Hatcher v. Plumley

164 N.W. 698, 38 N.D. 147, 1917 N.D. LEXIS 24

• Court: North Dakota Supreme Court
• Decided: August 20, 1917
• Status: Published

Opinion

Christianson, I.

The defendant Plumley was the president of the Forum Printing Company, and he and the defendant Edwards owned-practically all the capital stock of the corporation. On January 19, 1912, these defendants entered into a contract with the plaintiff O. M. Hatcher whereby they agreed to sell their stock in said corporation to said Hatcher on or before April 1, 1912, for a stipulated eonsid«ration. Thereafter, on April 2, 1912, the plaintiff brought an action to rescind said contract, and to recover certain moneys paid to defendants thereunder, and to recover special damages alleged to have been sustained in connection with said transaction. On the same date, to wit, April 2, 1912, the plaintiff instituted, ancillary to said main ■action, a garnishment action against, the Forum Printing Company as .garnishee. On April 30, 1912, the Forum Printing Company served ■an affidavit admitting an indebtedness to the defendant Plumley in the sum of $12,902.42, and an indebtedness to the defendant Edwards in the sum of $11.10. On August 16, 1912, an. action was commenced in the district court of Cass county wherein S. S. Lyon was plaintiff and the Forum Printing Company defendant, in which action the garnishee H. F. Emery was duly appointed receiver of the Forum Printing Company by an order duly entered in said last-mentioned action on August 16, 1912. ■ Thereafter the receiver published notice to creditors to present their claims, and on January 3, 1913, the plaintiff Hatcher filed' a claim reciting the facts above stated. On January 2, 1916, a stipulation was entered into between the parties in the main action, wherein the preceding stated facts, including the facts with respect to the appointment of the receiver of the Forum Printing Company and the presentation by Hatcher of his claim to such receiver, were fully stated. The stipulation provided for entry of judgment adjudging that the contract of purchase be rescinded, and that Hatcher recover judgment against Plumley and Edwards for the moneys paid upon the purchase price, namely $4,583.33, with 7 per ■cent interest from March 1, 1912. The stipulation further provided, however, that no ■-'>xecution should issue on such judgment against the defendants, personally, but that such judgment should be collected only •out of the indebtedness of the Forum Printing Company to the defendants, and by and through the garnishment proceedings, and the claim of the plaintiff filed against the receiver.. Judgment was duly entered upon and in accordance with the terms of such stipulation on July 5, 1915. On Fébruary 23, 1915, the garnishee defendant asked for and ■obtained leave to serve an amended disclosure. In such amended disclosure it is asserted “that at the time of the service of the garnishment summons in the above-entitled matter upon the said above garnishee, to wit, on April 2, 1912, it, the said Forum Printing Company, was indebted to the said defendant H. C. Plumley, upon open book account covering salary for services as president and general manager of said company for preceding years in tbe sum of $12,902.43; that except as aforesaid, tbe Forum Printing Company then bad no property, money, or effects of tbe said defendant in its possession or under its control, save that it was at said time further indebted to the said H. C. Plumley in the sum of $184.03 upon a claim which, by decree of the court herein, has heretofore been established as a prior lien upon the assets of the Forum Printing Company.

“That said debt above mentioned, to wit, $12,902.43, of the Forum Printing Company to IT. C. Plumley, was on and prior to April 2, 1912, in all things subject to prior equities and claims as follows: Said sum, as a claim against Forum Printing Company, was subject to the prior payment in full of all the other creditors of the Forum Printing Company; that payment of said debt of $12,902.43 to the said IT. C. Plumley by said Forum Printing Company had been by him, the said H. C. Plumley, long prior to April 2, 1912, waived, and the payment thereof postponed in favor of all other creditors of said Forum Printing Company; that such waiver and agreement for postponement of the payment thereof, thus made by the said H. C. Plumley, had been acted upon by creditors of the Forum Printing Company in the matter of their granting credit, making loans, and renewals and extensions, all of which things were done long prior to April 2, 1912; that the Forum Printing Company, prior to April 2, 1912, received credit, obtained loans of money, and obtained extensions of previously negotiated loans and notes, upon the basis and strength of the said H. C. Plumley’s waiver of his said claim of $12,902.43, and upon the strength and basis of said last-mentioned claim being at all times held and taken to be subordinate and inferior to, and subject to, the payment of all other creditors of the said Forum Printing Company, in full, before any payment whatever should be made or should become liable to be made by the Forum Printing Company in favor of the said II. C. Plumley; and that the said H. C. Plumley, long prior to April 2, 1912, consented and agreed to and with the other creditors of the said Forum Printing Company, that as consideration for the making of loans, the granting of credit, and the extension of maturing loans of creditors of the Forum Printing Company, he, the said II. C. Plumley, would and did waive and agree that he would never assert said claim of $12,902.43 unless, or until, all other creditors of said Forum Printing-Company were first paid in full their claims against said company; that the interest, if any, of the plaintiff, O. M. Hatcher, in and to said claim of $12,902.43 against the Forum Printing Company, is subject and subordinate to the claims of all other creditors of said Forum Printing Company which were in existence on or prior to April 2, 1912.”

