
    SOUTHARD v. PINCKNEY.
    
      N. Y. Common Pleas ;
    
    
      General Term, February, 1877.
    
      Again, Court of Appeals ; February, 1878.
    Jurisdiction. — Action by Assignee in Bankruptcy. — Fraudulent Conveyance. — Chattel Mortgage. — Creditor’s action by Trustees.
    The State courts have jurisdiction of an action, by an assignee in bankruptcy to disaffirm, and treat as void a debtor’s transfer of his property, in fraud of the creditors (Frost v. Hotchkiss, 1 Abb. N. Cas. 27; S. C., 14 Bankruptcy Reg. 443, distinguished).
    An uninterrupted possession and continued disposal and replenishing of a fluctuating stock in trade, under a chattel mortgage, proceeds of sales being used by the mortgagor to pay general liabilities and current expenses, raises a sufficient presumption of fraud, under the statute, to go to the jury, although the mortgage was duly filed.
    It is for the jury to say, under such circumstances, whether the mortgage was made in good faith.
    In such case it is proper to instruct the jury that, if the mortgage was not fraudulent, and the mortgagees knew of the sales, but supposed the proceeds were to be applied to the payment of their debt, the mortgagees were entitled to a verdict.
    Upon the converse of this proposition the plaintiff would be entitled to a verdict.
    Under the act of 1858, c. 314, — allowing executors, administrators, assignees and other trustees, to disaffirm, for the benefit of creditors, transfers in fraud of creditors, — a trustee need not obtain judgment before commencing a creditor’s action to set aside a transfer as fraudulent.
    
    
      Hence an assignee in bankruptcy can bring such an action, without having recovered judgment.
    Collins’ case, 12 Blatchf. 548, distinguished, as not applicable to a case of actual fraud.
    A chattel mortgage, with an extrinsic agreement or understanding pursuant to which the mortgagor remaining in possession, from time to time sells, and from time to time replenishes the stock, applying proceeds of sales to his own uses or debts other than the mortgage debt, is void as in fraud of creditors.
    The agreement rendering the mortgage thus fraudulent, may be proved by extrinsic evidence.
    Appeal from a judgment.
    The action was brought by Charles C. Southard, as assignee in bankruptcy of Wm. H. Decker, against Hiram Benner and William Pinckney.
    On December 4, 1879, William H. Decker executed a chattel mortgage to defendants, who were copartners, to secure payment of $30,000 on demand. The mortgage covered lumber of various kinds, being all the stock owned by the mortgagor, who continued in business until adjudged a bankrupt, December 15, 1873. During the period above mentioned, Decker sold this lumber at the rate of about $30,000 a month, and made purchases to replenish his stock. No separate account was kept of the lumber mortgaged and that subsequently bought, and the proceeds of the sales were used by the mortgagor to meet his general liabilities and living expenses. On February 3, 1874, defendants foreclosed the mortgage, and realized from the sale thereunder the sum of $2,217.36.
    Plaintiff, as assignee in bankruptcy, now brought suit to recover the proceeds of the foreclosure, claiming that the mortgage was void.
    Judgment was given in his favor for the sum named, with interest.
    The cause was tried before Mr. Justice Van Brtjht, whose instructions to the jury, material to the decision on appeal, were as follows :
    
