Michael v. Moore, 157 N.C. 462 (1911)

Dec. 20, 1911 · Supreme Court of North Carolina
157 N.C. 462

P. W. MICHAEL v. J. O. MOORE and Wife.

(Filed 20 December, 1911.)

1. Debtor and Creditor — Insolvency—Gifts—Improving Property, of Another — Equity.

An insolvent debtor cannot withdraw money from bis own estate and give it to another to be invested by him in the purchase or improvement of his property, and to that extent, when it is done, • creditors may subject the property so purchased or improved ¿to the payment of their claims.

2. Same — Husband and Wife — Contract—Fraud.

The right of the creditors of an insolvent husband to follow his funds used in making improvements upon his wife’s lands is an equitable one, and does not rest on contract, and the money so invested is regarded as a “personal fund fraudulently withdrawn from the husband’s creditors.”

3. Debtor and Creditor — Insolvency—Gifts—Husband and Wife — Improving Wife’s Property — Fraudulent Purpose — Intent—Equity.

The funds of an insolvent husband invested in improvements on his wife’s lands, in fraud of his creditors, is not regarded in equity as being a part of his wife’s property, and may be subjected by the creditors to the payment of their debts, though the husband may not have intended to defraud them, or the wife may not have known of or participated therein, if he had such intention.

4. Debtor and Creditor — Fraud—Husband and Wife — Improving the Wife’s Property — Resulting Trusts.

An insolvent husband who has put improvements on his wife’s land in fraud of his creditors has no resulting trust in the land of his wife for the value of the improvement, the equity being only in favor of his creditors, who have the right to follow the fund invested for the satisfaction of their debts.

*4635. Execution — Debtor and Creditor — Fraud—Improving Wife’s Property — Personal Property Exemption.

When an insolvent debtor has, in fraud of the rights of his creditors, invested his money in improvements on his wife’s lands, and such has been established in a suit by his creditors, the debtor may claim his personal property exemption from the money so invested; and when the pleadings raise this issue, the amount of the personal property exemption must first be deducted from the amount expended in making the improvements, and the clear balance will be the basis for the estimate of the amount subject to the satisfaction of debts. Whether the creditors can recover the entire sum wrongfully used in improving the property, less the exemption, or only the amount by which the property is enhanced in value, qucerc.

6. Same — Appeal and Error — Pleadings—Reformation—Issues—Procedure.

It appearing in this suit that the creditors of an insolvent defendant are entitled to have improvements put upon his wife’s land with his funds subjected to the payment of their debts, from which the debtor may claim his personal property exemption were the pleadings properly drawn to present the issue,* the case is remanded with direction to reform the pleadings in accordance with the principles declared, and to submit issues for the purpose of ascertaining the amount invested by the husband for his wife in the improvement, less the personal property exemption therein, and, also, the amount by which the property has been enhanced in value by reason, of the improvement, with such other issues as may be necessary. .

Appeal from Long, J., at May Term, 1911, of Catawba.

Tire plaintiff, at May Term, 1908, of Catawba Superior Court, obtained a judgment against J. 0. Moore, one of the defendants, for $300 and costs in a suit for damages for malicious prosecution. At tbe time the judgment was taken the defendant J. O. Moore owned a tract of land in Alexander County. He gave notice of appeal from the said judgment to this Court, being allowed time within which to perfect such appeal, which appeal was not, in fact, prosecuted. Before the time for perfecting said appeal had expired, and before the plaintiff caused a transcript of said judgment to be docketed in Alexander County, the defendant J. 0. Moore, his wife, Dora Moore, joining him, executed a mortgage on the land in Alexander County to secure *464tbe payment of $2,000 borrowed from tbe mortgagee. Tbe defendants, with tbe $2,000 so borrowed, erected a residence on a lot in tbe city of Hickory, tbe title to wbicb was in tbe defendant Dora Moore. Tbe feme defendant bad actual notice of tbe suit, and of tbe judgment taken therein, before tbe execution of tbe mortgage and tbe use of tbe $2,000 in tbe erection of tbe dwelling-bouse on ber lot. At tbe time of tbe transaction tbe defendant J. O. Moore was insolvent. After plaintiff bad exhausted bis legal remedies by execution and supplemental proceedings, be instituted this proceeding for equitable relief.

