The petition of a bankrupt in bankruptcy, in which he states
under oath that he owns no real estate and holds no interest in
real property, is evidence of the execution and validity of a prior
deed of his real estate in a suit in which he contests such
execution and validity.
The proof in this case fails to show imbecility, dotage, or loss
of mental capacity on the part of the appellee at the time when the
contract in dispute was made.
An executed agreement by one party to cause the debts of the
other to be cancelled by his creditors, valid in its inception, is
not invalidated as to the debtor by reason of the settlements'
being effected for a small percentage, or even by the employment of
improper means to effect them.
A conveyance by a debtor, deeply indebted and in anticipation of
decree, and judgments which, added to existing encumbrances, will
amount to the value of the property conveyed, will lead a court of
equity to presume that the instrument was executed in fraud of the
creditors.
If a person conveys his property for the purpose of hindering,
delaying, or defrauding his creditors, and for many years
acquiesces and concurs in devices, collusive suits, and impositions
upon the court in furtherance of that purpose, without taking any
step to annul such conveyance or stop such proceedings, a court of
equity will not aid him or his heirs to recover the property from
the grantee or his heirs after the fraud is accomplished.
The maxim
in pari delicto, potior est conditio
defendentis is decisive of this case.
This is a suit in equity, originally brought in the Chancery
Court of Shelby County, Tennessee on the 10th of December,
Page 132 U. S. 51
1881, by the appellees, heirs at law of Alexander M. Ferguson,
deceased, against the appellants, heirs at law and legal
representatives of Henry G. Dent, deceased. Upon application of the
complainants, the case was removed into the United States Circuit
Court for the Western District of Tennessee on the ground of the
diverse citizenship of the parties.
The object of the original and the two amended and supplemental
bills is to recover from the defendants a large amount of real
property alleged to have belonged to A. M. Ferguson, deceased, and
to have been fraudulently obtained from him by Henry G. Dent,
deceased, and also to have set aside and annulled the agreement,
deeds, and judicial proceedings by which such fraudulent
acquisition was effected.
The instrument which the complainants most especially seek to
have delivered up and cancelled purports to be an absolute
agreement for the conveyance of a large amount of real property
situated in Memphis, Tennessee, executed by Ferguson to Dent, and
is as follows:
"This agreement, made this 14th day of May, 1869, by and between
A. M. Ferguson, of the first part, and H. G. Dent, of the second
part, all of the City of Memphis and State of Tennessee, witnesseth
that the said Ferguson, for the purposes and considerations
hereinafter set forth, has this day bargained and sold to the said
Dent all his property hereby agreed to be conveyed is lots or
parcels of land situated, lying, and being in the City of Memphis
and State of Tennessee, as per schedule thereof hereto annexed, and
for identification signed by the parties hereto; that for said
considerations he binds himself to make conveyance by quitclaim to
said Dent, or to whomsoever he may direct, of said several pieces
of property on demand, excepting, however, one piece of property,
contained in the schedule hereto annexed, situated on the southeast
corner of Beale and Hernando Streets, to which he agrees to make a
warranty deed to James E. Dillard, to whom said Dent has bargained
the same for $8,000, subject to certain judgment liens which will
be expressed on the face of said deed when it shall be executed.
The
Page 132 U. S. 52
consideration of this agreement is that the property hereby
agreed to be conveyed is much encumbered by judgments, decrees, and
deeds of trust, taxes, and assessments for grading and paving, to
nearly, if not quite, its full value, as also shown in said
schedule, and the only interest remaining to said Ferguson in the
same is his equity of redemption. For this equity he is willing to
take the sum of $10,000, and allow the purchaser to make the best
use he can of the property in paying off said encumbrances and
making what he can out of the surplus. The further consideration of
this agreement is therefore that the said H. G. Dent will pay the
said A. M. Ferguson the sum of $4,000 in cash in hand, and by the
conveyance to be made to James E. Dillard will secure the payment
of the further sum of $6,000 to said Ferguson, making an aggregate
of $10,000, as agreed upon, and will dispose of the balance of said
property to the best advantage, to discharge the liens thereon, or
otherwise discharge the same, and will have no recourse on said
Ferguson, in law or equity, for any encumbrance or defect of title
whatsoever on any of said pieces or parcels of land, but take the
same at his own risk; and inasmuch as the terms, conditions, and
considerations of this agreement cannot be properly expressed in
the several conveyances desired and contemplated by the parties,
this instrument, and the schedule hereto annexed, are made for a
more thorough and complete explanation and exposition of the
same."
