Andrew J. Hackley et al., Respondents, v. John H. Draper et al., Executors, etc., et al., Appellants

Andrew J. Hackley et al., Respondents, v. John H. Draper et al., Executors, etc., et al., Appellants. (Argued January 25, 1875; decided February 9, 1875.) Where a receiver, appointed in an action against a corporation, fraudulently obtains an order for a sale of a debt due the corporation, an equitable action, at the suit of the creditor, will lie to vacate the order and set aside a sale made in pursuance thereof. The creditor is not limited to a motion in the action wherein the receiver was appointed. In such an action, wherein the debtor to the corporation was made a party defendant, it appeared that by his instigation and procurement a judgment of $68,000 was secretly sold by the receiver for $2,500; that the receiver had previously been offered by the judgment debtor at one time $25,000, at another $10,000 ; that the sale was to a third person; hut that the debtor furnished the money and the purchaser subsequently satisfied the judgment of record. Held, that although it did not appear that the debtor was a direct participator in the receiver’s fraud, yet the evidence was sufficient to authorize a judgment against him setting aside the sale and satisfaction-piece. It is not necessary, to the maintenance of such an action, for the plaintiffs to return the money paid for the assignment, as it was not received by the plaintiffs and was not within their control. Appeal from judgment of the General Term of the Supreme Court in the fourth judicial department, affirming a judgment in favor of plaintiffs entered upon a decision of the court at Special Term. (Reported below, 2 Hun, 523; 4 N. Y. S. C. [T. & C], 614.) This action was brought to set aside, on the ground of fraud, a sale made by Robert Yelverton, receiver, etc., of a judgment against one Simeon Draper, and to cancel and set aside the assignment of the judgment by the receiver, and a satisfaction thereof executed by the purchaser. The findings of fact by the court, as far as pertinent to the questions discussed, are in substance as follows: Libby v. Rosekrans (55 Barb., 219) questioned. In 1855, the plaintiffs herein commenced an action in the Supreme Court against the Lake Ontario, Auburn and New York Railroad Company. On the 18th day of March, 1855, Joshua Burt was appointed in said action receiver of the property of the said defendant, “ with the rights, powers and authority of receivers, under and pursuant to article 3, title 4, chapter 8, part 3 of the Revised Statutes as prescribed by law,” and upon his filing a bond as described in and by said order it was ordered that “ he be and hereby is vested with the right, authority and power, as receiver of the property, etc., as prescribed by said article 3, title 4, chapter 8, part 3, of the Revised Statutes and the law in such cases.” The bond required by said order was filed, and said. Burt entered upon the discharge of the duties of receiver. Among the assets that came to his hands was a claim against the city of Auburn, upon and for their subscription for the stock of the said railroad company. The said city of Auburn had recovered a judgment against Simeon Draper for the sum of §69,578.36. On the 19th day of May, 1857, the said city of Auburn, in satisfaction and settlement of said claim, duly assigned said judgment to the said receiver. On the 7th day of December, 1861, judgment was recovered in said action in favor of plaintiffs against said railroad company for the sum of $75,825.83 Several receivers had been appointed and removed, and on the 21st day of January, 1862, by an order of the Supreme Court, Robert Yelverton was appointed receiver, and upon filing a bond as directed in said order it was ordered that he “be vested with full power as receiver for the defendants in said action.” At the time of such appointment plaintiffs and another person, were the sole creditors interested in, and having a claim upon the assets. Yelverton was and had been for along time an intimate and personal friend of plaintiffs, and was appointed such receiver at their request, with the understanding and agreement that he would, in endeavoring to collect said judgment, consult with, and