
    Peyser et al. v. Myers et al.
      
    
    
      (Supreme Court, General Term, First Department.
    
    March 14, 1890.)
    1. Assignment for Benefit of Creditors—Preferences—Usury.
    Though a preference in a general assignment for the benefit of creditors is made up in part of usurious interest, the other creditors are precluded by the assignment from questioning the validity of the preference.
    2. Same—Compound Interest.
    The unpreferred creditors may recover compound interest paid by the assignee to a preferred creditor, in the absence of a valid agreement for its allowance; the estate being insufficient to pay the demands against it.
    8. Judgment—Default—Fraud.
    A judgment recovered by default in an action commenced at the suggestion of the debtor is fraudulent so far as it includes compound interest for which there was no valid agreement.
    Appeal from special term, Yew York county.
    Action by Henry M. Peyser and others against William M. Halsted and others, composing the firm of Halsted, Haines & Co., and Sarah L. Myers and others as executors, etc., of John K. Myers. There was judgment for defendants. Plaintiffs appeal.
    Argued before Van Brunt, P. J., and Brady and Daniels, JJ.
    
      John J. Adams and Charles E. Hughes, for appellants. Stimson & Williams, (Wm. Pierrepont Williams, of counsel,) for respondents.
    
      
      Reversing 5 N. Y. Supp. 827.
    
   Daniels, J.

The plaintiffs are judgment creditors of the firm of Halsted, Haines & Co. They recovered their judgments in the latter part of the year 1884, and the early part of 1885; and upon these judgments executions were issued against the property of the judgment debtors, and returned unsatisfied. On tlie 12th of July, 1884, the judgment debtors made a general assignment to Lewis May of all their joint and individual property for the benefit of their creditors. This assignment contained a preference in favor of the executors of John K. Myers for the sum of $102,872. The assignment also contained other preferences amounting to about the sum of $400,000. After the assignment was made and accepted by the assignee, and on the 9th of September, 1884, he delivered to Frederick A. Ward, who was the attorney for the preferred creditors, a check substantially for the amount of their preferences. The payment of this check was restrained by an injunction at the suit of other judgment creditors, but it was paid on the 16th of October, 1884; and the attorney transferred to the executors and executrix of the estate of John K. Myers the amount received by him on account of, and to satisfy, this preference. And it was the object of the action to set aside the assignment and this payment, and require the executors and executrix to account for so much of this money as should be necessary to pay the judgments set forth in the complaint in this action. The testator became a partner in a preceding firm, engaged in the same business and under the same name, as early as January 1, 1860, and he invested as capital in the firm the sum of $62,318.73. This was increased by interest and profits to the sum of $131,828.85 by the 1st of December, 1872; and the evidence tended to show that on that day the testator withdrew from the firm. The evidence as to this fact was not very decisive. But it did appear that after the 1st of January, 1873, his account on the books of the firm was headed, instead of a stock account, a private account; and a notice was published in the Hew York Times, over the name of the firm, stating that Myers had withdrawn from it. . A new firm was organized in January, 1873, and the book-keeper of that firm testified that Myers was not one of its members. His evidence was by no means decisive, but it tended to establish that to be the fact. And a similar statement was made by the plaintiffs' witness Davidson, from the examination which he made of the books, but it was not confidently adhered to in the future course of his evidence. The witness William A. Haines stated that he was very confident that Myers retired from the firm within three years after he himself entered it, and he became a member of the firm in 1870; and the witness William M. Halsted added, in the course of his evidence, that he thought Mr. Myers retired from the firm in December, 1872. These witnesses were unable to state the making of any agreement by which Myers ceased to be a member of the firm; but, from the manner in which the books were kept, and the statements were made by these witnesses, there was sufficient to sustain the conclusion reached by the judge presiding at the trial, that Myers did cease to be a member of the firm from the last of December, 1872.

