Huntington v. Clark

39 Conn. 540

• Court: Supreme Court of Connecticut
• Decided: February 15, 1873
• Status: Published

Opinion

Foster, J.

The rules and principles which govern contracts of compromise between an insolvent debtor and his creditors, whether in the form of composition deeds, as they are usually styled, or otherwise, are very thoroughly established and very generally understood. The utmost good faith must be observed by all parties ; any fraud taints and makes void the agreement, -however technical or solemn may have been its form, or the mode of its execution. This, indeed, may be said of all contracts, but especially of those of this character. The nature of these transactions, and the situation of the parties, afford at once temptation and opportunity for committing fraud. .The debtor ,in his statement is tempted to swell the amount of his liabilities, or lessen the amount- of his assets, or both, in order to make a settlement at the lowest figure ; and the creditors, though purporting to act together, are found, not rarely, acting individually, and stipulating with the debtor for the payment of their claims, in whole or in part, over and above the amount of their dividend. It scarcely need be said that any misrepresentation or concealment on tlio part of the insolvent renders his release void ; any contract by one creditor for a preference over bis fellow-creditors is not only void, but, as determined by the later authorities, such contract in effect works a forfeiture of the claim to an otherwise honest dividend. The parties necessarily repose special trust and confidence in each other, and to repress the temptation' to abuse or violate that trust and confidence the rule requiring the observance of entire good faith, the uberrima fides of the civilians, should, be rigidly enforced. The case of Doughty v. Savage, 28 Conn., 146, is entirely in accordance with these views.

While these principles are abundantly plain, the application of them to the case before us requires care and discrimination, and is perhaps not free from difficulty.

The plaintiffs seek to recover of the defendant the balance of an indebtedness agreed to have been about $45,000 in the spring of 1868. The defendant was then unable to pay his debts in full, and on the 27th of March, 1868, ho made a compromise with his creditors, to which the plaintiffs were parties, signing the composition deed of that date with the sum of $25,000 opposite their name. The defendant claimed that the plaintiffs had agreed to call this sum the amount of their debt, and. by the terms of the deed it was to be discharged on the payment within a time specified of twenty-five cents on the dollar. To avoid the effect of this deed the plaintiffs proposed to prove that their signature tq it was procured by fraud ; that the defendant had put a fictitious debt into his schedule to increase his liabilities, and had fraudulently concealed money and other personal propertythus making his ability to pay to appear less than it really was.

. The court charged the jury that if the plaintiffs intentionally concealed from the other creditors the fact of an indebtedness over $25,000, or induced other creditors to join in the composition by representing that the amount affixed to their name in the d&ed represented their entire claim, they could in no case recover any of the balance ; that it would be immaterial what representations were made by the defendant to induce the plaintiffs to enter into the composition deed ; that if the plaintiffs by their conduct and words intentionally induced the other creditors of the defendant to believe, when they signed the composition deed, that the plaintiffs’ debt was only $25,000, when in fact it was over $40,000, and thereby intentionally induced them to sign the same, such conduct was in law a fraud.

If the plaintiffs had set down the full sum due to them, and signed the composition deed without any agreement for a preference over other creditors, the fraud imputed to the defendant, if found proved, would certainly have rendered his discharge a nullity. The concealment of a portion of their indebtedness, it is said, is a fraud on the part of the plaintiffs, and concludes them from any relief against the fraud of the defendant. It should be borne in mind that in the court below it was not claimed by the defendant that the plaintiffs stated their debt to be $25,000 when it was in fact $45,-000 with any fraudulent intent or purpose towards the other creditors, or that there was any understanding or agreement that the plaintiffs should have any preference over other creditors, or should be paid, either in part or in whole, for the residue of the debt thus omitted on the composition deed. On the contrary, the defendant claimed that-the plaintiffs agreed to call their debt $25,000, and to discharge the defendant upon receiving twenty-five per cent of that sum. The plaintiffs’ claim upon this subject varied from that of the defendant, but as no question arises upon it the claim need not be stated.

