Bell v. Leggett's Executors — 4 N.Y. Super. Ct. 450

Majority

p. 450

Bell, Survivor, &c. v. Leggett’s Executors.

Headnote

Under the bankrupt act of 1841, a friend of a person applying for his discharge as a bankrupt, may buy the debt of an opposing creditor, so as to remove such opposition ; provided the bankrupt himself is neither a party, nor privy to the arrangement, and his effects are not to be made liable for the purchase.

Accordingly, where a bankrupt debtor applied for his discharge under the act, which discharge was opposed, and thereupon the father-in-law of the petitioner, without his knowledge or connivance, arranged with the opposing creditors to give them his own notes, in satisfaction of their claims, and to take an assignment of their judgments against the bankrupt, as soon as the bankrupt should receive his discharge; and, in pursuance of that arrangement, the opposing creditors withdrew their opposition, and the bankrupt obtained his discharge ; Held, that such notes were valid, and upon a sufficient consideration, and that an action lay thereon.

March 14, 15;

April 28, 1849.

This was an action of assumpsit brought by the plaintiff, as survivor of Jacob Harvey, upon two promissory notes made by Samuel Leggett, deceased, dated December 12,1845, one for the sum of $579 37, payable in six months, and the other for the sum of $586 41, payable in nine months. The defendants are the executors of the last will and testament of Samuel Leggett.

Upon the trial, the notes were read in evidence, and proved. The plaintiffs proved by the counsel of the testator, that he received from the testator the notes in suit, together with several others, to be delivered to the plaintiffs upon their executing to him assignments of certain judgments which they held against Barney Corse, a son-in-law of the testator; that Corse was at that time an applicant for a discharge under the bankrupt law, and the notes were to be delivered when he should receive his discharge. The notes were delivered to Mr. Gerard, the counsel for the plaintiff, after the discharge of Corse, and the assignments of the plaintiffs’ claims against Barney Corse were delivered to the counsel for the testator. The assignments bore date November 12, 1846.

The plaintiffs then rested, and the defendants offered to show by .way of d^npe, that the consideration of the two notes in

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suit was the withdrawal by the plaintiffs of their opposition to the discharge of Barney Corse from his debts, under the bankrupt law, which discharge Corse was then applying for, and which the plaintiffs opposed as judgment creditors. The plaintiffs objected to the evidence, but the court admitted the evidence.

It appeared in evidence, on the part of the defendants, that Barney Corse filed his petition in bankruptcy on the 23d of February, 1842. That the plaintiffs, with two other judgment creditors, filed their dissent, June 12, 1842, and also their objections to the discharge of the petitioner. The opposing creditors proved their debts in due form. The ground of objection, on the part of the opposing creditors, was that a debt of $100,000, set up by Barney Corse upon a bond executed to his father, was a false and fictitious debt. The issue thus raised was tried before a jury, in June, 1843. Upon this trial, the jury disagreed.

A venire de novo was awarded, and a second trial had, when the jury again disagreed. A third trial resulted in a verdict against Mr. Corse. An attempt was made to get rid of the verdict, which was unsuccessful. Subsequently, and in the year 1845, the testator, Samuel Leggett, left with his counsel, the notes in suit, with other notes, which were to be delivered to the plaintiff and the other opposing creditors, upon Corse receiving his discharge, and on such creditors executing to him assignments of their claims against Barney Corse.

The counsel of Samuel Leggett testified, that the counsel of the opposing creditors knew of the notes having been left with him, and the terms on which they were left; that they consulted together about the best way to get the judge to grant the discharge ; and finally, that a consent was given to withdraw all opposition. The discharge was obtained, April 27, 1847. Afterwards, and on the 20th of May, the notes were delivered by the counsel of the testator, and he received the assignments. The witness further testified, that he stated to the counsel of the opposing creditors the terms on which he had received the notes, and that all objections to the discharge of Corse were „ thereby removed.

