Thelusson v. Smith

Syllabus

(common law.)

T0 brought a suit against C. in the circuit court of Pennsylvania, Which was referred to arbitrators ; an award was made in favour of T.» and a judgment nisi entered on the' 2Cth May, 1805;' exceptions were, filed,- overruled, and judgment finally entered on the 15th of May, 1806. On the 22d May, 1805, C. executed a Conveyance of all his estate to 'trustees, for the payment of his debts, at which time he was indebted to the United States, on several duty bopds which became due at different periods subsequent to the 22d May, 1805. Suits were brought on the bonds as they severally became due, and judgments obtained,, and .execm, tions issued, utider which a landed estate belonging to C. was levied upon and sold. T. brought an action against S., (the marshal of the district,) who levied the executions, to recover so much of the funds in, his hands as would be sufficient to satisfy .T.’s judgment. Jn this suit the jury found a special verdict that C. was insolvent on the 20th May, J8Q5, but that it was not notoriously known j and the parties agreed that on .the 22d May, 1805, he was unable to satisfy all his debts, and that this fact, should be considered part of the.'special verdict.

Held, that the Word insolvency, mentioned in the dpty act of 1790, ch. 35. sec. 45,; and repeated in the act of 1797, ch. 74. sec. 5., and of 179?, ch. 128. sec., 65. means a legal insolvency, which, whenever it occurs, the right of preference arises to the United States as well as ?n the other specified cases to which the acts of 1797 and 1799 have extended the cases of insolvency.

Rut if before the right of preference has accrued to the United States, the debtor has made a bona Jicfe conveyance of his estate to a third person, or has mortgaged it to secure a debt, or if his. property has been seized under an execution; the property is devested out of the debtor, and panpot be made liable to the United States.

A judgment gives to tip; judgment creditor a lien on the debtor’s, lands, and a preference over all subsequent judgment creditors. Put the law defeats the preference in favour of the United States in the cases specified in the act of 1799, ch. 128. sec, 65,

Error to the circuit court for the district of Pennsylvania.

_ _ _ . The plaintiffs in error instituted a suit in the circuit court for the district of Pennsylvania against William Crammond', which., by the agreement of the parties, and the order of the court, was. referred, to arbitrators. An award was made in favour of the plaintiffs, and a judgment nisi was entered on the 20th of May, 1805. Exceptions were filed and overruled; and a judgment was finally entered on the 15th of May, 1806. On the 22d of May, 1805, Crammond executed a conveyance of all his estate to trustees, for the payment of his debts, at. which time he was indebted to the 'United States, on several duty bonds, which became due at different periods subsequent to the 22d of May, 1805* Suits were instituted on these bonds as they. severally became due, and judgments were obtained and executions issued, under which a landed estate belonging to Crammond, called Sedgefy, was levied upon and sold.

The plaintiffs, considering this property as being bound by their prior judgment of the 20th of May, 1805, and that they were entitled to be first satisfied out of the money in the hands of the defendant, (the marshal of the court,) which he had raised under the above executions, issued in the name of the United States, they brought this action to recover so much of those funds as would be sufficient to satisfy their judgment.

Upon the trial of the cause in the circuit court, the jury found that Crammond was insolvent on the

United. States to have .the force of a lien on the real estate of the debtor, because the act of 1798, ch. 88. sec. 15., expressly gives to the United Stales a lién on the . real estate of supervisors and other revenue officers,. from the time of the commencement of ' the suit againstj them. Certainly it cannot Jbe imagined the United States intended to haye a less security, against the delinquency of their revenue officers than in the case of ordinary, debtors; onthe contrary, it is unquestionable, that by the law of' i 7,98 they intended to increase their security against their revenue officers; and yet, if the mere right of priority has the force and effect now contended for, the law of 1798 was not only unnecessary, but has really diminished the security for the payment of moneys collected by .and due from these officers. That law limits the responsibility of the real estate to the commencement of the suit; whereas, the responsibility now claimed under the privilege of preference, has no limit;. Should it be answered to this, that under the law of 1798, the United States are made secure even against conveyances and mortgages subsequent to the commencement of their suit, still it shows that the legislature considered, a lien on thé real estate of the debtor as something of a nature and effect higher and better than the mere priority they before enjoyed; and if it be so, it must hold[_t'he same rank in the hands of a citizen, and be considered superior to the priority of the United States: especially, when that priority attached after the lien was in full force and operation on the reaf estate of tho debtor. If any argument may be drawn from the reasoning of