The receiver, H. F. Emery, who was joined as a party, adopted the disclosure of the Forum Printing Company as his answer in the garnishment action, and that action was tried upon the issue joined by plaintiff on such disclosure.

The undisputed evidence showed that Plumley and Edwards were and had been owners of practically all the capital stock of the Forum Printing Company; that Plumley, up to May 4, 1912, was the president of the company; that the Forum Printing Company was indebted to Plumley in the sum of $12,902.42; that Plumley at various times prior to April 2, 1912, had negotiations with various large creditors of the company and induced them to extend credit ho such company upon his promise that his (Plumley’s) claim would be secondary and subordinate to the claims of the other creditors of the company; that such promises were made to and relied upon by the following specific creditors, whose claims were as follows:

Wright, Barrett, & Stillwell Co.............•........................ $6,671.49'

A. E. Bestic, ..................................................... 3,205.94

Eirst National Bank of Eargo, .................................... 5,790.88

Merchants National Bank of Far’go, ................................ 13,512.55

James Kennedy, .................................................. 5,015.42

Total ......................................................... $34,196.28

(In addition to his claim above mentioned, James Kennedy had executed notes, as accommodation maker, or as an accommodation had guaranteed payment of notes, for the Forum Printing Company, which notes are held and have been filed as claims against the Forum Printing Company, by the State Bank of Erie, First National Bank of Page, and the Fargo National Bank, in amounts aggregating $1,146.60. And 'it appears from the evidence that Kennedy not only extended the credit ■evidenced by his claim, but also assumed the liability as accommodation maker or indorser upon the claims mentioned, in reliance upon Plumley’s promise that his (Plumley’s) claim would be secondary to the •claims of all other creditors.)

It further appears that all the assets of the corporation have been .sold and converted into cash; that the total amount of cash in the hands of the receiver, after payment of claims secured by mortgages upon the property, taxes, and other claims of a preferred character, is $33,410.-89, and that the unsecured claims allowed aggregated $57,301.99. (The •claim of Plumley was not allowed, and is not included in this amount.)

The trial court ordered a dismissal of the garnishment action, and plaintiff appeals.

. The sole question on this appeal is whether the agreement on the part of Plumley, made with and acted upon by certain creditors of “the Forum Printing Company prior to the institution of the garnishment action, is valid as against, and takes precedence over, the garnishment.

Under our statute, a creditor is “entitled to proceed by garnishment - . . against any person . . . who shall be indebted to or have any property ... in his possession or under his control-belonging to such creditor’s debtor.” Comp. Laws 1913, § 7567.' When a ¡garnishee is indebted or under liability to the defendant named in the garnishee summons, he should set forth in his answer a description of the indebtedness and whether the same is “an absolute or contingent liability and all the facts and circumstances necessary to a complete understanding of such liability or indebtedness or when the garnishee shall be in doubt respecting any such liability or indebtedness, he may .set forth all the facts and circumstances concerning the same and submit the question to the court.” Comp. Laws 1913, § 7575.

When the answer of the garnishee discloses that any other person than the defendant claims the indebtedness or property in his hands, the court may order such claimant to be interpleaded as a defendant to the garnishment action. Comp. Laws 1913, § 7582.

The garnishee from the time of the service of the summons stands '“liable to the plaintiff to the amount of the property, money, credits And effects in his possession or under his control belonging to the defendant, or in which he shall be interested, to the extent of his right •or interest therein, and of all debts due or to become due to the defendant, except such as may be by law' exempt from execution.” Comp. Laws 1913, § 7583. And “no judgment shall be rendered upon a liability of the garnishee arising . . -. by reason of any money or ■other thing owing from him to the defendant, unless before judgment against the defendant it shall have become due absolutely and without depending upon any future contingency; but judgment may be given for any money or other thing owing after it shall have become due absolutely and without depending on any contingency.” Comp. Laws 1913, § 7584.

