Corbett v. Joannes

104 N.W. 69, 125 Wis. 370, 1905 Wisc. LEXIS 166

• Court: Wisconsin Supreme Court
• Decided: June 23, 1905
• Status: Published

Opinion

Maeshaul, J.

This cause seems to have proceeded up to the close of the oral argument here on the mistaken theory that in case of an assignment for the benefit of creditors, one holding a secured claim cannot share with the general creditors pari passu without covering his security into the trust fund; that otherwise his status as a beneficiary is to be determined by the face of his claim at the date of the assignment less the value of his security. Hence for the assignor not to report the collateral as part of the trust fund, or for the secured creditor to participate in the trust or in any proceeding based on his beneficiary interest therein, not disclosing the existence of the security, is necessarily fraudulent. The law was distinctly declared here to be otherwise in Harrigan v. Gilchrist, 121 Wis. 127, 344, 99 U. W. 909. It was there held that in the administration of a general trust for creditors under judicial supervision, as in case of a receivership matter or an assignment for the benefit of creditors, one who holds security for the payment of his claim has, nevertheless, to the extent of the full face of such claim at the date of the creation of the trust, the same status regarding the distribution of the trust fund as an unsecured creditor ; that he is entitled to dividends accordingly and to the benefit of his security as well till the avails from both shall have been sufficient to fully discharge the indebtedness, the residue of the security, if any there be, to be then covered into the trust fund. The reason for that is this: A creditor holding security, in the absence of an assignment or other trust for creditors, may enforce it for the purpose of thereby collecting his claim, or resort to the general assets of the debtor as he sees fit. That privilege is a property right which cannot be taken away by any mere act of the debtor or in any manner without the creditor’s consent, in the absence of some statutory regulation to the contrary existing at the time of the creation of the debtor relation. The remedy afforded for the enforcement of an indebtedness existing at the creation thereof is regarded as a property right so within the inhibition of sec. 10, art. I, of the federal constitution that legislative authority is not competent to change it so as to materially impair the value of such indebtedness. Peninsular L. & C. Works v. Union O. & P. Co. 100 Wis. 488, 76 N. W. 359; Eau Claire Nat. Bank v. Macauley, 101 Wis. 504, 77 N. W. 176; N. W. Wright L. Co. v. Nixon, 105 Wis. 153, 80 N. W. 1110, 1135.

We shall not discuss at length anew the subject, which was decided, as suggested, in Harrigan v. Gilchrist, supra. A large number of authorities are there referred to, including recent decisions of the supreme court of the United States. In some of the latter it will be seen that the matter was exhaustively treated. Courts are in substantial, though not in entire, harmony in respect to this matter. The slight want of harmony grows out of instances where the rule in bankruptcy was followed without appreciation that it is grounded on federal statutes; or by erroneously applying the equitable-doctrine, that where a person has a lien on two funds for the payment of his claim and another has a lien on one of them,, the former must first exhaust his remedy as to the fund in which his right is exclusive.

Justice Eullee discussed the general subject we have here at considerable length in Merrill v. Jacksonville Nat. Bank, 173 U. S. 131, 19 Sup. Ct. 360, using this language:

“The secured creditor is a creditor to the full amount due-him, when the insolvency is declared, just as much as the unsecured creditor is, and cannot be subjected to a different rule. And as the basis on which all creditors are to draw dividends is the amount of their claims at the time of the-declaration of insolvency, it necessarily results, for the purpose of fixing that basis, that it is immaterial what collateral any particular creditor may have. The secured creditor cannot be charged with the estimated value of the collateral, or he compelled to exhaust it before enforcing his direct, remedies against the debtor, or to surrender it as a condition thereto, though the receiver may redeem or be subrogated as-circumstances may require.”

“When secured creditors have received payment in full, their right to dividends, and their right to retain their securities cease, but collections therefrom are not otherwise material. Insolvency gives unsecured creditors no greater rights than they had before, though through redemption or subro-gation or the realization of a surplus they may be benefited.”

