
    CENTRAL NATIONAL BANK v. SELIGMAN.
    [Reversing 64 Hun, 615.]
    
      N. Y. Court of Appeals ;
    
    
      June, 1893.
    1. Assignment for benefit of creditors; effect of illegal preference^ An assignment for benefit of creditors is not made void by the giving in it, or in contemporaneous instruments, of preferences in an amount exceeding the limit of one-third the net assets, prescribed by L. 1887, c. 503.
    2. Fratidulent conveyances.] The giving of an excessive preference is not in itself an act to hinder, delay or defraud creditors.
    3. Cases explained.\ The cases of Berger v. Varrelmann, 127 N. Y. 281 ; Spelman v. Freedman, 130 Id. 421 ; Manning v. Beck, 129 N. Y. 1, explained.
    4. Assignment for benefit of creditors ; restriction of preferences.] L. 1887, c. 503,—restricting preferences,—operates only to scale down a preference which exceeds the limit, and does not deprive the creditor preferred of all benefit of the preference.
    5. The same; preferetice by extrinsic instrument^ A security obtained,—in this case a judgment entered,—after the making of the general assignment, though immediately after and as a part of a scheme to create an unlawful preference, cannot secure a preference.
    6. The same ; remedy of creditorsi\ If the holder of such a security enforces it against the assigned assets in defiance of the assignment, the remedy is an action by the assignee, or in his right. A creditor’s suit to set aside the transaction as a fraud on creditors cannot be sustained.
    7. Creditor’s actioni\ A creditor’s action does not lie to set aside ■an assignment for benefit of creditors, or extrinsic securities given immediately subsequent, on evidence that they were a scheme to secure a preference in excess of the one-third of net assets allowed by law.
    8. The satne.] It'seems, that to sustain such an action to set aside a transfer or security given immediately before the assignment, the burden is on the plaintiff to show not only that the intent was to secure an excessive preference, but also that the preference if allowed, would prove to be excessive in relation to the net assets.
    Cross-appeals from a judgment of the General Term of the Supreme Court, First Department. The defendants appeal from the entire judgment and seek to review at the same time the merits of an interlocutory judgment of the Special Term of that Court as modified by an order of said General Term. The plaintiffs appeal from so much of said judgment as modified the judgment of the Special Term by limiting the relief therein granted to plaintiff.
    The action was brought by the Central National Bank of N. Y. City, George F. Victor, Carl Victor, Thomas. Achelis, Jr., and John Achelis, judgment creditors of the' defendants, Sigmund J. Seligman,. Philip Seligman and Abraham H. Herts, co-partners of the firm Seligman Bros. & Co., to set aside a general assignment made by such. debtors to the defendant Simón H. Herman; and also to annul two certain judgments and executions made on the same day as the assignment, in favor of the defendants, Isaac Herts and Benjamin H. Herts (composing the firm of Herts Bros.), and a transfer of accounts made at the same time to the defendant Jonas Sonneborn, on the ground that the assignment, judgments and transfer were all a part of an alleged scheme to burden and defraud the creditors of Seligman Bros. & Co., and were executed and enforced in violation and evasion of L. 1887, c. 503, restricting preferences upon a general assignment to one-third the assets of the assignor after making certain deductions.
    
      The Special Term held that the case of the First National Bank of Jersey City v. Bard (13 N. Y. Supp. 688) was directly in favor of plaintiffs’ contention, and set aside the assignment, judgments and executions and transfers, and adjudged that the defendants respectively account for and pay over to a receiver the sums received by them, to be applied in satisfaction of plaintiffs’ judgments.
    
      The General Term affirmed the Special Term, in so far as it set aside the assignment, judgments and transfers, on the ground that such acts were properly one transaction, the effect of which was to give a fraudulent preference, and that the defendants benefited thereby were not entitled to hold any part of sums realized, not even to the extent of one-third of the assets assigned, but must account to the plaintiffs for the whole amount. The General Term, however, modified the judgment of the Special Term by denying the right of certain of the plaintiffs’ judgments to participate in the relief granted. [Reported in 64 Hun, 615.]
    Both plaintiffs and defendants appeal to this court.
    The further facts are fully stated in the opinion.
    
