HALL V. KANSAS CITY TERRA COTTA CO. et al.

(Supreme Court of Kansas, 1916. 97 Kan. 103, 154 Pac. 210, L. R. A. 1916D, 361, Aun. Cas. 1918D, 605.)

Action by W. C. Hall against the Kansas City Terra Cotta Company, wherein the Southwest National Bank of Kansas City, Mo., was impleaded. From a judgment for plaintiff, interpleader appeals. * *

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DAWSON, J. The plaintiff, W. C. Hall, commenced this action on October 12, 1912, against the Kansas City Terra Cotta Company to recover on the defendant's promissory note, and on the same day caused garnishment proceedings to be served on Albert Neville, a Coffeyville contractor. Neville, the garnishee, answered and alleged that on July 26, 1912, he had entered into a written contract with the defendant, the Kansas City Terra Cotta Company, for certain materials to be delivered to him at Coffeyville on or before September 20, 1912. Other allegations covered failure of the Terra Cotta Company to comply in full with its contract, consequent damages to garnishee, including freight bills which he was compelled to pay for the defendant, etc. He also pleaded that on November 16, 1912, he had been notified by the Southwest National Bank of Kansas City that the claim of the Terra Cotta Company had been assigned to it on September 16, 1912, and advising him that all the proceeds of his contract should be paid to the bank. He also prayed that the bank should be impleaded and required to set up its rights, and that he be protected.

By leave of court, the bank filed its answer and cross-petition, and by agreement of parties, and with the approval of the court, Neville, the garnishee, was permitted to pay into court a sum of money and was discharged. This action thereupon proceeded between the plaintiff and the interpleading bank. *

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The district court found that the Terra Cotta Company was indebted to the bank, and that for the purpose of securing the same and to procure a further loan, which was then made, the contract between Neville and the Terra Cotta Company was assigned and delivered to the bank on September 16, 1912; that the bank did not notify Neville until about a month after this.action and garnishment were begun. *

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The general rule is that garnishment, like other proceedings in invitum, only affects the actual property, money, credits, and effects of the debtor in the hands of the garnishee, and the rule relating to bona fide holders or purchasers without notice. has no application.

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In 20 Cyc. 1012, it is said: "Where the principal defendant has made a valid assignment of the garnishee's indebtedness, or conveyance of the property in his possession belonging to such defendant, before the service of the summons upon the garnishee, the latter cannot be charged on account of such debt or property."

"The above rule is especially applicable to bills of exchange, promissory notes, and other evidences of indebtedness, and where such paper is assigned or transferred in good faith before the drawer, maker or indorser thereof is served in garnishment proceedings by a creditor of the payee, or of the last holder thereof, the rights of the

assignee or transferee are not affected by such proceedings." Page 1013.

"In the absence of statutory provision prescribing the mode of assignment, no particular mode or form is necessary to effect a valid assignment of property, claims, or debts so as to defeat garnishment proceedings by a creditor of the assignor. If the intent of the parties to effect an assignment be clearly established, that is sufficient, and the assignment may be in the form of an agreement or order or any other instrument which the parties may see fit to use for that purpose. * * * The rule is sometimes broadly stated that an assignment is not complete so as to defeat proceedings in garnishment until the garnishee is notified thereof; however, this rule seems to be subject to limitations; thus as between assignor and assignee, it is not necessary to the validity of an assignment that the garnishee be notified thereof; and the assignment will likewise be complete as against creditors of the assignor instituting garnishment proceedings after assignment and before notice of the assignment to the garnishee, provided that notice of the assignment be given to the garnishee in time to permit him to disclose the assignment in his answer to the garnishee process." Pages 1016, 1017.

The district court treated the assignment of the contract between the Terra Cotta Company and Neville as a chattel mortgage. If it were treated as a mortgage of the contract, then the possession of the contract by the bank would obviate all necessity for its registration. Nothing is more common than the advancement of funds to contractors and manufacturers, and while banks with proper prudence usually take more tangible security than the potential and possible future profits of the pending contracts of the borrowers, yet there is no impropriety in taking an assignment of the latter also; nor does the statute require such assignments to be recorded.

When the borrower thus assigns his contract or the possible profits of his contract in good faith, such assignments should be respected. Nor can a later garnishing creditor justly complain. The garnishment process only reaches the property, assets, and credits of the debtor, and not that of which the debtor was formerly the owner, nor that which he has lawfully assigned to a third party. This view.seems to be amply sustained by the authorities.

