Arnold v. Hagerman

• Decision Date: 22 January 1889
• Citation: 45 N.J.E. 186,17 A. 93
• Parties: ARNOLD v. HAGERMAN et al. SAME v. SECOND NAT. BANK.
• Court: New Jersey Supreme Court

17 A. 93

45 N.J.E. 186

ARNOLD

v. HAGERMAN et al.

SAME

v. SECOND NAT. BANK.

Court of Errors and Appeals of New Jersey.

Jan. 22, 1889.

(Syllabus by the Court.)

Appeal from court of chancery; BIRD, Vice-Chancellor.

Bill by Hagerman and Fielder against Farr, Arnold, the Second National Bank of Red Bank, and others, to set aside their assignment to Farr, as induced by fraudulent representations, and bill by the bank against Farr, Hagerman, Fielder, Arnold, and others, to have assignments to Farr and Arnold set aside as fraudulent as to creditors. Arnold, assignee, appeals from a decree in favor of the bank.

Mr. Collins, for appellant. Mr. Hartshome, for Hagerman and Fielder. John S. Applegate and Fred W. Hope, for Second National Bank.

DIXON, J. On July 17, 1883, John C. Farr, having a lumber business in Hoboken, and a wood-manufacturing business in Asbury Park, formed a copartnership in the latter business with John H. Hagerman and John S. Fielder, under the name of J. C. Farr & Co., to continue for four years. Under their agreement Hagerman and Fielder each gave to Farr his notes for $7,500, and thereupon property already in the business at Asbury Park became the capital of the new firm, owned one-half by Farr and one-quarter by each of the others. Each partner was to draw out a stated sum annually, and the profits and losses were to be divided in proportion to their respective interests, but the profits accruing to Hagerman and Fielder were to be applied towards the payment of the notes aforesaid. The firm also assumed the debts of Sullivan & Co., a concern of which the new partnership was said to be a continuation. On October 29, 1883, the new firm, being embarrassed, dissolved, and Hagerman and Fielder assigned all their interest in the business and property of the partnership to Farr, Farr surrendering to them the notes aforesaid, and agreeing to pay the debts owing by the firm, and which were assumed by the firm from the firm of Sullivan & Co., and to save Hagerman and Fielder harmless therefrom. On November 30, 1883, Farr assigned all his property to Benjamin W. Arnold for the purpose of securing to his creditors an equal distribution of his property and effects, pursuant to the directions of the statute of this state, entitled "An act to secure to creditors an equal and just division of the estates of debtors who convey to assignees for the benefit of creditors," and the supplements thereto. In January, February, and March, 1884, the Second National Bank of lied Bank recovered several judgments in the supreme court against the members of the firm of J. C. Farr & Co., for partnership debts, and caused executions thereon to be levied upon what had been the property of said firm. On March 3, 1884, Hagerman and Fielder filed their bill in the court of chancery against Farr, Arnold, the bank, and others, to set aside their assignment of October 29th to Farr, alleging that he had induced them to make the same by fraudulent representations, and for a fraudulent purpose; and on March 10, 1884, the bank filed its bill in said court against Farr, Hagerman, Fielder, Arnold, and others, to have said assignments by Hagerman and Fielder to Farr, and by Farr to Arnold, set aside as fraudulent against the creditors of J. C. Farr & Co., so that the property of said firm might be applied to payment of the bank's executions, and also praying that, if necessary, a receiver might be appointed to take charge of the business, assets, and effects of John C. Farr, and also those which were of J. C. Farr & Co., to manage, control, and dispose of the same under the directions of the court. These bills, and the answers thereto, of the defendants above named present the issues now to be decided. The causes have throughout been tried and argued together, since they aim at similar results. Nevertheless their proper decision can be reached only under the guidance of principles which are quite dissimilar.