The manifest purpose of garnishment process, and the intent of the legislature as evinced by these statutory provisions, is to subject the property owned by, or debts due to, á defendant in an action, to the payment of the judgment obtained therein. But it is equally evident that only the actual interest of the defendant in such property or indebtedness can be reached by such garnishment proceedings. The creditor cannot by garnishment obtain any more than actually belongs to Lis debtor. The rights of the debtor are the source of the creditor’s rights. The stream cannot rise higher than its source. And if there are any legal or equitable bars standing in the way of the defendant •enforcing his right or interest against the garnishee (or claimants inter-pleaded), the same bars will stand in the way of the plaintiff in the garnishment action. The plaintiff in a garnishment action at the most becomes subrogated to the rights of the defendant in the main action. He can obtain no greater or better title to the property or indebtedness garnished than that possessed by the defendant in the main action. If it appears that for some reason the defendant in the main action could not successfully have maintained an action in his own name for his •own use against the garnishee defendant by reason of the rights of the garnishee, or some third person, manifestly, these rights will equally bar the rights of the plaintiff. Under no circumstances can the plaintiff be placed in a more favorable, or the garnishee in a worse, position than. if the defendant was himself enforcing his claim. Smith v. Clarke, 9 Iowa, 241, 245. Bor the plaintiff cannot by garnishment place himself in a superior position as regards a recovery than is occupied by the principal defendant. The garnishee’s liability is measured by his responsibility and relation to the defendant. And he can be charged only in consistency with the subject of his contract with the defendant. And if, by any pre-existing bona fide contract, his accountability has been removed or modified, it follows that the garnishee’s liability is correspondingly affected. The garnishment cannot change the nature of a contract between the garnishee and the defendant, nor prevent the garnishee from performing his contract with third persons. Shortridge v. Sturdivant, 32 N. D. 154, 158, 155 N. W. 20; Shinn, Attachm. & Garnishment, § 516; Petrie v. Wyman, 35 N. D. 126, 159 N. W. 616.

“Priority between garnishment liens, and other liens or claims upon the same property, is generally determined by priority of time. The right first acquired is, as a rule, superior. Rights under garnishment are subordinate to a good pre-existing equitable assignment, though the latter is not perfect at law. . . . Again, the right of subrogation which arises upon payment by sureties of a judgment against the principal debtor takes priority over a lien acquired by garnishment entered after the judgment.” 12 R. C. L. p. 848, § 90.

As already stated, it appears from the undisputed evidence in this case, that certain creditors of the Forum Printing Company extended existing obligations and advanced new credits in reliance upon the agreement and representations of Plumley that his claim against the Forum Printing Company would be subordinate and inferior to the claims of other creditors of the company. When Plumley made these promises and representations, it was greatly to his interest to have the credit sought extended to' the Forum Printing Company. He was vitally interested in the maintenance and continuation of the business, of that company. And we are wholly unable to' see any reason why he could not legally waive his claim against the Forum Printing Company as to other creditors. Suppose Plumley, instead of making the agreement referred to, had in good faith absolutely canceled his claim against the Forum Printing Company in order to enhance the financial standing of the company, could the plaintiff in the present action have contended that the claim was still existent so far as he was concerned ? Manifestly not. In the case at bar, Plumley, in effect, told the creditors that he would release his claim in so far as their claims were con•cerned. And, in reliance upon his promise, they extended credit to the Forum Printing Company accordingly;

Appellant has assailed the arrangement between Plumley and his ■creditors upon various grounds, but apparently overlooked the fact that the plaintiff is not a creditor of the Forum Printing Company, — he is Plumley’s creditor. And in this action he stands in Plumley’s shoes. He has as much right as, and no more right than, Plumley would have had to assail such arrangement in event Plumley had endeavored to ble a claim in the receivership proceedings in disregard of his agreement with the creditors.

The instant garnishment action “is,- in substance, an equitable proceeding for the settlement of the ownership of a fund, especially, since ■a claimant to the fund has appeared and become party to the proceeding, though arising in an action at law. . . . ‘As between the plaintiff and claimant, equitable considerations must prevail, so far as the nature of the process will admit.’ ” Jenness v. Wharff, 87 Me. 307, 32 Atl. 908; Haynes v. Thompson, 80 Me. 125, 13 Atl. 276.

Plaintiff’s right to enforce or collect the account is burdened with all claims or rights, legal or equitable, which might have been urged by the Forum Printing Company, or the creditors against Plumley. Rood, Garnishment, §§ 66, 349; Jenness v. Wharff, supra; Cram v. Shackleton, 64 N. H. 44, 5 Atl. 715; Haas v. Old Nat. Bank, 91 Ga. 307, 18 S. E. 188; Chamberlain v. Gilman, 10 Colo. 94, 14 Pac. 107; Carr v. Waugh, 28 Ill. 418; Dressor v. McCord, 96 Ill. 389; Smith, T. & Co. v. Clarke, 9 Iowa, 241; North Chicago Rolling Mill Co. v. St. Louis Ore & Steel Co. 152 U. S. 596, 38 L. ed. 565, 14 Sup. Ct. Rep. 710; Dickinson v. Davis, 164 Iowa, 449, 145 N. W. 957.

The judgment appealed from must be affirmed. It is so ordered.

Grace, J. I dissent.