      Van Brunt, J. — The question in this case is, whether this mortgage is fraudulent in law. If the defendants in this case have established to your satisfaction that this mortgage was not fraudulent either in law or fact, but that it was made in good faith and not for the purpose of hindering or defrauding the other creditors, they are entitled to a verdict. But if the understanding of these parties was, at the time that this mortgage was made, that this mortgage included all the stock in trade of Mr. Becker, and that he should go on and sell that stock in trade and use the money for his own benefit, the law says that is fraud, and it will not permit, a mortgage of that kind to be sustained. If, upon the other hand, you find from the evidence in the case that there was no arrangement or understanding between these parties to that effect, but that the sales were made with the knowledge of these mortgagees, and they supposed that the money was going to be applied to the payment of their debt, then there was no fraud in law. There must be an intention to defraud the creditors of Mr. Becker, and an honest intention to secure the debt which was due from Mr. Becker to Benner & Pinckney is not such an intention. Now that is the issue you are called upon to determine in this case. If you find, from the facts in this case, that it was the' intention of these parties, that the understanding was, that Mr. Becker should go on and sell this property and use the money, — that is, the proceeds of the property covered by this mortgage, — then there is fraud, and the plaintiff is entitled to a verdict. If, upon the other hand, you find that the defendants knew that Mr. Becker was going on and selling this property covered by the mortgage, and that they supposed that the proceeds arising therefrom was to be applied to pay them their debt, then there was no fraud in law, and the defendants would be entitled to a verdict at your hands. That is the issue, and that is the question to which you are to apply the evidence, and upon which you are to pass. Now, the plaintiff in this action claims that it was the understanding between these parties, and that the defendants knew that Mr. Decker was selling this property and was applying the money to his own use generally. If that was the fact then of course it comes in conflict with the rule which I have already laid down for your guidance. On the other hand, the defendants claim that whatever knowledge they had in regard to the selling of the merchandise or lumber covered by the mortgage was consistent with the idea that Mr. Decker was applying that money to the payment of these debts which were covered by the mortgage. If you find that was the intention of the parties, and that that was their joint belief, and that there was no fraud in the contracting of this mortgage by the defendants, then they are entitled to a verdict.
    After some exceptions had been taken, his Honor added:
    “ I desire to charge you, that if you find that it was the understanding of these parties, at the time that this mortgage was made, that Mr. Decker was to go on and sell part of this stock, and use the money generally in his business, that was fraudulent in law.
    “I also desire to charge you that in considering that question you have a right to infer that such was the agreement, if the defendant permitted such things to be done after the mortgage was made.”
    After judgment on the verdict defendants appealed.
    
      A. J. Vanderpoel & James K. Hill (Mr. Hill, attorney), for defendants, appellants, insisted :
    I. That as the mortgage was filed and valid on its face, fraud could not be presumed, and that the burden was on plaintiff to show that defendants knew of the sales, otherwise the fact of sales was immaterial (Chatham Bank v. O’Brien, 6 Hun, 281).
    II. The burden was on the plaintiff to show intent to defraud, but the judge, in effect, put the burden on defendants to show the contrary.
    III. The corrections to the charge were erroneous in allowing the jury to infer agreement if the defendant “ permitted such things to be done.” Permission does not imply even knowledge, but merely not prohibiting.
    IY. The question of fraud in law could not be submitted to the jury. The question was of good faith, as matter of fact (Ford v. Williams, 24 N. Y. 359). And the fact of sales with the knowledge of the mortgagor does not alone render fraudulent (Frost v. Warren, 42 N. Y. 204).
    Y. The assignee in bankruptcy cannot maintain this action (Frost v. Hotchkiss, 1 Abb. New Cas. 27; S. C., 14 Bank. Reg. 443).
    
      Field & Deyo, for plaintiffs, respondents,
    Relied on the cases cited in the opinion in the text, and Chatham National Bank v. O’Brien (6 Hun, 231), and distinguished Frost v. Hotchkiss.
    By the Court. — Larremore, J. — No objection was made on the trial to the jurisdiction of the court. But on the argument of the appeal it was urged that plaintiff, as assignee in bankruptcy, could not maintain this action in a State court. Section 711 of the revised statutes of the United States confers upon the federal courts exclusive jurisdiction of all matters and proceedings in bankruptcy; but this is not a proceeding in bankruptcy. The act to declare and extend the powers of executors, assignees, and trustees, and protect creditors from fraud (L. 1858, ch. 314) authorizes an assignee of an insolvent for the benefit of creditors to disaffirm and treat as void all transfers made of any estate or property in fraud of the rights of any creditor (3 R. S. p. 226, 5th Ed.).
    Our attention has been called to the case of Frost v. Hotchkiss (1 Abb. New Cas. 27; S. C., 14 Bank. Reg. 443) as an authority upon the question of jurisdiction. There the suit was brought, not by the assignee, but by a trustee in bankruptcy (chosen as such at a meeting of the creditors), to recover real estate conveyed by the bankrupt to his wife in fraud of creditors. The court on demurrer held that the State court had no jurisdiction, and properly so held ; for section 5,103 of the revised statutes of the United States, in pursuance of which such trustee was chosen expressly declares that the winding up and settlement of any estate under its provisions shall be deemed to be proceedings in bankruptcy. The sections of the act. defining the powers and duties of an assignee in bankruptcy do not prohibit a suit by him at law in a State court against a party whom the debtor might have sued. We are of opinion, therefore, that plaintiff ha legal capacity to sue in this court (Cook v. Whipple, 55 N. Y. 150).
    The first exception taken at th ) trial was to the denial of the motion to dismiss the jomplaint on the ground that no cause of action had -been established. In this we think there was no error. The statute of frauds expressly declares that every assignment of goods and chattels by way of mortgage, unless accompanied by immediate delivery and followed by an actual and continued change of possession of the thing mortgaged, shall be presumed to be fraudulent and void as against creditors of the mortgagor, and shall be conclusive evidence of fraud unless it shall be made to appear that the transaction was in good faith and without intent to defraud (2 Edm. R. S. 140, § 5; Same stat., 3 R. S. 6th ed. p. 143). The uninterrupted possession and disposal of the mortgaged property by the mortgagor raised the statutory presumption of fraud as to the validity of the transaction ; and it was the province of the jury to decide, upon the facts and circumstances presented, whether or not the mortgage was made in good faith (Ford v. Williams, 24 N. Y. 359).
    The remaining exceptions as to the judge’s charge and refusals to charge may be considered under one head. The jury were instructed that if the mortgage was not fraudulent and defendants knew of the sales of lumber, but supposed the proceeds were to be applied to payment of their debt, they were entitled to a verdict. Upon facts showing the converse of this proposition the plaintiff would be entitled to a verdict. The charge of the learned judge was in conformity with the law as settled in Gardner v. McEwen (19 N. Y. 123); Ford v. Williams (24 Id. 359); Conkling v. Shelley (28 Id. 363); Miller v. Lockwood (32 Id. 293); Frost v. Warren (42 Id. 207). There was nothing said that could have misled the jury, and no valid reason has been shown for disturbing the verdict.
    Judgment affirmed, with costs.
    Defendants appealed to the court of appeals.
    
