
    (80 Hun, 476.)
    DELANEY v. VALENTINE et al.
    (Supreme Court, General Term, Third Department
    September 27, 1894.)
    Fraudulent Conveyances—Mortgage—Trust in Favor oe Mortgagor.
    A mortgage covering all the mortgagor’s property, and by its terms given to secure debts due to the mortgagee' and to others not parties to the mortgage, and providing that the mortgagee may sell the property, and that he shall return to the mortgagor any surplus left after satisfying such debts, creates a trust in favor of the mortgagor (2 Rev. St. p. 135, § 1), and is therefore void as to the unsecured creditors. .
    Appeal from special term, Saratoga county.
    
      Action by William J. Delaney, as receiver in supplementary-proceedings of the property of Thomas B. Valentine, against Thomas-B. Valentine, William H. Lockwood, and Ann Lockwood, to set-aside, as in fraud of creditors, certain mortgages and an assignment made by Thomas B. Valentine. The complaint was dismissed, and plaintiff appeals. Reversed.
    Argued before MAYHAM, P. J., and HERRICK, J.
    Winsor B. French, for appellant.
    W. P. Butler and Edgar T. Brackett, for respondents.
   MAYHAM, P. J.

This action was prosecuted by the plaintiff!, as receiver of the property of Thomas B. Valentine, to have two chattel mortgages executed to Ann A. Lockwood, and an assignment of certain choses in action to William H. Lockwood,, declared fraudulent and void as to the claims of the plaintiff as receiver, and as to the plaintiff, as such receiver, set aside, on the ground that the same were given by the defendant Thomas B-Valentine and received by the said defendants Ann A. Loclnvood. and William H. Lockwood for the purpose and with the intent. of hindering, delaying, and defrauding the plaintiff as such receiver, a creditor of the said Thomas B. Valentine. The defendants Ann Lockwood and William Lockwood joined in an answer, denying: the allegations of fraud, setting up the mortgages to Ann Lockwood, and a sale of the mortgaged property at public auction, at which the defendant William Lockwood purchased the same. The-answer also set up the assignment of the accounts to William: H. Lockwood by the defendant Valentine as collateral to the payment of the debts of Valentine to certain other persons. The defendant Valentine, by separate answer, alleged that the mortgages; and assignment were made in goodfaith, and to secure actual indebtedness of such defendant, and alleged that the mortgagee took possession of the mortgaged property, and actually sold the same for the sum of $5,000 to William H. Lockwood, who took actual possession of the same, and also alleges that the assignment of the accounts to William H. Lockwood was to secure actual indebtedness-of the defendant Valentine to certain persons named in the assignment, and was in good faith, without any design to defraud creditors. The answer also alleged that the appointment of the plaintiff as receiver was irregular and void. The trial judge dismissed the? complaint, and from the judgment entered on such dismissal the plaintiff appeals.

The case discloses that on tlig 23d day of March, 1893, the defendant Thomas B. Valentine, who was a merchant doing business in. the village of Saratoga Springs, was indebted to Ann A. Lockwood; in the sum of $7,500, and also indebted on two notes, one of $1,200' and one for $180, indorsed by William H. Lockwood, and a note of $1,500 indorsed by Augustus H. Lockwood; that to secure the aforesaid debts he executed on that day a chattel mortgage covering the entire stock of merchandise owned by him, and in his store at 4G8 Broadway, in Saratoga Springs, which mortgage was duly ■filed in the town clerk’s office. Subsequently, and on the 14th ■day of June, 1893, the defendant Valentine executed to the defendant Ann A. Lockwood another chattel mortgage on the same ■stock of goods. And “all the stock of goods, the fixtures, and personal property of every kind and description, owned by said Thomas B. Valentine, situate in and about the premises of Ño. 468 Broadway, in the village of Saratoga Springs,” which was also duly filed in the office of the proper town clerk, and which mortgage contained the following conditions and provisions:

