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THE LAW OF DEBTOR AND

CREDITOR

(PART 2)

FRAUD ON CREDITORS

GENERAL NATURE

1. In the commercial world, "a person is trusted or obtains credit in proportion to the property he appears to own; the creditor, when he trusts him, looks to his possession as evidence of his ability to pay, and as a fund from which, if other resources of the debtor fail, he is to receive his demand. After the credit is obtained, for the debtor to divest himself of his property by giving it away, thereby rendering himself unable to pay his debt, or perform his contract, is unjust; it is a fraud upon his creditor. Whether by making the gift the debtor intended to prevent the payment of the debt or not can make no difference as to the rights of the creditor; his injury is the same. It is the duty of the debtor to retain at least a sufficiency of his property to pay off his debts, and perform all his contracts. If he does not, justice requires that the property should be followed into the hands of the donee by the creditor. He who combines with a debtor to defraud his creditor, by buying his property, even at a full price, and receiving a conveyance of it, does a wrong to the creditor for which he should answer by having the property subjected to the creditor's demands. He who gives or sells his property and remains in the possession and enjoyment of it, as before the conveyance, has the credit of being the owner of such property,

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and it should be subject to his debts contracted while he so appears to be the owner.' The maxim, which is grounded in morals as well as law, is that a man must be just before he is generous. He must pay his debts before he makes gifts.'

To enforce these principles and thereby prevent debtors from dealing with their property in any way to the prejudice of their creditors was the object of the English statutes, known as the statutes of Elizabeth, which were regarded as the foundation of all the modern law of fraudulent conveyances. They have been adopted or substantially reenacted almost universally in the United States.' Though merely declaratory of the common law, they enacted in effect that all conveyances or other disposition of property, real or personal, made with intent or purpose to delay, hinder, or defraud creditors and others of their just and lawful actions, suits, debts, accounts, damages, penalties, forfeitures, etc., shall be deemed and taken (only as against that person or persons, his or their heirs, successors, etc., whose actions, suits, etc., by such guileful, covinous, or fraudulent devices and practices, shall or might be in any way disturbed, hindered, delayed or defrauded) to be clearly and utterly void, frustrate, and of no effect; any pretence, color, feigned consideration, or any other matter or thing to the contrary notwithstanding.

DEBTOR'S RELATION TO HIS PROPERTY

2. A debtor sustains two distinct relations to his property-that of owner and that of quasi trustee for his creditors. As owner, he may contract debts to be satisfied out of his property, confess judgments, create liens upon it, sell or give it to others at pleasure, and, so far as he is personally concerned, will be bound by his own acts. But the law lays upon him an obligation to pay his debts, and holds him in behalf of his creditors to the exercise of good faith in all

15 Ohio 122, 123 (1831).

2 128 U. S. 195, 204 (1888).

313 How. (U. S.) 92, 98 (1851); 39 Pa. 507 (1861); 9 Fed. Rep. 86 (1881); Stats. 13 Eliz., c. 5, 29 Eliz., C. 5.

transactions relating to the fund upon which they must depend for payment. He can, therefore, neither create a debt nor do any of the things above mentioned in bad faith to their prejudice. But it is only the creditors of an insolvent debtor who have an equitable interest in his property, or the means he has of satisfying their demands, which the law will recognize and enforce. This was true at common law, where every gift, or gratuitous transfer, of such property, although valid as against the debtor himself, was void as to his creditors.

Where, however, a valuable consideration is paid for the transfer, the interest of the creditor is superseded. The purchaser in such a case having parted with value upon the faith of the vendor's possession and ownership of the property acquires not only the legal title, but an equity which is paramount to that of the creditor of such vendor. It is this equity alone, arising out of the consideration paid, which protects the right of the purchaser; because the mere legal title is transferred by a gift as completely as by a sale.

