The Voluntary Assignment Act of the Illinois of 1877, which went
into effect July 1, 1877, was intended to secure equality of right
among all the creditors of the debtor making the assignment, and
was a remedial act, to be liberally construed.
In Illinois, the surrender by an insolvent debtor of the
dominion over his entire estate, with an intent to evade the
operation of the Voluntary Assignment Act of that state, and the
transfer of the whole or substantially the whole of his property to
a part of his creditors in order to give them a preference over
other creditors, whether made by one instrument or more and
whatever their form may be, operates as an assignment under that
act, the benefit of which may be claimed by any unpreferred
creditor who will take appropriate steps in a court of equity to
enforce the equality contemplated by it.
Page 129 U. S. 330
A creditor in Illinois who attempts to secure to himself an
illegal preference of his debt by means of a conveyance to him of
the property of his debtor when insolvent, to the exclusion of
other creditors, is not thereby debarred, under the operation of
the Voluntary Assignment Act, from participating in a distribution
under that act of all the debtor's property, including that thus
illegally conveyed to him.
The case was stated by the Court in its opinion as follows:
This is an appeal from a decree declaring two conveyances of
real property in Illinois, a bill of sale of numerous pictures, a
judgment by confession in one of the courts of that state pursuant
to a warrant of attorney given for that purpose, and certain
transfers of property accompanying that warrant to be void as
against the appellee, Cotzhausen, a judgment creditor of Alexander
White, Jr. It is assigned for error that the decree is not
supported by the evidence. Besides controverting this position, the
appellee contends that the conveyances, judgment by confession, and
transfers were illegal and void under the provisions of the Act of
the General Assembly of Illinois in force July 1, 1877, concerning
voluntary assignments for the benefit of creditors. 1 Starr &
Curtis Annotated Stats. 1303.
The record contains a large amount of testimony, oral and
written, but the principal facts are as follows:
Alexander White, Sr., died intestate in the year 1872, his wife,
Ann White, four daughters, Margaret, Elsie, Mary S., and Annie, and
two sons, Alexander and James B., surviving him. Each of the
children except James was of full age when the father died. At the
request of the mother, and with the assent of his sisters,
Alexander White, Jr., qualified as administrator, and in that
capacity received personal assets of considerable value. With their
approval if not by their express direction, he undertook the
management of the real estate of which his father died possessed,
making improvements, collecting rents, paying taxes, and causing
repairs to be made. He received realty in exchange for stock in a
manufacturing company and in part exchange for the homestead,
taking the title in his own name.
Page 129 U. S. 331
After the death of the father, the widow and children remained
together as one household, the expenses of the family and of each
member of it being met with money furnished by Alexander White,
Jr., out of funds he received from time to time and deposited in
bank to his credit as administrator. But no regular account was
kept showing the amount paid to or for individual members of the
family.
In 1878, it was determined by the widow and children to have an
assignment of dower and a partition of the real property, and
proceedings to that end were instituted in the circuit court of
Cook County, Illinois. Before the close of that year or in the
spring or summer of 1879, having failed to obtain from the
administrator a satisfactory account of the condition of the
estate, they consulted an attorney who, upon investigation,
ascertained (using here the words of the appellants' counsel) that
Alexander White, Jr., "had lost the entire personal estate, and had
nothing except his interest as an heir in certain of the real
estate with which to make good his losses." It appeared, as is
further stated, that he had mortgaged some of the real property the
title to which had been taken in his name, had anticipated rents on
other property, had exchanged lands for stock in a heating and
ventilating company, had allowed taxes to accumulate, and had
besides induced some members of the family to guaranty his notes to
a large amount. Upon these disclosures being made, the property was
put under the immediate charge of the younger son, and the attorney
with whom the mother and sisters had advised was directed to
collect the amount due from Alexander White, Jr. Thereupon a
friendly accounting was had which resulted in a report by him to
the probate court, on the 18th of July, 1879, of his acts and
doings as administrator during the whole period from the date of
his appointment, April 9, 1872, to July 21, 1879. The report admits
a balance due from him as administrator of $89,646.05, and charges
him, "by virtue of the statute" (Rev.Stat. Ill. 1874, c. 3, ยง 113),
with $40,123.80, being interest on that sum from January 21, 1875,
to July 21, 1879 at the rate of ten percent per annum -- in all,
the sum of $129,769.85. He does not seem to have asserted any
claim
Page 129 U. S. 332
whatever for his services as administrator or for managing the
real property.
