
    James Chambers, Limited, v. Smith et al.
    
    
      (Supreme Court, General Term, Third Department.
    
    May 21, 1891.)
    3. Assignment for Benefit of Creditors—Preferences—Employes.
    A preferential assignment for the benefit of creditors, which contains a proviso that the preferred claims shall be “paid in full only in case one-third of the value of the assigned estate shall he sufflcientforthat purpose, and said preferences shall in every particular be made in accordance with the laws of the state of New York in regulation of preferential assignments, ” is valid, under Laws N. Y. 1887, c. 503, amending Laws 1877, c. 466, by adding thereto section 30, which provides that a preference in a general assignment “shall not be valid except to the amount of one- ■ third in value of the assigned estate left after deducting ” wages or salaries of employes, and the costs and expenses of the assignment. Following Richardson v. Thurher, 104 N. Y. 606, 11 N. E. Rep. 133.
    
      2. Same—Firm and Individual Debts.
    Defendant’s partner, J., borrowed money, giving bis individual notes, therefor, and used the money in the business of the firm. Afterwards J. died, leaving as his sole heir and distributee defendant, who continued the business of the firm, and paid interest on the notes given by J. Held, that the debt for which such notes were given was the individual debt of J.. and could not be preferred in a general assignment for the benefit of creditors subsequently made by defendant. Learned, P. J., dissenting.
    8. Same—Debt op Another.
    The preference in a general assignment of debts for which the assignee is not liable will vitiate the assignment, though the assignor, believed that he was liable for such debts.
    4. Same—Findings op Referee.
    A finding by the referee that an assignment for benefit of creditors was executed honestly, and not with intent to hinder, delay, or defraud creditors, will be set aside on appeal, where he also finds facts from which fraud would be necessarily inferred, though 2 Rev. St. H. Y. p. 137, § 4, provides that the question of fraudulent intent in a conveyance or assignment is “a question of fact, and not of law,,”
    5. Same—Prior Disposal of Property.
    Where an assignor, immediately before executing a general assignment which purports to include all his property not exempt from levy, gives a sum of money to his wife, the assignment will be set aside.
    Appeal from judgment on report of referee.
    Action by James Chambers, Limited, a judgment creditor, against E. Leroy Smith, assignee, etc., and Burr W. Upham, to set aside a general assignment of defendant Upham to defendant Smith for the benefit of creditors, on the ground of fraud. The case shows that prior to October 14, 1888, J. M. Up-ham and Burr W. Upham were partners in business under the firm name of J. W. Upham & Son. That on that day J. M. Upham died intestate, leaving no widow, and that the defendant Burr W. Upham was his only heir and next of kin, and that no administration was ever granted on his estate. After his death Burr W. Upham continued the business in his own name, and on the 18th day of December, 1889, the defendant Burr W. Upham was indebted to the plaintiff, for which indebtedness the plaintiff, on the 8th day of January, 1890, recovered a judgment for the sum of $1,183.16, which was duly docketed in the proper county, on which an execution was issued to the sheriff, and before the commencement of this action the execution was returned wholly unsatisfied. On the 13th day of February, 1890, the plaintiff, upon an indebtedness which accrued from the defendant to him before December 18, 1889, recovered another judgment against the defendant Burr W. Upham for the sum of $487.81, which was duly docketed, and on which an execution was in like manner issued to the sheriff, and before the commencement of this action returned wholly unsatisfied. On the 18th day of December, 1887, the defendant Burr W. Upham executed, acknowledged, and delivered to the defendant E. Leroy Smith a general assignment for the benefit of creditors, in and by which, after providing for the costs and expenses of executing the assignment, and the commissions of the assignee, and the payment of labor claims preferred by law, and directed the assignee to pay in full the notes made by J. M. Upham to Clark White, one for $1,000, and two of $500 each, and one note for $500, made by J. M. Upham & Son, also payable to Clark White. The assignment also directed the assignee, after the payment in full of the claims above specified, to pay in full 12 other creditors, whose names and the amount of wiiose claims are respectively set out in the assignment, amounting in the aggregate to about $1,600. The assignment then provides that the preferred claims shall be paid in full, “only in case one-third the value of the assigned estate shall be sufficient for that purpose, and the said preference shall in every particular be made in accordance with the laws of the state of New York in regulation of preferential assignments.” Tiie assignment then provides for the payment of all the creditors of the assignor in full, if the assigned estate is sufficient for that purpose; and, if not sufficient, ratably; and, if a surplus remains after the payment of all debts and expenses, then to return that.surplus to the assignor. On the day of the execution of this assignment the assignor, Burr W. Upham, in contemplation of the assignment, gave to his wife, without any consideration, $200. The value of the assigned estate was $11,953.03. The liabilities were $17,-717.51. The referee ordered judgment for the defendants, and plaintiff appeals.
    Argued before Learned, P. J., and Landon and Mayham, JJ.
    
