Opinion
(December Term, 1840.)
A debtor upon being applied to by a bona fide creditor to secure him by a deed of trust on his property refused to secure any part of the debt unless the creditor would transfer one-half to a trustee for the benefit of the debtor's wife and children, and that the half so transferred should also be secured by such deed. The creditor, though reluctantly, consented; the transfer was made and a deed of trust executed according to such agreement. Held, that this was tantamount to a reservation by the debtor himself of so much of his property for the use of his wife and children, and was, therefore, fraudulent and void as against other creditors.
Whether the trust in favor of the creditor for the one-half of the debt retained to himself is not also void because of his being a party to such arrangement. Quere?
THIS was a bill filed in HALIFAX Court of Equity, and after the answers were put in, depositions taken and the cause set for hearing, the case was transmitted to this Court. The facts are stated in the opinion of the Court.
Badger and B. F. Moore for the plaintiff.
Iredell for the defendants.
In November, 1837, the defendants, Edmundson King, as partners in merchandise, were indebted to the present plaintiff in the sum of $1,000, and to the defendant Beasley in the sum of $3,536.23, and to sundry other persons in sums which together greatly exceeded the whole value of their joint effects, and also of the separate effects of the two partners. Beasley being informed of their insolvency by Edmundson, and applied to by him to take the stock of merchandise in discharge of his debt, readily assented to do so. But when the parties met to carry into effect the agreement Edmundson retracted his offer, but proposed by an assignment to a trustee of sufficient property to secure to Beasley one-half of his debt for Beasley's own benefit if he, Beasley, would agree that the other half, which was also secured by the same assignment, should be in trust for the separate use of the wife of Edmundson and for his children. To this arrangement Beasley at first strenuously objected, and urged Edmundson to secure (181) to him, Beasley, his whole debt. But finding that Edmundson obstinately persisted in his refusal to secure the debt or to secure any part of it but upon the condition above mentioned, Beasley finally yielded to the proposition of Edmundson. The parties were then about to secure the whole debt of $3,536.23 in the name of Beasley, as if the same still belonged to him, and thus leave it to him to account with Edmundson or his wife and children for the one-half. But Edmundson again objected, and required the debt to be divided at once; and to that also Beasley yielded, as the only means of saving any part of his debt. Accordingly a new note was executed to Beasley for the sum of $1,768.12, and also a note for the like sum of $1,768.12 was executed to the defendant Shield, who was selected by Edmundson, and agreed to receive and hold the money in trust for Edmundson's wife and children, as stipulated between those other parties; but of this trust nothing appeared in the note or subsequent assignment, nor was it disclosed by any written instrument. Immediately thereafter Edmundson executed a deed of trust to the defendant Nichols for all his property, both real and personal, and all debts due to him and his interest in the firm, in trust to receive and satisfy, in the first place, a debt of $800 due to one Little; secondly, the said debt of $1,768.12 due to Beasley; thirdly, the said sum due on the note to Shield; and then sundry sums due to other enumerated and classified creditors, among whom the plaintiff Kissam is not included. This deed was executed by Edmundson and Nichols only, and not by Beasley or Shield; not does it appear that any other creditor besides those two was privy to it.
Within a short time thereafter the plaintiff recovered a judgment for his debt against King and Edmundson, and issued a scire facias, which was returned nulla bona; and then the plaintiff filed this bill against Edmundson and King, Nichols, Beasley, Shield and the wife and children of Edmundson, and therein (submitting that the other debts mentioned in the deed except those to Beasley and Shield are true debts, and that the plaintiff is willing they should be paid) prays that the (182) deed may be declared fraudulent and void as against the plaintiff, so far as it purports to secure the said two sums to Beasley and Shield, and more especially in respect to the debt to Shield, as being substantially a voluntary settlement by Edmundson, an insolvent debtor, on his wife and children; and that the plaintiff's judgment may be satisfied out of the effects in the hands of Nichols, after paying off the debts mentioned in the deed other than these two.
There is no material difference as to the facts of the case as they appear upon the bill and the answers. But Nichols, the trustee, has been examined as a witness upon the answers, and upon his deposition the case is very satisfactorily made out as above stated.
