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[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 5 By chapter 503 of the laws of this state, passed in 1887, it was enacted that "In all general assignments of the estates of debtors for the benefit of creditors hereafter made, any preference created therein ____ shall not be valid except to the amount of one-third in value of the assigned estate left after deducting ____ the costs and expenses of executing such trust; and should one-third of the assets of the assignor be insufficient to pay in full the preferred claims to which, under the provisions of this section, the same are applicable, then the said assets shall be applied to the payment of the same prorata to the amount of said preferred claims."
The provisions of this act have been under review in the second division of this court in the case of Berger v. Varrelmann (127 N.Y. 281), and whatever has been therein decided we regard as conclusive upon us to the same extent as if decided by us. That action was brought by judgment creditors of the assignor, to set aside a judgment entered against them by confession as in fraud of an assignment by them executed immediately after the confession of such judgment, and to recover for the benefit of the estate of the assignors the amount realized on the sale under the judgment. The ground of the action was that the judgment was confessed by the judgment debtors in contemplation of the subsequent assignment made by them and for the purpose of creating a preference by such judgment for more than the amount permitted by the statute.
It was held that the provisions of the act were not confined to preferences in the assignment itself, but that they applied to those created by a separate instrument in contemplation of the assignment, including all the instrumentalities which the insolvent debtor, in contemplation of such general assignment, *Page 8 voluntarily employed to give a preference. But a question arose in the case whether the act applied as against a judgment creditor by confession, who had no knowledge that the debtor confessing the judgment intended to follow it with an assignment.
The learned chief judge in the course of the opinion considered (not decided) the case upon the theory that the creditor had no knowledge when he took his confession of judgment that the debtor contemplated making a general assignment, and said that he thought it might well be decided upon that theory, but because some of his brethern thought, in the absence of a finding of fact that the creditor had this knowledge, the judgment by confession should not be set aside, but allowed to stand as a valid preference to the extent of one-third of the estate of the assignors, he proceeded to discuss the question of knowledge by the creditor, and from the whole evidence he came to the conclusion that the creditor had such knowledge, and that the court was required, under the rule as to implying facts, to infer in support of the judgment under review that the creditor knew when he took his confession of judgment and made his levy that the judgment debtor then contemplated making a general assignment.
A majority of the court agreed in this view, and the judgment by confession was set aside. Some of the members, however, thought that the fact of knowledge could not be implied, and, as it had not been found, they dissented from the views of the majority.
This case is, therefore, authority for holding that when the creditor has knowledge that the judgment is confessed by the debtor in contemplation of his assignment for the benefit of creditors, the judgment under the facts set forth in the case will be regarded as in violation of the statute.
The case under discussion here does not come within the authority of that just cited. A careful examination of some additional facts found by the learned court herein is necessary in order to determine precisely what is the status of the case before us. By the fifty-first finding the court found that the *Page 9 bill of sale and the assignment to Weinberg were one transaction and were both made for the purpose and with the intent on the part of the vendor and assignor to cheat, hinder and defraud his creditors, and to divide his property among creditors whom he wished to prefer in violation of the laws of the state of New York forbidding the creation of preferences in any assignment to an extent greater than the assets of the person making such assignment, and for the purpose of evading such statute and cheating and defrauding his said other creditors.
By the fifty-second finding the court found that the vendee William H. Beck had, at the time of the making of the bill of sale, actual knowledge of the intent of the vendor and assignor (his father) to cheat, hinder, delay and defraud his creditors.
By the fifty-third finding the court found that the two Becks, father and son, at the time when the bill of sale was executed and for a long time prior thereto, had connived and conspired together to cheat and defraud the creditors of the father and to dispose of all his property of any value among his friends whom he wished to prefer, in violation of the laws of the state of New York prohibiting any preferences beyond the amount of one-third of the assets of the person making the general assignment.
In the first of these three findings the intention of the vendor and assignor Beck is alone spoken of. The finding in substance is that it was his intention to cheat some of his creditors by dividing his property among other creditors whom he wished to prefer, in violation of the laws of New York, and by evading those laws. The court finds that this intention of the elder Beck, the son William H. Beck had actual knowledge of at the time of the making of the bill of sale.
