An assignment made in Indian Territory on the 29th day of July,
1889, by a debtor in failing circumstances, of a portion of his
property to a trustee for the benefit of several persons who had
become sureties on notes of the assignor not then due, being made
in good faith and for a valuable consideration, was valid as
against attaching creditors of the assignor, the common law being
at that time in force in the territory, and not the statutes of
Arkansas which were subsequently extended and put in force in the
Territory by the act of May 2, 1890, c. 182, 26 Stat. 81.
At common law a debtor in failing circumstances has a right to
prefer creditors, though the fund for the payment of other
creditors be lessened or absorbed thereby.
This action was originally begun September 28, 1889, by Kingman
& Co., a corporation organized under the laws of Illinois,
against one Duncan (whose Christian name is not given, and whose
surname is sometimes spelled "Duncum" and sometimes "Duncan"), a
white man, a citizen of the United States and a resident of the
Indian Territory, to recover the sum of $1,994.42, with interest
and exchange, being the amount of two promissory notes made by
Duncan, payable to the order of the plaintiff but not then due. The
complaint contained an allegation that Duncan, the defendant, had
disposed of his property and had suffered it to be sold with intent
to defraud his creditors and to hinder and delay them in collection
of their debts, and also that he was about to remove his property,
or a material part thereof, out of the Indian Territory with
fraudulent intent, etc., and prayed for an attachment and for
judgment. On the same day, a formal affidavit for an attachment was
filed and a writ issued.
Pursuant to the attachment, the marshal seized a stock of goods
as the property of Duncan, and plaintiffs in error filed an
interplea setting up that the interpleaders were sureties for the
defendant, Duncan, upon certain promissory notes, two
Page 152 U. S. 528
of which were then overdue, and that on July 27, 1889, Duncan,
for the purpose of saving his sureties harmless, executed and
delivered to one Salters (whose Christian name is not given), as
trustee, a deed of trust of his stock of goods; that immediately
after the execution of such deed, Salters at the instance of the
beneficiaries, took absolute possession of the property named in
the deed of trust and began the discharge of his duties as trustee,
advertised the property for sale, and had procured a buyer for the
same at its full cash value at the time the levy was made which
stopped the sale; that at the time of such levy, the trustee was in
actual possession of the property; that the plaintiffs and the
officers making the levy were notified of the fact, and that the
notes to secure which the deed of trust was given were still
unpaid, and valid claims against Duncan and his sureties; that the
deed of trust is a valid lien upon the property; that the property
is not worth the amount of the lien, nor more than the sum of
$2,500; that a sale by the marshal would necessarily be attended
with great loss, and that the trustee could sell the property at a
much better advantage than the marshal. Wherefore the trustee and
sureties prayed for an order restoring the property to the trustee,
and for the execution of the trust.
The so-called "deed of trust" was as follows:
"State of Texas"
"County of Cooke"
"Know all men by these presents, that I, W. H. Duncan, a
resident of the Indian Territory, for and in consideration of the
sum of ten dollars paid by J. J. Salters, the receipt of which is
hereby acknowledged, have sold, and by these presents do sell,
transfer, convey, and confirm, unto the said J. J. Salters, and to
his successors in this trust, the following described property,
to-wit: the storehouse now owned and occupied by the said W. H.
Duncan at Beef Creek, in the Indian Territory, the fixtures
therein, and all goods, wares, and merchandise contained in said
house, and the books, notes, and accounts of said W. H. Duncan in
said business, it being
Page 152 U. S. 529
intended hereby to include all stock owned by said W. H. Duncan
in his business as a general merchant at Beef Creek, I.T., also all
cattle and horses owned by him at said Beef Creek, together with,
all and singular, the right and appurtenances to the same in any
manner belonging or appertaining, to have and to hold all and
singular the property above described unto the said J. J. Salters
or substitute forever. This conveyance is, however, intended as a
trust for the better securing of S. M. Huntley, Samuel Paul, S. M.
White, and James Rennie against the payment of three promissory
notes on which I am principal, and which, as hereafter shown, they
signed as sureties, which said notes are as follows."
"[Here follow copies of three notes, one by Duncan, White, and
Rennie, for $1,550, one by Duncan, Paul, and Rennie, for $2,500,
and one by Duncan and Huntley, for $5,165; the first two were due
August 1, 1889, the last, June 1, 1890.]"