Was the representation of these plaintiffs on the deed of composition, that their debt against the defendant was $25,-000, when in fact it was over $40,000, such a concealment as to be a fraud on the other creditors ? — -What is fraud, is a question in answer to which as much perhaps has been written and spoken as in reply to the question of the Roman governor, “ What is truth?” In the leading case of Leicester v. Rose, 4 East, 372, Le Blanc, J., page 383, says : “ It is agreed in all the cases that if there be a fraud upon the general agreement of all the creditors, by a particular stipulation with any of them, it is void ; and the only contest has been as to what shall be said to constitute such fraud. It has been supposed to consist in one stipulating 'to* receive more money than the others, but that is a fallacy ; for the real question is, whether he be put in a better situation than he stipulated for with the other creditors at large.” — Lord Ellenboeough, in the same case, p. 381, says : “ Where the creditors in general have bargained for an’ equality of benefit and mutuality of security, it shall not be competent for one of them to secure any partial benefit or security to himself.” In Breck v. Cole, 4 Sandf. S. C. Reps., 79,.a case fully argued and well considered, Mr. Justice Duer says: “ Whenever a composition is made with creditors, any agreement or arrangement by which an advantage is secured to any one or more of the creditors which is denied to others, is a fraud upon the creditors from whom it is concealed, although it neither has nor can have the effect of depriving them of any portion of the amount which they have agreed to receive. It is in all cases the concealment of a fact which it was material for them to know, and the knowledge of which might have prevented them from assenting to the composition. _ Britton v. Hughes, 5 Bing., 466, per Best, C. J. Every composition deed is, -in its spirit, if not in its terms, an agreement between the creditors themselves, as well as between them and the debtor. It is an agreement that each shall receive the sum or the security which the deed stipulates to be paid or given, and nothing more, and that upon this consideration 'the debtor shall' be wholly .discharged from all the debts then owing to the creditors who signed the deed.”

' Applying the most stringent of these principles as tests of fraud ; applying any others more stringent, if such there be; (see the case of Bean v. Amsink, Circuit Court Southern Dist. N. Y. per Blatchford, J., Am. Law Register for June, 1873, p. 379 ;) the question recurs, was the representation of the plaintiffs, of their debt against the defendant at $25,000, on the composition deed, when in fact it was $45,000, a fraud on the other creditors ? Was it a violation of any principle of law or public policy ? It was' certainly calculated to excite suspicion that there was some secret agreement, by virtue of which the plaintiffs were to have some preference or advantage over the other creditors. If such was the fact it was a palpable fraud, and so utterly void. That a party cannot thus sever his claim, even where he has several demands on different accounts against an insolvent, was expressly held by Lord Kenyon in Holmer v. Viner, 1 Esp., 132. No such fact is proved here, no such intention even. The question depends solely on the character of the act. Was that per se fraudulent ? ' There was, in a certain sense, a concealment; a keeping back, not a part of the price, but that part of the debt 'which the defendant claimed the parties had agreed should be remitted, merging the whole claim in the $25,000. It is no fraud for a creditor to forgive a debtor the payment of his debt. • If insolvent himself he must not prejudice his own creditors by so doing. The law cannot pronounce this act fraudulent without proof, when it may have been honest. Fram nunepuam presumitur. There was concealment, true, but how did, how could, that concealment benefit the plaintiffs ? How was their situation, over that of the other creditors, improved by it ? Was the fact concealed at all material for the other creditors to know ? Had they known it, are there any conceivable reasons for supposing that they would not have signed the deed of composition with equal, if not even with greater readiness than they did without knowing it ?