his.debt, interest, and costs, and the surplus belongs to the debtor, as. in the salé of any other property -taken in execution for the satisfaction of a judgment. On what principle can it be maintained that every act of a debtoi over his real estate in. favour of a purchaser, or creditor, shall be available against this preference oí the. United States, except the most solemn of all acts, a public recbrded judgment.? That this priority is not. a lien on the property of ‘ the debtor has been; expressly, decided; and, for this reason, it is not permitted to disturb a purchaser, or Mortgagee; it is, -therefore-, something, less, in the estimation of the law, than a lien: how, then, can it overthrow the firmest of all liens, a judgment dply rendered ? If a debtor, by a. particular assignment, should appropriate his real estate to pay a debts or a number of debts, tlie United States' could not de-' feat the appropriation by their claim toa preference^, and yet when he makes the same appropriation by a.judgment, or, what is perhaps stronger, the law does it. for hioq and he certainly also intends to do it^ the appropriation is inva.ltd.and ineffectual.against the 'claim of the* United States, resting on a priority arising, perhaps, years after the appropriation was thus solemnly made, and oft the faith of which the innocent creditor may have trusted his all. Another. Strange consequence and incongruity grows out of this, doctrine, so pregnant with inconvenience and injustice. A .judgment has unquestionable preference over a subsequent conveyance, assignment, or mortgage. The priority, then, of the Unite ates,

shall not affect the conveyance,- an assignment, or. ft mortgage, but it shall destroy that which is greater than them all. It overthrows the stronger security, while it cannot avail against the.weaker. Farther; when a debtor has secured the debt by a judgment, is it not a sound. principle that he Cannot impair the sécurity of his creditor by any subsequent .act of his own, by any contract or conveyance he,may afterwards make ? How, then, can he do, so by.a bond given to the United States, by a.contract afterwards .made with them ? 3, The only distinction that can be drawn between a judgment and a mortgage is, that the. latter is said to; be a specific, and the former a general lien; or, in other words» the One covers the whole, and the other but ft part of the real estate of the debtor.. This has always béen Considered a circumstance to the advantage of the judgment; and it is by . a singular course, of argument it should be now discovered to. be precisely otherwise. In thte first place it may be ftsked, why should either a general or specific lien or light be overreached by a subsequent fight? and why should not the one as well as the,other? There if ho difference in justice or in law. A general lien at law is just as;good and effectual as a specific lien. In equity a general lien is sometimes made to yield to an equity/ which would no* disturb a specific lien; as in the case where one agrees.to purchase, and pays money on the contract, he has been permitted to prevail against a judgment, but not against-a mortgage. But, in this case, the purchaser must succeed on his equity ; for if he has none,

overreach other rights previously vested. And as there is nothing in the words of the act to produce this effect} .neither is there any thing in the legal nature of the priority to do it,, inasmuch as the court has decided it is no lien; and that it has no power to. disturb a previous conveyance or mortgage. The law enacts that in all cases of insolvency where the estate in the hands of the assignee shall be insufficient to pay all the debts due, the debts due to the United States shall be first satisfied. And any assignee who shall pay any debt due by the insolvents out of his estate and effects, until the debts due to the United States are satisfied, shall he answerable in his own person and estate. But what, properly and legally speaking, is the estate of the insolvent, in the hands,, that is, at the disposal, of the assignee? Surely nothing but the interest which remains in hint after discharging incumbrances legally imposed upon it. 5. But it is said the assignee shall not pay any debt before that of the United States is satisfiedand that' a judgment is a debt, and, therefore, to be postponed. I would rather say a j udgment is the security, or means to enforce the payment of a debt, than that it is the debt. But if it be a debt, it is also something more than a debt} it is a debt accompanied by a lien to secure its payment} and the question is not whether the debt shall be postponed, but whether the lien shall be defeated. So the money secured to be paid by a mortgage is a debt, appearing, and, indeed, created by a bond referred to in the mortgage. The difference, bet ween the cases, then, is only this,

