Henry M. Dearing, as Trustee for the Creditors of the Elms Buggy Company, a Corporation, Respondent, v. McKinnon Dash and Hardware Company, Limited, and Others, Appellants

Henry M. Dearing, as Trustee for the Creditors of the Elms Buggy Company, a Corporation, Respondent, v. McKinnon Dash and Hardware Company, Limited, and Others, Appellants. Foreign corporation— an instrument transferring its property to a trustee who is to pay the proceeds to such of its creditors as accept the conditions imposed—invalid under the New York Statute of Frauds, as in fraud of creditors, although valid in the foreign State—rights of New York creditors—pleading the Statute of Frauds, when unnecessary. A foreign corporation, organized under the laws of the State of Michigan, and having its principal office in that State, but having considerable personal property in New York State, executed an instrument to a trustee as such, by the terms of which it conveyed to such trustee, for the creditors of the company,' all its property,-and authorized him to “dispose, of the same at any time in the best manner and for the best prices he .can obtain for the same at wholesale, retail or in job lots, as in his judgment shall be best for the beneficiaries herein; ” and, after providing for the payment of the expenses of administration, taxes, insurance and a reasonable compensation to the trustee, directed that out of the residue of the net proceeds of the property said trustee should “pay all of the other creditors of said first party (the Michigan corporation) in full who accept of this security and assent thereto, if there be in his hands a sufficient sum for that purpose. And if not, then he shall pay all such residue and remainder to all other creditors of said first party so accepting, ratably, share and share alike, in proportion to the amount of their respective claims;’’ and that, after the payment of all said claims, he should pay the surplus, if any, to the party of the first part. The instrument further provided that each of- the persons and corporations “ who are intended to be benefited hereby shall accept and abide by the terms and conditions of this security, and the same shall only operate in favor of those who shall, after knowledge hereof, avail themselves of the security of this instrument and accept and abide by the terms and conditions hereof, and all whose debts are due, or to become due within ninety days, shall assent to an extension of the same for said period.” The instrument contained the following condition: “These presents are upon the express condition that if the party of the first part shall and do ninety days after date hereof, well and truly pay or cause to be paid, to the several creditors and classes of creditors before mentioned, in the order above mentioned, the several debts, liabilities and obligations to them and each member thereof respectively owing * * * then this instrument to be void, otherwise to remain in full force.” Held, that, assuming that this instrument, under the decision of the Supreme Court of Michigan, was a chattel mortgage and did not violate the statutes of that State, it was in violation of the Statute of Frauds of the State of New York; as designed to hinder and delay the creditors of such corporation from the collection of their debts; first, in that, by requiring its creditors to accept the conditions thereof, it obliged them to extend their debtor's term of credit; second, in that, by the provisions as to the sale of the property, the trustee was authorized to sell upon credit; That the general rule that voluntary transfers of personal property wheresoever situated are to be governed by the law of the State of the owner’s domicile, is not applicable in the case of Creditors, in another State where the property is situated, who have secured a lien thereon by attachment proceedings; That, although the Statute of Frauds in order to he available to a party- as a defense must he pleaded, yet Where an instrument is invalid upon its face because it violates the provisions of. that statute, a complaint incorporating such instrument and based-thereon- is defective and insufficient for the reason that it does not state facts sufficient to constitute.a cause of action.. .-. Semblé,, that where an instrument constituting a plaintiff’s cause of action is "void on its face because pf its violation of the Statute of Frauds, it is not necessary that such objection be taken by answer or demurrer. Appeal by the defendants, McKinnon Dash and Hardware Company, Limited, and others, from a judgment of the Supreme Court in favor of the- plaintiff, entered in the office of the clerk of the - county of Monroe on the 3d day of July, 1897, upon the verdict of a jury rendered after a trial at the Monroe' Trial Term, and also from an order entered in said clerk’s office on the' 3d day of July, 1897, denying the defendants’ motion for a new trial made upon the minutes.- The “ Elms Buggy Company” is a.foreign corporation organized under, the laws of the State of Michigan,., with its principal' office at the city of' Albion in that State. On the 22d day of May,. 