      Hastings & Gleason, (A. H. Gleason, of counsel,) for appellant. Robert O. Bascom, for respondents.
   Mayham, J.

The plaintiff attacks this assignment on the ground that upon its face it does not conform to the provisions of chapter 503 of the Laws of 1887. By this act, chapter 466 of the Laws of 1877, as the same had been amended, was again amended by adding another section, as section 30, which pfovides 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 such wages or salaries, and the cost and expenses of such trust.” The assignment in this case does not follow the wording of the statute, and it is insisted by the appellant that the assignment directs the payment of the preferred claims in full only in case óne-third of the entire estate shall be sufficient for that purpose. The language of the proviso in the ssignment is as follows: “Provided, nevertheless, that all the claims above preferred to be paid, shall be by the party of the second part paid in full only in case one-third of the value of the assigned estate shall.be sufficient for that purpose; and the said preferences shall in. every particular be made in accordance with the laws of the state of Hew York in regulation of preferential assignments.” It is quite obvious that this language is broad enough to require the assignee to pay the preferred claims in full, if one-third of the bulk of the estate assigned before any deduction for expenses or payment to labor was made were sufficient for that purpose. But it is insisted on the part of the respondents, as the same paragraph of the assignment provided that “the said preferences shall in every particular be made in accordance with the laws of the state of Hew York in regulation of preferential assignments, any misdirection in the'assignment was cured by that provision, and that the assignee was required to follow the statute, and not the precise wording of the assignment.” It is apparent, if we read the assignment in connection with the statute, that the assignor intended that the preferences should be measured by its provisions, and paid in full only out of one-third of the net assets, after paying expenses of the execution of the trust and the statutory preference to laborers. This was the construction given to the assignment by the learned referee, and in that construction we think he is sustained by the case of Richardson v. Thurber, 104 N. Y. 606, 11 N. E. Rep. 133.

The next point raised on this appeal by the appellant is that the assignment is void, for the reason that it creates fraudulent preferences. Three of the notes held by Clark White, amounting in the aggregate to $2,000 and interest, were given by J. W. Upham, to which the assignor, upon the notes themselves, does not appear to be a party, and the only evidence upon this subject is that of the defendant Upham, who says the money was borrowed by his father, that it went into the business, and that after his father’s death he paid the interest on the notes. Did that act amount to such a valid assumption of the notes on his part as to bind him for their payment? ' We think not. Assuming that J. W. Upham borrowed that money of White, and put it directly in the firm business, Upham, and not White, would thereby become the creditor of the firm, and White would be compelled to look in the first instance to J, W. Upham for payment. He would have no claim against the firm as such. The most he could do would be to procure a judgment against Upham, and then, in default of payment, enforce it against J. W. Upham'b interest in the firm property. But it is said that on the death of J. W. Upham the defendant succeeded to all of his interest as his only next of kin and heir at law, and that he took the estate of his deceased father subject to his debts. While that is so, the father’s debts, in no just sense, became the debt of the son. He may, as administrator de son tort, have made himself liable to the personal representative of his father’s estate for the property or money of his father’s estate which, as against the personal representative or the creditors of such estate, he wrongfully converted to his own use without due administration of that estate, but such liability, if it existed, could not be the subject of a preference in an assignment made by him for the benefit of his own creditors. The debts of J. W. Upham must be paid out Of the estate, and, if that estate is insufficient for that purpose, this defendant, Upham, could not make good that deficit by a preference in favor of the creditors of his father as against his own creditors. The error into which the learned referee seems to have fallen on this branch of the case is that of treating Burr M. Upham as primarily liable for his father’s debts, because of the devolution of his father’s estate to him, as the next of kin of his father, J. W. Upham, and his taking and appropriating the same to his own use, or that by some valid act he bad assumed and made himself personally liable to pay the "Clark White notes. As we have seen, he did not become personally charged with the payment of his father’s debts by reason of his relation as next of kin or heir at law.