But waiving these considerations, supposing the manner in which the plaintiffs stated their debt on this deed of composition constituted a fraud on the other creditors, does it lie in the mouth of this defendant to set up such fraud in answer to, and is it an available answer to, the claim of the plaintiffs that the defendant obtained their signature to this deed of composition by fraudulently misrepresenting both the amount of his debts and his means of paying them ? This fraud of the defendant, if perpetrated, would, as we have seen, make his release null and void as between himself and each and all of his creditors ; and that fraud, it must be remembered, would be solely and exclusively the fraud of the defendant himself. Neither the plaintiffs, nor any other of the creditors, were, in any manner, participators in the fraud. It rendered the compromise between him and them null and void' from the very beginning. These contracts of compromise may be viewed in different aspects ; first, as. a contract between the insolvent on the one part, and all his creditors jointly, considered as a unit, on the other; next, as a contract between the insolvent and each creditor severally ; and lastly, as between the creditors themselves. If the contract, considered primarily, as between the insolvent and all the creditors, as a unit, be void in its origin, by -reason of the fraud of the insolvent alone, can the insolvent,.when sued by. one of the creditors, set up and establish as Valid against that creditor, the void compromise, because of some secret arrangement for a preference, entered into between him and that creditor, in fraud of the other creditors ? We think not. We know of no principle by which sucli a defence could be successfully made. We are referred.to no case, our own researches have not enabled us to .find a case, where such a de-fence, under such circumstances, has been made. The case of Mallalieu v. Hodgson, 16 Adol. & El. N S., 690, (71 E. C. L., 689, and 5 Eng. L. & E., 279,) comes perhaps as near to the case before us as any one "of the- many that have been cited. There the .-defendants, being insolvent, had compromised their debts for six shillings and eight pence in the pound, but the plaintiff, not being present at the meeting, refused to sign the composition deed unless he was paid thirteen shillings and four pence in the pound upon part of the debt, and the other part in full. These terms being acceded to by the defendants, and the positive assurance given by them to the plaintiff that no other creditor was to have anything beyond the six shillings and eight pence, he signed' the composition deed. He received the thirteen shillings and four pence on a portion of his debt, but the notes given for the residue, which was to be paid in full, not being paid, he sued for bis original demand. It appeared on the trial that other creditors besides the plaintiff had been preferred, and had received more than the six shillings and eight pence. The Court of Queen’s Bench, held by Wightman, Coleridge, and Erle, Js., decided that the plaintiff was not entitled to recover. The decision was by, two judges against one, Wightman, J., dissenting. He said: “It appears to me that •it is no answer, upon this issue, [whether or not the release was obtained by fraud,] 'to show that the plaintiff himself had also contracted for preference, in fraud, not of the defendants, but of the other creditors. * * ® * It can hardly bo allowed the defendants to set up a counter fraud by them and the plaintiff, by which they colluded to deceive other persons, as an answer to a charge of fraud practiced by the defendants upon the plaintiff, which would have the effect of depriving him of part of his original right.” The other,justices, Coleridge and Erle, making a majority of the court, put their decision for the defendants on grounds which seem to us to sustain the right of the plaintiffs in this case to recover. They held that, the plaintiff having obtained a preference for himself not vitiating the release as against himself, the fact that the defendants had also given a preference to others, was no fraud upon him. Coleridge, J., says : “ The whole consideration for his, the plaintiff’s, release, is the fraudulent preference promised to himself, and the withholding any such preference from other creditors. He cannot allege'the former as a fraud on himself to vitiate the release, for he is partieeps fraudis, and the latter is so entirely mixed up with it, deriving all its materiality from it, that the same disability seems to me to attach to it.” Erle, J., says: “ A deed is not to be avoided on the ground of a fraudulent misrepresentation unless the matter misrepresented was a material inducement to the execution of the deed, — in other words unless the matter was such as, in case of a simple contract, would bo substantially the consideration for the contract. Here the misrepresentation relied on is not of this nature ; the exclusion of others from a preference is no direct advantage to the plaintiff, and the whole stipulation for a preference, being a fraud on tlie part of the plaintiff towards other creditors, no part of it can be legally relied on by him as forming a material inducement for his deed ; it could not form any part of a legal consideration. Also as in a composition deed, the principal parties to a stipulation for a release are the creditors who mutually contract, each with the rest of the body, any misrepresentation of the debtor to any one of the creditors, cannot be relied on by that one as. the material inducement for his stipulation with the others. * * * The plaintiff does not prove the issue, that the deed which operates between him and them, as well as between him and the debtor, was obtained by fraud, by showing that he was deceived by the debtor, and would not have executed the deed if he had not been so deceived.”

The application of these principles to the case at bar is easily made. These ■ learned judges of the Queen’s Bench were of opinion that where an insolvent debtor had stipulated to give a preference to one creditor, assuring him that no other creditor was thus favored, the giving of a preference to others was not a fraud on such creditor, and so the release signed by such creditor was not thereby made void ; that the whole stipulation for a preference, being a fraud on the part of the plaintiff towards other creditors, no part of it could be legally relied on by him as forming a material inducement for signing the deed. That a statement of fictitious debts, and a misrepresentation as to the amount of the assets, by the debtor, as claimed in this case, would constitute fraud,, is beyond dispute ; not fraud against one only, or a portion of the creditors,' or by which one only was deceived, but against the whole ; not fraud with which the plaintiff, or any one of the creditors, in the language of Mr. Justice Coleridge, was “ mixed up,” but solely the fraud of the plaintiff.

Now we think that such fraud avoids a release, and that it is not answered by showing simply that the plaintiff, stated his debt at 125,000, when it was over 140,000, even supposing; as we now do, that this statement was a fraud. The case of Mallalieu v. Hodgson, from which we have largely quoted, as it is an important one, fully sustains, as we believe, the same views.

The conclusion to which we come, therefore, is, that the act • of stating the plaintiff’s debt, on the deed of composition, to' be $25,000, was not, in the .absence of all proof on the subject, per se a fraud. But if it be regarded as a fraud in law, it would not be a sufficient answer to the fact that the defendant procured the signing of the deed of composition by fraudulently misrepresenting, in the statement of his condition, the amount of his assets and liabilities. The instructions to the jury in the court below. upon the other' questions arising on the record, we are inclined, as at present advised, to sanction, but in regard to these we have been considering, we think the judge erred. A new trial is therefore advised.

In this opinion the other judges concurred.