Opinion
Argued November 28, 1887
Decided December 13, 1887
William Barnes for appellant. A Blumenstiel for respondents.
It is a general rule of law that the acceptance of a lesser sum, or an agreement to accept it, does not bar a demand for a greater sum. There is an exception to this general rule, however, in the case of a composition by a debtor with his creditors, in which they agree to accept less than their entire demands. Such an agreement, if entered into by a debtor with a number of his creditors, each acting on the faith of the engagement of the others, will be binding upon them, for each in that case has the undertaking of the rest as a consideration for his own undertaking. "Where creditors thus mutually agree with each other," says Mr. Justice DALY, in Williams v. Carrington (1 Hilton, 514, 519), "the beneficial consideration to each creditor is the engagement of the rest to forbear. A fund is thereby secured for the general advantage of all; and if any one of the parties were allowed afterwards to enforce his own claim, it would operate to the detriment of the other creditors who have relied upon his agreement to forbear, and might even deprive them of the sum it was mutually agreed they should receive by putting it out of the power of the debtor to carry out the composition." "Every composition deed," says Mr. Justice DUER, in Breck v. Cole (4 Sand. 79, 83) "is in its spirit, if not in its terms, an agreement between the creditors themselves, as well as between them and the debtor. It is an agreement that each shall receive the sum or the security which the deed stipulates to be paid and given, and nothing more; and that, upon this consideration, the debtor shall be wholly discharged from all the debts then owing to the creditors who sign the deed." It is, therefore, held that every agreement made by one creditor for some advantage to himself over other creditors who unite with him in a composition of their debts, is fraudulent and void. So scrupulous are courts in compelling creditors to the observance of good faith toward one another in cases of this kind, that any security taken for an amount beyond the composition agreed upon, or even for that sum, better than that which is common to all, if unknown at the time to the other creditors, is void and inoperative; and no contract to pay money or do any other valuable thing, and no security given upon any such promise, whereby a creditor obtains an advantage peculiar to himself, can be enforced. ( Russell v. Rogers, 10 Wend. 474, 479.)
Hence the agreement on the part of Michael Kuntz made with the plaintiff, without the knowledge and consent of the other creditors, to pay him $10,000, for the four notes amounting to about $6,000, was fraudulent and void and cannot be enforced. And the composition agreement as to all the innocent parties thereto was absolutely void, and they were left with the right to enforce their original claims as if they had never signed the agreement. If the plaintiff, therefore, were an innocent party, and guilty of no fraud, he could, first repudiating the agreement, have commenced an action at law upon his original notes, and have recovered judgment thereon, and the composition agreement would have been no defense as to him. But he is not an innocent party. He was himself guilty of the very fraud of which he complains, and he cannot therefore allege that he was induced to enter into the composition in consequence of any fraud practiced upon him. He executed the composition agreement knowing that there was not to be equality among the creditors and hence he cannot be permitted to complain that there was not such equality. Having himself taken a fraudulent advantage he cannot set up that other creditors also took a fraudulent advantage. Having made the best bargain he could for himself, he cannot complain that other creditors did the same. The only persons who can complain of these frauds are the innocent parties to the agreement. What then are the rights of the plaintiff in the dilemma in which he has been placed? He has not forfeited all claims upon his debtors, and there is no ground upon which he can be deprived of all remedy against them. He must either have the composition notes or his original notes. If as to him the composition should be held fraudulent and void, then he could not enforce the composition notes, but would inevitably be left with his action upon his original notes. Having by his signature to the composition induced other innocent creditors to sign also in the belief that all the creditors were to be treated alike, while in fact he was to receive a large advantage over them, he perpetrated one fraud upon them, and if he could now avoid the composition agreement as to him, and enforce his original notes for their full amount, he would perpetrate another fraud upon them, and take a still further advantage of them by depleting the very fund out of which alone perhaps the debtors would be able to fulfill the composition on their part. This he should not be permitted to do, and to defeat such an unjust result he should be held to the composition and his remedy upon the composition notes. The courts would not as between the parties