      
      A. J. Dittenhoefer (Dittenhoefer & Gerber, attorneys), for defendants, appellants and respondents.
    I. The Herts and Moses judgments having been entered after the title to the assignors property had become vested in the assignee cannot be held to be part of and preferences under the assignment (citing Manning v. Beck, 129 N. Y. 1; Otis v. Bertholf, 13 N. Y. Supp. 445 ; Stein v. Levy, 55 Hun, 381; Bishop v. Stebbens, 41 Id. 243 ; Williams v. Whedon, 109 N. Y. 333-337; Varnum v. Hart, 119 Id. 101).
    II. The debts for which the judgments were respectively obtained being honestly due, other creditors cannot maintain an action to compel the holders of such judgments to pay them what they had realized from the debtors’-property (citing Knower v. Central National Bank, 124 N. Y. 552 ; Leather Manuf’rs Bank v. Halsted, Id. 674 ; Smith v. Wise, 132 Id. 172 ; Rothschild v. Hogge, 43 Fed. Rep. 97 ; White v. Cotzhausen, 129 U. S. 329).
    III. The judgments and assignment of accounts being concededly in payment of honest debts, the most that can be done—assuming that they are preferences under the assignment—is to scale them down so that they will not amount to more than one-third of the estate (citing Berger v. Varrelmann, 127 N. Y. 281 ; Manning v. Beck, 129 Id. 1).
    
      Nathaniel Myers, for the appellants, Herts Bros. & Co.
    •—I. It is urged that the act of June 2, 1887, does not comprehend preferential transfers accomplished by any mode excepting only that technically known as a general assignment, if the question has not been settled to the contrary beyond all reconsideration by Berger v. Varrelmann, 127 N.Y. 281, and Spelman v. Freedman, 130 Id. 421 (citing Manning v. Beck, 129 N. Y. 1 ; Tiemeyer v. Turnquist, 85 Id. 516, 522 ; Knapp v. McGowan, 96 Id. 75).
    II. In no event can the act of June 2, 1887, be availed of, excepting only in an action or proceeding under and in aid of the assignment, and for the benefit cf the general body of the creditors ; for the following reasons : (a.) The statute does not vitiate or affect the assignment itself. It does not purport to do so. It simply says that any preferences created in the assignment other than wages and salary shall not be valid “ except ” to the amount of one-third in value of the assigned estate left after making certain deductions. It is impossible reasonably to give any other meaning to the word “ except ” in this connection, than-that so far as the statute affects the matter, not only shall the assignment stand, but also the preference shall stand to the extent of one-third of the net assets, for that much is expressly excepted out of the operation of the act (citing Race v. Beardsley, 68 Mo. 455 ; White v. Cotzhausen, 129 U. S. 329, 344.) (b.) The one-third act contemplates the protection of the general body of unpreferred creditors claiming under the assignment by securing to them in the absence of actual fraud, a statutory right to at least two-thirds of the net assigned assets in spite of any will of the assignor to the contrary (citing Richardson v. Thurber, 104 N. Y. 606). (c.) The only reason urged in favor of the contrary view is the unsound one that equity should favor the so-called diligent creditor. There is no good-reason why any special inducement should be held out to a creditor to litigate. The older and better rule that equality is equity should be favored.
    III. It is inconsistent for a creditor to insist that a judgment in contemplation of an assignment is violation of the one-third act, and therefore to be deemed a part of a contemplated general assignment, and at that same time to insist that the general assignment is void, that he may monopolize not only the assigned property, but also that affected by the judgment (citing Manning v. Beck, 129 N. Y. 1; Cox v. Wilder, 2 Dillon C. C. 45).
    IV. Herts • Bros. & Co. received the amount of their claim not by virtue of any title in fraudulent assignee, but by a judgment which they had a right to obtain, and their right to retain it cannot be impeached except only' on the ground of actual fraud in fact (citing Knower v. Central National Bank, 124 N. Y. 552; Smith v. Wise, 132 Id. 172; Peyser v. Myers, 135 Id. 600).
    V. A judgment affecting more than one-third of the' debtor’s property, suffered in contemplation of and followed by a general assignment, does not justify a decree that the assignment and judgment are fraudulent and void, or that either of them is void, under the statute of fraudulent conveyances.
    VI. The only remedy against Herts Bros. & Co. on the facts of this case is an action of trover by the assignee for the benefit of the estate and in the interest of the general-body of the creditors (citing Dudley v. Danforth, 61 N. Y. 626).
    
