1-- APPELLANTS;' *Nov. 8.
(PLAINTIFFS)
*Dec. 30.
AND
MOSES RITTENBERG (DEFENDANT) . RESPONDENT. ON APPEAL FROM THE COURT OF KING'S BENCH, APPEAL SIDE, PROVINCE OF QUEBEC.
the judgment of the creditors has been influenced by the supposition " that they are treating on terms of equality as to each and all."
This is not a case of a gratuitous gift made after composition.
Here there was a previous secret understanding that the appellants should receive security for their debt and a direct advantage over all the others who were contracting on the assumption that all were being treated alike.
The notes sued on were given in pursuance of an agreement which was void as made in fraud of the other creditors of Grossman: Art. 990 C.C.; see also Ex parte Milner(5). S
J.-The appellants sued the respondent as indorser of six or seven promissory notes, remainder of ten ,or a dozen such, made by one Grossman and indorsed by respondent in order to satisfy the demands of appellants upon said Grossman, who had asked them to join in an agreement he was trying to obtain from a half dozen of his chief creditors for an extension of time. The agreement, as drawn up, had named one Eisen as one of the creditors intended to execute the agreement.
Eisen it turned out had no authority to sign being only an agent of the appellants..
This circumstance tends to confuse matters and the most has been made thereof.
But as appellants signed the agreement and Eisen did not and there can be doubt of what was intended to have been accomplished by the substitution of appellants for Eisen in the way of signing and in fact Idington J. I think was accomplished, the agreement should be treated as one of the ordinary kind for an extension by creditors of time to a debtor, who otherwise might be forced to make an assignment as an insolvent.
On such basis I agree with the late Mr. Justice Dunlop's construction of the clause in said agreement which reads as follows:- What was done was clearly a preference, and none the less obnoxious because an ingenious method was resorted to of extracting something from the assets without the assent of other creditors.
It was circuitous but partially effective.
The notes given on the basis of the extension were to have been, and I think in fact were, for three, six, nine and twelve months.
The appellants got, in substitution thereof, notes spread over some twelve months, indorsed by respondent, divided into equal sums but payable monthly. Thereby, unless (which is not pretended) the money could be conceivably got elsewhere than out of the debtor's assets mentioned in above clause, the appellants got an improper advantage over others they held themselves out as joining.
Then apart from the interpretation of the agreement the giving these notes was illegal.
It may be worth while to let those people, and others inclined to do the like, know what Vice-Chancellor Malins, an able English judge, thought was the law.
He, in the case of McKewan v. Sanderson(1), at page 234, spoke thus:- I give no opinion as to whether this is a proper case for law or equity, and I give no opinion as to the law or the equity.
That will have to be Idington J. considered hereafter; but the ground this plea is that there was an improper arrangement between the debtor and his creditor to the detriment of the other creditors, and the doctrine of this court is appealed to which was laid down so repeatedly by Lord Eldon, and finally in the case always referred to, of Jackman v. Mitchell(2). It a doctrine founded on the soundest principles, namely, that whenever there are proceedings in bankruptcy or insolvency, or any arrangement between a debtor and his creditors generally, and one the creditors stipulates either for the payment a greater dividend to him than is paid to the other creditors, for any collateral advantage whatever, even such as giving the right to purchase a horse, or any advantage whatever not common to the creditors, any payment made will be ordered to be repaid, any security given will be ordered to be given up, and this court will treat the whole thing as fraudulent against the other creditors; and anything done in favour of the creditor who obtains this advantage will be set aside by this court. That principle has been frequently acted upon.
I refer to Jackman v. Mitchell(2), because it has been cited, but Geere v. Mare(3), a case on the point at law; and finally, it was very much considered by Vice-Chancellor Stuart in Mare v. Sandford(4), which, as well as some other cases, arose under the same bankruptcy as Geere v. Mare
The case is adopted, and cited with many others, by Sir Frederick Pollock at page 238 of his work on contracts, when dealing therein with the subject of fraudulent or illegal contracts of this character.
