Skinner, et al. v. Southern Grocery Co.

Skinner, et al. v. Southern Grocery Co. Bill to Bet Aside Conveyance as Fraudulent. Decided Dec. 19, 1911. 56 South. 916.) 1. Fraudulent Conveyances; Grounds of Invalidity; Intent. — A conveyance intended to delay a creditor, though it does not defraud him or prevent him from obtaining satisfaction of his judgment, is fraudulent under the direct provisions of section 4293, Code 1907. 2. Same; Invalid Transfers; Presumption. — Where the effect of a conveyance is necessarily to delay or defraud creditors of the grantor it is conclusively presumed that it was made with intent to defraud, and hence, if the intent which determines the validity of a conveyance is necessarily to delay or defraud creditors of the grantor it is conclusively presumed that it was made with intent to defraud, and hence, the intent which determines the validity of a conveyance is the legal and not the moral intent. 3. Same; Remedy of Creditors; Pleading.- — A bill to set aside a conveyance as fraudulent under section 4293, Code- 1907, need only allege facts which reasonably show an intent to hinder, delay or defraud creditors; but mere general allegations that a conveyance is fraudulent is insufficient. 4. Same; Partnership Property; Partition. — Where land was inherited by a number of heirs and most of them entered into a partnership to carry on a plantation, and when the partnership became involved, they made voluntary partition of the land by conveyances between themselves, assigning the shares of those who were not engaged in the partnership and arranging for the assumption of mortgages upon the property, the conveyances were not fraudulent as to creditors of the partnership, for the owners had a right to partition. 5. Same; Transfer; Conveyance to Corporation. — Where a number of partners had been carrying on a plantation business which had become involved, and they transferred all their property to a newly created corporation in which they owned all the stock, and the corporation assumed all the debt, the conveyance to the corporation was not fraudulent as to the creditors of the partnership as it in no way hindered or delayed them. Appeal from Marengo Chancery Court. Heard before Hon. Thomas H. Smith. Bill by the Southern Grocery Company against W. B. Skinner and others, to declare certain conveyances fraudulent and void and to annul them. Prom a decree overruling demurrers to the bill respondents appeal. Reversed and remanded. Henry McDaniel and Partridge & Hobbs, for appellant. In respect to the two allegations of the bill, the court must accept that least favorable to the pleader, and presume that the parties who acquired the stock still own it free from encumbrance. — Rogers v. Brooks, 99 Ala. 31; Loseh v. Pickett, 12 Pac. 822. We must, therefore, consider the case strictly as one between the individual members of the partnership, and a creditor seek'ing to reach property belonging to these individuals in satisfaction of a partnership liability. — Rapier v. Gulf City G. Go., 64 Ala. 330; Ware v. Owens, 42 Ala. 212; Hatchett v. Blanton, 72 Ala. 423. In passing on the demurrers, the direct allegations of intent must be eliminated as mere conclusions of the pleader.- — Flewellen v. Grane, 58 Ala. 627; McHan v. Ordway, 76 Ala. 342; Curran v. Armstead, 101 Ala. 692; Goal Go. v. Powder Go., 108 Ala. 218; First Nat. Bank v. Acme Go-., 123 Ala. 344. One of the inseparable incidents of ownership, the power of alienation, remains with the debtor even after insolvency, it being required only that the disposition shall he such as to do no wrong to creditors. — Hawkins v. Bailey, 48 Ala. 376. It is not the kind of- property but the quantum of the estate from a standpoint of capacity to pay debts that is considered in this respect. — Levy v. Williams, 79 Ala. 179. The question of intent is one of construction to be determined by the legal effect of the act. — Myer v. Sulzhacher, 76 Ala. 128; Pollock v. Myer, 96 Ala. 172. The transfer to the corporation did not have the effect of hindering or delaying creditors. — Moor e-Handley H. Go. v. Tower M. Go., 87 Ala. 206; G. & G. G. Go. v. Fruitdale L. Go., 121 Ala. 340; Taylor v. Dwyer, 131 Ala. 91; Reeves v. Peterman, 109 Ala. 366. The burden is on complainants to allege the facts constituting fraud according to their legal effect.— Heinz v. White, 105 Ala. 670; Warren v. Hunt, 114 Ala. 506; Little v. Stern, 125 Ala. 609, and authorities supra. A share of stock is as tangible and as easily levied upon as a piece of real estate, and more easily sold. — 182 111. 