Harris v. Peabody

Virgin, J. Boyal Williams and James A. Norton, copartners under the firm name of Williams and Norton, upon their own petition, were individually and as copartners duly adjudged insolvent debtors. The assets of the partnership, amounting to one dollar and nineteen cents only, were absorbed by the expense of selling the same. Norton’s individual estate had no assets, while Williams’, after deducting legal costs and charges, amounted to eleven hundred and seventy-seven dollars and thirty-six cents. Against the partnership estate, claims amounting to more than twenty-two hundred dollars were proved; against Williams’ individual estate eleven hundred and thirty-three dollars and sixty-seven cents; and against Norton’s, no claims. Before the court of insolvency the partnership creditors claimed a pro rata dividend from the separate assets of Williams pari passu with his individual creditors; but the judge denied the claim and decreed that the assignees should distribute those assets among the individual creditors. Thereupon the complainants brought this bill (claimed by them to be authorized by the insolvent statute of 1878, c. 74, § 11, as amended by stat. 1879, c. 154, § 3,) somewhat in the nature of an appeal from the decree of the judge of insolvency; and the parties have brought the case before us on an agreed statement, reserving the question of jurisdiction of this court, which is expressly raised. 1. Jurisdiction. By the provisions of the original act (stat. 1878, c. 74, § 10,) an appeal lay "in all cases arising under this act.” This section was amended by stat. 1879, c. 154, § 2, by providing that "no appeal shall lie in any case under this act — 266 — unless specially provided for therein.” If this court has no jurisdiction under § 11 to revise the decree of the judge of insolvency, then the complainants are without relief, since the section (§ 54,) under which the decree was made, contains no special provision for an appeal. By § 11, "full equity jurisdiction in all matters arising under this act” is given to this court. This language is very sweeping and comprehensive ; and although it does not contain some of the specific terms adopted in the Massachusetts statute (from which very many of the provisions of our statute were derived,) we think the legislature intended to confer upon the court full power to revise in the manner therein specifiedthe proceedings, orders and decrees of the court of insolvency in all cases in which no other remedy is given by the statute ; and that such power was given in part for the purpose of avoiding a suspension of all further proceedings below till the appeal is settled, and also to secure a consistent and uniform application of the law. Barnard v. Eaton, 2 Cush. 301-2. A like construction has been given to a somewhat similar provision in the Massachusetts insolvent act, § 16, Mass. Insolv. Laws, (Cutler’s ed.) 29, and cases there cited. See also cases cited under U. S. E. Stat. § 4986. 2. The next question is, was the decree of the court of insolvency correct in ordering a distribution of Williams’ individual assets among his separate creditors, to the exclusion of the complainants, the creditors of the firm. The respondents rely upon the provisions of § 54, stat. 1878, c. 74, and certain cases cited of their brief. It is familiar history that as early as 1715, Lord Ch. Harcourt laid down as the rule of administering the joint and separate estates in bankruptcy, that the joint estate shall be applied in payment of the partnership debts, and the separate estate, of the separate debts, any surplus of either estate being carried over to the other. Ex parte Crowder, 2 Vern. 706. This doctrine was followed by Lord Ch. King, in Ex parte Cook, 2 P. Wms. 500. But it seems that this rule was departed from by Lord Thuklow . who let in creditors of the firm concurrently with the separate creditors, upon'the separate estate, upon the ground that they — 267 — were equally creditors of the firm and of the partners. Ex parte Cobham, 1 Bro. C. C. 576; Ex parte Hodgson, 2 Bro. C. C. 5 ; Ex parte Page, 2 Bro. C. C. 119. The former rule was restored, however, by Lord Loughborough (Ex parte Elton, 3 Ves. 239 ; Ex parte Abell, 4 Ves. 837,) confirmed by Lord Eldon; (Ex parte Clay, 6 Ves. 813; Ex parte Taitt, 16 Ves. 193,) and it has been the prevailing general rule ever since in England. Lindl. Part. (3d Eng. ed.) 1201; Robs. Bank. 584; Colly. Part. (Perkins’ ed.) 775-6; Lodge v. Prichard, 1 De G. G. and S. 609 ;, and in this country as well. Among the numerous cases, see Wilder v. Keeler, 3 Paige, 167; Payne v. Mathews, 6 Paige, 19; Murray v. Murray, 5 Johns. Ch. 60; 3 Kent, 64, 65; Story Partn. § § 376-378; In re Marwick, 2 Ware, 233; Pars. Partn. 480, et seq. and notes. This rule was also adopted in the U. S. Bankrupt Law, 1841; (5 U. S. Stat. 440, 448, § 14,) U. S. Bankrupt Law, 1867, (§ 36, R. S., U. S. § 5121) ; in the Insolvent Laws of Massachusetts, (1838, § 21,) and in the Insolvent Laws of this State, stat. 1878, c. 74, § 54. Jarvis v. Brooks, 23 N. H. 136. This rule applies to the estates as they exist when the parties are declared bankrupt or insolvent, and not before; for the creditors of the firm have no lien upon its property which can prevent the partners from bona fide changing its character and converting it into the separate estate of one of them prior thereto. Ex parte Ruffin, 6 Ves. 119 ; Case v. Beauregard, 9 Otto, 119; Robb v. Mudge, 14 Gray, 534. The reasons assigned for giving the partnership creditors the preference over the joint estate in bankruptcy have been various. But the view generally taken founds it not upon any lien or superior claim which they primarily have, but upon a privilege or preference sometimes denominated a lien " derived from the equitable right which each partner, who being liable for all the partnership debts and whose interest in its property being simply his share of the residue after payment of its debts and settlements of its accounts, consequently has that the partnership property shall go to pay its debts in preference to those of any individual