The character of this transaction is not left in any doubt. It was an attempt by George Tunnell to indemnify the sureties in his several guardian bonds by means, first, of a regular assignment on the sixteenth of August, 1842, of all his property, real, personal and mixed, to three of them, with an express trust for the eight others, by name, and a resulting trust for himself. This security was abandoned, under the impression that it was prohibited by our act against fraudulent insolvency. The grantees, or assignees, took possession of no part of the property under this assignment; but repudiating the same, as to any action under it, they further executed a reconveyance of the real property to George Tunnell.
But, for the same purpose of securing an indemnity to these sureties, Tunnell on the same day, executed to three of them, in trust also for the eight others, an absolute bond and warrant of attorney in $30,000, conditioned for the payment of $15,000, upon which judgment was confessed, and in execution of which all of Tunnell's property was sold. For the same purpose and on the same consideration, he assigned to them certain judgments and other debts due him, which they collected and received, holding the proceeds for their indemnity as aforesaid.
The leading question in the case is, whether this transaction is lawful in respect to the other creditors of George Tunnell, who had not before the sixteenth of August, 1842, obtained by judgment or execution any lien on his property?
It does not appear that George Tunnell, at the date of this bond, contemplated insolvency; or that he, or his sureties, considered him insolvent; or that he was insolvent. There were no judgments against him, and he was in possession of a considerable property, real and personal, but his guardian accounts showed large balances due to his wards, for which these eleven securities were answerable, and at their urgent solicitation he executed this bond, to secure the debt which he owed the minors, and thus indemnify the sureties. *Page 217
The question is, whether he had the power to do this; or whether, in reference to his other creditors, it is to be deemed legally fraudulent. There is no actual fraud in it; on the contrary it was right and proper to pay the debt due these minors, and to secure or indemnify his sureties, who were all meritorious creditors; but on grounds of general policy, can a debtor thus in embarrassed and failing circumstances, prefer even the most deserving creditor, by giving him in the mode here adopted, the first judgment lien and the first execution, to an amount sufficient to cover his whole property?
Preferring creditors by a debtor in failing circumstances, is not fraudulent; it is only prohibited when in connection with assignments under the insolvent laws, or voluntary assignments made with the intention or in contemplation of taking the benefit. A failing debtor may lawfully pay a just debt, or many debts, even to the extent of all his property; and if he may pay such debt by an application of his property, I see no reason why he may not secure it by a transfer, assignment, judgment lien or mortgage thereof. His power to do so is conceded in the cases cited by complainant's counsel from Cowen andWendell and Johnson, which cases are decided under the New York statute of frauds, prohibiting conveyances to the use of the grantor, and all conveyances made with intent to delay, hinder or defraud creditors; either of which would be void at common law, or under the statute of Elizabeth. But merely preferring creditors either by assignment or security by lien, is not within that statute, and would be lawful there or here, unless the mode of performance so connects itself with proceedings in the insolvent court, actual or contemplated, as to fall within the special restrictions of our act of assembly. Hence in Waters vs. Comly, 3 Harr. Rep., 129, this court decided that a failing debtor might pay any one of his creditors, or give a judgment for a bona fide debt, securing payment of it in full.
Our act of assembly adopts the principle of equal distribution, after insolvency, and prohibits preferences in assignments made "in contemplation of insolvency, or in contemplation of taking the benefit of the insolvent laws;" being assimilated, in this respect, to the English bankrupt law. The securities taken in this case, whether the deed or bond, if unlawful, must be so either under this act, or at common law, or under the statute of Elizabeth. The last prohibits feigned and covinous conveyances, bonds, c., made to defraud *Page 218 creditors and others of their just and lawful debts; and, at common law, all conveyances made with intent to delay, hinder or defraud creditors, were void. Was the bond in this case covinous, made to defraud creditors, or with intent to delay and hinder them? George Tunnell was under a real obligation to these sureties. They were bound for him in large balances ascertained on his guardian accounts, for property of his wards, which was then in his posession; as such sureties they were his creditors, and not merely creditors, but of a class of creditors always regarded as having strong claims to priority and protection. [Murray vs.Riggs, 1 Johns. Rep., 584.] His affairs were becoming embarrassed, and though not apprehending actual insolvency or contemplating such a result, they urgently solicited the security of a conveyance or bond of indemnity, giving them a preference of other creditors, by lien upon his property. They were entitled to this as his sureties; they obtained it by lawful diligence. They sought not, nor did he, to cover his property from other liabilities, nor to defraud or delay other creditors; the proposition came from them, and was reluctantly agreed to by him, under threats of proceedings for his removal from the guardianship. This appears to be the line of distinction between lawful and unlawful preferences. The question is always whether they were made with intent to defraud others, or granted in discharge or security of a fair liability, as a concession to the superior diligence or urgency of a creditor. This is often left to a jury, as ruling questions of fraudulent preference. Thus, in Thompson vs. Freeman, 1 Term Rep., 155, Lord Mansfield said, a bankrupt when in contemplation of bankruptcy, cannot by his voluntary act favor any one creditor; but if under fair or legal process he give a preference, it is evidence that he does not do it voluntarily. (2 Bos. Pul., 584, Hartshorne vs. Slodden.) To avoid the delivery of goods (as security) by a trader in failing circumstances, it must appear that he had the act of bankruptcy in contemplation; if they were delivered through urgency of demand or fear of prosecution, whatever may have been his contemplation, it will not vitiate the security. If a security be given bona fide, under the impression of an obligation, and not springing from the voluntary act of the bankrupt, said security is good. The rule is this. Any payment by a trader in contemplation of an act of bankruptcy, voluntarily and with the intention to prefer a creditor, is deemed fraudulent as to other creditors; but a creditor has the right by diligence *Page 219 to procure such preference, and if payment be made or security be given at his solicitation or from fear of suit, it will be good, even where the debt is not due. (11 East Rep., 262, Crosby vs. Cranch.)