256; 86 N. W. 399; 48 R. W. 228; 14 S. W. 578; 21 Atl. 811; 133 Fed. 556. B. F. Elmore, and C. K. Abrahams, for appellee. Equity will set aside as fraudulent, conveyances of property made to and for the formation of a. corporation by debtors. — Metcalf v. Arnold, 110 Ala. 180; Metcalf v. Arnold, 132 Ala. 74; Moore & Handley Hwd. Go. v. Totoers Hwd. Go., 87 Ala. 206; The Christian & Graft Gro. Go. v. Fruitdale Lmh. Go., 121 Ala. 340; 20 Cyc. 404. The bill is not multifarious in attempting to set aside separate and distinct conveyances among the several parties. — Hill Bros, et al. v. Moone, 104 Ala. 353. The legal duty of a debtor is to keep his property open to his creditors, and not to put it beyond their reach, nor dispose of it for any purpose other than the payment of his debts. “Money is more easily shuffled out of sight than land.” — Chief Justice Black. So are certificates of stock in a corporation, we submit, more easily shuffled out of sight and placed beyond the reach of creditors than lands. — Levy & Go-, v. Williams, 79 Ala. 179. The transfers and conveyances of the lands to the corporation operate as impediments to the efficacious pursuit of the complainant’s legal remedy to levy an execution on the said lands for the satisfaction of its debt, and equity will intervene to remove the impediment- — Taylor et al. v. Divyer, 131 Ala. 110. It can make no difference in this case that the appellee might subject the certificates of stock to the satisfaction of its judgment, if the conveyances were made with the intent to hinder, delay or defraud, equity will set said conveyances aside. — Henderson v. Farley Nat. Bank, 123 Ala. 517; McGlarin v. Anderson, 109 Ala. 571; Beall v. Lehman, Durr & Go., 110 Ala. 116; Code 3739. The transactions being all be-between parties closely related, the several transactions should be closely scrutinized. — Davis v. Vandiver, 160 Ala. The complainant being an existing creditor at the time of the several conveyances, the burden is on the grantees to show the bona fides of the several transactions. — Davis v. Vandiver, 160 Ala. 151; Bussell v. Davis, 133 Ala. 655. The insolvency of the parties is sufficiently averred, and so are the facts and knowledge and dealings and relations and conduct of all the parties to make the bill sufficient for the conclusion of fraud to logically flow, and to place the burden on the defendants (appellants) to show the bona fides of the various transactions. — Goal Gity Goal & GoJce Go. v. Hazard Powder Go., 108 Ala. 218. [MAJORITY — MAYFIELD, J.] MAYFIELD, J. This is a bill by a single judgment creditor to set aside a number of conveyances of its debtors as fraudulent. Demurrers were interposed to the hill for want of equity, and because no sufficient facts were alleged, to sIloav an intent on the part of the grantors to hinder, delay, or defraud creditors within the meaning of the statute against fraudulent conveyances (Code 1907, § 4293) under Avhich the bill is filed. The demurrer Avas overruled, and from that decree respondents prosecute this appeal. The property, the subject-matter of the suit, originally belonged to one W. A. Skinner, who died intestate on the 13th day of February, 1907, leaving the respondents as heirs and distributees of his estate, Avith the exception of B. P. Allen, Jr., who is the husband of one of deceased’s daughters. These heirs and distributees at the time of or soon after the death of A. B. Skinner composed a partnership under the name of W. A. Skinner Company, and as partners became indebted to complainant, which debt Avas reduced to judgment in May, 1909, and Avas thereafter recorded in Marengo county. The partnership Avas also largely indebted to other creditors, including W. M. Spencer, in the sum of $11,000,- and to Mrs. Watkins in the sum of $1,484. These two debts Avere secured by mortgages upon the lands in question. The partnership continued to do business up to March 5, 1908, upon the lands in question, and so continued to use the property of the estate of W. A. Skinner in connection Avith the business; but there is no sufficient averment that this property was a part of the assets of the partnership, it rather appearing from all the averments of the bill that it Avas the individual property of the partners, instead of being that of the partnership proper. But the bill is a little uncertain as to this. On February 27, 1908, prior to the rendition of complainant’s judgment and to the acquiring of any lien, but during the continuancy of the partnership, all the heirs except Louise Allen conveyed to her a part of the premises as her share of the estate of W. A. Skinner, and in consideration that she would assume and discharge the debt and mortgage of Mrs. Watkins. On the same date, February 27, 1908, Louise Allen and her