1896, at a meeting of the officers and stockholders of this corporation, a resolution was adopted authorizing- the president and secretary to “ make, execute, acknowledge and deliver to some person to be by them selected as trustee, a, chattel mortgage upon all the personal property of the company, and .a real estate mortgage upon its land and plant, all in this city, to secure payment of its indebtedness and indemnity to the First National Bank of Albion, against any guarantees or indorsements, and in the following order, said several creditors having priority also in the same order.” (Specifying the creditors to be secured.) Thereupon, and in pursuance of the- foregoing resolution; the' president and secretary of the company- made, executed and delivered to the plaintiff an instrument, by the terms of which the company granted, bargained, sold and mortgaged unto the plaintiff, as trustee for certain creditors of the company, all and singular the goods, chattels, personal property and effects of the company wherever situated, and of every name and nature. It also authorized the party of the second part, as such trustee, to forthwith take and keep possession of the property thus conveyed, and to “ dispose of the same at any time in the best manner, and for the best prices he can obtain for the same at wholesale, retail or in job lots, as in his judgment shall be best for the beneficiaries herein, and to receive payment therefor, and to apply the proceeds in the manner hereinafter provided, after deducting all necessary expenses of taking possession of the same, and of disposing thereof.” The mortgage then specified certain parties to whom the company was indebted in various sums, amounting in the aggregate to some $54,000, and stated that it (the company) is also' indebted to divers and sundry other persons, firms, corporations, etc., elsewhere, in divers amounts aggregating about the sum of $34,000. It then provided that “ These presents are upon the express condition that if the party of the first part shall and do, ninety days after date hereof, well and truly pay, or cause to be paid, to the several creditors and classes of creditors before mentioned, in the order above mentioned, the several debts, liabilities and obligations to them and each member thereof respectively owing, and shall indemnify and save harmless said First National Bank (one of the creditors before mentioned). from all liabilities, losses and damage on account of any drafts, notes or bills discounted by it, or indorsed or guaranteed by said first party, and shall also pay, satisfy and discharge all of its other indebtedness and liabilities, whether specifically named or not, but intended to be secured hereby, then this instrument to be void, otherwise to remain in full force.” The mortgage also contained a covenant “ to pay and discharge the said liabilities and obligations ninety days from the date hereof accordingly.” It also contained the usual provision authorizing the mortgagee, in the event of default, or in case he deemed “ himself or said debts insecure,” to take possession of and sell the mortgaged property, and to apply the moneys realized from such sale in the payment of certain debts and obligations in manner following, to wit: “ 1. He shall- pay all the costs incurred by him in and about the ■execution of the trust herein created. “2. He shall pay all the taxes, insurance and other expenses incurred in and about the foreclosure of this mortgage. !■ “ 3. He shall pay himself a reasonable compensation for his services, and executing the trust herein created.” ¡ With the residue and remainder in his hands, such trustee was then directed to pay certain creditors in the order and manner specified, and “ 9. Out of all the rest, residue and remainder of the net proceeds and avails of said property, including the proceeds 'of the mortgage of said real estate, then remaining in his hands, after paying all the debts, liabilities and expenses before mentioned, the said party of the second part, as such trustee, shall pay all of the other creditors of said first party, i/nfull, who accept of this security and assent thereto, if there be in his hands a sufficient sum, for that purpose. And if not, then he shall pay all such residue and'remainder to all other creditors of said first party so accepting, ratably, share and share alike, in proportion to-the-amount of their respective claims. It is understood that the proceeds or avails of said real estate mortgage shall be used and applied in the same order and in the same way as the avails of this mortgage. ■ “And said party of the first part promises and agrees to furnish the said party of the second part, as such trustee, a complete list or ■schedule of the names and post office addresses of the creditors not hereinbefore mentioned specifically, together with the amount of indebtedness owing by said first party to them respectively, and the ¡same when complete shall be taken to be a part of this instrument, ■so far as designating the persons to whom said residue shall be distributed, and to whose benefit the provisions of. this instrument and the avails of said real- estate mortgage shall inure after payment of the expenses and other indebtedness as before juovided. ' ‘‘'And after the payment in full of all said claims, charges a/nd ■expenses in the maimer aforesaid, and vn the order aforesaid, said' ■second party, as such, trustee, shall deliver the surplus remaining m Ms hands, if any, to said party of the first part, its successors and assigns.” The mortgage also contained these further provisions, viz.: “ And it is expressly understood that each, and every of the said persons and corporations above mentioned or referred to, and who are intended to be benefited hereby, shall accept and abide by the terms and conditions of this security, and the same shall only operate in favor of those who shall, after knowledge hereof, avail themselves of the security of this instrument and accept and abide by the terms and conditions hereof, and all whose debts are due or to become due within ninety days shall assent to an ' extension of the same for said