Interest was stated to appear from the books to have been added to his account at the rate of 12 per cent, from the 1st of January, 1870, to the 1st of June, 1877; and, so far as this exceeded the sum of 5 per cent., it is claimed in behalf of the plaintiffs that it should be accounted for, and applied to the payment of the plaintiffs’ judgments. But it appeared from the evidence that the testator, in the early part of the summer of 1877, became apprehensive that the reservation of this additional interest might imperil his right to the moneys standing to his credit on the books of the firm; and during the months of May, June, and July, 1877, he, with the assent of Mr. Halsted, who seems to have been more especially the managing partner of the firm, drew out of it the principal and interest to which, according to the books, he had become entitled, receiving in this manner the aggregate sum of $183,699.70, and during the same months he returned to the firm the sum of $179,000. The objeet which seems to have induced these collections, and the return of the money, was to put it out of the power of the firm to question its liability because of the reservation of this usurious interest; and the adjustment of the amount in this manner not only prevented the firm itself, but the plaintiffs, insisting upon the right to the collection of this usurious reservation of interest. The result would have been the same if this change in the accounts had not taken place; for by the statute the right of the borrowers, as well as of the plaintiffs claiming under them, to recover the usurious excess of interest, was limited to an action to be brought within one year after the payment of the usurious interest. 2 Rev. St. (6th Ed.) 1165, § 3; Palen v. Johnson, 50 N. Y. 49. But when the debtors made the assignment, even if the preference contained in it in favor of the executors and executrix of the testator included the balance which in part had arisen out of the allowance of this interest, that would not entitle the plaintiffs to recover it; for such an assignment has been held to preclude the assignee, as well as the other creditors, from questioning the legality of the preference. Murray v. Judson, 9 N. Y. 73. As to this usurious interest, it was properly held, therefore, that the plaintiffs were not in a condition to maintain their action.

It further appeared from the books of the business that $141,893.31 was due to the testator on the last of January, 1874, and from that date to the failure, in July, 1884, there was $130,157.74 allowed as interest on his account, and that the simple interest for that period was the sum of $57,095.70, leaving a residue, consisting of credits for compound interest, amounting to the sum of $48,-574.99; and this interest had been compounded annually, or semi-annually, as it appeared by the books. The testator died in September, 1877, and this firm is shown to have been insolvent from the 1st of January of that year; and no agreement has been proved at any time to pay or allow to himself or his representatives this compound interest, and without proof of an agreement sustained by a legal consideration the allowance of such interest was unauthorized. This was considered in Young v. Hill, 67 N. Y. 162, where the court determined “that an agreement to pay interest upon interest must, in order to its validity, be made after the interest which is to bear interest has become due; and, second, that it must be supported by a sufficient consideration. A mere voluntary promise, without a consideration, is a nudum pactum, and cannot be enforced. ” Id. 167, 168. As the proof appeared in the case, therefore, so much as was paid by the assignee to the personal representatives of this partner for compound interest was unlawful. Neither an agreement for its allowance was proved to have been at any time entered into, nor was any consideration shown to support such an agreement, if it had been made. And the consequence was that so much money as was paid by the assignee under the assignment to the executors and executrix of this estate as included this compound interest was substantially a gift to them, which, as the trustee of an insolvent estates he had no right or authority to donate; and they were equally without the right to receive it. And in Bates v. McConnell, 31 Fed. Rep. 588, it was held that a judgment creditor was authorized to follow such a disposition of the insolvent estate, and have it applied to the payment of his judgment; and this principle has the sanction of Bank v. Furness, 114 U. S. 376, 5 Sup. Ct. Rep. 900. There a retiring partner had drawn out a part of the capital of the firm, receiving an agreement from the other members that they would pay its debts. The firm was at the time insolvent; and it was held, under these facts, that the retiring partner should restore the capital received by him, “so far as may be necessary to pay the debts of the concern existing at the time; and this, too, whether there was any fraud designed in the transaction or not.” Id. 380. And this principle has nob been in any manner questioned or impugned by what was decided in First Nat. Bank v. Central Nat. Bank, 6 N. Y. Supp. 236; for there the payment was not only made in good faith, but the creditor receiving it had become entitled to it through the preference of an existing indebtedness contained in the assignment, while in this case the executors and. executrix receiving the money had no title whatever to it, and no right to withhold it from the other creditors of this firm. By the assignment, all the property of this firm, or substantially all of it, was devoted to the payment of the preferences contained in it; and the other preferred creditors received their money at or about the time when the payment of this preference was made to the representatives of this estate, and diverting so much of it as was used to satisfy the creditors for compound interest was no more than a gift of that sum of money. And, as this assignment has been adjudged, and was conceded at the trial, to have been made with the intent to hinder, delay, and defraud creditors, the plaintiffs were entitled to succeed, and to be secured the appropriation of this money for the satisfaction of their demands. The law does not permit insolvent debtors, or an assignee representing them, voluntarily to donate any part of his estate to another. But such donation or gift will be held to be void when the estate is insufficient to pay the demands existing against it, as this estate was and had been for a period of upwards of six years. Dunlap v. Hawkins, 59 N. Y. 342; Cole v. Tyler, 65 N. Y. 73; Carr v. Breese, 81 N. Y. 584, 589.