husband conveyed to the other heirs, respondents in this suit, the remainder of the property in question and belonging to the estate of W. A. Skinner, or rather their share of such of the estate, in consideration of said conveyance by the others to Louise Allen, and of the assumption, by the others, of all the debts against the property conveyed, except the aforesaid debt of Mrs. Watkins, Avhich had been assumed by Mrs. Allen.' On March 5th, seven days after these conveyances, the Skinner Plantation Company, the respondent corporation, Avas formed; the sole officers and stockholders thereof being the respondents herein. Its authorized capital stock Avas $25,000, of Avhich $20,100 Avas paid up, each of the corporators receiving 40 shares, of the par value of $100 each, except Allen, the husband of Louise Allen, who received only one share which was paid for in money, the other subscriptions being paid by the conveyance of the respective interests of the subscribers in the property inherited from W. A. Skinner, deceased. The corporation assumed to pay and discharge the debt and mortgage of W. M. Spencer, which Avas a charge upon the lands, amounting to $11,036. The lands conveyed to the corporation Avere valued at $20,000 over and above the debt and mortgage of Spencer. The bill further avers that this was. all the property owned by the incorporators, but that the stock, as above stated, was all issued to the grantees and incorporators in the amounts shoAvn. The bill seeks to have these several conveyances of this common property originally belonging to W. A. Skinner set aside as fraudulent, and to have the property subjected to the payment of complainant’s debt or demand. Tbe equity of tbe bill is undoubted if the facts averred are sufficient to withstand tbe demurrer. No statute probably has been often er construed by tbe courts than the statute under consideration. England and most all tbe states of tbe Union have statutes similar to this. St. 13 Elix. c. 5, is said to be tbe last of a series of English statutes which has ever since been tbe foundation of modern laws on tbe subject of fraudulent conveyances. Tbe various state statutes upon tbe subject will be found to be largely modeled after it, and, in tbe main, re-enactments of it. This statute, however, both in England and America, has been held by tbe courts to be largely declaratory of the common law. Judge Dillon in tbe case of Gardner v. Cole, 21 Iowa, 205-210, said that tbe English statute bad never been reenacted in Iowa, but that the English statute was mainly, if not wholly, declaratory of tbe common law, which at an early date “set a face of flint against fraud in every shape,” and so became tbe basis of American jurisprudence on this subject and that it was, therefore, in that' state a part of tbe unwritten law. The intent put into action, and which merely binders or delays tbe creditor, is sufficient. It need not defraud him, nor deprive him wholly, or even partially, of bis remedy for finally obtaining satisfaction of bis debt or demand. Tbe intent to defraud, however, must exist to render the transaction void; but this intent is sometimes a question of fact and sometimes a question of law. If the necessary consequence of a given act, on tbe part of a debtor, is to binder, delay, or defraud bis creditor, then tbe law conclusively presumes that it was committed with tbe intent to defraud, no matter what was the motive that prompted tbe act. Such would be a voluntary gift by an insolvent debtor of a large- part of liis property. The motive might 'be “sweet charity,” but the gift would nevertheless be fraudulent as to the donor’s creditors. Such acts carry within themselves evidence of fraud against- the creditors. The statutes therefore refer to the legal, and not to the moral, intent. The fraud meant to be prevented by the statute is a legal fraud. To invoke it is not necessarily to impute a corrupt or evil motive; on the other hand, an act of the debtor may be a fraud in morals, and dishonorable, but, unless it be a legal fraud upon the creditor, he cannot have it declared void under the statute. For a bill to be sufficient under this statute, it is not necessary that it should set forth facts showing any formal or premeditated design to accomplish the illegal purpose. It is enough that it alleges facts which reasonably show an intent to hinder, delay, or defraud the creditors. If facts are thus alleged which reasonably show the necessary intent, the transaction cannot be sustained by showing that there is open to the creditors some remedy other than the setting aside of the fraudulent transactions. It has been uniformly held, however, that ci*editors’ bills