It was admitted, that Barney Corse was not a party to the

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arrangement made by Samuel Leggett, and that it was made without his connivance, collusion, or Knowledge.

It was contended, on the part of the defence, that the notes being given in consideration of the withdrawal of opposition on the part of the plaintiff, to the discharge of Barney Corse, were void, as being against public -policy.

The judge, reserving the questions of law, submitted the facts to the jury, to determine whether the withdrawal of the opposition of the plaintiff to the discharge of Barney Corse under the bankrupt law, formed a part of the consideration of these notes, instructing them, if they found the fact so to be, to bring in a verdict for the defendants. To which decision and charge, the plaintiff excepted. The cause was thereupon submitted to the jury, who found a verdict for the defendants.

T. C. T. Buckley, and J. W. Gerard, for the plaintiff.

I. The purchase of a judgment from an opposing creditor, by a stranger, without the knowledge, privity, or assent of the bankrupt, and the consideration not to come from the bankrupt or his assets, is not rendered void, either by the bankrupt act, or by any principle of the common law, as being against public policy.

II. Whether the time on which the note is to run, given by the stranger for the consideration of the judgment, dates from the day of the purchase, or the day when the bankrupt may get his discharge, makes no difference. If the note is good in the first case, it is equally so in the second. In both cases, the motive to continue the opposition would fall to the ground by the act of purchase. The notes were not given for any bonus for withdrawal of opposition, or even for the amount of the debt, but for less than 15 per cent, of the debt. (5 Taunt. 117 ; 1 Pr. Wms. 620.)

III. The cases in which notes were given for withdrawing opposition to an insolvent or bankrupt’s discharge are void, are where the agreement is made by the bankrupt, or with his privity, or where his assets are to go the creditor for his withdrawal of his opposition. (Kaye v. Bolton, 6 T. R. 34; Bankrupt Law of 1841, sec. 4 ; Jackson v. Davison, 4 B. & A. 691.)

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As a perfect test of the legality of the notes, could Barney Corse’s discharge be defeated on account of the transaction, by any creditor ? If not, the notes cannot be impeached. ( 3 Denio, 10 ; 1 Ibid. 195; 2 Metcalf, 57; 3 Story R. 507; 10 Alabama R. 523.)

IV. If the law is otherwise, and as the judge ruled it, there is no proof that the withdrawal of the opposition was part of the bargain or consideration of the notes; such inference cannot be raised from the mere fact that the notes were to be dated when the discharge was obtained.

V. No such inference could be deduced from the acts of the counsel of the opposing creditors.

VI. On a question of the transaction being against public policy, the court and jury should look at the whole transaction.

After a third trial, the jury found that the bankrupt had admitted the mortgage as a false and fictitious debt. In July, 1845, the highest possible evidence was given, that that could not have been, for the very mortgage was foreclosed, and property to the amount of $100,000, was transferred under it, and the validity of the mortgage unquestioned. It was after this, that the plaintiffs sold their judgments, and the opposition was withdrawn by the counsel.

VII. The acts of the counsel of Messrs. Bell and Harvey, after the month of December, 1845, could not take away the prior vested rights of the plaintiffs.

If the transaction was good when the notes were made, no subsequent acts or declarations of counsel could affect the plaintiffs ; especially when they were without their consent or knowledge.

VIII. The verdict was rendered by the jury, under a misapprehension that it was only a matter of form, and that the court was to settle the cause as on a case reserved. The jury were equally divided, and declared in open court, that they never could agree.

Wm. Kent, for the defendants.

I. The debt of the plaintiff against Barney Corse having been duly proved under the bankrupt proceedings, the remedy of the

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plaintiff was thenceforth confined exclusively to the dividend under the bankrupt proceedings; and the property assigned by Corse being obviously insufficient to pay the assignee’s expenses, the judgments of the plaintiffs were of no value whatever; and therefore the notes given by Samuel Leggett were without consideration.