partner. Case v. Beaureguard, supra; Johnson v. Hersey, 70 — 268 — Maine, 74; Washburn v. Bellows Falls Bank, 19 Vt. 286, 288. It has also been said that this priority in joint assets and equality in the separate are founded on the fact that the partnership creditor trusted each and all the partners while the separate creditor trusted but one; and that natural justice warrants the marshalling of the assets so as to give the former the preference. Brock v. Bateman, 25 Ohio St. 609. That it is familiar law that a creditor of a partnership, having recovered a judgment against it, may satisfy his execution against partnership property or against the individual property of any of the partners; (Juchero v. Axley, 5 Cranch, 34, 40; Egery v. Howard, 64 Maine, 68, 73 ; Washburn v. Bellows Falls Bank, supra,) and in the case of intervening insolvency, having two funds, from which to satisfy his claim, the principle familiar in marshalling assets or securities, comes in and compels him to exhaust the fund to which he has the exclusive right before he be ¿llowed to compete with a creditor who has a claim only on one of the funds. Ex parte Elton, 3 Ves. 240; 1 Story Eq. § 558. Lord Justice Turner, said: "This rule may perhaps proceed upon this : that the joint estate is clearly liable both at law and in equity for the joint debts, at law, by reason of the survivorship, and in equity by virtue of the rights of the partners, inter se, to have it so applied; and that the separate estate is as clearly liable, both at law and in equity, for the separate debts; and that the carrying over the surplus of the one estate to the other, although it may not strictly work out the rights, may afford the best means of adjusting the complications which arise from the joint estate being liable for the separate debts only so far as the interest of the partners from whom the debts may be due may extend, and from the separate estates, if taken for the joint debts, having recourse over against the joint estates, and which arise also from the equities between the parties.” Lodge v. Prichard, supra. Prof. Parsons suggests the ground that a partnership is a distinct entity, contracting its own debts, having its own creditors, and possessing its own property applicable to its debts. That when it has ceased to exist, it is resolved into its elements and the relations between its members and creditors arise. If the — 269 — joint debts have been paid, the former partners share the remaining property. If the joint funds are not sufficient to pay its debts, they who were its members become the debtors of the joint creditors. Pars. Part. 346-7. The rule that each estate is to be applied to its own debts, and the surplus of each to the creditors remaining of the other, is applicable only to the facts upon which it is predicated, i. e. when there is joint estate, and all the partners are insolvent. But if there is no available joint estate and no solvent partner, then the creditors of the partnership have no exclusive fund to exhaust, but may share concurrently with the separate creditors the separate estate. Ex parte Hayden, 1 Bro. C. C. 454, and notes in Perkins’ ed. 398; Colly. Part, § 926; Lindl. Part. 1234; Story Part. § 380; Pars. Partn. 482. In some of the cases this is called an exception to the rule. Professor Parsons says that " instead of being an exception it is a case that falls without the rule.” Others say it is a part of the rule. Judge Drummond, after stating what he denominates "the well established rule upon the subject,” says : "It is partly on the ground that, although it is a debt of the firm, it is still a debt against each individual member of it, for the satisfaction of which the property of each is responsible ; and that being the only source to resort to for the payment of the debt of the firm, it should be appropriated as well to pay the debts due from the firm as from the individual members.” In re Knight, 8 N. B. R. 436, 438. The same doctrine prevails in all the federal ¿list, courts. In re Marwick, 2 Ware, 233 ; Bump, Bankruptcy, (9th ed.) 771 and cases there cited. Such, evidently, is the opinion of Mr. Justice Clifford. Amsink v. Bean, 11 N. B. Reg. 495; S. C. 22 Wall. 395 and the cases of ex parte Leland, which he there cites. . We are aware that this question has been decided otherwise in Massachusetts (Howe v. Lawrence, 9 Cush. 553 and Som. P. Works v. Minot, 10 Cush. 592) ; but the answer of Judge Drummond is more satisfactory to our minds. In re Knight, supra. Neither does the dictum of Mr. Justice Daniel outweigh the great weight of current authority. See also, Rogers v. Meranda, 7 Ohio St. 179 ; Brock v. Bateman, 25 Ohio St. 609. — 270 — It seems there were some joint assets, though not enough to pay the cost of selling: and hence (in the language of the statute) no "net proceeds.” In such case, there should be considered no joint assets. Though when there are any available joint assets, however small in value, the rule is applicable. Lindl. Partn. 1235 ; Colly. Part. § 926 ; Story Partn. § 380, says they must be enough to be "available.” The question is thoroughly examined in In re McEwen, 12 N. B. R. 11. As recently as December, 1880, the question came before Judge Choate (S. D. N. Y.), who said: "It is, however, unnecessary to go into this question, because in a recent decision, which is conclusive on this court, the right of firm creditors to share pari passu with individual creditors in the individual estate has been recognized and enforced, where the firm, as well as the individual partners, had been adjudicated, and the firm assets were not more than sufficient to pay the costs and expenses properly chargeable to the firm estate. In re Slocum, D. C. Vt. Oct. 4, 1879 ; S. C. affirmed on review, by Blatchford, C. J., December 13, 1880.” In re Litchfield, 5 Fed. Rep. 47, 50. Decree reversed. Decreed that the partnership creditors of Williams and Norton are entitled to dividends from the assets of the estate of Royal Williams, pari passu with his separate creditors. Walton, Barrows, Libbet and Stmonjds, JJ., concurred. Appleton, C. J., did not concur.