Hewitt v. . Northrup

Earl, J. As the General Term did not reverse the judgment of the Special Term upon the facts, we must take them as found by the trial judge and they are as follows : On the 10th day of August, 1874, the defendant Campbell being indebted to his co-defendant, Northrup, in the sum of $2,000, executed and delivered to him a mortgage upon his individual real estate to secure such indebtedness. At that timo Campbell was a member of the firm of Campbell & Shaw, which had become insolvent, and was then contemplating bankruptcy, which facts were known to Northrup : and Campbell executed the mortgage in contemplation of insolvency, and with a view to give Northrup a preference over, the firm creditors, and with the view of preventing his property from coming into the hands of the assignees in bankruptcy. At that time, and also at the time of filing the petition in bankruptcy, Campbell owned and possessed individual property more than sufficient to pay all his individual debts. In less than two months thereafter a petition in bankruptcy was filed against the firm, an adjudication in bankruptcy was made, and such proceedings had that the *509 plaintiffs wore appointed assignees, and they brought this action to set aside the mortgage as fraudulent and void under the bankrupt law. It also appeared in the evidence that between the date of the mortgage and the time of filing the petition judgments to a large amount were obtained against the firm of Campbell & Shaw, and the result will be, that if the plaintiffs succeed in this action, Campbell’s individual property will be taken, not for administration in bankruptcy for the payment of his individual, debts, but for the payment of the firm debts, a result abhorrent to equity. The equitable rule, for the administration of the property of persons who are members of an insolvent firm, and who own firm property and individual property, and owe firm as well as individual debts, is, that the firm creditors are entitled to be first paid out of the firm property, and individual creditors to be first paid out of the individual property. (Wilder v. Keeler, 3 Paige, 167; Payne v. Matthews, 6 id., 19; Meech v. Allen, 17 N. Y., 300.) And this equitable rule has been incorporated into the bankrupt law. It is there provided (U. S. E. S., section 5121) that the individual property, as well as the firm property shall pass to the assignee, and that the firm creditors and individual creditors may prove their debts : that the assignee shall keep separate accounts of the firm property and of the individual property, and that the firm property shall be appropriated to pay firm debts and the individual property to pay individual debts. It is no fraud upon the bankrupt law for an insolvent to dispose of his property just as that law authorizes. (Haa s v. O’Brien, 66 N. Y., 597.) Suppose this mortgage had not been given, and the subsequent judgments had not been recovered, and all the property, firm and individual had been brought into the bankrupt court unincumbered, for distribution, this debt of Northrup would have been paid out of the individual property of his debtor, just as it will be now. A member of an insolvent firm owning individual *510 property may appropriate all such property to the payment in full, or prorata, of his individual debts, and such “disposition of his property, if honestly and fairly made, would be upheld in bankruptcy because it is just such a disposition as the law authorizes and directs. No one can complain of it because it wrongs no one. The fact of the intervening judgments can make no difference with this case. Aside from the bankrupt law, the mortgage is perfectly valid against them. And as to them a bankrupt court, proceeding upon equitable principles, would not set aside this -mortgage because the judgment-creditors have there no right to complain of it. But it may be said that the assignees represent not only firm, but also individual creditors. True; but Campbell’s individual debts, aside from this secured by the mortgage, did not exceed $150, and he had more than sufficient individual property to pay them, and no bankrupt court would set aside this mortgage in the supposed interest of individual creditors and then let the firm creditors with their judgments take it all to pay firm debts. The learned counsel for appellants, claims that this case must be treated the same as if Campbell alone had been put into bankruptcy. Grant it. And then what have we ? Campbell in bankruptcy with an abundance of individual property to -pay all his individual debts: and then this mortgage would not have been interfered with, certainly if the effect of such interference would be to give all the property to firm creditors. But the claim is further made that the Supreme Court is not the court to determine the amount and validity' of debts, nor to marshal the assets of ' a bankrupt, and that the proper parties are not here for that purpose. But the plaintiffs went into that court, and invoked its jurisdiction, and brought in just such parties as they deemed proper, and they cannot now complain that the court determined all the questions needful for a proper disposition of the case. It is not the purpose of the bankrupt law to put the property of bankrupts into the hands of their assignees for the *511 benefit of such assignees, or simply to permit them to distribute it. If the bankrupt has made such a disposition of his property as the law sanctions, it will not be disturbed. It is not enough under the bankrupt law (U. S. R. S., §§ 5021, 5128) that the parties in this case intended that jNorthrup should obtain a preference over the firm creditors, and that Campbell's individual property should - not, except as incumbered, go into the hands of the assignees. They must also have intended a fraud on the bankrupt act, and the facts here show that they did not, for reasons above stated, intend or perpetrate such a fraud. The order of the General Term must therefore be affirmed, and judgment absolute given against the plaintiffs, with costs. All concur. Order affirmed, and judgment accordingly.