“Upon condition that if said party of the first part shall and do well and truly pay or cause to be paid the following notes owing by him, to wit: One made by him, said Thomas B. Valentine, for the sum of $5,000, dated July 22nd, 1892, payable twelve months after date, with interest, at the First National Bank of Saratoga Springs, to the order of said Ann A. Lockwood. One made by said Valentine, dated November 10, 1892, payable to the order ■of said Ann A. Lockwood, twelve months after date, at the B'irst National Bank, for $1,500 and interest. One made by said Valentine, dated December 2nd, 1892, payable to the order of W. H. Lockwood twelve months after date, with interest, at the First National Bank of Saratoga Springs, for $1,200. One made by said Valentine, dated January 31, 1893, payable to the order of Ann A. Lockwood, twelve months after date, at the First National Bank of Saratoga Springs, with interest, for the sum of $1,000. One made ■by said Valentine, dated March 25th, 1893, for the sum of $1,500, payable three months after date, at the First National Bank of Saratoga Springs, indorsed by Augustus H. Lockwood. A note of $967.71 given by said Valentine to M. H. Berge & Sons, due July 2, 1893. A note of $1,500 given by said Valentine to Ivah Holmes, payable on demand, on account of $629.75 due from said Valentine to J. O. Wemple & Co. Then these presents, and everything herein contained, shall cease and be void. And the said party of the first part, for himself, his executors, administrators, and assigns, does hereby covenant and agree to and with the said party of the second part, her executors, administrators, and assigns, to make punctual payment of the money .hereby secured. And in case default shall be made in payment of the said sum above mentioned, or in case the said party of the second part shall ■sooner choose to demand the said goods and chattels, it shall and may be lawful for, and the said party of the first part does hereby authorize and ■empower the said party of the second part, her executors, administrators, and assigns, with the aid and assistance .of any person or persons, to enter and come into and upon the dwelling house and premises of the said party ■bf the, first part, and in such other place or places as the said goods and chattels are or may be held or placed, and take and carry away the said •goods and chattels, to sell and dispose of the same for the best price they can obtain, at either public or private sale, and out of the money to retain and pay the said sum above mentioned, with the interest and all expenses .and charges thereon, rendering the overplus, if any, unto the said party of ■the first part, his executors, administrators, and assigns. And until default be made in the payment of the aforesaid sum of money the said party of the first part to remain and continue in quiet and peaceable possession of the said goods and chattels, and the full and free enjoyment of the same, unless the said party of the second part, her executors, administrators, or assigns, shall sooner choose to demand the same; and until such payment be made the possession of the said party of the first part shall be deemed the possession of an agent or servant for the sole benefit and advantage of his principal, the said party of the second part.”

On the day of the execution and delivery of the last-mentioned -mortgage, and at the same time, the defendant Valentine executed .and delivered to the defendant William H. Lockwood an assignment, ,of which the following is a copy:

“For value received, I hereby sell, assign, set over, and convey unto William H. Lockwood, of Saratoga Springs, N. Y., all the account due or owing to me mentioned in the annexed list, and all other accounts, dues, and choses in action due or owing to me, as collateral security for the payment of a balance of §1,352.50 on a note of §1,500 made by me, Thomas B. Valentine, and indorsed by Augusta A. Lockwood, and owned by the First National Bank of Saratoga Springs, the sum of §147.50 being paid on said note; also, a note of §007.71 held by M. H. Berge & Sons, due July 4th, 1893; also, a note of §500 and interest owned by Ivali Holmes,—said Berge note and Holmes note being each made by said Thomas B. Valentine; also, a note of §18.93 given by said Thomas B. Valentine to It. H. Trimm; a claim of §282.91 owing by said Thomas B. Valentine to George W. Valentine for work; also, a claim of §148.85 due from said Thomas B. Valentine to John W. Valentine for work; an account of §629.70 owing by said Thomas B. Valentine to Jay 0. Wemple & Co., which became due July 2, 1893; three notes of said Thomas B. Valentine, owned by the First National Bank of Saratoga Springs,—one of §50, due July 3rd, 1893, one of §150, due July 9, 1893, and one of §100, due Aug. 5, 1893. Also, to pay two notes of §65 each given to S. A. Rickard, and §83.33 for a month’s rent of the store No. 468 Broadway.”

On the 14th of June, the day of the execution of the last-mentioned mortgage by the defendant Valentine to the defendant Ann A. Lockwood, she, by her agents and attorneys, took possession of the goods and chattels embraced in and covered by the mortgage, and on the same day and time the defendant William H. Lockwood took possession of the accounts, notes, and choses in action assigned to him under and by virtue of the assignment above set out. On the 15th day of June, 1893, a judgment was recovered against the defendant Valentine, on which an execution was duly issued, and returned wholly unsatisfied, and on proceedings supplemental to execution the plaintiff was on the 17th day of June, 1893, duly appointed receiver; and on the 29th day of June another judgment was obtained against the same defendant, and the receivership was extended by order to the last-mentioned judgment.

The receiver, who is appellant on this appeal, insists that the mortgage to Ann A. Lockwood of June 14, 1893, and the assignment to William H. Lockwood made on the same day by the defendant Valentine, are in violation of the provisions of 2 Eev. St p. 135, § 1, for the reason that they create a trust in favor of the mortgagor and assignor, and are therefore violative of the right of his creditors. The language of that section is as follows:

“All deeds of gift, all conveyances and all transfers or assignments verbal or written of goods, chattels and things in action, made in trust for the use of the person making the same, shall be void as against creditors existing, or subsequent of such persons.”