"In testimony whereof the said A. M. Ferguson and H. G. Dent
have hereunto set their hands the day and date first above
written."
"A. M. FERGUSON [Seal] ~ H. G. DENT [Seal]"
"Attest: W. L. VAN DYKE"
"C. W. FRAZER"
The complainants aver in their bills that this instrument was
drawn up and signed only as a plan proposed, but never adopted, was
never understood by the parties to it to be of any force as between
themselves, and was never in fact delivered to Dent, but was
retained by Ferguson as his private property, and placed with his
other papers in the possession
Page 132 U. S. 53
and custody of his attorney, one W. L. Van Dyke, where it
remained until the death of the latter, when Dent, by fraudulent
representations to a woman in charge of Van Dyke's room and
effects, succeeded in abstracting it from the papers of Ferguson,
and that Dent then, after Ferguson died, set up a claim to the
ownership of the property under said pretended contract. They
further aver that even if said instrument was really delivered, it
was void because of the fraudulent means and undue influence by
which Dent imposed upon Ferguson to make a conveyance of his
property at a grossly inadequate price, which was never paid. It is
further alleged that Dent was at the date of said agreement, and
had been for many years prior thereto, the agent of Ferguson in the
management of his property, and had so gained his confidence, and
had acquired such an ascendency over Ferguson's mind and will,
especially during the latter part of his life, when he was in his
dotage, and incapacitated to attend to his interests, that all his
financial transactions were subject to Dent's supervision and
direction; that among these transactions was an endorsement by
Ferguson on the 12th of April, 1867, of four notes of Dent of
$12,500 each, aggregating in amount $50,000, which he (Dent) gave
in part payment of a purchase by him of a stock of goods from
Lockwood & Co. in Memphis; that this sale by Lockwood & Co.
to Dent was soon afterwards attacked by the creditors of the former
as fraudulent, and four successive attachments were sued out and
levied upon the stock of goods, and that four replevin bonds were
given by Dent, and signed by Ferguson -- one as surety, and the
other three as a principal -- he having purchased from Dent
one-half interest in the stock.
It is alleged that the amount of the judgment rendered on these
bonds against Dent and Ferguson was about $65,000, and that, of the
Lockwood notes for $50,000, one was claimed to have been paid off
and taken up by Dent, the other three having been compromised by
Dent and Ferguson giving their notes for $18,000, secured by a deed
of trust upon a large part of the Ferguson property in dispute, and
one lot belonging to Dent, executed to one Carmack, trustee for
certain
Page 132 U. S. 54
creditors into whose hands the notes had fallen. It is further
alleged that Ferguson, harassed by this sudden and largely
increased indebtedness (already great), desired and proposed to
make an assignment for the benefit of his creditors, but was
overruled in this purpose by the controlling influence of Dent,
who, by imposition and fraud, prevailed upon him to sign the
pretended contract of May 14, 1869, which the said Dent got up to
serve his purpose of fraudulently possessing himself of Ferguson's
estate.
The bill further sets forth with great minuteness of detail the
various subterfuges and contrivances to which, it is alleged, Dent
resorted to cover up and conceal from the creditors the ownership
of the property, and the trust deeds and judicial proceedings by
which the baffled creditors were inveigled into compromises at
enormous sacrifices, and that various persons, mostly Dent's
attorneys and relations, or persons having an understanding with
him, purchased all of the property under these trust deeds and at
said judicial sales with money furnished by Dent, which he raised
from the rents and profits or Ferguson's estate, and now hold their
titles in trust for said Dent.