      A. Blumenstiel (Blumenstiel & Hirsch, attorneys), for plaintiffs, appellants and respondents.
    I. The general assignment, transfers of accounts and entries of judgments were all made at the same time, with intent to effect an unlawful purpose, and constituted: one transaction ; and the • circumstance that the general-assignment was delivered and filed a few minutes before-the issuing of the execution does not change this result (citing Britten v. Lorenz, 45 N. Y. 51; Hine v. Bowe, 114. Id. 350; Putney v. Freisleben, 11 Southeast Rep. 337; Davis v. Harrington, 8 N. Y. Supp. 218; Rothschild v. Salomon, 52 Hun, 486; Illinois Watch Co. v. Payne, 82 Ill. State Rep. 967 ; Loos v. Wilkinson, 110 N. Y. 195 ; First National Bank v. Bard, 59 Hun, 529; Billings v. Russell, 101 N. Y. 226).
    
    II. If the judgments and transfers were to evade the-law and to give unlawful preferences, the transaction was. void under the provision of the statute against fraudulent conveyances (2 R. S. pt. II., tit. 3, c. 7). The provisions of L. 1888, c. 503, prohibit preferences in general assignments of more than one-third of the net assets, and the fact that the parties knowingly resort to a scheme by which to circumvent this statute amounts to a transfer intended to hinder, delay and defraud creditors (citing Berger v. Varrelmann, 127 N. Y. 281 ; Manning v. Beck, 129 Id. 1; Abegg v. Bishop, 20 N. Y. Supp. 810). It can not stand even to the extent of one-third of the assets (citing Sands v. Codwise, 4 Johns. 598; Wood v. Hunt, 38 Barb. 302 ; Davis v. Leopold, 87 N. Y. 620 ; Smith v. Wise, 132 Id. 172).
    
   ANDREWS, Ch. J.

The firm of Seligman Bros. & Co. on the 2d day of July, 1888, made a general assignment of their property for the benefit of creditors. This action was brought by the plaintiffs, to whom the firm was indebted at the time of the assignment, and who subsequently procured judgments against the assignors for their debts, to set aside the assignment for fraud, and to have the property of the assignors applied to the payment of the judgments of the plaintiffs.

The plaintiffs joined as defendants with Seligman Bros & Co., and the assignee, one Moses, and the members of the firm of Herts Bros. & Co., and one Sonneborn. Moses and the firm of Herts Bros. & Co., obtained judgments against the assignors, which were entered on the same day the assignment was made, but a few minutes-after the filing of the assignment. They were obtained upon suits commenced, followed by offer and acceptance under the Code. The plaintiffs in these judgments issued execution thereon, and the sheriff levied on the stock of goods assigned, and subsequently, on being indemnified, sold the property on the executions, and realized thereon sufficient to satisfy the Moses judgment of $4,218.53, and the additional sum of $19,289.85, which was applied on the judgment of Herts Bros. & Co. The assignors, on the day of the assignment, but, as is to be inferred, prior to its execution, assigned to Sonneborn accounts due the assignors, upon which he collected the sum of $7,806.32 to apply on a debt owing by the assignors to him.

The plaintiff’s demanded, in addition to the other relief, that the judgments in favor of Moses and Herts Bros, and Co., and the executions thereon, be vacated and set aside, and that they account for and pay over to a receiver to be appointed for the benefit of the plaintiffs, the sums severally collected by them on the executions ; and that the transfer of accounts to Sonneborn be set aside, and that he likewise be required to account for and to pay over the sums collected by him thereon.

The judgment at special term set aside the general assignment, the judgments and executions in favor of Moses and Herts Bros. Sc Co., and the transfer made to Sonneborn ; and adjudged that these parties respectively account for and pay over to a receiver the sums severally received by them as above stated, with interest, to be applied in satisfaction of the judgments obtained by the plaintiffs, which,' in the aggregate, are nearly equal in-amount to the sums which the defendants Moses, Herts Bros. & Co., and Sonneborn a're required to pay. The -General Term modified and affirmed the judgment .of the Special Term as modified ; the modification, however, not affecting the theory of the action or of the Special Term judgment.