so far as his duty would permit, follow their directions. Draper had offered the sum of $25,000 to compromise the judgment and subsequently the sum of $20,000, and in and prior to June, 1863, the sum of $10,000, which» several offers were rejected by plaintiffs, of all which Yelverton was informed, and was informed that if said judgment was sold at public auction plaintiff Iiungerford would give $35,000 therefor. Yelverton promised and agreed with plaintiffs’ counsel that he would take no proceedings on or with said judgment without first informing and consulting with said counsel. At a Special Term of the Supreme Court held on the third Tuesday of January, 1864, Yelverton procured an order authorizing and empowering him to sell said judgment by public or private sale in his own discretion; such order was procured ex parte without notice to or the knowledge of any of the parties interested or their counsel or attorneys, although the receiver met one of the plaintiffs almost daily. It was procured upon a petition stating in substance that Draper was insolvent and nothing could .be collected on said judgment. On the 20th day of February, 1864, Yelverton, assuming to act under and in pursuance of said order, sold and assigned said judgment at private sale to one John Steward, for the sum of $2,500, which was paid by Steward, who was afterward repaid that sum by Draper. Such sale and transfer wras so made at the instigation and by the procurement and for the sole benefit of Draper. At the time such order was procured and sale and assignment made, Draper was worth more than the amount paid to the receiver for and on the transfer of said judgment. Dpon being notified of such order, sale and assignment, and on or about the 17th day of November, 1865, this action was commenced against Draper (who was then living), Steward and Yelverton. The executors of Draper, on the'18th day of April, 1867, filed an inventory of the assets of the said deceased, duly appraised at the value of $96,673. The court thereupon directed judgment, that said order, sale and assignment of judgment, and the satisfaction thereof, he set aside as fraudulent and void, and the judgment restored of record; that Yelverton be removed from such receivership, and that a new receiver be appointed. Judgment was entered accordingly. Further facts appear in the opinion. Luther R. Marsh for the appellants. The court had power to make the order for a sale of the judgment, and it was valid until regularly reversed or set aside. (2 R. S., 469, § 68; id., 42, § 7, sub. 4; id., 467; 2 Edm. Stat., 490, § 68; id., 43, § 7, sub. 4; id., § 488.) Receivers are entitled to the instructions of the court in the discharge of their duties. (Edw. on Recrs., 1-6; Verplank v. Mer. Ins. Co., 2 Paige, 438, 452 ; Lawrence v. Green. Ins. Co., 1 id., 587; Law v. Ford, 2 id., 310 ; Marten v. Van Schaick, 4 id., 479 ; In re Croton Ins. Co., 3 Barb. Ch., 642; Chataw. Bk. v. White, 6 Barb., 597 ; Curtis v. Leavitt, 10 How., 481.) Plaintiffs should have applied for relief in the action in which the receiver was appointed and cannot ask relief in equity. (Graff v. Jones, 6 Wend., 522; Mulks v. Allen, 12 id., 253; Wright v. Hooker, 4 Cow., 415; Lowber v. Mayor, 26 Barb., 262; Chappel v. Chappel, 12 N. Y., 215 ; McCotter v. Jay, 30 id., 80; Requa v. Rea, 2 Paige, 349; Brown v. Frost, 10 id., 243; Nichol v. Nichol, 8 id., 350; Am. Ins. Co. v. Oakley, 9 id., 259 ; Gould v. Mortimer, 16 Abb., 450.) No order or judgment of a court having jurisdiction and free from fraud can be assailed collaterally ; it is binding until vacated in the proceedings in which it was made. (People v. Sturtevant, 9 N. Y., 266; Embury v. Conner, 3 id., 522; Bangs v. Dunkenfuld, 18 id., 592-595; Schaettler v. Gardner, 47 id., 404; Voorhees v. Bk. of U. S., 10 Pet., 449; Cooke v. Halsey, 16 id., 71; Ex parte Watkins, 3 id., 193; Grignon v. Astor, 2 How. [U. S.], 319; Harvey v. Tyler, 2 Wall., 328; Parker v. Kane, 22 How. [U. S.], 1; Libby v. Rosekrans, 55 Barb., 202-220; Brown v. Frost, 10 Paige, 243; Am. Ins. Co. v. Oakley, 9 id., 259; McCotter v. Jay, 30 N. Y., 80; Gould v. Mortimer, 26 How. Pr., 167; 55 Barb., 239.) The transaction should be supported as a compromise or settlement