Austin, Nichols & Co. v. Morris
| Decision Date | 17 September 1885 |
| Citation | 23 S.C. 393 |
| Parties | AUSTIN, NICHOLS & CO. v. MORRIS. |
| Court | South Carolina Supreme Court |
1. Is nulla bona return an essential prerequisite to creditors seeking equitable relief against a conveyance made by an insolvent debtor for the purpose of defrauding his creditors?
2. A mortgage for a past due debt, not executed bona fide for the purpose of securing its payment, but with intent to transfer all of the debtor's property to one or more of his creditors to the exclusion of others, is, in effect an assignment giving preferences, and therefore null and void under section 2014 of General Statutes.
3. Such a transaction may be assailed by creditors, even though their demands be not reduced to judgment. Gen. Stat. , § 2016.
4. Where a debtor, with the purpose of evading the assignment law, and of transferring all his estate to certain preferred creditors to the exclusion of all others, gave chattel mortgages at short date to three of his creditors for past due debts, covering all his tangible property, and on default consented to a sale in bulk or in parcels, at their option and on insufficient notice, such mortgages were held void at the suit of the unpreferred creditors.
5. Findings of fact by the Circuit Judge upon testimony taken before him approved.
Before HUDSON, J., Sumter, February, 1885.
This case is fully stated in the opinion of this court. The evidence was all taken in open court, and consisted of the mortgages, the depositions of the members of the firm of E H. Frost & Co., and the testimony of other witnesses. The Circuit decree was as follows:
At the trial of this cause, so soon as the plaintiffs' counsel had read the complaint and exhibits, the counsel for the defendants moved to dismiss the complaint because it did not state facts sufficient to constitute a cause of action, in that creditors of David Morris, without first having obtained judgment at law and exhausted their legal remedies, were invoking the aid of this court on its equity side to relieve them of the consequences of deeds of mortgage given by the said Morris to certain of his creditors, in alleged preferences fraudulent as to the plaintiffs.
It is well established that a creditor must first exhaust his remedy at law before he can invoke the aid of equity to relieve him against a fraudulent conveyance of property by a debtor. The only exception to this rule is that contained in section 2016, chapter LXXII., of the General Statutes, which gives to a simple contract creditor, or any creditor who has no judgment, a right to assail on the equity side of the court such an assignment for the benefit of creditors as is set forth in section 2014 of said chapter, without first having reduced his claim to judgment.
Now, the term " assignment" in said section has been defined by our Supreme Court, in the late case of Wilks v. Walker (22 S.C. 108), to mean not only the usual formal deed of assignment for the benefit of creditors in its directly technical sense, but any other mode of conveyance or transfer of property which is intended to have the effect of an assignment, and which in truth and fact does operate as such, be the said transfers called by whatsoever name. It must, however, be equivalent or tantamount to the instrument technically called an assignment, and must make preferences prohibited in section 2014. If the instrument or instruments of conveyance in effect accomplish, and are intended to accomplish, what is inhibited in said act, they are within its purview, whether called an " assignment" eo nomine or not. The court says: " Any other view, it seems to us, would sacrifice substance to mere form, and enable insolvent debtors by evasion to effect a purpose declared by statute to be unlawful."
Now, the motion to dismiss the complaint, commonly called an oral demurrer, and which in this instance is an objection to the jurisdiction of the court for want of equity shown in the complaint, admits the truth of all the allegations of the plaintiffs. An examination of the complaint shows that it is there in substance and in strong language alleged that the defendant, David Morris, being totally insolvent, and wishing to prefer certain of his creditors to the exclusion of others, and by far the largest in amount, and intending thus to defraud them of their just demands, did make to the said preferred creditors conveyances of all his property of every description for their sole and exclusive benefit; that he did not do this by an instrument technically called an assignment, but resorted to the subterfuge of chattel mortgages of very short maturity, which were accepted by said preferred creditors with a full knowledge of the insolvency of Morris, and his inability to redeem, and with a full knowledge that all his property was thus conveyed.
