A debtor may prefer one creditor over another; and to that end he may rightfully give a lien by mortgage or other legal means, sell in payment of the debt, or transfer choses in action as collateral security, where the surplus in such cases is not reserved for the debtor's own benefit.
(Orig. Code 1863, § 1955; Code 1868, § 1943; Code 1873, § 1953; Code 1882, § 1953; Civil Code 1895, § 2697; Civil Code 1910, § 3230; Code 1933, § 28-301.)
Law reviews.- For article, "Preparing the Georgia Farmer (or Other Small Entrepreneur) for Bankruptcy," see 22 Ga. St. B.J. 186 (1986). For note discussing assignments for benefit of creditors, see 12 Ga. L. Rev. 814 (1978).
JUDICIAL DECISIONSANALYSIS
General Consideration
Legislative intent behind this section and former
§ 18-2-22. - Construing former Code 1868, §§ 1942 and 1943 (see now O.C.G.A. §§ 18-2-22 (repealed) and18-2-40) together, as being in pari materia, the intention of the legislature was that an insolvent debtor may assign property in trust, for the benefit of one or more of the debtor's creditors, to the exclusion of others, if it was done bona fide, and no trust or benefit was reserved to the assignor, or any person for the assignor. Embry & Fisher v. Clapp, 38 Ga. 245 (1868).
Discussion of effect of Ga. L. 1865-66, p. 29 on former Code 1882,
§ 1953. - See Powell, Brother & Co. v. Kelly Brothers & Porter, 82 Ga. 1, 9 S.E. 278, 3 L.R.A. 139 (1889).
Even an insolvent debtor may prefer one creditor to another, and to this end the debtor may transfer choses in action as collateral security for preexisting debt, surplus in such case not being reserved for the debtor's own benefit. Suttles v. Vickery, 179 Ga. 751, 177 S.E. 714 (1934).
Effect of pendency of suit.
- Mere pendency of suit against debtor does not extinguish debtor's right to prefer one creditor over another, and in such case, controlling question is "existence or nonexistence of fraud in the transfer." Suttles v. Vickery, 179 Ga. 751, 177 S.E. 714 (1934).
Transfer to be made in good faith and not benefit debtor.
- Debtor is permitted to prefer one creditor over another and to make assignments to that end so long as the transfer is made in good faith and does not benefit the debtor. Bank of Cave Spring v. Gold Kist, Inc., 173 Ga. App. 679, 327 S.E.2d 800 (1985).
Means of accomplishing preference of one creditor over others.
- Insolvent debtor may give preference in a great variety of ways to one creditor to the exclusion of others, provided it be done with good faith. McWhorter v. Wright, Nichols & Co., 5 Ga. 555 (1848).
Insolvent debtor cannot assign all property for benefit of part of creditors.
- Assignment made by insolvent debtor of all debtor's property for benefit of part of creditors is not allowed by laws of this state, but one in debt may sell part of the debtor's property to pay one of the debtor's creditors. Bones v. Printup Bros. & Co., 64 Ga. 753 (1880).
Prerequisites to valid preferential conveyance.
- Debtor may in good faith prefer one creditor to others by conveying property, even while insolvent, in total or partial payment of a debt, and without additional consideration, provided that such payment or credit represents the fair market value of the property or is not unreasonably disproportionate to such value; and provided that no secret trust or covert benefit, prohibited by former Code 1933, § 28-301, was reserved to the debtor; and provided further that the intent of the debtor, known to the creditor, shall not be to hinder, delay, or defraud other creditors. Moncrief Furnace Co. v. Northwest Atlanta Bank, 193 Ga. 440, 19 S.E.2d 155 (1942).
Intent as key in judging validity of preferential conveyance.
- Husband who is indebted to his wife may convey property to her in preference to other creditors; but this rule is subject to qualification that conveyance must be made only for purpose of paying or securing his wife as creditor, and not be tainted with any intention to hinder, delay, or defraud others, such conveyance being judged by intention with which it is made and accepted, and not by its consideration or effect. Cotton States Fertilizer Co. v. Childs, 179 Ga. 23, 174 S.E. 708 (1934).
While it is true that "a debtor may prefer one creditor to another," and may convey property for this purpose, such right is subject to qualification that conveyance must be made only for purpose of paying or securing creditor so preferred, and not be tainted with any intentions to hinder, delay, or defraud others; such conveyance being judged by intention with which it is made and accepted, and not by its consideration or effect. Dickson v. Citizens Bank & Trust Co., 184 Ga. 398, 191 S.E. 379 (1937).
