Opinion
No. 6,986.
Submitted March 6, 1933.
Decided March 28, 1933.
Fraudulent Conveyances — Creditor's Action to Set Aside — Complaint — Sufficiency of Lien Acquired by Plaintiff — Insolvency of Defendant — Absence of Consideration for Transfers — Evidence — Execution — Sheriff's Return — Presumptions. Fraudulent Conveyances — Setting Aside by Creditor — Manner of Acquisition of Lien Necessary to Right to Maintain Action. 1. The lien which a creditor who seeks to have a conveyance of realty set aside as fraudulent must have acquired as a condition precedent to his right to maintain the action, may be acquired, under section 9424, Revised Codes 1921, by levy of execution, and, having once been acquired, it is not lost by failure of the sheriff to hold a sale but, instead, making return nulla bona. Same — Complaint — Necessary Allegations. 2. In an action of the above nature, plaintiff must show that the grantor, at the time of the alleged fraudulent transfer, was insolvent, or that he did not reserve sufficient property subject to immediate seizure to satisfy his then existing debts. Same — Admission of Insolvency by Defendant at Time of Attempted Levy of Execution — Evidence — Admissibility. 3. Where defendant in an action to set aside a conveyance as fraudulent in his answer admitted the allegation in the complaint that he had advised the sheriff when attempting to levy execution, that neither he nor his wife had any property that could be levied upon, admission of the sheriff's return containing the statement in evidence may not be held reversible error. Same — Insolvency of Defendant — Levy of Execution Unsatisfied — Evidence — Sufficiency. 4. A sheriff's return of an execution unsatisfied, supplemented by the debtor's admission that he had no property subject to seizure, held sufficient to warrant a finding of his insolvency at the time he made an alleged fraudulent conveyance of his property. Same — Execution — Sheriff's Return — Presumption. 5. In the absence of evidence showing that a sheriff, in attempting to make a levy of execution, made no search for personal property, it may be presumed from the recital in his return that he was unable to find any that he made a search. (Subd. 15, sec. 10606, Rev. Codes 1921.) Same — Close Relationship Between Transferor and Transferee — Absence of Consideration — Evidence — Sufficiency. 6. Finding of the jury in an action to set aside a fraudulent conveyance, adopted by the court, that there was no consideration for the transfer, held supported by the evidence, showing inter alia a close relationship between the interested parties, and vague and uncertain in character in explaining the transactions resulting in the transfer, under the rule that unless the evidence preponderates against the findings they will be deemed conclusive on appeal.
Appeal from District Court, Fergus County; John C. Huntoon, Judge.
Mr. Ralph J. Anderson, for Appellants, submitted a brief; Mr. Aaron Shull, of Counsel, argued the cause orally.
Messrs. Murch Wuerthner and Mr. E.K. Matson, for Respondent, submitted a brief; Mr. Clarence W. Murch argued the cause orally.
This court has frequently held, in accordance with the general rule, that before such a case as this can be maintained, it is necessary that the creditor, as a condition precedent to the bringing of his action, shall have secured a specific subsisting lien upon the property against which he seeks to enforce his claim. ( Bowen v. First State Bank, 69 Mont. 223, 221 P. 527.) At the commencement of the trial of this action timely objection was made to the sufficiency of the complaint in this respect in that it appeared on the face of it that there was no existing lien at the time of the commencement of the action; that by the return of the execution without sale, the lien created by the levy was lost. We are mindful of the fact that a somewhat similar question was presented to this court in two cases where it was asserted that no lien existed, but the court held otherwise. We refer to the case of Ferrell v. Elling, 84 Mont. 384, 276 P. 432, and Piersky v. Hocking, 88 Mont. 358, 292 P. 725. In both of those cases, however, a lien was secured on the property by virtue of an attachment, in an action brought by the creditor against his debtor. The lien created in those cases and held by this court to be sufficient was a lien created by an attachment, and such a lien continues even after judgment, the attachment being merged in the judgment. Such is not the fact in this action, where no attachment was made in the original action but a levy was made after judgment.