Tbe jury returned tbe following verdict:

1. Did defendant J. O. Moore dispose of all of the lands owned by him, and expend tbe bulk of tbe proceeds therefrom in tbe erection of permanent improvements on lands of tbe defendant Dora Moore, for tbe purpose of defeating or delaying or defrauding tbe payment of tbe plaintiff’s judgment against, him, referred to in tbe complaint? Answer: No.

2a If so, did tbe defendant Dora Moore have knowledge of such purpose on tbe part of ber husband, and participate in tbe alleged fraud of her husband, as set out in tbe first issue? Answer: No.

3. What is tbe value of tbe lot of land owned by Dora Moore, independent of tbe improvement placed on it by tbe money of her husband? Answer: $600.

4. What amount of money of J. O. Moore, referred to in the first issue, was expended upon tbe lot of Dora Moore with ber consent? Answer: About $2,000.

Upon tbe verdict, tbe court rendered tbe following judgment:

“This cause coming on before tbe undersigned and a jury, and tbe jury having found tbe third and fourth issues in favor of tbe plaintiff; and the male defendant, as it appears from the record, being indebted to tbe plaintiff in tbe sum of $300 and costs, $48.15: It is, therefore, upon tbe whole record, considered and adjudged that tbe plaintiff recover of tbe defendant J. O. Moore $348.15 and tbe costs of this suit. It is further considered and adjudged that the value of tbe lot owned by the defendant Dora Moore, in ber own right, independent of tbe interests of ber husband in tbe bouse and lot, is $600. It is *465further considered, and adjudged that the interest of the defendant J. 0. Moore in the bouse and lot described in the complaint is $2,000, and that- said sum was expended by J. 0. Moore on the said lot of bis wife, with her consent, in making improver ments thereon, from his own moneys, and the said wife holds her said lot subject to the equity in the same of her husband in the sum of $2,000, to be pursued by the plaintiff as he may be advised.”

Defendants appealed.

W. A. Self and A. A. Whitener for plaintiff.

OounciU '<& Yount for defendant.

"Walker, J.,

after stating the case: We entertain no doubt as to the plaintiff’s right to follow the fund invested by his debtor in improvements upon his wife’s land. No principle is better settled by our decisions than the one that an insolvent debtor cannot withdraw money from his own estate and give it to another to be invested by him in the purchase or improvement of his property, and when it is done, creditors may subject the property so purchased or improved to the payment of their claims. Guthrie v. Bacon, 107 N. C., 338, and cases cited; McGill v. Harmon, 55 N. C., 179; Gentry v. Harper, 55 N. C., 177. The doctrine is well stated and applied in Burton v. Farinholt, 86 N. C., 260, by Justice Ruffin, as follows: “The life policy in question was the property of the plaintiff’s intestate. As soon as delivered, it vested in him, and, like any other chose in action, became an integral part of his estate, subject to every rule of property known to the law. Being indebted, to a state of clear insolvency, at the time of its voluntary assignment to his daughters, his act was fraudulent as to his creditors and void in law, whether made with an intent actually fraudulent or not. It is a principle of the common law as old as the law itself, and upon which the preservation of all property depends, that, except so far as the same may be exempt by positive law, the whole of every man’s property shall be devoted to the payment of his debts. He cannot gratuitously give away any part of it, the law meaning that he shall be just to his creditors before he is generous to his family. From the fact that he was at *466the time insolvent, and that his transfer to his daughters was without valuable consideration, it results, as a conclusion of law, that the assignment was void as to his creditors. As said in Gentry v. Harper, 2 Jones Eq., 177, it is against conscience for debtors to attempt in any way to withdraw property or effects from the payment of debts; and if the courts of law cannot reach the debtor’s interest, a court of equity will.” More apposite is the case of Pender v. Mallett, 123 N. C., 57, in which the present Chief Justice says: “If she were not a free trader, the action concerns property she claims as her separate property, and she can be sued in regard thereto, no matter when she acquired it, her husband being joined with her as defendant. Code, secs. 178, 424 (4). It cannot be allowed that when an insolvent husband (or his firm, as here charged) makes over his property to his wife in fraud of his. creditors, she cannot be sued for the recovery thereof because she is a married woman. If in such case the specific property (money, for instance) has been invested in some other shape the fund may be followed. Edwards v. Culberson, 111 N. C., 344, and cases there cited.”