The condition in the mortgage which directs the mortgagee to sell and dispose of the property mortgaged for the payment of the amount intended to be secured is not unlike an ordinary mortgage of chattels, and, had all the persons whose debts are attempted to be secured been made mortgagees, it could hardly be maintained that the provision requiring the mortgagee to pay the surplus to the mortgagor would be such trust for his benefit as to render the mortgage void under the provisions of the statute above quoted. Under such circumstances the legal title, before breach or forfeiture, would have remained in the mortgagor, liable to sale on execution, subject to the payment of the mortgage; and if the mortgage was an honest transaction, and the same given to secure honest indebtedness due to the mortgagees, the creditors of the mortgagor not secured by the mortgage would have no right to complain, as their right to the surplus after the payment of the mortgage would in that case be in no wise impaired. Does the creation of a trust in the mortgagee for the benefit of creditors who are not mortgagees alter the rights of the parties who are creditors of the mortgagor, but whose debts are not provided for in the trust created for the benefit of certain preferred or favored creditors who are named in the mortgage? The same question may be asked as to the assignment made by the defendant Valentine to the defendant William H. Lockwood. Both the mortgage and assignment create a trust for the benefit of creditors of Valentine who are not parties to the instrument, and together they transfer all of Ms property to the mortgagee and assignee, who are to use the avails of the same in paying the debts of the defendant Valentine, which are therein specified, and return to the mortgagor and assignor any surplus that may arise out of the sale of the property assigned or mortgaged, to the mortgagor or assignor. This trust, so far as such surplus or excess is concerned, is for the benefit of the mortgagor and assignor. Such a trust seems clearly in contravention of the provisions of the statute. We are referred by the learned counsel for the respondents to the following cases: Bank v. Fitch, 48 Barb. 344; Paper Co. v. O’Dougherty, 36 Hun, 79; Murphy v. Briggs, 89 N. Y. 446; Knapp v. McGowan, 96 N. Y. 75,—in support of the contention, made by him, that, so long as a party devotes his property to the payment of a bona fide debt, no unlawful act is done,—a proposition which is to some extent established by ■'he cases cited, and which cannot be doubted, when the party makes no reservation of the property to himself, in violation of the rights of other creditors. But the case of Knapp v. McGowan, above cited by the respondents, contains this very important and significant qualification, which seems to support the contention of the appellant in this case, and is stated in the syllabus of that case, and supported by the decision:

“That a conveyance by a debtor, whether solvent or Insolvent, of all of his property to a trustee, to pay a portion of his creditors, with a provision that the surplus shall be returned to him, leaving his other creditors unprovided for, is fraudulent and void as to the latter.”

And, in stating that proposition, Judge Earl uses the following language:

“An insolvent, or even a solvent, debtor cannot convey all his property to a trustee, to pay a portion of his creditors, with a provision that the surplus will be returned to him, and leave other creditors unprovided for, because such a conveyance ties up his property in the hands of his trustee, and places it beyond the reach of his creditors by the ordinary process of law, and thus hinders and delays them, and is therefore void as to creditors unprovided for.”

In the case at bar the referee found that the defendant Valentine, at the time of making the mortgage and assignment, on the 14th day of June, was indebted beyond and in excess of the value of his property; and it is quite apparent from the evidence of the defendant William H. Lockwood that he and his mother, Ann A. Lockwood, knew that fact. In Sutherland v. Bradner, 116 N. Y. 410, 22 N. E. 554, Follett, J., in delivering the opinion of the court, uses this language:

“A preferential assignment by an insolvent of all of his estate in trust for the payment of a part of his debts, which provides that after paying the creditors named the remainder of the assigned estate shall be restored to the assignor, hinders and delays the unpreferred creditors, and it is void as against them.”

