Bell v. Leggett et al.

Bell v. Leggett et al. Illegal contract. A promissory note given by a third person to a creditor, in consideration of the withdrawal of opposition to the debtor’s discharge in bankruptcy, though without the knowledge of the latter, is void, as against the policy of the bankrupt law. Bell v. Leggett, 2 Sandf. 450, overruled. Appeal from the general term of the Superior Court of the city of New York, where judgment had been entered upon a verdict in favor of the plaintiff, denying a motion for a new trial, made on a bill of exceptions. (Reported below, 2 Sandf. 450, where a new trial was granted, after a former verdict in favor of the defendants.) This was an action of assumpsit brought by the plaintiff, as surviving partner of the firm of Abraham Bell & Co., against the executors of Samuel Leggett, deceased, to recover the amount of two promissory notes, dated 12th December 1845, one of them for $579.37, at six months, and the other, for $586.41, at nine months. On the 23d February 1842, Barney Corse, a son-in-law of Samuel Leggett, the maker of the notes in question, filed his petition in the District Court of the United States for a discharge under the bankrupt law. Abraham Bell & Co., and two other creditors, having proved their claims, in due form, opposed the bankrupt’s ^discharge, on the ground that a bond for -* $100,000, given by Corse to his father, was a false and fictitious debt. The issue thus raised was tried by a jury, in June 1843, but the jury disagreed; a venire de novo was awarded, and on a second trial, there was a similar disagreement on the part of the jury; a third trial resulted in a verdict against the bankrupt. Under these circumstances, Samuel Leggett, on the 20th December 1845, delivered to William G. Wetmore, his counsel, who was also Corse’s solicitor in the bankruptcy proceedings, the notes in suit, with six others, accompanied by the following letter: New York, 12 mo. 20th, 1845 William C. Wetmore, Respected friend: I inclose to thy care eight notes of hand, drawn by myself, payable to my own order, and indorsed, in all amounting to $5184.68, the day of the month in blank, to be filled in the day Barney Corse may receive a full discharge in bankruptcy, and said notes are to be delivered to Joseph Gerard, as the attorney of Belden, Haxton, and Abraham Bell & Co., on a delivery to thee, for me, a full and complete assignment of all claims, judgments, suits, &c., against Barney Corse, as has been understood, when said discharge is obtained. Respectfully yours, Samuel Leggett. Barney Corse, the debtor, received his discharge in bankruptcy, on the 17th April 1847, and on the 26th May, Wetmore delivered the notes to Mr. Gerard, and received from the opposing creditors assignments of their judgments against Corse, the bankrupt. On the trial, the defendants’ counsel offered to prove that the arrangement was made by Leggett, without the connivance or knowledge of the bankrupt, and without any collusion on his part; which, on objection, was excluded, and an exception taken. *The court, thereupon, charged the jury, that , if the consideration of the notes was, in whole or ^ in part, an agreement that the creditors of Corse, to whom they were given, should withdraw all opposition to his discharge, but made without his having anything to do with it, the facts formed no defence, and the plaintiffs were entitled to recover upon them. To which the defendants’ counsel excepted. The jury found a verdict for the plaintiff; and the court, at general term, having denied a motion for a new trial, made upon a hill of exceptions, and entered judgment upon their verdict, the defendants took this appeal. Howard, for the appellants. Gerard, for the respondent. [MAJORITY — * J. Gardiner, J.] * J. All contracts or agreements which have for their object anything which is repugnant to justice, or against the general policy of the common law, or contrary to the provisions of any statute, are void; and whenever a contract or agreement is entered into with a view to contravene any of these general principles, there is no form of words, however artfully introduced or omitted, which can prevent courts of law and equity from investigating the truth of the transaction; for ex turpi contract'd actio non oritur — is a rule both in law and equity. (1 Com. on Cont. 30; 1 Story Eq. 296; Nellis v. Clark, 4 Hill 424.) This principle is universally recognised and has often been applied in our own courts, to contracts which had for their object the perversions of the ordinary operations of the government; such as contracts to prevent a fair competition at legal sales by auction, contracts to prevent the administration of the insolvent laws, and contracts by which one person engages to pay another for his aid or influence in procuring an appointment to office. (Gray v. Hook, 4 N. Y. 449.) It was correctly said by the learned judge in the court below, in delivering the judgment of that court, in this case, that the principle had long been established in this [ *180 state, by a series of cases, that a security given by a friend of an insolvent, pending his application for a discharge from his debts, to induce a hostile creditor either to join in the petition for such discharge, or to withdraw his objections to its being granted, is void, as being contrary to the policy of the insolvent law. The defence relied upon and offered to be proved, was, that the testator, Samuel Leggett, made the note upon which the action was brought, in consideration that the plaintiffs would withdraw their opposition to the discharge of Barney Corse, his son-in-law, who was then an applicant for a discharge from *his debts, as a bankrupt, under the late bankrupt act, and which they opposed as judgment-creditors, and assign their judgments against Corse to him, immediately after a discharge to Corse should be granted. This evidence was objected to and excluded, to which the defendants excepted. The