“[T]he appellant would not have acquired priority over other creditors by the sheriff’s levy, for the obvious reason that the right of property in the goods seized under the execution had previously passed” to the assignee under Debtor’s ABC.
- Reed v McIntyre, 98 U.S. 507, 512 (1878).
Facts
The Debtor, in the U.S. Supreme Court’s Reed v. McIntyre opinion, is a merchant.
On March 13, 1874, Debtor executes an assignment of all Debtor’s property to Combs, as Assignee, for the benefit of Debtor’s creditors, and Assignee takes immediate possession of Debtor’s assigned property. This assignment for benefit of creditors is referred to herein as “Debtor’s ABC.”
The next day, March 14, 1874, Creditor obtains a judgment against Debtor and immediately levies upon Debtor’s already-assigned property.
On March 31, 1874, another of Debtor’s creditors files a petition to declare Debtor a bankrupt upon two grounds:
- Debtor “fraudulently stopped and suspended payment” of his debt to this creditor; and
- Debtor committed an “act of bankruptcy” by effectuating Debtor’s ABC “with intent to hinder, delay, and defraud his creditors.”
Meanwhile, Creditor sues for a court determination on this question:
- Which claim to Debtor’s assigned property is prior: (i) the Assignee’s claim in Debtor’s ABC, or (ii) the judgment Creditor’s levy claim.
U.S. Supreme Court Case
Through appeals, the dispute arrives at the U.S. Supreme Court, which:
- finds that Debtor’s ABC is “made in good faith for the purpose of securing an equitable distribution of the debtor’s property for the benefit of all his creditors, including the appellant, and not with any intent to hinder, delay or defraud them”;
- declares that the “right of a debtor at common law to devote his whole estate to the satisfaction of the claims of creditors results . . . from that absolute ownership; which every man claims over that which is his own”; and
- rules that Creditor “acquired no priority by the levy.”
–Supreme Court Observations
The U.S. Supreme Court’s opinion makes these observations:
- ABCs, not made with the intent to hinder, delay or defraud creditors, are upheld at common law; and
- under the common law:
- Debtor’s ABC cannot be assailed “simply because its effect was to prevent the appellant from obtaining by judgment and execution a priority and preference over other creditors”; and
- an ABC that delays a creditor’s collection efforts, by the ordinary process of law, is sustained at common law—if not made with the intent to hinder, delay, or defraud creditors.
The U.S. Supreme Court’s opinion adds:
- an intent to hinder, delay, or defraud creditors can exist, in an ABC under the common law, only if the assignment contains unusual provisions that justify a conclusion that the ABC was a mere “trick or contrivance to defeat creditors”; but
- when an ABC’s provisions are consistent with an honest purpose to deal fairly and justly with creditors (e.g., there is no reservation of benefits or control to the assignor, and there is no improper restriction upon a speedy liquidation or equitable distribution), a temporary interference with a particular creditor’s collection efforts is regarded at common law as a necessary and unavoidable incident in the discharge by a debtor of his duty to creditors; and
- such interference is not a hindrance or delay within the meaning of the statutes against fraudulent conveyances.
–Supreme Court’s Citation
The U.S. Supreme Court’s opinion cites, approves-of and follows these findings and rulings from another case:
- an ABC can be referred to as “an act of duty, rather than of fraud, when no purpose of fraud is proved,” and such act “arises out of a discharge of the moral duties attached to his character of debtor to make the fund available for the whole body of creditors”;
- in an ABC, it “is not the debtor who breaks in upon the rights of the parties by this assignment, but the creditor who breaks in upon them by proceedings in his suit,” and “I see no fraud; the deed was for the fair purpose of equal distribution”; and
- this ABC conveyance, “so far from being fraudulent, was the most honest act the party could do,” and the debtor “felt that he had not sufficient to satisfy all of his debts, and he proposed to distribute his property in liquidation of them; this was not acceded to, for the plaintiff endeavored by legal process to obtain his whole debt, the obtaining of which would have swept away the property from the rest of the creditors” (emphasis added).
–Supreme Court’s Conclusions
The U.S. Supreme Court’s opinion reaches these conclusions:
- Debtor’s ABC “assignment to Combs could not, upon common law principles, be impeached simply because it had the effect to prevent the appellant, by means of the execution levy, from securing priority over all other creditors”;
- as to Creditor’s day-late levy, “the appellant would not have acquired priority over other creditors by the sheriff’s levy, for the obvious reason that the right of property in the goods seized under the execution had previously passed, by a valid and unimpeachable deed, to Combs [the Assignee in Debtor’s ABC], and they were not thereafter subject to execution as the property of the debtor”; and
- Creditor “acquired no priority of right by the execution levy.”
Conclusion
There we have it. The U.S. Supreme Court has declared that, once an ABC is accomplished, the assigned assets cannot be attached by legal action outside the ABC process.
Post Script
A Drafting Committee of the Uniform Law Commission is preparing a uniform law on assignments for benefit of creditors.
My view is that such a law can rely upon the U.S. Supreme Court’s Reed v. McIntyre ruling that assigned assets under an ABC cannot be impaired by post-assignment efforts of a creditor to create a lien thereon.
** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.
Feed Original Url