Opinion
Department Two
Appeal from an order of the Superior Court of the city and county of San Francisco denying a new trial.
COUNSEL
John R. Jarboe, W. S. Goodfellow, and Edward R. Taylor, for Appellants.
Wal. J. Tuska, for Respondents.
JUDGES: McFarland, J. De Haven, J., and Sharpstein, J., concurred.
OPINION
McFARLAND, Judge
The main question in this case is about the validity of a composition deed, by which the respondents and the other creditors of appellants agreed to receive pro rata the proceeds of the sale of appellants' assets, and thereupon to release them from all claims and demands. Respondents contend that said agreement is invalid, because a fraudulent preference was given to certain of the creditors who signed it, and the court below so found. The court found as facts, that some of the creditors at first refused to sign the agreement, and that, to induce them to sign, "some of the relatives and friends of the defendants did pay such creditors the full amount of their several demands, with the knowledge, but without the direction of the defendants, and not out of the assets of the said defendants, nor under any promise or expectation of repayment, and thereby did make a preference of such creditors, and induced them to sign the said composition; and that such creditors did receive a larger proportion or sum than secured by said agreement; of all of which facts the plaintiffs at the time of signing such composition were ignorant, and upon the discovery thereof notified the defendants," etc.
We think that the ruling of the court below was right, and in line with the current of authorities. The general rule is correctly laid down in Story's Equity Jurisprudence, sec. 378; and we stated it quite fully in the recent case of O'Brien v. Greenebaum, ante, p. 104. It is strenuously argued by counsel for appellants that the principle does not apply here, for the reasons that the payments to the preferred creditors were not made by the debtors or their agents; and particularly that the payments were not made out of the debtors' assets, -- that is, out of the actual and disposable property which they then had. It is to be noticed, however, that the appellants knew of these secret payments to preferred creditors; and as the utmost good faith is required in such transactions, the appellants can hardly be said to be innocent of the imposition practiced upon respondents. But beyond all that, the rule does not, by any means, rest solely upon the participation of the debtor in the fraud and the diminution of the actual assets. In a composition agreement each creditor is a party as to each other creditor, as well as to the debtor. "Creditors sign upon the consideration that others sign upon the same terms; and if they are deceived, they are misled into an act to which they might not otherwise have assented." (See Story's Eq. Jur., sec. 379, and notes.) Solinger v. Earle , 82 N.Y. 393, was a case where a brother-in-law (as in the case at bar) had given his note to induce a creditor to sign a composition deed; and in the opinion of the court in that case there is aptly expressed the views which are determinative of the point in question against appellants in the case at bar. The court say: "The agreement between the plaintiff and the defendants, to secure to the latter payment of a part of their debt in excess of the ratable proportion payable under the composition, was a fraud upon other creditors. The fact that the agreement to pay such excess was not made by the debtor, but by a third person, does not divest the transaction of its fraudulent character. A composition agreement is an agreement as well between the creditors themselves as between the creditors and their debtor. Each creditor agrees to receive the sum fixed by the agreement in full of his debt. The signing of the agreement by one creditor is often an inducement to the others to unite in it. If the composition provides for a pro rata payment to all the creditors, a secret agreement, by which a friend of the debtor undertakes to pay to one of the creditors more than his pro rata share, to induce him to unite in the composition, is as much a fraud upon the other creditors as if the agreement was directly between the debtor and such creditor. It violates the principles of equity and the mutual confidence as between creditors upon which the agreement is based, and diminishes the motive of the creditor who is a party to the secret agreement to act in view of the common interest in making the composition. Fair dealing and common honesty condemn such a transaction."
2. We think that there was sufficient evidence to support the finding of the court that the shares of stock mentioned in the complaint were deposited by respondents with the appellants as security for certain loans of money made by the latter to the former, and not upon any other account; and that when respondents [28 P. 675] demanded said stock of appellants there was due upon said loan account eight thousand dollars, and thirty-seven dollars interest. At the time of the demand, respondents paid to appellants (and the latter received it) the said eight thousand dollars, but nothing was said about the thirty-seven dollars for interest, and it was not paid. And it is now contended by appellants, among other things, that respondents did not establish a technical conversion of the stock mentioned in the complaint, because said thirty-seven dollars was not paid or tendered. But it is evident that the item of interest was overlooked or forgotten by both parties. Appellants did not refuse to deliver the stock because this item of interest was not tendered. They received the eight thousand dollars as the amount due on the loan, and did not demand or call attention to the interest. They delivered to respondents, at the time they received the eight thousand dollars, other stocks which had been pledged in the same way; and they evidently refused to deliver the stocks mentioned in the complaint because they contended, as they still contend, that they were held upon the stock account as well as upon the loan account. Under these circumstances, and without considering other views presented on the question by counsel for respondents, it is sufficient to say that the item of interest was so small when compared with the eight thousand dollars received, and the eighteen thousand dollars' worth of stock involved, that we are justified in determining the point against appellants upon the maxim, De minimis non curat lex .
Judgment and order affirmed.