Brown v. Smart

14 A. 468, 69 Md. 320, 1888 Md. LEXIS 75

Opinions

Alvey, C. J.,

delivered the opinion of the Court.

This is an appeal by an insolvent debtor from an order of the Court below adjudicating him an involuntary insolvent, under the provisions of the insolvent law of this State, as enacted by the Act of the General Assembly of 1886, ch. 298, and incorporated into Article 48 of the Code as part thereof. It is section 13 of the Article just mentioned that is material to the determination of this case. By that section it is provided, that “No deed or conveyance executed, or lien created, by any banker, stock-broker, merchant, manufacturer or trader, being insolvent, or in contemplation of insolvency, shall be lawful or A'alid if the same shall con tain any preferences, save such as result from operation of law, and save those for the wages or salaries to clerks, servants and employes contracted not more than-three months anterior to the execution thereof, and all preferences, with the exceptions aforesaid, shall he void, however, the same may he made; provided, the grantor or party creating said lien or preference shall he proceeded against under section twenty-four, or shall apply for the benefit of this Act under section one, within four months after the recording of the deed or conveyance, or the creation of said lien or preference, and shall he declared, or shall become, under the provisions of this Act, an insolvent.”

The petitioners upon whose petition the debtor was adjudicated an insolvent, are conceded to be creditors of the insolvent, and are citizens of the State of New York. It is also conceded that the insolvent was, at the time of committing the act of insolvency charged, a merchant trader doing_ business in the City of Baltimore. The petition makes all the necessary allegations of fact to bring the parties within the terms of the statute. The petition was filed on the 8th of December, 1881, and it charges that the debtor, on the 30th of November, 1881., being then insolvent, or in contemplation of insolvency, executed and delivered to a certain Isaac Eichberg, of the State of Virginia, a deed of trust of all his property, of every kind and description, for the pretended benefit of all his creditors, but, by reáson of undue preferences given to certain creditors.named in the deed, the assignment was in reality for® their benefit only, and not for the benefit of creditors generally. The petition charges that the preferences thus given are in violation of the insolvent law of the State, and constituted an act of insolvency, according to the express terms of the statute. The creditors whose claims are preferred by the deed, are all non-residents of this State, and are citizens of other States of the Union. The deed was made and recorded in this State, and the property intended to be transferred by it is situated here;—consisting principally of a stock of goods and merchandise in store in the City of Baltimore, together with all the debts, accounts, and dioses in action of every kind, belonging to the debtor. The deed of assignment is exhibited with the petition, and upon its face the fact is recited that the debtor was insolvent; that he was indebted to an amount that exceeded his means to pay his creditors in full, and he therefore made the assignment, giving the preferences referred to in the petition.

The petition prayed for subpoenas against the debtor, the trustee, and the preferred creditors named in the deed of assignment, that they might answer; but none but the debtor was served, and he alone appeared and entered a demurrer to the petition. The demurrer was overruled, and he then answered. By his answer, he admits that he was a merchant, and the petitioners were his creditors, as alleged. He also admits the making of the deed of assignment, but he denies that such deed contains any illegal or forbidden preferences; and he then proceeds to state the grounds of his defence to the petition thus:

1. “He alleges that the persons named as preferred creditors in said deed of trust, all reside out of the State of Maryland, and were creditors of this respondent upon contracts made and to be performed out of the State*of Maryland, and that each and every one of said creditors named in said deed agreed with this respondent at the time of the execution of said deed, to accept the provisions of said deed made for each of said creditors, in full satisfaction of their respective claims against him, and did, in consideration of said deed and the provisions therein contained as to each of said creditors, release this respondent from all further obligation to each of said creditors, and elect to take the benefit of said deed in full discharge and satisfaction of said claims, and each of them.

2. “He denies that this Court has any jurisdiction to decide upon the validity and effect of said deed of trust, and especially does he deny that such an adjudication can be made in any Court which has not acquired jurisdiction over the persons named in said deed of trust, either directly or by representation through the trustee; and he avers that neither the trustee named in said deed, nor any of the creditors secured thereby, have been served with process, or otherwise been made parties to this proceeding, even if it would in any case be competent for this Court to exercise jurisdiction on said petition to declare the deed of trust void, which this respondent denies. And he respectfully claims the benefit of this answer to so much of the petition as prays that the said deed may be declared void, as if the same objection had been formally taken by plea to the . jurisdiction, or by demurrer.”

- Upon hearing, the Court passed the order of the 21st of March, 1888, adjudicating and declaring the debtor to be an insolvent, and declaring the deed of assignment void, in accordance with the prayer of the petition. It is from this order that the present appeal is taken by the insolvent debtor.

It is quite apparent from this statement of the case, and the defence interposed by the insolvent, that the important question involved is as to the extent to which State insolvent laws can be made effectual to secure the full administration of the assets of insolvent debtors, within the jurisdiction of the several States.

