A creditor may enforce his claim through the means of an ordinary suit at law pursued to judgment.
Where one has a claim against another it may or may not be such a claim as the law will allow to constitute a legal obligation, or it may be justly or unjustly made. In order to establish the legality and justness of a claim, courts are established in which the evidence on both sides is taken and a judgment entered accordingly. It is not until such judgment is obtained that one's claim becomes a matter of legal certainty or of record. When it has once been so obtained, then a judgment is on its face of legal value, the evidence upon which it is supported cannot, except upon appeal or in a few cases we need not notice at present, be again inquired into. By virtue of such a judgment the law provides machinery whereby under it a debtor's property may be taken to satisfy the debt.
The suit is first to be put at issue by the written pleadings, i.e., the plaintiff's statement of the case and the defendant's defense, if any.
If the defendant makes no defense he is defaulted.
After the issue is determined by the pleadings, the case proceeds to trial. It may be before the court with or without a jury. Either party is entitled to jury trial upon the questions of fact, but frequently both sides waive jury and submit the issues of fact to the judge. The jury's return is called a verdict; a judges finding of fact is called a finding. The judgment is based upon the verdict or finding and becomes the unimpeachable record of the rights of the parties, except that the defeated party may appeal to the upper court which passes merely upon the record to determine if the error was committed in the lower court.
231. Being the second of two added chapters on the general subject of Debtor & Creditor.
A conveyance by a debtor whereby he hinders, delays or defeats his creditors in the collection of his indebtedness to them is called "fraudulent" and may be set aside by the creditors through the medium of a bill in equity.
(1) General statement.
We have seen that a creditor has no lien upon the property belonging to his debtor, unless he has secured the lien by contract, except in a few cases, until he has obtained such lien through legal proceedings. Consequently a debtor may freely sell his property, even though insolvent, provided he acts in good faith and gets value, and if not insolvent may dispose of his property by gift.
But it is a well settled principle of law that a debtor cannot dispose of his property if his purpose and the effect of the disposition is to "hinder, delay and defraud" his creditors.
It is at once apparent that in a conveyance alleged to be fraudulent, a complication arises in the fact that a third party, namely, the purchaser or taker is involved. It is, therefore, not enough to prove the debtor's purpose; it must also be shown that the third party is chargeable with a knowledge of that purpose, or that he has parted with nothing in return for the property.
We will find that fraudulent conveyances may be grouped under two general heads: (1) Conveyances for value (or apparent value), and (2) voluntary conveyances. In a conveyance for value, the taker must be a party to or chargeable with notice of the fraudulent purpose or else he gets a perfect title. A voluntary conveyance is deemed to be fraudulent under circumstances we may note later; and in that case it may be set aside no matter how innocent the taker is, for, having given nothing, he may not complain against those who have been defrauded. We will find, therefore, that a fraudulent conveyance may be set aside unless the taker both gives value and has no notice. And one is deemed to have notice not only when he has actual notice, but also when the circumstances are such that it is the policy of the law to charge him with notice. We will find that a conveyance may be fraudulent in the eyes of the law though in fact the particular case has no taint of moral turpitude. For there are circumstances which would tend to encourage fraud if we allowed conveyances to be made under them, and therefore the courts will set these aside as fraudulent as a matter of law.
(2) History of law of fraudulent conveyances.
By the principles of the common law and by many statutes passed declaratory thereof, conveyances in fraud of creditors could be set aside.
An early English statute was passed on this subject known as the Statute of 13th Elizabeth, Chapter 5; and it declared for the punishment of parties who should justify fraudulent conveyances as made in good faith and upon good consideration. This statute is one of the famous and important statutes in the history of English jurisprudence. It has in effect been copied in the American commonwealths.
Shortly after this statute was passed, a famous case was decided known as Twyne's Case,232 in which it was held that a certain conveyance had signs or badges of fraud, in that the conveyance was general in its terms, and because the seller remained in possession of the goods and treated them as his own.
(3) Gifts as fraudulent conveyances.
232. Twyne's Case, 3 Coke, 80.
It will be noticed that the language of the statute of fraudulent conveyances declares all conveyances fraudulent except such as are made bona fide and upon good consideration. It has been decided in innumerable cases that a gift, though in fact honestly made and innocently taken, may be set aside by creditors and its subject reached for satisfaction of debts, whenever it was made by one whose circumstances made such gift an improvident thing to do; in other words, when his creditors were thereby deprived of, or hindered and delayed in, the collection of their debts. A maxim, uttered by one of the judges, has become famous: "A man must be just before he is generous." Consequently the law classifies a gift as a fraudulent conveyance, though in the particular case, innocently made and taken, provided the giver was in such straits, financially, that he was or thereupon became practically insolvent. Thus suppose that A owes $10,000, now due. His assets are practically $5,000. He buys a lot of land and gives it to his son. The gift may be set aside by A's creditors. On the other hand if the gift is made by one while he is solvent, it cannot be attacked by his creditors. A while unquestionably solvent deeds his wife his property. Afterwards he contracts debts which he cannot pay. A's creditors cannot reach the property conveyed to Mrs. A. Yet one may make a voluntary conveyance fraudulent as to future creditors, as well as to existing creditors, as shown in the following paragraph.
Different rules have been formulated in reference to the rights of future creditors to set aside a gift. We have just seen that a person who is perfectly solvent may make gifts which are irrevocable by his creditors, though he have existing creditors, for by our hypothesis enough assets remain to pay all his debts. We have also seen that if he is insolvent his creditors can object. Must these creditors be creditors at that time? In some jurisdictions the future creditors need only show that there were existing creditors; but in other states the future creditors must show that ;the gift was made with actual intent to defraud them.
If one makes a conveyance as a gift or as a sale to another in order to defeat his creditors, he is perhaps more likely to make the conveyance to a member of his family. Most of the Courts will therefore look upon such conveyances with some suspicion when made by a debtor in failing circumstances, to see whether the conveyance, though expressed to be upon considerations, is voluntary; or to see if it is actually fraudulent though for value. Such circumstance then is a proper one with other circumstances to make out a case of fraud.
A gift is a conveyance, as we know, for which no value is promised or given. When a conveyance is for value, it may still be set aside if the taker have actual knowledge, or constructive notice. We must now consider what is value.