That report was approved by the probate court, which made an
order July 22, 1879, directing the said sum of $129,769.85 to be
distributed and paid by the administrator as follows: to the widow
$43,256.61 and to each of the other children $14,418.87.
It should be stated in this connection that on the 16th of July,
1879, two days before the report to the probate court, the
proceedings in the partition suit were brought to a conclusion by a
decree assigning dower to the widow and setting off specific
parcels of land to Margaret and Alexander, respectively, and other
parcels to the remaining heirs jointly. On the same day, Alexander
White, Jr., executed two conveyances, one to his sisters (except
Margaret) and his brother James jointly for part of the lands
assigned to him by the decree of partition, and the other to his
sister Margaret for the remaining part, the former deed reciting a
consideration of $56,859.20, which is about the aggregate of the
several amounts subsequently directed to be paid by the
administrator to his brother and sisters (except Margaret), while
the latter deed recited a consideration of $14,214.80, which is
about the sum directed to be paid to his sister Margaret. Two days
later, July 18, 1879, Alexander White, Jr., executed to his mother,
brother, and sisters (except Margaret) a bill of sale of his
interest in certain pictures which had come to his hands as
administrator, and three days thereafter, July 21, 1879, he
executed to his mother a note, accompanied by a warrant of attorney
to confess judgment, and by a conveyance and transfer of certain
real and personal property as collateral security for the note.
Subsequently, September 4, 1879, pursuant to that warrant of
attorney, judgment was entered against Alexander White, Jr., for
$43,807.50, in the Circuit Court of Cook County. It is not claimed
that any money was paid to him in these transactions, and it is
admitted that the sole consideration for his transfers of property
to the members of his family was his alleged indebtedness to them
respectively.
By the final decree in these consolidated causes, it was
adjudged
Page 129 U. S. 333
that the two conveyances of July 16, 1879, the bill of sale of
July 18, 1879, and the judgment by confession of September 4, 1879,
and the transfers accompanying the warrant of attorney of July 21,
1879, were made without adequate consideration and with intent to
hinder, delay, and defraud the appellee Cotzhausen, who was found
by the decree to be a creditor of Alexander White, Jr., in the sum
of $27,842.22, the aggregate principal and interest of four several
judgments obtained by him against White in 1881 and 1882. The debts
for which these judgments were rendered originated in the early
part of 1878 in a purchase from Cotzhausen of nearly all the stock
of the American Oleograph Company, whose principal place of
business was Milwaukee, Wisconsin. In this purchase Alexander
White, Jr., was interested. It is to be inferred from the evidence
that the principal object he had in making it was to transfer the
office of the company to one of the buildings owned by the family
in Chicago, and to start or establish his younger brother in
business. His mother and sisters were evidently aware of his
purchase and approved the object for which it was made.
It may be here stated that Margaret White died unmarried and
intestate before the decree in this cause was entered, but the fact
of her death was not previously entered of record. The parties to
the present appeal, however, have, by written stipulation filed in
this cause, waived all objections they might otherwise make by
reason of that fact. It is further stipulated that the appellants
are the only heirs at law of Margaret White. The appellee waives
all objections to the present appeal on the ground that Alexander
White, Jr., did not join in it.
Page 129 U. S. 336
MR. JUSTICE HARLAN, after stating the facts in the foregoing
language, delivered the opinion of the Court.
