these facts made a case of actual, positive fraud as against the creditors, and made the assignment void ah initia, and afforded no protection to the assignee to the prejudice of such creditors.

■%. Same—Disbursements of assignee.

The statutory provision allowing the assignee to account for the estate received by him, “lessany lawful disbursements made or incurred” by him, does not extend to credits for disbursements beyond those which would be treated as lawful without its aid.

3. Same.

After paying the wages of the employees, and before this action was commenced, the assignee paid a debt due the Irving National Bank, a preferred creditor. Held, that the payment was made when the debtor was at liberty to make it, and when the direction as such to the assignee was operative. The amount, when so paid, passed beyond his control, and the bank, being a bona fide creditor, could retain it as against the other creditors, and the assignee should be allowed the amount paid.

Appeal from judgment entered on order of the general term ■of the supreme court in the first judicial department, modifying, and affirming as modified, the final judgment, and to review the judgment entered on order of the general term affirming the interlocutory judgment entered upon the decision of the special term.

The action was brought to set aside the assignment of the defendant, James White, for the benefit of his creditors, to the defendant, Charles Wise, as fraudulent against such creditors.

The assignor was engaged in the business of manufacturing -shoes in the city of Brooklyn. He made the assignment April

p. 720

22, 1886. The plaintiffs then being creditors, afterwards, in May,, June and July following, recovered judgments against him, and. on July 14 commenced this action.

The defendant White did not answer. The trial of the issues'made by the answers of the other defendants resulted in a- decision of the court that the assignment was fraudulent and void as-against the creditors óf White, followed by a judgment vacating the assignment, appointing "a receiver to take possession of the property, and a referee to take and state the accounts of the defendants. The defendants Wise constituted the film of L. & C. Wise, a creditor of White for considerable amount, and by the-assignment given-a preference preceded after that for wages of employees only by a debt represented by notes of White, endorsed! by L. & C. Wise, held by the Irving National Bank. The trial court found that the assignment was made pursuant to arrangement between the parties to it, that the assignor and his wife-should have and derive from it certain benefits and advantages int fraud of his creditors; and that shortly after the assignment was-made, and to carry out such an arrangement, the assignee sold the-stock and'property in the shoe factory to the defendant Hirsch that such sale was colorable only, and the defendants Wise furnished the money to make it; and that the business was carried oni for their benefit in the name of Hirsch. By the judgment, the-sale to him was also set aside. And the referee, in stating the-accounts of the defendants, charged them with the property, and gave them credit for only the amount'of $760.59, paid by the assignee to the workmen in the factory for services performed prior to the assignment And exceptions, taken to the disallowance to the assignee of certain items, of credit claimed by him were heard at special term, and exception to the disallowance of the amount paid by the assignee to the Irving National Bank in satisfaction of the notes held by it, and before mentioned, was sustained, and the other exceptions, save one, were overruled. On appéal by both the plaintiffs and deferidants to the general term, the order of the special term, so far as it sustained such exceptions, was reversed, and in other respects affirmed. The payments disallowed, and for which the assignee claims he should have credit, are:

1. The payment to appraisers for appraising the stock,

machinery, etc., in factory, of................ $150 OO

2. The payment to counsel for legal services rendered

to the assignee............................. 1,500 00-

3. The payment for feed for horses, rent of factory,

labor, etc.................................. 451 25-

4. The payment to Irving National Bank of debt pre-

ferred in the assignment..................... 4,871 94r

Further facts to which reference may be deemed necessary appear in the opinion.

Otto Horwiiz, for app’lts; Alex. Blumenstiel, for resp’ts.

The case presented by the facts as found by the trial court was one of fraud in fact as against the creditors of the assignor and chargeable to both parties to the assignment; and such findings essential to the conclusion that the assignment was-fraudulent and void as. against such creditors were supported by the evidence.

And by it the inference was warranted, as the fact was found., that to consummate the plan and purpose with which the assignment was made, to continue the business for the mutual benefit and advantage of the assignor and the defendants Wise, the sale of the stock, property and machinery of the factory was made by the assignee Wise to the defendant Hirsch; and that such sale was fictitious and made and intended as a cover to the business, to be carried on with the property for the benefit of the other defendants pursuant to the design contemplated when the assignment was made, to the end that the assignor might realize a benefit to himself out of the assigned estate. The conclusion of th& trial court was warranted by the evidence and the interlocutory judgment entered on its decision was properly affirmed by the general term.

