Morse v. Godfrey

17 F. Cas. 854, 3 Story 364

• Court: U.S. Circuit Court for the District of Massachusetts
• Decided: May 15, 1844
• Status: Published

Opinion

STORY, Circuit Justice.

On the 19th of March, 1842, William Reed (the bankrupt) made the two deeds of conveyance on mortgage to Godfrey, which are now sought to be set aside as fraudulent and void, under the bankrupt act of 1841, c. 9. On the same day, Reed signed and swore to a petition for the benefit of the bankrupt act, as a voluntary bankrupt; and his petition was filed in the district court on the succeeding Monday, (the 21st of March), and has been acted upon in the district court, and Reed has since, -under the same, been declared a bankrupt. One of these deeds purported to convey to Godfrey “all the right, title and interest” which he (Reed) then had “in and to any lands, buildings and real estate,” in the county of Bristol. The other deed purported to convey to Godfrey, “all the goods, wares and merchandise, consisting of wool-len, cotton, linen, and other cloths, silks, ribbons, laces and handkerchiefs, hose, car-petings and rugs, and various other articles of dry goods merchandise, now in the store occupied by me,” and situate in Taunton. In point of fact, the last deed comprehended all his stock in trade, and the other deed nearly all his real estate, leaving him in the possession and ownership only of his furniture and some other personal property, not included in the mortgage to Godfrey. Godfrey on the same 21st of March conveyed to the Cohannet Bank, in mortgage, “all the right, title and interest,” which he then had “in land to all and singular the goods, wares, and merchandise, of every name and description in the store,” etc., which he derived from the mortgage to him by Reed of the 19th. of March. By subsequent deeds, on the 26th of May following, Godfrey conveyed “all his right, title and interest,” as well in the goods aforesaid, as in the real estate aforesaid, so conveyed to him by Reed, to the Cohannet Bank, the Institution for Savings, and to Samuel Blake, and five other persons, who were his creditors in fee, as security for their debts; and thereby on, and in consideration thereof, the said •creditors on the same day by their deed agreed to withdraw and discharge their attachments upon the property of Godfrey. Godfrey afterwards became a bankrupt and his assignee is made a party to the bill. The second section of the bankrupt act of 1841, c. 9, provides “that all future payments, securities, conveyances, or transfers of property, or agreements made or given by any bankrupt in contemplation of bankruptcy, and for the purpose of giving any creditor, indorser, surety or other person any preference or priority over the general creditors of such bankrupt; and all other payments, securities, conveyances or transfers of property, or agreements made or given by any such bankrupt, in contemplation of bankruptcy, to any person whatsoever, not being a bona fide creditor or purchaser for a valuable consideration, without notice, shall be deemed utterly void, and a fraud upon this act.”

The first and main question is, whether the conveyances so made by Reed to God-frey come within the reach of this enactment. If they do, then another question will remain, whether the defendants claiming under Godfrey are entitled to protection, as being bona fide purchasers of the same for a valuable consideration, without notice. It does not strike me, that there is any substantial doubt upon the facts and circumstances resting on either point.