Too much stress is laid by the appellee upon the fact that
Alexander White, Jr., after qualifying as administrator, was
authorized by his mother and sisters to control, in his discretion,
both the real and personal estate of which his father died
possessed. The granting of such authority cannot be held to have
created any lien in favor of his creditors upon their respective
interests. Nor can it be said that they surrendered their right to
demand from him an accounting in respect to his management of the
property. Upon such accounting, he might become indebted to them,
and, to the extent that he was justly so indebted, they would be
his creditors, with the same right that other unsecured creditors
had to obtain satisfaction of their claims. The mode adopted by
them to that end, with full knowledge as well of his financial
condition as of the fact that he was being pressed by Cotzhausen,
was to take property one account of their respective claims. After
he had executed the conveyances, bill of sale, warrant of attorney,
and transfers to which reference has been made, he was left without
anything that could be reached by Cotzhausen. So completely was he
stripped by these transactions of all property that subsequently,
when his deposition was taken, he admitted that he owned nothing
except the clothing he wore. He recognized his hopelessly insolvent
condition, and formed the purpose of yielding to creditors the
dominion of his entire estate, and it is too plain to admit of
dispute that in executing to his mother, sisters, and brother the
conveyances, bill of sale, warrant of attorney, and transfers
Page 129 U. S. 337
in question, his intention was to give them, and their intention
was to obtain, a preference over all other creditors. What was done
was in execution of a scheme for the appropriation of his entire
estate by his family, to the exclusion of other creditors, thereby
avoiding the effect of a formal assignment. The first question,
therefore, to be considered is whether the several writings
executed by Alexander White, Jr., for the purpose of effecting that
result may be regarded as, in legal effect, one instrument,
designed to evade or defeat the provisions of the statute of
Illinois known as the "Voluntary Assignment Act," in force July 1,
1877.
The first section of that statute provides
"That in all cases of voluntary assignments hereafter made for
the benefit of creditor or creditors, the debtor or debtors shall
annex to such assignment an inventory, under oath or affirmation,
of his, her, or their estate, real and personal, according to the
best of his, her, or their knowledge, and also a list of his, her,
or their creditors, their residence and place of business, if
known, and the amount of their respective demands; but such
inventory shall not be conclusive as to the amount of the debtor's
estate, but such assignment shall vest in the assignee or assignees
the title to any other property, not exempt by law, belonging to
the debtor or debtors at the time of making the assignment, and
comprehended within the general terms of the same. Every assignment
shall be duly acknowledged and recorded in the county where the
person or persons making the same reside or where the business in
respect of which the same is made has been carried on, and in case
said assignment shall embrace lands or any interest therein, then
the same shall also be recorded in the county or counties in which
said land may be situated."
Other sections provide for publication of notices to creditors,
for the execution by the assignee of a bond and the filing of an
inventory in the county court, for the report of a list of all
creditors of the assignor, and for exception by any person
interested to the claim or demand of any other creditor. The sixth
section provides
"That at the first term of the said
Page 129 U. S. 338
county court, after the expiration of the three months, as
aforesaid, should no exception be made to the claim of any
creditor, or if exceptions have been made and the same have been
adjudicated and settled by the court, the said court shall order
the assignee or assignees to make, from time to time, fair and
equal dividends (among the creditors) of the assets in his or their
hands, in proportion to their claims,"
etc.
The eighth section declares that "No assignment shall be
declared fraudulent or void for want of any list or inventory as
provided in the first section."
The thirteenth section is in these words:
"Every provision in any assignment hereafter made in this state
providing for the payment of one debt or liability in preference to
another shall be void, and all debts and liabilities within the
provisions of the assignment shall be paid
pro rata from
the asserts thereof."
The main object of this legislation is manifest. It is to secure
equality of right among the creditors of a debtor who makes a
voluntary assignment of his property. It annuls every provision in
any assignment giving a preference of one creditor over another. No
creditor is to be excluded from participation in the proceeds of
the assigned property because of the failure of the debtor to make
and file the required inventory of his estate and the list of his
creditors, nor, if such a list is filed, is any creditor to be
denied his
pro rata part of such proceeds because his name
is omitted, either by design or mistake upon the part of the
debtor. The difficulty with the courts has not been in recognizing
the beneficent objects of this legislation, but in determining
whether, in view of the special circumstances attending their
execution, particular instruments are to be treated as part of an
assignment, within the meaning of the statute.
The leading case upon this subject in the Supreme Court of
Illinois is
Preston v. Spaulding, 120 Ill. 208. In that
case, the members of an insolvent firm, in anticipation of
bankruptcy, made, within a period of less than thirty days, four
conveyances of their individual estate to near relatives, and
various payments of money to other relatives, on alleged debts.
Page 129 U. S. 339
After these conveyances and payments and with full knowledge of
impending failure, the members of the firm held a conference with
their legal advisers before the expiration of said thirty days
respecting the measures to be adopted by them and the shape their
failure was to assume. It was determined that they should make a
voluntary assignment, but that preference be given to certain
creditors by executing to them what are called "judgment notes."