In applying the doctrine thus established courts treat the-right of a secured creditor in the trust fund as a thing somewhat distinct from the indebtedness itself. The debt as it existed at the time of the creation of the trust is regarded as-the measure of the proportional interest of the creditor as a cestui que trust in the trust fund, while it has a separate existence as regards the security till it is paid or the security exhausted. Payments thereon whether from the trust fund or from the security reduce the same but do not change in any respect the basis of the beneficiary right so long as any part of the indebtedness remains unpaid. To illustrate, in Paiten's Appeal, 45 Pa. St. 151, the case was this: A person at the time of an assignment of another for the benefit of his creditors held the latter’s notes to the extent of $23,420.39 on account of indebtedness for sugar, with the right of stoppage in transitu as to the greater part of the property. That right was subsequently exercised. The sugar was held as security for the payment of the notes. Upon the notes maturing the sugar was sold, $21,026.28 being realized therefrom, leaving a debt of $2,394.11 unpaid. Subsequently the creditor claimed the right to participate with the other creditors in the distribution of the trust fund on the basis of the face of his claim as it existed at the date of the assignment, and it was held that such was his clear legal right so long as the dividends did not overpay the aforesaid balance. The decision is to 'the effect that in such a case the effect of the assignment is to convey such an equitable interest in the assignor’s general assets to each creditor as the amount of his claim bears to the total proved indebtedness of the assignor, and that such equitable interest is no more affected as to any creditor by his having other security for the payment of his claim received from the debtor before the assignment than it would be by his holding the property of a stranger as such security.

Graeff’s Appeal, 19 Pa. St. 146, is mentioned in the elementary books as a very significant illustrative case. The assignor for the benefit of creditors at the date of the assignment was indebted on three judgments which were liens on real estate. Such liens were enforced, sufficient being realized to pay two of the .judgments and a part of the third. Application of the proceeds was made accordingly. Notwithstanding that it was held that the creditor was entitled to share with the general creditors on the basis of the aggre.gate of tbe three judgments as they stood at the date of the assignment; that the creation of the trust made every creditor having several claims an equitable owner of the general assets of the assignee in the proportion which 'his several claims as they existed at the date of the assignment, merged in one, bore to the entire indebtedness of the assignor; that he was not to be regarded as having a separate beneficiary right for each particular claim; that such a beneficiary right in a trust fund is one thing and the creditor’s right as regards security held by him at the time of the assignment is another, and that payments in one capacity cannot prejudice the right in the other, so long as anything remains unpaid of the indebtedness. Many similar illustrative cases could be .given. The text-writers state the matter this way:

“What the creditor holds as security is so much additional to the personal obligation of the debtor. In order that the secured may retain the entire benefit of his security, he must be permitted to prove upon the entire debt, otherwise some part, either of the debt or the security, is destroyed without 'his consent. It is upon these grounds that the rule, as stated above, has finally prevailed.” Bishop, Insolvent Debtors (3d ed.) 533.

So far as the misconception of law suggested ruled this case, resulting in the conclusion complained of, it is plainly wrong. It may possibly be that in a case where no trust for -creditors has been created with the double relation of secured and unsecured creditors, as above indicated, and all creditors without reservation join in compromising their claims, secured creditors ostensibly sharing in misfortune •equally with others, but having an understanding with the •debtor that their rights as to the security shall not be prejudiced thereby, — such understanding would be subject to condemnation as fraudulent. It might well be said in such circumstances, omitting the element of concert of action between the favored creditors and the debtor, that the consummation of the compromise agreement as to the latter, they receiving the compromise amount and surrendering tbeir evidences of indebtedness, or formally discharging tbe debtor, would leave tbe collateral in tbeir bands as tbe latter’s property. It may also well be tbat if tbe element of outside-agreement for retention by secured creditors of tbeir collateral, notwithstanding tbe execution of tbe composition agreement, was verbal and tbe latter’s agreement was in writing,, under ordinary circumstances at least, it would not be permissible to avoid tbe effect of tbe writing by giving efficiency to tbe verbal agreement. Again it is quite likely tbat with: the element of assignment for tbe benefit of creditors added, a compromise, as in this case, would be fraudulent in jurisdictions where tbe right of a creditor is affected by tbe circumstance of bis having security for tbe payment of bis claim, so tbat tbe retention of such security could be regarded, in any sense, as an advantage obtained through tbe secret agreement. Authorities are not wanting as to each of those propositions. Tbe following are the most helpful of them which have been brought to our attention or which we have been able to discover. 6 Am. & Eng. Ency. of Law (2d ed.) 389, 390; Robinson v. Striker, 47 Hun, 546; Van Brunt v. Van Brunt, 3 Edw. Ch. 14; Nicolai v. Lyon, 8 Oreg. 56; Matlack's Appeal, 7 Watts & S. 79; Bush v. Shipman, 14 Sim. 239; Cowper v. Green, 7 M. & W. 633; Duffy v. Orr, 5 Bligh, n. s. 620; Ex parte Sadler, 15 Ves. Jr. 52; Kinsing’s. Assignee v. Bartholew, 1 Dill. 155, 14 Fed. Cas. 642, No. 7,831.

