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Smith v. Whitman

Decided: March 4, 1963.


For modification -- Chief Justice Weintraub, and Justices Jacobs, Francis, Proctor, Hall, Schettino and Haneman. Opposed -- None. The opinion of the court was delivered by Weintraub, C.J.


These cases arose out of embezzlements by Paul A. Vivers, an attorney (now disbarred, Vivers, In re, 36 N.J. 531 (1962)), of property of clients. Defendant Whitman, who is a nephew of Vivers, suffered losses of about $100,000. He obtained from Vivers assets worth about $39,000 which plaintiffs, also victims of Vivers, sought to recover in these proceedings.

The complaints seemingly advanced two theses: (1) that Vivers held specific properties in trust for plaintiffs and transferred those properties to Whitman who took without consideration and with knowledge of the trust; and (2) that the transfers resulted in insolvency and were made and accepted "for the purpose of defrauding creditors."

At the trial funds were not traced in support of the first thesis stated above, that trust properties were transferred to

Whitman. Rather the trial was upon the claim of a fraudulent conveyance and apparently also of an unlawful preference. The trial court found the transfers were neither in fraud of creditors nor an unlawful preference, but held the transaction was vitiated by "duress."

The finding of duress was based upon Whitman's testimony on cross-examination that at one point during his efforts to obtain satisfaction, he threatened to go to the prosecutor if Vivers did not make good. In their brief filed with the trial court after the testimony was closed, plaintiffs projected for the first time the claim that the transfers should be voided for "duress," to which Whitman replied accurately that no such issue had been tried. In fact there was no testimony by Vivers that he yielded to any threat.

The Appellate Division declined to accept duress as an independent basis for relief but held it could sustain the charge of fraudulent conveyance. More specifically, it held that duress would negate "good faith" required by the definition of "fair consideration" in section 9 of the Uniform Fraudulent Conveyance Act, R.S. 25:2-9. As to this, the Appellate Division noted that the answer would ultimately depend upon the impact of the threat upon Vivers, a subject which, as we have said, was not explored when Vivers was on the stand.

The Appellate Division then considered still another thesis, that there may have been an illegal agreement to compound Vivers' offense, and held that such an agreement would also negate "good faith."

The Appellate Division concluded that Whitman should prevail as to assets he received prior to his threat to complain to the prosecutor, but that as to the assets thereafter received, the matter should be remanded for proceedings limited to the subject of "good faith," as to which plaintiffs would prevail, as we have said, if it should be found that Vivers' will was overborne by the threat of criminal prosecution or that there was an illegal agreement to compound Vivers' crime. Smith v. Whitman, 75 N.J. Super. 228 (App. Div. 1962).

Plaintiffs petitioned for certification, to which Whitman replied that he too was dissatisfied. We granted the petition. 38 N.J. 318 (1962).


We start with the proposition that a preference as such is not a fraudulent conveyance. True, a creditor who collects from an insolvent debtor fares better than other claimants. Yet if the transfer were set aside in favor of another creditor, there would be but a substitution of one preference for another. For that reason a preference cannot be undone by a competing creditor whether the preference was obtained through judicial process or by a transfer from the debtor, and the Uniform Fraudulent Conveyance Act did not alter that proposition. Rednor v. First-Mechanics National Bank, 131 N.J. Eq. 141 (E. & A. 1942); Hersh v. Levinson Bros., Inc., 117 N.J. Eq. 131 (E. & A. 1934); Atlantic Refining Co. v. Stokes, 77 N.J. Eq. 119 (Ch. 1910), affirmed o.b. 78 N.J. Eq. 301 (E. & A. 1911); 1 Glenn, Fraudulent Conveyances and Preferences (Rev. ed. 1940) ยง 289, p. 488.

The rule obtains as well in equity. Monmouth Lumber Co. v. Indemnity Ins. Co. of North America, 21 N.J. 439 (1956), is not to the contrary. There it was held that a fund interpleaded by a surety, representing the amount of its liability, will be distributed ratably among all of the claimants to it. Equality is equity, as one of the maxims goes, and in harmony with it, equity will usually parcel a common fund pro rata among all creditors, but equity will not reach out to avoid a preference in order thereby to create a fund to which to apply its principle of equality in distribution. Whether equity here follows the law because of the difficulty of achieving equality in a suit involving less than all assets and all creditors or because it is not ...

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