The assignment in form was made, but on the same day and before it
was executed, the creditors to whom the notes were given caused
judgment by confession to be entered thereon, and immediately, and
before the deed of assignment was or could be filed, caused
execution to be issued and levied, whereby they took to themselves
the great bulk of the debtor's estate. The trustee named in the
assignment having refused to attack the preferences thus secured, a
creditor brought suit in equity upon the theory that the giving of
the judgment notes and the making of the deed of assignment were
parts of one transaction, and consequently the preferences
attempted were illegal and void under the statute. The Supreme
Court of Illinois, considering the question whether the
preferential judgments obtained in that case were within the
prohibitions of the act of 1877, said:
"The statute is silent as to the form of the instrument or
instruments by which an insolvent debtor may effect an assignment .
. . If, then, these preferences are to be held to be within the
'provisions' of the assignment or 'comprehended within its general
terms,' it must be because they fall within the intent and spirit
of the act. It will be observed this act does not assume to
interfere in the slightest degree with the action of a debtor while
he retains the dominion of his property. Notwithstanding this act,
he may now, as heretofore, in good faith sell his property,
mortgage or pledge it to secure a
bona fide debt, or
create a lien upon it by operation of law, as by confessing a
judgment in favor of a
bona fide creditor. But when he
reaches the point where he is ready, and determines, to yield the
dominion of his property, and makes an assignment for the benefit
of his creditors under the statute, this act declares that the
effect of such assignment shall be the surrender and
Page 129 U. S. 340
conveyance of all his estate, not exempt by law, to his assignee
-- rendering void all preferences and bringing about the
distribution of his whole estate equally among his
bona
fide creditors, and we hold that it is within the spirit and
intent of the statute that when the debtor has formed a
determination to voluntarily dispose of his whole estate, and has
entered upon that determination, it is immaterial into how many
parts the performance or execution of his determination may be
broken -- the law will regard all his acts having for their object
and effect the disposition of his estate as parts of a single
transaction, and, on the execution of the formal assignment, it
will, under the statute, draw to it, and the law will regard as
embraced within its provisions, all prior acts of the debtor having
for their object and purpose the voluntary transfer or disposition
of his estate to or for creditors, and if any preferences are shown
to have been made or given by the debtor to one creditor over
another in such disposition of his estate, full effect will be
given the assignment and such preferences will, in a court of
equity, be declared void and set aside as in fraud of the
statute."
After setting out the details of the plan devised to secure
certain creditors a preference in advance of the filing of the deed
of assignment, the court further said:
"It will be observed that all this was strictly in accordance
with the
forms of law, but will anyone deny that a most
palpable fraud was in fact perpetrated upon the appellee,
Spaulding, by the debtors, or that the acts of the debtors were in
fraud of the statute? . . . This voluntary assignment act is in its
character remedial, and must therefore be liberally construed, and
no insolvent debtor having in view the disposition of his estate
can be permitted to defeat its operation by effecting unequal
distribution of his estate by means of an assignment, and any other
shift or artifice under the forms of law, and, whatever obstacles
might be encountered in other courts of this state, a court of
equity, when properly invoked, was bound to look through and beyond
the
form and have regard to the substance, and, having
done so, to find and declare these preferential judgments void
under the statute and to set them
Page 129 U. S. 341
aside."
See also Miner's National Bank's Appeal, 57 Penn.St.
193, 199;
Winner v. Hoyt, 66 Wis. 227, 239;
Wilks v.
Walker, 22 S.C. 108, 111,
We agree with the Supreme Court of Illinois that this statute,
being remedial in its character, must be liberally construed --
that is, construed "largely and beneficially, so as to suppress the
mischief and advance the remedy." That court said in
Chicago
&c. Railroad v. Dunn, 52 Ill. 260, 263:
"The rule in construing remedial statutes, though it may be in
derogation of the common law, is that everything is to be done in
advancement of the remedy that can be done consistently with any
fair construction that can be put upon it."