—And he cites in support of that proposition Goodrich v. Downs, 6 Hill, 438; Barney v. Griffin, 2 N. Y. 365; Collomb v. Caldwell, 16 N. Y. 484. It can malee no difference in principle, or in the practical effect of such an assignment, whether the surplus provided for is large or small, or whether, indeed, there is or is not in fact any surplus. The vice consists in its effect in hindering and delaying the other creditors in the use of the ordinary remedies for the collection of these debts. Knapp v. McGowan, supra. But the respondents urge that the ordinary remedies available to other ■creditors were not suspended by the giving of this mortgage and the simultaneous execution and delivery of the assignment, and in support of this contention cite Murphy v. Briggs, 89 N. Y. 446. But it will be observed that in that case no trust was created by the mortgagor in the mortgage for the benefit of other creditors not named as mortgagees, and the mortgage was the ordinary case of a mortgagor giving a mortgage in the usual form to secure the debt due the mortgagee in person, and the mortgage did not, as in this case, create a trust in favor of other creditors. It is true that the common pleas of New York, in Wheel Co. v. Frost, 13 Daly, 233, held that a mortgage somewhat like the one under consideration, upon the authority of Murphy v. Briggs, was a valid security. But no such conditions existed in the case of Wheel Co. v. Fielding, 101 N. Y. 504, 5 N. E. 434, to which we are referred, nor did that case affirm the determination of the New York common pleas in Wheel Co. v. Frost, supra. It is quite apparent from this transaction that the simultaneous transfer of all of the property of Valentine by this mortgage and assignment was for the purpose •of placing the same within the control and at the disposal of the mortgagee and assignee, for the purpose of securing and paying their claims, not only, but also for the purpose of securing to the ■other beneficiaries and cestuis que trustent therein named their claims, to the exclusion of other creditors of Valentine not referred to in those transfers. The mortgage was to secure debts, some of which were due when it was given, and the mortgagor was in default the moment the mortgage was delivered; so that by operation of law, if this transaction was valid, the title to the mortgaged property vested at once in the mortgagee, subject, of course, to the performance of the trust therein created. This rule has long been well settled, and in Moore v. Supply Co., 133 N. Y. 149, 30 N. E. 736, Judge Earl, in discussing the rights of parties to a chattel mortgage, says:

“After default In the payment of the plaintiff’s mortgage, whatever title the mortgagor had was vested absolutely, subject to the right of redemption in equity in the plaintiff [mortgagee].”

In the case at bar the mortgagee, availing herself of the title thus acquired, immediately took possession of this property, advertised and sold it to the defendant William H. Lockwood, and thereby cut off all equity of redemption of the other creditors of the mortgagor. Under such circumsances, it can hardly be said that the trust created in this mortgage did not have the effect to hinder and delay other creditors in the ordinary proceeding for the collection of their debts. The case is not like Wheel Co. v. Fielding, supra. In that case no trust was created for the benefit of third parties, and the mortgage under discussion then was a real-estate mortgage, under which a forfeiture or breach of condition did not work a change in the title, as in this case; and in the discussion of that case, Finch, J., says:

“This is the usual clause reserving surplus to mortgagor in every mortgage upon real estate, and, as here employed, cannot be regarded as of the same character as if used in an assignment of property for the benefit of creditors specially preferred, in which case it would render the assignment inoperative and void.’’

In a real-estate mortgage the surplus, on foreclosure, passes to the person entitled to the same under the order of the court. But the surplus provided for in this mortgage is reserved to the mortgagor after the satisfaction of all the trusts provided for in the instrument itself; and in effect the trustee, who is also mortgagee, is charged with the duty of returning such surplus to the mortgagor, without regard to the rights of other creditors who are not provided for in the mortgage. In no light in which we can examine this mortgage and assignment can we escape the conclusion that a trust is created by this mortgage for the benefit of the mortgagor’s creditors named therein, and that the surplus is reserved to the mortgagor w’ho makes the transfer, and creates the trust for his own benefit. To allow such a transfer in the name of a chattel mortgage to stand in the way of bona fide creditors of the mortgagor or assignor would seem to furnish an easy method for a debtor to transfer his property in a manner that hinders and delays his creditors, and at the same time secure to himself the remainder of his estate, in violation of the plain intent, if not of the letter, of the statute. The referee finds that at the time Valentine made this mortgage and assignment he was insolvent, and expected to be closed. Under such circumstances, his transfer of all of his property was in the nature of a general assignment, and any reservation of an interest in the property assigned, in himself, rendered the transfer void, within the statute referred to. In Curtis v. Leavitt, 15 N. Y. 9, the court holds that where a security is given in the ordinary course of business, with a provision that after the payment -of the debt the balance of surplus shall belong to the mortgagor or grantor, no illegal trust is created in the surplus. But the same case holds, at page 132, as follows:

“But when they are made in favor of an insolvent, who winds up his-affairs by an assignment of his whole estate, then they have been justly regarded as high, and sometimes conclusive, evidence of a fraudulent design. The principle, indeed, which runs through this whole branch of our law is that when a trader or dealer fails, and proposes to put his estate-in trust, he must devote the whole of it, immediately and unconditionally,. to the payment. It is only on those terms that he is allowed to withdraw it from the ordinary process of the law. He must reserve nothing to himself, but must give all to his creditors.”

Upon the facts of this case, and within the principle here enunciated, we think that the learned trial judge erred in non-suiting the plaintiff, and for that error the judgment must be reversed.

Judgment reversed, and a new trial ordered; cost to abide the event.  