17 A. 93 (N.J.Eq. 1888), Arnold v. Hagerman

Citation:17 A. 93, 45 N.J.Eq. 186
Opinion Judge:DIXON, J.
Party Name:BENJAMIN W. ARNOLD, assignee &c., appellant, v. JOHN W. HAGERMAN et al., respondents. BENJAMIN W. ARNOLD, assignee, appellant, v. THE SECOND NATIONAL BANK OF RED BANK, respondent
Attorney:Mr. Gilbert Collins, for the appellant. Mr. A. C. Hartshorne, for Hagerman and Fielder. Mr. John C. Applegate and Mr. Fred. W. Hope, for the Second National Bank.
Judge Panel:MAGIE, J., dissenting. Mr. Justice Depue concurred with Mr. Justice Magie. MAGIE MAGIE, J. (dissenting).
Case Date:November 01, 1888
Court:Supreme Court of New Jersey
 
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Page 93

17 A. 93 (N.J.Eq. 1888)

45 N.J.Eq. 186

BENJAMIN W. ARNOLD, assignee &c., appellant,

v.

JOHN W. HAGERMAN et al., respondents.

BENJAMIN W. ARNOLD, assignee, appellant,

v.

THE SECOND NATIONAL BANK OF RED BANK, respondent

Court of Errors and Appeals of New Jersey

November 1, 1888

On appeal from two decrees advised by Vice-Chancellor Bird, who filed the following conclusions in the case of the First National Bank:

Farr, Hagerman and Fielder formed a copartnership. Farr's interest was one-half, the others each one-fourth, each of whom gave a note to Farr for $ 7,500, with the agreement that said notes were to be paid out of their respective shares of the profits of the business. The name of the copartnership was J. C. Farr & Co., and this firm was the successor to the firm of Sullivan & Co., the debts of which firm were assumed by the former. The firm of J. C. Farr & Co. continued in business a little over three months, when, on October 29th, 1883, it was dissolved. The dissolution was effected in this way: Farr was largely indebted individually to creditors living in Albany and elsewhere, because of which he was unquestionably embarrassed. He informed his copartners that he was indebted individually, without giving them any statement in detail of the extent of his liabilities or the value of his assets, but assuring them that he was free from any real embarrassment, and desiring them to transfer to him all their interest in the firm of J. C. Farr & Co. He prevailed upon them, by assurances, to believe that if they would make such transfer, he could not only manage his own individual creditors and discharge all his own individual liabilities, but could also pay all the debts of the said firm of J. C. Farr & Co. I have no doubt but that he prevailed upon them by representations which were wholly false, whether he knew it or not, but that they, on their part, believed his representations to be true, and consequently that they acted in good faith.

The individual liabilities of Farr, which he assured his copartners he could so easily control, were over $ 79,000, and his assets did not exceed $ 50,000, and most probably not over $ 40,000. The complainant insists, that, after making proper allowance for the liabilities of the firm of J. C. Farr & Co., the assets of said firm assigned to John C. Farr were in excess of said liabilities; but this is not so material, for, as I understand the case, on the last showing, after increasing his assets by all of those which he took from said firm, his liabilities were about $ 40,000 in excess thereof, and when the value of said assets came to be tested by a sale, the excess of liabilities was greatly increased.

Before and at the time of the transfer of the assets of the firm of J. C. Farr & Co. to John C. Farr, said firm was largely indebted to the complainant. Since the transfer, the complainant obtained judgments on its several claims. It files its bill, alleging that the transfer to John C. Farr was fraudulent, and asks to have it declared void.

In considering this question, the rights of third parties are to be taken into account; for, as the sale was made to Farr on October 29th, he, on November 30th, of the same year, made an assignment under the statute for the equal benefit of all his creditors, and certain creditors of Farr filed their claims with the assignee. Hence, if upon inquiry I find that the sale to Farr by his copartners was fraudulent, I must then inquire whether the rights of third parties have so intervened as to prevent the court from setting aside the sale.