"Upon payment of which said promissory notes according to their
face and tenor being well and truly made, then in such case this
conveyance is to become null and void and shall be released at cost
of said W. H. Duncan. But in case of failure or default of payment
of said notes when they shall respectively become due, or of either
of them, then the other of said notes shall be deemed due and
payable, and in such event the said J. J. Salters is by these
presents fully authorized and empowered, and it is made his special
duty, upon request of either or all the aforesaid beneficiaries
herein at any time made after default as aforesaid, to sell the
above-described property to the highest bidder for cash in hand,
selling at public or private sale, in bulk or retail, with or
without advertisement, as may seem to said trustee or his
substitute best, and after said sale shall make the necessary
conveyance of the property so sold, and the proceeds of said sale
shall pay to the aforesaid beneficiaries herein in proportion to
the respective amounts for which each may be surety at the time of
said sale, as evidenced by the above notes, and the payments that
may be made thereon, in which notes all signing are sureties,
except W. H. Duncan, and shall pay the expenses of this trust,
including a commission of 5% to the trustee acting
Page 152 U. S. 530
hereunder, holding the remainder subject to the order of the
said W. H. Duncan. It is hereby especially provided that should the
trustee named herein, from any cause whatever, fail or refuse to
act or become disqualified from acting as such trustee, then the
beneficiaries aforesaid, S. M. Huntley, S. M. White, Samuel Paul,
and James Rennie, shall have full power to appoint a substitute in
writing who shall have the same power as trustee hereinbefore
named, and I, by these presents, ratify and confirm any and all
acts which said trustee or substitute may do hereunder."
"Witness my hand this 27th of July, 1889."
"W. H. Duncan"
Kingman & Co. subsequently filed an answer to this interplea
averring that the notes secured by the deed of trust were void for
usury and for want of consideration; denied that the interpleaders
were accommodation endorsers or sureties, or that the trust deed
was valid or gave to the interpleaders any right of property, and
alleged that the instrument was made by Duncan for the purpose of
placing his property beyond the reach of his creditors, and for the
purpose of hindering and delaying them in the collection of their
debts; denied that Salters was acting for the beneficiaries named,
and averred that he was a clerk of Duncan's, and was assisting him
in fraudulently disposing of his property, and that he took
possession for the purpose of protecting the property from Duncan's
creditors.
The case was tried upon the issues joined between Kingman &
Co. and the interpleaders. Upon the trial, the court instructed the
jury that the deed of trust under which the interpleaders claimed
the property was fraudulent on its face, that the same was
sufficient for plaintiff's attachment, and that the jury should
return a verdict in its favor, which was accordingly done. The
defendants in the proceeding sued out this writ of error.
Page 152 U. S. 531
MR. JUSTICE BROWN, after stating the facts in the foregoing
language, delivered the opinion of the Court.
This case turns upon the validity of the so-called "deed of
trust" executed by Duncan to Salters to indemnify the plaintiffs in
error for their signatures upon Duncan's notes.
The property conveyed consisted of a storehouse and its
fixtures, together with all the goods, wares, and merchandise
contained therein and the books, notes, and accounts of Duncan in
his business as a general merchant, as well as all cattle and
horses owned by him at Beef Creek. The testimony indicated that the
deed did not include all the property of Duncan, but that he also
had a farm near Beef Creek, although the proof was not clear as to
its size or value.
No brief was filed by the defendant in error, but in the court
below the following clauses appear to have been relied upon as
invalidating the deed:
1. The deed was to become null and void upon the payment of the
notes secured by it, and there is an inference, though no express
provision, that Duncan was to remain in possession until
default.
2. Upon default in the payment of either of the notes, it was
made the duty of the trustee, upon the request of the beneficiaries
or either of them, to sell the property to the highest bidder for
cash either at public or private sale, with or without
advertisement.
3. Upon such sale's being made, the trustee was to pay to the
beneficiaries in proportion to the amounts for which each might be
surety at the time of the sale,
holding the remainder subject
to Duncan's orders.
The court instructed the jury that by the reservation of the
surplus, the deed was fraudulent upon its face and was sufficient
ground for the plaintiffs' attachment, and the jury were
accordingly instructed to return a verdict for the plaintiffs.
The case must be determined by the application of the general
principles of the common law to the questions involved. It is true
that by Act of Congress of May 2, 1890, c. 182, 26 Stat. 81,
certain general laws of the State of Arkansas, among
Page 152 U. S. 532
which was a chapter relating to assignments for the benefit of
creditors, were extended and put in force in the Indian Territory
until Congress should further provide. But the instrument in
question in this case was made July 27, 1889, before this statute
was enacted, so that neither the statutes of Arkansas nor the
decisions of the Supreme Court of that state construing those
statutes constituted at the time a rule of decision of the United
States Court in the Indian Territory.