It would be a very unnecessary work for this Court, at this day, to restate the reasons and arguments employed by the Supreme Court of the United States, in- the many cases that have been decided by that tribunal, wherein it has been held, that the Legislatures of the several States of the Union have authority to pass bankrupt or insolvent laws. It has been so held by that high tribunal uniformly and in a large number of cases ; but subject to the proviso, that there be no act of Congress in force, establishing a uniform system of bankruptcy, with which such State laws could conflict, and that such State insolvent laws be so framed that they do not in any way impair the obligation of contracts. And, as a logical result of this power retained by the States, it is held, that such bankrupt or insolvent laws of the State, which discharge both the person of the debtor and his future acquisitions of property, do not impair the óbligation of contracts, so far as respects debts contracted subsequent to the passage of such laws. But such State lavs can have no extra-territorial effect, so as to operate upon the rights or claims of non-residents of the State; and therefore the claims of citizens of another State will not be barred by a discharge under the State insolvent law, although the debt was made payable in the State where the discharge was had; and this without reference to the place where the contract was made. This is the result of the decisions of the Supreme Court, from that made in the leading case of Sturges vs. Crowninshield, 4 Wheat., 122, to that of Baldwin vs. Hale, 1 Wall., 223. If, however, a creditor, being a citizen of another State, invokes the aid of the insolvent laws, or voluntarily makes himself a party to the proceedings thereunder, he thereby abandons his extra-territorial immunity, and he will be bound, and his claim discharged, as if he were a domestic creditor. Clay vs. Smith, 3 Pet., 411; Jones vs. Horsey, 4 Md., 306. And it is among the privileges and immunities secured to the citizens of each State, by the Eederal Constitution, Art. 4, sec. 2, to institute and take the benefit of legal proceedings in the Courts of any other State (Campbell vs. Morris, 3 Harris & McH., 535; Corfield vs. Coryell, 4 Wash. C. C., 380; Morgan vs. Neville, 74 Penn. St., 52; Reynolds vs. Geary, 26 Conn., 183; Barrell vs. Benjamin, 15 Mass., 354,) ; so that the New York creditors had full right to file the petition, and to ask to have the debtor declared an insolvent, for the act of insolvency set forth in their petition.

It is not, and could not for a moment be, contended that the adjudication of the debtor an insolvent, under the State- insolvent law, could operate to discharge or impair the obligation of the original contracts of indebtedness from the insolvent debtor to the nonresident creditors. Such contracts are entirely exempt from the operation of the State insolvent laws, unless the creditors elect to become parties in some form to the insolvent, proceeding. But it is insisted, on the part pf the appellant, that the deed of. assignment having been made and accepted on the basis of a contract for the release and satisfaction of pre-existing debts, it constitutes a contract with the preferred nonresident creditors, which is equally protected from the operation of the State insolvent law, as the original contracts creating such debts; and therefore the assignment itself cannot be affected or invalidated by the operation of such insolvent law. But to that proposition, as presented under the facts of this case, we cannot assent. The questions are, whether the making of such deed of assignment constitutes an act of insolvency on the part of the debtor, and if so, whether such assignment is subject to the operation of the insolvent law of the State. It requires no argument to show that if such proposition as that contended for could be maintained, it would virtually defeat the power of the States to enforce or give effect to their insolvent laws; for there are few merchants or traders, such as those mentioned in the 13th section of the insolvent law of this State, who have not creditors beyond the limits of the State, and to whom or for whose benefit such assignments could be made without risk of impeachment. But such method, we think, can never be sanctioned as a means to defeat, to any extent, 'a great and important power of internal government reserved to the States.

As will be observed, the statute makes no sort of reservation in favor of non-resident creditors to whom or for whose benefit assignments may be made. On the contrary, it is emphatic in declaring that no deed or conveyance executed by the debtor, being of the class of debtors mentioned, and being insolvent or in contemplation of insolvency, shall be lawful or valid, if the same shall contain any preferences, save such as are mentioned; and all preferences, with the exceptions named, shall be void,, however the same may be made, if the debtor be proceeded against under, or shall apply for the benefit of, the statute, within four months after the recording of the deed or the creation of the preference, and shall be declared, or become, an insolvent under the law. Here the proceedings were instituted within the time prescribed; and, by section 23 of Art. 48, it is expressly declared that the making of any such assignment with preferences shall be deemed an act of insolvency by the debtor.