that the one. is á debtseeüredby a judgment binding all the real estate: and the other is a debt sec u red by a mortgage binding a part of that real estate. The supposed distinction between general and specific lien has no influence on this point in the case; and if a judgment is to-: be cut out on the eflect of the-words “any debt” in the act of congress, I know not what is to save a mortgage. ít seems to be Obvious that the law, when it speaks of debts to be postponed to the United States, relates only to the casfe.of a mere debt, standing on its owbstrength and: security, and never intended to interfere, with any collateral or additional act doné in relation td the'debt, which gives a new right to the'creditor; but -that right, whatever it'may .be, shall have its full, and .fair legal operation and efficacy. If, fhen^ the debtor has pledged his property, or given a lien upon it, or any part of it, it was never intended to disturb , this right. By taking .preference of a mere debt, no injustice is doné; at least, no rights are destroyed ; because the debtor himself might have done the siime in favour of any creditor, having it in his power to give preferences;.and every creditor knowing he hás this power cannot complain if it is-exercised. Oh this construction, therefore, the act of congress brings no loss upon the creditor but- what he knew he was exposed to, and consented to take the chance of, when he trusted his-debtor. There is a clear distinction between taking priority of payment of a debt, and overthrowing a security, a lien, a pledge, general or specific, given for the payment of the debt.

preferred to the United States. Before that pretension can be -sustained, the plaintiffs must bring their case within .some exception of the law, either express or necessarily implied. The former is out qf the question ; for the directions-of the law are unqualified, and without 'exception. If there be any such implied, it. must be so latent, and is to be inferred, only from such remote premises, and by so refined and subtle a process of reasoning, ns would present a Strange anomaly in legislation. Surely there is no defect of congruity or precision imputed by the counsel on the other side to our construction of the law which is, many degree, comparable to that of leaving so mportant and prominent an exception from plain and positive terms of enactment, to be discovered only by the optics keen” of the few gifted intellects capable of deep research and abstruse deductions. As regards the great body of the community, sucha mode of legislation would be as unreasonable as that of the Roman despot, who posted his edicts so high that they could not be read, and then punished his’subjects for their involuntary disobedience. 2. No exception of pne description of creditor, any more than another, is either expressed or implied. ’Tis.true that the debt due to the United States can only, be satisfied out of the property of the debtor himself, according to the. terms of the law ; 'Consequently, there is no necessity for'any constructive or implied exception from the general terms of the law : in 'order to save property in the hands . of a bona fide purchaser, from being subjected to

the payment of the vendor’s debts: it is excluded éx vi termini, nor could it have been brought within the purview of the law, without a substantive and .. . . , Í • positive provision to that etiect* A mortgagee is a purchaser; the estate is devested from the mortgagor, to whom nothing remains but an equity of redemptiohi and to that equity of redemption must the United States resort for satisfaction. A judgment, on the contrary, operates no devesture of property till carried into actual execution; and the debtor has the jus disponendi as completely after judgment as be to re; except tnat tne purcnaser taües cum onefe, subject to the general lien created by the prior judgment. That lien vests no-specific interest or estate in the Creditor; but is nothing more than an outstanding claim, (which may or may not be enforced,) to have the judgment satisfied out of the estate: let the judgment be, in any manner, released or satisfied, and the lien is, ipso facto, dissolved; the,estate of the' vendee is instantly discharged and exonerated from the claim, without any act whatever proceeding from the creditor of the vendor to the vendee. The mortgagee trusts the mortgagor, upon the faith of a contract which specifically vests in him, the estate of the debtor, as a collateral security for the debt - .he judgment creditor, on the con-, trary, stands upon his legal rights, has trusted no-, thing to the faith of contracts, and has.gained nothing, by contract; his ad, antage, whatever it be, is gained by sheer- coercion upon his debtor, and by mere operation of law. To the mere operation of law, therefore, let him look for his security. The prin