There is upon this record but little evidence of actual fraud in
the execution of the instrument in question. The notes mentioned,
the payment of which it was designed to secure, were given for
money borrowed of Stevens & Henning, bankers of Gainesville,
for the purchase of grain to feed certain cattle in which Stevens
& Henning had an interest. The beneficiaries were joint makers
with Duncan of the notes so given to Stevens & Henning. It is
entirely well settled, both in England and America, that at common
law, a debtor in failing circumstances has a right to prefer
certain creditors to whom he is under special obligations, though
by such preference the fund for the payment of the other creditors
be lessened or even absorbed. If, as must be conceded, he has the
right to pay one creditor in preference to another, even where he
is aware of his inability to pay all in full -- in other words,
where he is insolvent -- there is not just reason why, in making
provision for all by way of assignment, he may not make special
provision for some.
Marbury v.
Brooks, 7 Wheat. 556,
20 U. S. 577;
Brashear v.
West, 7 Pet. 608;
Clarke v.
White, 12 Pet. 178;
Tompkins
v. Wheeler, 16 Pet. 106;
Grover v.
Wakeman, 11 Wend. 187, 194;
Tillou v. Britton, 9
N.J.Law 120, 136;
Blakey's Appeal, 7 Penn.St. 449, 451;
Burrill on Assignment § 160; Jones on Chat.Mtges. §
356.
The tendency of courts in modern times has been not to hold
instruments of this character to be fraudulent and void upon their
face unless they contain provisions plainly inconsistent with an
honest purpose or the instrument indicates with reasonable
certainty that it was executed not to secure
bona fide
creditors, but to enable the debtor to continue to carry on his
business under cover of another's name. So early
Page 152 U. S. 533
as 1805, it was held by this Court in
United
States v. Hooe, 3 Cranch 73, that the mortgage of a
part of his property, made by a collector of revenue to the surety
upon his official bond, to indemnify him for his responsibility and
to secure him for endorsements at the bank, was valid against the
United States though it turned out that the mortgagor was unable to
pay all his debts at the time the mortgage was given, and the
mortgagee also knew at this time that he was largely indebted to
the United States. It was contended that the mortgage was
fraudulent upon its face, but the case was distinguished from
Twyne's Case, 3 Coke 81, in the fact that in
Twyne's
Case, the deed was of
all the property, was
secret, was of
chattels, and purported to be
absolute, yet the vendor remained in possession, and
exercised ownership over them, while in the case then under
consideration, the deed was of a part of the property, was of
record, was of lands, and purported to be a conveyance which left
the property conveyed in the possession of the grantor. The case
was also distinguished from
Hamilton v.
Russell, 1 Cranch 310, in which this Court declared
an absolute bill of sale of a personal chattel, of which the vendor
retained possession, to be a fraud. In
Lukins v.
Aird, 6 Wall. 78, an absolute deed of land, with a
secret reservation to the grantor to possess and occupy it for a
limited time, was held to lack the element of good faith, though
made upon a valuable consideration, for, while it purported to be
an absolute conveyance on its face, there was a secret agreement
between the parties, inconsistent with its terms, securing a
benefit to the grantor at the expense of those he owed. The deed
was held to be void by reason of the trust thus secretly created.
So, in
Robinson v.
Elliott, 22 Wall. 513, a chattel mortgage which
provided that, until default was made in the payment of the notes,
the mortgagor might remain in possession of the goods, sell the
same as theretofore, and supply their places with other goods,
which should become subjected to the lien of the mortgage, was held
to be a fraud upon its face although the mortgage was recorded
according to law. The decision was put upon the ground that both
the possession and the right of disposition were to remain with the
mortgagors:
"They are to
Page 152 U. S. 534
deal with the property as their own, sell it at retail, and use
the money thus obtained to replenish their stock. There is no
covenant to account with the mortgagees, nor any recognition that
the property is sold for their benefit. Instead of the mortgage's
being directed solely to the
bona fide security of the
debts then existing, and their payment at maturity, it is based
upon the idea that they may be indefinitely prolonged. . . . It is
very clear that the instrument was executed upon the theory that
the business could be carried on as formerly by the continued
endorsement of Robinson, and that Mrs. Sloan was indifferent about
prompt payment."