There can be no question of the jurisdiction of the Court over the insolvent debtor himself; and the property being here and within the jurisdiction of the Court, and the assignment having been made here, and being dependent upon the law of this State for its validity, we fail to perceive why the jurisdiction of the Court below was not well exercised. It is certainly a well settled principle that, in cases like the present, the lex loci rei sitm must alone furnish the rule for deter mining the validity of the assignment, and the preferences thereby created; and though the instrument may be valid according to the principles of the common law, it can hardly be contended that its validity can be maintained in defiance of the express terms of a statute declaring it to be absolutely void. Whart. Confl. Laws, secs. 297, 312, 802. The deed of assignment was made and accepted with reference to the terms 6f the statute that we have quoted, and with the implied condition annexed, that if the assignor was proceeded against in insolvency within four months, and declared an insolvent, the deed would fall as a necessary legal consequence. This results from the general principle well established, that the laws which subsist at the time and place of making a contract enter into and form a part of it, as if they were expressly referred to or incorporated in its terms; and this rule embraces alike those which affect its validity, construction, discharge, and enforcement. Ogden vs. Saunders, 12 Wheat., 353; Von Hoffman vs. City of Quincy, 4 Wall., 535; Edwards vs. Kearzey, 96 U. S., 595, 601. Therefore, under the statute to which we have referred, the making the deed of assignment was clearly an act of insolvency, subjecting the debtor to adjudication, and such adjudication of the debtor as an insolvent, based upon the fact of his making the assignment, of necessity involves the determination that the deed of assignment contravenes the provisions of the statute, and is consequently void.

Itisinsisted, however, thatas thenon-residentparties interested in maintaining the deed of assignment have not been served with process, and, as foreign creditors, they could'not berequired to appearand subject themselves to be bound by the Insolvent proceedings, no adjudication can be had that would affect the assignment. or the rights of the parties thereunder. But it is manifest if that position be correct, it would be entirely futile to proceed against the insolvent debtor; for though he might be adjudicated an insolvent, yet his property would be withheld from administration under the insolvent law, and the mass of his creditors get nothing. But is it necessary to serve or attempt to serve process on the non-resident creditors? It is certainly unnecessary to do a nugatory thing, ora thing that is without practical effect upon the rights of any one. It is conceded that the non-resident creditors could not be required to come in against their own consent, and thus subject their original contracts with the debtor to the operation of the State insolvent law; and it was certainly not necessary to make such creditors parties in order to confer jurisdiction upon the Court to proceed against the insolvent debtor; nor was it essential to the power of the Court to declare the debtor an insolvent. Such an adjudication declares the status of the debtor, and is a judgment in rem, or in the nature of a judgment in rem; and as such it is conclusive, and binds all persons, whether parties or otherwise, as to the particular point or matter decided: 2 Tayl. Ev., (6th Ed.,) secs. 1487, 1488, 1489; Freeman on Judgts., secs. 606 to 610. And such being the nature of the judgment required to be passed against the insolvent debtor, all the legal incidents, within the terms of the statute, necessarily follow, and among these is the absolute avoidance of the deed creating the illegal preferences, because the statute so expressly declares. Such certainly is the result in the case of a deed like the present, where both the insolvency of the debtor and the illegal preferences to the creditors are apparent upon the face of the deed; for in such case the deed is made void ipso facto, et constructions legis, and in no way depends upon any express declaration of the Court apart from the adjudication of the debtor to be an insolvent. The statute, by force of its own terms, operates upon the deed and (unlike in the eases provided for in section 25 of Art. 48,) strikes it down from the moment the debtor is adjudicated an insolvent, the illegal preference being the basis of the adjudication; and, in such case, no defence could be interposed to rescue the deed from the fate .declared for it by the statute. The adjudication, with all its direct legal incidents and consequences, binds every one, unless it can be shown to have been procured by fraud or collusion.

In the 2nd vol. of Taylor’s Evidence, (6th Ed.,) secs. 1488, 1489, will be found stated the various cases wherein the adjudications have been treated as judgments inrem, and. among these is classed the case of adjudication in bankruptcy; and it is based upon the reason that such adjudication is the judicial declaration of the status of the bankrupt and his effects,—such adjudication being classed with that granting probate, and with sentences passed in matrimonial cases. “ These judgments,” says the author, “ so far furnish conclusive evidence of the points they decide, not only against the parties who were the actual litigants in the cause, but against all others., that, unless it can be shown, either' that the Court had no jurisdiction, or that the judgment was obtained by fraud or collusion, no evidence can be admitted, at least iii any civil cause, for the purpose of disproving the facts adjudicated. This rule appears to rest, partly, upon the ground, that in most of the above cases every one who can possibly be affected by the decision is entitled, if he think fit, to appear and assert his own rights, by becoming an actual party to the proceedings; and, partly, upon the ground, that judgments in rem not merely declare the status of the subject-matter adjudicated upon, but ipso facto render it such as they declare it to be.” See also 1 Stark. Ev., 286, and Mankin vs. Chandler & Co., 2 Brock., 125. The insolvent Court is open to any and all persons who may possibly be affected by .the adjudications of that tribunal upon the status of the debtor, alleged and shown to be insolvent; and those who have rights to assert must appearand assert them at the proper time.

(Decided 14th June, 1888.)

The fact therefore that the foreign creditors were not served with process, anil could not have been compelled to become parties to the insolvent proceedings even if they had been served, cannot be assigned as ground of error in the order of the Court below. That order is not objectionable because it declares in terms the deed of assignment to be void, that being the legal result of the adjudication of insolvency founded thereon, as declared by the statute. The order appealed from will be affirmed.

Order affirmed, and cause remanded.