REPORT OF COMMITTEE ON JURISPRUDENCE AND LAW REFORM

ON RELIEF OF SIMPLE CONTRACT CREDITOR AGAINST

FRAUDS OF INSOLVENT DEBTOR.

To the American Bar Association:

The Committee on Jurisprudence, to whom was referred the resolution offered at the session of 1885 by D. K. Tenney, Esq., of Wisconsin, respectfully report as follows:

The resolution was this:

"Resolved, That the Committee on Jurisprudence and Law Reform be instructed to consider and report at the next annual meeting whether the rule of law which deprives the simple contract creditor of an insolvent debtor of all equitable relief against the frauds of the debtor until the claim has first been reduced to judgment is now a senseless relic of antiquity which ought to be abolished by legislation; and if the committee shall so find, that they prepare and also report a bill suitable for enactment and to be presented to Congress and the legislatures for that purpose, placing the bond, promissory note or other undisputed liability of an insolvent upon the same plane for affording equitable relief against fraud as if such obligation had previously been adjudged by the court."

The committee do not feel able to report in favor of any legislation such as is contemplated by the resolution. The reasons which have led them to this conclusion may be briefly stated.

If law, both substantive and remedial, were in this country the subject of a code, and if all rules defining rights and prescribing modes for their enforcement were regulated or to be regulated by statute, it would no doubt be wise to introduce some such provision as that contemplated by the resolution. But under existing circumstances, and in view of the remedies believed to exist in all or nearly all of the states of the Union, for the purpose of correcting the mischief alluded to, and in view, also, of the fact that the rule of law in reference to the

remedy of the simple contract creditor, as laid down in the resolution, is perhaps too broadly stated, the committee has not deemed it advisable to recommend any statutory change.

The remedy in equity, not only for the collection of debts but also for restraining frauds attempted to be perpetrated by debtors upon their creditors, is and has long been well established. Two classes of cases involving the rights of creditors long ago presented themselves to the attention of courts of equitable jurisdiction. The first class embraces those cases in which assets of the debtor existed, but assets which nevertheless could not be reached by common law process. Such assets, it was held, could be rendered applicable to the payment of the debt by virtue of a bill in equity, which, when thus used, was not inaptly termed an "equitable levy." Such bills were not aimed, at all events primarily, at fraudulent dispositions of property, but were designed simply to effect that which could not be effected by any known legal process of execution, namely, a levy upon equitable property. This jurisdiction by creditors' bill, pure and simple, was not founded on fraud, but on the inadequacy of the common law remedies. The other class of cases which claimed the attention of the chancellor were those in which the inability to get at a debtor's property was not due to the nature of the property, but to the fact that a fraudulent transfer thereof had been made. Here, then, were cases of fraud. It was fraud of such description, moreover, that it properly formed a basis for the exercise of equitable jurisdiction, inasmuch as there was no full, adequate and complete remedy at law for its redress. Hence, in these cases also, equity interposed, but it did so not, as in the case of a true creditors' bill, merely to supply the defects in common law machinery, but by virtue of its general jurisdiction to defeat fraud.

These two classes of cases may be well illustrated, and the distinction above suggested shown to be sound. by a reference to three decisions, two by the Supreme Court of the United States and the third by Chancellor Kent.

In the case of The Public Works vs. Columbia College, 17 Wallace, 521, Mr. Justice Field said: "The jurisdiction of a court of equity to reach property of a debtor justly applicable to the payment of his debts, even when there is no specific lien on the property, is undoubted. It is a very ancient jurisdiction." And in the comparatively recent case of Taylor vs. Bowker, 111 U. S. 110, Mr. Justice Harlan substantially expressed the same thought when he said: "Courts of equity are not tribunals for the collection of debts, yet they afford their aid to enable creditors to obtain payment when their legal remedies have proved to be inadequate." The jurisdiction, therefore, of chancery in such cases is founded on the inadequacy of the common law remedies, and may be exercised even when there is no fraud.

On the other hand, the subject of bills filed to subject property which has been transferred in fraud of creditors to the payment of their claims was carefully considered by Chancellor Kent in Bayard vs. Hoffman, 4 Johnson's Chan. 452. If the facts in that case are examined, it will be found that the doctrine there laid down by the chancellor is broad enough not only to cover the cases in which judgment creditors are seeking to subject property which has been fraudulently transferred to the payment of the judgment, but also to those cases in which dispositions of property by an insolvent are claimed to be in fraud of general creditors. For it will be observe that in Bayard vs. Hoffman the bill was filed by the assignees for the benefit of general creditors, and the right of the court to interfere for the protection of such creditors appears to be recognized as being beyond dispute and to be founded on the court's power to assume jurisdiction in all cases of fraud.

It is true that in creditors' bills the general rule is well established that the creditor must show that he has exhausted his common law remedies before resorting to equity, and that this is generally done by obtaining a judgment, issuing an execution and having a return of nuila bona made.

Mr. Justice Field, in the case in 17 Wallace, already referred to, in speaking of the jurisdiction of courts of equity to reach property which cannot be levied upon by common law writs of execution, said: "It is a very ancient jurisdiction, but before its exercise the debt must be clear and undisputed, and there must exist some special circumstances requiring the interposition of the court to obtain possession of and bind the property."

But even in cases of creditors' bills, strictly so called, the rule that legal means for the collection of the debt must be first exhausted is not without exceptions. It will be sufficient, in support of this assertion, to refer again to the same opinion. of Judge Field, who says: "Unless the suit relate to the estate of a deceased person, the debt must be established by some judicial proceeding, and it must generally be shown that legal means for its collection have been exhausted;" obviously implying that exceptional cases may exist in which the previous exhaustion of legal remedies is not necessary. reports, moreover, will show not a few instances in which such exceptions have been recognized; and a decision of the Supreme Court of Missouri (Turner vs. Adams, 46 Mo. 95) holds that if it appear, in case of any ordinary creditors' bill, that an action at law would be unavailing, a sufficient foundation is laid for the interposition of equity.

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But it must be borne in mind that those cases in which the rule of equity requiring the claim to be reduced to judgment and a return of an unsatisfied execution to be made, before the aid of a chancellor is invoked, are cases which fall within the first of the two classes above mentioned, and that if any judicial expressions are found indicating that the rule is to be extended to the second class, they will be discovered to be generally, if not universally, obiter dicta.

Moreover, the decision of Chancellor Kent, in Bayard vs. Hoffman, shows that the rule was not intended to be, and ought not to be, extended to cases in which the jurisdiction of the court is based on fraud, and the doctrine there laid