of a desperate claim. (2 R. S., 42, § 7, sub. 9; 2 Edm. R. S., 43, § 7, sub. 9; Sup. Ct. Rule, 93.) Plaintiffs have no standing-in court and cannot maintain this action. (Code, §§ 117, 119; Osgood v. Laytin, 5 Abb. [N. S.], 1.) Charles Mason for the respondents. The order allowing the sale was in violation of all precedents and practice and in conflict with Buie 93 of the Supreme Court. (1 Crary’s Pr., 229; 2 R. S., 483, § 67, [2d ed.J § 68; 1 R. S., 798, § 7, sub. 4 [2d ed.]; 2 R. S., 13 [1st ed.]; 34 N.Y., 555, 582; 32 How. Pr., 21; 2 Abb. Pr., 20; Isnaid v. Gazeaux, 1 Paige, 38.) The court was right in setting aside the order. (15 J. R., 121; 3 Barb., 616; 12 N. Y., 156; 6 J. Ch., 87; 1 id., 406; 1 Sandf. Ch., 103; 40 Barb., 512; Clarke v. Underwood, 17 Barb., 202; 8 N. Y., 9.) [MAJORITY — Miller, J.] Miller, J. The counsel for the defendant claims, that if the plaintiffs were entitled to any relief in this action their true remedy was to apply to the court, by motion, in the action in which the receiver was appointed. The Special Term .had authority, no doubt, to hear a motion for the purpose indicated, and could have vacated the sale made by the receiver, although it- is not so clear that the equitable rights of the parties could have been as well protected and disposed of in this form as could be done in an action brought especially for that purpose. But even if a motion could have been made, I think that' an equitable action will lie to vacate an order of a court, obtained for a fraudulent purpose, and a sale made in pursuance of the same. The rule is well settled, that courts will set aside, as a nullity, a judgment, decree, or award obtained by fraud. (State of Michigan v. Phoenix Bank, 33 N. Y., 9, 27; Wright v. Miller, 4 Seld., 9 ; Dobson v. Pearce, 2 Kern., 156; Tiernan v. Wilson, 6 J. Ch., 411.) In Wright v. Miller, it was held, that equity will entertain a suit to vacate a decree obtained by collusion between trustees and tenants in possession of a trust estate, to defeat the rights of persons entitled to equitable interests therein. In Dobson v. Pearce, it was said: “ It is unquestionable that a Court of Chancery will grant relief against judgments obtained by fraud.” In Tiernan v. Wilson, a sheriff’s sale of real estate was set aside by the chancellor, in an action brought for that purpose, upon the ground that it was fraudulent in law, as the sheriff was chargeable with a gross act of negligence and abuse of trust. The same rule is applicable to a case where an order was fraudulently obtained, and within these cases, I do not see why this action was not properly brought. There is a dictum in the opinion of Libby v. Rosekrans (55 Barb., 202, 219, 220), which is cited by defendants’ counsel, to the effect that there is no 'authority which will sustain an independent action for the purpose of setting aside an order directing a receiver as to the manner in which he should proceed in giving notice of and making the sale, because it is irregular and improvident, even although the plaintiff was not a party to the proceeding in which the order was made; but the authorities cited by the learned judge to sustain this position are all cases of foreclosure sales, where it has been held that there is a full, adequate, and complete remedy by a motion to the court. (See Brown v. Frost, 10 Paige, 243 ; Am. Ins. Co. v. Oakley, 9 id., 259 ; McCotter v. Jay, 30 N. Y., 80; Gould v. Mortimer, 26 How. Pr., 167.) Even if the case cited was in point, it would be in direct conflict with the principle laid down in cases decided by this court, which have been already cited supra. It is insisted that there was no fraud or collusion between Simeon Draper and the receiver, Yelverton, in obtaining the order or in carrying out the sale, and as fraud and collusion is the basis of the original complaint, that the action cannot be maintained. Conceding that no fraud is established against Draper, sufficient appeared upon the trial to authorize a judgment against him, as well as the other parties. By Draper’s instigation and procurement, and with his knowledge and assent, a large judgment of $68,000 was secretly disposed of for the trifling and inadequate consideration of $2,500, when the