It is not necessary to show an actual intent to defraud. The transaction is void per se. Revisal, sec. 962; McCanless v. Flinchum, 89 N. C., 373. Nor does her coverture protect the feme defendant. Bell v. McJones, 151 N. C., 85; 2 Pom. Eq. Jur. (3 Ed.), sec. 945. The facts of our case are substantially like those in Trefethen v. Lynam, 90 Me., 376 (60 Am. St., 271), and with reference to the transaction in that case, by which the wife’s property was improved, the Court said: “The wife cannot rightfully retain, as against her husband’s creditors, the value of permanent additions voluntarily made by him to her property. Outside of the statute exemptions he cannot acquire any property which shall be free from the claims of prior creditors; nor can she acquire such property out of his principal or income. Whenever it appears that she has thus absorbed his money or estate, she can be compelled to account for it by this equitable trustee process. The prior creditor of the husband need not show an actual fraudulent intent on the part of either husband or wife. It is enough for him to show that the wife has acquired some property or value out of her husband’s un-*467exempted principal or income. Tbis value thus obtained should be restored by her for the payment of his prior debts, though the husband or his representatives might have no legal or equitable claim to such restoration. The wife may owe a. duty of restoration to her husband’s prior creditors without owing any such duty to him. Under the principles above stated, however, the husband’s right is not the test of his prior creditor’s right. As to them, neither husband nor wife can erect buildings on her land with his money and retain the benefit. In the absence of fraudulent intent or active participation upon the part of the wife, it might not be equitable to require her to account for the full sum thus subtracted from her husband’s means and appropriated to her property, since the benefit to her estate might not be so much; but she should not retain any benefit or increment in value of his estate made at the expense of her husband’s prior creditors. To turn over to those creditors the benefit or increment, if any, thus obtained would cause her no loss of her own property, but would simply transmit some part of the husband’s property to his creditors — a most equitable proceeding.” It is there said by the Court that the principle so stated is fairly deducible from the cases.