This case presents an important question arising under chapter 503 of the Laws of 1887, which has not been considered or decided by this court. That question is whether a preference in a general assignment by insolvents for the benefit of creditors, made either in the assignment itself, or by separate instruments which may be ■construed as parts of the assignment, where such preferences exceed in amount one-third of the assets of the assignors, after making the deductions mentioned in the act, renders the assignment void.

In considering this question it will be for the present assumed that the judgments in favor of Moses and Herts Bros. & Co., and the transfer of accounts to Sonneborn, constituted preferences exceeding the statutory limit. These alleged unlawful preferences furnish the only ground upon which, upon the evidence, the validity of the- assignment can be assailed. There were no facts shown upon which any common-law fraud could be predicated, or to bring the case within the statute.as to fraudulent conveyances (2 Rev. St. p. 137, §§ 1-8). It is not claimed that the assignors withheld any of their property from their creditors. It was formally admitted on the trial that the debts for which the judgments were obtained, and the debt of Sonneborn, were hona fide.

The only ground of attack upon the assignment and the other transactions”mentioned is that the assignors, in contemplation of the assignment, promoted a scheme by which certain creditors holding just and valid debts were given preferences exceeding the statutory limit, and that' the creditors had knowledge at the- time that a general assignment was contemplated. The assignors, in giving such preference, violated no rule of the common law. The giving of such preference was not a hindering, delaying, or defrauding of their other creditors, as these terms have been uniformly understood and interpreted. Whether, under the statute of 1887, an excessive preference makes an assignment wholly void, has not been hitherto decided in this court. The cases of Berger v. Varrelmann (127 N. Y. 281), and Spelman v. Freedman (130 N. Y. 421), were actions by creditors in aid of general assignments to set aside preferences exceeding the statutorylim.it, and for an accounting by the preferred creditors to the assignees for the proceeds collected or received by them. The actions assumed that the assignments to which they related were not invalidated, but only the preferences. The question whether an excessive preference made the assignment void, or only affected the preference, was not decided in either of the cases mentioned. In Manning v. Beck (129 N. Y. 1), this court reversed a judgment setting aside a general assignment and an alleged preferential transfer, in an action brought by a judgment creditor of the assignor, on the ground that the creditor who took the bill of sale from the insolvent had no knowledge at the time that a general assignment was contemplated. Judge Beckham, ■ in his opinion, carefully reserves the question of the effect of an excessive preference on the assignment, and the further question, whether such preference affects the whole . claim of the preferred creditor, or only makes it subject to reduction within the statutory limit. These questions, therefore, being res nova, must be* decided in view of the language and policy of the act of 1887.

The object of the act is plain and unmistakable. It was intended to insure to the general body of the creditors of an insolvent debtor, upon a transfer of his property by general assignment, the right of participation in the distribution of the debtor’s property to the extent of at least two-thirds of the assets of the insolvent after certain deductions. In order to secure this result the act declares that “ any preference ” contained in a general assignment, other than for wages or salaries of employes, shall not be valid except to the amount of one-third of the assigned estate left after deducting such wages or salaries, and the costs and expenses of executing such trust.” The statute operates upon the preference only, and not upon the assignment or the title of the assignee. It does not undertake to destroy or affect the assignment, except in so far as it provides for preferences beyond the prescribed limit. When the preferences made exceed this limit, the statute intervenes, and declares the consequence. It reduces the preference to the limit mentioned in the statute. The “preference,” it declares, shall not be valid “ except ” to the amount of one-third of the assets. The statute enacts a rule for the administration of the trust in case of preferences. It may not in many cases be known until the •closing of the trust, and the ascertainment of the amount due for wages and salaries and the expenses of administration whether the preferences exceed the statutory limit. Creditors may or may not know in advance that they are to be preferred, and, if they know that preference is intended, they may or may not know the amount of the assets, or whether the intended preference exceeds the statutory limit. They do know the rule, and other creditors are not defrauded by a preference in excess of the one-third. The statute, we think, only operates to scale down the preference, if in excess. This construction accomplishes the purpose of the statute.