      Samuel Hand, for the appellants.
    
      R. E. Heyo, for respondents.
    
      
       See also Wheelock v. Lee, p. 72 of this volume.
    
    
      
       For recent cases on the general rule requiring other creditors to have judgment, see Miller v. Miller, 7 Hun, 208; Same v. Same, 1 Abb. N. Cas. 30; Schnitzer v. Cohen, 7 Hun, 665; Estes v. Wilcox, 67 N. Y. 264; Spicer v. Ayres, 3 Sup'm Ct. (T. & C.) 626; Ballou v. Jones, 13 Hun, 629; Geery v. Geery, 68 N. Y. 252; Produce Bank v. Morton, 67 Id. 199.
    
    
      
       Under U. S. R. S. §§ 5,040, 5,103.
    
   Allen, J.

A creditor at large cannot assail an assignment or other transfer of property by the debtor as fraudulent against creditors, but must first establish his debt by the judgment of a court of competent jurisdiction, and either acquire a lien upon the specific property, or be in a situation to perfect a lien, and subject it to the payment of his judgment upon the removal of the obstacle presented by the fraudulent assignment or transfer.

Every assignment or conveyance of property with intent to hinder, delay, or defraud creditors, is void as against creditors, not only at common law but by statute, and every conveyance or transfer of chattels not followed by an actual and continued change of possession, is presumed to be fraudulent as against creditors, and such want of change of possession is conclusive evidence of fraud, unless it be shown that the same was not made with intent to defraud. The term “ creditors,” as used in the statute, includes all persons who are creditors of the vendor or assignor at any time, whilst the goods remain in his possession, or under his control (2 R. S. 136, §§ 5, 6). A creditor by simple contract is within the protection of the statute as much as a creditor by judgment; but until he has a j udgment and a lien, or a right to a lien, upon the specific property, he is not in a condition to assert his rights by action as a creditor (Geery v. Geery, 63 N. Y. 256; Frisbee v. Thayer, 25 W. R. 396). The plaintiff, as assignee in bankruptcy, represents the whole body of creditors, and may in their behalf impeach a conveyance of property by the bankrupt as fraudulent, wherever the creditors might or could by any process acquire the right to contest its validity.