guilty of the fraud, if their interests alone were to be affected, enforce or relieve from the composition agreement. But they will see to it, so far as they can, that the innocent parties are not made the victims of a double fraud, and this they will accomplish by holding the guilty parties to the composition agreement; and so it was held in Mallalien v. Hodgson (16 A. E. [N.S.] 690) a case quite analogous to this. There, as here, the plaintiff before signing a composition agreement stipulated for a secret advantage to himself, and so and some of the other creditors unknown to him while it was represented to him by the debtors that all the other creditors were to have no more than the composition agreed upon EARL, J., said: "Here the plaintiff having received the composition and the value of the preference, which was a fraud upon the other creditors, is seeking to gain a further exclusive advantage to himself, also in fraud of them, by suing for the balance of his original debt after allowing for the composition and the value of the preference, and claims to avoid his release on the ground that he was induced by the defendants to believe that he alone was fraudulently preferred, whereas some other creditors had also obtained some unjust advantage. But a deed is not to be avoided on the ground of a fraudulent misrepresentation, unless the matter misrepresented was a material inducement to the execution of the deed." COLERIDGE, J., said: "As the plaintiff was himself, in the transaction of the composition and release, guilty of fraud in respect to the other compounding creditors, by stipulating for a preference to himself, he is not at liberty to insist on the fraud at the same time practiced on himself; nor indeed to say that it is any fraud which induced him to enter into the composition. * * * The plaintiff in this case has entered into an arrangement for the compounding of his claim on the defendants which is fraudulent as regards the other creditors. He has received the composition notes and has executed a release; but he now resorts to his original demand, and is thereupon met by a plea of the release. Prima facie the release is an answer to the action, because to allow the plaintiff now to recover for his whole original demand would be a fraud on the other creditors who have come into the composition on the faith of the plaintiffs being a party to it." As to the secret advantage given to some of the other creditors to induce them to sign the composition, the learned judge further said. "The plaintiff has stipulated and obtained a preference for himself which for the reason I have stated, will not vitiate the release as against himself, and it appears to me that the having given a preference to others was also no fraud upon the plaintiff. A mere misrepresentation by the defendants of a fact not material to the plaintiff would not sustain the issue, and the only way in which the misrepresentation could be material to the plaintiff, would be inasmuch as the defendants might be rendered the less able to carry into execution the fraudulent preference to himself by having bound themselves to act similarly by others. But he had no right to have that preference carried into execution, and, therefore, is not in law prejudiced by a failure in regard to it. The whole consideration for his release is the fraudulent preference promised to himself, and the withholding any such preference from other creditors. He cannot allege the former as a fraud on himself to vitiate the release, for he is particeps fraudis, and the latter is so entirely mixed up with it, deriving all its materiality from it, that the same disability seems to exist as to it."
The plaintiff is, therefore, in a position where he is not permitted to allege that the composition agreement is invalid, and he cannot, therefore, enforce his original notes. His only remedy against the defendants is upon the composition notes.
Hence it is quite clear that this complaint does not state a cause of action against the defendants or any of them. The plaintiff upon familiar principles could not come into court and ask to have the agreement of Michael Kuntz dated the 28th day of April, 1881, cancelled. That agreement was fraud ulent and void, and the parties thereto were in pari delicto, and the courts would not aid either of them to enforce or cancel it. Besides that agreement does not bind him to any thing and if he desires to be rid of it he can tear it up, and he does not need the aid of any court. For reasons already stated the court would not vacate the composition agreement as that is binding upon the plaintiff. The court would not cancel the composition notes and authorize the plaintiff to surrender them to the defendants because they are valid. The court could not for reasons already stated give the plaintiff judgment upon the original notes because they are released and discharged by the composition agreement. The court could not under this complaint, as it now stands, render judgment upon the composition notes because, besides other obstacles, at the commencement of this action neither one of them was due.
The judgment should be affirmed, with costs.
All concur.
Judgment affirmed.