There was no ruling in this case, however, that a mere retention
of possession would have avoided the mortgage. Upon the other hand,
it was held in
Stewart v. Dunham, 115 U. S.
61, that in the absence of fraud, a transfer by a debtor
in Mississippi of all his property to one of his creditors in
satisfaction of his debt was valid. The case was disposed of as one
of general law. And in
Estes v. Gunter, 122 U.
S. 450, a deed by an insolvent debtor in Mississippi to
secure sureties upon his note, though made in advance of and in
contemplation of a general assignment for the benefit of creditors,
was held to be valid under the laws of that state though containing
a provision that the creditor should remain in possession until the
maturity of the note. In this case also, the common law did not
seem to have been affected by any local statute. So too, in
Smith v. Craft, 123 U. S. 436, a
bill of sale of a stock of goods by way of preference of a
bona
fide creditor was held not to be fraudulent as matter of law
by reason of a stipulation that the purchaser should employ the
debtor at a reasonable salary to wind up the business.
The latest expression of this Court upon the subject is
contained in the case of
Etheridge v. Sperry, 139 U.
S. 266, in which certain creditors of one Hamilton were
secured by chattel mortgages upon a stock of goods levied upon by
an execution creditor. There was no reservation of interest to the
mortgagor, but an express provision that if he defaulted in payment
or attempted to remove from the county any part of the mortgaged
property, the mortgagee might take immediate
Page 152 U. S. 535
possession, and before the maturity of the secured notes. The
question presented was whether as matter of law a mortgage given by
a merchant on his stock of goods to secure debts not yet due, which
had no imperfections upon its face, contained no reservations for
the benefit of the mortgagor, was apparently only for the security
of the mortgagee, and gave him full power to take possession upon
default of payment, was invalidated by a parol understanding at the
time of its execution that the mortgagor might use the proceeds of
his sales to support himself and to keep up the stock by purchase,
applying only the surplus to the payment of the mortgage debt, or
whether such understanding was simply to be taken into
consideration, with the other circumstances, as bearing upon the
question of good faith. The cases of
Bank of
Leavenworth v. Hunt, 11 Wall. 391;
Robinson
v. Elliott, 22 Wall. 513, and
Means v.
Dowd, 128 U. S. 273,
were all reviewed and distinguished, and it was held that the
chattel mortgage was not necessarily invalidated by the parol
agreement that the mortgagor was to retain possession with the
right to sell goods at retail, the Court placing its opinion
largely upon the Iowa cases, which were regarded as resting upon
sound principles.
See also People's Savings Bank v. Bates,
120 U. S. 556.
The principal reliance of the court below in this case was
placed upon
Means v. Dowd, 128 U.
S. 273, which was a conveyance of all the goods and
personal property of the assignor to provide for the payment of
certain debts and to indemnify the endorsers upon certain notes.
The instrument was variously called a "deed of trust," an
"assignment," and a "mortgage." It contained an express provision
that the grantors were to remain in possession of the property and
continue to sell the goods for cash only, and to collect, under the
direction and control of the grantees, the proceeds to be deposited
in bank weekly and applied, under the direction of the grantees, to
replenishing the stock by such small bills as might be agreed upon,
and to the payment of the debts of the firm in a specified order,
and in case of failure to make payments, or if for any other cause
the grantees might so elect, it should be lawful for them to take
possession, and dispose of the same
Page 152 U. S. 536
at public or private sale. This instrument was held to secure to
the assignor an interest in, or an unlimited control over, the
property conveyed, which had the effect of hindering or delaying
creditors, and to be void, as being a fraud. "In the case before
us," said Mr. Justice Miller,
"the whole face of the instrument has the obvious purpose of
enabling the insolvent debtors who made it to continue in their
business unmolested by judicial process and to withdraw everything
they had from the effect of a judgment against them, for it is
shown that except the goods in this place of business transferred
by the conveyance, they had nothing of value but one or two pieces
of real estate encumbered by mortgage for all they were worth. It
specifically provides that the grantor shall remain in possession
of the said property and choses in action, with the right to
continue to sell the goods and collect the debts, under the control
and direction of the grantees."