Tbe situation here is quite different from any discussed in tbe citations if, as tbe trial court decided, there was no written compromise agreement. Treating tbat as a verity for the-moment, we can see no ground whatever for denying appellants’ right to tbe collateral which it was agreed they should have. Tbe underlying principle of tbe doctrine as to a secret agreement with one of several creditors, advantageous to tbat one, joining in a compromise agreement, being fraudulent, is-that such an agreement is pecuniarily preferential in that it secures to one creditor a valuable advantage from tbe compromise not common to all but to the common disadvantage aside from tbe favored one. True, it bas been said that if one creditor privately gains an advantage over other creditors as a consideration for bis joining in a compromise agreement it is fraudulent even if tbe advantage is in tbe form of a bonus paid by a stranger. Bisbop, Insolvent Debtors (3d ed.) 608; Knight v. Hunt, 5 Bing. 432. But bere no advantage was obtained by tbe appellants in any way. Tbe agreement, wbicb bas been supposed to be wrongful, only provided that tbey should not lose anything by tbe compromise. In tbe briefs of counsel for respondent and in tbe opinion of tbe trial court we find iterated and reiterated such terms as “preferential agreement,” “gained an advantage,” but there was no such thing wbicb characterized tbe transaction.

We must next consider whether tbe trial court’s decision, that tbe compromise agreement was not made in writing, is wrong. Respondent’s counsel contend that it is and that tbe written agreement cannot be varied by tbe previous oral one. Obviously, it is not necessary in order to make a written contract that tbe terms thereof shall be reduced to writing in a formal way on one paper and that it shall be signed by tbe parties in person. A proposition in writing by or on behalf of one to another and accepted by or on behalf of tbe latter, each suggestion being on a separate piece of paper and not expressed in any formal way, yet so that tbe two show a meeting of minds upon some particular subject matter, and tbe parties assuming to act as agents in tbe matter, if there be such, being duly authorized thereto in writing or otherwise, make a good contract. Here tbe committee authorized to represent tbe respondent and tbe owners of some ninety per cent, of tbe liabilities made a written proposition .to all entitled to be represented in tbe assignment proceedings for a settlement of their claims. Pursuant thereto respondent deposited money therefor with a suggested mutual agent. Appellants on October 2, 1902. by a letter addressed to sucb agent, accepted in writing. Tbat made a written agreement as completely as if wbat was expressed in tbe two papers bad been reduced to writing on one and tbat signed by appellants and respondent. Tbat is elementary. Tbe trial court’s decision in regard to tbe matter we cannot approve.

It is claimed on bebalf of appellants tbat, conceding tbe compromise agreement to be in writing, it was competent to sliow tbat it was a mere part performance of an entire verbal contract and does not preclude showing tbe latter. Tbat familiar rule does not apply where tbe verbal contract is inconsistent with .or contradicts tbe written one, or where tbe writing plainly purports to contain tbe entire contract. Hubbard v. Marshall, 50 Wis. 322, 6 N. W. 497; Braun v. Wisconsin R. Co. 92 Wis. 245, 250, 66 N. W. 196; Cuddy v. Foreman, 107 Wis. 519, 526, 83 N. W. 1103. It will not be necessary to discuss sucb exceptions with reference to tbe facts of this case. Whether the first one mentioned applies depends upon wbat tbe written contract clearly means. If it does not include and is not inconsistent with tbe verbal .agreement then tbe rule invoked by respondent’s counsel does not apply, and there is no need of resorting to tbe one invoked by appellants’ counsel.

Tbe composition was made with reference to tbe status of tbe creditors in tbe assignment proceedings and tbe opportunity afforded respondent to judicially obtain bis discharge from personal liability. Tbat seems very plain by tbe idea expressed by the proposition and acceptance tbat tbe creditors purposed, by mutual agreement, to take tbe proposed percentage of their filed claims in lieu of their interests in tbe trust fund, and release respondent from personal liability ■as fully as the law might release him under the circum•stances. Tbe proposition referred to tbe report of tbe as-signee, showing tbe assets and liabilities, and to tbe opportunity for a discharge of tbe debtor from personal liability, regardless of tbe attitude of bis creditors, and stated that it was for tbe best interests of tbe latter to accept thirty-five per cent, of their claims and voluntarily discharge tbe former. 'They were admonished that in tbe event of any one of them ■declining tbe offer, tbe receiver, meaning tbe assignee, would pay each bis percentage of tbe scheduled assets and tbe debtor ■could then obtain bis discharge at the hands of tbe court. In that view and in tbe light of the legal right of appellants before indicated, which had been fully assented to by respondent, as shown by its omitting to schedule the collateral in the assignment proceedings, it seems very plain that neither of the parties considered the compromise agreement as any more advantageous to the debtor than an acceptance by appellants of their due share of the general assets at the hands of the as-signee and a judicial discharge of respondent from personal liability, which, as we have seen, would not have prejudiced appellants’ right to the collateral.

