McDonald v. Cummings, (1895) 24 SCR 321

Supreme Court of Canada

McDonald v. Cummings (1895) 24 SCR 321

Date: 1895-03-11

Hugh McDonald (Defendant)

Appellant

and

Selden W. Cummings, Assignee of the Estate of Neil McKinnon (Plaintiff)

Respondent

1894: Nov. 7; 1895: Mar. 11.

Present:—Sir Henry Strong C.J. and Taschereau, Gwynne, Sedgewick and King JJ.

ON APPEAL FROM THE SUPREME COURT OF NOVA SCOTIA.

Chattel mortgage—Preference—Hindering and delaying creditors—Statute of Elizabeth.

In an assignment for benefit of creditors one preferred creditor was to receive nearly $300 more than was due him from the assignor on an understanding that he would pay certain debts due from the assignor to other persons amounting in the aggregate to the sum by which his debt was exceeded. The persons so to be paid were not parties to nor named in the deed of assignment.

Held, reversing the decision of the Supreme Court of Nova Scotia, Taschereau J. dissenting, that as the creditors to be paid by the preferred creditor could not enforce payment from him or from the assignor who had parted with all his property, they would be hindered and delayed in the recovery of their debts and the deed was, therefore, void under the statute of Elizabeth.

Appeal from a decision of the Supreme Court of Nova Scotia affirming the judgment at the trial in favour of the plaintiff.

The material facts of the case are thus set out in the judgment of Mr. Justice Sedgewick:

“The question involved in this case is as to whether the assignment in the pleadings referred to is void under the statute of 13 Elizabeth, chapter 135. One Neil McKinnon, a trader at Mabou in Inverness, Nova Scotia, being in insolvent circumstances, on the 11th November, 1892, made an assignment to S. W. Cummings, the plaintiff in this action. Subsequent to the

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date of the assignment Mr. Robert Taylor recovered a judgment against McKinnon for $919.60, and having issued execution thereon the sheriff levied upon and sold considerable quantity of the goods covered by the assignment, and the plaintiff, McKinnon’s assignee, brought this action to recover damages from the sheriff by reason of this alleged conversion of the goods in question. The case was tried before the Chief Justice of Nova Scotia without a jury and he gave judgment in favour of the plaintiff. Upon appeal to the Supreme Court en banc this judgment was sustained, Meagher J. dissenting. The assignment in question, upon its face, was in no respect obnoxious under the authorities to the statute of Elizabeth although it provided for preferences and contained a clause by which the executing creditors released the assignor as a consideration for participating in its benefits.

“It is, however, claimed that the instrument is void by reason of the following facts:—William Cummings & Sons were, shortly previous to the assignment, creditors of McKinnon to the extent of $318. It was at the instance of these creditors that the assignment was made. It would appear that McKinnon was anxious to pay in full certain creditors before executing the assignment, and to provide for the payment of certain other creditors after the assignment, and thereupon an understanding was come to between the plaintiff and one Gladwin (both of whom were representing William Cummings & Sons at the time) on the one hand, and McKinnon on the other, by which Cummings & Sons paid on account of one Murray $162; a Mr. Hunt $101; and a further sum of $340 to other creditors; making McKinnon’s indebtedness to Cummings & Sons amount in the whole to about $921. But it was further provided in the deed of assignment that the assignee was to pay to William Cummings & Sons not $921 but

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$1,201 therein alleged to be due them by McKinnon, and the defendant claimed that that firm having been preferred for an amount largely in excess of their real claim against McKinnon the effect is that the deed is void as against the creditors under the statute of Elizabeth. The plaintiff, on the other hand, claims that the amount of this difference, $280, represented amounts due by McKinnon to certain local creditors about Mabou for cattle and otherwise, and that the plaintiff and Gladwin having agreed on behalf of Cummings & Sons that they would subsequently pay these local claims in full it was perfectly justifiable to add this amount, $280, to McKinnon’s actual indebtedness, and thereby make his total claim, as represented in the instrument, $1,201. And the question is whether this particular transaction, in connection with other facts, to which I will refer, has the effect of vitiating the deed.”

Ross Q.C. and McNeil for the appellant relied on Ex parte Chaplin[1].

Harrington Q.C. for the respondent.

The judgment of the majority of the court was delivered by:

SEDGEWICK J. (His Lordship stated the facts set out above and proceeded as follows):—

The instrument contained a clause giving authority to the assignee to employ any person he pleased, upon such wages as he might think fit, to carry out the trusts of the deed, and it seems to have been understood at the time the assignment was executed that that duty was to be performed by the assignor himself. The learned Chief Justice who tried the case came to the conclusion that the plaintiff should recover, stating that—

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it was strongly urged that the payment by which the debt of Cummings was apparently increased from $300 to $1,200 could not be sustained, but it was quite clear that no deception or fraud was intended or practised. The assignor declared his intention before making the assignment to make these debts preferential and the mode adopted, when explained, removes all difficulty as to the bona fides of the transaction. The transaction was not a “mere cloak” for retaining a benefit to the grantor. If the deed is bonâ fide, that is, if it is not a mere cloak for retaining a benefit to the grantor, it is a good deed under the statute of Elizabeth; Alton v. Harrison[2], Ex parte Games[3];

and this view of the case was accepted by Ritchie and Townshend JJ. upon appeal. Mr. Justice Meagher, however, was not satisfied as to the proof of the alleged indebtedness to the “local creditors” and thought there should be a new trial.