By the statute of this State (Laws of 1858, c. 314), any executor, administrator, assignee or other trustee of an estate or the property and effects of an individual, may, for the benefit of creditors or others interested in the estate or property so held in trust, disaffirm and treat as void all transfers in fraud of the rights of any creditors or others interested and maintain all necessary actions for that purpose. This act, conferring special authority for the benefit of creditors, dispenses with the necessity of any special or other lien in behalf of individual creditors. The act is not for the enforcement of specific liens for the benefit of individual creditors. No statute was necessary for that purpose, as each creditor having such lien could vindicate his rights under the law as before administered. This act gave a new remedy in favor of creditors at large, by giving to an assignee or trustee for their benefit a statutory right to property conveyed in fraud of creditors, and this statutory right took the place of the specific lien of individual creditors required by law as a condition of their right to contest the validity of the transfers. The bankrupt law of the United States in express terms vests in the assignee all property coveyed by the bankrupt in fraud of creditors, and thus gives him a title to all property so conveyed, and supersedes the necessity of a judgment and execution lien in favor of any or all the individual creditors (Bankrupt Act, § 14 ; U. S. R. S. §5,046). The policy of the bankrupt law is to secure an equal distribution of all the property of the bankrupt among his creditors, and this object would be defeated if a fraudulent assignor could set the fraudulent assignee at defiance, and a fraudulent conveyance not be contested by the assignee. Creditors could not well do it after a decree in bankruptcy. They would be practically remediless. The bankrupt court would be a place of refuge for every debtor who had fraudulently disposed of his property, and the bankrupt act a perfect shield for fraud. The assignee represents the creditor’s rights without the technical obstructions to the enforcement of those rights by a creditor at large. It was held by the late Judge Hall, of the northern district of New York, that the assignee, represented the whole body of creditors, and that it was his right and duty to contest the validity of any mortgage by which one creditor had obtained a preference over another (In re Metzger, 2 Bank. Reg. 355).

The same principle was asserted by Chase, Ch. J., in the circuit court of Virginia, in Wynne Case (4 Id. 23), and by Judge Curtis, in Carr v. Hilton (1 Curtis, 230).

The latter judge says : “ A fraudulent conveyance is no effectual conveyance, as against the interest to be defrauded. This interest the assignee represents, so far as respects all creditors who prove their claims.”

In Collins’ Case (12 Blatchf. 548), fraud was not alleged. The validity of the chattel mortgage was contested upon the sole ground that it had not been filed as required by law, and Judge Hunt held that within the terms of the act none but creditors who had, by judgment and execution, obtained a specific lien on the thing mortgaged, or subsequent purchasers or mortgagees in good faith, could attack the mortgage, for the reason alleged, and that the assignee was not within the benefits of the statute. The reasoning of the learned judge, it must be conceded, would apply to a mortgage alleged to be fraudulent in fact; but in following it as an authority, we think the principle should not be extended so as to prove a shield to actual fraud. The non-compliance with a statute, merely imposing a new condition to the validity of chattel mortgages, for the protection of the particular classes mentioned, and not involving the question of fraud or fraudulent intent, may well be. restricted in its operation to the individuals for whose immediate protection it was passed. Upon sound reason, the policy of the law, as well as the authorities quoted, and others that might be referred to, there can be no doubt, we think, that the plaintiff, as assignee, has a right of action for property conveyed by the bankrupt in fraud of his creditors, although none of the creditors have acquired a specific lien.

It is not such liens or any particular interest in the property, or an interest for the benefit of any one creditor or class of creditors, that is vested in the assignee, but the entire property fraudulently transferred, and for the benefit of all the creditors. The assignee takes title, not under any claim of right existing in the creditors, but under the statute, and that right he may assert' by action, although no individual creditor, or all the creditors combined, could have a standing in court to challenge the conveyance.

The case was not submitted to the jury upon the presumption of fraud, arising from the want of a change in the possession. There was no such change, and the presumption by statute was, that the mortgage was fraudulent and void for that reason, and such presumption was conclusive unless the defendants satisfied the jury by evidence that it was not made with intent to defraud, and such would have been the proper instruction to the jury if that had been the only circumstance relied upon to impeach the transfer (2 R. S. 136, § 5).

Evidence was given that from the time of making the mortgage to the defendants, the mortgagor continued to deal with the mortgaged property, consisting chiefly of lumber materials, in which he was a dealer, as he had been accustomed to do, buying and selling as opportunity offered, and using the proceeds of his sales to meet his liabilities, and in the prosecution of his business in all respects as if no mortgage was in existence, and there was evidence tending to prove that business was thus carried on, and the mortgaged property dealt with and sold by the permission of the defendants. This, with the other facts, of which there was also evidence that the defendants had, from the time of making the mortgage for several months thereafter employed a Mr. Brown in and about the business of the lumber yard of the mortgagor, acting with and under him, to look after their interests, and that the mortgages were made to secure advances, to enable the mortgagor to continue his business, made it a question for the jury whether this continued dealing with, and sales of the mortgaged lumber was not in pursuance of an arrangement between the parties contemporaneous with the giving of the mortgage, that the mortgagor should continue his dealings with and sales of lumber as before, notwithstanding the mortgage. That question was submitted to the jury, and they have found the arrangement as suggested.