See also Johnes v. Johnes, 3 Dow 1, 15. If, then, we
avoid over-strict construction and regard substance rather than
form; if effect be given to this legislation, as against mere
devices that will defeat the object of its enactment -- the several
writings executed by Alexander White, Jr., all about the same time,
to his mother, sisters, and brother whereby, in contemplation of
his bankruptcy and according to a plan previously formed, he
surrendered his entire estate for their benefit, to the exclusion
of all other creditors, must be deemed a single instrument,
expressing the purposes of the parties in consummating one
transaction,= and operating as an assignment or transfer under
which the appellee, Cotzhausen, may claim equality of right with
the creditors so preferred. It is true there was not here, as in
Preston v. Spaulding, a formal deed of assignment by the
debtor under the statute. But of what avail will the statute be in
securing equality among the creditors of a debtor who, being
insolvent, has determined to yield the dominion of his entire
estate and surrender it for the benefit of creditors if some of
them can be preferred by the simple device of not making a formal
assignment and permitting them, under the cover or by means of
conveyances, bills of sale, or written transfers, to take his whole
estate on account of their respective debts to the exclusion of
other creditors? If Alexander White, Jr., intending to surrender
all his property for the benefit of his creditors and to stop
business, had excepted from the conveyances, bill of sale, and
transfers executed to
Page 129 U. S. 342
his mother, sisters, and brother a relatively small amount of
property, and had shortly thereafter made a general assignment
under the statute, it could not be doubted, under the decision in
Preston v. Spaulding and in view of the facts here
disclosed, that such conveyances, bill of sale, and transfers would
have been held void as giving forbidden preferences to particular
creditors, and his assignment would have been held at the suit of
other creditors to embrace not simply the property owned by him
when it was made, but all that he previously conveyed, sold, and
transferred to his mother, sisters, and brother. But can he, having
the intention to quit business and surrender his entire estate to
creditors, be permitted to defeat any such result by simply
omitting to make a formal assignment, and by including the whole of
his property in conveyances, bills of sale, and transfers to the
particular creditors whom he desires to prefer? Shall a failing
debtor be allowed to employ indirect means to accomplish that which
the law prohibits to be done directly? These questions must be
answered in the negative. They could not be answered otherwise
without suggesting an easy mode by which the entire object of this
legislation may be defeated.
We would not be understood as contravening the general
principle, so distinctly announced by the Supreme Court of
Illinois, that a debtor, even when financially embarrassed, may in
good faith compromise his liabilities, sell or transfer property in
payment of debts, or mortgage or pledge it as security for debts,
or create a lien upon it by means even of a judgment confessed in
favor of his creditor.
Preston v. Spaulding; Field v.
Geohegan, 125 Ill. 70. Such transactions often take place in
the ordinary course of business, when the debtor has no purpose in
the near future of discontinuing business or of going into
bankruptcy and surrendering control of all his property. A debtor
is not bound to succumb under temporary reverses in his affairs,
and has the right, acting in good faith, to use his property in any
mode he chooses in order to avoid a general assignment for the
benefit of his creditors. We only mean by what has been said that
when an insolvent debtor recognizes the fact that he can no longer
go on in business,
Page 129 U. S. 343
and determines to yield the dominion of his entire estate, and
in execution of that purpose, or with an intent to evade the
statute, transfers all or substantially all his property to a part
of his creditors in order to provide for them in preference to
other creditors, the instrument or instruments by which such
transfers are made and that result is reached, whatever their form,
will be held to operate as an assignment the benefits of which may
be claimed by any creditor not so preferred who will take
appropriate steps in a court of equity to enforce the equality
contemplated by the statute. Such, we think, is the necessary
result of the decisions in the highest court of the state.
The views we have expressed find some support in adjudged cases
in the Eighth Circuit, where the courts have construed the statute
of Missouri providing that
"Every assignment of lands, tenements, goods, chattels, effects,
and credits, made by a debtor to any person in trust for his
creditors, shall be for the benefit of all the creditors of the
assignor in proportion to their respective claims."
Referring to that statute, Krekel, J., said, in
Kellog v.
Richardson, 19 F. 70, 72, following the previous case of
Martin v. Hausman, 14 F. 160:
"A merchant may give a mortgage or a deed of trust in part or
all of his property to secure one or more of his creditors, thus
preferring them, but he cannot convey the whole of his property to
one or more creditors and stop doing business. Such turning over
and virtually declaring insolvency brings the instrument or act by
which it is done within the assignment law of Missouri, which
requires a distribution of the property of the failing debtor for
the benefit of all the creditors in proportion to their respective
claims. Such is the declared policy of the law; it places all
creditors upon an equal footing."