The return of an execution by an officer after levy without sale by the direction of the judgment creditor is a surrender of his authority and leaves such property as free from his control as if no levy had been made, and the lien of the levy is lost. (23 C.J. 519; Speelman v. Chaffee, 5 Colo. 247; Rickards v. Cunningham, 10 Neb. 417, 6 N.W. 475; Hickok v. Coates, 2 Wend. (N.Y.) 419, 20 Am. Dec. 632.) If the lien is lost or has become extinguished an action to set aside a fraudulent conveyance of property on which the lien existed will not lie. (27 C.J. 725; Blish v. Collins, 68 Mich. 542, 36 N.W. 731; Daugherty v. Powell, 67 Kan. 857, 72 P. 274, 74 P. 242.)
The proof of insolvency was wholly insufficient. In actions of this character it is necessary for the plaintiff, in order to recover, to show that the grantors were insolvent at the time of the transfer, or did not reserve sufficient property subject to immediate seizure to satisfy his then existing debts. ( Ferrell v. Elling, 84 Mont. 384, 276 P. 432; Dick v. King, 80 Mont. 40, 257 P. 1022.) The only proof attempted to be offered on the question of insolvency by the plaintiff was the returns of the sheriff on the various executions. We are mindful of the fact that this court has held that the return of an execution unsatisfied is prima facie proof of the insolvency of the debtor. ( Hart-Parr Co. v. Schafer, 73 Mont. 429, 236 P. 675.)
It was the theory of respondent, in the court below, and doubtless will be urged here, that this court in the last cited case literally meant what it said, that if a sheriff made a return on an execution showing that he had received nothing, that was prima facie proof of insolvency. It is our contention that in order for the sheriff's return to be prima facie evidence of insolvency, it must appear therefrom that he has made some effort to discover property and has been unable so to do, and if he does make such statement, then the sheriff's return is prima facie evidence of insolvency. An examination of the authorities cited in the Schafer Case, where the lien was held to be prima facie evidence of insolvency, discloses that the returns in those particular cases, including the Montana case of Whiteside v. Hoskins, 20 Mont. 361, 51 P. 739, stated that the sheriff had made due and diligent search and was unable to find property.
The respondent will urge that the sheriff's return discloses that the defendant H.E. Strong told the sheriff that neither he nor Hazel L. Strong, his wife, had any property subject to execution, but this statement was made after the deed of conveyance. Declarations of a grantor made subsequent to the conveyance are inadmissible. ( Dick v. King, supra.) If no one was concerned in the case other than the debtors, doubtless this admission would be admissible, but other persons are parties to this action, and as against them such a declaration is inadmissible and should not be considered by the court as admitted.
If we are correct in either of the contentions which we have thus far made, the judgment must be reversed and the cause dismissed.
As we read the decisions of this court, before a fraudulent conveyance action can be maintained, the plaintiff must have exhausted his legal remedy before he can invoke the equitable jurisdiction of the court, and this is done by a levy of attachment or execution, returned nulla bona, which gives the plaintiff a specific lien upon the property and a consequent right to prosecute an action for fraudulent conveyance. ( Northern Montana State Bank v. Collins, 67 Mont. 575, 216 P. 330; Koopman v. Mansolf, 51 Mont. 48, 149 P. 491; see, also, Wheeler Motter Merc. Co. v. Moon, 49 Mont. 307, 141 P. 665; Rowley v. Mullen, 74 Mont. 283, 240 P. 374; Roman v. Albert, 81 Mont. 393, 264 P. 115; Nelson v. Wilson, 81 Mont. 560, 264 P. 679; Edenfield v. C.V. Seal Co., 83 Mont. 49, 270 P. 642; Security State Bank of Havre v. McIntyre, 71 Mont. 186, 228 P. 618; National Bank of Anaconda v. Yegen, 83 Mont. 265, 271 P. 612; Harrison v. Riddell, 64 Mont. 466, 210 P. 460; Springhorn v. Springer, 75 Mont. 294, 243 P. 803; Fousek v. DeForest, 90 Mont. 448, 4 P.2d 472.)
Appellants contend that the proof of insolvency of the defendant Strong at the trial in the lower court was wholly insufficient. Again, respondent is favored by decisions of this court which definitely determine the character of evidence and proof sufficient to establish insolvency of an alleged fraudulent vendor.
