OpenJurist

856

nDEBAL BJilfOBTER.

SMITH &nd others

1.

'V.

CRAFT and others.July 27, 1882.)

(Oirouit Court, lJ. Indiana.

PREFERENCE-RIGHT OF INSOLVENT DEBTOR TO MAKE, AND

How IT MAY BE MAnE. '. An insolvent debtor, in, the a.bsence of the bankrupt law, has the absolute control of his unencumbered property; an.d he may prefer one creditor to the exclusion of all others. The favored creditor's debt mayor may not be. due, and the preference may be by a judgment, a mortgage, a deed, a trliusfer of securities, or choseshi actIon, the sale of personal property, or the paytnent of money.

Z'o SAME-CONDITIONS AND LJMI'l'A'l'IONS AS TO TIlE RIGHT.

While the motive which 'prompts the debtor to make the preference Is material, the transfer, to be valid,must be in good faith, and in payment of an honest debt;. the debtor cahnot make a preference on such terms as he pleases. The preference must :be abS0luteand:unconditional, and without designs to secure to the debtor &ny personal benefit as against hi&non-preferred crllditors. or to. hiP4llr or p.elay in the coHection of their debts.. Equity favors an equardistrib.ution of a debtor's property among all his credit'ors, and conditional preferences will not be sustained j; e. g., where-the preference is 'the ,:transfer of an entire of goods to ,a single creditor, conditioned on the employment of the debtor, by the preferred creditor, at a fixed monthly salll-ry, as the creditor's agent and superintendent in continuing and carrying on the business formerly conducted by the debtor for himself, it iB invalid becaUlieof such conditJon. . .

M'

complainants,. . and Baker, Hard. £t Ifendricks, for respondents. GRESHAM, D.;J. The defendant Craft, who was a merchant at Indianapolis, on the ,fifth of April, 1879, executed to his Churchmap, in trust for Fletcher '& Ohurchman, a bill of sale embraQing, his stockof watches, diamonds, jeweity and also lease' upon in which he halt carried on hisb\isiness, one. y.ear of the term not having then expired. This was all the property that Craft owned, except his notes and accounts, which he estimated to be worth $1,000, and some real estate, which was encumbered for as much ,aEl. was worth. Fletcher. & Churchman were bankers, and as such at different times had loaned money to if they would make the loans, and Craft, O:P his. agreement a.nything ocpllrred by which he. wall. unable to pay all his creditors, he would first payor secure'them: It is recited in the bill of sale that Craft is indebted to the bank in about the sum of $31,000, and that the sale is made in ,Payment and satisfaction of this indebtedness, .. and the further consideration that said Churchman shall emHorace Rand £t

a

.Reported by Charles H. McCarer, Asst. U. S. Atty.

_ SMITH V. ORAFT.

ploy said Craft in said business, at the rate of $150 per month,so long as said Churchman shall carryon or continue said business." Immediately after the execution of this instrument, Craft's elll: ployes were notified by Churchman and Craft of the sale, and that thereafter the business would be carried on by Craft as the agent of Fletcher & Churchman. After this Craft conducted the just as before the business as agent, with his old force of transfer, until some time in August, when, by direction of Fletcher &. Churchman, he commenced selling the remainder of the goods at auction, and in this way the stock was finally disposed of some time in October. During the time that Craft managed the business he paid himself and his co-employes. weekly out of the proceeds. The complainants, the Middleton Plate Company, Keller & lIntermeier, William Smith & Co., and Freund & Co., are eastern merchants and manufacturers, with whom Craft had been dealing for many years, and to whom he was indebted for goods purchased prior to· the sale-to Fletcher & Churchman. After the sale, and before the commencement of this suit, on the twenty-seventh of June, 1881, the complainants obtained judgments against Craft for the amounts respectively due them, upon which executions issued and returns were made of no property. The bill charges that the goods which the complainants sold to Craft on time, and for which their several judgments were taken, were part of the stock sold to Fletcher & Churchman; that they divided the proceeds with Craft, and that the transfer was. intended by both Craft and Fletcher & Churchman to hinder and delay the complainants and the other creditors of Craft. Fletcher & Churchman, in their answer, deny all fraud, and aver that on the twenty-seventh of December, 1878, Craft was indebted to them in the sum of $25,000, for which he gave his two notes, each for $12,500, payable in 30 and 60 days, and in the further sum of $7,313, that being the amount paid by them for Craft, at his request, in taking up a note which he had previously given to George F. McGinnis; that the sale by Craft to them was in good faith, and in full payment of his indebtedness; that they realized not more than $20,000 from the goods; that Craft got no part of the that they have no knowledge that any of the goods purchased of either of complainants were in the stock at the time of the transfer; and that the sale to them was in good faith, as preferred creditors, with no intention of cheating, hindering, or delaying the complainants or other creditors.