period. “And the security of this mortgage shall operate and inure to said several creditors or classes of creditors in the order in wdiich. they are mentioned as"aforesaid, and shall extend to the liabilities of said first party to them in the order above stated, and on account of the liabilities of said first party to them respectively, as above mentioned. * * * “ It is believed by the first party that it is for the benefit and advantage of the creditors for it to continue the business of manufacturing until such time as it shall have used up all of its stock now on hand for the purpose of transforming the raw material into manufactured stock, and in case some certain lines should be exhausted, that it should buy sufficient new material of any kind not on hand necessary to complete the working up of any other available for that purpose. For this reason said first party contemplates the continuance of its said business and of selling its said product for the benefit of those secured. “ And it is expressly understood that said first party shall keep a true and accurate and detailed account of all the expenses of so operating the business and of all neceipts, and shall render such account and statement to said trustee, who shall have the right to examine into the said business and said work, and if at any time he shall believe that the continuance of said business is not for the interest of said creditors secured hereby he shall have full power and authority to stop the operation of said factory and take possession of the said property, if he deems it necessary, and at maturity of this mortgage dispose of the said property in accordance with the. terms of this mortgage. . “ And said party of the second part, as such trustee, is also authorized and empowered by himself or his agents to receive into his custody all proceeds of sales and all remittances and all orders for manufactured goods at all times, arid for that purpose he shall have access to all the correspondence and letter books of said first party to such extent as in his judgment is necessary for the full and complete discharge of his duties hereunder.” On the day this instrument was executed it was duly filed and docketed as a chattel mortgage in the city clerk’s office of the city of Albion, and thereafter and on the 23d day of May, 1896, a copy thereof was duly filed in the clerk’s office of the county of Monroe in this State, in which county the Elms Buggy Company, at that . time, had some sixteen buggies and other property, of the value of from $500 to $1,000. On the 27th .day of June, 1896, the defendant, the McKinnon Dash and Hardware Company, a domestic corporation doing business in- the city of Buffalo, in this . State, commenced an action against the Elms Buggy Company, upon a promissory note, and thereupon caused the property of that company, within this State, to be attached, and thereafter the same was sold upon execution by the sheriff of Monroe county. The plaintiff accepted the trust conferred upon him by the chattel mortgage, which acceptance bears even date with the mortgage, but the business, with the exception of a small amount of material purchased by the plaintiff, Was thereafter conducted by and in the name of the company itself, down to February 25, 1897, wdien a ■ receiver was appointed in an action brought to foreclose the mortgage upon the company’s real estate, since which time the business has been conducted by the company subject to the plaintiff’s rights. After the sheriff of Monroe county had taken possession of the personal property under the attachment, issued to him, a demand of its return was duly made by the plaintiff, which demand was refused, whereupon this action was brought. ' Charles M. Williams, for the appellants. Horace L. Bennett, for the respondent. [MAJORITY — Adams, J.:] Adams, J.: At the close of the proofs the learned trial court held as matter of law that the plaintiff was entitled to the possession of the property in question, and submitted nothing to the jury save the question of value. This disposition of the case' was apparently based upon the theory that the instrument relied upon by the plaintiff to sustain his claim of title was a chattel mortgage; that the same was •valid under the law of the State of Michigan, and that it conse-quently operated as a valid transfer of the mortgagor’s personal ■property wherever situated. In reviewing the several questions which are necessarily involved in the disposition made of the case by the trial court, it becomes important to determine at the outset the nature and effect of this •instrument, as construed by the law of the State where it was executed, for it seems to be conceded by the jdaintiff that if it is to be treated as a common-law assignment for the benefit of creditors, it is void for the reason, if for no other, that it creates preferences among the creditors of the Elms Buggy Company, and consequently contravenes the Statute of Frauds of the State of Michigan, which declares that “ All assignments, commonly called common-law assignments for the benefit of creditors, shall be void unless the same shall be without preferences as between such creditors and shall be of all the property of the assignor [not] exempt from- execution.” (Howell Ann. Stat. § 8739.) The courts of the State of Michigan have had occasion to give construction to instruments similar in character to the one under consideration, and in doing so to point out certain characteristics by which an assignment may be distipguished from a chattel mortgage, "Without stopping to consider these various distinguishing features, it may be said