The sheriff's returns on levy of executions nulla bona are all that is required under the laws of this state and the decisions of this court to make out a prima facie showing of insolvency. ( Hart-Parr Co. v. Schafer, 73 Mont. 429, 236 P. 675; Whiteside v. Hoskins, 20 Mont. 361, 51 P. 739; Edenfield v. C.V. Seal Co., 83 Mont. 49, 270 P. 642.)
Where facts commonly denominated badges of fraud appear which are sufficient to raise a presumption that conveyances are in fraud of the grantor's creditors, the burden of showing good faith surrounding such conveyances is shifted to the parties to the conveyances. (27 C.J., sec. 715, p. 788; Koopman v. Mansolf, 51 Mont. 48, 149 P. 491; Lewis v. Lindley, 19 Mont. 422, 48 P. 765; Dick v. King, 80 Mont. 40, 257 P. 1022.)
Both Strong and Hunter suppressed evidence when they failed to produce the records, books, accounts and ledgers of their insurance transactions and commission deals. Is it reasonable to suppose that these men, who, according to their own testimony, were ex-bankers, did not keep any records of their dealings on insurance matters and real estate commissions? To ask the question is to answer it, and the fact of the matter is they did keep such records and their refusal to produce them was because of the fact that said records would show the fallacy of their testimony as given at the trial. Such facts raise a strong presumption of fraud. (27 C.J., sec. 733, p. 803, sec. 774, p. 826; Eberhardt v. Bennett, 163 Ga. 796, 137 S.E. 64; National Bank of Republic v. Hobbs, 118 Fed. 626; Carter v. Richardson, 22 Ky. Law Rep. 1204, 60 S.W. 397.)
The testimony adduced at the trial shows conclusively that Strong and Hunter bore close business relationships and were on terms of intimacy. These facts are circumstances which the jury had a right to take into consideration in determining the issues of this case. ( Turner v. Hammock, 229 Ky. 836, 18 S.W.2d 285.)
This is an action wherein plaintiff below, respondent here, sought to have set aside certain transfers of real estate made by H.E. Strong and Hazel L. Strong, his wife, defendants below, to the other defendants, Moore Land Company and R.L. Hunter, appellants here, and to have the property so transferred subjected to the lien of a judgment of respondent, entered against appellants Strong in the district court of Cascade county and docketed in Fergus county, wherein the land is located.
Plaintiff's complaint alleged that H.E. Strong and his wife, Hazel L. Strong, were indebted to plaintiff on a promissory note in the sum of $1,375.83 and interest; that plaintiff on July 25, 1928, instituted action on the note in the district court of Cascade county, and on January 30, 1929, obtained judgment by default in the total sum of $1,611.72, and that plaintiff was at the time of the institution of this action still the owner and holder of the judgment; that at the time of the commencement of plaintiff's original action, the defendants Strong were managers, owners and in full control of the defendant Moore Land Company, and the owners of the entire issued capital stock of that corporation; that when plaintiff commenced its action on the note, the defendant H.E. Strong was the owner in fee simple of certain interests in real estate in Fergus county, Montana, being a part interest in some lots in the town of Moore and a whole interest in some other lots in the town of Moore; that the Strongs, on July 2, 1928, at the time they were obligated and indebted to plaintiff on the promissory note, and with intent to cheat and defraud plaintiff, and without consideration, sold and transferred certain of said real estate to the defendant R.L. Hunter, and on January 23, 1929, a few days prior to the time plaintiff obtained its original judgment, did fraudulently transfer and convey certain of the other real estate to Moore Land Company, a corporation.
That on February 21, 1929, plaintiff had execution issue to the sheriff of Fergus county with instruction to levy on personal property of the defendants; that the execution was returned by the sheriff indorsed as wholly unpaid and unsatisfied; that on the second day of April, 1929, another execution was issued on the judgment and likewise directed to the sheriff of Fergus county with instruction to levy on any property of the defendants Strong that he could find and locate; that on the twenty-fifth day of April, 1929, that execution was returned by the sheriff wholly unpaid and unsatisfied, and with the further indorsement that "he [H.E. Strong] advised me that neither he or his wife, Hazel L. Strong, had any property that could be levied upon; and I further certify that I am unable to find any personal property within Fergus county belonging to H.E. Strong and Hazel L. Strong but what is pledged or chattel mortgaged."