The consequences which follow from the theory upon which this case was decided, viz., that an excessive preference makes the assignment absolutely void, where the assignors and the preferred creditors are cognizant, when the assignment is made or securities taken, operating as a preference, that the preference exceeds the statutory limit, would involve great inconsistency. Such a rule would defeat the purpose of the statute, and enable a creditor, who by reason of the maturity of his debt, or favorable circumstances enabling him to commence his action earlier than other creditors, to appropriate the property of the insolvent to the payment of his debt, to the exclusion of the other creditors. The violation of the act of 1887 would be the very circumstance which would enable him to exclude other creditors from sharing in the assets.

The present case is an apt illustration. The plaintiffs complain that the assignors have given preferences in excess of the statutory limit, thereby depriving the general body of creditors of participation in the insolvent’s property, intended to be secured by the statute of 1887. Thereupon they claim, and the judgment awards to them, nearly the whole available property of the assignors, to be applied to the satisfaction of their debts exclusively, -wholly ignoring the rights of the other creditors. We are of the opinion that the judgment proceeds upon an erroneous view of the statute. An assignment is not, we think, invalidated because it provides for preferences exceeding the statutory limit. Nor, in our opinion, does an excessive preference deprive the party preferred of all benefit of the preference. The statute, and not the direction in the assignment, is, in such a case, the rule by which •the assignee is to be guided in administering the trust. The preference is to be reduced so as to make it conform to the statutory limit, and is not annihilated ; and if the statute has been violated, and the judgments in favor of Moses, Herts Bros. & Co., and the transfer of accounts to Sonneborn, constituted unlawful preferences, the right of creditors can, we think, only be asserted by the assignee, or by an action in aid of the assignment for the benefit of the body of creditors, as in the case of Spelman v. Freedman (supra).

But the assumption, which has been made, that the judgments in favor of Moses and Herts Bros. & Co., and the transfer of áccounts to Sonneborn, constituted preferences within the act of 1887, is not sustained by the record. The judgments, though entered on the same day on which the assignment was executed and filed, were subsequent in fact, and the property vested in the assignee, who took possession under the assignment, before the judgments were entered or the executions were issued. The entry of the judgments was intentionally postponed until after the execution and filing of the assignment. It was disclosed by the evidence introduced by the plaintiffs that the assignees refused to permit the judgments to be entered so as to give them priority over the assignment. They were to stand like all creditors ; whatever value a judgment gave them after the assignment, they were to have, but no other value.” -The case of Burger v. Varrelmann, (supra) is authority for the proposition that a preference, within the act-of 1887, may be obtained through separate instruments executed before, but in contemplation of, the execution of a general assignment. But it is legally impossible that a preference can be created by the confession of a judgment made and entered after the assignment is executed and filed, and the assignee has taken possession ' of the assigned property, and the fact that but a few moments intervened between the two transactions can make no difference. The finding that the execution of the assignment and the entry of the judgments were parts of a scheme to create, an unlawful preference, does not alter the fact that the sequence of events made the scheme impossible of execution. The levy and sale of the property on the executions were in hostility to the rights of the assignee, and he brought an action for the conversion of the property.

It so happened that chapter 294 of the Laws of 1888 went into force July 1, 1888,—the day before the execution of the assignment,—whereby it was required that in all general assignments the assignor should state his residence and the kind of business carried on by him. It was held by the court of common pleas in the city of New York, in the case of Bloomingdale v. Seligman (22 Abb. N. C. 98 ; S. C., 19 State Rep. 64 ; 3 N. Y. Supp. 243), which was another attack on the assignment now in question, that the noncompliance with the act of 1888 rendered the assignment void, and the suit brought by the assignee for the levy and sale of the property under the judgments of Moses and Herts Bros. & Co. was thereupon discontinued. This court, in Duchess Co. Mut. Insurance Co. v. Van Wagonen (132 N. Y. 398) held that the omission to comply with the act of 1888 did not invalidate an assignment. In this case it is true that the assignors promoted the securing of the judgments; but in so doing they violated no rights of the creditors. The judgments were for valid debts, and they were not suffered to be entered until the right of the assignee under the assignment had become vested and perfect. The judgments and executions constituted, and could constitute, no preference under the act of 1887. If no assignment had been made, the judgments could not have been assailed by the other creditors (Manning v. Beck, 129 N. Y 1 ; 29 N. E. Rep. 90); and having been entered after the assignment, the other creditors have no ground for complaint. We can perceive no way in which Moses and Herts Bros. & Co. can be compelled to account for the proceeds of the property sold on the executions except in an action brought by the assignee or in his right, asserting title under the assignment. Assuming, as we must, .that the property sold under the judgments and executions of Moses and Herts Bros. & Co. belonged to the assigned estate, it was not made to appear that the .accounts assigned to Sonneborn exceeded in amount one-third of the assets of the insolvents, after making the deductions specified in the act of 1887. These views lead to a reversal of the judgments of the Special and General Terms, and the granting of a new trial.