It was then alleged that all the liabilities of Ferguson have
been settled, and all the encumbrances upon his property removed,
for the most part, out of the rents and profits of said property.
The prayer of the bill is that the contract of May 14, 1869, be
declared void, and that the defendants be declared trustees of the
property for the complainants, and required to turn it over to
their possession, and account for its rents and profits.
The answer, after a general denial of all the allegations of the
bill, especially denies those relating to the undue influence
charged to have been exercised by Dent over Ferguson, those
relating to Dent's agency, and those relating to Ferguson's dotage,
weakness of mind, and incapacity for business. It admits that
Dent's heirs have in their possession a deed or contract, properly
executed, attested, and delivered, dated May 14, 1869, but
unregistered, under which they claim title to the property referred
to in the bill, and avers the fairness and justice of the contract,
its delivery to Dent by Ferguson, and
Page 132 U. S. 55
also the delivery into his actual possession of all the property
conveyed by it. It also sets forth the hopeless condition of
Ferguson's affairs; that Dent had extinguished the debts, and
removed from the property all the encumbrances, and paid the
$10,000, or its equivalent, which was the consideration mentioned
in the deed, and that $10,000 and the discharge of the debts --
quite as great in amount as that of the value of the property
conveyed -- constituted a full and sufficient price therefor. It
sets up as a defense the acquiescence of Ferguson, as long as he
lived (a period of eleven years), in the contract, and in Dent's
acts under it, and also the fact that Ferguson had filed his
petition in bankruptcy, stating under oath that he did not own any
real estate, which proceeding it relies on as an estoppel, and as
proof of an outstanding title.
The defendants Frazer, Trezevant, and the De Soto Building and
Loan Association each filed a separate answer in which they each
stated that the titles held by them, respectively, to the property
with which the bill had connected their names were held by them as
trustees for Dent, or as a security for fees, advances, and loans
to him. Dillard, in his deposition, answered, alleging that the
titles held by him to any of the property claimed by complainants
were held for the benefit of Dent. Hooper and wife answered,
denying the averments of the bill that Susan R. Hooper purchased
the Shelby claim which she is prosecuting against the estate of
Ferguson, as the agent of Dent, but averring that such purchase by
her was
bona fide, and for her own use and benefit, and
that said claim is now her own property.
The answers of the other defendants aver that, before the filing
of the bill, they had parted with whatever right or title they ever
had to any of the property in controversy.
Proofs were taken and a hearing was had before the circuit
justice, the district judge sitting with him, and a decree was
rendered in accordance with the prayer of the bill. 24 F. 412.
Page 132 U. S. 57
MR. JUSTICE LAMAR, after stating the facts as above, delivered
the opinion of the Court.
The main grounds of the bill are
(1) That the agreement or conveyance of May 14, 1869, was never
delivered, but was only a paper in contemplation to be executed,
and that the execution and delivery of it were finally abandoned,
and
(2) That said contract was procured by fraud on the part of Dent
to enable him to possess himself of the estate of Ferguson without
paying him a valuable consideration therefor, and that Ferguson was
of weak mind, in his dotage, and easily imposed upon by Dent,
between whom and himself the relation of principal and agent
existed.
We concur fully in the position, assumed by both the circuit
justice and the district judge, that the execution and delivery of
the agreement and conveyance of May 14, 1869, by Ferguson to Dent,
were sufficiently proven. A careful examination of the evidence,
especially that introduced in behalf of complainants, leaves no
doubt on this point. The paper was frequently recognized and acted
upon by Ferguson. He received part, at least, of the money to be
paid under it, and frequently called for more, complaining of Dent
that he had not fully paid the amount agreed to in the contract. He
received the two Dillard notes for $3,000 each, as provided for in
it, in part payment, and also accepted Dillard's deed of trust on
the property conveyed to him, as security therefor. He solemnly
reaffirmed it over his own signature and seal on the 23d of August,
1869, in a deed introduced in evidence by complainants, in which
deed the recital is as follows:
"Whereas, on the 14th of May, 1869, H. G. Dent and A. M.