If the sum secured to Shield for the benefit of the wife and children of Edmundson is legally to be regarded as a provision made for them by Edmundson himself, it is very certain that it cannot be raised out of his property to the disappointment of his creditors, and the deed must be deemed ineffectual, so far, at the least, as it was intended as a security for that sum. A conveyance after marriage by a debtor to his wife and children, or in trust for them, is unquestionably fraudulent and void as against prior creditors, and that without regard to the amount of the debt or the circumstances of the party making the conveyance. O'Daniel v. Crawford, 15 N.C. 197; Read v. Livingston, 3 John. C. C., 481; Jackson v. Seward, 5 Cowen, 67. Much more is that true where there is an admitted insolvency of the settler and the assignment includes all his effects.
The only doubt that can be raised on the case is whether this provision for Edmundson's family be his bounty or that of Beasley. Upon that question our opinion is, notwithstanding the form into which the transaction was put, that it is substantially and essentially a gift from Edmundson to his wife and children.
The objection to that position or conclusion is that Edmundson really owed the whole sum to Beasley; and the law allows a debtor to prefer one creditor before another, and it is not material to the general creditors whether the money thus actually due be paid to one person or to another. In other words, the argument is that it was lawful for Beasley to do what (183) he willed with his own; and in giving a part of his debt to Shield or to Edmundson's family, he did no wrong to the present plaintiff. This mode of presenting the case we admit to be plausible; but we think it more specious than sound. It is not denied that a creditor may, like a relation or any other compassionate person, give out of his debt or any property belonging to him a bounty to the family of his unfortunate debtor. But then it must be really a gift from the creditor and not from the debtor himself. It is not sufficient that the sum secured was altogether a true debt. If that were sufficient then the deed would be good though it secured half the debt to the creditor and the other half to the debtor, or to a trustee for the debtor. But certainly in this last case the conveyance is fraudulent. Why? Because, as is mentioned in Twine's case, although the debt be a true debt, yet if the debtor is to have the benefit of it or of the property conveyed to secure or satisfy the debt, the conveyance is taken, not to have been made for the satisfaction of the debt, but in truth and reality for the ease and favor of the debtor. Therefore the whole is a nullity. It is not doubted that a creditor may lawfully be compassionate and bountiful to his debtor by giving up a part of his debt before he receives payment or after he has received his debt, by applying a part or the whole of it in relief of the necessities of his indigent friend. But it must be the act of him who was the creditor, and independent of any arrangement between the debtor and creditor at the time or as a part of the contract to convey property, either as a security or in apparent payment of the debt. Whatever benefit is secured, either openly or covertly, by such a deed to the maker of it out of the effects conveyed by him, is obviously inconsistent with the professed purpose of conveying to satisfy or secure the debt to the creditor; and for that reason is mala fide and void.
Now, how does the present case differ from that just supposed of a provision for the debtor himself? It is said there is an essential difference in this: that in the one case there is an interest reserved to the debtor, and that at least is liable (184) for his debts; and in the other the property goes at all events from the debtor and in discharge of his just debts, be it payable to whom it may. But it is clear that a deed in which an interest is secured to the debtor, unless as a mere resulting trust, is void in toto under the statute, and not merely in regard to that provision in favor of the debtor. Riggs v. Munay, 2 John. C. C., 565; Hobart, 14; and therefore the debtor's interest under the deed is not the only thing subject to his creditors. As to the consideration that in the other case all property is gone from the debtor, it is true; but to whom does it go? Why, to the very persons to whom every husband and father wishes his property to go — to his wife and children. If it had been secured to the debtor he would have desired it chiefly to enable him to do directly what has been done indirectly, namely, provide for his family. Admit that Beasley might, of his charity or caprice, have transferred to his debtor's family one-half of his debt, and that an assignment to secure the two debts after the transfer is as valid as one to secure the whole to Beasley would have been; yet we cannot regard this transaction as a donation from Beasley to Mrs. Edmundson and her children. It is preposterous to call it so. A bounty is a voluntary act. It was indeed a bounty to those persons. But to whom do they look as the author of it? Whom do they thank for it? Most unquestionably not Beasley. They understood the truth of the case, and are not such dupes as to suppose themselves indebted for this provision to anything but to the power the husband and father had over his creditors in giving or refusing to him a preference over other creditors, and to the use he made of that power. The gift was not, therefore, the gift of Beasley — not his free gift. It was forced from him, or purchased from him, by making his transferring one-half the debt to the debtor's family the condition and the price of getting any part of it for himself. The question is, will the law allow such a use to be made of the right to give a preference among creditors? We think not. The rule has been carried far enough in permitting preferences to be effected by voluntary assignments. It is too late to question that power; and generally the exercise of it is sustained without inquiring into the debtor's motives (185) for particular preferences. But that must be understood of preferences between real creditors, and cannot be applied to the case of one who is made to appear to be a creditor, without giving any value and by the mere contrivance, art or bounty of the debtor himself. To uphold such a transaction as this would not be to treat the preference we are speaking of as founded on the equity of the creditor to save himself, or even as the privilege of the debtor to be exercised for the benefit of the preferred creditors; but it would be to convert it or to suffer and entice insolvent debtors to convert it into a valuable interest in themselves, as a means of directly providing for their families, and in so doing of indirectly providing for themselves.