"Against public policy" is, I think, in this connection but another name for fraud.
I agree with the law as laid down in what I quote from Malins V.-C. and hold the promissory notes sued upon herein are of the kind he describes and subject to the legal consequences he suggests.
They furnish no security upon which any one can recover or should as part of public policy be permitted to recover.
(1) L.R. Eq. 229.
Ves.
H. & 339. 1 Giff. I cannot distinguish in principle any difference between a deed of composition and anything else of the like nature, jointly agreed upon by creditors, or a number of them, in case of a common debtor. J.
The Quebec law I imagine is the same despite the nice distinction said to have been made in France. I also think as the debtor gave the notes in Toronto and all else was.done there except possibly the mere signing by respondent, and as it is the indorsement of a promissory note delivered there that is in question, the Ontario law is what should govern, if there is any difference.
The appeal should be dismissed with costs. J.-The controversy which has led to this appeal arose out of an agreement, the terms of which are embodied in a memorandum dated the 4th April, 1913, between one Grossman and certain creditors of Grossman who included the appellants.
Grossman being in difficulties arranged with these creditors for an extension of time; there were other creditors whose claims were not included in the arrangement, these claims not being considered of sufficient importance to embarrass Grossman after obtaining the extension arranged for.
The memorandum embodying the arrangement was executed on its date by all the parties except the appellants and one Ward. The absence of Ward's signature appears to have been) accidental, since he carried out the arrangement in accordance with the understanding that he was a party to it.
The appellants executed the document in the following month; and the execution of it by them was procured through an arrangement between themselves and Grossman, that Grossman was to obtain the guarantee of his brother-in-law, the respondent Rittenberg, that the appellants' claim would be paid. The guarantee was given in the form of an indorsement of each of the promissory notes sued upon; and was given and accepted on the understanding that the existence of the guarantee was not to be disclosed-as in point of fact it was not-to the creditors who were parties to the extension agreement.
The respondent's defence is that the agreement to give this guarantee behind the backs of the other creditors participating in the extension arrangement being a fraud on these creditors-the fraud vitiates the agreement and deprives of all legal effect the indorsements given in execution of it.
The memorandum signed by the creditors contains a recital to the effect that the creditors named as parties have executed it; and there can be no doubt that this recital embodies an essential term of the extension agreement which was made on the understanding that the claims of all the creditors named in the instrument as drawn were to be affected by the extension. It is true that the appellants are not mentioned nomine as parties but their agent is named and it was no doubt the appellants' claim that the parties had in view. It is clearly made out in point of fact, that Grossman, the appellants and the respondent all understood that the appellants' claim was to be brought within the arrangement for giving time and that involved, as it has been many times held, the assumption that they were to stand on an equal footing with all the other parties to the extension.
Any advantage, therefore, obtained by them as the price of their participation, which was not made known to the other parties, must be an advantage which they could not retain without departing from the line of conduct marked out in such circumstances by the dictates of good faith.
Yet this, in view of the agreement between the respondent and Grossman and the appellants, must be held to have been precisely what it was intended the appellants should do.
In Ex parte Milner(1), it was decided by the Court of Appeal that the essence of a composition arrangement between a debtor and his creditors is equality among the creditors; and that any departure from the course pointed out by this principle by which one creditor seeks to obtain an unconscionable advantage over the others must fail of its object because any arrangement having that as its object is unenforceable as being a fraud upon the other parties to the composition.
It was not suggested that the principle is any less a principle of law in the Province of Quebec than in places where the common law obtains. But it was argued by Mr. Lafleur that the principle has no application in the case of a mere agreement for extension. That is a view I cannot accept, for the core of the matter is that the inculpated transaction is a fraud upon persons to whom in the circumstances the creditor owes a duty of disclosing any such transaction. I cannot concede that the principle of equality or that this duty of disclosure is any less imperative where the creditors give merely an extension of time, than where they give up a proportionate part of their claims; and such being the case the sterility which affects a bargain for a secret advantage where a composition is in question is equally the consequence of a secret bargain having reference to an arrangement for giving time only. An argument which at first gave me some concern arising out of the last paragraph of the memorandum requires notice.