receiver had been previously offered for the same, by Draper himself, at one time, $10,000, and at another, $25,000. The money, according to the facts proved, was furnished by Draper. The sale was for his benefit, and if valid he would have reaped the fruits of it. He suffered no loss by the purchase. In no sense does he occupy the position of a bona fide purchaser, and cannot be injured by setting aside the sale. Although Draper was not a direct participator in the receiver’s fraud, yet he was, to a certain extent, a party to the sale sufficient to render him liable. It would be strange if, under such a state of facts, there was no relief in equity even against innocent parties who had, by the fraud of an officer of the court, without a fair consideration, unlawfully acquired title to property intrusted to his charge. As Draper had knowledge of the.negotiations which had previously been made, and encouraged the sale, it is no answer to say that he was acting under the order of the court and therefore should be protected. The order of the court should not shield a party who thus acts with knowledge, and no wrong is done by restoring the parties to the same condition which they occupied prior to the alleged sale and transfer of the judgment. In Tiernan v. Wilson (supra), the sheriff had sold land of the judgment debtor for a mere nominal sum, which sale was held to be fraudulent and void. As to the purchaser it was decided that there was no sufficient evidence of any fraudulent combination between him and the sheriff, though he undoubtedly purchased at his peril, and with a knowledge of all the circumstances that could affect the validity of the sale. And as to his assignee it was held that there was no fraud, he being a stranger to the proceedings, but the notice to the purchaser of the circumstances of the sale was constructive notice to him so as to affect his title. The receiver here was liable to the charge of fraud, as the sheriff was in the case cited, for a gross violation of his duty, and Draper for purchasing with knowledge of the facts hereinbefore referred to.’ Although it is so stated in the order, I think that the receiver was not appointed in accordance with the provisions of the Revised Statutes in regard to the voluntary dissolution of corporations (2 R. S., 467), but was, what is commonly called, a “common-law receiver,” in contradistinction to a statutory receiver — an officer of the court vested with all the powers which the court may confer, and subject to its order and direction. In such a case the court has the power to give directions as to his proceedings, and perhaps may, in its discretion, provide as to the manner of disposing of the effects of the debtor. But if such an order be obtained fraudulently by an imposition upon the court it may be vacated for the fraud, and the parties restored to their original position. My opinion is that the judgment of the Special Term may be upheld upon this ground. As the transaction was fraudulent the sale cannot be upheld as a compromise. In fact, if intended as a compromise of a doubtful claim an application should have been made to the court for that purpose, and an order obtained authorizing a settlement to be made. It is said that the money paid for the assignment of the judgment not having been returned no cause of action was made out. The answer to this position is, that the plaintiffs never received it, and it was in the hands of the receiver, beyond the plaintiffs’ control, and they could not, therefore, return it. A point is made, that the court had no power to direct that the $2,500, paid to the receiver, should be applied on account of the judgment. There is no such provision made in the judgment as contained in the printed case, and therefore it is not necessary to discuss that question. There is no force in the point made, that the plaintiffs have no standing in court and cannot maintain the action. The plaintiffs have an interest in setting aside the sale of the judgment; and this objection is also sufficiently answered in the opinion of the judge upon the demurrer to the plaintiffs’ complaint. There was no error upon the trial, and the judgment must be affirmed, with costs. All concur. Judgment affirmed.