858 Crafts answer denies tha.t lie received any part of the proceeds; denies all fraud; and avers' that the sale was in good faith, in payment of'!l,n indebtedness which exceeded the value of the goods and fixtures and the unexpired lease. " Craft's credit seems toha'\Te been-good with the complainants up' to time of hisfailure,and yet it appears from the evidence that he was insolvent early in 1878. The ju<lgments til;'ken by the complainatits were' for goods sold-after tbiS'time, and mostly within a,iew months be-Iore the sll,le to Fletcher & Churchman." The last purchase from Keller & Untermeier, amol1ntingto $8'/ti, was as late, ,as the 'Of ,March, and only 10' days 'before .the It is probable that'these gooda were part ,of the stook sold to Fletcher &. Churchman., That they' got some of the goods purchased from the complainants, whieh:had n(}t' been paid for, is clear enough. ,Craft swears that inthes-pi-ingof 1878, and from that time until his final failure, he bad:the coI1fidence0tra sanguine business man that he would, to keep up and pay all his debts, and I am satisfied that during·thisperiod,he made payments to the complainants. !Fletcher&, Chl1rdhril<ll;ni hlld been accommodating Craft with IQMls fbr a number of years. Churchman testifies that Craft always promised if the loans were made, and from any cause he was unable ,to pay all h<e:would, proteot or secure Fletcher & Churchml1n. The loans made from time to time (on faith of these promises, it. is to be presumed) amOllnted, in August, 1877, to as much as $20,000. ['hese loans, and others made after that time, were regularly renewed every 90 days, andthe\ interest paid in advance at the rate of 10 per cent. per annum, until the notes were given, which matured on the twenty"seventh of December, 1878. At this time Craft's indebtedness from loans, both he and Churchman say, amounted to $25,000, f()r which Craft gave his two notes for $12,500, payable in 30 and 60 days, instead of 90 days, as in all former renewn,ls. About this time, and perhaps the same day, Fletcher & Churchman paid for Craft the McGinnis note, which was indorsed by Churchman. Instead of taking Craft's note for the amount thus paid for him, Fletcher & Churchman simply held the cancelled note as evidence of its payment by them. to December 27, 1878, Craft had always been required to renew his notes promptly at maturity. The two notes given on this day became due in 30 and 60 days, as already stated, and they were allowed to remain due without renewal until the sale, on the fifth of April. Gxaft is not able to explain why Fletcher & Churchman required those notes to be made in 30 and 60 day5,

