Davis v. Hudson Trust Co.

• Decision Date: 01 October 1928
• Docket Number: No. 3773.,3773.
• Citation: 28 F.2d 740
• Parties: DAVIS v. HUDSON TRUST CO. et al.
• Court: U.S. Court of Appeals — Third Circuit

28 F.2d 740 (1928)

DAVIS v. HUDSON TRUST CO. et al.^*

No. 3773.

Circuit Court of Appeals, Third Circuit.

October 1, 1928.

Wall, Haight, Carey & Hartpence, of Jersey City, N. J. (Thomas G. Haight, of Jersey City, N. J., of counsel), for appellant.

Lionel P. Kristeller, of Newark, N. J., for appellee Hudson Trust Co.

Cornelius Doremus, of Ridgewood, N. J., for appellee Fidelity Title & Mortgage Guaranty Co.

Victor E. Whitlock, of New York City (Walter G. Winne and William J. Morrison, Jr., both of Hackensack, N. J., of counsel), for appellees.

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

DAVIS, Circuit Judge.

This is an appeal from a decree of the District Court reversing an order of the referee in bankruptcy adjudging a mortgage to be invalid.

The trustee in bankruptcy instituted proceedings to set aside a mortgage executed by Frances S. Dyer, the bankrupt, to the Holt Power Light Company, hereafter called the Holt Company, on certain real estate in Bergen county, New Jersey. The mortgage was later assigned to the Hudson Trust Company. Its validity was guaranteed to the Hudson Trust Company by the Fidelity Guaranty Company, the other appellee.

F. Monroe Dyer, husband of the bankrupt, Mrs. Frances S. Dyer, is alleged to have sold treasury stock of the Holt Power Light Company and did not turn over to it the proceeds of his sales to the extent of $157,912.95. The Holt Company was, it is alleged, about to prosecute him for failure to account for the money and on June 8, 1922, when in New York he telephoned to Mrs. Dyer, with the knowledge, understanding, and co-operation of the Holt Company, to meet him in Edgewood, N. J., just across the Hudson river from New York. When they met, upon his request she executed a bond and mortgage for $157,912.95, which had already been prepared, on a certain farm of 128 acres which she owned in Norwood, Bergen county, N. J. At that time Mrs. Dyer had many creditors. The execution of this mortgage rendered her insolvent. Her creditors have not been paid, and if the validity of the mortgage is sustained, they will never be paid.

The mortgage was not recorded until December 15th following. On June 23, 1923, an involuntary petition in bankruptcy was filed against Mrs. Dyer on which she was adjudicated a bankrupt on October 1, 1923. The cause was referred to George R. Beach, referee in bankruptcy, and on the 31st of that month Joseph M. Davis was elected trustee. The Holt Company assigned the mortgage to the Hudson Trust Company on April 12, 1924. In October, 1924, the trustee filed a petition in the bankruptcy proceedings attacking the validity of the mortgage on the grounds, among other things, that it was (a) fraudulent and void under the Uniform Fraudulent Conveyance Act of New Jersey, because it was given by the bankrupt without "fair consideration" and the making of it rendered her insolvent, and (b) in the alternative, if the mortgage is controlled by the laws of New York and not New Jersey, it was void for usury, the interest provided in the mortgage being 8 per cent. and the legal rate of interest in New York being 6 per cent.

The referee held the mortgage invalid under the New Jersey Uniform Fraudulent Conveyance Act as against both the original mortgagee and its assignee, the Hudson Trust Company. On review the District Court reversed the referee on the ground that the Hudson Trust Company was a purchaser of the mortgage for value without notice. From its order the trustee appealed to this court.

The questions at issue are two: (1) Was the mortgage fraudulent and therefore void as between the mortgagee and creditors of the mortgagor for want of "fair consideration"? and (2) if void as against the mortgagee, is it void as against the assignee also? The property has been sold and the proceeds of the sale are held intact and will abide the determination of this case.

"Fair consideration" is defined by section 3 of the Uniform Fraudulent Conveyance Act, 1 Comp. St. Supp. N. J. 1924, p. 647, § 44 — 144. "Fair consideration" is given for property, "when in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied." Conveyance under the act includes every payment of money, assignment, release, transfer, lease, mortgage, etc. Section 4 of the act provides that "every conveyance made * * * by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration." Section 44 — 145.

A wife in New Jersey may make a valid mortgage to pay or secure the debt of her husband, even though the mortgage be a voluntary gift on her part. But if she has creditors, the mortgage which will be sustained against all others, is void as to them. This is the law under the Uniform Fraudulent Conveyance Act and was the law in New Jersey before the act was passed. Campbell v. Tompkins, 32 N. J. Eq. 170, 172; Butterfield v. Okie, 36 N. J. Eq. 482; McMurtry v. Bowers, 91 N. J. Eq. 317, 109 A. 361.

The referee found that the giving of this mortgage rendered Mrs. Dyer insolvent. This fact seems to be established and was not questioned in the District Court nor is it here. This being the fact, her creditors at the time she executed the mortgage may have it set aside as provided in section 9 of the act (1 Comp. St. Supp. N. J. 1924, p. 648, § 44 — 150), unless a "fair consideration" was given for the property conveyed by her in the mortgage.

She received absolutely nothing for the mortgage. It is true, as counsel for appellees say, that "the agreement of a creditor to extend his debtor's time for payment, or to forbear suing on the claim, constitutes a valuable consideration for the promise of a third party to pay the debt." But we are not here dealing with a "valuable" consideration for the promise of a third party to pay another's debt. We are here dealing with what constitutes "fair consideration," which when given in good faith may prevent creditors from setting aside a conveyance under the Uniform Fraudulent Conveyance Act. The act itself defines the term as above quoted. No property was conveyed to Mrs. Dyer "as a fair equivalent" for the mortgage and she had no antecedent debt to the mortgagee to be satisfied by the mortgage. Her creditors may, therefore, set the conveyance aside as fraudulent unless it comes within the exception hereafter mentioned. Merchant's Bank v. Page, 147 Md. 607, 128 A. 272; Share v. Trickle, 183 Wis. 1, 197 N. W. 329, 34 A. L. R. 1016; Campbell v. Tompkins, supra; Butterfield v. Okie, supra; McMurtry v. Bowers, supra. This mortgage may have prevented prosecution of Mr. Dyer for money which he is alleged to have embezzled from the Holt Company. But, be that as it may, Mrs. Dyer was in no way liable for his indebtedness. However, nobody may complain at her act, except her creditors and they have first claim upon her property, and may set aside any conveyance of it, which rendered her insolvent, except when made to bona fide purchasers for a "fair consideration."

That the fraud here may...