II. The notes in suit having been given in consideration of the withdrawal of opposition by the plaintiff to the discharge of Barney Corse, under the bankrupt act, the notes are void, as contrary to the spirit of the bankrupt act, and as against public policy and public justice.

If the last mentioned consideration was not the sole consideration of the notes, yet they are void.

The principle has long been established in this state, by a series of authorities, that a security given by a friend of an insolvent, pending his application for a discharge from his debts, to induce a hostile creditor either to join in the petition for such discharge, or to withdraw his objections to its being granted, is void, as being contrary to the policy of the insolvent law. All the cases to which we have been referred, arose under the statute for discharging an insolvent from his debts, upon the application of two-thirds of his creditors; and in all, the arrangement was made by the insolvent himself, or through his intervention.

Our decisions were founded upon those made in England, under the bankrupt act 5 Geo. 2, by which the debtor was prevented' from obtaining his certificate, unless four-fifths of his creditors united in a petition that it should be granted. The act also made it unlawful for the bankrupt, or for any person, tó give any money or property to a creditor to induce him to sign the certificate. The subsequent bankrupt acts reduced to three-fifths the proportion of the creditors necessary for a discharge. Under these acts, it was held in England, nearly a century ago, and such has been the law ever since, that a bond given by a relative of the bankrupt to a creditor, who would not otherwise sign the certificate, was illegal and void. The decisions were in accordance with the positive enactment of the

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statute; but when a case arose, not within the provision, though against the policy of the act, Lord Tenterden said the security was not void, and a bona, fide holder might recover upon it. (Birch v. Jervis, 3 Carr. & P. 379.)

It will be observed, that in respect of the conjunction of a large proportion of the creditors in making a certificate effectual to discharge the bankrupt, the English bankrupt acts are entirely analogous to our statute for the discharge of an insolvent debtor, on the petition of two-thirds of his creditors. And the principle upon which preferences and purchased assents, should be deemed invalid, is equally applicable to both. There are cases in which securities have been adjudged void; but it is not, under the circumstances, necessary to advert to them in detail. All the authorities are founded upon one or the other of the grounds, that the payment or security made to the favored creditor, is contrary to the provision of the statute, detrimental to the rights or interests of third persons, oppressive upon the insolvent, or a fraud upon his other creditors.

In the instance of the bankrupt certificate in England, and the petition of two-thirds of the creditors under our insolvent act, the signature of each creditor by turn, has its influence upon others to whom the instrument is presented. It may induce some to concur by its example of generosity, and may lull the vigilance of others by its apparent assent to the justice of a discharge.

In instances of composition deeds and the like, which are parallel in principle, as well as in those last referred to, if the sum paid or promised to the favored creditor, be from the bankrupt’s own funds, it is a direct fraud upon the other creditors, in diminishing the dividend théy would otherwise receive. Or, if given after the discharge, on a promise or obligation made previously, it is an unfair advantage taken of the debtor ; and may be open to the remark, that it diminishes the chance of all the other creditors of receiving payment out of his future acquisitions, if he should be so honest as to discharge his moral .obligations. The late bankrupt act of 1841, has no provision analogous to those upon which we have commented, contained in our insolvent law and the English bankrupt acts. In the

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proceeding adverse to the bankrupt, each creditor was at liberty to act for himself, and could withdraw his proceeding, if he thought proper. When the bankrupt was the applicant, each creditor resisted for himself; and before he could oppose at all, it was necessary that he should prove his debt.

So far as the authorities adverted to, proceed on positive law, or on the supposed influence of signatures and names upon other creditors, it is evident they are not applicable in principle to the bankrupt act of 1841. The same thing may be said of all those cases which arose upon payments made, or securities given, out of the effects of the bankrupt or insolvent, obligatory upon him.