SMITH V. CJ;t.t\.FT.,

8i)9

instead of 90 days, as in 'all fmmer but.l!uppoaes they had their own reasons for the change. He was not asked to ,renew theBe notes when they became due, and he requested no delay. But after; thus testifying he says he thinks Fletcher, & Churchman were, waiting for him to make his annual invoice, on the first of April, beWl'e renewing again. Churchman testifies that when these notes were exe,cuted, on the twenty-seventh of December,he was,anx.ious to have the indebtedness .reduced; that Craft said he would cease b;Uy,ing goods, and he had no doubt he could fix the notes up in 30 or 60 day.s, or sell enough goods in that, time to reduce the amount he ",as o'Yingj and that when these notes pl'lcame due he told Craft to let, them stand, as they were in the, hope that his sales would yet justify him in making some payments. Churchman gives no' other reason for the change of time in the renewals, or for allowing them to'sta.wl after maturity until the transfer. ' . Craft completed his invoice on the first of April, which showed that his stock and fixtures amounted to "somewhere,ip the neighborhood of $33,000," exclusive of notes and Il.ccounts, which were estimated at "about $1,000." Recognizing that he was in "deep water," he went to the office of his counsel on the fifth of April and directed him to make out papers for an assignment. Just what was done under direction does not appear; but, instead of making an assignment, Churchman was sent for, and arriving, was told that had finished his inventory, could not pay all his debts, and was undecided as to what he had better do. Churchman then reminded Craft of his repeated promises, when he got the money from time to time, that if if he failed and became unable to pay all his debts, he would secure or prefer Fletcher & Churchman. Craft admitted that he had made these promises, and there and then the bill of salewas prepared and exe· cuted. Churchman's information was, he says, that Craft was solvent, and he knew nothing to the contrary until he was sent for when the transfer was made. Craft testifies that it was made because Fletcher & Churchman had been his friends, and he felt it to be his duty to prefer them. Both Craft and Churchman testify that the sale was in good faith, in payment of an honest debt, amounting more than the property was worth. Neither Craft nor Churchman produced the inventory, and in speaking of it, Craft says it amounted to "somewhere in the neighborhood ,of $33,000," and Churchman says it amounted to "about $30,000." It does not appear from the evidence · that Churchman saw the invoice before the transfer. It is not stated at what price the goods were invoiced j and although Craft deposited
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860

FEDERAL REPORTER.

the prooeeds daily with Fletcher & Churchman, and they kept an account with the 15tore, neither witness is definite in speaking of the total or net amounts realized. They both think the net amount was "about $20,000." Craft is not able even to approximate the proportion of goods sold before the auction sales commenced in August, but thinks that probably half of the stock was thus disposed it; and he is unable to tell what the auction' sales amounted to, or at what reduction, if on the cost price the goods were sold. There is no as to the value of the lease. While I have no doubt that Craft was indebted to Fletcher & Churhman, the true amount that was owing does not clearly appear from the pleadings and the evidence. It is true, both Craft and Church. man state that the McGinnis note of $7,313, with accrued interest from date, and the two $12,500 notes, and interest after maturity, represented the true amount owing at the time of the transfer. But one of the special interrogatories required the respondents to state the amount of the indebtedness discharged by the sale, and the date and amount of each loan, if any were made, with date and amount' of each renewal. In answer to this interrogatory Craft says that at the time of' the sale he owed the tW6$12,500 notes and the McGinnis note,' With thl! interest dlie on thes.e notes. Although directly interrdgated as to the original loans, their amounts, dates, and renewals, is silent on thatsubjerit.' Churchman's answer to the same interrogatory, though iil.differeht is the same as Craft's. These answers were not prepared by the same counsel, and it lssomewhat say the least, that both should be silent on the same point. While testifying b(jfore the master, in answel' to substantially the same inquiry, Craft says he got $7,000 Noyember 17, 1876; $6,000 in February, 1877; $2,500 August 15, 1877 ; 'and $6,500 October 23, 1877. ' These loans, a,mounting to $22,000, are all that Craft is able to specify!;' but he says' that sometimes he went intd the bank and got lo'ans which were not entered, and that he thinks he' got $3,OOO'li't other time', as the total loans amounted to $25,000. Craft and Churchman are the only witnesses that testified, and they were called by the complainants. An insolvent debtor, in the absence of a bankrupt law, has the absolute control of his unencumbered property, and he may prefer one creditor to the exclusion of all others. The favored creditor's debt mayor may not he due, and the preference may be by a judgment, a mortgage, a deed, a transfer of securities or choses in action, · the sale of personal property, or the payment of money. 'While tho

SMITH V. ORAFT.