Good faith conveyance for consideration to creditor before another creditor obtains judgment.
- Creditor may in good faith and for valuable consideration take from the creditor's debtor a deed to property before another creditor obtains judgment, and such a valid deed, even though improperly recorded or not recorded until after judgment, will not be subordinate thereto. Moncrief Furnace Co. v. Northwest Atlanta Bank, 193 Ga. 440, 19 S.E.2d 155 (1942).
Preference enabling one creditor to obtain advantageous judgment.
- Insolvent debtor may prefer one creditor to others by dividing debt which the debtor owes to that creditor into smaller debts so that they shall be within jurisdiction of court in which judgment may be obtained on them that shall be such as to give that creditor an advantage over others. Bank of Savannah v. Planters Bank, 22 Ga. 466 (1857); Andrews & Co. v. Kaufmans, 60 Ga. 669 (1878).
Mortgage by insolvent debtor to secure payment of preexisting debt.
- Mortgage, executed by insolvent debtor to secure payment of bona fide preexisting debt, is not per se fraudulent as against creditors. Davis v. Anderson, 1 Ga. 176 (1846); Lee v. Brown, 7 Ga. 275 (1849).
Partner's sale of share of partnership assets to pay individual indebtedness.
- Under this section and the law generally, each partnership member has the right, with consent of a partner, to sell the partner's share in firm assets in payment of the partner's individual indebtedness. Ellison & Son v. Lucas & McDuffie, 87 Ga. 223, 13 S.E. 445, 27 Am. St. R. 242 (1891).
Sale of stock of goods to extinguish debt.
- Former Civil Code 1895, § 2697 (see now O.C.G.A. § 18-2-40) was not repealed by the former Bulk Sales Act (see now O.C.G.A. § 11-6-101 et seq.), but the sale of a stock of goods in extinguishment of a debt, in whole or in part, was permissible, if the Bulk Sales Act was complied with. Sampson v. Brandon Grocery Co., 127 Ga. 454, 56 S.E. 488, 9 Ann. Cas. 331 (1907).
No distinction as to kind of creditor preferred or property used.
- No distinction is made as to kind of creditors who may be preferred or as to kind of property which may be used for this purpose. Ellison & Son v. Lucas & McDuffie, 87 Ga. 223, 13 S.E. 445, 27 Am. St. R. 242 (1891).
Debtor cannot discriminate in trust deed among creditors.
- Debtor may prefer creditors by direct sale to them, in extinguishment of the creditor's claims, or the debtor may bona fide sell the debtor's property to a stranger, and apply the proceeds to debts of favored creditors; but the debtor cannot discriminate, in trust deed, between creditors. Brown v. Lee, 7 Ga. 267 (1849); Hobbs v. Davis, 50 Ga. 213 (1873); McLendon v. Reynolds Grocery Co., 160 Ga. 763, 129 S.E. 65 (1925).
Recording agreement to prefer certain creditor in event of insolvency.- Fact that agreement by debtor to prefer certain creditor in case of insolvency is not recorded does not render the agreement fraudulent since such agreement is not required by law to be recorded, and its record would therefore not constitute notice. Fechheimer v. Baum, 43 F. 719 (S.D. Ga. 1890).
Extinguishment of right to prefer.
- Right of the debtor to prefer one creditor to another in a bona fide transaction continues up to the date when a judgment or lien is obtained against the debtor. The mere pendency of a suit does not extinguish that right to prefer. Bank of Waynesboro v. Ellison, 162 Ga. 657, 134 S.E. 751 (1926).
Mortgage not ground for equitable relief.
- That insolvent firm seeks to prefer certain creditors by mortgage constitutes no ground for equitable relief. Heidingsfelder v. Slade & Etheridge, 60 Ga. 396 (1878).
