Whether a debtor in Illinois in failing circumstances has or has
not the right by transfers of property to prefer certain creditors
in the disposition of his assets, it is clear that he has not the
right to transfer to such creditors property largely in excess of
their claims to the injury of other general creditors.
A bill in that state by other creditors of the debtor filed
several years after
Page 152 U. S. 548
such transfers were made, which attacks them and prays to have
them decreed to be invalid and to have the assigned property
distributed
pro rata among the general creditors and which
alleges that the plaintiffs were ignorant of the matters complained
of, but now have knowledge acquired within a month prior to the
filing of the bill, but which does not show how knowledge of the
wrongs complained of was obtained, nor why they had not had earlier
the same means of ascertaining the facts, may be dismissed, on
demurrer, for laches on the part of the complainants.
On April 23, 1889, the appellants, as plaintiffs, citizens of
the State of New York, filed their bill in the Circuit Court of the
United States for the Northern District of Illinois, making as
defendants the following persons, citizens of the State of
Illinois: Sigismund Heidweyer, Norbert Stieglitz, the National Bank
of Illinois, Siegmund Florsheim, Philip Florsheim, and Simon
Florsheim. On January 15, 1890, they filed an amendment to their
bill. To the bill, with its amendment, the defendants demurred on
the several grounds of a want of equity in the bill, the laches of
plaintiffs, a lack of jurisdiction, and a defect of parties. On May
5, 1890, this demurrer was sustained, and the bill dismissed. From
the decree of dismissal the plaintiffs have appealed to this
Court.
The facts, as stated in this bill and its amendment, are as
follows: the plaintiffs were judgment creditors of the defendants
Heidweyer & Stieglitz, a firm doing business in Chicago from
July, 1875, to October 15, 1884. As early as January 1, 1884, the
latter were hopelessly insolvent, their liabilities exceeding even
their nominal assets, as they well knew. By the assistance of
friends, however, they were enabled to keep up the appearance of
doing business until October. Early in September they ascertained
and determined definitely that they must fail, make a general
disposition of their property among their creditors, and go out of
business. At that time their indebtedness amounted to about
$240,000, their assets to about $150,000, of which $125,000 was the
value of their merchandise and $25,000 that of their bills
receivable and open accounts. Among other creditors were the
following parties, to whom Heidweyer & Stieglitz claimed were
due at the time the sums set opposite to their names:
Page 152 U. S. 549
National Bank of Illinois . . . . . . . . $12,000.00
Siegmund Florsheim. . . . . . . . . . . . 2,628.00
Julius Heimann. . . . . . . . . . . . . . 5,000.00
Julius Heimann, administrator . . . . . . 5,000.00
Florsheim Bros. . . . . . . . . . . . . . 5,000.00
Philip Florsheim. . . . . . . . . . . . . 9,000.00
Simon Florsheim . . . . . . . . . . . . . 5,000.00
Herman Hahlo. . . . . . . . . . . . . . . 2,500.00
Hahlo, Stieglitz & Co. . . . . . . . . . 2,086.56
In fact, the true amount due to such parties was much less than
the sums so named. In addition to this, the defendant Siegmund
Florsheim was liable, as they pretended, as endorser on their
commercial paper for the sum of $22,925.
It was their duty, so the bill avers, in view of their financial
condition, under the policy of the assignment law of Illinois, to
make in due form a general assignment to some person of all their
property for the benefit of their creditors, and without any
preferences; but instead of doing this, they consulted with counsel
as to the best means to prefer the creditors above named. On
September 16th, by the advice of such counsel, they executed
certain judgment notes, payable on demand to the parties, and for
amounts as follows:
National Bank of Illinois . . . . . . . . $12,000.00
Siegmund Florsheim. . . . . . . . . . . . 41,553.50
Florsheim Bros. . . . . . . . . . . . . . 5,000.00
Philip Florsheim. . . . . . . . . . . . . 9,000.00
On the note in favor of Siegmund Florsheim, $16,000 was
subsequently credited as paid. On October 13th they executed
further judgment notes, payable on demand, as follows:
Julius Heimann, two notes, each . . . . . $ 5,000.00
Simon Florsheim . . . . . . . . . . . . . 5,000.00
H. Hahlo & Co. . . . . . . . . . . . . . 2,500.00
Hahlo, Stieglitz & Co. . . . . . . . . . 2,086.56.
