The government class book / Designed for the instruction of youth in the principles of constitutional government and the rights and duties of citizens.

by Andrew W. Young

Chapter LVI.

Fraudulent Sales; Assignments; Gifts, &c.

§1. The title to property is sometimes transferred with fraudulent intent. A debtor, to place his property beyond the reach of his creditors, sells or assigns it to others by way of mortgage, under the false pretense of securing the payment of a debt; the property to remain in the possession and use of the assignor.

§2. Any agreement which operates as a fraud upon third persons, is void. It is a rule of common law, that all deeds of gift, and all transfers of goods and chattels made by any person to secure them for his future use, shall be void as against creditors; and that if property assigned or sold remains with the seller or assignor, the transaction is to be presumed fraudulent. But whether such conveyance of goods is only prima facie (at first view) evidence of fraud, which the vendee or assignee may rebut by proving the sale or assignment to have been made honestly and in good faith; or whether the transaction is fraudulent in point of law, and void, is a question upon which the decisions of the courts in England as well as those in this country differ, and which, therefore, may be considered as not conclusively settled.

§3. Some have made a distinction between bills of sale and assignments that are absolute and those that are conditional. The supreme court of the United States has affirmed the doctrine that an absolute and unconditional bill of sale or conveyance, when the property is retained in possession, is of itself conclusive evidence of fraud; in other words, it is presumed to be fraud in point of law, whatever it may be in fact. It has been held by the same court, that a conveyance with a condition that the property is to remain with the vendor until the condition shall be performed, or a conveyance in the nature of a mortgage or security, expressing an agreement between the parties, that the mortgager shall retain possession, is valid.

§4. In some states, the doctrine established by the courts is, that a continuance of possession is only prima facie evidence of fraud; in which case the mortgagee or assignee is allowed to show by proof, that the conveyance was made in good faith and for a valuable consideration. In other states, the strict rule prevails, that, without a change of possession, the transaction is fraudulent in law; in which case the assignee, or person claiming the property under the assignment, is not permitted to show that, in point of fact, the transaction was bona fide, (in good faith.)

§5. The rule that holds every conveyance to be fraudulent unless the property immediately changes hands, often operates to inconvenience and even injury of honest debtors. A debtor may be obliged to part with property, however convenient or needful its present use may be to him, when, but for this stringent rule of law, he might borrow the money to pay a debt, or procure a postponement of payment, and retain the use of the property pledged.

§6. In many of the states, this perplexing question has been settled by statute. In the state of New-York, the law expressly declares, that a sale or an assignment without immediate delivery and a change of possession, shall be presumed to be fraudulent and void as against creditors, unless the party claiming the property under the assignment shall make it appear that the same was made in good faith, and without any attempt to defraud. Laws more or less similar to this, and securing to the assignor the use of the mortgaged property, are believed to exist in a majority of the states. The instruments conveying the property are usually called chattel mortgages, and are required to be recorded as deeds; in New-York, and perhaps a few other states, only filed in the town or county clerk's office.

§7. In the sale of personal property, though there should be a judgment against the vendor, and the purchaser should have notice of it, that fact would not of itself render the sale fraudulent. But if the purchaser, knowing of the judgment, purchases with the view or purpose to defeat the creditor's execution, the transaction is fraudulent. The question of fraud depends upon the motive.

§8. Assignments are sometimes made by debtors for the benefit of their creditors. A person deeply indebted, or in embarrassed circumstances, assigns his property, in trust, to one or more persons, who are to dispose of it, and to apply the avails to the payment of his creditors, or a part of them; for the law does not forbid a debtor's giving a preference to one or more creditors over others, provided the assignment is for a sufficient consideration. A debtor may directly assign or transfer all his property to a single creditor, and the assignment be valid; but if the value of the property is manifestly excessive, and disproportionate to the debt which it is intended to cover, the other creditors have a right to the surplus.

§9. When an embarrassed debtor agrees to pay his creditors a certain proportion of their claims in consideration of a discharge of their demands, if he privately agrees to give a better or further security to one than to others, the contract is void; because the condition upon which they agree to discharge the debtor is, that they shall share equally.

§10. A gift, or conveyance founded merely upon a consideration of affection, or blood, or consanguinity, may be set aside by creditors, if the grantor was in embarrassed circumstances when he made it; for a man is bound, both legally and morally, to pay his debts before giving away his property. But if he is indebted to only a small amount in proportion to the value of his property, and wholly unembarrassed, the gift is not rendered voidable by his indebtedness, even though he should afterwards become insolvent.