Cited in Lamkin v. Clary, 103 Ga. 631, 30 S.E. 596 (1898); Mobley v. Merchants & Planters Bank, 157 Ga. 658, 122 S.E. 233 (1924); Durden v. Royster Guano Co., 158 Ga. 234, 123 S.E. 603 (1924); Cowan v. Bank of Rockdale, 159 Ga. 123, 125 S.E. 194 (1924); Walker v. Martin, 170 Ga. 447, 153 S.E. 41 (1930); Johnson v. Sherrer, 185 Ga. 340, 195 S.E. 149 (1938); Anderson v. Chambers, 59 Ga. App. 115, 200 S.E. 478 (1938); First Nat'l Bank v. Kelly, 190 Ga. 603, 10 S.E.2d 66 (1940); Williams v. Russell, 82 Ga. App. 529, 61 S.E.2d 567 (1950); Threlkeld v. Whitehead, 95 Ga. App. 378, 98 S.E.2d 76 (1957).
Conveyances Between Spouses
Burden of proof.
- When transaction between husband and wife is attacked for fraud by creditors of either, burden is on husband and wife to show that the transaction was fair. Cotton States Fertilizer Co. v. Childs, 179 Ga. 23, 174 S.E. 708 (1934).
Conveyance by husband to wife holding equitable title.
- When wife's money is used with her consent to purchase a tract of land, the title to which was intended to be in her but unknown to her at the time, was taken in the name of the husband, the wife had equitable title and it was perfectly proper and lawful for the husband to convey such land to her. Rowe v. Cole, 183 Ga. 477, 188 Ga. 668 (1936).
Failure of wife to make claim known does not deprive her of rights as creditor, even as against one of husband's creditors who gave credit to him in ignorance of her claim, there being no inquiry made of her by such creditor. Rowe v. Cole, 183 Ga. 477, 188 S.E. 668 (1936).
Preferences by Corporate Officers
Officers' scheme to indemnify selves against loss.
- Officers and directors of insolvent corporation may not use position to prefer themselves over creditors, and any scheme or device, the purpose of which is to indemnify themselves against loss, whether as creditors or as endorsers of notes given by the corporation or otherwise, constitutes legal fraud. Ware v. Rankin, 97 Ga. App. 837, 104 S.E.2d 555 (1958).
Preference by officers of insolvent corporation.
- Officers and directors of insolvent corporation may prefer one creditor over another, and may pay a debt which is due and payment of which is being demanded, even though the effect of payment is to reduce assets available to other creditors, and even though such action by directors or officers may result in some incidental benefit, such as extinguishment of liability they may have previously incurred as endorsers or sureties on commercial paper in hands of a preferred creditor. Ware v. Rankin, 97 Ga. App. 837, 104 S.E.2d 555 (1958).
Intent key in determining whether preference fraudulent.
- Test for determining whether or not a creditor preference by directors of insolvent corporation is fraudulent is intent or purpose which induced the making of payment or giving of security. Ware v. Rankin, 97 Ga. App. 837, 104 S.E.2d 555 (1958).
Assignments
Accounts may be transferred as collateral security. Boykin v. Epstein, 94 Ga. 750, 22 S.E. 218 (1894).
Right of heir to interest in estate of ancestor is a chose in action and is assignable. Greenwood v. Greenwood, 178 Ga. 605, 173 S.E. 858 (1934).
Choses in action.
- Choses in action are not subject to seizure and sale under executions based upon ordinary judgments and can only be reached by judgment creditor through garnishment or some other collateral proceedings; and, inasmuch as such garnishment or collateral proceeding is necessary to fix lien of judgment so as to make it effective, an assignment of the chose in action by the debtor before institution of such collateral proceeding passes to assignee property of the debtor in the chose in action assigned, freed from lien of general judgment previously rendered against assignor. Greenwood v. Greenwood, 178 Ga. 605, 173 S.E. 858 (1934).
Assignable interest of voluntary bankrupt.
- Voluntary bankrupt has an assignable interest in property claimed in the bankrupt's petition as exempt under the constitution and homestead laws of this state; and the bankrupt may assign property in good faith to an existing creditor before it is set apart by a trustee in bankruptcy, and therefore before exemption is confirmed by a referee in bankruptcy. Strickland Hdwe. Co. v. Fletcher, 152 Ga. 445, 110 S.E. 229 (1921).
Voluntary bankrupt has an assignable interest in the property claimed by the bankrupt in the bankrupt petition as exempt under the constitution and homestead laws of this state and can transfer this interest in good faith to the bankrupt's creditor either in extinguishment of, or to secure, a preexisting debt, before the property is set aside by the trustee in bankruptcy, and before the proceeding is confirmed by the bankrupt court. Silver & Goldstein v. Chapman, 163 Ga. 604, 136 S.E. 914 (1927).
Assignment prior to service of summons of garnishment.