On October 15th the counsel above referred to, acting for
both
Page 152 U. S. 550
the creditors and the debtors, caused judgments to be entered
upon said notes in the superior court of Cook county, Ill., in
favor of the creditors for the amounts of principal and interest
and attorneys' fees, the attorneys' fees amounting in all the cases
to the sum of $3,564.04. Immediately after the entry of such
judgments, executions were issued thereon to the Sheriff of Cook
County, who levied upon the stock of merchandise of said firm of
Heidweyer & Stieglitz, being all the tangible property of which
they were possessed, and of the value of $125,000. Of this
merchandise, about $8,500 was replevied from the sheriff before the
sale, and the remainder sold at great sacrifice, producing only
$65,537.38, which sum was applied upon the executions, leaving a
small balance due upon most of them. The only property of value
which the said Heidweyer & Stieglitz, on October 15th,
possessed, other than the stock of merchandise, were certain bills
receivable, of the value of about $18,000, and certain accounts
receivable, of the value of about $6,000. It is charged:
"That as a part of the same scheme of preference said Heidweyer
& Stieglitz assigned and delivered said bills and accounts
receivable to the defendant Simon Florsheim, in trust to collect
the same for the benefit of said judgment creditors as to the
amounts remaining unpaid on their aforesaid judgments, and for the
benefit of himself as to a claim of thirteen hundred dollars, due
to him by said Norbert Stieglitz individually, the surplus, if any,
to be returned to said Heidweyer & Stieglitz, so that, out of
said accounts and bills receivable so assigned, and out of said
replevied goods subsequently surrendered or paid for, said
defendants' judgment creditors, as aforesaid, have received the
amounts of their judgments and interest and said attorneys' fees in
full. Said defendant Simon Florsheim has received payment in full
of his claim against the defendant Norbert Stieglitz, as aforesaid,
and the entire scheme originally devised by and between said
Heidweyer & Stieglitz and said judgment creditors has been
successfully accomplished, and all the property of said defendants
Heidweyer & Stieglitz has been appropriated to prefer said
creditors to the exclusion of all others."
And that all these
"judgment notes,
Page 152 U. S. 551
judgments entered thereon, executions issued, levies and sales
thereunder, transfers, assignments, and other dispositions of all
their property, . . . are in effect but one instrument and one
transaction, and, taken together, constitute a general assignment
for the benefit of creditors,"
and
"were all entered into and consummated in pursuance of a
conspiracy between the parties thereto to defraud the other
creditors of said Heidweyer & Stieglitz."
It is further charged:
"That while it is true that all the transactions aforesaid
constitute an assignment for the benefit of creditors, yet said
assignment is fraudulent and void as to creditors in this, that
said judgment notes were purposely given for sums greater than was
due the payees thereof respectively at the time they were so given;
that the sum provided in said judgment notes for attorneys' fees,
being thirty-five hundred and sixty-four 4-100 dollars, and which
was included in said judgments confessed, and thereafter collected
thereon, was so inserted in said instruments with actual intent to
hinder, delay, and defraud the creditors of said Heidweyer &
Stieglitz, and actually has defrauded them, whereby said notes,
judgments, and everything that was done under them became wholly
fraudulent and void as to the creditors of said Heidweyer &
Stieglitz, and that all of said transactions constituting such
assignment were conceived and executed from beginning to end with
the sole and only purpose of defrauding the law and defrauding all
the creditors not intended to be protected thereby, including your
orators."