Bid he make such a valid personal agreement with Clark White, or the holder of the Clark White notes as to bind him personally for their payment? Clark White was an uncle of the defendant Burr M. Upham, and the only evidence in the case of Upham’s assumption of the White notes is in his testimony, and in the receipt for payment of interest, and his letter to his uncle after the death of his father. In his testimony he says: “I wrote to Mr. White, my uncle, in relation to the matter. Clark White is dead. I never saw Clark White after my father died. I received a reply from White. Question. What, if anything, did you do in relation to these Clark White notes, in July, 1889, or about that time? Answer. I paid the interest on them up to the 1st of July, 1889. Q. At the time you executed this assignment, did you believe that you were liable to pay the Clark White notes? A. Yes, sir; I did believe so. I told Mr. Gleason that the money on these Clark White notes was borrowed by my father.” The referee received in evidence upon this question, under the plainiiff’s objection, a letter-written by the assignor to Clark White, as follows: “Glens Falls, N. Y.. Oct. 24, 1884. Clark White, Esg.—Bear Uncle: In reply to yours, I would say I will take up one note of $500 on Hov. 15th or 20. Cannot do it before. And will you kindly send me a receipt for interest paid on all notes July last, and oblige, your nephew, B. W. Upham.” As bearing upon the question of the assignor’s liability upon these notes, the referee received in evidence, under the plaintiff’s objections, a letter from Clark White to the assignor, dated October 25, 1889, containing a receipt in the following form: “Received, Hew York, July, 1889, $187 81-100, of B. M. Upham, the amount of interest due on four notes given by J. W. Upham and J. M. Upham and Son, dated as follows: April 12th, 1887, one of one thousand dollars; Hov. 19th, 1887, one of ($500) five hundred dollars; Feb. 10th, 1888, one of five hundred dollars; Sept. 11th, 1888, one of five hundred dollars. Clark White. ”

We find no other evidence in the case which, either directly or indirectly, bears upon the liability of the assignor to pay the Clark White notes made by J. M. Upham. The only agreement in writing by the assignor is in his letter of October 24, 1889, in which he agrees to “ take up one note of $500,” without designating any particular $500 note. There were three $500 notes held by White, one given by J. M. Upham & Son and two by J. M. Upham alone. As the surviving partner of J. M. Upham & Son, he was liable on the note given by the firm, and his promise in this letter would, in the absence of any evidence to the contrary, be deemed to refer to the note on which he was liable. Nor do we see how it can bind the assignee, if applied to any other note. If applied to the J. M. Upham individual notes, it would be but a collateral promise to answer for the debt of another, without any consideration expressed in it, and would be void within the statute of frauds. As these notes were not rbade by the assignor, as appears upon their face and as is found by the referee, and as they did not represent á firm debt, the assignor could not assume them as surviving partner, and thus create a liability against the partnership; nor did his payment of the interest thereon amount to any valid legal assumption which would bind him, as an individual, to pay the amount due on these notes. In no aspect of this case, upon the evidence, can these Clark White notes be held to be valid claims against the assignor individually or as surviving partner at the time of making this assignment.

