King v. Wilcox — 11 Paige Ch. 589

Majority

p. 589

King and Swift vs. Wilcox and Sawyer.

Headnote

Where the owner of a house and lot, which was subject to two mortgages thereon, conveyed it absolutely to his brother-in-law, for the purpose of defrauding the creditors of the grantor, and the grantee subsequently went into possession, and réceived'the rents and profits, and made some improvements thereon, and paid and took an assignment of the mortgages ; Held, that a subsequent creditor of the fraudulent grantor had a right to file a bill, to set aside, the fraudulent conveyance, and to have the proceeds of the property applied to the payment of his debt, after paying the amount due upon the mortgages, and the value of the improvements made by the fraudulent grantee upon the premises.

Held further, that in taking an account of the rents and profits of the premises received by the fraudulent grantee, to be offset against the amount due to him upon the mortgages, he should not be charged with that part of the rents and profits which had arisen exclusively from his own improvements.

Where a voluntary conveyance is made, and received, with the actual intention of defrauding existing creditors of the grantor, it is not such a conveyance as will protect the property, in the hands of the fraudulent grantee, against the claims of subsequent creditors of the grantor. But such subsequent creditors are not entitled to the benefit of improvements made upon the property by the fraudulent grantee, so far as the value of the property is actually enhanced by such improvements.

This was an appeal, by the defendants, from a decree of the vice chancellor of the eighth circuit, setting aside a conveyance, from the defendant Wilcox to his co-defendant. Sawyer, as

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fraudulent and void, as against the creditors of the grantor. Previous to the fourth of July, 1828, Wilcox was the owner and in the actual possession of the premises in controversy, a house and lot in Rochester, subject to two small mortgages. On that day he executed a conveyance of the premises to Sawyer, his brother-in-law, for the alleged consideration of $1800.. The deed Wilcox acknowledged and caused to be recorded in September thereafter. Wilcox continued to occupy the premises until he removed from the state about five years after-wards, with the exception of one year, when the premises were rented by him. In January, 1829, Sawyer executed to Wilcox a power of attorney, authorizing him to mortgage or lease the premises, for any 'sum or sums of money, or for any time or term of years which he might deem fit; or to sell and convey the premises to any person, if he should think proper to do so. Under this power Wilcox mortgaged the -premises to Sibley & Field, in February, 1829, to secure a debt of his own to them, of $440. At the time of the date of the deed, in July, 1828, Wilcox owed about $1200, in addition to the two mortgages then upon the premises, and had no other visible property; which debts could not be collected.. In 1831 a judgment was entered in the supreme court, upon a bond and warrant against Wilcox, in favor of the complainants, given to secure them as his sureties upon notes which were made subsequent, to the deed of July, 1828; on which judgment there remained due to them, in March, 1836, about $740, for payments which they had been compelled to make upon two of the notes. For the amount thus due, they issued an execution to the sheriff of Monroe county; but Wilcox had no property on which the execution could be levied, except the premises specified in the deed to Sawyer. In July, 1833, Sawyer paid the amount of the mortgage given to Sibley & Field; and he paid and took an assignment of the two mortgages which were upon the premises previous to the conveyance of July, 1828. In July, 1833, he went into possession and made some improvements, and was in possession of the premises at the time of filing the bill in this cause, the latter part of March, 1836. In 1835, the complain*

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ants employed J. C. Swan to endeavor to obtain satisfaction of their debt, from the defendant Wilcox, who then lived at Cleveland. Swan made a conditional bargain to take certain village lots in Michigan, provided the transaction was ratified by the complainant. This transaction the defendants contended amounted to a satisfaction of the amount due upon the judgment. The cause was heard upon pleadings and proofs. The .vice chancellor decided and decreed that the deed of July, 1828, from Wilcox to Sawyer, was made to defraud the creditors of Wilcox, and was fraudulent and void as against the complainants, and should be set aside; that the interest of Sawyer in the premises was a mere mortgage interest, to the extent of the three mortgages mentioned in the pleadings,- and that having entered into possession under the fraudulent deed he was not'entitled to payment for his improvements. He directed an account, therefore, of the rents and profits and of the amount due on the mortgage; and that, upon the payment of the balance which might be found due to Sawyer upon the mortgages, the complainants should be substituted in his place as to the amount thus due, and that the premises be sold by a master for the payment of the amount thus found due, and the amount due to the complainants on their judgment; and that the defendants pay to the complainants their costs of this suit.