It is not claimed that the first above-mentioned finding was intended to refer to these instruments as having been executed with the intent to hinder, delay or defraud creditors under those sections of the statute relating to fraudulent conveyances. (2 R.S. 137, §§ 1-8.) The learned counsel for the plaintiffs cites the findings for the sole purpose of sustaining his claim *Page 10 that the bill of sale and assignment were set aside because upon their face they were a fraud upon the statute relating to preferences in general assignments.
The exact extent of the knowledge imputed to the son by the second of these findings is rendered somewhat plainer by referring to the sixteenth and one hundred and first findings of fact made by the court upon the request of the defendants.
Those findings are respectively (1) that at the time of the purchase by the son from the father through this bill of sale, the son did not know that the father intended making a general assignment for the benefit of his creditors; (2) that the son first learned of the assignment made by his father to Weinberg, the day after it was made, when he was told of it by the assignee.
So far as the son is concerned, taking into consideration his ignorance of the existence of any intention on the part of his father to thereafter make an assignment, all the knowledge that can be imputed to him by the fifty-second finding is that he knew of his father's intention to execute the bill of sale and that it would operate as a preference to those creditors benefiting by it. Of any intention on the part of the father to hinder and defraud creditors by making an assignment upon the heels of the bill of sale, the son is by the express finding of the court entirely acquitted. The court in order to characterize the intent of the father, connects the execution of the bill of sale on one day, with the execution of the assignment on a subsequent day and calls them one transaction, and then finds that both were made for the purpose of hindering and defrauding the creditors of the father by dividing his property in a manner not permitted by the statute.
These findings show the fact that a preference was intentionally given to the son and others by the execution of the bill of sale by the insolvent father, and unless that fact constituted a violation of the statute as to preferences, there is no finding that the son was aware of any intent on the part of the father to violate that statute.
It is claimed that the fifty-third finding is a finding of actual *Page 11 fraud and conspiracy separated from the bill of sale and assignment, and in which fraud they were the culminating acts.
Bearing in mind the ignorance of the son as to any intent on the part of the father to make an assignment, and the result of the finding is that the father meant to pay or secure some of his creditors by making this bill of sale, and the son conspired with the father to that end, the effect of which the court says would be to prefer some of the creditors to a greater amount than one-third of the property of the vendor, and this connivance and action the court characterizes as a conspiracy to cheat and defraud creditors and a violation of the laws of New York in regard to preferences. There was no conspiracy to execute this bill of sale and to thereafter make an assignment, for the court finds the son was ignorant of an intent by the father to execute such an instrument, and indeed it fails to find even that the father had such intention when the bill of sale was made.
Of course a mere conspiracy to cheat and defraud amounts to nothing (Brackett v. Griswold, 112 N.Y. 454), and if an intent to defraud creditors is only proved by the doing of perfectly lawful acts, the mere fact that such acts are charged as being done pursuant to a conspiracy, is immaterial. The finding of the court of an intent to cheat and defraud creditors is based upon the finding of a conspiracy to dispose of all the father's property among his friends in violation of this statute, and the alleged intent to illegally dispose of the property or to violate the statute, is based, so far as the son is concerned, upon the fact of the execution of the bill of sale by the father, with the knowledge and connivance of the son, the result of which was to give a preference to the son and those other creditors whose debts were to be paid by the son. If this were an illegal act, where the son was in ignorance of any intent on the part of the father to thereafter execute a general assignment, then such act might be characterized as one which did hinder, delay and defraud creditors; otherwise not.
My examination of these findings of fact has been quite minute because of the claim made by the learned counsel for *Page 12 the plaintiffs that there was a substantial finding of fraud under the statutes relating to fraudulent conveyances, irrespective of any alleged fraud arising from an intentional evasion or attempt at evasion of the act of 1887, but I cannot see that any such construction can be fairly placed upon what has been found by the trial court. A reference to the opinions of the court makes the matter still more clear, as it there appears that the case was decided upon the theory that the bill of sale and the assignment must be construed together, and although there was a cunningly devised scheme to accomplish by indirection what he was prohibited by statute from doing directly, the vendor and assignor must be held to have failed in such purpose.