The amendment was intended to cover the objection of laches, and
its allegations in respect thereto are as follows:
"And your orators further represent that at the time of the
several transactions hereinbefore mentioned, they were, and ever
since have been, residents of the City of New York, and that the
judgment creditors aforesaid, who were defendants to this bill,
were and now are residents of the City of Chicago; that immediately
after the entry of the judgments aforesaid, your orators caused an
investigation to be made as to the genuineness of the indebtedness
represented by said judgments and the good faith of the judgment
creditors in having them
Page 152 U. S. 552
entered and enforced in the manner set forth herein. That it was
upon such investigation given out, represented, and stated to your
orators by each of said judgment creditors, defendants herein, that
their said judgments were for full value, and were entered
aggressively by them for the sole purpose of realizing the moneys
due them respectively, and that they did so without the knowledge,
privity, or procurement of the debtors themselves, and said debtors
then stated that they had still a large amount of property
remaining in their hands in the form of book accounts and bills
receivable, applicable to the payment of their other debts, and
that they proposed to convert the same, and apply the proceeds
thereof to such payment as soon as possible."
"Relying upon which statements and believing the same to be
true, your orators refrained for a considerable time to take legal
measures to collect the large indebtedness due them, in the belief
also that the transactions as to said judgments were
bona
fide, and having no knowledge or information of any fact
tending to show that they constituted, constructively, an
assignment for the equal benefit of all creditors."
"A long time afterwards, and within, to-wit, less than one month
from the time of bringing this suit, your orators for the first
time learned not only that said judgments covered and took all the
tangible property of said Heidweyer & Stieglitz, but that the
entry thereof was procured by them for the express purpose of
preferring said judgment creditors, and that at the same time they
transferred all their remaining property to a trustee for the
benefit of creditors, as heretofore in this bill alleged, thereby
creating an assignment, as herein alleged. "
Page 152 U. S. 556
MR. JUSTICE BREWER, after stating the facts, delivered the
opinion of the Court.
It will be perceived that nowhere in the bill is it alleged that
the failing debtors, Heidweyer & Stieglitz, ever executed any
formal written assignment for the benefit of creditors. It is
charged that they gave to certain creditors judgment notes, and
assigned and delivered their bills and accounts to one of the
creditors in trust; that these judgment notes, with the proceedings
had thereon, and the assignments of bills receivable and accounts,
were, in effect, but one instrument and one transaction, and
constituted a general assignment for the benefit of creditors, and
this, as plaintiffs insist, brought the case within the ruling in
White v. Cotzhausen, 129 U. S. 329,
129 U. S. 342,
in which this Court, by MR. JUSTICE HARLAN, said
"that when an insolvent debtor recognizes the fact that he can
no longer go on in business, 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."
On the other hand, it is contended that the supreme court of the
state has since that decision reached a different conclusion, and
in support thereof reference is made to the opinion in
Young v.
Clapp, 147 Ill. 176, 184, where this language
Page 152 U. S. 557
is found:
"The thirteenth section of the assignment act does not prohibit
preferences generally, but only preferences which are contained in
written deeds of assignment voluntarily executed for the benefit of
creditors. The language of the section is that 'every provision in
any assignment hereafter made in this state for the payment of one
debt or liability in preference to another shall be void.�"
A preference given by a debtor after he has made up his mind to
execute a general assignment for the benefit of his creditors has
been held to be void, upon the theory that such a preference must
be regarded as a part of the assignment. There is no such thing as
a constructive assignment contemplated by the assignment act. That
act does not take away the common law right of a debtor to prefer
one or more of his creditors. A preference may be given by the
execution of a judgment note resulting in the entry thereon of a
judgment.
See also Schroeder v. Walsh, 120 Ill. 403;
Weber v.
Mick, 131 Ill. 520, 533;
National Bank v. North Wisconsin
Lumber Co., 41 Ill.App. 383;
American Cutlery Co. v.
Joseph, 44 Ill.App. 194, and
Ross v. Walker, decided
November 27, 1893, by the appellate court of Illinois and reported
in 26 Chicago Legal News 133.
It is insisted that this construction of the statute should be
accepted by this Court as controlling, and the case of
Union
Bank of Chicago v. Kansas City Bank, 136 U.