J. W. Gilbert, for the appellants.

If the conveyance in question be deemed fraudulent as to creditors, at the time of its execution, the complainants being subsequent creditors, cannot impeach it, without showing express fraud. (1 Dane’s Ah. 628, .620. 12 Ves. 14T, 155.) The defendant Sawyer is a bona fide purchaser, and entitled to be protected as such. The consideration was good. (1 R. L. 77 § 6. Jackson v. Peck, 4 Wend. 304 . Seward v. Jackson, 8 Cowen 406.) If the conveyance was fraudulent in fact, the onus was upon the complainant to prove that Sawyer took with notice. (Seymour v. Strong, 1 Hill, 563 .) Notice is effectually disproved by the answer. (Woodcock v. Bennett, 1 Cowen, 743. Cunningham v. Freeborn, 11 Wend. 240 .) The transaction between Swan, the

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agent of the complainants, and Wilcox, in 1836, was an accord and satisfaction. (Chit, on Cont. 275. Hunt v. Silk, East, 448. Commonwealth v. Henderson, 15 Mass. 329 .) The bill concedes that Sawyer is a bona fide mortgagee in possession. As such he is entitled to be credited in his account with interest, and all expenditures for repairs, improvements, taxes .and assessments. (3 Powell on Mortgages, 956.)

N. Sawyer, for the respondents.

The deed from Wilcox to Sawyer was executed to hinder, delay and defraud creditors, and is therefore void. The complainants, as subsequent creditors, have a right to impeach it. The power of attorney given by Sawyer to Wilcox, vested in Wilcox the legal interest in the pro'perty as to his creditors; no consideration having been actually paid by Sawyer for the lot. The law will imply a trust in favor of the creditors of Wilcox. If the deed is void, our judgment is a lien, and we are entitled to come here to remove the fraudulent incumbrances; even without execution. Sawyer is bound to account for the rents and profits from the date of the deed. The possession and interest of Sawyer commencing in fraud, he is not to be allowed for any advances made, or improvements put upon the premises, they being done in his own wrong and at his peril. As the complainants called upon Sawyer, before the commencement of the suit, and informed him of their rights and asked discovery, &c., he must pay the costs of suit.

Swan had no authority to make the settlement which is set up as an accord and satisfaction. If Swan originally had power to make this settlement, such power was virtually revoked by the commencement and pendency of this suit, of which Wilcox had notice. The commencement of the suit altered the state of facts existing when the power was conferred, and this change being known' to the defendants, and unknown to Swan, the settlement made with him under such circumstances was a fraud. Wilcox, in any event, practised a gross fraud upon Swan in getting the notes. The agreement was not, by its own terms, to be binding, unless approved by the complainants; and it is, therefore, not

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binding, because they never have affirmed it. The appointment of a new attorney here, to issue execution and enforce the judgment, implies a revocation per se 'of the authority of any prior attorney. ( 6 Pick. 198 .) The notes, given up by Swan, are of no validity, being merged in the judgment; and no authority was given to Swan to cancel the judgment. Such authority must have been by deed, and must be clearly proved. ( 1 Tenn. 209 . 6 John. Rep. 51 . Gary and Morgan v. Turner, 6 Ld. Ray. 331. Theobald on Principal- and Surety, and Principal and Agent, 221.)

I have no doubt, from the evidence in this cause, that there was actual fraud in the conveyance of July, 1828; and that the whole of the transactions between the defendants in relation to the premises, were intended to hinder, delay and defraud the creditors of Wilcox, and to prevent them from collecting their debts out of the premises in question. The reasons assigned in the opinion of the vice chancellor for coming to that conclusion, are perfectly satisfactory to my mind upon that point. The vice chancellor is also right in supposing that the alleged compromise of the complainants’ debt, by the bargain made with Swan, and the conveyance of the worthless Michigan village lots, which bargain was never ratified by the complainants, did not amount to an accord and satisfaction of the amount due them upon their judgment. The whole of that transaction was a gross fraud attempted to be practised upon the complainants and their agent; and if the notes which were delivered up had been valid securities, and the transaction had taken place in this state, Wilcox would have been liable to indictment for obtaining such notes by false pretences, and false representations in relation to the nominal village of Ionia.