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In the case at bar, the debt due from Neville to the Terra Cotta Company for goods sold and delivered and resting for evidence on a written contract, was assigned to the bank, and such assignment must likewise be valid though made only by mere delivery of the contract.

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But in our opinion the assignment was neither a chattel mortgage nor a pledge. It was simply what it purported to be-an assignment of a sum or sums of money due and to become due. There was nothing about the transaction which was unusual or against public policy. This general subject is one which might well be regulated by statute, but so far it has been left free to develop in the usual course of modern business. * * *

We do not think the fact that the Terra Cotta Company was made the agent of the bank to collect the proceeds of the contract can affect the validity of the assignment. Neither can the later modification of the contract by remitting $330 of the contract price. That deduction in plain terms recognized that "this money is subject to the

order of the court." Recurring to the proposition first laid down, that the garnishing creditor can reach only the property of the defendant in the hands of its debtor, the plaintiff could not reach or attach that which had already passed by lawful assignment, and this necessitates a reversal of the judgment with instructions to render judgment for the interpleader. All the Justices concurring.

SECTION 6.-ATTACHMENT OF PROPERTY

The general policy of the law is not to permit a plaintiff to obtain any hold on the defendant's property until a judgment has been entered against him. This rule is obviously just, because until final judgment it is not known whether the plaintiff's claim against the defendant is true in law and fact. It would not be just to the defendant, therefore, to allow the plaintiff to seize the defendant's property and to hold it during the time the action was pending. But there are some special cases where the plaintiff's interests overbalance the interests of the defendant in this respect, and accordingly the plaintiff is permitted to have the property kept by an officer of the court from the time the action is commenced. Such a proceeding is known as an "attachment proceeding." The circumstances under which a plaintiff is allowed to attach the property of the defendant differ somewhat in the various states. Generally, however, non-residence of the defendant or some kind of fraudulent conduct by him will be ground for attachment. The proceeding, being one which confers upon the plaintiff an extraordinary privilege, the plaintiff must give some counter protection to the defendant. This is secured by requiring the plaintiff to give a bond, which must be approved by the court.

WEARE COMMISSION CO. v. DRULEY et al.

(Supreme Court of Illinois, 1895. 156 Ill. 25, 41 N. E. 48, 30 L. R. A. 465.) Attachment by the Weare Commission Company against William M. Druley and Albert A. Druley. Plaintiff obtained judgment for its debt, but the attachment was dissolved. This judgment was affirmed by the Appellate Court, and the plaintiff appeals.

BAILEY, J. On the 3d day of September, 1890, the Weare Commission Company commenced its suit in assumpsit, by attachment, as against William M. Druley and Albert A. Druley. The grounds for the attachment, as stated in the affidavit, were: (1) That the defendants had, within two years then last passed, fraudulently conveyed or assigned their effects, or part thereof, so as to hinder and delay their creditors; (2) that they had, within two years last past, fraudulently concealed or disposed of their property so as to hinder and delay their creditors; and (3) that they were about fraudulently to conceal or dispose of their property or effects so as to hinder and delay their credi

The principal controversy, as presented here, turns upon the propriety of the peremptory instruction to the jury to find the issues

upon the attachment affidavit for the defendant. If that instruction, and the consequent verdict and judgment, are sustained, it is manifestly immaterial whether the court erred in refusing to quash the attachment on motion of Albert A. Druley, or on the subsequent motion of the administratrix. * * *

Some time about the year 1885, Jesse Druley, William M. Druley's father, sold a farm in McLean county, and of the proceeds loaned to William M. Druley, or put into his business, about $18,000. William M. Druley afterwards advanced to his father and mother various sums of money, and about March 10, 1887, a settlement was had between them, at which it was found that William M. Druley was indebted to his father in the sum of $10,000. For this sum William M. Druley, with his father's consent, executed his promissory note, dated March 10, 1887, payable to Jane Druley, his mother, five years after date, with interest at the rate of 6 per cent per annum, payable quarterly. This note remaining wholly unpaid, William M. Druley, some weeks prior to his death, but whether in payment of or as security for the note is left by the evidence somewhat in doubt, signed and acknowledged a deed conveying the two-acre tract of land upon which the attachment writ was afterwards levied to Jesse Druley, his father, in trust for Jane Druley, his mother.