The complaint of Hagerman and Fielder will be first considered. The statements, relied upon by them as the ground for setting aside their transfer to Farr are substantially these, as gathered from the testimony of Hagerman, to whom alone any statements were made by Farr. In a casual conversation about finances, held in the streets of New York, at an indefinite time, before any discussion was had about Farr's buying out the partnership property, Farr said to Hagerman that his Hoboken business had made $10,000 a year, and that he could pay his debts, and have $30,000 left. About the 1st of October, 1883, the creditors of Sullivan & Co. were pressing J. C. Farr & Co. for payment, and Hagerman went to see Farr about it, and told him that unless they got funds to meet the debts their notes would be protested, and they would get on bad credit with the bank. Farr promised that he would borrow $10,000 from Mr. Arnold. Subsequently Farr sent Hagerman word that Arnold would not let him have the money, because he was not satisfied with the Asbury Park business, and wanted a settlement of his accounts, (Arnold being a large creditor, mainly of the Hoboken business.) Hagerman again called on Farr, who said that his Albany creditors (Arnold being one) were urging him, and that he could get along a great deal better with them if he had the Asbury Park business in his own name. Hagerman replied that he would be perfectly willing to assign his interest over to him, if it would be of any benefit in getting him out of his trouble, and thought Mr. Fielder would be willing to do as he did. Farr thereupon promised that he would then go ahead and straighten out his affairs, and there would be no more trouble about it. Afterwards, a committee of the Albany creditors having come down to Hoboken, the assignment was prepared and executed with their concurrence. In these statements there is nothing to warrant the rescission of the assignment. So far as they purported to represent existing facts, the evidence shows that they were all true, except the allegation that Farr was worth $30,000 above his debts. That allegation was made in a casual conversation, in the streets of New York, before the assignment in question was thought of. It was uttered, we think, bona fide, and in view of circumstances quite different from those which presented themselves when the negotiations for this transfer were in progress, and therefore Hagerman and Fielder had no right to regard it as entering into those negotiations. Indeed, it is plain that those negotiations proceeded, not upon the idea that this statement was accurate or reliable, but upon the fear that Fair's assets were unequal to his debts, and his financial difficulties were almost, if not quite, insurmountable. Whatever of these so-called misrepresentations related to the future were but promises honestly made, and Farr's inability to fulfill them does not at all invalidate the assignment. The fraudulent purpose which the complainants, by their bill impute to Farr, as prompting him to obtain this transfer, was a design to secure the property of J. C. Farr & Co. for the payment of his personal creditors, and so to leave the complainants without the means of discharging their obligations as members of the firm. But we have failed to discover any grounds for saying that this was Farr's motive, except such as were substantially known to the complainants when they conveyed to him their interest in the firm property. They may not, indeed, have been apprised of the precise proportion which Farr's assets bore to his liabilities, but they knew that he was insolvent; that his notes were under protest; and if the court, from the circumstances now disclosed, should infer that Farr's purpose was as charged, the complainants, from the facts then patent to them, ought to have drawn the same inference. Consequently, if we are satisfied of the existence of this imputed design, we must also be satisfied that the complainants were cognizant of and acquiesced in the scheme. In that case the transaction did them no wrong, and they have no standing to complain of its effect upon others. Schenck v. Hart, 32 N. J. Eq. 774. But even if Hagerman and Fielder were at the time deceived as to Farr's responsibility and purpose, their subsequent conduct was such as to deprive them of the right to rescind their transfer on that account. Upon discovery of fraud which has induced a contract, the party defrauded must promptly elect whether he will rescind or not, and if he then evinces an intention not to rescind, the contract becomes, as to him, irrevocably established. In the present case, when Farr made his assignment to Arnold for the benefit of his creditors, his inability to extricate himself, and his plan for disposing of his affairs, were plainly revealed to Hagerman and Fielder; yet, so far from repudiating their conveyance upon the ground that this assignment was a fraudulent perversion of it, they actually took part in perfecting and carrying out this assignment, Hagerman acting as appraiser in making Arnold's official inventory and valuation; both Hagerman and Fielder being employed by Arnold for some weeks afterwards to manage the Asbury Park business in his behalf. This conduct shows an election to stand by their transfer, after they were fully apprised of all the circumstances because of which they now seek to avoid it. Their bill should be dismissed, with costs.

The bill of the Second National Bank raises questions requiring the application of different principles. It insists that the transfer from Hagerman and Fielder to Farr, as also that from Farr to Arnold, were void with respect to the creditors of J. C. Farr & Co., because they were contrived of fraud, covin, on collusion, with intent to hinder, delay, or defraud those creditors. The earlier assignment will be first dealt with.

In equity a partnership is for some purposes deemed a single entity. Thus, when the property involved in the business of a partnership is to be...