That on the eighth day of January, 1930, another execution was issued at the direction of plaintiff, and on the twenty-first day of that month this execution was returned by the sheriff with a return reciting that the sheriff had on January 17, 1930, levied said execution by attaching all the right, title and interest of the defendants Strong in and to the real estate mentioned, and which real estate was standing in the names of the defendants Moore Land Company and R.L. Hunter on the records of Fergus county. The sheriff also made further return on the execution to the effect that the same was wholly unpaid and unsatisfied.
Plaintiff alleged that by virtue of the last execution and the levy of the same, it obtained a specific lien on all of the real estate, and that after diligent search and inquiry, plaintiff could not ascertain or discover any other property of defendants Strong, and therefore could not satisfy its judgment; that defendants divested themselves of their said property in order to cheat, defraud, hinder and delay their creditors, and particularly the plaintiff; and that the conveyances made to Moore Land Company and R.L. Hunter were made by the Strongs for the purpose of placing their property beyond the reach of their creditors and particularly to avoid the process of the law. Plaintiff demanded that the conveyances made to Moore Land Company and to Hunter be set aside as fraudulent, and that the real estate be subjected to the lien of its judgment.
The defendants answered, admitting some of the allegations of the complaint, including the entry of the judgment, and admitting that Strong owned the real estate previous to the transfers, but denying that the transfers were fraudulent. The answer also admitted, by affirmative allegation, that "the defendant H.E. Strong advised Guy Tullock, sheriff of Fergus county, that neither he nor his wife had any property in that county."
The case was tried by the court with a jury acting in an advisory capacity. Before any testimony was taken, an objection was made to the introduction of evidence on the ground that the complaint did not state a cause of action, and upon the further ground that there was no lien existing at the time of the commencement of the action, by reason of the return of the sheriff without sale on the execution. This objection was overruled. Motion was also made by defendants, after the evidence was all in, to take the cause from the jury. This motion was denied.
The court submitted to the jury four findings of fact, which, with the answers, are as follows:
"1. Did the conveyance of the defendants Strong to the Moore Land Company constitute an honest transaction with good consideration? Answer. No.
"2. Did the conveyance of the defendants Strong to R.L. Hunter constitute an honest transaction with good consideration? Answer. No.
"3. Did the defendants Strong convey the interest in the store and hotel property to the defendant Moore Land Company in consideration of the funds received from sale of the quarter section of the Moore Land Company to J.A. Johnson? Answer. No.
"4. Did the defendants Strong convey the property referred to as the residence to the defendant Hunter in consideration of a debt honestly owing to the defendant Hunter by the defendant Harry Strong? Answer. No."
The defendants excepted to the findings and made appropriate motions for judgment in their favor. The court denied the motions and adopted the findings of the jury and entered judgment in favor of the plaintiff. The judgment ordered that the deeds to the Moore Land Company and R.L. Hunter be canceled and the property described therein subjected to the lien of the judgment and directed issuance of execution accordingly. From this judgment the defendants appealed and assert ten specifications of error. Only three of these are important and are stated in appellants' brief as follows:
"1. That by reason of the return of the sheriff on the execution under which a levy was made on the property conveyed, without sale, the lien created by the levy was abandoned or lost prior to the commencement of this action and, therefore, the court was without jurisdiction.
"2. That the evidence in this case wholly fails to prove insolvency of the defendants Strong, in that the only proof of insolvency was the returns of the sheriff, and that they were insufficient in that none of them discloses the fact that the sheriff had made any search for the property of the defendants and he nowhere certifies that he was unable to find other property.
"3. That the evidence clearly preponderates in favor of a finding that there was an adequate consideration for the conveyance of the residence property by the defendants Strong to the defendant Hunter."