3. In crediting debts or establishing the relation of debtor and creditor, the debtor is accountable to no one unless he act in bad faith. A judgment, therefore, obtained against the latter without collusion, is conclusive evidence of the relation of debtor and creditor against others: (1) because it is conclusive between the parties to the record, who, in the given case, have the exclusive right to establish it; and (2) because the claims of other creditors upon the debtor's property are through him, and subject to all previous liens, preferences, or conveyances made by him in good faith. Any deed, judgment, or assurance of the debtor, so far at least as they conclude him, must estop his creditors and all others. Consequently, neither a creditor nor stranger can interfere in the bona-fide litigation of the debtor, or retry his cause for him, or question the effect of the judgment as a legal claim upon his estate. A creditor's right to impeach the act of his debtor does not arise until

42 N. Y. 269, 273 (1849).

the latter has violated the tacit condition annexed to the debt, that he has done and will do nothing to defraud his creditors."

A fraudulent transfer of property by a debtor is binding as between the parties and cannot be impeached or set aside by the assignee of the debtor under an assignment for the benefit of creditors. The assignee is the debtor's instrument for distribution; he stands in relation to the property as the debtor himself stood, except that it cannot be seized in his hands on a creditor's execution. A general assignment for the benefit of creditors does not pass to the assignee any interest in property before fraudulently transferred by the assignor, nor any right to avoid such fraudulent transfer. Such rights belong to the creditors alone.'

PREFERENCES

4. A creditor violates no rule of law when he takes payment or security for his demand, though others are thereby deprived of all means of obtaining satisfaction of their equally meritorious claims, and, hence, in the absence of a bankrupt or insolvent law, a debtor may lawfully pay one creditor to the exclusion of the other." He may give one or more of them judgment notes, by which such creditors are enabled to satisfy their claims out of the debtor's property to the exclusion of the other creditors and by the appropriation of all the debtor's assets. And the fact that the preference is accomplished quickly or secretly, in order to prevent interference, is immaterial."

This may be done though the debtor and creditor are close relatives. Thus, where a husband is indebted to his wife and to others, he may by confessing judgment to her prefer her to his other creditors the same as he might prefer one of the latter to the rest of them, and the mere fact that

52 N. Y. 274 (1849).

67 W. & S. (Pa.) 373 (1844); see subtitles
Assignments for Benefit of Creditors,
The Rights, Powers, and Duties of
Assignee, intra.

7 123 III. 142, 149 (1887), and cases cited.

8 See subtitles Assignment for Benefit of Creditors, Preferences, Bankruptcy. infra.; 69 Cal. 247 (1886). 9133 Ill. 45 (1890). 1071 Fed. Rep. 151 (1895).

the judgment confessed includes interest on the loan, when in fact there was no agreement that the sum loaned should bear interest, will not make it fraudulent as against other creditors. But, as between the wife and other creditors, at the time of confessing such judgment, the burden of proving good consideration for it rests with her."

No debtor can, in an assignment, make a reservation, at the expense of his creditors, of any part of his income or property for his own benefit, nor can he stipulate for any advantage either to himself or family. This rule is applicable when the transaction takes the form of an absolute sale, and there is a secret stipulation by which some pecuniary benefit or advantage is reserved for the vendor. And

a bill of sale, absolute upon its face, by an insolvent debtor, and delivery of possession of the goods in pursuance of it, is fraudulent and void as against creditors, if accompanied by a secret trust from which the debtor might ultimately derive advantage or pecuniary benefit. Thus, where a tanner, who was insolvent, transferred all his property to a party in payment of a debt, and received a note for a balance, there being at the time of the transfer an understanding that the tanner should get back part of the property for working out the tannery stock, and that the money was to be made out of the stock before the note should be paid, it was held that the transfer was void." A conveyance to secure a just debt will be fraudulent and void if it contain provisions to delay, hinder, or defraud other creditors."

FRAUDULENT ALIENATION

NECESSARY ELEMENTS

5. To constitute a fraudulent disposition of property, three things must occur: (1) The thing disposed of must be of value; (2) it must be transferred or disposed of by the debtor; and (3) it must be done with intent to defraud."

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11 183 Pa. 219, 221 (1897).

12 69 Pa. 71, 77 (1871).

134 Rand. (Va.) 282 (1826).
14 88 N. Y. 669, 670 (1882).

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