In considering the question of fraud, I shall regard the act of each and all the persons in copartnership, and the copartnership itself, in dealing with the partnership property, as subject to the same legal rules as an individual; I shall hold that one of them cannot transfer partnership property without the knowledge of the others in violation of the rights of creditors; I shall also hold that one cannot make such transfer with the consent of the others as to the transfer, though they may be ignorant of the fraud; and I shall likewise hold that the transfer in fraud by one cannot be upheld, even though the others join therein ever so innocently. The intended fraud of the one vitiates it as to all. The whole transaction is permeated by the wrong. Were it otherwise, the fraud-doer need only to bring to his aid some innocent and helpless person to secure all the benefit of the greatest fraudulent conception.

Was the transaction in this case fraudulent? I think it was in equity, as to the creditors of J. C. Farr & Co. Why so? First, because it was a well-devised plan on the part of John C. Farr to place all this partnership property beyond the reach of the partnership creditors by having it transferred to himself, so as to make it first subject to the payment of his individual debts. And, second, because, by means of such transfer, the identity of the property would soon be lost, and the partnership creditors would be without hope or redress until Farr's creditors should all be satisfied. But most especially, in the third place, because Farr knew, or ought to have known, the result of the transaction, and is therefore chargeable with knowledge, and, consequently, with the intention of committing the wrong which necessarily ensued. Most certainly Farr knew that he was hopelessly insolvent. If the assignment which so swiftly followed the dissolution of the partnership, at his earnest instance, was not then contemplated, the equivalent thereof most undoubtedly stared him most obtrusively in the face. His Albany creditors were anxious; they were waiting upon him in person; they sent a committee to visit him at his place of business and at the place where he was carrying on the partnership; they had that committee inventory all his property, including this partnership property; and they continued their zeal until the assignment was reached, and to the individual assets were added a great many thousands of dollars' worth of goods which had been partnership assets.

But it is said, that Farr assumed the payment of the debts of the firm, and that the creditors of the firm can share in the distribution. That may be; such course might be very acceptable to the individual creditors, as where $ 10,000 worth of individual assets should be increased in value by the addition of $ 50,000 worth of partnership assets. But that is not the question. If the transaction were honest, the consequences cannot control, but if dishonest, then the partnership creditors have a right to have it declared void. And on this ground, I think the bill is properly filed.

What as to the rights of third parties? It is said that the creditors of John C. Farr have filed claims with the assignee of Farr, and that it would be doing great injustice to them to withdraw this large amount of assets from the hands of his assignee, since the creditors cannot be restored to their original condition. In the first place, I would observe that every creditor in such case files his claim without knowing, to a very great degree of certainty, what percentage of his claim will be paid. It often happens that the fairest promises produce the least percentage. It often happens that assets, which are inventoried at large values, dwindle to insignificance, either through unforeseen depreciation of values, forced sales, or the claims of others to such assets. I think it cannot be said that in such case the rights of third parties stand in the way. They have given nothing, and it seems to me that in the eye of the law they cannot be heard to say that they have surrendered anything. If the plea of a creditor, or in behalf of a creditor (which is the case here), can prevail on such grounds, then it would be in vain for the owner of goods to assert his rights to them after administration had been once begun by an assignee, and claims had been presented.

But, secondly, if the creditor in such case was misled by the false appearances of assets, he would not be without remedy. He would not be bound to stand and accept the consequences of a fraudulent device of his debtor. There cannot be a doubt but that he could obtain relief and be discharged from the statutory obligation in which he is placed by reason of filing his claim. In such case, it would be a question between the creditor and his debtor, and who can doubt but that if it appeared that the debtor had made a fraudulent accession to his assets, and thereby induced his creditors to file their claims, the court would at once discharge the creditor from the legal consequences of filing his claim. Hence, I do not find that the rights of third parties prevent this court from declaring the sale to Farr by his copartners void.

But it is said that the complainant is in laches in not filing its bill sooner. The assignment was made November 30th, and the bill was filed March 10th following--within three months and ten days. But the complainants did not recover judgment on any one of their several claims until January 3d next after the assignments, so that the time which elapsed before the commencement of this suit after it might have been commenced was only two months and seven days. I can find nothing in this to warrant the charge of laches. But it is insisted that a judgment was not necessary in such case. I think the counsel are in error in this. Whatever may be the law elsewhere, it seems to be settled in New Jersey that a creditor has no standing in equity to set aside the fraudulent transfers of his debtor until he has recovered a judgment, except in the case of the death of the debtor and there is no administrator, or if there be one where the creditor files his claim and it is not disputed. Hunt v. Vanderveer, MS., is an illustration of the former condition...

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