The paragraph is in the following words:- It was contended by Mr. Lafleur that the preposition "on" coninects "preference" as well as "security" with the succeeding phrase "any of his assets" and that consequently the respondent's guarantee is not within the contemplation of this clause.
I do not find it necessary to express any opinion upon the point of construction. Assuming Mr. Lafleur's reading to be the right reading, I think, after reflection, that the respondents' rights are not in any way prejudiced by the presence of this clause.
The clause, it should be noted, is not primarily directed to securing the observance of good faith among the persons executing the memorandum; it imposes primarily a duty upon the debtor who is a party to the agreement and the result of it is to disable him from giving any preference or security to any of his creditors including, of course, those who were parties to the extension agreement, but including also those who were not parties to it.
The clause itself would no doubt, apart from any general principle of law, involve the persons executing the memorandum in an obligation not to concur with the debtor in any conduct which would be in violation of the letter or spirit of it. But the clause is not aptly framed to displace, and the duties and rights expressly created by, or arising by implication out of the clause, do not necessarily displace, the reciprocal obligations of good faith which the law imposes ab extra upon the creditors who are parties to the transaction inter and it would not be right to infer an intention to displace them for the reason already mentioned, namely, that primarily the clause is framed alio intuito, namely, to impose an obligation on the debtor; and extends to the claims of all creditors whether parties to the arrangement or not.
I think the appeal should be dismissed with costs. J.-By executing the agreement made between the debtor Grossman and a number of his principal creditors the appellants represented to the other creditors who were parties to it that they were giving to the debtor an extension upon the terms contained in that agreement, to which the other creditors had bound themselves, and without obtaining any preference or advantage over them.
The agreement contained a recital that the creditors named in it had agreed to grant the debtor an extension only on the condition that all of them should join therein. In that agreement the appellants were first represented by their agent Eisen.
Eventually they executed it in their own name.
But whereas the other parties who executed the agreement accepted from the debtor, without other security, his notes at three, six, nine and twelve months the appellants insisted on their claim being liquidated in monthly instalments and upon payment thereof being secured by the indorsement of the debtor's brother-in-law.
When making this arrangement they impressed upon the debtor the necessity of keeping it from the knowledge of the other creditors.
I can see no distinction in principle between an agreement for extension given by his creditors to a debtor and an agreement whereby they forego proportionate parts of their claims.
Equality as between themselves and a strict adherence to the terms of the common arrangement with the debtor is an essential element in both cases.
On grounds of public policy a secret bargain violating that equality is unlawful and additional security obtained under it is unenforceable: Clark v. Ritchie(1); McKewan v. Sanderson(2). No authority has been cited which upholds a security obtained in distinct violation of the express terms of an agreement made with other creditors such as we have before us. The present case is clearly distinguishable from Langley v. Van Allen(3), relied on by the appellant.
That was a case of seeking to recover for the estate money given by the debtor to a creditor who had insisted on being paid off sooner than the other creditors.
This is a case of resisting the enforcement of a security unlawfully taken.
This action was brought in Montreal, no doubt because the defendant resides there. But the notes sued upon were made at Toronto and are payable there.
The extension agreement was also made at Toronto where the debtor resided and carried on business.
It would therefore seem that the legality of the transaction whereby Rittenberg became an indorser must be tested according to the law of that province, which was duly proved at the trial.
It may be observed, however, that a French decision cited by the appellants, reported in D. 69.1.92 and noted in Fuzier- Herman,
Rep. Vo. "Atermoiement"
No. 106, is there significantly referred to as having been "command~e par l'espice, " and not in conflict with the rule of equality.
The appellant's case, in my opinion, is wholly devoid of merit.
The appeal should be dismissed with costs.
