Kullman v. Greenebaum

McFarland, J. The main question in this case is about the validity of a composition deed, by which the respondents and the other creditors of appellants agreed to receive pro rata the proceeds of the sale of appellants’ assets, and thereupon to release them from all claims and demands. Respondents contend that said agreement is invalid, because a fraudulent preference was given to certain of the creditors who signed it, and the court below so found. The court found as facts, that [405]some of the creditors at first refused to sign the agreement, and that, to induce them to sign, “ some of the relatives and friends of the defendants did pay such creditors the full amount of their several demands, with the knowledge, but without the direction of the defendants, and not out of the assets of the said defendants, nor under any promise or expectation of repayment, and thereby did make a preference of such creditors, and induced them to sign the said composition; and that such creditors did receive a larger proportion or sum than secured by-said agreement; of all of which facts the plaintiffs at the time of signing such composition were ignorant, and upon the discovery thereof notified the defendants,” etc.

We think that the ruling of the court below was right, and in line with the current of authorities. The general rule is correctly laid down in Story’s Equity Jurisprudence, sec. 378; and we stated it quite fully in the recent case of O’Brien v. Greenebaum, ante, p. 104. It is strenuously argued by counsel for appellants that the principle does not apply here, for the reasons that the payments to the preferred creditors were not made by the debtors or their agents; and particularly that the payments were not made out of the debtors’ assets, — that is, out of the actual and disposable property which they then had. It is to be noticed, however, that the appellants knew of these secret payments to preferred creditors; and as the utmost good faith is required in such transactions, the appellants can hardly be said to be innocent of the imposition practiced upon respondents. But beyond all that, the rule does not, by any means, rest solely upon the participation of the debtor in the fraud and the diminution of the actual assets. In a composition agreement each creditor is a party as to each other creditor, as well as to the debtor. “ Creditors sign upon the consideration that others sign upon the same terms; and if they are deceived, they are misled into an act to which they might not otherwise-have assented:” (See Story’s Eq. Jur., sec. 379, and notes.) [406]