861

motive which prompts the debtor thus to favor a single creditor is not material, the transfer, to be valid, must be in good faith and solely in payment of an honest debt. There must be no design to secure an advantage to the debtor over his other creditors, or to delay them in the collection of their debts. It does not follow·that because a debtor may prefer such creditor or creditors as he pleases, that he may prefer them on such terms as he pleases. GrfYVer v. Wakema.n, 11 Wend. 222. Equity favors an equal distribution of a debtor's property among all his creditors, and it does not view with favor a transaction whereby a single creditor is preferred to the exclusion of all others. craft and Churchman are vague and indefinite, when they should be certain and definite. They should state the different loans, specifying dates and amounts, including renewals, which constitute the two $12,500 notes, the exact amount of the invoice, the amount realized from the goods, both before and after the auction sales commenced, and the gross and net amounts realized from all sales. Craft had been insolvent for a yeaT and a half, and perhaps longer, before the twenty-seventh of December,1878. Churchman testifies that on the seventh of Augnst, 187'1., Craft's loans amounted to $20,000, after which time he paid the interest, 'but nothing on the principal. The two $12,500 notes were the first and onJy renewals that were permitted to stand after maturity. After these notes were given, on the twenty-seventh of December, 1878, and after they beca;tne due; Craft continued to buy goods from the 'complainants on credit, part of which were in ·the stock at the time of the transfer. Without saying that it waBin the minds of Fletcher & Churchman and Craft, at the time the last renewals were given, or at any other time, that the latter should get goods east on credit and turn them over to the former in payment of their debt, I think the preference was fraudulent on other .grounds. Fletcher & Churchman loaned money to Craft on the faith of hi's agreement to secure them to the exclusion of all others, if he became insolvent. The· complainants, ignorant of these agreements; sold Craft goods on time, trusting to his skill, energy, and integrity. They would not have done this, it is safe to assume, if they had known of the agreements to prefer Fletcher & Churchman at all hazards. These agreements were in the nature of secret liens, which the law will not allow to be enforced against Craft's other creditors. Fletcher & Churchman Beem to have beBnon friendly and confidential relations with Craft, ahd I have no doubtl'theyknew he was buying gOlilds east on time, after the last

$62

FEDERALREPORTRR.

renewals were given as well as before. 'They assisted him in taining a credit to which he' was not entitled, and now claim the proceeds of the entire stock against the injured and deluded creditors. If the right of preference may be exercised as the parties exercised it in this case, the law affords ample opportunity for a failing debtor to get the property of one person and use it in paying the debt of another. Groverv. Wakeman, supra; Boardman v. Holliday, 10 Paige,' 222; Riggs v. MU1Tay, 2 Johns. Ch. 565; Nicholson v. Leavitt, 4 Sandl. 252. A further objection to the sale is that the property was not taken absolutely and unconditionally in payment of Fletcher & Churchman's debt, as a preference. It was a scheme, in part at least, to secure to Craft a personal benefit against his other creditors. Fletcher & Churchman got the lease, and they were to continue the business at the old stand, and, as part of the consideration of the transfer, Craft was to be employed as their agent and superintendent, at a. salary of $150 per month for an indefinite period. During the .seven months that he acted as agent be' received $1,050 out of the proceeds -of the stock for wages. Why this agreement in advance to employ Craft at a :fixed salary, unless he was unwilling to make the prefer-ence on any other terms? If he exacted these terms as the condition on which he wpuld make the sale. it was clearly not made for the honest and sole purpose of paying Fletcher & Churchman. It is evident that Craft bargained for and secured a personal benefit or advantage over the complainants while some of the goods which they had sold him on credit were yet on hand as part of the stock, or that Fletcher & Churchman tempted him to make the preference by offering to employ him as stated. If the employment of Craft had been subsequent to the sale instead of before it, and part of the consideration of it, and the preference had been otherwise free from objection, other creditors would have had no right to complain, for they would have sustained no legal injury. If it be admitted-and I do not think it {lan-that an insolvent debtor may make the best arrangement in his power with his creditors, preferring those who offer the best terms, then all creditors should have a chance to bid for tbe assets. It is urged for Fletcher & Churchman (I) that, admitting tbe sale to them to have been fraudulent in fact, the proceeds bavebeen applied as' a preference in payment of an honest debt, and· equity will not interfere; and (2) that the sale being at most only constructively fraudulent, they had a right to hold the property as a security for their debt, and therefore they were entitled to the proceeds. The first

· SMITH V. ORAFT.