The instruction to the jury upon which the case hinged, as explained and qualified upon a recalling of the jury for such explanation, and to avoid a misapprehension, was, that if they found that it was the understanding of these parties at the time the mortgage was made, that Mr. Becker, the mortgagor, was to go on and sell part of this stock and use the money generally in his business, that was fraudulent in law. The charge was equally explicit, that unless they found such to have been the understanding, and the sales had, in fact, been made without the knowledge or assent of the defendants, they would be entitled to a verdict. There was no error in charging the jury that the understanding referred to might be inferred if the defendants had permitted the sales to be made as alleged. It is the province of the jury to make all necessary inferences from the facts proved, and the existence of the arrangement and understanding was a material and necessary inference from the undisputed facts.

The question then is, did the arrangement, if made as alleged, and carried out by the permitted sales of and dealing with the mortgaged property, necessarily invalidate the mortgage? Bid it conclusively prove that the mortgage was fraudulent in law ; that is, so conclusively establish the fraud that a verdict of the jury to the contrary would have been set aside as against evidence ? Such an arrangement is incompatible with a mortgage designed only as security to the mortgagee. The dealing with the mortgaged property as merchandise by the mortgagor, and the sale of the same in the ordinary course of business as a merchant, with the consent of the mortgagee, necessarily destroys the value of the mortgage as a security, and makes it only available, if for any purpose, so long as this arrangement and dealing continues to protect the property from creditors and secure it to the mortgagor. Such a transaction is necessarily fraudulent. It hinders and delays other creditors without securing the application of the property or its avails to the payment of the mortgage debt.

In Frost v. Warren, 42 N. Y. 204, it was held that the fact that the mortgagor continued to sell the mortgaged property, consisting of goods in a store with the knowledge of the mortgagee in the absence of proof, that this was pursuant to an agreement between the parties, did not render the mortgage fraudulent in law as against other creditors, clearly implying that such an agreement, and a selling of the goods in pursuance of it, would constitute fraud in law, that is, be conclusive evidence of fraud. Here the jury have found the agreement upon evidence that could warrant no other conclusion. Advances made to enable the mortgagor to continue his business as a dealer in lumber, the entire stock of the dealer mortgaged to secure the advances, an agent of the mortgagees designated and appointed to supervise the business and watch their interests, sales continued by the mortgagor as before, and the avails used by him for his support, and as his wants and business calls demanded, and this continued for a full year, the mortgagee receiving not the avails of the mortgaged lumber, but such moneys as the mortgagor could spare from the general business, — all point to but one conclusion, that this was in pursuance of an agreement between the parties, cotemporaneous with the mortgage. Such an arrangement, included in and making a part of the written instrument of mortgage, would clearly invalidate it as fraudulent in law as that term is understood; that is, would be conclusive evidence of fraud in fact, and would be so held by the court as matter of law. This was decided in Edgell v. Hart, 5 Seld. 213. Whether the agreement is in or out of the mortgage, whether verbal or in writing, can make no difference in principle. Its effect as characterizing the transaction would be the same. The difference in the modes of proving the agreement cannot take the sting out of the fact and render it harmless. If it is satisfactorily established, the result upon the security must be the same.

It is the fact that such ah agreement has been made and acted upon, that in law condemns the security, and not the fact that it is proved by the instrument of such suretyship, instead of by parol or in some other way. This question is considered by Judge Denio in Gardner v. McEwen (19 N. Y. 123), and by Judges Grover and Woodruff in Russell v. Winne (37 N. Y. 591), and although not expressly decided in either case, it is very conclusively shown, by the reasoning of those learned judges, that an agreement, by which the mortgagee is permittéd to deal with the mortgaged property outside of the mortgage, and proved by parol, is equally fatal to the security, as if made a part of the written mortgage.

The judge presiding at the trial of this action adopted the principle adjudged in Edgell v. Hart, and applied it to an agreement proved by evidence aliunde the mortgage in accordance with the views of the judges named. We are of the opinion that the correct rule was applied, and that there was no error of which the defendants can complain, in the submission of the case to the jury.

[Remarks on a claim not necessary to notice are omitted.]

The judgment must be affirmed.

All the judges concurred, except Audbews, J., who was absent.  