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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 37 I am not disposed to dispute the proposition of the appellants, which has been so ably argued by their counsel. If the transactions between the firm of Falk Brothers Co. and the creditors of that firm, which resulted in transfers of all the firm property, had been simultaneous and it was plain that, in their guise, the debtor firm had, in fact, made a general assignment to favored creditors, then I should consider that there had been a violation of the provisions of the statute, regulating the assignments of the estates of debtors for the benefit of their creditors. The prohibition of the act of 1887 (Chap. 503, N.Y. Session Laws, sec. 30) against the creation of preferences, except to the amount of one-third in value of the assigned estate, cannot be evaded by resort to instrumentalities, which, however independent, are merely parts of a plan, through which certain creditors secure a preference in payment and the distribution of the debtor's assets as intended by the statute is prevented. Such a scheme between a debtor and some of his creditors would be as intolerable an evasion of the statute, as would be a transaction where the particular instrumentality, resorted to between the parties to secure the undue preference, was a transfer of property made independently, but in contemplation of a general assignment. If it were the fact that the defendant banks knew of their debtors' intention subsequently to accomplish an assignment of their whole estate to favored creditors, then we might regard the transaction with them, on the evening of March 27th, as one of the instrumentalities for evading the statute and for working a fraud upon creditors. But there was no general assignment under the statute by the Falks and the *Page 40 finding to that effect is in accord with the facts of the case; although, as a matter of fact, through the various transfers, the debtors have disposed of all of their property.
The evidence does not bear out the plaintiffs' proposition, nor establish the existence of any scheme as between these banks and Falk Brothers. Before discussing that part of the case, I may observe that if it were true that the transaction with these banks constituted an undue and illegal preference and there was, as it is also in substance alleged and as it has been argued, a general assignment by the debtors Falk of their property, which was in evasion of the statute and in violation of its provisions simply because creating preferences contrary to the provisions of the statute, then the plaintiffs have not pursued, in my judgment, the proper remedy. In such a case they should come into the court and ask its equitable aid to secure to themselves and the other creditors, who were excluded by these instruments from a share in the debtors' assets, that ratable distribution of two-thirds thereof, which the act of 1887 intended they should in all events have. Otherwise they would by reason of their judgments obtain a preference in the payment of their debts, which they complain of as having been given by the debtors to other of their creditors. That is a position which a court of equity could not regard with any favor. The purpose of the statute is to prevent any preference, other than that for wages or salaries of employés, beyond one-third of the assigned estate and if that amount is exceeded, the penalty is not the annihilation of the assignment, but the reduction of the preference to the prescribed limit. (Central National Bank v.Seligman, 138 N.Y. 435.) Where that is the condition of affairs under a general assignment of the debtor's property, the remedy of creditors aggrieved by their debtor's act is by an action in aid of the assignment for the benefit of the body of creditors; if their rights are not asserted by the assignee. (Spelman v.Freedman, 130 N.Y. 421; Bank v. Seligman, supra; Abegg v.Bishop, 142 N.Y. 286.) In such a case the maxim vigilantibuset non dormientibus jura sub-veniunt *Page 41 cannot be invoked. It has application in cases where it is the policy of the law to reward enterprise and to punish indolence and negligence. It is needless to observe that it cannot be the policy of the law to encourage an activity, which would defeat one of its principal objects. But the difficulty with this case is that it is not borne out by the facts. Although the various instruments of transfer between the Falks and the defendant banks and between them and their other creditors, all, bore the same date, as matter of fact the transaction with the banks, alone, took place on the 27th of March, 1891; while the transactions with the other creditors were upon the succeeding day. So far as the evidence discloses, there was no relation, nor connection, between the transaction with the banks and that with the other creditors on the following day. None can be inferred from the similarity of the dates. The finding of fact was that at the time of the transaction none of the banks had any knowledge, or notice, of any other transfer, or intended transfer, of any property by the Falks. There is nothing in the evidence which shows, or tends to show, that knowledge and the burden upon the plaintiffs to give such proof was never shifted upon the defendants. The argument in answer assumes that the plaintiffs had shown that when the Falks executed their transfer to the banks, they contemplated insolvency and an evasion of the statute respecting assignments and that, therefore, it was for the defendants to prove their innocence of any participation in such a scheme. The assumption is wrong not only in the facts, but in the law. The proof simply showed that the Falks, finding themselves financially embarrassed, hastened to secure their indebtedness to the three banks upon the unmatured notes and accomplished it by taking up the existing notes and giving therefor notes payable on demand; payment of which was secured by a transfer or pledge of property; under the terms of which the banks were enabled to proceed, immediately, to take possession of the property covered and, by a sale, eventually, to satisfy nearly all *Page 42 their indebtedness. There is not a word, nor an incident, to show that, at the time of this transaction, the Falks intended anything more than to secure the banks against loss upon the notes held. Whether they had in mind, at the time, the making of further transfers, afterwards; or whether that idea occurred to them subsequently does not appear and it is immaterial to the issue. The transaction was one to secure the payment of a valid and subsisting indebtedness and if the defendant banks were ignorant of any intention of their debtors to follow up the transaction by divesting themselves upon the next day of all control over the balance of their property, they cannot be said to have been participants in any scheme for the violation, or evasion, of the statute. The finding is explicit upon the question of knowledge and the case, therefore, in that aspect, and as one where the creditor simply obtains security for the payment of his honest debt, comes within the authority ofManning v. Beck (129 N.Y. 1). In that case the question was 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 exceeded one-third of the assets of the vendor. There a father transferred to his son, to whom he was indebted, a stock of goods and fixtures in a store by a bill of sale, in payment of the indebtedness. The next day the father made an assignment for the benefit of creditors to an assignee. The son knew that his father was insolvent, but did not know that he intended to make a general assignment. The preference thus intentionally given to the son was upheld. It was said that "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 when 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 *Page 43 in general assignments, it at once becomes a question whether the act was ever intended to cover a case, where the creditor * * * 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." The decision in Manning v. Beck is carefully reasoned out and shortens a discussion upon questions which were there considered.
In view of the findings and upon the evidence, the transfers of property to the defendant banks and to the other creditors cannot be regarded as constituting one transaction, or having one and the same general object. In the case of the debtors, there is nothing but surmise upon which an inference can be rested of an intention to evade the statute by preferring certain creditors through a series of separate assignments or transfers of property; while as to the defendant banks, there is no evidence to charge them with knowledge of any such intention, if it existed, and there is the express finding that they had no knowledge of any other intended transfer of property by the Falks.
The position of the appellants is weak in several respects. It incorrectly assumes that all the instruments were simultaneously executed. It regards the transfer of the property to the defendants as a mere trust assignment; whereas it was actually a pledge or mortgage of the property as security for an existing indebtedness. It assumes that the Falks made the transfer in contemplation of insolvency and with a design to evade the statute, without any evidence upon which the assumption might rest. It assumes the existence of evidence tending to prove as a fact an intention to hinder, delay and defraud creditors; when there was none, unless by treating the transfer to the defendants on March 27th and the subsequent transfers to other creditors upon the following day as one transaction; which, because preferring certain creditors to the extent of all their property, was in violation of law, or, as it is said, "a fraud upon the statute." *Page 44
I think it needless to pursue further a subject, which in recent and successive decisions has been in effect covered by their discussions, in its several phases. (See Berger v.Varrelmann, 127 N.Y. 281; Manning v. Beck, 129 id. 1;Central Bank v. Seligman, 138 id. 435, and Abegg v.Bishop, 142 id. 286.)
The judgment should be affirmed, with costs.
All concur.
Judgment affirmed.