It does not appear to me that the bond given in this case to secure the amount due on the guardian accounts was fraudulent at common law or by statute; nor that the deed itself can be regarded, according to the decree of the Chancellor, as "fraudulent and void, being voluntary and creating a preference contrary to the act of assembly." The act only prevents preferences given in the deed of assignment of all the debtor's property for the benefit of his creditors, or such as are made in contemplation of insolvency; and has never been held to prevent a debtor in failing circumstances from paying a debt, executing a bond, or giving a security for a bona fide debt or obligation. (Waters vs. Comly, 3Harr. Rep., 117.)
At the time of the execution of these papers, it would have been lawful in George Tunnell to have paid the balances appearing on the guardian accounts in cash; or to have delivered property to the full amount to any person authorized to receive it for the minors; and I cannot perceive how an assignment, or bond to the sureties for the same object, can be deemed fraudulent. It deprived the other creditors of no rights, except the right of preference, which they as well as the sureties might have obtained by diligence; it covered no property beyond the just debt, for the trust was expressed on the deed, and the bond was taken as an indemnity; it hindered no one in the collection of his debt, beyond the amount of the wards' claims, which were equally meritorious debts, having, through the sureties, obtained a legal preference by superior diligence.
If the deed is objectionable in law, it seems to me it is not for giving a preference, for it is not an assignment for the benefit of creditors, in which preferences are prohibited, but for another feature which would make an assignment void at the common law, viz: the reservation of a reversionary interest in the debtor. To that extent this deed would probably be held void, and it might vitiate it altogether, (2 Pick. Rep., 137,) though it is not unquestioned whether this would deprive the creditor, not being a party to the fraud, of the benefit of his security under it, if that security is otherwise lawful and valid. (5 T. Rep., 420; 8 Ib., 521; 2 Pick. Rep., 131.) The same objection does not lie against the bond; *Page 220 which, though of the same date, is a distinct security, both having similar objects, but the one not taken to enforce the other, which is the case where separate instruments are vitiated by the fault of one. (5 Cow., 571-2.) It would be impossible by the bond to enforce this objectionable feature of the deed; the effect of the judgment, if executed, was just the reverse, to prevent a return of the property or its proceeds to the debtor, and make it immediately applicable to all his debts, in the just order of preference. And the answer distinctly states that the bond was taken as an alternative and not an ancillary security, the obligees having determined not to execute the trusts of the deed. The whole case then comes to the question whether a surety in a guardian bond, after accounts settled, showing indebtedness to the minor, may, for the purpose of indemnity, lawfully, by persuasion or threats of suit, procure from the guardian, being embarrassed but not insolvent, a judgment bond in an amount sufficient to cover his liability. I think he may; that such security is not fraudulent in itself, nor fraudulent in law; it is not merely voluntary on the part of the debtor; not made in contemplation of insolvency; not without consideration; and does not cover his property or deprive other creditors of their rights, or confer any rights which a bona fide creditor may not by diligence lawfully acquire.
The complainant in this case was guilty of great neglect. He might by ordinary diligence have secured his debt, which he held without even entering judgment, for a period of more than eighteen months, during which time, or before the respondents entered their judgment, no other creditor so much doubted George Tunnell's solvency, as to enter any judgment against him. If during this time he was thriftless and improvident, becoming involved in debt and approaching insolvency, the diligent creditor who first took warning, is entitled to the benefit of his diligence, if he merely protects himself, without in any way aiding the debtor to defraud others, and the sureties on whose credit and by whose means this debtor held most of his property, were as much entitled to this protection as any other creditor.
But apart from these questions, upon which the case was presented to the Chancellor, there appears to be sufficient ground for relief to the complainant presented by the bill and not denied, but rather admitted by the answer. The complainant's demand was for the balance of the purchase money of the lands conveyed to Tunnell, of which the respondents had full notice at the time of the conveyance *Page 221 to them, and the execution of the bond under which the land was sold, and the proceeds paid to the respondents. The complainant is, therefore, entitled, on principles of equity, to be paid the purchase money out of these proceeds; and to the decree of the court for the payment of the same, namely, $700, with interest from the first of January, A. D. 1841. The residue of such proceeds and all other money, property or effects of George Tunnell, collected or received by the defendants, under the bond and judgment, or the assignments, or otherwise, ought to be decreed to be applicable to their indemnity, as Tunnell's securities, and the balance to Tunnell's other creditors; and the defendants ought to be required by the decree of this court, to account for all the funds so received, and to show the amount of their liability or loss as sureties, for which they are entitled to indemnity. For this purpose, an account should be decreed and the record remanded.
And the respondents should pay the costs of this cause, both here and in chancery; for although the decree of the Chancellor, declaring the bond and judgment fraudulent and void is reversed, the complainant's equity is sustained to the full extent of his claim, and the obligation of the defendants to pay that claim out of the proceeds of sale of his land conveyed to George Tunnell, is established. Had this obligation been recognized by them and discharged, there would have been no necessity for these proceedings; nor, so far as Paynter Jefferson is concerned, any costs incurred.
Decreed accordingly.