Ferguson entered into an agreement of purchase and sale by which
said Dent purchased the equity of said Ferguson in all his real
estate in Shelby County for the sum of $10,000, $4,000 of which was
to be paid in cash, and $6,000 in notes,"
etc. He again recognized and carried out his part of it when on
the 25th of May, 1869, he made a deed to Dillard in pursuance of
its terms. His petition in bankruptcy, filed on April 29, 1878, in
which he stated on oath
Page 132 U. S. 58
that he did not own any real estate nor hold any interest in any
real property except a leasehold that would expire in less than a
month, though not a technical estoppel as a defense in this suit,
is at least evidence of the execution and validity of the
instrument in question. In view of these facts, which appear from
the proofs and pleadings of the complainants, we do not deem it
necessary to review the mass of testimony offered by the
complainants to sustain their charge that Dent purloined the
writing from Ferguson's papers.
As to the second point, we cannot assent to the conclusions of
the court below. The evidence, we think, fails to show any
imbecility, dotage, or loss of mental capacity on the part of
Ferguson in 1869, when the contract was made. About fifteen
witnesses produced by the complainants were questioned as to the
character and condition of his mind, three, and perhaps four, of
whom speak of him as being weak, ignorant, and childish; but the
general tenor of the testimony of the others who had any opinions
to express was directly the reverse. The combined effect of this
testimony, taken as a whole, putting out of view the evidence on
behalf of the defendants, leaves on the mind a decided impression
that Ferguson, though to a certain extent illiterate, was a man of
good sound sense, of large experience in business, and capable of
transacting his own affairs. Outside of the nature of the
transaction itself and the relation of principal and agent between
him and Dent, which will be presently considered, there is very
little, if any, testimony that he was ignorant of his rights or of
the value of his property, or in the slightest degree incompetent
to comprehend the terms of the contract in question or to
understand the obligations of an oath. Nor does a single witness
testify that Dent ever falsely represented to Ferguson the amount
of his indebtedness, ever underestimated to him the value of his
property, or ever exaggerated to him the danger from creditors.
Even as to who suggested the contract of May 14, 1869, the
testimony, slight as it is, is conflicting and uncertain.
It is, however, insisted that the price agreed to on the face of
the instrument itself was so grossly inadequate as to create the
presumption of fraud and undue influence, aside from, and
Page 132 U. S. 59
independent of, any proof other than the single fact that the
parties thereto bore the relation to each other of principal and
agent. Assuming for the present, and for present purposes only,
that the agreement was
bona fide as respects third
persons, creditors of Ferguson and Dent, and considering it with
exclusive reference to the reciprocal rights of the two parties to
it, we do not think the evidence is such as to raise the
presumption of fraud and therefore to call for or justify the
interposition of a court of equity for the cancellation of the
contract. The fairness of the transaction on this point should be
determined by the condition of things at the time the contract was
made and executed, and not by what occurred afterwards, except so
far as subsequent developments may reflect light upon it.
What were the circumstances under which this instrument was
executed? A. M. Ferguson was then possessed of a large estate in
Memphis, consisting of valuable city lots with improvements, all
estimated by competent witnesses to be worth $100,000, more or
less. At that time, he was indebted to various persons in sums
which, we believe, it is admitted amounted to as much as the value
of his property. Many of these debts, perhaps the majority in
amount, originated as joint promisor with, or as endorser or surety
for, Henry G. Dent, who had been his agent for the renting of his
property and intimate friend for many years, and who was himself
wholly insolvent. But whatever the origin of his debts, they had
become, as between Ferguson and his creditors, legal and binding
upon him; nor did the fact that they were the liabilities of an
endorser lighten the burden of them, or lessen the peril of
impending insolvency, or abate the eagerness of pursuing creditors.