In the first place, nothing can be clearer than that Reed intended by the deeds in controversy to give a preference to Godfrey over all his other creditors. He conveyed to him all his stock in trade, and nearly all his real' estate, leaving but a small residue, either of personal or real estate. Godfrey well knew of his embarrassments; and Reed himself admits that his whole property was about $24,000, and his debts and liabilities amounted to about the same sum. So it is plain beyond controversy, that a preference was intended to be given to Godfrey over the other creditors, in case of any deficiency; and Reed states, that he did not at the time suppose that he was able to meet all his engagements at their maturity. If it were necessary under such circumstances to rely upon authorities in confirmation of this doctrine, the cases of Harman v. Fishar, 1 Cowp. 117, 123; Thornton v. Hargreaves, 7 East, 544; Compton v. Bedford, 1 W. Bl. 362; Hooper v. Smith, Id. 441,—will be found to support it. Then, as to the conveyances being made in contemplation of bankruptcy, in the sense in which these words are used in the bankrupt act of 1841, c. 9, § 2, I have already had occasion to consider this subject in former cases, and especially in the case of Arnold v. Maynard [Case No. 561], and Hutchins v. Taylor [Id. 6,953]. In these cases, it was expressly decided that the words “in contemplation of bankruptcy,” in the act, were not limited to, and did not mean the contemplation on the part of the. bank-nipt of committing an act of bankruptcy within the terms of the act, for which his creditors might proceed against him in in-.vitum, or his own contemplation of voluntarily taking the benefit of the act; but that they properly meant the contemplation of a state of bankruptcy, or known insolvency and inability to carry on his business, and a stoppage of his business. In other words, that he contemplated a breaking up and failure and stoppage of his trade or business, and thus to become, .in the sense of the old law, a bankrupt, or one whose trade and business is broken up, his counter or table being, in a figurative sense, bankus-ruptus. 2 Bl. Comm. 471, note e. In addition to the English cases cited in suport of this doctrine in the case of Arnold v. Maynard [supra], I might add the more recent case of Gibson v. Muskett, 4 Man. & G. 160, where Lord Chief Justice Tindal said, “Then the question is, whether this was not money paid in contemplation of bankruptcy, that is, under such circumstances that any prudent man, taking a reasonable view of his situation and the surrounding circumstances at the time, might fairly expect bankruptcy to follow.” But I did not found myself on the cases of Arnold v. Maynard and Hutchins v. Taylor [supra], nor do I in the present case found myself, upon the construction of the words, as applied to the English bankrupt statute, but upon their true meaning and objects as used in our own act of 1841, c. 9. Reed must be presumed to have known the natural consequences of his acts in making these conveyances. He could not but have known, that these conveyances, transferring the bulk of •his property, did give a preference to God-frey, which was a fraud upon the bankrupt act, entitling his other creditors to proceed against him therefor in invitum,' under the first section of the act. It was an attempt, on his own part, to divide his property among his creditors in a manner prohibited by the bankrupt act, at the very moment when he was about to fail in business, and when he knew that he must by those very conveyances break up and stop his whole trade and means of carrying it on. Nay, the present case demonstrates that he must at the time have had it in contemplation to take the benefit of the bankrupt act, as a voluntary bankrupt; for on the same day, and at most at a few hours after he had made these conveyances, he actually signed and swore to a petition to be filed for the benefit of the act, and that petition was immediately proceeded in, and he has been since declared a bankrupt accordingly. Such acts cannot be overcome or gainsaid by any declarations, — even if Reed had made them, — that he did not, at the moment of executing these conveyances, contemplate taking the benefit of the bankrupt aet; but that it was an after-thought. The law will not tolerate such evasions of its obligations, nor permit any man to set up his own private and secret intentions to subvert the just conclusions to be drawn from his overt acts and notorious embarrassments, and stoppage of his business. The language of Lord Ellen-borough in Thornton v. Hargreaves, 7 East, 544, 547, is very significant upon this subject; and in its circumstances it approaches very nearly to the present. See, also, Newton v. Chanter, Id. 138, 143. It would make no difference in the present case, that Godfrey was not aware, that the conveyances were made with an intention to give him an unlawful preference over the other creditors, and in. contemplation of bankruptcy; for the act makes such conveyances under such circumstances utterly void, whether the grantee has «uch knowledge or not. But, in fact, it is not ■susceptible of any reasonable doubt, that •Godfrey at the time was aware of the desperate circumstances of Reed, and he could not but know, that these conveyances, embracing the bulk of his property, necessarily •amounted to a failure and stoppage in his business, and reduced him to a state of positive and immediate inability to pay his other ■debts. .Without, therefore, going farther into the details of the case, it appears to me that the conveyances to Godfrey were fraudulent in the sense of the bankrupt act of 1841, having been made in contemplation of bankruptcy, and with intent to give Godfrey a preference over the other creditors.