All the judges concurred.

Judgments reversed.

Note on the Effect of Preferences in a General Assignment for Benefit of Creditors.

Naturally, after the long contest on the rightfulness of allowing preferences in assignments for creditors, the act of 1887 sanctioning them, to the amount of one-third the ■net assets only, seems to have been regarded differently, .according as one regards preferences as just or unjust. It squares with the opinion of those who condemn them, and with the policy of the bankrupt law which made them illegal, to regard the act of 1887 as a positive prohibition of the purpose to prefer beyond one-third, and to deem an excessive preference a malum prohibitum, because a fraud on creditors ; and therefore the giving such a preference as an act of illegality. This is the view on which the action in the text was .framed.

The conclusion of the court squares with the Common-Saw doctrine that the giving of preferences is innocent, and the power to give them important to business interests ; and that the intent to give all that the law will now allow is equally proper. Consequently, as the law prescribes a measure of amount which can never be ascertained in advance of the final settlement of the assigned estate, there seems to be no middle ground short of holding that the debtor’s intent to give and the creditor’s intent to receive as large a preference as possible are legal; and that the law does not require them to keep within the limit in their transfers, but only requires the assignee and the court to keep within the limit in their administration. The statute in this aspect may be compared to the act of i860 in relation to wills, which declares that bequests to charity in the will of a testator leaving specified survivors, shall be valid to the extent of one-half of the estate only. This limit too is one that cannot be ascertained before the final settlement of the estate. This restriction does not render it illegal for such a testator to make a will giving all his estate to charity. The law does not stamp with illegality an intention nor an attempt to exercise the old freedom of testamentary power, but limits the result, and gives a right to the survivors specified to have the administration regulated accordingly.

It is not perhaps inconsistent with the freedom in creating preferences on paper which the decision in the text seems to sanction, if we should add that a case in which the bulk of the assets should be intentionally given in preference, in a manner which would necessarily and intentionally put creditors to the delay and expense of ligitation in order to get any assets into the hands of an assignee, might raise .a different question from that presented here.

The recent decisions of the courts as to the duty of a trustee to uphold and sustain, if possible, the instrument creating the trust, may in some instances create a doubt in the minds of assignees as to the course which they should pursue when the validity of the assignment is attacked. The court of appeals has recently held that it is the duty of a trustee under a will to maintain its validity even when the beneficiaries desire to have it adjudged void, and intimate that an offer of judgment or the mere suffering of a default in such action would be a breach of duty on the part of the trustee (Cuthbert v. Chauvet, 136 N. Y. 326). It is probable that a less stringent rule would apply under an assignment for creditors where the interest of the beneficiaries is assignable and more subject to their control, but doubtless the duty of actively maintaining the validity of the instrument rests to some degree upon the assignee.

It has been held, however, that an assignee will not be allowed his expenses in unsuccessfully defending the validity of the assignment in a creditor’s suit, and that it is his duty to call the creditors together and ask them to indemnify him (Mayer v. Hazard, 49 Hun, 222). Even if it be conceded that the assignee would be protected in his failure to defend, as against subsequent complaints on the part of creditors who had expressly refused to furnish the desired indemnity, the difficulty, and in some cases absolute impossibility, of communicating witli creditors or of even ascertaining who they are within the time allowed for defending a suit, may cause much embarrassment, while the reluctance of creditors, already contemplating a loss of a portion of their debt, to assume the responsibility of a litigation, uncertain both in its result and in the amount of expense involved, will doubtless often prevent the prompt support of the assignee in the cases where he is able to call the-creditors together. 
      
       And see 34 State Rep. 911; s. c., 12 N. Y. Supp. 641.
     
      
       And see 54 Hun, 414.
     