To apply these considerations to the case before us. The three judgment creditors had proved their demands, and opposed the discharge of Corse, with a prospect of ultimately defeating it. It seems probable there was no good cause for this opposition, but that is not material, as we regard the point. The testator, without the connivance or knowledge of Corse, and without any collusion on his part, arranged with the three creditors to give the testator’s notes for a portion of their debts, on receiving an assignment of the judgments ; the notes and assignments to be delivered by the depositary to the creditors whenever Corse should be discharged. The principal consideration for the notes, was the withdrawal of their opposition to his discharge. But how does this affect their validity ?

If when the notes were signed by the testator, in December, 1845, he had, for the same considerations, actually delivered them to the creditors, and received the assignments, there would have been no good objection to a recovery upon the notes. The testator, as the owner of the judgments, could withdraw the opposition founded upon them, and the agreement of the creditors to withdraw their opposition when they had ceased to have a right to make any, would be altogether idle and unmeaning.

Are the notes any the less valid, because they were to be retained by the depositary until Corse was actually discharged ? We have seen that the case is not within the principle of the insolvent act requiring two-thirds, and of the English bankrupt certificate.

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It is certain that the arrangement was not oppressive upon Corse, because he did not know of it, and was not to participate in it. It was no fraud upon his other creditors, for it is not shown that there was any other creditor who had ever put himself in a condition to oppose the discharge. If there were others who had proved their debts, and had stood back, relying upon these three creditors to fight the battle at their own expense, for the benefit of all the creditors ; we do not perceive that such others had any right to insist on the continuance of the warfare, or would be entitled to any sympathy, if it were terminated without their concurrence.

There is no aspect of the arrangement, in which it was detrimental to the rights or interests of third persons. It legitimately affected no one, except the testator, who was satisfied with the consideration he received. As to its sufficiency, we will speak presently.

Although, on the first statement of the case, we were under the impression that the spirit of the adjudged cases was against the plaintiff, we are satisfied on an analysis of their principles, that there is no good reason for holding that the acceptance of the notes was contrary to the policy of the bankrupt act, or against public justice.

We have found no authority which holds that a note thus given, without the procurement, connivance, or knowledge of the bankrupt, and in no manner affecting his property, present or future, is void. On the contrary, there is a decision of a distinguished judge, which in principle, appears to sustain an obligation given under such circumstances. In Winsor v. Kendall, (3 Story R. 507,) it was decided, that a payment made by a friend of a bankrupt, in contemplation of bankruptcy, out of his own funds, or in such a manner that the creditor had a right to suppose he was paying out of his own funds, and not out of those of the bankrupt, was not a fraudulent preference, within the meaning of the bankrupt act.

In England, where the bankrupt acts have been far more stringent than either of those enacted by Congress, it has been held, that a creditor may sell his debt to a friend of a bankrupt debtor, upon the terms that the creditor should sue out a commission of bankruptcy against the debtor. (Fry v. Malcolm, 5

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Taunt. 117.) And we perceive no good reason, why under the act of 1841, a friend of the bankrupt might not buy the debt of an opposing creditor, so as to remove such opposition; provided the bankrupt himself was neither a party, or privy to the arrangement, and his effects were not to be made liable for the purchase.

It is made a point, that the notes were without consideration. The assignment of the judgments was a sufficient consideration. We have no means of knowing, either that they were wholly worthless, or what circumstances induced' the testator to estimate them as valuable.

A new trial must be granted; the costs to abide the event of the suit.^[1]

(a) (a) In Fox v. Paine, (10 Alabama Rep., New Series, 523,) it was held, that the fact that the bankrupt, or some one for him, paid money to a creditor, to induce him to withdraw his objections to the bankrupt’s discharge, is not such a fraud as will render the certificate inoperative. The court considered the circumstance that under the English bankrupt acts, it was necessary that four-fifths, and after-wards three-fifths, of the creditors to consent in writing to the bankrupt’s discharge, as being the ground of the decisions relied upon by the defendant’s counsel, and as distinguishing the case before them from those decisions.