863

of these propositir.ns is'iInsound, both in law'imd in morals. ,:One or more creditors of an insolvent debtor are not allowed to take his property by a fraudulent arrangement, convert it into. money, and, because the debtbrhad a right to ,make an honest preferenae,defy the other creditors. If a debtor make a vOluntary assignment, which is afterwards set aside as fraudulent, the acts of the assignee performed in good faith, in the execution of the trust, will not be disturbed. He will not be held to account for the property its proceeds which have been paid out 'by him in 'good faith to the creditors. This is the law whether the assignment be, fraudulent in fact, or only constructively so. Gt'over v. Wakeman, 4 Paige, 23; Amos v. Blunt, 5 1,3. And a .sale is :rlOt. tain.ted. withaCt)lal Jt;l1pd, but is frau,dulent mfilrely by of law, it is sometimes :allowed tostand as· a security' for the;grantee or vendee, 'Tripp v. Vincent, 8 'Weeden'v; Hawes, 10 Conn. 50; Buthp, Fraud. Cont. a scheme or' purchase, by which a creditor gets the property of an insolvent debtor, is set aside in a suit brought by another creditor against the fraudulent gril.ntee or ven.dee, he will not be allowed to share with the plltintiff the proceeds of the property. Wilson v. Horr, 15 Iowa, 489; Riggl'v. MU1'ray,2 Johns. . Ch. t)65;HarriS v.Sumner, 2 Pick. 129. No generalrule can be laid down, applicable to all cases of fraudulent sales,assignments, and preferences. The relief granted in a given case depeJil&largelyon the factsdf that case; "Equity," say the court in Clement v. MoOre, 6 Wall. 312; ":looks at alHhe facts, giving to each its due weight, 'deals with the Bubjec't"lJefore itac'cordingto its own ideas of right and justice. In 'Some instances it visits the buyer' with thesatne consequences which would have followed in a court of law." The complainants, before bringillg this suit, obtained judgments on theirelaims against Craft, and executions were issued, upon which there were returns of no property. If the property had remainedin the hands of the'respondent until the bill was' filed, the complliinants would have acquired alien on it to the exclusion of other creditors, and they had a right to pursue the proceeds in Fletcher & Churchman's hands with the same result. The aggregate amount of the judgments is less than $20,000, and Fletcher & Churchman admit that they realized as much from the goods. I hold, on the facts in the case, that the complainants are entitled to a decree against Fletcher & Churchman for the full amount of their jndgments.

8M

FEDERAL

Sinae the court's finding announced for the complainants, other creditors have ,asked to be made parties to the suit as co-complainants. This may be done, but these creditors will be postponed in favor of complainants. Weed v. Pierce, 9 Cow. 722.

BOWMAN v. WILSON, Assignee.

(Oircuit Oourt, W. D. Mi880uri.)

BANKRUPTCy-INTEREST ON

CLAnr. Interest is never allowed where, by order of a court of competent jurisdiction, or by the interposition of the law, or the act of the creditor, payInent of the debt has been It is allowed where the debtor is in default and has the use of claimant's money; but where the fund is in the custody of the law, and cannot be paid out without an order of court, it does not ordinarily bear interest. '

Bill of Review. L. F. Parker, for complainant·. B. 13. Kingsbury, for MCCRARY, C. J. Interest is allowed upon the ground that the debtor is in default and has the use of olaimant's money. It is never allowed where, by the order of a court of competent jurisdiction, .or by the interposition of the law, or the act of the creditor, payment <?f a debt been prevented. During the continuance of such prevention the interest does not If a fund is in the custody of,the law-in the possession of a court-and cannot be paid out without the order of such court, it does not ordinarily bear interest. I know of no principle of law or equity upon which the interest claimed can be allowed .at the expense of the general unsecured creditors,. who are certainly in nowise responsible for the delay in making the final order of distribution. 1 Am. Lead Cases. (3d Ed.) 516 et seq. Demurrer to bill sustained. Decree for respondent.