A court of justice is not to be duped by the mere language parties may use. We are to look at what was said and done — both, and to understand the whole in its substance as the parties understood it at the time. It is said the gift of the debt was made by Beasley, and that it must be so as it was his debt, and nobody else could give it. But that is a view limited by the forms of the transaction; whereas, forms signify nothing upon an occasion of this sort. Beasley gave the debt, but at whose instance, to whom and from what motive? He gave it at the instance of the debtor to the debtor's family, and as the only means of receiving anything from the debtor for himself. Is it not plain that substantially this was not a gift by Beasley to the wife and children, but a gift to them by Edmundson himself? Beasley bargains with the debtor that he will put up with half of his debt, and as to the other half — which, in respect of his own interest, was extinguished — he stipulates with the debtor that instead of totally extinguishing it he will keep it on foot for the benefit of the debtor himself or any person he may designate. He then nominates his wife and children, and upon the surrender of the former note he, the debtor, executes a new note for one-half the sum to a person in trust for his own wife and children. Yet it is said he did not give them this sum of money, but that Beasley did! The Court cannot be so blind as not to see through so simple and shallow an artifice as this, nor (186) be so insensible to good morals among the trading classes and to the tendency of such a transaction to break down the security of creditors, and to put them completely in the power of the debtors, as to hesitate in declaring that in law such a provision cannot stand, and that the deed is void as against the plaintiff so far as it is a security for the debt in question. It is true Shield and those whose interest he represents are not themselves guilty of any fraud; but, then, they are mere volunteers who gave nothing for this debt, but acquired their interest entirely by the fraud and dishonesty of the person who made this conveyance as a security to them. Though innocent themselves they cannot derive a good title through that person, but must take it tainted with his fraud. At the bar it was also urged that the deed was void as a security for the residue of the debt to Beasley himself; and, indeed, that it was void as an entire deed in respect to all the deeds mentioned in it, if the plaintiff had impeached it to that extent. Perhaps it will be found difficult, upon principle or authority, to exonerate Beasley from the consequences of his privity in that part of the case which taints the deed and renders it void, to some purpose at least. But as it is obvious that he was more sinned against than sinning, and was innocent of any actual intent to injure any person, but aimed to save himself, the Court would most reluctantly pronounce the deed ineffectual as a security for his half of the debt; and will at least defer doing so until the question has been further considered, and it shall be found necessary to the justice due to this plaintiff. At present it is to be hoped there will be no such necessity. The trustee does not give in his answer an account of the trust fund; but it is intimated that when got in it may be sufficient to satisfy all the debts mentioned in the deed and leave a small surplus, which of course would be applicable to the plaintiff's judgment, whether the deed stood or not. If the fund should realize those expectations then, after putting out of the way the debt due on the note to Shield, the means will be ample to pay the plaintiff without interfering with Beasley's right to have his debt satisfied out of the fund. Therefore, after declaring that no part of the fund in the hands of Nichols, the trustee, shall, as against the plaintiff, be (187) applied to the debt to Shield, the decree must direct an inquiry and account of the trust fund and of the debts paid or payable thereout, so as to enable us to see what sum will be applicable to the plaintiff's demand. Should there be sufficient without intercepting what would, according to the deed, go to Beasley, we need not consider the question just alluded to as the deed is, at all events, good between the parties, and Beasley can call for any funds in the hands of the trustee not claimed by another creditor.
PER CURIAM. Decree accordingly.
Cited: Hafner v. Irwin, 23 N.C. 497; Palmer v. Giles, 58 N.C. 77.