This deed was executed as the result of considerable negotiations between William M. Druley and an attorney representing Jesse and Jane Druley, such negotiation resulting in an agreement that the deed should be executed, but that, if William M. Druley recovered from his illness, he should have the land back, or that the deed should be returned to him. The deed, after it was signed and acknowledged, remained in the possession of the grantor about two weeks, and he then handed it to his brother, Edwin P. Druley, who was attending and taking care of him in his illness, saying to him that he should take it, and carry it in his pocket, and that if he, the grantor, got well, he should return it to him, but that, if he did not, he should put it on record. On the 2d day of September, 1890, Edwin P. Druley, having learned that the firm of Druley Bros. was about to fail, or supposing that it had failed, put the deed on record, and about six weeks afterwards he got it from the recorder's office, and delivered it to his father and mother. This deed, and the circumstances attending its execution, constituted the only evidence given by the plaintiff in support of the grounds for an attachment alleged in its attachment affidavit. It is urged, and with some show of reason, that the deed was never delivered so as to become effectual as a conveyance. The contention is that Edwin P. Druley took and held the deed merely as agent of the grantor, and that by delivering it to him with instructions to keep it in his pocket, and return it to the grantor in case of his recovery, and to record it only in case of his death, the grantor did not, and did not intend to, absolutely yield dominion over it, but that it remained, down to the time of his death, subject to his control, and liable to be recalled by him at any time; and it would seem that, if the deed was never delivered, it has no tendency to prove the charge of fraud made by the attachment affidavit. But, without determining the question of delivery, we prefer to place our decision upon another ground. Even if the deed is to be regarded as having been effectually delivered, it must be conceded that there is no evidence of express fraud, or what is usually termed "fraud in fact." There is no evidence of

any actual intention on the part of the grantor to hinder or delay his creditors. But the evidence tends to show that the deed, though absolute on its face, was intended by the parties as a mortgage to secure the $10,000 note given by the grantor to his mother, and the rule is supported by many authorities that a conveyance of lands, absolute on its face, but intended as a mortgage or security for a debt, is fraudulent and void as against existing creditors, although there may have been no actual intent to defraud. *

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The question thus arises whether, under our statute, an attachment will issue where the fraud charged is a legal or constructive fraud only, as contradistinguished from express or intentional fraud, usually denominated "fraud in fact." This question, so far as we are advised, has never been decided by this court, but it has received consideration by the Appellate Courts in several cases, and in each case it has been decided in the negative. It first arose in the Second district, in Shove v. Farwell, 9 Ill. App. 256, and there the court said: "The law does not allow a creditor to ignore the process of the common law in the collection of his debt, and resort to a summary seizure of the debtor's property upon mesne process, from the fact, alone, that the debtor has, within two years, sold his property, or any part of it, or has secured some other creditor by mortgaging or pledging it, even though the attaching creditor should be hindered or delayed in the collection of a just debt. Another element must exist in the transaction, the fraud of the debtor, and, in our opinion, the statute contemplates that this fraud shall be one of fact, as contradistinguished from a legal or constructive fraud. If a man has shown himself to be dishonest by making a conveyance of his property, designing thereby to delay and hinder his creditors, and such effect is produced, then, for the space of two years, the statute permits the creditor to treat him as one who may repeat the fraud, and authorizes its prevention by a seizure of his property upon mesne process, and hold it to answer any judgment that may be rendered in the action."

The same question arose in the same district in First National Bank v. Kurtz, 22 Ill. App. 213, where the same conclusion was again announced. * * * In Spencer v. Deagle, 34 Mo. 455, an attachment writ was issued under a statute apparently identical with ours, and it was held to be error for the court to refuse to instruct the jury that, to render the deed of trust there in question fraudulent as to the defendant's creditors, it must appear that it was executed for that purpose; that it was not enough that the effect of the deed was to delay his creditors, but it must have been executed with that purpose and intent.

While some decisions, perhaps, may be found in other states supporting the contrary view, we are disposed to think that the interpretation put upon our statute by the Appellate Court is the correct one. It seems to be the policy of our attachment law to give creditors the right to seize the property of their debtors on original or mesne process, and hold it for the satisfaction of such judgments as may be subsequently recovered, in those cases where the situation or conduct of the debtors is or has been such as to raise a reasonable apprehension that the ordinary common-law processes of the court will be thwarted, and thus rendered unavailing.