for the purpose of setting-aside conveyances made by debtors as fraudulent must plainly and succinctly state the facts which constitute the fraud; that mere allegations, in terms, that the conveyance was “fraudulent” or was made with the “intent to hinder, delay or defraud,” are not sufficient; that allegations which merely impute motives of fraud are not sufficient; that fraud must be charged, which should be-done by setting forth the facts which constitute it. In the case of Ft. Payne Furnace Co. v. Ft. Payne Coal Co., 96 Ala. 476, 11 South, 440, 38 Am. St. Rep. 109, the rule was thus stated by Stone, G. J.: “A mere general averment of fraud as that a conveyance, or a sale or other disposition made or threatened was or is with fraudulent intent, is not sufficient in pleading. Fraud is a conclusion. The conduct and facts from which the conclusion is deduced must be averred, so that issue can be formed on the averments. We do not mean that all the details must be given, but the substantial facts which constitute the bad faith must be set out. And, to obtain relief, they must be proven, if denied. — Story, Eq. Pl. § 215a,” etc. In Flewellen v. Crane, 58 Ala. 628-629, the law upon the subject was thus stated by Brickell, O. J.: “The conveyance sought to be vacated is exhibited with the bill, and on its face recites that it is made in payment of $20,000, due from the grantor to the grantee. The averments of the bill are that the grantor was insolvent at the time of the execution; and that it conveyed all his property which was subject to levy and sale, and that it is ‘fraudulent and void as against preexisting creditors,’ and ivas ‘made with intent to hinder, delay, or defraud said creditors.’ It is now insisted that these averments are insufficient to support the decree vacating the deed — that there is no averment impeaching the bona fides or sufficiency of the consideration expressed in it, no averment that the debt was not real, and the conveyance accepted in payment of it; no averment that there was any secret trust for the grantor; and no averment of any fact which authorizes the mere conclusion, stated in the bill, that the conveyance is fraudulent. Fraud is a conclusion of law from facts stated and proved. When it is pleaded at law or in equity, the facts out of which it is supposed to arise must be stated. A mere general averment, without such facts,, is not sufficient.” These two cases we think clearly show that the facts averred in this bill do not show any fraudulent intent sufficient to support the general averments or conclusions of the pleader as to fraud. The facts-averred in the two quoted cases we think come nearer showing fraudulent intent than do the facts in this case, yet in each of the two the bill was held insufficient, in that last quoted from it was so held after a final decree granting relief. It is very true that the facts constituting the transactions complained of are very fully and clearly set out in this bill. The conveyances complained of are set out, as well as the proceedings to organize the corporation to which the property was conveyed, but the trouble is these proceedings on their face are perfectly valid. They appear to be supported by sufficient considerations, and are all authorized by law, and are in a great measure declared valid by statute. As a part of this partition Mrs. Allen agreed to discharge a mortgage lien of Mrs. Watkins to the amount of more than $1,400, the other owners agreeing to discharge that of Mr. Spencer to the amount of more than $11,000; they thus attempting to free the property for the use of the respective joint owners and their respective creditors. Surely there could be no fraud in this as agáinst the other unsecured creditors who had no lien upon the property. It Avas clearly to their advantage that these prior and paramount liens should be discharged. We are wholly unable to see hoAV the rights of any of the creditors other than Mrs. Watkins and Mr. Spencer Avere violated or could.be injured by this voluntary mode of partition of the property and of the incumbrances thereon. And the two creditors named are not complaining. Mrs. Allen not being a debtor of complainant, it is certain that the latter had no right to proceed against her interest in the common property, and her right to have it set apart to her was both prior and paramount to the complainant’s right to proceed against the interests of the other joint owners Avho were its debtors; and it was certainly to the interest of complainant to have her share separated from the shares of its debtors. No attendant badges of fraud are shown' by the bill or its exhibits; but, on the other hand, according