J.-Par un acte d'atermoiment dat6 du 14 avril 1913 entre le d6biteur Grossman et certains de ses cr6anciers parmi lesquels se trouvaient les appelants il avait t6 convenu qu'une extension de temps serait accord6e au d6biteur pour payer ses diff6rents cr6anciers; et l'une des clauses de ce con- J. trat comportait que le d6biteur ne pourrait pas pendant le cours de cette extension sans le consentement de ses cr6anciers.
Les appelants malgr6 cette convention formelle, ont obtenu de leur d6biteur des billets endoss6s par l'intim6.
La question est de savoir si cet endossement est 16gal et ne constitue pas une pr6f~rence contraire A l'ordre public.
Les appelants pr6tendent qu'en vertu de la convention le d6biteur ne pouvait pas donner de pr6f6rence ou de garantie sur aucun de ses biens mais que le fait pour eux d'avoir obtenu ce consentement ne constituait pas une violation de cette convention. Cette clause formelle qui se trouve dans l'acte ne pouvait pas permettre aux diff6rents cr6anciers d'obtenir de leur d~biteur des avantages sp6ciaux. Cette clause, suivant moi, avait pour but d'empicher le d6biteur, pendent l'existence de l'atermoiement, de donner A aucun autre cr6ancier des privil~ges ou des garanties sur ses biens.
Alors on ne voulait pas que le d6biteur qui aurait contract6 de nouvelles dettes put donner A ses nouveaux cr~anciers des faveurs particulibres sur les biens qui 6taient le gage de ses cr6anciers antirieurs.
Mais cette disposition particulibre du contrat pouvait-elle empcher les cr6anciers qui la signaient d'obtenir A leur tour de leur d6biteur des avantages particuliers?
Je dis que non.
La loi exige que tous les cr~anciers dans les concordats ou dans les atermoiments soient tous mis sur le m~me pied.
Elle proscrit tout avantage consenti A l'6gard d'un seul cr~ancier.
Fuzier-Herman, verbo "Atermoiement"
No. 96.
Il est d'ordre public, il est dans l'interat de la bonne foi des'contrats, que ces actes soient faits sans qu'aucun cr6ancier soit plus avantag6 que l'autre.
C'est IA un principe bien 6tabli dans notre droit et qui a 6t6 reconnu par la jurisprudence dans la cause de Brigham v. La Banque Jacques- Cartier(1) oil il a 6 d~cid6 qu'un billet promissoire donn6 pour garantir le montant d'une pr6f6rence est absolument nul.
Les appelants ont tent6 de d6montrer que les r~gles concernant le concordat et I'atermoiement 6taient diff6rentes et ils ont cite A cette fin une cause rapport~e dans Fuzier-Herman, R6pertoire, vo. atermoiement, No. 106.
La d6cision qui est inoqu6e par les appelants doit 6tre consid6r6e comme d6cision d'espice, vu que Fuzier-Herman declare lui-mime qu'il ne faudrait pas la considdrer comme contraire A la doctrine qui exige que les avantages consentis h l'6gard d'un crdancier soient prohib6s.
En supposant que la pr6tention des appelants serait bien fond6e sous ce rapport, il ne faudrait pas s'appuyer trop fortement sur les autoritis frangaises, vu que les dispositions de leur code de commerce diff6rent quelque peu d'avec les dispositions de notre droit. En principe g6n6ral, les concordats comme les atermoiements doivent 6tre faits avec la meilleure foi du monde entre les diff6rents cr6anciers qui les signent. Le d6biteur alors ne doit pas avantager aucun de ces cr6anciers; mais ils doivent toujours tre maintenus sur le mime pied.
Il ne doit pas donner A l'un des garanties qu'il ne donnerait pas aux autres, A moins que ces derniers ne soient mis au courant de ces avantparticuliers; et alors tout acte ou endossement qui serait fait par le d6biteur et qui serait de nature h d6truire cette 6galit6 qui doit exister entre tous les cr6anciers est suivant moi ill6gal, contraire A l'ordre public et doit 6tre mis de c6t6.
Les cours inf6rieures en sont venues A cette conclusion et les jugements qu'elles ont rendus doivent 6tre confirmis avec d6pens.
Appeal dismissed with costs.