ciple of affording greater protection to rights growing out of bom fide contracts than to those acquired! by mere operation of law, is not confined to the cases of' general and specific liens as differently affected by the principle of relation incident to a state of bankruptcy, or by a' prior equity,; for it is a settled rule Of equity to afford relief as against assignees coming into the legal estate by operation of laW; When relief would be refused as against assignees or purchasers under contract for valuable consideration. 3. In order to ascertain the state of insolvency, in the life-time of the debtor, upon which the preference of the United States is to. be enforced,, three tests, are adopted; any one of which is sufficient;, and all of which must be presumed equal between themselves: 1st. An assignment of property for the benefit of creditors, at a time when the debtor has not Sufficient for the payment of aH his debts. 2d. His absconding, concealment, or absence, followed by attachment of his effects; and 3d. An act of legal bankrnptcy committed. This last (inasmuebas the bankrupt law of the United -States was not passed till afterwards) is presumed to comprehend, as well acts, of legal bankruptcy or insolvency under state laws, as under the subsequent act of congress.' Mow, it must be presumed that congress intended all those enumerated instances of insolvency to be equivalent; and to be- ^flowed by precisely the same consequences in relation to the rights of the United States. Then, if the. debtor had become insolvent under the law of Pennsylvaniá, ever so long after the rendition of judgment, the prior lien would hare been over

reached and annulled by relation, and all thecreditors reduced to a perfect equality} and such, also, unquestionably would have been the case under the bankrupt law of the United States.; In either case, could the preference of the. United States over all the creditors, thus reduced by operation of law to perfect equality, admit of doubt? A substantial distinction between the consequences attached to « an act of legal bankruptcy,” and those attached to any other of the equivalent acts of insolvency enumerated in the 65th section, is altogether inconceivable. The enumeration, among those acts, of attachments against absconding debtors, shows what little regard was had to the strongest of all liens produced by mere process of law, and not arising ex-contracts in the nature of a bona fide alienation of property. 4. As to the argument that. Has been so much pressed to prove, that because the preference of the United States does not overreach these conveyances' and' incumbrances, it is not in the nature of a Sen-created with the debt ab initio ; it may be satiety admitted (and Indeed it is now settled) that it is not, technically speaking, a lien: yet the inference that it is therefore less than,a lien, is hot so obvious. The legislature, when it is contemplated to defeat pné lien, is under no necessity to effect; the object through the instrumentality of another lien. Nor is there any thing absurd or incongruous in making mat paramount, which, according to pre-existing rulés of positive institution, was inferior. It is perfectly competent>for the legislature to exalt the humble, and humble the exalted; and to declare the less to be

greater, when the relative magnitudes of the two ohjects are not from the nature of things, but the mere creatures of law. Then whatever success may at^encj effort to establish a specific difference between a lien, technically so called, and the right of preference claimed by the United States, the law is express that the latter shall prevail- to place the United States first in the order of payment of all debts. It may have been deemed adequate to all the purposes of reasonable security, without attaching any specific lien upon the debtor’s property, that every person who happens to be charged, either ministerir ally or under trust, with the administration of the in? solvent’s effects, is bound, at his peril, to regard the established preference in favour of the United States. 5. It is objected, that our construction gives the United States a more extensiye and coercivé remedy against an ordinary debtor for duties than was deemed necessary against defaulting supervisors and other officers of the revenue, upon whose estates the lien commences only.with the commencement of thñ suit, according to the provisions of the act of 1798. This objection would be entirely inconclusive if if were well founded; but, in truth, ithas no foundation : for not only is the commencement of suit made équivalent to attachment by the law of 1798, and any alienation whatever of the defaulting officers’ estate thenceforth peryented; but that is cumulative on the general preference secured to the United States, by the,5th section of the act of the 3d of March, 1797, ch.74. 6. The distinction insisted on, bet ween á mere debt and a debt accompanied by a lien; between,

postponing a ¡debt, and defeating a lien, id Conceived to be utterly unsubstantial.' The general lien-incidental to a judgment, is the means pf securing to the judgment creditor a preference over other creditors: tajee away his preference; postpone him to another creditor, and all the incidents by which his preference was secured arg necessarily destroyed.