judge then charged the jury, that the defendants defended on the ground that the consideration of the notes was, in whole or in part, an agreement that the opposing creditors, to whom the notes were given, would withdraw all opposition to the discharge of Corse, but that such facts formed no bar in law to the plaintiff’s recovery on the notes; to which there was also an exception. It was remarked by the court below, that all the cases to which it had been referred, arose under the statute for discharging an insolvent from his debt, upon the application of two-thirds of his creditors; and in all, the arrangement was made by the insolvent himself, or through his intervention; that our decisions were founded upon those made in England, under the bankrupt act, 5 Geo. II., by which the debtor was prevented from obtaining his certificate, unless four-fifths of his creditors united in a petition that it should be granted;. that the act,- also, made it unlawful for the bankrupt, or any person, to give any money or property to a creditor to induce him to sign the certificate; that under this act, it was held in England, nearly a century ago, and such had been the law ever since, that a bond given by a relation of the bankrupt, to a creditor who would not otherwise sign the certificate, was illegal and void; that these decisions were in accordance with the positive enactment of the statute, but when a case arose, not within the provision, though against the policy of the act, Lord Tenterden said, the security was not void, and a bond fide holder might recover upon it. (Birch v. Jervis, 3 Car. & Payne 379.) The policy of the English bankrupt act, as well as our insolvent laws, and our late bankrupt act is, that a full and fair disclosure and surrender of the property of the debtor should be obtained; and that, on such disclosure and surrender, he should be discharged from his debts, * 181 "1 an^ crec^ors *placed upon an equal foot- -* ing, without preference, except where liens existed, in respect to his property thus subjected to the control and disposition of the law. Any transaction or arrangement which tends to defeat either of these objects, is inconsistent with the policy of the law, illegal and void. The giving of the note, as was offered to be proved in this case, and the agreement made, was inconsistent with the policy of the late bankrupt act. In the first place, it might, and probably did, place these creditors on more favorable grounds than the rest, in regard to the amount which they would obtain of their demands. In the second place, which is of greater importance, it was well calculated to suppress inquiry and to protect fraud and concealment from successful disclosure and development. The just presumption is, that the giving of the notes and making the arrangement were induced from apprehension that the investigation which these creditors were prepared and intended to make of the bankrupt’s affairs, would result in defeating his discharge; if so, the transaction was fraudulent and deserves to be condemned. To the remark, made by the court below, that all our cases to which it had been referred, arose under the statute for discharging an insolvent from his debts, upon the application of two-thirds of his creditors, and in all the arrangements were made by the insolvent, or through his intervention; and that all the authorities were founded upon one or other of the grounds; that the payment or security made to the favored creditor was contrary to the provisions of the statute, detrimental to the rights or interests of third persons, oppressive upon the insolvent, or a fraud upon his other creditors; and that the late bankrupt act had no provision analogous to those upon which the learned judge had commented, contained in our insolvent law and the English bankrupt acts — it is a sufficient reply, that the observation of Lord Mansfield, in Smith v. Bromley (Doug. 696), shows that these principles are not the result of statute law. “ It was a wrong, in itself, before any provision was made against it by statute.” The substance of the consideration for giving the notes, was *the withdrawal of the opposition of _ ... . qo these creditors to the discharge of Corse, their *- debtor, and depending upon its being granted him under the bankrupt act. In other words, this arrangement was to be carried out, if, by the withdrawal of their opposition, a discharge should be granted, and not otherwise. This, in my judgment, was an arrangement clearly against the policy of the act. It was a wrong in itself, and so, it seems, that the court below looked upon it; but on the ground that there was no provision against it contained in the act, upon the authority of Birch v. Jervis, supra, it was held, not to make the notes void. Some stress was laid upon the fact, that no one, under the bankrupt act, was dependent on another, as each creditor might, on proving his debt, oppose the discharge of the applicant and that the procuring the creditors in question to withdraw their opposition, did not affect the rights of others. This is true, but it does nbt go to the question. It affects the policy of the bankrupt law as vitally, when there is but one creditor opposing the discharge of a debtor, and that one is procured to withdraw his opposition, as though there were many, and one only is induced to stop his opposition. It is the policy of the law, to obtain a full and fair disclosure and surrender of the property of the debtor, which the withdrawal of the opposition of one creditor, if there be no other, tends to defeat. That principle governed in the case of Payne v. Eden (3 Caines 212.) The note on which the suit was brought, and declared to be void, was given to the last of the petitioning creditors, and who signed the insolvent’s petition after there was a sufficiency in number and value to exonerate the debtor. In the case of Waite v. Harper, 2 Johns. 