Other questions arise on the appeal presenting for review the-accounting represented by the referee’s report. The evidence-taken at the trial was not, nor was that taken before the referee, in the record upon that appeal to the general term. The findings-of the trial court as well as those of the referee were there. The-facts represented by the record supported the view of the general term that this case was one of actual, postive fraud as against tliecreditors of the assignor on the part of both him and the assignee. It followed that the assignment was on its vacation properly treated as void ab initia, and as a consequence it afforded no protection to the assignee to the prejudice of such creditors. Sands v. Codwise, 4 Johns., 536 ; Davis v. Leopold, 87 N. Y., 620 ; Swift v. Hart, 35 Hun, 128 . The referee allowed to him the amount paid the workmen in the factory for services performed prior to-the assignment and the additional value given to the stock by working it after the assignment, so as to give the creditors the-value only of it as of' that tima The referee found that the-various sums claimed to have been expended by the assignee, except that so allowed, were paid out in pursuance and furtherance of the scheme to defraud the creditors of White. And we-think that none of them other than that paid to the Irving National Bank require any special consideration. It is urged that theassignee’s right to allowance of his disbursements is preserved by the provisions of the decree entered upon the decision of the special term, to the effect that, the defendants should hand over to the receiver all the property of the assigned estate “ and likewise account and pay over all the income, profits and benefits-thereof received by them, or either of them, less any lawful disbursements made or incurred by said assignee.” That provision has. not been construed to extend the right to credits for disbursements beyond those which would be treated as lawful without its

p. 722

..aid. We see no error in the disallowance of the assignee’s claim for disbursements as such.

Before this action was commenced the assignee paid to the Irving National Bank the debt due to it and which was, firstly, •after wages of employees, preferred in the assignment,amounting to $4,871.94. There would .have been no Question about his right to credit for the amount so paid the bank if he had not been chargeable with actual fraud in the transaction of making the .assignment, although it were set aside as fraudulent against the ■creditors of the assignor. Wakeman v. Grover, 4 Paige, 23; Ames v. Blunt, 5 id., 13; Collumb v. Read, 24 N. Y., 505 .

If this were a tortious intermeddling by Wise with the property of White it would be seen that he could have no protection whatever in the disposition of it or its proceeds ;• and if such was the legal effect of the vacation of the assignment the consequence. would be the same. But that cannot be so. His possession was .derived from the assignor and taken with his assent and was lawful. When the assignment was set aside for actual fraud of the parties to it, he was as to creditors treated as never having had title under the assignment, and therefore no rights dependent upon title were as against them available to him. The other disbursements referred to were made by virtue of power dependent ■upon title or the right to possession of the property which rested an the transferring clauses of the assignment The payment to the bank was by the direction of the assignor expressed in that instrument. It was made when the debtor was at liberty to make it, and when the direction as such to the assignee was operative. The amount when so paid passed beyond his control, and the bank being a bona fide creditor could retain it as against the other ■creditors. Knower v. Bank, 124 N. Y., 552 ; 37 St. Rep., 89 .

While it is said an assignee chargeable with participation in the .fraud cannot effectually assert any equity in his behalf, he may have rights which courts will recognize, arising out of his relation to the property taken by virtue .of a fraudulent assignment so far ■as they are consistent with those of the creditors of the assignee, .and do not prejudice them. Loos v. Wilkinson, 113 N. Y., 485 ; 23 St. Rep., 282 . The rights of creditors may be preferential, may be made so by voluntary payment, or may result from the greater vigilance of some than other creditors. In the present ■case the bank had the benefit of the direction by the debtor of a preferential payment to it, and the execution of the direction. The .assignee should be allowed the amount so paid unless the fact that his firm had endorsed the notes held by the bank denied to him the right to such allowance for the reason that otherwise a benefit would result to him from the appropriation of so- much of . the assigned estate.

There may be some apparent force in that view in its bearing upon the policy of the law to permit the adoption o.f no rule which may tend to encourage fraud. But no benefit to the assignee was ■■directly derived from the payment, although it had the effect to relieve him from a contingent liability^. Nor was it an appropriation of the assigned property to the benefit of the assignee in the

p. 723

sense which, furnishes a reason for charging him in behalf of other creditors as for misappropriation of the amount of the fund so> paid to the bank, a creditor of the assignor. He had and executed, the direction of the debtor White to pay the bank debt out of the-property of which his possession was then lawful. Murphy v.. Briggs, 89 N. Y., 446 , 451. The view of. the general term, in accord with that of the referee, that the defendants should be charged, with the expenses of the accounting, seems to dispose of that question. The construction of the provision of the interlocutory judgment to the effect that out of the proceeds and the property in the possession of the receiver “ after deducting the legal fees, and expenses of the said receiver and of the said reference the said receiver pay to the plaintiffs” the amounts of their judgments, against Smith, is not necessarily that which is contended for by the defendants. While it apparently provides for taking the expenses of the reference out of the estate, its purpose may have been the protection of the receiver in paying them out of the fund, and without any view to the relief of the defendants from such, expenses. The case was not necessarily an improper one for charging them with the disbursements of the action; and this is-done by a subsequent provision of the same judgment. There is-no occasion to interfere on this review with the conclusion of the court below on the subject of those expenses.

The final judgment should be modified by deducting from the amount with which the defendants are there charged the sum of $4,871.94 paid by the assignee Charles Wise to the Irving National Bank and interest from April 22, 1886; and in other respects the judgments should be affirmed.

All concur; Follett, Oh. J., in result