The payment of these moneys to the representatives of this estate, and their right to detain it from the other creditors, is not sustained by the fact that a judgment was recovered in their behalf against the assignors in August, 1884. A suit was brought to recover such a judgment, and the judgment was obtained afterwards by default, for want of an answer. Tiie other preferred creditors also obtained similar judgments upon their demands, and there is reason to believe that the actions were commenced and prosecuted at the suggestion of one, at least, of the judgment debtors. They were all brought by the same attorney; and, so far as this particular judgment included the amount of this compound interest, it stood on no more than a fictitious demand. It had no foundation either in law or in fact, and was on that account a collusive or fraudulent judgment. It is, of course, true, as the law was conceded to be in Candee v. Lord, 2 N. Y. 269, that a judgment recovered in good faith by a creditor against his debtor will be held to be conclusive in a controversy of this description. But, to allow that effect to be attributed to it, it is essential that it must be recovered without fraud or collusion. If it has been recovered in bad faith, it is then entitled to no effect whatever. Acker v. Leland, 109 N. Y. 5, 15 N. E. Rep. 743. And a judgment recovered upon an alleged indebtedness having no foundation in fact may reasonably be held to be a fraudulent or collusive judgment; and, where the object of its recovery is to transfer the insolvent debtor’s property to parties not entitled to receive it, there its recovery is to be inferred to have been induced to defraud the creditors of the insolvent debtor. And where that is the case it has been declared to be void by the statute, providing that every conveyance, etc., and every charge upon lands, goods, or things in action, and every bond or other evidence of debt given, suit commenced, or judgments suffered, with the intent to hinder, delay, or defraud creditors, shall be void. 3 Rev. St. (6th Ed.) 145, § 1. And this judgment, to the extent already considered, is within the condemnation of this section of the statute. But, if it were not, as the money in dispute was not collected by the executions issued upon the judgment and levied on the assigned property, the judgment affords no obstacle whatever in the way of the success of the plaintiffs’ action; for the fact was proved in the case, and found by the court, that the amount received by the representatives of this estate was paid by the assignee, and his authority for making that payment was not the judgment or execution, but the preference contained in the assignment. The money was mot collected under the execution, but it was voluntarily paid over under the authority of the assignment itself; and, as the representatives of this estate had no title to it, no authority to receive it, the plaintiffs were entitled as judgment creditors to maintain this action ior the appropriation of this money to the payment of their judgments. When their action was commenced the •assignment had been declared void at the suit of other creditors, and it was not interposed as a valid instrument in the way of this action. But, whether it could be or not, the payment of this compound interest to the representatives of this estate was a fraud upon the unpreferred creditors of the insolvent debtorsl and, as neither the assignment nor the judgment stands in "their way, they should be permitted to recover these moneys, certainly since July, 1877, when the $179,000 was returned, so far as they will be sufficient to pay the judgments in dispute, if the amount shall exceed the aggregate sum which may he recovered upon them. The judgment should be reversed, •and a new trial ordered, with costs to the plaintiffs to abide the event. All ■concur.  