Mortley v. Flanagan

Where the members of a firm, acting in good faith, dissolve the partnership, and one member sells his interest in the partnership property to the other, the latter will not be deprived of the right to hold such property exempt from the payment of a debt thereafter asserted against him, on the ground that such debt was a partnership debt due at the time of the dissolution; nor will the fact that the partners knew the firm to be insolvent, at the time of such dissolution, make any difference. Gaylord v. Imhoff, 26 Ohio St. 317, distinguished. ERROR to the District Court of Guernsey county. A. C. Flanagan, engaged in a small retail business, formed a partnership with E. S. Flanagan, under the firm name of A. C. Flanagan Bro. E. S. Flanagan was without capital, and executed to A. C. Flanagan his note for $400, being equal to one half of the whole stock which A. C. Flanagan then had on hand. In 1877, the partnership was dissolved; by the *Page 402 terms of the dissolution A. C. Flanagan becoming the owner of the partnership property and assets, except the account for the individual debt of E. S. Flanagan to the firm, surrendering to E. S. Flanagan his note for $400, and agreeing to pay the partnership debts. The partnership, at the time of the dissolution, was insolvent. On November 9, 1877, shortly after the dissolution, A. C. Flanagan executed a deed of assignment for the benefit of creditors, which was filed in the probate court of Guernsey county, Ohio, and George W. Taylor was thereafter substituted by the probate court as such assignee in place of the person named in the deed. Taylor reduced the property and assets, all of which belonged to the firm at the dissolution, into money, and the sum realized exceeded $500, but was less than the aggregate of the firm debts. A. C. Flanagan was a resident of Ohio, the head of a family, and not the owner of a homestead. In the deed of assignment he reserved such rights as he might have under the exemption laws; but Taylor, the assignee, before and after he reduced the property and assets into money, refused to permit A. C. Flanagan to have such exemption, and thereupon Flanagan brought suit in the court of common pleas of Guernsey county against Taylor, and issue was joined in the action. In his answer Taylor says he holds the proceeds of such trust subject to the order of the court, and he states the names of the creditors of the firm, and the fact that those creditors deny the right of A. C. Flanagan to such exemption. Mortley Pinkerton, creditors of the firm, were admitted as defendants, and their answer and cross-petition contains, among other things, the following: "These defendants aver that but a few days prior to the assignment of said A. C. Flanagan, and while said firm of A. C. Flanagan Bro. was insolvent and unable to pay more than thirty per cent. of their then existing indebtedness, all of which was well known to them, the said A. C. Flanagan and Edward S. Flanagan, in fraud of said partnership creditors, and conspiring to cheat and defraud their said creditors, and for that purpose alone, did agree to, and did then and there dissolve or pretend to dissolve said partnership, and the said Edward S. *Page 403 Flanagan left said county of Guernsey, wherein they had been doing business, and continues to remain absent therefrom. "These defendants further aver that said A. C. Flanagan and Edward S. Flanagan did not have at the time of said dissolution, nor have they now, any individual assets, and that said pretended dissolution was simply made and had for the purpose of thereby enabling said A. C. Flanagan to claim and hold the sum of five hundred dollars exempt, c., out of said partnership assets. And these defendants say that said A. C. Flanagan, immediately after said pretended dissolution and in furtherance of said conspiracy to defraud as aforesaid, took steps to assign the property afterwards assigned, and all of which was the property of said firm of A. C. Flanagan Bro." To this answer and cross-petition A. C. Flanagan replied, among other things, as follows: "It is not true, and he denies, that he entered into any conspiracy with Edward S. Flanagan, or any other person, to cheat or defraud said defendants, or any other person. Nor is it true that the partnership referred to between plaintiff and Edward S. Flanagan was dissolved for the express purpose of enabling the plaintiff to claim the benefit of a homestead exemption. Nor is it true that he made the assignment of his property for the benefit of his creditors in furtherance of any such conspiracy, or for any other fraudulent purpose. And said plaintiff avers that some time prior to the time he made the assignment for the benefit of his creditors, as set forth in the petition herein, he and said Edward S. Flanagan agreed to dissolve, and did in good faith dissolve, said partnership."And then follows a statement of the terms of sale, substantially as herein before set forth. A demurrer to the reply was overruled. On the trial the court decreed that Taylor should pay to A. C. Flanagan $500 and interest, as exempt from the payment of debts, and the district court affirmed the judgment. The record contains no part of the evidence. This petition in error is filed by Mortley and Pinkerton to reverse as well the judgment of affirmance as the order of the court of common pleas. *Page 404 In Gaylord v. Imhoff, 26 Ohio St. 317, the question was presented whether the members of an insolvent firm were entitled to the statutory exemptions out of the partnership property, after it had been seized in execution by partnership creditors, all the members joining in demanding the exemptions. The cases upon the question were found to be in conflict, but this court, for reasons clearly stated by Gilmore, J., and entirely satisfactory to us, answered the question in the negative. The question now before us, however, is different. It is whether the joint interest was severed — whether the title to the property was vested in A. C. Flanagan alone — before the partnership creditors asserted, in any form, a lien upon or claim to such property. And this question we answer in the affirmative. The denial in the reply seems to be as broad as the averments in the answer; but if we construe the reply as admitting that one of the reasons which induced the dissolution and the sale to A. C. Flanagan was to enable him to claim an exemption from execution, the result would be the same. A sale fairly and honestly made by one member of a firm, of his interest in the partnership property and effects to the other partner, will not be rendered invalid by the fact that it was expected such partner would thereafter avail himself of the provisions of the statute to hold such property exempt from execution. Such a purpose, where the purchase is bona fide, is not the subject of averment or proof. Worman v. Giddey, 30 Mich. 151; Russell v. Lennen,39 Wis. 570; Fick v. Mulholland, 48 Wis. 413; Thompson on Hom. Ex. § 211,et seq. Judgment affirmed. *Page 144