that the one essential difference between a chattel mortgage and a common-law assignment is, that the former is a conditional while the latter is an absolute- transfer of the title to the property affected thereby. (Pettibone v. Byrne, 97 Mich. 85 ; Warner v. Littlefield, 89 id. 329.) When, therefore, this simple test is applied to the instrument under which the plaintiff claims the right to maintain this action, it is quite clear that Ms contention rests upon a substantial foundation, for the mortgage contains an express condition that the transfer of title which it was designed to accomplish was to become absolute only in the event of the failure' of the mortgagor to pay, within ninety days from its. date, the several creditors and classes of creditors therein mentioned. . Several other objections to 'the validity of this instrument are raised by the defendant, but without noticing the same in detail, we think, in view of the conclusion we have -reached upon another branch of the case, it is sufficient to say that it may be assumed that under the decisions of the Supreme Court of Michigan the instrument in question is a chattel mortgage; and that inasmuch as its execution was authorized by the directors of the Elms Buggy Company and it does not entitle the mortgagor to any of the surplus moneys- until all the creditors have been paid in full, it does not violate the statute-of that State inhibiting preferences in common-law assignments. (Kendall v. Bishop, 76 Mich. 634; Cluett v. Rosenthal, 100 id. 193; Austin v. F. N. Bank, Id. 613; Adams v. Niemann, 46 id. 135.) The question, however, with which we are more immediately concerned is this: Does this mortgage contravene any statute of this State ? The contention of the defendants being that in. several of. its provisions it is repugnant- to the policy of this State as declared in what is known as the Statute of Frauds, and that, consequently, it is not valid as against creditors who have acquired any rights as to property within this State. This contention we áre inclined to think is well founded ; for the instrument' in question, by whatsoever name it may be called, does apparently contravene the provisions of our statutory law which are designed to prevent a failing or dishonest debtor from hindering or delaying his creditors in the collection of their debts. (R. S. part 2, chap. 7, tit. 3, § 1.) In the first place, the instrument, so far as it affects the creditors who are specifically mentioned therein, is coercive, in that it expressly directs that the provision for such creditors, shall operate only in the event that they shall, “ after knowledge hereof, avail themselves of the security of this instrument and accept and .abide by the terms and conditions hereof, and all whose debts are due or to become due within ninety days shall assent. to an extension of the same for said period,” This it seems to us is equivalent to saying to these creditors that if they will extend their debtor’s term of credit to a time fixed by the debtor himself, they can share in whatever benefits are to be derived from the instrument, but otherwise they must take whatever the debtor sees fit to allow them. The effect of such provision must necessarily be to hinder and delay these creditors in the collection of their debts. (Hyslop v. Clarke, 14 Johns. 458; Grover v. Wakeman, 11 Wend. 187; Armstrong v. Byrne, 1 Edw. Ch. 79.) Again, by the terms of this instrument, the trustee named therein was authorized to dispose of the property transferred to him “ at any time in the best manner and for the best prices he can obtain for the same at wholesale, retail or in job lots, as in his judgment shall be best for the beneficiaries herein, and to receive payment therefor and to apply the proceeds in the manner hereinafter provided,” etc. This clearly vests the trustee with discretionary power as to the time and manner of converting the property transferred to him into cash, and in the carrying out of this provision he is hampered by no limitation as to time. He is simply called upon to exercise hi.s own judgment, and in doing this he would obviously be at liberty, if he 'saw fit, to sell upon credit, and thus defer the settlement of the trust and the payment of creditors indefinitely. Such a delegation of power is in direct violation of the spirit, if not the letter, of the statute, because it is well calculated to cause the very delay which the statute inhibits. In the case of Jessup v. Hulse (21 N. Y. 168), which involved a consideration of. this same question, it was said : “ If the clause in question purported in terms to invest the assignee with any discretion, as coming directly from the assignor himself, it- would be fatal to the assignment; as if it had authorized the assignee to dispose of the property at such time and in such manner as in his judgment would be most conducive to the interests of the creditors, or as he should deem expedient and best calculated to promote their interests.” And in the case of The City Bank of Rochester v. Westbury (16 Hun, 458) it was held that where, by the terms of a chattel mortgage, the mortgagor was permitted to remain in possession of the mortgaged property, and in his discretion to sell- the same on credit and thereby keep his other creditors at bay, the transaction was fraudulent per se. But the provisions of this instrument to which attention has thus far been directed are by no means the only ones which have a tendency to hinder arid delay creditors, for the mortgagor or assignor expressly reserves to itself the right to continue the business, and not only to convert the raw material which' was