These creditors had been for some time active and pressing for
payment, and his real estate was heavily encumbered with judgments,
decrees, deeds of trust, sheriff's deeds, taxes, and assessments
for public improvements. Several other suits, aggregating nearly
$50,000, were proceeding to judgment. Some idea of his embarrassed
condition may be found from the fact that on the 29th of March,
1869, a bill had been filed to reach his equitable rights and
interest in the
Page 132 U. S. 60
property, the subject of this controversy, in which the
complainant alleged on oath that an execution issued on a judgment
at law obtained by him against Ferguson had been duly returned, "No
property found whereon to levy," and that after diligent search and
inquiry, he could not find any property in Memphis to which
Ferguson had an unencumbered legal title subject to an execution at
law.
Such was the condition of Ferguson's affairs when he made the
agreement of May 14, 1869. The consideration of this agreement was
that Ferguson should receive $4,000 in cash and $6,000 in notes,
and that Dent should "discharge the liens," not that he should pay
them in full. This discharge Dent fully procured. Ferguson was
fully discharged, and all claims against him were legally cancelled
-- not only those then existing, but also those that were
impending, and which afterwards matured. This fact is thus stated
in the words of complainants' bill:
"The liabilities of the said A. M. Ferguson by judgments, trust
deeds, mortgages, and mortgages in the form of warranty deeds have
all been settled and paid off, except as hereinafter stated, and
the said complainants, as heirs at law of the said A. M. Ferguson,
are entitled to have the said real property handed over to them
free and discharged of all liens."
If the promise to cancel the debts was a fair and valid
transaction when it was made, it did not become less so because
subsequent occurrences enabled Dent to effect a settlement with the
creditors upon the payment of a small percentage of their
respective claims, and if the means he employed to effect such
compromises were not proper, it might give the overreached
creditors cause of complaint, but certainly not Ferguson. Had Dent
been able to persuade the creditors to give a release of their
claims without any consideration whatever, that could not retroact
and make inadequate what was an adequate consideration when the
contract was made. When it was made, no one knew that the debts
could be compromised for much less than their face value, as was
done by Dent, for, as the district judge truly remarks, "the
astounding fact in this record is that the creditors did not
appropriate
Page 132 U. S. 61
all this property to their debts." And yet it is an undeniable
fact that Dent did avert such an appropriation, and that Ferguson
was fully discharged, and the claims were legally cancelled, by
methods not fully developed, but assented to and facilitated by
Ferguson. For instance, a judgment for over $22,000 in favor of H.
B. Claflin and Co., of New York, was settled for $1,000; a claim in
favor of Louis Selby for $12,622.11, for $1,325, and an assessment
for $6,998 for the Nicholson pavement, stated in said agreement of
May 14, 1869, to be a lien on the property conveyed, was entirely
defeated on legal grounds.
The consideration as to the extinguishment of the debts was
fully performed. The $6,000 of notes were received by Ferguson and
afterwards endorsed to his relatives. As to how much of the
remaining $4,000 coming to him under the agreement was paid to him
in cash there is much conflict of testimony, which, owing to the
lapse of time and the death of both parties to the contract, cannot
be reconciled. Apparently $1,400 was paid soon after, for the
instrument dated August 23, 1869, which the complainants introduced
and rely on, states that the payment of that sum was made on that
day. C. L. Morrison, a witness for complainants whose testimony
their counsel declares in his brief to be more important than that
of any and all the other witnesses for complainants, testifies that
from 1871 to 1876 he paid to Ferguson from $80 to $90 a month out
of the rents collected by him from a portion of the property, and
that he saw Dent pay him during that period out of his own pocket
about $300 a year. These sums aggregate a larger amount than
$4,000.
Our conclusion, therefore, is that the contract, considered
apart from its bearing on other creditors, does not, in the absence
of other proof, lack the essential qualities of adequacy and
fairness as between the parties thereto themselves. If this be so,
the point as to principal and agent, upon which so much stress has
been laid, is of minor importance. The doctrine as to this
fiduciary relation, applied to its full extent, is simply a rule of
evidence which, under some circumstances, imposes upon an agent the
burden of proving the fairness and justice
Page 132 U. S. 62
of the transaction with his principal within the scope of his
agency. If the contract was valid as to the creditors of Ferguson,
the consideration therein expressed was sufficient to satisfy this
burden.