In the next place, how stands the case as to the Cohannet Bank, upon the transfer to them, on the 21st of March, 1842, by Godfrey? It is suggested, that they are bona fide purchasers, without notice of the invalidity of the conveyances to Godfrey. Now, the answer of the bank does, in part, deny that at the time when the transfer was made to the bank by Godfrey, the bank knew, that the deed of conveyance of the same property by Reed to Godfrey was given in contemplation •of bankruptcy, and to give Godfrey a prefer■ence over other creditors. But I do not find, that the bank denies, that at the time, that the transfer was so made to the bank, they did not know, that Reed had actually failed in business, and stopped payment, and broken up his business, and that the property therein stated was his whole stock in trade. Indeed, I should infer, that the bank must well have known all these facts, for the transfer was made to the bank solely, as the deed shows, as security for certain notes of Reed, indorsed by Godfrey; so that the apparent object was to get security for the payment of -the notes of Reed, and not for any debts of •Godfrey, due from him personally. If so, the bank was certainly put upon inquiry, and was bound to inquire into and to ascertain -the true nature of the transaction between Reed and Godfrey.

And this leads me to remark, that the bank does not stand within the predicament of being a bona fide purchaser, for a valuable consideration, without notice, in the sense of the .rule upon this subject. The bank did not pay any consideration therefor, nor did it sur.render any securities, or release any debt due, either from Reed or Godfrey, to it. The transfer from Godfrey was a simple collateral -security, taken as additional security, for the old indebtment and liability of the parties to the notes described in the instrument of transfer. It is true, that, as between God-frey. and Reed, and the bank, the latter was a debtor for value, and the transfer was valid. But the protection is not given by the rules of law, to a party in such a predicament merely. He must not only have had no notice, but he. must have paid a consideration at the time of the transfer, either in money, or other property, or by a surrender of existing debts or securities, held for the debts and liabilities. See Story, Eq. Pl. §§ 604a, 662, 805; Boone v. Chiles, 10 Pet. [35 U. S.] 177, 210-212; Stanhope v. Earl Verney, 2 Eden, 81; Mr. Butler’s note to Co. Litt. 200-296, note 1, § 13; Willoughby v. Willoughby, 1 Term R. 763, 767; Maundrell v. Maundrell, 10 Ves. 246, 261. But here the bank has merely possessed itself of the property transferred, as auxiliary security for the old debts and liabilities. It has paid or given no new consideration upon the faith of it. It is, therefore, in truth no purchaser for value in the sense of the rule. Mr. Chancellor Walworth in Dickerson v. Tillinghast, 4 Paige, 215, seems to have gone somewhat farther, and to have held, that a transfer to a grantee in payment of a pre-existing debt, without giving up any security, or divesting himself of any right, or placing himself in a worse situation than he was in before, of an estate, upon which there was a prior unrecorded mortgage, of which the grantee had no notice, did not make him a purchaser, in the sense of the rule, for a valuable consideration; but that there must be some new consideration, in order to entitle him to a preference over-the prior mortgagee. I do not say, that I am prepared to go quite to that length, seeing, that by securing the estate as payment, the pre-existing debt is surrendered and extinguished thereby. But here, there was no such surrender or extinguishment or payment; and the general principle adopted by the learned chancellor is certainly correct, that there must be some new consideration, moving between the parties, and not merely a new security given for the old debts or liabilities. without any surrender or extinguishment of the old debts and liabilities, or the old securities therefor. See, also, Coddington v. Bay, 20 Johns. 637. So that upon this ground alone the title of the bank would fail. The case of Swift v. Tysen, 16 Pet. [41 U. S.] 1, does not apply. In the first place, there the bill was taken in payment or discharge of a pre-existing debt. In the next place, it was a case arising upon negotiable paper, and who was to be deemed a bonS. fide holder thereof, to whom equities between other parties should not apply. Such a ease is not necessarily governed by the same considerations, as those applicable to purchasers of real or personal property, under the rule adopted by courts of equity for their protection.