It will be observed that appellants claim that no specific [1] lien attached to the property involved by reason of the fact that the lien was predicated upon an execution, rather than upon an attachment. There is no merit in this contention. This court has recognized such specific procedure in numerous cases. ( Wheeler Motter Merc. Co. v. Moon, 49 Mont. 307, 141 P. 665; Rowley v. Mullen, 74 Mont. 283, 240 P. 374; Roman v. Albert, 81 Mont. 393, 264 P. 115; Nelson v. Wilson, 81 Mont. 560, 264 P. 679; Edenfield v. Seal Co., 83 Mont. 49, 270 P. 642; Security State Bank v. McIntyre, 71 Mont. 186, 228 P. 618; National Bank of Anaconda v. Yegen, 83 Mont. 265, 271 P. 612; Harrison v. Riddell, 64 Mont. 466, 210 P. 460; Springhorn v. Springer, 75 Mont. 294, 243 P. 803; Fousek v. DeForest, 90 Mont. 448, 4 P.2d 472.) The authority therefor is contained in section 9424, Revised Codes 1921, wherein it is provided, among other things, that "shares and interests in any corporation or company, and debts and credits, and all other property, both real and personal, or any interest in real or personal property, and all other property not capable of manual delivery, may be attached on execution, in like manner as upon writs of attachment."
In this case the sheriff, under one of the executions, pursued the exact procedure provided by statute for the attachment of an interest in real estate owned by a defendant or defendants and standing on the records of the county in the name of a third person or persons. Here the third persons, grantees of the Strongs, were parties defendant in the action and are all bound.
Appellants further claim, however, that even though the lien might have attached under the procedure followed, it was abandoned and lost by reason of the fact that the sheriff did not hold a sale, but did make a second and further return nulla bona. There is ample authority for the procedure followed. In fact, many of the cases decided by this court have recognized and approved that procedure. In such actions no sale upon execution is required to be made, and attachment before judgment is not an exclusive mode of procedure. ( Northern Montana State Bank v. Collins, 67 Mont. 575, 216 P. 330; Koopman v. Mansolf, 51 Mont. 48, 149 P. 491; Edenfield v. Seal Co., supra.)
Appellants' second specification of error is based upon the [2] alleged insufficiency of the evidence. It is contended that there was not sufficient proof of the insolvency of the defendants Strong. In an action of this kind the plaintiff must show that the grantor was insolvent at the time of the transfer, or that he did not reserve sufficient property subject to immediate seizure to satisfy his then existing debts. ( Ferrell v. Elling, 84 Mont. 384, 276 P. 432; National Bank of Anaconda v. Yegen, supra; Security State Bank v. McIntyre, supra.)
The evidence relative to the insolvency consisted of the [3] statement of Strong that neither he nor his wife had any property that could be levied upon, and the returns of the sheriff that he had been unable to find any personal property belonging to the defendants upon which he could levy. Appellants contend that under the ruling in Dick v. King, 80 Mont. 40, 257 P. 1022, the statement by Strong to the sheriff was inadmissible. However, the pleadings of the plaintiff here set forth the statement and the answer of the defendants admitted it specifically. This being true, it follows that no error was involved in the admission of the statement of H.E. Strong.
In Hart-Parr Co. v. Schafer, 73 Mont. 429, 236 P. 675, [4] 677, the court said: "It appears to be the rule, established by a long line of decisions, that the return of an execution unsatisfied is sufficient proof of the exhaustion of the legal remedy; that such a return establishes, prima facie, the insolvency of the debtor; that he has no other property out of which the execution could be made, and entitles the execution creditor to invoke the aid of a court of equity to set aside a conveyance made in fraud of his rights."
It is true that in the instant case the sheriff did not recite [5] that he had made due and diligent search; however, his statement that he was unable to find any personal property presupposes a search, and, in the absence of any evidence to the contrary, it is fair to presume that he made one. It may be presumed that an officer did his duty. (Sec. 10606, subd. 15, Rev. Codes 1921; Burgess v. Lasby, 91 Mont. 482, 9 P.2d 164.)
It is true that the returns recited that the sheriff had been unable to find personal property belonging to the defendants, upon which he could levy. It was the duty of the sheriff to first have resort to personal property. (Sec. 9417, Rev. Codes 1921.)