to the averred facts, as contradistinguished from the conclusions of the pleader, the transactions were perfectly valid and were made in the utmost good faith. None of the transactions were voluntarily, in the sense of not being supported by sufficient consideration. If the facts stated in the bill are true, the real equitable ownership of the property has never changed hands; and there is manifested no intent to conceal the real facts — all have been put upon record as the law directs. The whole of the property came to these respondents by descent. They therefore acquired it as tenants in common, and, of course, the rights of' their creditors must of necessity attach to the property, subject to the rights of the joint OAvners to partition it by sale or by division in specie. The tAvo deeds, made between these joint OAvners, the one to Mrs. Allen, by the other heirs, and the one, by her and her husband, to the other heirs, represented nothing hut a partial partition — -partition to the extent of separating Mrs. Allen’s share from that of the others. No facts are averred to sIioav that there Avas any fraudulent intent in the making of these conveyances. Nothing Avas done that a court of chancery Avould not have done for the parties had they been unable to agree upon a partition. The right of the complainant as against this property, for the satisfaction of its debt, of necessity was subsequent and secondary to the right of the joint owners to partition it, no matter if the joint owners had been its debtors. Having acquired the property by descent, as such joint owners, the right to partition was necessarily prior to the rights of complainant, who was then only a creditor of a part of the owners, without any lien upon the property. This certainly disposes of the question of fraud as to the two conveyances among the joint owners for partition, and decides it against the contention of the complainant. We will uoav proceed to notice the feature of the bill which deals with the formation of the corporation, and the conveyance of the property thereto in payment of the subscriptions of the stockholders to such corporation. There can be no doubt that a conveyance of property to or for the purpose of the formation of a corporation by a debtor, Avhen. made Avith the purpose or intent to hinder, delay, or defraud creditors, is void, as much as if it Avas attempted to vest the title in an individual or any other entity in fraud of the rights of creditors. As was said by this court in .the case of Metcalf v. Arnold, 110 Ala. 184, 20 South. 301, 55 Am. St. Rep. 24, the formation of a corporation, investing it with the legal title to all the debtors’ property, and parceling out the stock among the debtors and their Avives, may be a neAv devise to defraud creditors. In the case of Kingman v. Mowry, 182 Ill. 256, 55 N. E. 330, 74 Am. St. Rep. 169, the question is discussed more fully than in any case Ave have found. Therein are reviewed the cases declaring conveyances of property for such purpose void, and that court states the law upon the subject as follows: “The contention of appellant is that the transfer by a debtor of his property to a corporation necessarily hinders and delays the creditor in the collection of his debts, and is in all instances a fraud in legal contemplation. Adjudged cases are cited as in support of this position. We have examined these cases, and, while such transactions were condemned in the instances then under consideration, we do not understand it to be deduced from them that it is a fixed rule of law that the formation of a corporation by the debtor, and the conveyance of all his property to the corporation, though made in actual good faith, is conclusively presumed to be fraudulent as a matter of law. * * * It is believed that in each of the cases relied upon some circumstances of fraudulent intent, as the reservation of a trust in favor of the debtor, the design to create and administer the corporation for the mere purpose of enabling the debtor to conduct his business under the guise of a corporation and escape, even temporarily, his creditors, or some improper disposition or manipulation of the stock interest of the debtor to the injury of his creditors, or other like consideration, determined the action of the court.” It is further said, in the above case, that the law has no universal rule that a mere change of the property into stock of a corporation must be denounced as a fraud in legal contemplation, when it may be clearly seen that it is not So in fact. A debtor may so deal with his property as to change its character, without subjecting himself, as matter of law or of fact, to the charge that he