Graham v. Railroad Company

APPEAL from the Circuit Court of the United States for the Eastern District of Wisconsin.

This is a bill in equity filed by Lawrence G. Graham and Donald D. Scott against the La Crosse and Milwaukee Railroad Company, the Milwaukee and St. Paul Railway Company, Moses Kneeland, James Ludington, Byron Kilbourn, and others, to subject certain real estate in the city of Milwaukee, Wisconsin, to the satisfaction of certain judgments recovered by the complainants against the first-named company for an indebtedness on contracts arising after its sale and conveyance of that real estate, to Charles D. Nash. The defendants deraign title through him.

The court below dismissed the bill, whereupon the complainants appealed here. The remaining facts are stated in the opinion of the court.

Mr. Matthew H. Carpenter and Mr. Newton S. Murphey for the appellants.

The complainants had the right, as subsequent creditors, to maintain this suit, because, first, if, as we contend, the sale was void as to Nash and purchasers from him with notice, then subsequent creditors of the company may treat the conveyance to him as never having been made; and, secondly, if such sale is merely voidable, it may, at the suit of such creditors, be set aside and the property subjected to the payment of their debts.

It is a general principle that a creditor may, in equity, reach every property right of his debtor. Williams v. Thorn, 70 N. Y. 270. Even damages recovered for torts to property which is subject to execution may be reached by a creditor's bill. Hudson v. Plets, 11 Paige (N. Y.), 183. A creditor purchasing the lands of his debtor on execution may bring his bill to set aside a prior usurious mortgage, or prosecute any suit in regard to them that the debtor could have maintained. Dix v. Van Wyck, 2 Hill (N. Y.), 525; Shaw v. Dwight, 27 N. Y. 245; McMahon v. Allen, 35 id. 403. A judgment creditor may, without issuing an execution, maintain a suit to remove a cloud upon the title to lands, whereon his judgment would otherwise be a lien. Shaw v. Dwight, supra.

Where A. is induced by fraud to convey lands to B. under circumstances which, in equity, entitle the former to set aside the sale, B. has thereunder no such adverse possession as will defeat a subsequent deed from A. to C., and the latter may maintain a bill to set aside the prior voidable conveyance. Livingston v. Iron Company, 9 Wend. (N. Y.) 511; Dickinson v. Burrell, Law Rep. 1 Eq. 337; McMahon v. Allen, supra; Baker v. Whiting, 3 Sumn. 475.

Crocker v. Belangee et al. (6 Wis. 645), and Milwaukee & Minnesota Railroad Co. v. Milwaukee & Western Railroad Co. (20 id. 174), relied upon by the appellees, rest upon Prosser v. Edmonds (1 Y. & C. 481), which was substantially overruled by Dickinson v. Burrell, supra. These cases are both consid ered, and Dickinson v. Burrell is followed in McMahon v. Allen, which is very like the present case. The conveyance was obtained by fraud, and in violation of the duty imposed by fiduciary relations. The grantor then made a general assignment for the benefit of creditors; and the assignee's bill to set aside the conveyance was sustained.

Again, Prosser v. Edmonds and the cases following it, even if held to be good law, do not apply to this case. They all proceed upon the ground that the second conveyance is void by reason of the first grantee's adverse possession of the lands. This cannot be said of a proceeding by a creditor seeking, as in the present case, to enforce the lien of his judgment on them.

The doctrine that subsequent creditors cannot set aside a debtor's fraudulent conveyance rests upon the ground that he was a party to the fraud, and, in furtherance of it, transferred the property. He cannot rescind the sale; and they find no property right in him which even he could assert against his grantee. Existing creditors only are protected by the statute in such a case. But where the conveyance was obtained by fraud practised upon him, he has a subsisting property right, and may enforce the rescission of the sale.

If the defrauded debtor company had sold the property for value to the complainants, or conveyed it to them in satisfaction of their judgment, they could, in either case, have bourght their bill to set aside the prior conveyance to Nash. If so, they could levy on the property, and, having thus acquired a specific lien, maintain such a suit.

The distinction between prior and subsequent creditors is not to be held as strictly in the case of a corporation as in that of individual debtors.

In Bradwell v. Weeks (1 Johns. (N. Y.) Ch. 205), and in Cumberland v. Codrington (3 id. 229), approved in Bank of the Metropolis v. Guttschlick (14 Pet. 19), it was held that when a trust is created for the benefit of a third party, though without his knowledge at the time, he may ratify and enforce it. In Railroad Company v. Howard (7 Wall. 392), and numerous subsequent cases, it is held that the property of a corporation is a trust fund for creditors; and we think the court meant all creditors becoming such during the life of the corporation. Jackson v. Ludeling, 21 id. 616.

Mr. Ephraim Mariner and Mr. John W. Cary, contra.

MR. JUSTICE BRADLEY delivered the opinion of the court.