But there is another ground, independent of this, and quite decisive against the bank. It is this, that the very deed of transfer, by its terms, purports to “sell, assign, transfer, and set over” to the bank, all the right, title, and interest of Godfrey, in and to the stock in the store, derived from the mortgage of Reed; and it contains no covenants whatsoever, as to the title or otherwise. So. that it is a mere naked conveyance to the bank, of the very right, title, and interest, which God-frey derived from the mortgage of Reed, and nothing more. The bank, therefore, took nothing but the “right, title, and interest,” of Godfrey, subject to all its original infirmities, and can now claim under it nothing, which Godfrey himself could not claim against the assignee. This view of the matter ends the ease, so far as respects the title of the bank under this deed.

The same objections, for the most part, apply to the deeds executed by Godfrey to the Cohannet Bank, and others, on the 26th of May, 1842. Each of them is a conveyance of all the “right, title, and interest” of Godfrey, derived under the mortgage deeds executed to him by Reed, on the preceding 19th day of March. There is this farther most important fact, that Reed had signed a petition on the same day (19th of March), for the benefit of the bankrupt act, that it was filed and acted on in the district court forthwith, and that Reed has under the proceedings been declared a bankrupt. The exact time when he was declared a bankrupt, does not appear; but I presume it was before the execution of those deeds, on the 26th of May. Now the pendency of these proceedings in the district court, at the time, would be constructive notice thereof, to ail the grantees under those deeds. But they admit, that they had in fact actual notice thereof, at the time of the execution of the deeds. They were, therefore, put upon inquiry, and bound to know, that the very deeds under which Godfrey claimed, and the very “right, title, and interest,” which he conveyed to them, were executed on the same day, that he signed his petition for the benefit of the bankrupt act. Under such -circumstances, it is impossible for them justly to insist upon the defence, that the conveyances executed by Reed, on the eve of bankruptcy, conveying the bulk of all his property, real, and personal, to a single creditor, were not acts done in contemplation of bankruptcy, and with a view to give that creditor a preference over all others. It is true, that they surrendered their attachments upon God-frey’s property, and made other arrangements, by which the Cohannet Bank agreed to put the whole rights acquired by it, in the stock of Reed, by the deed of the 21st of March, into a common fund, and share, pro rata, with the other creditors, who were parties to those conveyances. But still, they bargained only for all the “right, title, and interest” of Godfrey, derived under the deed from Reed. Godfrey, by the same deed, assigned to the same grantee all his claims agains't William Reed the bankrupt, and also against John Reed, and “against the estates, or assignees, of the said William, and John.” The surrender of their attachments might be a valuable consideration for the deeds of Godfrey to them, under certain circumstances, but not under circumstances like the present, where they had notice of the time and circumstances of the bankruptcy of Reed. And besides; they purchased, if, indeed, they could b‘e called purchasers at all, only the “right, title, and interest” of Godfrey, in the premises, with all the infirmities, and subject to all the equities, belonging thereto. So that the case, as to these grantees, also falls back upon the validity ‘of the conveyances to Godfrey by Reed, arid must be treated as if Godfrey now claimed the ■ property under those conveyances.

I am,' therefore, of opinion, that it ought to be declared, that the said deeds made by Reed to Godfrey, and by Godfrey to the other defendants, ought to be declared void, as against the .assignee of Reed; that the said Cohannet Bank, and the other defendants, be decreed to execute a release of all their right, title, and interest in, and to the real estate of the said Reed described therein, in such form as shall be settled by the master; and that the said defendants be required to account for, and pay over to the said assignee, the rents, and profits thereof, received by them; and also, that the said Cohannet Bank, and the other defendant’s, be required to account for, and pay over to the said assignee, all the proceeds of the said stock in trade, conveyed by the said Reed, to the said Godfrey, by the deed of the 19th of March, 1842, so far as the same shall have been sold, or otherwise disposed of, by the said bank and the other defendants respectively. And that it be referred, to the same master, to take an account thereof, and to report to the court upon all the matters aforesaid. And all further orders are reserved until the coming in of the master’s report, or the further order of the court in the premises.