Smith v. Smith — 49 N.Y. St. Rep. 398

Majority

p. 398

Gideon F. Smith, Assignee, Resp’t, v. W. Frank Smith, App’lt.^[1]

(Court of Appeals,

Filed December 23, 1892.)

Headnote

Assignment bob cbeditobs—Fictitious debt.

The firm of M. & N. were successors to M. & H. H. sold out his interest in the property and business to N. The firm of M. & H. then owed one M. $500, which the new firm assumed, and to secure which the new firm gave a note to H. M. & N. afterwards made an assignment for the benefit of creditors, and preferred H. for the amount of the note given, and in the inventory the debt was specified to be on the note held by H. Held, that the pi eference was not fraudulent, as M. had the right in equity to be subrogated to the rights of H., and so the insolvents were really preferring the debt of all to M.

Appeal from judgment of the supreme court, general term, second department, affirming a judgment for plaintiff, rendered on report of referee.

Nathan D. Petty, for app’lt; John M. Perry, for resp’t.

The plaintiff was the assignee of the members of the copartnership of Mosbacher & Rewey, insolvent debtors, and the defendant, as deputy sheriff, under an execution issued upon a judgment against that firm, seized upon the assigned property and sold it, whereupon plaintiff sued as for a conversion.

The defendant, who is the appellant here, presents but one-question deserving of our consideration. It seems that a preference was given in the instrument of assignment to -Arthur G. Howell, which, upon reference to the inventory and schedules-filed, is described as being on a promissory note made by Mosbacher & Rewey to Howell. The evidence showed that, originally, Howell was a partner with Mosbacher, and upon the dissolution of their firm, by the retirement of Howell, a new firm was formed by Mosbacher with Rewey. There was, at that time, an existing indebtedness from the original firm to Masury, for $500, and the new firm agreed by a writing to assume its payment. According to Mosbacher’s evidence, the note/ for $500, for which

p. 399

Howell was preferred in the assignment papers, was given by him and Uewey as security to Howell for the note held by Masury against Howell & Mosbacher (the former firm).

It is true Howell swore he never received a note, but the referee -chose to believe in the making of the note, found it as a fact, and we must so accept it. The appellant contends that this preference to Howell was fraudulent as to the creditors of the assignors, inasmuch as no debt was in fact owing from the assignors to Howell.

It is undoubtedly true that a provision in an assignment for the benefit of creditors for the payment of a fictitious debt is a sufficient indication of fraud to warrant the avoidance of the assignment, for such a provision operates to deprive the creditors of property which should go towards paying their claims. But in the present case, while no debt was actually due to Howell by the assignors, nevertheless, it cannot be said that the provision was for the payment of some fictitious demand.

The assignors owed a debt to Masury, which the note to Howell in fact represented, and which was given to secure Howell against. Howell, as a member of the former firm, was, of course, also liable for the payment of that debt I think that Masury would have the right in equity to demand to be subrogated to the rights of Howell in the insolvent proceedings, and to stand in his place under the assignment upon the distribution of "the assignor’s property, Under these circumstances, in preferring the payment of Howell’s note, the insolvent assignors were really preferring the debt of all to Masury. If, pending the proceedings, Howell discharged that debt, he would be entitled to claim reimbursement through the provision in the instrument of assignment; while if he had not done so before the distribution of the assets, Masury would be entitled to be substituted in his stead for payment. Thus a debt which was honestly due from the insolvents would be discharged and no property of the debtors would have been withdrawn from distribution among their creditors.

For these reasons, I think the judgment appealed from was right and should be affirmed, with costs to the respondent to be paid by the appellant.

All concur.