So in
Kerbs v. Ewing, 22 F. 693, where Judge McCrary,
referring to the Missouri statute, said:
"No matter what the form of the instrument, where a debtor,
being insolvent, conveys all his property to a third party to pay
one or more creditors to the exclusion of others, such a conveyance
will be construed to be an assignment for the benefit of all the
creditors, the preference being in contravention of the
assignment
Page 129 U. S. 344
laws of this state."
Again, in
Freund v. Yaegerman, 26 F. 812, 814, it was
said by Treat, J., that the conclusion reached by MR. JUSTICE
MILLER, and Judges McCrary, Krekel, and himself, was
"that under the statute of the State of Missouri concerning
voluntary assignments, when property was disposed of in entirety or
substantially -- that is, the entire property of the debtor, he
being insolvent -- it fell within the provisions of the assignment
law. The very purpose of the law was that no preference should be
given. No matter by what name the end is sought to be effected, it
is in violation of that statute. You may call it a mortgage, or you
may make a confession of judgment, or use any other contrivance, by
whatever name known, if the purpose is to dispose of an insolvent
debtor's estate, whereby a preference is to be effected, it is in
violation of the statute."
See also Perry v. Corby, 21 F. 737;
Clapp v.
Dittman, 21 F, 15;
Clapp v. Nordmeyer, 25 F. 71.
If Alexander White, Jr., had made a formal assignment of his
entire property in trust for the benefit, primarily or exclusively,
of his mother, sisters, and brother as creditors, its illegality
would have been so apparent that other creditors would have been
allowed to participate in the proceeds of sale. By the conveyances,
bill of sale, confession of judgment, and transfers, all made about
the same time and pursuant to an understanding previously reached,
he has effected precisely the same result as would have been
reached by a formal assignment to a trustee for the exclusive
benefit of his mother, brother, and sisters. The latter is
forbidden by the letter of the statute, and the former is equally
forbidden by its spirit. Surely the mere name of the particular
instruments by which the illegal result is reached ought not to be
permitted to stand in the way of giving the relief contemplated by
the statute. Courts of equity are not to be misled by mere devices
nor baffled by mere forms.
It remains only to consider the effect of these views upon the
decree below. We have already seen that the circuit court proceeded
upon the ground that the conveyances, bill of sale, confession of
judgment, and transfers by Alexander
Page 129 U. S. 345
White, Jr., were made without adequate consideration, and with
intent to hinder, delay, and defraud the appellee. Upon these
grounds, it gave him a prior right in the distribution of the
property. We are not able to assent to this determination of the
rights of the parties, for the mother, sisters, and brother of
Alexander White, Jr., were his creditors, and, so far as the record
discloses, they only sought to obtain a preference over other
creditors. But their attempt to obtain such illegal preference
ought not to have the effect of depriving them of their interest,
under the statute, in the proceeds of the property in question or
justify a decree giving a prior right to the appellee. It was not
intended by the statute to give priority of right to the creditors
who are not preferred. All that the appellee can claim is to
participate in such proceeds upon terms of equality with other
creditors.
It results that the decree below is erroneous so far as it
directs the property, rights, and interests therein described to be
sold in satisfaction primarily of the sums found by the decree to
be due from Alexander White, Jr., to the appellee. The case should
go to a master to ascertain the amount of all the debts owing by
Alexander White, Jr. at the date of said conveyances, bill of sale,
and transfers. In respect to the amounts due from him to his
mother, sisters, and brother, respectively, it is not necessary at
this time to express any opinion further than that the accounting
in the probate court between them is not conclusive against the
appellee. It will be for the court below to determine under all
evidence what amounts are justly due from Alexander White, Jr., to
his mother, sisters, and brother, taking into consideration all the
circumstances attending his management of the property formerly
owned by his father, whether real or personal.
To the extent we have indicated, the decree is reversed,
each side paying one-half the costs in this Court, and the cause is
remanded with a direction for further proceedings not inconsistent
with this opinion.
THE CHIEF JUSTICE did not sit in this case or participate in its
decision.