1. The court will not fail to. pt ceive that the questioh involvéd in this case arises, not. out of the .obnoxious act of the 3d of-March, 1797, ch. 74., the 5th .section of which gives universal and unqualified preference to the government “where any revenue officer, or other person, becomes indebted to the United States, by bond, or Otherwise,” but put pf the act of the 2d,of March, 1799, ch. 128., which affords priority to the government over individual creditors, only, in the case of custom-house bonds and duties. Even the constitutionality of the law of 1797 has beej> questioned, though always maintained; and its policy has been the theme of severe animadversion. But the constitutionality of the law of 1799 has seldom, if ever, been drawn into doubt; and its policy is sufficiently obvious. Government could, if it would, exact pay-, ment of duties in money, or irra portion of the article imported, at the time of importation, instead of bond-, ing the duties for future and contingent liquidation. For the accommodation of merchants, the 62d section, at their option, substitutes bonds giving time, on security, for payment, instead of exaeting it'on' the permit to land, and delivery of the goods; for

gagee is much better fortified against the law in question; because, in the one case, the property i s still in the original debtor, liable to the future operations of a judgment; whereas, in the other case, the property has been, in legal contemplation, conveyed away from the original debtor to his creditor, with a clause of defeasance in the event of. certain conditions complied with. A .particular appropriation of the estate in payment of the debt would not defeat the public preference, unless that appropriation were followed up by a conveyance of the estate, and the actual change of ownership; in which case it would be no longer the property of the public debtor. 4. The law Contemplates the three cases of, 1st, death; 2d,, insolvency; and, 3d, attachment; to which may, perhaps, be added, a 4th, that of legal bankruptcy; though this is nearly similar to the 3d, Now, in the case of death and insufficiency of assets, there can be no doubt. If Gtammond had died on the 21st May, 1805, the United States would clearly have enjoyed the preference secured to them over the plaintiffs. And why not in like manner in the case of insolvency ? All the policy and all the hardship that can be imagined for the sacond case, are just as applicable to the first. But because a line, which it is not necessary to contest, has beep drawn, in the decisions on this subject, between thé. cases of popular insolvency, or mere inability to pay debts and meet engagements, and of legal, or technical, insolvency, or a public acknowledgment of that inability ; efforts have been made to extricate insol

vency from the law, when no reason can bé given for it that is not .equally applicable to death. The last illustration in this section is the. case of legal bankruptcy; and it is well known that, under the 'bankrupt system, a bankruptcy cuts out a prior judgment on which no execution has been levied; and that the judgment creditor is entitled to no more than his rateable proportion, and mere dividend, in common with other creditors having no security. But the reply is, that we have no bankrupt system. Still, however, a secret act of bankruptcy is within our law; end, on the score of hardship,, is, at least, as severe a case as any that can be set up. Whten a mortgagor pays a debt, or it is paid for him, this is not any debt within the law; because it is Specifically secured, and in legal contemplation, paid, by the transfer of a certain portion of the debtor’s real estate, which the creditor holds, as it were, possession of. It is true, that in order to recover payment of the money the mortgagee must pursue the forms and process indicated by -law for that purpose; but neither the mortgagor', nor any other person, can prevent his taking possession of the property mortgaged, otherwise than by paying him the money for which it is specifically pledged. The difference between such a lien and that of a mere unexecuted judgment, is perfectly obvious, and, indeed, is most emphatically recognised in the case from Peere Williams, cited on the other side. The 65th section of the act-of 1799, makes no exceptions. It prohibits the payment of any debt by an assignee, under the penalty of personal accountability. Nor can the court

incorporate exceptions into the Jaw. But where the property is no longer in the debtor’s hands, as in the cases of a mortgage, a bona fide sale, or ají./a. levied, the property is taken.outof the debtor’s hands} and the court will not permit the public to carry th,eir priority info the possession of an innocent third person. Up to the period of his assignment, Cram? mond continued in possession of the Sedgely estate», At that period, the Thelussons had no specific powe* or controul over that estate; Unless, therefore, it became, from that moment, liable to the public pre? feirence,, what is that preference, and what does jit amount to? To nothing more, says the opposite counsel, than a claim upon what is left after satisfying all incumbrances. If so, the la w vvas. framed, (as it evidently was,) with great pains, to very little purpose indeed. 5. As ¿to the argument drawn from the supposed admission of counsel arguendo in the. case of. the. United States v. Fisher,it is true, that while the debtor remains master of his property, the priority cannpt dispossess him on the plea of a'popular insolvency, or inability to pay his debts, It. is equally true that the priority has no pretensions to be deemed a lien. But it nevertheless may have force enough to operate whenever the insolvency is announced, by intercept? ing the mere prospective security of a judgment creditor without execution. But this is no retrospective opera tion. 6. As to the comparative equities, the surety, or assignee, who pays the bond, on the faith of this act of congress, has at least as much to recommend him on that score, as the mere judgment creditor, of the nature of whose debt nothing is known;

