Opinion
February, 1898.
Nelson S. Spencer and Otto C. Wierum, Jr., for plaintiffs.
A. Blumenstiel, for Bernard Moses and others.
Samuel Greenbaum, for Lilianthal.
John Frankenheimer, for E.A. Marcus.
James Byrne, for Franklin, receiver.
This action is brought to set aside the fraudulent transfers and confessions of judgment made by the debtors, Lesser Brothers, who were merchants doing business in the city of New York. In January, 1896, that firm had a surplus of assets over liabilities of $153,866.24. On the 2d day of October, 1896, nine months later, the entire property of the partnership, with a prudent collection of their accounts and a well-managed receivership sale of their merchandise, would not pay forty cents on the dollar of their indebtedness. There intervened no extraordinary losses of merchandise or on collections, and no sufficient explanation is given of this great discrepancy in nine months of business life.
Shortly before the 2d day of October, 1896, the debtors planned to dispose of their partnership and individual property which would be liable to execution, by some arrangement the most favorable to themselves that could be devised in the then emergency of pressing obligations. They were in position to compel assent to their proposed action by those creditors whose debts they wished to secure or pay in preference to all others. Their voluntary action in the execution of their plan was assented to by the creditors preferred, during the consummation of the scheme, in such a way and with such inferential knowledge on the part of the creditors as to make them participants in the purpose and effect of the plan.
The evidence is voluminous, and the details of the various transactions complicated; but it is unnecessary to scan each of these details here as the leading purpose and object of the ultimate result run through each of the events, culminating on the 2d day of October, 1896. That purpose and result, if successful, disposed of their entire property, partnership and individual, so far as it could be reached by creditors, by paying some of them in full and leaving others without any prospect of a share in the insolvent estate.
It would not answer to make a general assignment. A provision of law (chap. 503, Laws of 1887) prevented a preference of over one-third in value of the assigned estate left after deducting the wages or salaries and the costs and expenses of executing such trusts. Therefore, the method pursued was adopted to achieve the result which could not apparently be otherwise accomplished.
Five judgments were confessed in favor of some of the defendants, amounting to $20,205.86, and executions immediately levied upon the personal property. Assignments of the best of the accounts for more than $20,000 were made to other defendants, and an omnibus assignment of all other accounts was made to secure any deficiency arising upon the collection of the confessed judgments, which omnibus assignment was unnecessary to secure those judgment creditors, if the judgments were valid and not too great an amount of merchandise should be taken away under replevin actions, brought by vendors on the ground of the sales being made by the fraud of the debtors. To cover the whole and prevent the lien of attachments reaching any of the merchandise or choses in action, like a general residuary clause in a will to prevent intestacy as to any part, a friendly receivership suit was brought by two of the partners against the third, and a friendly receiver appointed by order of the court, the order so taking effect that the levies under the executions and the assignments preceded any right of the receiver.
The whole arrangement was in direct violation of the theory of the law that no disposition of the entire property of the insolvent debtor shall be made which prefers some creditors in full to the exclusion of all others, and which was adopted to accomplish the result of a general assignment with preferences in full, without being bound by the law in regard to such assignment.
There were transfers of individual property by two of the partners with some understanding as to continued possession by the debtors, and some other indications of fraudulent intent to which it is not here necessary to refer.
There is no doubt that a debtor honestly acting may pay any debt by the transfer, if necessary, of all of his property, he receiving full value for it. Tompkins v. Hunter, 149 N.Y. 117.
He may mortgage a part of his property to secure creditors, even if insolvent. Delaney v. Valentine, 154 N.Y. 692.