S. 223,
136 U. S. 235,
is cited, in which this Court said:
"The question of the construction and effect of a statute of a
state regulating assignments for the benefit of creditors is a
question upon which the decisions of the highest court of the
state, establishing a rule of property, are of controlling
authority in the courts of the United States."
But we deem it unnecessary to enter into any consideration of
this question, or to determine whether there is any substantial
difference between the views of the Supreme Court of Illinois and
those of this Court, or whether, in case such difference be found
to exist, it becomes the duty of this Court to defer to the
opinions expressed by that, for there are questions nearer to the
surface and controlling. Even if it be conceded
Page 152 U. S. 558
that there is not disclosed by this bill that which is
equivalent to a voluntary assignment within the scope of the
statute, and that, in the absence of restrictive statutes, a
failing debtor has the right to prefer certain creditors, even to
the entire exclusion of others,
Jewell v. Knight,
123 U. S. 426,
123 U. S. 434,
and cases cited;
Smith v. Craft, 123 U.
S. 436, yet such debtor cannot, under pretense of
preferring certain creditors, pay to them sums largely in excess of
their demands, and thus prevent his other creditors from receiving
any payment. Here, the charge distinctly is that, while Heidweyer
& Stieglitz claimed to owe the preferred creditors certain
sums, for which they gave judgment notes, and which judgment notes
were afterwards satisfied in full, yet the amounts in fact due to
such creditors were much less than those so named and paid, and
that is a wrong of which the creditors who receive no payment can
justly complain. It is unnecessary, therefore, to inquire whether
the transaction between Heidweyer & Stieglitz and these
creditors was within the inhibition of the statute or not.
While this is so, we are constrained to hold that the plaintiffs
have not shown due promptness in asserting their rights. It is said
by counsel for defendants that it was the decision in
White v.
Cotzhausen which enabled the plaintiffs to perceive that they
had been defrauded, and our attention is called to the fact that
the opinion in that case was announced January 28, 1889, and this
suit was commenced April 23, 1889.
Post hoc, propter hoc
is not, however, sufficient, and the rule of causation implies some
other sequence than that of time. Nevertheless, the plaintiffs
waited nearly five years before commencing any proceedings to
charge the preferred creditors, and no satisfactory excuse for the
delay is shown. It is well settled that a party who seeks to avoid
the consequences of an apparently unreasonable delay in the
assertion of his rights on the ground of ignorance must allege and
prove not merely the fact of ignorance, but also when and how
knowledge was obtained, in order that the court may determine
whether reasonable effort was made by him to ascertain the facts.
Thus, in
Stearns v. Page, 1 Story 204, 215, 217, Mr.
Justice Story observed:
Page 152 U. S. 559
"General allegations that there has been fraud or mistake or
concealment or misrepresentations are too loose for purposes of
this sort. The charges must be reasonable, definite, and certain as
to time and occasion and subject matter. And especially must there
be distinct averments of the time when the fraud, mistake,
concealment, or misrepresentation was discovered, and how
discovered, and what the discovery is, so that the court may
clearly see whether, by the exercise of ordinary diligence, the
discovery might not have been before made, for if by such diligence
the discovery might have been before made, the bill has no
foundation on which it can stand in equity on account of the
laches. . . . But the bill does not state what particular
discoveries have been obtained, or when they were obtained, or by
what inquiries, or in what manner, or at what time."
On appeal, this decision was affirmed,
Stearns v.
Page, 7 How. 819,
48 U. S. 829,
and in delivering the opinion of this Court, Mr. Justice Grier laid
down the rule in this language:
"And especially must there be distinct averments as to the time
when the fraud, mistake, concealment, or misrepresentation was
discovered, and what the discovery is, so that the court may
clearly see whether, by the exercise of ordinary diligence, the
discovery might not have been before made."
Similar declarations may be found in several subsequent cases.
Badger v.