The evidence shows that for many years Dent was an agent of
Ferguson for the renting of his property, with more intimate
relations than with his other patrons. But the record does not show
that he was ever employed to buy or sell real estate for Ferguson.
On the contrary, there is positive testimony that his (Ferguson's)
traffic in that business was carried on by himself alone.
We have considered this case so far upon the assumption of the
circuit justice that the agreement was executed and delivered by
Ferguson to Dent in good faith as to Ferguson's creditors. We do
not concur in this assumption. If the voluminous record before us
discloses a single fact tending to sustain that assumption, except
a general expression of opinion by some of the witnesses that he
was an honest man, it has escaped our search. The instrument itself
was executed under circumstances which would lead a court to
presume fraud upon creditors. It was a conveyance by a person
deeply indebted, in anticipation of decrees and judgments which,
added to the existing encumbrances, amounted to the value of his
property. We therefore agree with the district judge on this point
that the real contract was one between Ferguson and Dent to defraud
the creditors out of the property conveyed, and to so conceal and
cloud the title that they could be circumvented, hindered, and
delayed, and coerced into settlements and compromises. We think the
evidence shows beyond doubt that Ferguson willingly participated
for ten years in carrying out this plot. Both parties knew that
$10,000 could not be saved for Ferguson, or any residuum out of the
property for Dent, unless creditors could be wrought upon by some
means to accept less than their claims. Neither party to such a
contract could have been deceived or imposed upon about that
result. Both knew the record fact that the encumbrances perfected
and the encumbrances rapidly perfecting exceeded in amount the
value of the property.
Page 132 U. S. 63
That Ferguson had that fraudulent design when he signed his name
to the instrument and turned over the property to Dent as its owner
was directly sworn to by witnesses introduced by the complainants
and examined by them -- of course, for a very different purpose.
Mrs. A.G. Morrison, a witness produced to show that Dent had
fraudulently abstracted certain papers from Ferguson deemed by him
to be important and valuable, deposes as follows in reply to the
question, "What was it Mr. Ferguson told you about the sale of the
property?" (referring to the sale now under consideration):
"He told me he went on Mr. Dent's bond, as near as I can
remember. Mr. Dent went into business, and broke, and the property
was covered up some way in Mr. Dent's name to keep it from being
sold. I couldn't tell you how long Mr. Ferguson told me, but I am
positive he told me it was covered up in Dent's name, and he says:
'There is wherein Dent has robbed me. He would not give me those
papers back.'"
In reply to another question, which the witness said did not
repeat her previous answer accurately, she replied: "He didn't say
it in those words. . . . He says he turned the property over to
Dent, put it in his name," etc. Again:
"He said something about a receiver being appointed, and he
says: 'I turned the property over to Dent to keep it from being
sold. I don't want it sold, because the rent of my property will
pay the debt,'"
etc. Another witness for the complainants, Robert McWilliams,
testifies as follows concerning a conversation had with Ferguson in
1878:
"If I remember correctly, he said that he had made over his
property to Dent, with the tacit understanding that he should have
sufficient to live on until his discharge in bankruptcy, and then
Dent would return or turn over the property to him again."
In rely to the question,
"What, if anything, do you know concerning the arrangement of A.
M. Ferguson and Henry G. Dent concerning the Ferguson property on
Beale, Hernando, and De Soto streets, and elsewhere?"
he said:
"I know of nothing, except that Ferguson told me that he had
conveyed this property to Dent with the tacit understanding that he
(Ferguson) should have enough out of the rents of the property
Page 132 U. S. 64
to live on until he had got through bankruptcy, when the
property should be returned to him again."
The question arises, if a person conveys his property for the
purpose of hindering, delaying, or defrauding his creditors, and
for eleven years acquiesces and concurs in the devices, collusive
suits, and impositions upon the court in furtherance of this
purpose without taking a single legal step to annul said conveyance
or to stop such proceedings, will a court of equity aid him or his
heirs to recover the property from the grantee or his heirs after
the fraud is accomplished? This Court has answered that question in
the negative in
Randall v.