But it is insisted on the part of the defendant that, at the time of making this assignment, the assignor believed he was liable to pay all of the Clark White notes, and that the same were preferred therein in good faith, and without intent to defraud his creditors, or to create any illegal preferences. But, even if the assignor believed himself liable to pay the notes given by his father to White, and to which he was in no way a party, that belief would not authorize him, in his voluntary assignment for the benefitof his creditors, to withdraw his assets which legally and justly belonged to his creditors, and direct the application of the same upon the debts of his father, which he was not bound to pay. In Bank v. Halsted, 20 Abb. N. C. 155, it"was held that an assignment by a firm is invalidated by a preference of an individual debt of a partner out of the proceeds of the partnership property. In Wilson v. Robertson, 21 N. Y. 587, it was held that the appropriation of an insolvent firm of partnership property to the payment of the individual debt of one partner is not simply void, but is fraudulent, and avoids the deed of assignment. In Bank v. Cohn, 42 Hun, 381, it was held that a general assignment, transferring the property of a firm for the purpose of paying an individual debt of the partners, as well as the firm debts, is wholly void as to the firm creditors, and must be set aside. All of these cases, and many others of a kindred character, proceed upon the theory that such a transfer tends to hinder, delay, and defraud the creditors of the assignor. In the case at bar the direct effect of preferring the debts of J. M. Upham out of assets assigned is to divert some of the assigned property to "a purpose other than the payment of the assignor’s debts, and thus to hinder, delay, and defraud his creditors. As was said in Bank v. Cohn, supra, “the effect being known, the intent to accomplish it is just as plain as if it had been confessed in the assignment itself;” and, in whatever form such intent is sought to be accomplished, the law condemns it. Billings v. Russell, 101 N. Y. 226, 4 N. E. Rep. 531.

It is true that the statute (2 Rev. St. p. 137, § 4) provides that the question of fraudulent intent “shall be deemed a question of fact, and not of law;” and it is insisted that, as the referee had found that this assignment was “executed by the defendant Burr W. Upham to the defendant Smith honestly, and without attempt to hinder, delay, or defraud the creditors of the assignor, ” that that finding is conclusive, and cannot be reviewed. But the referee, in finding that the three White notes preferred were made by J. M. Upham, and not by the defendant Burr W. Upham, has found a state of facts inconsistent with the liability of the assignor upon such notes, and with his right or power to legally prefer the same, from which facts the inference of a fraudulent preference is inevitable. In discussing the effect of the provisions of the statute above quoted, Earl, J., in Coleman v. Burr, 93 N. Y. 31, uses this language: “The statute provides that the question of fraudulent intent * * * ‘ shall be deemed a question of fact, and not of la w; ’ and the claim is made that here there is no finding by the referee of a fraudulent intent, but, on the contrary, he has found the whole transaction fair and honest. He has, however, found facts from which the inference of fraud is inevitable, and, although he has characterized the transactions as honest and fair, that does not make them innocent, nor change their essential character in the eye of the law. Burr must be deemed to have intended the natural and inevitable consequences of his act, and that was to hinder, delay, and defraud his creditors.” See, also, Webb v. Daggett, 2 Barb. 9, and Kavanagh v. Beckwith, 44 Barb. 192. The application of this rule to the facts proved in this case, and the findings of the learned referee upon the subject of these three notes, would lead to the legal conclusion that they were improperly preferred in this assignment, and that that instrument was for that reason fraudulent and void, as against the creditors of the assignor.