Badger, 2 Wall. 87, in which is found this
quotation:
"The party who makes such appeal should set forth in his bill
specifically what were the impediments to an earlier prosecution of
his claim, how he came to be so long ignorant of his rights, and
the means used by the respondent to fraudulently keep him in
ignorance, and how and when he first came to a knowledge of the
matters alleged in his bill."
Godden v. Kimmell, 99 U. S. 201,
99 U. S. 211;
Wood v. Carpenter, 101 U. S. 135,
101 U. S. 140,
in which this Court said:
"A general allegation of ignorance at one time and of knowledge
at another is of no effect. If the plaintiff made any particular
discovery, it should be stated when it was made, what it was, how
it was made, and why it was not
Page 152 U. S. 560
made sooner."
See also Lansdale v. Smith, 106 U.
S. 391,
106 U. S. 394;
Hammond v. Hopkins, 143 U. S. 224,
143 U. S. 251;
Felix v. Patrick, 145 U. S. 317,
145 U. S. 332;
Foster v. Mansfield, Coldwater &c. Railroad,
146 U. S. 88;
Fisher v. Boody, 1 Curtis 206;
Carr v. Hilton, 1
Curtis 390;
Moore v. Greene, 2 Curtis 202.
Tested by this rule, it is apparent that this bill must be held
deficient in not showing how knowledge of the wrongs complained of
was obtained by the plaintiffs. It is alleged that they were
ignorant, and now have knowledge, and that they acquired such
knowledge within a month prior to bringing the suit, but how they
acquired it and why they did not have the same means of
ascertaining the facts before are not disclosed.
What were the wrongs complained of? So far as the mere
preference is concerned, that was obvious. If the attorneys' fees
were improper,
Young v. Clapp, ubi supra; Hulse v.
Mershon, 125 Ill. 52, the fact that such attorneys' fees were
specified in the notes and included in the judgments was a matter
of record. That the stock of goods sold at sheriff's sale for less
than its value does not, of itself, show wrong on the part of the
parties thereto, plaintiffs or defendants. No act is shown tending
to prevent a fair sale, and the result, that of realizing less than
the value, is a common experience of such sales, and of itself
proves nothing amiss. If these plaintiffs failed to attend such
sales, they cannot complain of the result, and if they did attend,
they should have seen to it that the property brought its value. At
any rate, there is no pretense of a want of knowledge on the part
of these plaintiffs. There remain, therefore, as the concealed
wrongs only these matters: first that the judgment notes were in
excess of the real demands; second that Heidweyer & Stieglitz
transferred their bills and accounts receivable in trust to
Florsheim, and that that trust included an individual debt of one
of the partners. That the plaintiffs knew of the existence of these
bills and accounts is shown, and their alleged ignorance is only of
the fact of their transfer in trust.
Now it is a matter of common experience that when there
Page 152 U. S. 561
is so pronounced a failure on the part of a firm carrying such a
large stock, there is made by the creditors a thorough examination
of the situation. That such an examination, if made, would disclose
any substantial difference between the true indebtedness to these
preferred creditors and the amount of the notes given to them seems
reasonably certain, and if no such examination was made, it
indicated indifference on the part of the other creditors. If the
plaintiffs relied on the mere statements of these defendants, why
did they cease to rely upon such statements, and how did they
become advised of their untruth? So with reference to the bills and
accounts receivable, knowing what they were, they could easily have
ascertained whether they were collected, and, if so, by whom. If
collected by other than their debtors, that fact certainly should
have provoked inquiry. If collected by the debtors, why were the
moneys received not appropriated in payment of other than the
preferred claims?
These are matters in respect to which the bill fails to
enlighten us. Indeed, so far as disclosed, it would seem that when
the debtors failing, and failing for so large a sum, appropriated
all their tangible property to the payment of a few of their
creditors, the others, including these plaintiffs, accepted the
situation, and made no inquiry or challenge of the integrity of the
transaction for nearly five years. Such indifference and
inattention must be adjudged laches. Upon this ground alone, and
without reference to any other questions discussed by counsel in
the briefs, the decree of the circuit court is
Affirmed.