Howard, 2 Black 585. In that case, the complainants
and defendant had made an agreement to defeat the claims of third
persons to certain lands which the complainants had mortgaged to
the defendant to secure a debt, so as to cloak the ownership by
means of a foreclosure sale at which the defendant should purchase
and hold the nominal title. After obtaining the title, he
fraudulently dispossessed the complainants, and asserted the right
of ownership in himself. The prayer of the bill was to restrain the
defendant from disposing of the land, and to restore it, or so much
of it as remained after paying the debt, to complainants. The
Court, Mr. Justice Davis delivering the opinion, held that the
agreement was a fraudulent one to defeat a claim set up by other
parties for a portion of the mortgaged lands by the covering up,
through the aid of the court, the real ownership of the property,
and said, (p.
67 U. S.
588):
"A fraudulent agreement was entered into to defeat, as is
charged, 'a fraud attempted against the complainants.' . . . A
court of equity will not intervene to give relief to either party
from the consequences of such an agreement. The maxim,
in pari
delicto potion est conditio defendentis, must prevail. It is
against the policy of the law to enable either party, in
controversies between themselves, to enforce an agreement in fraud
of the law or which was made to injure another,"
citing Story's Equity ยง 298;
Bolt v. Rogers, 3 Paige
156, and
Wilson v. Watts, 9 Md. 356. The same principle
was applied in
Wheeler v.
Sage, 1 Wall.
Page 132 U. S. 65
518. In that case, an agreement was entered into between
complainants and defendant to secure the title to valuable real
estate of an insolvent debtor at the expense and sacrifice of his
creditors, which the defendant violated, and, in conjunction with
another person, secured an interest in the property to himself. The
bill prayed that he be declared a trustee for the complainants, and
required to convey to them that portion of the land to which, under
the agreement, they were entitled. The Court, Mr. Justice Davis
delivering the opinion, said (p.
68 U. S.
529):
"Generally, when a party obtains an advantage by fraud, he is to
be regarded as the trustee of the party defrauded, and compelled to
account; but if a party seeks relief in equity, he must be able to
show that on his part there has been honesty and fair dealing. If
he has been engaged in an illegal business, and been cheated,
equity will not help him."
And then, after a review of the evidence in that case, the
opinion concluded in these words:
"A proceeding like this is against good conscience and good
morals, and cannot receive the sanction of a court of equity. The
principle is too plain to need a citation of authorities to confirm
it. It is against the policy of the law to help either party in
such controversies. The maxim
in pari delicto. etc., must
prevail."
P.
68 U. S.
530.
We cannot assent to the opinion of the district judge that this
maxim has no application to the case at bar. In the views prepared
by him at the request of Mr. Justice Matthews, and which were
adopted by the latter, he says, in speaking of the contract of May
14, 1869, that it is only "in form a contract for the sale of
property," and proceeds:
"The real contract was one to defraud the creditors of Ferguson
and Dent out of this property, and it was calculated that this
could be done on a basis of $10,000 to Ferguson, to be realized out
of the property itself, and all the balance to Dent, whatever that
might be. But this was an unequal, unconscionable, and unfair
division, particularly in view of actual results, in the
accomplishment of which Dent has risked nothing but his time and
labor. Ferguson has agreed to give too much for Dent's services in
that behalf. . . .
Page 132 U. S. 66
One of the objects of the bill is to prevent the defendants from
reaping the lion's share of the benefits of this confessed fraud,
and the maxim
in pari delicto potior est conditio
defendentis . . . has no application whatever to a case like
this."
From this view we dissent. We find no authority for the idea
that it is the province of a court of equity to make a fraudulent
debtor the special object of its favor because he has not received
a large enough consideration for his "confessed fraud." That court
is not a divider of the inheritance of iniquity between the
respective heirs of two confederates in fraud. Mr. Justice Baldwin,
delivering the opinion of the Court in
Bartle v.
Coleman, 4 Pet. 184,
29 U. S. 189,
uses the following language:
"The law leaves the parties to such a contract as it found them.