The only remaining questions to be considered, therefore, are whether the complainants, whose debts were contracted subsequent to the fraudulent deed of the premises, were éntitled to a decree declaring such deed fraudulent and void as to them, as well as to those who were creditors previously? And whether the provisions of the decree were right in reference to the rents

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and profits of the premises and the improvements made thereon by the defendant Sawyer, subsequent to July, 1833, when he took possession 7

There appears to have been much conflict of opinion among the judges of different courts, in England and in this country, whether all voluntary conveyances, without a valuable consideration were, not void, under the provisions of the statute, 13th Eliz. ch. 5, as to creditors whose debts existed at the time of the conveyance'; some holding that the existence of such indebtedness rendered the voluntary conveyance constructively fraudulent as to pre-existing debts, without reference to the amount of such debts, or the value of the debtor’s remaining property; and others holding that the existence of such debts was merely prima facie evidence of fraud, which might be rebutted by proof that there was in fact no intention to defraud. And those who held that the conveyance was absolutely void as to pre-existing debts, seeing the injustice of applying the same rigid rule of construing the statute in reference to debts subsequently contracted, necessarily made a distinction between a conveyance actually fraudulent as to creditors, and one which was constructively fraudulent as to debts previously existing. This distinction is maintained by Chancellor Kent, in the case of Reade v. Livingston, (3 John. Ch. Rep. 481,) who held a voluntary conveyance to be constructive and conclusive evidence of fraud in relation to pre-existing debts. Upon a full examination of all the cases, the legal principle appears to be established, that where a voluntary conveyance is made and received with an actual intent to defraud the then existing creditors of the grantor, it is not a bona fide conveyance, which can protect the grantee against the claims of subsequent creditors. This was clearly the opinion of Chancellor Kent in the case just referred to. And Mr..Justice Story says, “where the conveyance is intentionally made to defraud creditors, it seems perfectly reasonable that it should be held void as to all subsequent, as well as to all prior creditors; on account of ill faith.” (1 Stor. Eq. 352, § 361. See also 1 Dana’s Rep. 533; 2 Pick. Rep. 411 ; Palm. Rep. 415; 4 Day’s Rep. 284; Mason v. Rogers, 1 Root’s

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Rep. 324.) The vice chancellor was, therefore, right in setting-aside this conveyance as fraudulent, in reference to the judgment of the complainants and the two notes; which notes they signed as sureties for Wilcox, while he remained in possession of the premises and exercised acts of ownership over the same.

I think, however, there is a slight error in the decree in reference to the rents and profits, and the improvements. So far as respects the mortgages, the rents and profits are unquestionably an equitable offset, after deducting for taxes and assessments, except such part of the rents and profits as have arisen exclusively from improvements made by Sawyer; who is treated as the assignee of the mortgages in possession of the mortgaged premises. The decision of Chancellor Kent, in the case of Moore v. Cable, (1 John. Ch. Rep. 385,) went to deprive the mortgagee in possession of the benefit of improvements made upon the land, without the consent of the owner of the equity of redemption, except so far as to give him the benefit of the increased rents and profits arising from such improvements. In this case, however, the complainants were not the owners of the equity of redemption in the premises, but only had a lien thereon to the extent of their judgment. And if the defendant Sawyer has made permanent improvements, which will enhance the value of the premises, and enable the complainants to obtain a greater sum, upon the sale, towards satisfying their judgment, than they could have obtained if those improvements had not been made, it is but equitable that he should be allowed therefor.

The decree appealed from must, therefore, be modified, so far as to direct the master in taking the account of the rents and profits, not to charge the defendant Sawyer with the increased rents and profits which have arisen exclusively from the improvements made upon the premises by him. The master must also be directed to inquire and report how much the actual value of the premises is increased, by reason of permanent improvements made by Sawyer, which are still remaining on the premises, beyond what such value would now have been, if .those improvements had not been made. And the decree must

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direct that such increased value, as reported by the master, be first paid to Sawyer out of the proceeds of the master’s sale, after deducting therefrom, by way of offset, the costs allowed to the complainants, by the decree.

With this modification, the decree of the vice chancellor is affirmed with costs.