has fraudulently hindered, and delayed his creditors in the collection of their debts. The statute condemns only those transactions which are fraudulent as against creditors. But it protects, or does not include, transactions which are made upon a good consideration and which are bona fide. As said by Mr. Bump (Fraud. Conv. § 201) : “The-intent of the act (the statute) is that the consideration shall be valuable, for equity requires that a transfer which defeats others shall be made on as high and good consideration as the things which are thereby defeated. Good consideration, therefore, is construed to' mean a valuable consideration as between creditors and others claiming under the debtor.” If the conveyances in question were shown to have been without consideration, the bill would be sufficient; but the bill shows upon its face that all were made upon valuable and sufficient consideration. If the averments of this bill and its exhibits are true — and this is all complainant can ask on this hearing — its creditors'now own as much property in value as they owned when its debt was created. It is true that the character of the property and the title thereto are changed, yet they still own all that they owned when this debt was contracted, and it has not been changed in character since it acquired its judgment lien. It is again true that the bill avers that complainant’s debtors put all of their property into the corporation, but it also shows that they own all of the stock in the corporation, and therefore own the whole of the corporation as well as all its property in a court of equity, there being no indebtedness of the corporation alleged, except the mortgage debt due to Spencer. It is said, by all the authorities that the mere fact that one is in debt or even insolvent does not deprive him of all dominion and control over his property; that his creditors have no- right to require that his’ property shall remain of one certain character. He may exchange it for other property, or sell it, if in good faith and for a sufficient consideration ; and, in like good faith to his creditors, he may apply the proceeds, in his discretion, to his •debts, to purchases of other property, and to his maintenance. But a debtor is held to good faith with his ■creditors in such dealings. He occupies two' relations with regard to his property — one, as the owner, and the other, as a quasi trustee for creditors. He is trusted by them oh faith that he is dealing with it in good faith towards them. They therefore have ■ this kind of an ■equitable claim as to the property. The law enjoins upon the debtor the obligation and duty of paying his debts, and to that end holds him to the exercise of good faith in dealing with his property. If he acts in bad faith towards his creditors in dealing with his own property, and they are prejudiced thereby, they may, by virtue of the statute, have the transactions set aside as fraudulent. So far as any facts appear from the allegations of this bill, these transactions were rather to the advantage than to the detriment of this complainant. In the first place, the property is not shown to be partnership property, but the individual property of the partners held jointly with others who were not debtors of the complainant, and whose interest in the common property, of' course, could not be subjected to the payment of complainant’s debt against the partnership. The effect of the transaction Avas to separate this interest not liable from that of the partners Avho Avere liable. The other transaction, conveying it to the corporation, Avhich Avas. merely substituted for the partnership, Avas to convert the land into partnership property, or corporate property, which Avas but a substitute for the partnership property. The conveyances also provide for the. discharge of two mortgages upon this property, for more than $12,000, held by other parties than the complainant, thus relieving complainant’s debtors, of this large debt and making them much more able to discharge complainant’s demand. If Mrs. Watkins and Mr. Spencer consented to this transaction — and the bill does not intimate that they objected — then certainly the conveyances did not tend to hinder, delay, or defraud complainant, but made it easier and more certain that it could collect its debt from the respondent and from their stock which they received in lieu of their interests in the land. It therefore follows that the bill in its present shape was subject to the demurrers interposed, and that the chancellor erred in overruling them. Reversed and remanded. Simpson, McClellan, Sayre, and Somerville, JJ., concur. Dowdell, C. J., and Anderson, J., not sitting.