The question is, therefore, now fairly before us, whether a creditor who procures a bill of sale from an insolvent debtor in payment of or as security for an honest and subsisting debt, and in ignorance of any intention on the part of the debtor to make thereafter a general assignment, can hold it as against the world, even though the property passing under the bill of sale exceed one-third of the assets of the vendor. If the preference were contained in the general assignment itself, we have no trouble in concluding that it would be unlawful if in excess of the one-third of the assets of the assignor, entirely irrespective of the question whether the creditor was ignorant of the preference when the assignment was made, or whether he was ignorant of the intention of the assignor to make such assignment. In that case the assignor attempts to do in the very instrument itself that which the statute says he shall not do in such an instrument. The inhibition of the statute is not limited to the condition that the creditor shall be in ignorance of the preference. Such preference shall not be made, says the statute, and if made, it shall be void for the excess over one-third the assets. If the creditor attempt to take the preference, he does it by virtue of the very instrument which the statute says shall not give it, or if it do give it, that it shall be void for the excess. There is no room for argument in such case; but it is an entirely different matter where a preference is given by reason of an instrument which the *Page 13 debtor ordinarily has full power to execute and deliver for the very purpose of thereby giving a preference, and which a creditor has like full power to receive for the purpose of thereby receiving such preference. In such case it seems to me an important consideration to inquire whether at the time the security was taken or the debt paid the creditor knew the debtor was insolvent and intended to follow the bill of sale by an assignment for the benefit of his creditors and to thus divest himself of all control over his property. If he had such knowledge it would be entirely proper, as was held by the second division, to regard the confession of judgment as one of the instrumentalities employed by the debtor in contemplation of making an assignment for the purpose of giving a preference in violation of the act. Whether it should be regarded as one of such instrumentalities ought, as it seems to us, to depend somewhat upon the state of mind of the creditor. If he had knowledge that the debtor intended to make an assignment and that the security was given with the intent that it should result in consequence of the assignment in a violation of the provisions of the act, then we think the security should be adjudged ineffectual. In such case the creditor in effect participates with the debtor in an attempt to violate the act; but even then how far the judgment should go is worthy of some inquiry when the question shall arise. Whether it should set aside the whole security or leave it to fare with the rest under the assignment to the extent of one-third of the debtor's assets in accordance with the act, we do not now determine.
It is said that the statute is aimed at the debtor and his action alone, and that it does not affect the creditor, and hence if the debtor make an illegal preference and thus violate the statute, the intent or knowledge of the creditor is immaterial, and the preference in excess of the amount permitted by the statute must be disregarded. This may well be true when the preference which the debtor makes is contained in the very instrument described in the statute. Any preference the debtor therein makes which runs counter to the statute, *Page 14 must be treated as the statute directs, and the intent of the assignor in giving the preference is wholly immaterial. But the statute does not and was not intended to prevent a creditor from obtaining payment of or a security, and thereby a preference for his debt, even from an insolvent debtor, and where a court is asked to set aside a security which is disconnected from and prior to any general assignment, on the ground that it is in violation of the act in relation to preferences in general assignments, it at once becomes a question whether that act was ever intended to cover a case where the creditor, obtaining or availing himself of such securities, was ignorant of any existing intention on the part of the debtor to thereafter perform an entirely separate act and make a general assignment. It does not, in terms, cover such a case, and we think it should not be thus extended by construction.
In White v. Cotzhausen (129 U.S. 329) it appeared that it was the intention of the debtor by the means he adopted, to give to his mother and relatives, and it was their intention to obtain a preference over all other creditors, and what was done was in execution of a scheme for the appropriation of the estate by the debtor's family to the exclusion of the other creditors, thereby avoiding a general assignment. In that case the Supreme Court was administering the law of Illinois, and the learned judge, in the course of his opinion, said that where an insolvent debtor recognizes the fact that he can no longer go on in business and determines to yield the dominion of his entire estate, and in execution of that purpose, or with intent to evade the statute, transfers all, or substantially all, his property to a part of his creditors in order to provide for them in preference to other creditors, the instrument or instruments by which transfers are made, and that result is reached, whatever their form, will be held to operate as an assignment, the benefits of which may be claimed by any creditor not so preferred who will take appropriate steps in a court of equity to enforce the equality contemplated by the statute. Such, said the judge, we think is the necessary result of the decisions in the highest court of Illinois. *Page 15
The act there under consideration was a statute of Illinois prohibiting the preference in an assignment of any debt or liability over another and declaring such preference void.