The solution of the question in controversy very largely depends upon the nature of the transaction, and upon the question whether or not the assignment might not be used as a method for securing an advantage to the assignor at the expense of the creditors or, to use the language of the Chief Justice, whether the assignment was not “a cloak” for his benefit. Now the actual payment by Wm. Cummings & Sons of the $600 above mentioned, either to McKinnon’s creditors or to McKinnon himself, whether on his own account or for the purpose of paying creditors, had, of course, the effect of increasing McKinnon’s indebtedness to the firm by the amount of such payments. But the effect of that firm’s verbal promise to pay at a future time certain other creditors of McKinnon is of a totally different character. Cummings & Sons entered into no contractual obligation with these creditors. Even supposing, as between them and McKinnon, an enforceable bargain had been made, yet the creditors for whose benefit it was made could not in any way take advantage of it or enforce their claims, either against

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S. W. Cummings & Sons or their agent and nominee, the assignee. In the event of Cummings & Sons failing to pay them they could look to McKinnon alone, but inasmuch as he had divested himself of his property by virtue of the assignment it is manifest that they would fail in their efforts to secure payment unless their debtor subsequently acquired means for that purpose. Assuming, however, the arrangement above referred to to have been made as between Cummings & Sons and McKinnon, and that that firm failed to carry it out, McKinnon doubtless would have his action against Cummings & Sons, and would be entitled to recover the amount which, under his agreement, he was bound to pay the local creditors. These local creditors, in any action which they might bring against McKinnon for the recovery of their debts, might possibly have the right, after judgment, to compel McKinnon to assign to them his rights against Cummings & Sons; but it is apparent that their rights and remedies against him must necessarily be very seriously prejudiced by reason of the assignment. It is obvious, in other words, that they, by the assignment, are hindered and delayed in their remedies for the recovery of their claims. When the seek for payment the debtor has no money to give them, no goods which they can take under execution, nothing but an imperfect obligation, possibly available and possibly not, against individuals whom they never knew and who may or may not be able to pay them.

The facts may be looked at from another point of view so far as this body of creditors is concerned. The preferences in the deed amounted to about $2,800, the assets to about $3,810, while the whole liabilities were about $7,500. The assignment provided that the preferences were to be first paid, that the executing creditors were next to be paid, and that the residue was to

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be divided among the non-executing creditors. The promise on the part of Cummings & Sons to pay the local creditors was not even communicated to them. It did not appear in the assignment that there was any intention on the part of the assignor to pay them in full; there was no method provided by which they could enforce any claim against Cummings & Sons; so that their position in relation to the assignment was a most peculiar one. If they executed the assignment they thereby became entitled to participate in a very small and insignificant residue after the preferred claims were paid and were at the same time releasing their debtor from all liability. If they refused to execute it it is apparent that, apart from the promise to McKinnon, there was even less probability of their getting anything. They were thus placed in a dilemma; all the property of their debtor had passed from him into the hands of the assignee and their only chance of payment was a possibly moral, but certainly unenforceable, obligation, so far as they were concerned, on the part of Cummings & Sons. This, I take it, was unquestionably a hindering and delaying of creditors within the meaning of the statute.

All these difficulties would have been avoided (assuming the arrangement to be a fair and honest one) had these local creditors been named in the assignment as preferential creditors. In that case they would have been secure in their rights and no difficulty such as the present would have arisen. The question is not whether the parties intended to be honest, or to act towards these creditors as they now allege they intended to act towards them; but it is: What does the instrument enable the debtor to accomplish? Is it possible that under its provisions he may secure a benefit for himself at their expense? If so the law presumes that he intends all that the instrument

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provides or permits. The assignee was bound, under the instrument to pay William Cummings & Sons $1,201; they might or might not, as they chose, pay the local creditors; if they did, good and well, if not McKinnon was entitled to recover from them. That was a personal benefit for himself, a secret advantage for himself, the effect being to make the instrument void. It is elementary law that where there are in an assignment for the benefit of creditors provisions under which the assignor may be personally benefited at the expense of his creditors the instrument is void under the statute of Elizabeth. Notwithstanding the able criticism of Mr. Justice Townshend in the court below of the case of Ex parte Chaplin[4], I am of opinion that the views expressed by Fry L. J. in dealing with that case apply equally to the present. The learned Lord Justice points out the distinction between hindering and delaying creditors and defrauding creditors, and he shows that the form of the instrument in that case representing an indebtedness, as in the present case, which did not exist, together with other facts similar to the concomitant facts in the present case, led to the conclusion that the intention was to do that which in fact the deed did, namely, to hide from the creditors the real facts of the case, thereby not to defraud them but to hinder and delay them in enforcing their legal rights.

In my view, to uphold an assignment such as the one in question in the present case would be giving the sanction of the court to a method of procedure on the part of insolvent debtors in reference to their property fraught with great danger and detriment to the mercantile community. It is of course settled law that; under the statute of Elizabeth an insolvent debtor may prefer one creditor to another, may in fact transfer his whole estate to a few individual favorites, leaving the

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great body of his creditors to fruitless or illusory remedies. We must, however, insist that where preferences are given they should be open, honest and fully disclosed; they must be so declared and that under no circumstances can the debtor as a matter of right, secure an advantage for himself by reason of them.

On the whole I am of opinion that this appeal should be allowed with costs, and the action dismissed with costs, including all costs in the court below.

TASCHEREAU J.—I would dismiss this appeal. The case turns upon questions of fact and I fail to see upon what ground we could interfere. The two courts below have come to the same conclusion.

Appeal allowed with costs.

Solicitor for appellant: Alexander McNeil

Solicitor for respondent: H. O. Lovett.