If we are right in this conclusion, it is unnecessary, for the disposition of this appeal, to determine the other question raised by the appellant,—that the payment by the assignor to his wife on the day of the assignment, in contemplation of that event, and without any valid pecuniary consideration, rendered the assignment fraudulent and void,—but, as that question is presented and discussed by both parties to this action, it may aid in the future determination of this case to examine it. The evidence is undisputed that the assignor gave money to his wife in contemplation of the assignment, and for a purpose creditable to his nature, unless in doing so he violated the legal rights of his creditors, in which case the law requires him to be just, rather than generous. The assignment purported to transfer.!» the assignee the assignor’s entire property not exempt from levy and sale on. execution. If, therefore, in contemplation of the assignment, the assignor intentionally, and for the purpose of putting any considerable portion of his assets beyond the reach of the assignment, gave this money to his wife, it would be such a fraud as to taint the whole assignment, and tend to show it fraudulent as against the creditors affected by the withdrawal of the assets from the assigned estate. The assignment and schedules purport to embrace the assignor’s entire estate; and, as was said by Finch, J„ in Shultz v. Hoagland, 85 N. Y. 464: “If that representation was false to a material extent, and consciously and purposely so, the inference of fraudulent intent could hardly be avoided. The intentional omission, calculated to deceive and to lull into slumber and inactivity the interest and diligence of the creditors, would plainly argue a fraudulent purpose. ” In the case of Rothschild v. Salomon, 5 N. Y. Supp. 865, the assignment was made on the 23d of January, and on the 20th of January, three days before, the assignor gave his wife a check of $402, which was charged to household expenses. Other checks were drawn about the same time, which appeared to have been intended for household expenses, and the court, in commenting upon these transactions, says, (Van Brunt, P.J.:) “In the case at bar, this money was abstracted in anticipation of and in preparation for the assignment. It was intended to reserve it from the operations of the assignment for the future benefit of the assignor, and the assignment was only a part and parcel of the scheme, and therefore the fraudulent intent in withholding this money permitted the making of the assignment, which was simply a culmination of the whole scheme, and renders the whole proceeding void.” It is true that the amount extracted from the assets in that case is much larger than in the case at bar, but in other respects the cases are quite similar in character. It is true that it has been held that on a withdrawal of a small per cent, of the assigned estate before making the assignment, for the assignor and family to subsist upon, and its return to the assignee after assignment, the question of fraudulent intent is for the jury. Fay v. Grant, 5 N. Y. Supp. 910. In the case at bar the referee refuses to find upon this subject, upon request of plaintiff, that assignor gave his wife the $200, and makes no special finding in reference thereto, but finds, generally, that the assignment was not fraudulent. In Vietor v. Nichols, 13 N. Y. St. Rep. 461, it was held that the withdrawal of funds just before an assignment did not necessarily vitiate the same, unless it was so connected with the assignment as to show that it was a part of it, or done in contemplation of withdrawingsassets from the operation of the assignment. In the case at bar the withdrawal of the money paid by the assignor to his wife is an act of great significance, and it is difficult to distinguish it, on principle, from the cases above cited, in which such withdrawal was regarded as evidence of fraud for which assignments were set aside. For the reasons above stated, we think the learned referee erred, and that the judgment should be reversed. Judgment reversed, referee discharged, and a new trial ordered; costs to abide.event.

Landón, J., concurs.

Learned, P. J.,

(dissenting.) I should think the reasoning of my Brother Mayhah’s opinion conclusive, if it were notfortherecent decision of Durant v. Pierson, in the second division of the court of appeals. 26 FT. E. Rep. 1095. In that case a surviving partner of an insolvent firm had borrowed money after the death of his partner. It was admitted that this did not create a debt of the firm, and that the note which he gave was only a debt of the survivor. Inasmuch, however, as he had used a part of the money thus borrowed to pay the debts of the insolvent firm, it was held that he might prefer this individual debt in his assignment, and might direct its payment out of the partnership assets before partnership debts. How, in the present case, the deceased partner borrowrnd the money, and gave his own notes for it, and the money went into the business. The surviving partner, who (as in the Pierson Case) was the son of the deceased partner, and succeeded to the business, and to'his father’s property, treated this as a liability which he ought to pay, and he did pay the interest. He made assignment, and preferred these notes. If, then, a surviving partner can prefer his own note over debts of the firm in respect to firm assets, for the reason that part of the money was used to pay firm debts, I see no reason why such surviving partner may not prefer, in like manner, his deceased partner’s notes, when the money borrowed thereon has been used in the firm business. As said in the Pierson Case: “The creditors have not been harmed or prejudiced, * * * for the assets were increased in value to the amount of the loan:” So, in this case, the assets of the firm were increased in value by the money loaned to the deceased partner, and therefore the creditors of the firm are not prejudiced by the preference. It may be added that, as between the partners, or, more accurately, as between the surviving partner and the estate of the deceased, this assignment is more equitable than that in the Pierson Case. That preferred the assignee’s own debt; this prefers a debt .of this deceased partner. It seems to me that the principle established in the Pierson Case sustains the finding below, although, if it were not for that case, I should think the reasons of my Brother May-ham’s opinion unanswerable. Respect for that decision, therefore, compels me to dissent.  