«nd éintíe the various, the decided, and the consist-* ent determinations of different cduris, both state and national, in support of this law, there can be no question on which side the hardship preponderates.

1. It is said that the Sedgely estate was taken in execution at the suit of the United States, before Thelusson, could levy his execution; who, therefore, never could have possession of the property, and yet endeavours, to take it from the custody and possession, of the United. States! I do not apprehend that this, is a question on the right of possession in the . property taken in execution ; nor is it at all material at whose suit the property was so taken and sold. Neither party .ever had a possession, either actual or legal. If the possession, asserted to . have been held by the United States under their execution, gives them a right which cuts out the antecedent judgment, it isneedless to resort to the protection and power of the act of congress to strengthen it, and any other creditor obtaining the same sort of possession woold have the samé right; and might assume the same preference over antecedent judgments. It does' not appear, by the special verdict, when the execution at the sdit .of the United States was taken ouf and levied; an*h therefore, there is no foundation in the record for saying it was done before Thelusson could levy his execution. The decision of the question must turn on the statutory priority of the United States.; and not on their legal priority of actual possession — they never have had any such pos

and the question was between , these judgment creditors and the purchaser from the administrator under the order of the orphans’ court. The decision is made, in favour-of the latter, on a review of the several laws of the state on the subject, and the clear intention of the legislature. No principle ia¡ affirmed at all applicable to our cáse. The court $ay, that the word “ debts,” in its most general sense, and as jused in those acts of assembly in-eludes a judgment; and that general words will not be restrained to particular cases, unless,"to avoid absurdity, contradiction, ox, flagrant injustice. . They then observe that neither will occur in their case. No inconvenience; “ because the dandis will sell better for being discharged from liens ; and it. makes no odds to the judgment creditors by whom they are sold, provided they are sold fairly, and the proceeds faithfully applied.'” The court then go on to declare that in the application of the proceeds the judgment creditors shall have, their preference, and all the benefit of their Hen; and that it' would . be monstrous injustice were it otherwise. This case gives no countenance to the suggestion that in Pennsylvania a judgment is considered as no more than a debt deprived; of all attributes of lien, and merely such in the course of distribution. 4. In Pennsylvania it is the cónstant practice for the mortgagor to keep possession, not only of the land, but of all. the deeds and instruments :of title; that he sells and disposes of the property, and delivers possession to the purchaser, who holds it, subject, indeed, to the mortgage as he would do

to.a judgment; and in no respect differently; and that a judgment is specific enough in its force and operation to have preference of a subsequent mortgage; tvhich a mere debt by simple contractor by specialty, would not do. Why, then, shall it not have the same preference over a mere priority of payment arising after its date? 5. The equality to which a bankruptcy reduces :a judgment creditor with the other creditors of;the bankrupt is greatly relied upon by the defendant; but it is the effect of the positive provisioaof the statute meeting the case in terms, and founded 00 the peculiar policy of that system; neither of which is found in the act of congress now under consideration.. |t is said there, is no difference, in reason* be tween the effect of a bankruptcy, and a legal insolvency; and as the former woul.t destroy, the right and lied of a judgment, so should the latter. The answer is obvious. The bankruptcy does it by virlue.of the. express terms and provisions of the statute ; and if the same authority can be found in. the case of insolvency, it will stand on the same reason, or, rather, the same right. No case fias been shown where a judgment creditor has been deprived of his right* his Hen, his interest in the land, his preference, by Construction; by. the use of general terms:. and in the case of Moliere’s' lessee v. Noe, his right'of priority of satisfaction out of the proceeds of the estate, is expressly recognised, and the contrary doctrine held to be “ mbhstrous injustice.’*