386, the promise was, to pay the cost of an action, in consideration of the plaintiff’s not opposing the defendant’s discharge under the insolvent law— it was held void. So, a bond given to procure, upon the like consideration, certain notes for. the plaintiff, it was held, could not be enforced. (Bruce v. Lee, 4 Johns. 410.) In Yeomans v. Chatterton, 9 Johns. 295, a note of a third person, given to a creditor to induce him to subscribe a petition for an insolvent’s discharge, it was held, • „ could not be recovered. In *all these cases, the -I instrument on which the action was brought was held void in its creation. Therefore, a transfer to an innocent indorsee of such paper, would not defeat the policy of the law; it would be deemed void, even in such hands. The same principle was sustainéd in Wiggins v. Bush (12 Johns. 306), and in Tuxbury v. Miller (19 Id. 311.) In the latter case, a bond had been given as a reward to the plaintiff for not opposing the discharge of the insolvent. The court said, the transaction implies that there was good ground for opposition, and that if such opposition had not been withheld, the insolvent could not have legally obtained his discharge. Such bargains, it was said, were against public policy and the true intent of the act; for they tend to facilitate fraud, by screening it from scrutiny. In my judgment, it is of no consequence that the arrangement was made between the creditors of this bankrupt and a third person, without the intervention or knowledge of the bankrupt. The consideration of the notes was illegal, it was the price of an act, wrong in itself, an inducement to contravene a great principle of public policy. (Nerot v. Wallace, 3 T. R. 17; Holland, v. Palmer, 1 Bos. & Pul. 95.) Lord Tenterden, in Birch v. Jervis (3 Car. & Payne 380), referred to by the court below, it is true, at nisi prius, did hold, that a bill given, not to induce the party to whom given to sign the certificate, but merely to keep him from taking any step to oppose the defendant, the drawee, from getting his certificate, was good in the hands of the plaintiff a bond fide holder. It is not, however, necessary to inquire, whether that decision is not in opposition to a series of adjudged cases in the courts of England. It is enough, that it is in conflict with many adjudged cases in our own courts, where it has been uniformly held, that negotiable paper given upon such a consideration was illegal and void, and being so, could not be enforced by a bond fide holder. I will, however, refer to the case of Jackson v. Dawson, 4 Barn. & Ald. 692, which, I think, stands opposed to the principle as held in Birch v. Jervis; there, an insolvent debtor having *petitioned the insolvent court to be discharged under the act, a creditor 184 gave notice of his intention to oppose him, on the ground, that the debt was fraudulently contracted. To induce the latter to withdraw his opposition, the insolvent agreed to execute, within three days after his discharge, a warrant of attorney for the debt, and in thé meantime to give a promissory note to a third person for the . amount, which was to be delivered up, on the execution of the warrant of attorney. The insolvent was discharged, the note delivered up, and the warrant of attorney executed, which the court set aside, together with the judgment entered upon it, on the ground that the agreement on which this was founded was contrary to the policy of the insolvent act. The judgment should be reversed, and a new trial granted, costs to abide the event. Gardiner, J. Corse, the son-in-law of the testator, was an applicant for a discharge from his debts, under the provisions of the bankrupt law. The notes in question were made by the defendant’s testator, in pursuance of an agreement with the plaintiffs, who were creditors of Corse, that they should withdraw all opposition to the proceeding. If the bankrupt were entitled to his discharge, the maintenance of such a contract by the court would have a direct tendency to encourage a factious opposition, which the creditor knew to be groundless, with a view to coerce a composition; this would operate oppressively upon the debtor. Opposition, under such circumstances, and with such motives, would he dishonorable, and no man should be permitted to exact a bribe for being honest. We must assume in this case, that the bankrupt was ignorant of the bargain made for his benefit; but by upholding the agreement, we establish a principle which invites collusion between the bankrupt and opposing creditors, through the instrumentality of friends, to the prejudice of others having claims upon his estate. If the bankrupt were not entitled to his discharge, in consequence of fraud or the commission of any other act which the law prohibits, the result upon the contract would be the same. *The discontinuance of a „ ... well-founded opposition, under such circum- *- stances, for hire, does not differ much in principle from compounding a felony. The whole purpose of the parties to the agreement would be, to give the bankrupt a benefit designed for the honest insolvent, and which the fraudulent debtor, by sound justice and express provisions of the statute, was prohibited from receiving. It is true, that the opposing creditor may discontinue his opposition, or dispose of his demand at pleasure; of this other creditors are aware and must take the risk. But neither they nor courts of justice are called upon to foresee and guard against a secret arrangement, the fruits of which are made contingent upon the obtaining of the discharge by the bankrupt, which will enlist the interest and is calculated to secure the action of the contestant in favor of the insolvent, whether his object is honestly to comply with the law, or to cheat and defraud his creditors. I think, that the agreement in which these notes originated is opposed to the whole policy of the bankrupt act, and is, consequently, illegal and void. Judgment reversed, and new trial awarded. Johnson, J., dissented.