If either has sustained a loss by the bad faith of a
particeps
criminis, it is but a just infliction for premeditated and
deeply practiced fraud, which, when detected, deprives him of
anticipated profits or subjects him to unexpected losses. He must
not expect that a judicial tribunal will degrade itself by an
exertion of its powers, by shifting the loss from the one to the
other, or to equalize the benefits or burdens which may have
resulted by the violation of every principle of morals and of
laws."
Or, as Chancellor Walworth states it:
"Wherever two or more persons are engaged in a fraudulent
transaction to injure another, neither law nor equity will
interfere to relieve either of those persons, as against the other,
from the consequences of their own misconduct."
Bolt v. Rogers, 3 Paige 157.
The cases relied upon by the court below to sustain its position
do not shake the authorities we have cited to show that courts of
equity refuse to annul, and also to enforce, contracts in fraud of
the rights of others, when called to act as between the parties,
for there is a distinct class of decisions affecting subsequent and
collateral contracts not partaking of the fraud which infects the
main transaction.
The principles established by those decisions in diversified
forms, according to the varying cases, is that a new contract,
founded on a new and independent consideration, although in
Page 132 U. S. 67
relation to property respecting which there had been unlawful or
fraudulent transactions between the parties, will be dealt with by
the courts on its own merits. If the new contract be fair and
lawful and the new consideration be valid and adequate, it will be
enforced. If, however, it be unfair or fraudulent, or the new
consideration so inadequate as to import fraud, imposition, or
undue influence, it will be rescinded, and justice done to the
parties.
Armstrong v.
Toler, 11 Wheat. 258;
McBlair v.
Gibbes, 17 How. 232;
Brooks v.
Martin, 2 Wall. 70;
Planter's
Bank v. Union Bank, 16 Wall. 483;
Railroad Co.
v. Durant, 95 U. S. 576.
But in all of those cases, the court was careful to distinguish
and sever the new contract from the original illegal contract.
Whether, in the application of this principle, some of them do not
trench upon the line which separates the cases of contracts invalid
in consequence of their illegality from new and subsequent
contracts arising out of the accomplishment of the illegal object
is not the subject of inquiry here. The present case does not
involve any question of a subsequent and distinct contract, but
seeks relief directly from the original fraud, to which the person
under whom complainants claim was a contracting party, fully
sharing in the fraudulent intent.
We do not think that complainants' counsel gives an explanation
of the testimony of McWilliams which strengthens their claim to
relief. That claim, stated in his own language, is
"that Ferguson placed his property in Dent's hands to be used in
liquidating his debts, and when this was done, the property, or so
much of it as had not been consumed in the payment of debts, was to
be restored to Ferguson, and that in the meantime Ferguson was to
have enough of the rents to live on."
Such an arrangement, so entirely inconsistent with the absolute
conveyance of the property as executed between the parties, has all
the features of a fraud upon creditors. It reserves to the grantor
the enjoyment of the rents and profits of the property conveyed, to
which the creditors
Page 132 U. S. 68
have a right of immediate appropriation to their debts, and
involves a secret trust for the return to himself of property of
which such creditors have the immediate right of sale. The law does
not countenance any such transaction, but leaves both parties in
the position where they have placed themselves.
Lukins v.
Aird, 6 Wall. 78.
The district judge is mistaken when he says that "one of the
objects of the bill is to prevent the defendants from reaping the
lion's share of the benefits of this confessed fraud." The object
of the suit, as clearly and explicitly stated in the bill, is to
secure to the complainants the entire benefit of the confessed
fraud by having all the property, with all the intermediate rents
and profits added, free from all liens and liabilities, returned to
them. The real complaint is that Dent, the fraudulent vendee,
refused to perform his part of the fraudulent understanding with
Ferguson, the fraudulent vendor, and the avowed purpose of the suit
is to compel the defendants to perform it. The prayer cannot be
granted without overturning established principles of equity.
The decree of the circuit court should therefore be
Reversed, and the case be remanded to that court, with a
direction to dismiss the bill, with costs; so ordered.