Appellants contend that there might have been real property subject to execution upon which the sheriff made no attempt to levy. We might note that the record in the Hart-Parr Co. Case, supra, discloses that the return made in that case related solely to personal property. However, it is unnecessary at this time to decide whether these returns alone would be sufficient to make out a prima facie showing of insolvency, for here we have the admission of the defendant that he had no property in the county subject to execution. The court was warranted in finding, as it did find, that the defendants were insolvent.
The third assignment is based upon a claim that there was [6] consideration for the transfer to R.L. Hunter, Apparently, appellants abandoned the idea that there was consideration for the transfer to the Moore Land Company. We might, therefore, refrain from further discussion of the transfer to that company, but for the fact that the record shows a close relationship between all the defendants and discloses a series of interrelated transfers. H.E. Strong, the husband, was the president of the bank; Hazel L. Strong was his wife, and R.L. Hunter was the cashier, and partner of H.E. Strong. The three were the owners of all the stock of the Moore Land Company. The case was tried on the theory that all the transactions were in furtherance of the same purpose. Therefore all of them should be considered together.
The evidence showed that the defendant H.E. Strong was one of the incorporators of the Moore Land Company; that he owned seventy-three of the seventy-five issued shares of the corporation; that the officers of the company were the defendants — Hunter was president, Strong vice-president and Mrs. Strong secretary — at the time the deeds were made by the Strongs. Hunter and Mrs. Strong owned but one share each. Strong owned the balance of the Moore Land Company stock, and was evidently the dominant personality in the group.
Strong tried to explain the consideration for the transfer of the property to the corporation. He testified that about 1918 the corporation acquired a quarter-section of land; that the land was sold to one J.A. Johnson on some sort of contract not clearly explained, and that afterward the proceeds of the sale went to him instead of to the corporation; that the transfer of the property in question was made to the corporation without a concurrent consideration, but in payment to the corporation of the amount he claimed was due by reason of his having collected and held the proceeds of the land.
It is impossible to obtain a clear understanding of the transaction from the record. The jury said, in answer to the interrogatories submitted by the court, that the transaction was not an honest one, and that the property sought to be impressed with the lien in this action was not transferred to the land company as a result of the Johnson deal. Certainly it cannot be said that the record, and particularly the testimony of Strong, could overcome the findings of the jury, which were adopted by the trial court. Strong's testimony, as it appears in the cold record, is fragmentary, uncertain and evasive. Had the jury found the other way, after seeing the witness upon the stand and hearing the testimony, there might be some justification for disregarding their conclusion, but the cold record discloses the reason for the jury's findings.
The transfer made to Hunter was explained by himself and by Strong. They testified that Hunter conducted a fire and hail insurance business through or in connection with the bank, and received certain commissions which they said aggregated something like $3,600; that these commissions were really the property of Hunter, but Hunter allowed Strong to take them and to that extent the latter became indebted to him; that no books were kept on these transactions except as they appeared in the books of the bank of which both Strong and Hunter were officers; that it was impossible to ascertain the exact amounts due; and that the transfer of the property made to Hunter was also without concurrent consideration but for the purpose of paying Hunter the amount so due him. Neither one of them produced any account or record upon which to base the claim of obligation due Hunter from Strong. They said the deed was made and the property transferred in payment of whatever obligation there was. After the deed to the property was made to Hunter, Strong continued to occupy the property and apparently there was no transfer of possession. The evidence as to the Strong-Hunter obligations was also vague and uncertain.
The jury made findings against the defendants and the court having adopted them and having entered judgment thereon, we find ourselves unable to say that such findings should be set aside and the judgment reversed. Certainly the evidence does not preponderate against the findings and without such apparent preponderance of evidence we are bound by well-established rules often announced by this court and must sustain the judgment.
No error appearing, the judgment is affirmed.
MR. CHIEF JUSTICE CALLAWAY, ASSOCIATE JUSTICES ANGSTMAN and MATTHEWS and HONORABLE A.J. HORSKY, District Judge, sitting in place of MR. JUSTICE ANDERSON, disqualified, concur.