Our attention has been called to the ease of Thurber v. LaRoque, 105 N. C., 301, in which it is held that money of an insolvent husband invested in land, as a gift to his wife, and which is conveyed to her, may be followed by creditors and the land subjected to its payment, but money, when thus invested in improvements on her land, cannot be followed by them, and the latter decision seems to rest upon the idea that the right of the husband’s creditors to follow the fund arises out of her implied promise or contract to pay for the improvements. ¥e do not concur in this view. The two cases are affected by the same principle, which has nothing to do with the law of contracts. The creditor’s right is an equitable one, and the money so invested, whether in land or improvements, is regarded as “a personal fund fraudulently withdrawn from the husband’s creditors,” as said by Justice Shepherd in his dissenting opinion, which fully and clearly states the true doctrine. The court proceeds to subject the property, which has derived a benefit from *468tbe improvement, not upon tbe theory that tbe wife has contracted, either expressly or impliedly, to pay for tbe improvements, but it follows tbe fund taken from tbe husband’s estate and which justly belonged to tbe creditors, into her bands apd bolds tbe property as security for its repayment, even against her consent. Any other ruling would be entirely opposed to tbe true principle upon which this equity of tbe creditors is based, as will appear in the numerous decisions of this Court, some of which we have cited. If a husband is permitted thus to dispose of his estate and without any accountability on the part of the wife to them, it would enable him to commit the most gigantic frauds in defiance of his creditors. The law cannot be supposed to have contemplated any such result in its attempts to protect the wife against the consequences of her improvident contracts. The general doctrine is nowhere better stated than in Perry on Trusts (5 Ed.), sec. 170: “Although courts of equity have not made general definitions stating what is fraud and what is not, they have not hesitated to lay down broad and comprehensive principles of remedial justice, and to apply these principles in favor of innocent parties suffering from the fraud of others. These principles, though firm and inflexible, are yet so plastic that they can be applied to every case of fraud as it occurs, however new it may be in its circumstances. The leading principle of this remedial justice is by way of equitable construction to convert the fraudulent' holder of property into a trustee, and to preserve the property itself as a fund for the purpose of recompense. In investigating allegations of fraud, courts of equity disregard mere technicalities and artificial rules, and look only at the general characteristics of the case, and go at once to its essential morality and merit. Thus, at law, married women or infants are not liable upon their contracts. But in equity, if a married woman has obtained property by fraud, the court disregards the technical rules of common law in regard to married women, and converts her by construction into a trustee, and compels her to do justice by executing the trust.”

We need not agree to all that is said in the passage just quoted for the purpose of disposing of this case, as there is no element of contract in the equity which we are now enforcing. *469Tbe suit is for tbe purpose of recovering tbe husband’s assets wbieb should be devoted to tbe payment of bis debts, and not the wife’s. It would be against good conscience for her to retain tbe benefit accruing from bis fraudulent act and not pay for it. It is not her property, but justly belongs to bis creditors. There is no injustice or wrong in taking from her that which she does not own, as against tbe creditors, and restoring it to them. It is said in Wall v. Fairley, 73 N. C., 464: “It does not follow that tbe creditors cannot follow tbe funds of tbe debtor in tbe bands of bis voluntary, and, therefore, in law, fraudulent donee. It is settled that in tbe case of a fraudulent donation, such as this appears to have been, they can do so,” and this must be true, without there being any implied promise to pay for tbe benefit that may have been derived from tbe improvement.

But in order to ascertain what tbe benefit is, tbe personal property exempted ($500) must first be deducted from tbe amount expended in making tbe improvement, and tbe clear balance will be the basis for tbe estimate. We need not decide whether tbe creditors can recover tbe entire sum wrongfully used in improving tbe property, less tbe exemption, or only the amount by which tbe property is enhanced in value, as it may not be necessary to do so. We are satisfied that, to tbe extent tbe property has been substantially benefited or increased in value by tbe improvement, tbe creditors are entitled to subject it to tbe satisfaction of their claims. Tbe pleadings are not framed, nor were tbe.issues, so as to allow to tbe debtor tbe benefit of bis personal property exemption by deducting $500 from tbe amount put into tbe improvements. His creditors could not have reached this, if be bad retained tbe money, and, therefore, are not entitled to have it considered in ascertaining tbe increased value of tbe land by reason of tbe improvement. Tbe judgment as rendered is incomplete, in any view of tbe case, as it requires nothing to be done, but merely declares tbe right of tbe husband, and erroneously too, as be has acquired no equity in tbe property because of its improvement with bis money. Tbe transaction is valid as between him and bis wife, and thus considered, she is entitled to tbe benefit of tbe improvement, there being no resulting trust in such a case.. It is the creditors who have tbe only equity and can follow tbe fund.

*470Tbe case is remanded, with direction to reform tbe pleadings in accordance witb tbe principles declared in tbis opinion. Issues should be submitted for tbe purpose of ascertaining 'tbe amount invested by tbe husband for bis wife in tbe improvement, less tbe personal property exemption therein, and also tbe amount by which tbe property has been enhanced in value by reason of tbe improvement, witb such other issues as may be necessary.

New trial.