Such in substance are the allegations of the complaint, and the demurrer admits their truth. It is very clear that by such a transaction an assignment for the benefit of certain creditors is made to the exclusion of the great body of his other creditors, and that the attempt is by this mode of conveyance to evade the plain terms of the act. I therefore overrule the demurrer, holding that under section 2016 of said act they are admitted to assail the transaction without waiting first to recover judgment at law, and obtain a return of nulla bona to an execution, before the possible accomplishment of which the entire stock of goods would have certainly been sold and the proceeds inevitably lost to these plaintiffs.
The defendants excepted. The answers were then read and the trial of the cause proceeded. I do not propose to review the testimony. It is sufficient to say that I find as a fact that the evidence fully sustains all the material allegations of the complaint. The defendant, David Morris, at and before he gave these mortgages on his stock of goods, & c., was clearly insolvent; hopelessly so. He knew it well, and to the defendant creditors he conveyed his entire property, consisting of his stock of goods, & c., and no realty. The mortgages were to mature at a very short day, less than a month. He knew he could not redeem, and did not intend to try to do so, but intended that a sale should take place, and before the maturity of the notes consented in writing that a sale should be made soon after maturity, and without the usual time of advertisement. He further knew that he could not effect this preference by a formal assignment, and deliberately set himself to work to evade the statute by mortgages at short time of maturity. In these transactions he has violated section 2014 of the General Statutes, and the conveyances cannot stand. The invalidity of such an assignment as is contemplated in said statute does not depend upon the fact whether or not the preferred creditor has knowledge of the fraudulent intent of the debtor; the statute declares the assignment invalid, and this is its character regardless of the bona or mala fides of the preferred creditors.
It is therefore ordered, adjudged, and decreed, that the said mortgages assailed in the complaint be set aside as null and void, and that all rights assigned thereunder be vacated and annulled, and that the property seized and sold, or its value, be delivered and paid over to the receiver appointed under these proceedings, by whichsoever of the said mortgagees the same was so taken and sold, viz., Alexander Morris. And it is further ordered, that the plaintiffs in this action who have proved their claims have judgment therefor, and that such of the creditors of said David Morris as have not, be allowed to come forward and establish their claims before the master of this court, who shall call upon them to do so by advertising to that effect in the Sumter Watchman and Southron for the space of two weeks, and that the funds of the said estate be distributed among said creditors as the law directs. The plaintiffs proved their debts, and the same was not questioned by defendants' counsel.
It is further ordered, that it be referred to the master of this court to ascertain and report what would be a reasonable fee to be paid out of the assigned estate to the attorneys for the plaintiffs of record in this cause.
Mr. Jos. H. Earle , for appellant.
I. The only question in this case is whether or not the mortgages executed by David Morris to his co-defendants constitute an assignment for the benefit of creditors in the sense of the term used in Gen. Stat. , § 2014. If there has been no such assignment made by David Morris, then it must follow that his honor, the Circuit Judge, erred in overruling the demurrer to the complaint. For, notwithstanding the strong language used by the plaintiffs in reference to the fraudulent transfer of their debtors' property, they were not in a position to question such transfers. They came into court as simple contract creditors, and as such they have no standing, except under Gen. Stat. , § 2016. A simple contract creditor cannot maintain a bill in equity against his debtor, and the grantee to set aside a fraudulent conveyance of the debtor's property, even though the debtor be insolvent, and without the aid of the injunction the debt may be lost. He must first proceed at law and exhaust his remedy there. 1 S.C. 186, 96; 18 Id. , 526. Equity has jurisdiction of fraud, but does not collect debt. A creditor must establish his demand at law, and obtain a lien upon the property before the transfer interferes with his rights, or he has any title to claim relief in equity. Bump Fr. Conv. , 533-4; Wait Fr. Conv. 80, 81; High Rec. , 277; High Inj. , 18, 19.
II. There was no assignment for the benefit of creditors in this case. An assignment is properly the transfer...
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