on hand into manufactured stock, but also to purchase new material for that purpose and to sell the same for the benefit of the parties secured. This, it seems to us, when considered in connection with the other portions of the instrument, is nothing more or less than a device by .means of which the corporation sought to carry on its business, and at the same time secure to itself immunity ffrorii importunate creditors; and, if so, it is obviously repugnant to the Statute, of Frauds.. Assuming, then, that the instrument in question is in conflict with the laws of this State, we are brought to the consideration of another and perhaps a still more important question, which is whether this fact permits us to treat it as void, in view of the further fact that it appears to be valid under the laws of the State where it was executed. It is not to be denied that, by a rule of interstate comity, transfers of personal property, -valid by the law of the domicile of the transferror, are, generally speaking, upheld and sustained by our courts. (Ockerman v. Cross, 54 N. Y. 29 ; Barth v. Backus, 140 id. 230.) But this, like every other rule, has its limitations, one of which is that the domiciliary law must not contravene the statute law of this State nor be repugnant to its policy. (Barth v. Backus, supra; Hervey v. Rhode Island Locomotive Works, 93 U. S. 664; Warner v. Jaffray, 96 N. Y. 248; Keller v. Paine, 107 id. 83.) In the case last 'cited it was said that “ the general rule that the voluntary transfer of personal property wheresoever situated is to be governed by the law of the owner’s domicil always yields when the law and policy of the State where the property is actually located have provided a different rule of transfer from that of the State whqre the owner lives.” And it has been repeatedly held that this general rule also yields in favor of domestic creditors who have secured a lien upon property within this State by attachment proceedings. (Guillander v. Howell, 35 N. Y. 657; Keller v. Paine, supra; Hallgarten v. Oldham, 135 Mass. 1. See, also, Bish. Insolv. § 295.) It thus appearing that, the instrument under which the plaintiff claims title is in some of its provisions repugnant to the statute as well as to the policy of this State, and that the property to which he asserts his title was within this State at the time that instrument was executed, the only remaining question to be determined is whether the defendants are in a position to avail themselves of these facts as a defense to the action. Although it was for some time a mooted question in this State, it seems now to be pretty well settled that the party seeking to avail himself of the Statute of Frauds as a defense must plead it, unless it appears upon the face of the complaint that the contract sued upon was within the statute (Porter v. Wormser, 94 N. Y. 450; Hamer v. Sidway, 124 id. 538; Wells v. Monihan, 129 id. 161; Crane v. Powell, 139 id. 379), and this, it is conceded, the defendants have failed to do. Nevertheless we are of the opinion that the defendants have not deprived themselves of the right to assert that the plaintiff cannot maintain his action for the reason that the instrument upon which he bases the same is violative of the Statute of Frauds. This instrument, it is to be observed, is incorporated into and made a part of the complaint, and whatever defects it jjossesses are consequently apparent upon the face of that pleading. It follows, therefore, that if the instrument is for any reason invalid, the complaint is defective for'the reason that it does not state facts sufficient to constitute a cause of action; and this is an objection which may be raised at any stage of the proceedings. (Code Civ. Proc. § 499 ; Coffin v. Reynolds, 37 N. Y. 640.) , It is true that in the case of Grane v. Powell (supra) it was said that “ When the defect in the plaintiff’s cause of action appears on the face of the complaint the defense must be interposed by demurrer; ” but in that case the complaint did not disclose an agreement which was invalid upon its face, and consequently the question now under consideration was not in the case, and the language above quoted must, we think, be regarded as obiter. ■ It appears that at the close of the plaintiff’s evidence in this case the defendants’ counsel moved for a dismissal of the complaint upon the ground that no cause of action had been established by his proofs; and among the reasons stated in support of the motion was one to the effect “ that the instrument under which the plaintiff claims.is void by the laws and policy of. the. State of New York as against these defendants.” This motion was denied, and when the proofs were all in it was renewed and again denied. We think that, within all the authorities which we have cited, this motion raised precisely the same question which would have been presented had the statute been pleaded by way of defense. We are not aware that it has yet been held that, where an instrument which constitutes a plaintiff’s cause of action is void upon its facei an objection to it must '.necessarily. be taken by answer or demurrer, and we are unwilling, to establish' any such practice. (Carling v. Purcell, 46 N. Y. St. Repr. 287; Lupean v. Brainard 20 App. Div. 212.) Our conclusion, therefore, is that the Statute of Frauds was available to the defendants as a defense in this action, and that because the instrument sued upon is clearly repugnant to that statute, the judgment and order appealed from should be reversed. All concurred. Judgment and order reversed and a new trial ordered, with costs to the appellant to abide the event.