In the cases cited the debtor does not undertake to place all of his property, by any form of a transfer, beyond the reach of his creditors. Up to the point of action where, through one instrument or a series of instruments, he transfers all the property he has and prefers in full some creditors to the entire exclusion of all others, he has the right to honestly choose the creditors whom he desires paid, if the transaction does not involve a design of personal benefit to himself. If the transaction, however, has all the substantial legal effect of a general assignment to pay creditors, without some of its safeguards, the right of preference should be curtailed, and an attempt to avoid the prohibitions of the Assignment Act should condemn the validity of the evasive acts. I know of no case which upholds a transaction of the kind as legal. And, if such an evasive purpose, carried into action, is not in itself, as a matter of law, sufficient to avoid the acts of the debtor, it is still important evidence upon the general question of an intent to hinder, delay or defraud. The unexplained change from abundant solvency to insolvency within a few months; the disappearance of books of account; the hurried events of the 2d of October; the unnecessary assignments of all remaining accounts in alleged protection of creditors who were amply secured; the collusive proceedings for the appointment of a receiver, who should hold in custody as an officer of the court all the property which might for any cause be afterwards exposed to attack, and which, if followed by a judgment and permanent receivership, took into its friendly embrace the rights of inquiry into the disposition of property apparently passed away between January and October, and the subsequent conduct of the parties in relation to the property, produce a conclusion of fraud which cannot be overcome.
The confessions of judgments and the transfers of accounts and other property should be declared fraudulent and void as made with intent to hinder, delay and defraud the creditors, and the property and its proceeds be freed from their apparent effect. The judgment, however, which should be rendered will not go to the extent of the relief demanded by the plaintiffs, who ask for the payment of their judgments and the appointment of a receiver to apply the property and its proceeds for that purpose. If the plaintiffs had levied executions before the appointment of the receiver, such relief as they now ask might be given. Matter of Thompson, 10 A.D. 40; Myers v. Myers, 15 id. 448.
The plaintiffs here can only claim an equitable lien, such as is ordinarily impressed upon property by a favorable judgment, following the filing of a creditor's bill. Were there no receivership, and had the court not assumed jurisdiction of the property to the extent that a receiver representing all the creditors might claim, possibly such a lien as the plaintiffs desire might still be adjudicated, although in case of partnership property other considerations might prevent. The receivership in question has been confirmed by the appointment of an additional receiver who is acceptable to the unpreferred creditors. It would be a matter of very doubtful propriety to set aside the appointments of these receivers made by this court, in a collateral action, simply for the purpose of letting one set of creditors obtain a preference from which they are so strenuous in excluding others. O'Mahoney v. Belmont, 62 N.Y. 133.
Undoubtedly the court has power, as between the parties in an action commenced for that purpose, to set aside any judgment or decree obtained by collusion or fraud. Dobson v. Pearce, 12 N.Y. 156; Wright v. Miller, 8 id. 9; State of Michigan v. Phoenix Bank, 33 id. 26.
And the court will assume power in such an action to set aside a fraudulent sale made by collusion of the receiver appointed in another action. Hackley v. Draper, 60 N.Y. 88.
Unless this court has power to do so, and sees equitable reasons to justify the exercise of that power, the orders of this court in the partnership action appointing the receivers should stand for the protection of the property which has been gathered within the grasp of the court, and no new receiver should be appointed in this action for the sole purpose of taking that property out of the possession of the other receivers and paying the plaintiffs' claims in full. The sole ground upon which a claim for such preference can be made is that of diligence in the pursuit of legal remedies uncovering the transactions in controversy. Such a consideration is not sufficient, and the plaintiffs will be rewarded to a substantial extent by the relief granted if they get their fair share of the insolvents' estate. The receivers, therefore, in the partnership action take the entire partnership property as it was before the confessions of judgment on the 2d of October, 1896, except that the proceeds are substituted as to property disposed of with their consent, and with all the rights of action which they as receivers would have to trace and follow the property of the partnership freed from the lien of the executions, assignments and transfers. But, as to the conveyance of the houses, which property the receivers do not take, the deeds are set aside as against the plaintiffs, with the usual judgment as in like cases. Costs are awarded in favor of the plaintiffs against the defendants, except the receivers.
Ordered accordingly.