- If assignment is made before service of summons of garnishment upon the drawee, the garnishing creditor will be postponed to the assignee, and this is so whether or not the garnishee was notified of the assignment. Suttles v. Vickery, 179 Ga. 751, 177 S.E. 714 (1934).
Assignment of life insurance policy to secure debt.
- Life insurance policy was a chose in action and may be assigned by an insured as security for a debt under former Code 1933, §§ 28-301 and 85-1803 (see now O.C.G.A. §§ 18-2-40 and44-12-22), and generally the effect of such assignment was to vest legal title to the policy in the assignee to the amount of debt secured. Parramore v. Williams, 215 Ga. 179, 109 S.E.2d 745 (1959).
Since rights of beneficiary and debtor were subjected by assignment of insurance policy to full amount of debt secured by such assignment which debt exceeded the value of the policies, the beneficiary had no further interest in such policies, and no rights to assert as to the policies in receivership proceedings. Parramore v. Williams, 215 Ga. 179, 109 S.E.2d 745 (1959).
Mortgage to creditor on all property followed by general assignment for creditors.- When mortgage is given by insolvent debtor to one of the debtor's creditors on all the debtor's property, and is followed immediately by other mortgages which in effect constitute a general assignment for creditors, the first mortgage does not constitute part of the assignment. Fechheimer v. Baum, 43 F. 719 (S.D. Ga. 1890).
Sufficient consideration to support equitable and legal assignments to secure preexisting indebtedness, see Suttles v. Vickery, 179 Ga. 751, 177 S.E. 714 (1934).
Actions
Petition stating cause of action under this statute and authorizing injunctive relief, see Moncrief Furnace Co. v. Northwest Atlanta Bank, 193 Ga. 440, 19 S.E.2d 155 (1942).
RESEARCH REFERENCES
C.J.S.
- 21C.J.S., Creditor and Debtor, § 3 et seq. 37 C.J.S., Fraudulent Conveyances, §§ 112, 115.
ALR.
- Conveyance in consideration of future support as fraudulent against creditors, 2 A.L.R. 1438; 23 A.L.R. 584.
Attachment or execution creditor as purchaser within rule that first of two purchasers to obtain possession will prevail, 21 A.L.R. 1031.
Right of surety who discharges obligation due to government to be subrogated to priority or preference of latter, 24 A.L.R. 1502; 83 A.L.R. 1131.
Right of surety discharges obligation due to government, to be subrogated to rights of latter against third persons, 24 A.L.R. 1523.
Priority as between different assignees of same chose in action as affected by notice to debtor, 31 A.L.R. 876; 110 A.L.R. 774.
Preference in event of debtor's insolvency in respect of funds designated or set apart by him for payment of specified obligations, 32 A.L.R. 950.
Right of debtor who pays creditor to control application of payments made by latter to his creditor with proceeds of original payment, 41 A.L.R. 1297; 130 A.L.R. 198; 166 A.L.R. 641.
Character of service contemplated by statutes giving a lien or preference, in event of insolvency, to servants, employees, laborers, etc, 54 A.L.R. 567.
Trust or preference in respect of money deposited in bank by court, or pursuant to its order, or by officer of court, 86 A.L.R. 209.
State's prerogative right of preference at common law, 90 A.L.R. 184; 167 A.L.R. 640.
Right of creditor who institutes supplementary proceedings to priority over other creditors in respect of property disclosed thereby, 92 A.L.R. 1435; 153 A.L.R. 211.
Conflict of laws as regards validity of fraudulent and preferential transfers and assignments, 111 A.L.R. 787.
Equality among claimants under indemnity or surety bond which is insufficient to pay all claimants in full, 128 A.L.R. 1096.
Judgment debtor's personal injury claims against third person or latter's liability insurer as subject to creditor's bill, 51 A.L.R.2d 595.
Debtor's return of merchandise to selling creditor for credit as preferential transfer voidable in bankruptcy proceedings, 62 A.L.R.2d 774.
Right of creditor to set up statute of limitations against other creditors of his debtor, 71 A.L.R.2d 1049.
Validity of provision in deed or transfer to assignee for benefit of creditors for payment of attorneys' fees, 79 A.L.R.2d 513.
Creditor's knowledge of preference, or of debtor's insolvency, under § 60(b) of Bankruptcy Act, as indicated by receipt of property in payment of debt, 88 A.L.R.2d 1050.