Taking the facts into consideration as shown in that case, viz., a scheme entered into by all the family, debtor and creditors, to give and to obtain a preference over all other creditors and by means of such scheme to appropriate the entire estate of such debtor to his own family and to the exclusion of all other creditors, it possibly might not be a great strain upon the statute to hold such a scheme void. But we have no such case. Instead of a scheme shared in by the creditors to appropriate property in evasion of the statute, there is entire ignorance upon the part of the creditor of any such scheme and there is the fact that the creditor is only doing an act which has always heretofore been entirely legal, viz., obtaining security for and probably thereby a preference in the payment of his debt from an insolvent debtor.
In the case in the Supreme Court it is recognized that the statute of Illinois does not contravene the general rule that a debtor when financially embarrassed, may in good faith compromise his liabilities, sell or transfer property in payment of debts, or mortgage or pledge it as security for debts, or create a lien upon it by means of a judgment confessed in favor of his creditor. But all these acts which might otherwise be valid and which a creditor would have the right to avail himself of, are to be declared void if the debtor has at that time recognized the fact that he can no longer go on in his business. Our statute does not, in terms, cover such a case and differs also from the Illinois statute, which declares void all preferences.
It does not seem to us that either the letter or the spirit of our statute covers a case where the creditor is ignorant of any intended violation of the statute by the debtor, and where the act of the creditor is simply to obtain security for the payment of an honest debt due from the debtor to himself.
We are disposed to agree with the Supreme Court of Pennsylvania as the doctrine of that court is announced in Lake Shore BankingCo. v. Fuller (110 Penn. St. 156), where the *Page 16 court says: "Nor can we agree that a mere intent of the debtor, unexpressed to the creditor, to give him a preference by paying or securing the debt, although he at the time contemplated and soon after executed a general assignment, operated to defeat such preference on the ground that it is contrary to the act of 1843. Such an intent is not unlawful and cannot be inferred from a proper act. But even if it were, the creditor who has a perfect right to accept payment or security of his debt, and has notparticipated in the alleged unlawful intent, should not be compelled to forfeit his preference in that amount. He at least is innocent and may in good conscience hold the advantage he has obtained."
It has been urged that by this construction the statute may be easily evaded. It is said a failing debtor may prefer his favorite creditors by separate instruments and then make a general assignment, and as a result his favored creditors will be paid in full and those provided for in the assignment will get nothing. Those creditors, however, who participated in or were cognizant of the intent of the debtor, could not avail themselves of their securities beyond, at any rate, the statutory rate (Berger v. Varrelmann, above referred to), and as to those creditors who were ignorant of any such intent it is not perceived that any great misfortune would attend the allowance of their securities in the same way as has been legal for a long number of years past. The debtor might also neglect to make an assignment and then it would look as if the acts of preference would be legal. The statute of 1887 at any rate does not cover such a state of facts and we do not feel at liberty to enlarge its provisions by construction so as to bring such facts within the condemnation of the statute. If it be thought good policy so to do, the legislature, and not this court, is the body to which application should be made to effect such change in the law.
There are many other facts testified to before the trial court, and not herein alluded to, which the counsel for plaintiffs claims are evidence of actual fraud on the part of the defendants herein, within the statute relative to fraudulent conveyances. *Page 17 The findings of the court, as we have seen, go upon the ground that the intent of the debtor to violate the statute of 1887 was a fraud, and hence a hindrance and delay to creditors. The actual fraud has not been found and we do not feel like disposing of this case upon a fact not found or passed upon by the court below, while repudiating the real ground upon which the judgment was founded. The actual fraud claimed by the counsel for the plaintiffs may be proved on the new trial and if found as a fact by the court or jury, will dispose of the case in favor of plaintiffs.
We think the judgment should be reversed and a new trial ordered, with costs to abide the event.
All concur, except EARL, J., not voting.
Judgment reversed.