The instrument was treated as an artful scheme to enable
insolvent debtors to continue in business, in connection with the
preferred creditors at the same time withdrawing their property
from the claims of other creditors which might be asserted
according to the usual forms of law, and that by the mere expedient
of paying interest upon the indebtedness, they had it in their
power to continue in business with a large stock of goods on their
shelves, and defy the unprotected creditors. The authority to take
possession was accompanied by no direction for immediate sale or
winding up the business, but, on the contrary, their discretion as
to taking possession and selling seemed to be absolute, and
intended to be controlled for their own benefit and that of the
debtors, without regard to the unsecured creditors. While the case
bears a strong analogy to the one under consideration, we think it
is distinguishable in the fact that there was an express provision
that the mortgagors should remain in possession and continue
business at the will of the mortgagees, who were given such powers
as would enable the mortgagors to continue in business for their
benefit, and at the same time to bid defiance to the unsecured
creditors. In this case, there is not only no express reservation
of possession to the mortgagor, but even if
Page 152 U. S. 537
there had been, in view of the fact that such possession was
immediately surrendered to the mortgagee, it is difficult to see
how unsecured creditors could have been deceived or prejudiced by
such reservation. In
Means v. Dowd, the mortgage was not
recorded as required by law for nearly three months after its
execution, and the mortgagors were permitted for several months to
control the goods and to deal with them as their own. Even when the
trustees did in fact take possession, they made no change in the
sign, nor in the manner of conducting the business, but kept the
same books, by the same bookkeeper, and also employed the
mortgagors to conduct the business upon a salary for them.
There can be no doubt upon this record that the deed of trust in
question was made upon a valuable consideration, and for the
protection of
bona fide sureties. The clause most relied
upon by the court below is the one which requires that after
payment to the beneficiaries and the expenses of the trust, the
remainder should be held subject to the order of Duncan. But if it
were not to be paid to Duncan, to whom should it be paid? Clearly
the trustee was not entitled to retain any more for himself than
was necessary for the payment of the trust and a reasonable
compensation for his own services. If he had retained more than
this, he might have been compelled by Duncan to account to him for
such surplus. Clearly, he had no right to pay it to certain of the
creditors in preference to others. If he had been a general
assignee for the benefit of all the creditors, he would have been
obliged to pay them
pro rata, but he was not. He was a
trustee of a part -- not necessarily of the whole -- of Duncan's
property, for the benefit of certain creditors, and if any surplus
were left after the payment of these creditors, it might properly
be paid to the mortgagor for the benefit of others.
Whatever may be the rule with regard to general assignments for
the benefit of creditors, there can be no doubt that in cases of
chattel mortgages -- and the instrument in question, by whatever
name it may be called, is in reality a chattel mortgage -- the
reservation of a surplus to the mortgagor is only an expression of
what the law would imply without a
Page 152 U. S. 538
reservation, and is no evidence of a fraudulent intent. This was
the ruling of the Court of Appeals of New York in
Leitch v.
Hollister, 4 N.Y. 211, where the assignment was to the
creditors themselves for the purpose of securing their demands. "A
trust," said the court,
"as to the surplus results from the nature of the security, and
is not the object, or one of the objects, of the assignment.
Whether expressed in the instrument or left to implication is
immaterial. The assignee does not acquire the entire legal or
equitable interest in the property conveyed, subject to the trust,
but a specific lien upon it. The residuary interest of the assignor
may, according to its nature, or that of the property, be reached
by execution or by bill in equity."
Cases in which reservations for the benefit of the assignor have
been held to invalidate the assignment have usually been those
where the reservation was either secret or was upon its face
detrimental to the interest of the creditors, and a practical fraud
upon them. But if the reservation be only of any surplus which may
chance to remain after the debts are paid, it is difficult to see
why it should invalidate the instrument, as the creditors obtain
all they are entitled to and the surplus is that which, as matter
of law, properly belongs to the mortgagor. It so rarely happens
that a surplus is realized after the payment of all the debts that
courts should not be too technical in holding that the reservation
of such surplus invalidates the instrument, unless it appears to
have been made with fraudulent intent. If a surplus had been
realized in this case, it is difficult to see what could have been
done with it except to return it to the mortgagor, in view of the
fact that the trustee was not a general assignee for the benefit of
all the creditors.
Dunham v. Whitehead, 21 N.Y. 131;
Curtis v. Leavitt, 15 N.Y. 9, 204;
Beck v.
Burdett, 1 Paige, 305;
Camp v. Thompson, 25 Minn.
175;
Calloway v. People's Bank, 54 Ga. 441;
Hoffman v.
Macall, 5 Ohio St. 124.
The judgment of the court below must therefore be
Reversed, and the case remanded, with directions to set
aside the verdict and grant a new trial.
MR. CHIEF JUSTICE FULLER concurred in the result.