To construe the contract as if it were intended that appellants should surrender the collateral and their interest in the general assets in consideration'of thirty-five per cent, upon the face of their claim would convict them of sacrificing about $1,000, for the purpose of taking part in the compromise agreement, while the ruling idea as to all was that each ■creditor could secure more by accepting the compromise than by not doing so. That is plainly shown by the wording of the proposition. Yet the claim is here made that appellants contracted to surrender the opportunity to obtain out of the general assets and the collateral upwards of $3,500 for the ■purpose of obtaining about $1,000 less. The result of so viewing the agreement would be so absurd that under a familiar rule one more reasonable should be sought for, and, if found within the fair scope of the language used by the parties, adopted. As has often been said, ambiguity calling for construction may as well appear from language clear in itself but leading to some absurd result when applied literally to the situation with which it deals, as by reason of uncertainty of meaning upon its face. Hoffman v. Maffioli, 104 Wis. 630, 641, 80 N. W. 1032. In either case the situation of the parties at the time of entering into the contract, the subject matter thereof, the circumstances leading up thereto,, and all matters essential to enable the court to survey the writing from the exact viewpoint of the parties at the time of' the transaction, may properly be considered in determining just what they intended to express. Boden v. Maher, 105 Wis. 539, 543, 81 N. W. 661; Johnson v. Pugh, 110 Wis. 161, 170, 85 N. W. 641; Excelsior W. Co. v. Messinger,. 116 Wis. 549, 93 N. W. 459. In such circumstances the contract may be read very differently from the literal sense thereof, so long as its reasonable scope is not departed from if necessary to give effect to what the minds of the parties really met upon. That does not involve any modification of' the contract, “but has relation to' the application of the language used to the subject within the contemplation of the-parties as represented by the situation then existing and the-surrounding circumstances, which it may be assumed they then had in view.” Zimmer v. Settle, 124 N. Y. 37, 42, 26 N. E. 341. Our judgment is that the written contract does-not include but is separate and distinct from the verbal agreement.

There is another rule not often successfully invoked, which-, seems to apply to this case. Where there is a distinct verbal agreement which, under ordinary circumstances, could not. be efficiently established in the face of a written one, it may be, in an action between the parties as matter of defense-when one seeks to use the writing in a way to effect a dishonest or fraudulent purpose. Braun v. Wisconsin R. Co., supra; Juilliard v. Chaffee, 92 N. Y. 529.

In the last case, cited the plaintiff, a receiver in a trust for creditors, sought to enforce against the defendant a written. instrument purporting to evidence an indebtedness on bis part of $100. He was permitted to prove in defense circumstances which occurred prior to and contemporaneous with the making of the writing, showing that it was not intended to create or evidence an indebtedness as indicated by its language. Objection to the proof in that regard was made upon the ground that its admission would violate the rule as to varying a written contract by parol. The objection was •overruled upon the ground, among others, that to exclude the proof, under the circumstances, would enable the plaintiff to use the writing in a way never contemplated by the parties ■thereto and to perpetrate a fraud.

TJnder the circumstances of this case it is very clear that when appellants accepted the offer of compromise neither they nor respondent supposed that it affected the former’s right to the proceeds of the collateral which had already become their property. In that view the effort to use the compromise agreement as an instrument with which to take the value of the collateral away from appellants looks very much like an attempt wrongfully to convict appellants of having consciously given a thousand dollars or thereabouts for the purpose of joining in such agreement. The whole difficulty springs from viewing a perfectly legitimate transaction in respect to the agreement for the retention of the collateral by appellants, notwithstanding the compromise agreement, as wrongful.

What has been said renders it unnecessary to consider any other propositions discussed in the briefs of counsel. The judgment must be reversed, 'and the cause be remanded with directions to render a judgment in favor of defendants dismissing the plaintiff’s complaint with costs.

By the Court. — So,ordered.