In re the Partial Judicial Settlement of the Accounts of Dauchy

Chase, J.: The assignor, by the '5th paragraph of the assignment, expressly provides for the pro rata payment of individual and partnership-debts and liabilities out of the assigned estate. (Smith v. Perine, 17 N. Y. St. Repr. 226; S. C., 121 N. Y. 376; Mills v. Parkhurst, 30 N. Y. St. Repr. 138; S. C., 126 N. Y. 89; Booss v. Marion, 129 id. 536.) [387] This paragraph of the assignment not only directs payment of “ all the debts and liabilities now due or to grow due ” from the assignor, but directs their payment “ without any priority or preference whatsoever.” That the assignor intended to include in this paragraph of the assignment the debts and liabilities of the firm of Lape & Dunlop is further shown by his providing in the 6th paragraph of the assignment that after the payment of the said debts and liabilities the assignee should return to the assignor any proceeds of the assigned property remaining in his hands. It is not claimed that the assignor intended to exclude firm creditors from all benefit under the assignment. By section 30 of the General Assignment Law (Laws of 1877, chap. 466, amd. by 'chap. 503 of the Laws of 1887) it is provided that in all general assignments of the estates of debtors for the benefit of creditors hereafter made, any preference created therein shall not be valid except to the amount of one-third in value of the assigned estate. It is claimed by the individual creditors of the assignor that as paragraph 4 of the assignment provided preferences to the extent of one-third of the assigned estate, the power of the assignor over the assigned estate had ceased, and that his direction to th.e assignee to pay the balance remaining in his hands upon the debts and liabilities of the assignor, including partnership debts and liabilities, is void. In the distribution of the estates of debtors, where there is no lawful direction by the assignor in regard to the same, partnership creditors are entitled to be first paid out of the partnership property, and individual creditors out of individual property. In the absence of express directions by the assignor, it is presumed that he intended a distribution of the estate according to recognized equitable rules. Partnership assets constitute a trust fund for the benefit of partnership creditors. It is well settled that an insolvent firm has no right to use its assets for the benefit of the individual members of the firm. The members of a firm having indebtedness that they are unable to pay in full are guilty of a fraud upon their creditors if they authorize or assent to the property of the firm being used or applied to the payment of a creditor of an individual member of the firm. Such application of the partnership property would be a payment of an indebtedness that the firm and the individual members of the firm, other than the one owing the indebtedness, was [388] neither bound, in law nor in equity to pay. The individual property of a person has never been held to be a trust fund for the payment of individual indebtedness, and it is said in the case of Nicholson v. Leavitt (4 Sandf. 252), “We know not that the separate property of a partner, even when he is insolvent, has ever been considered as a trust fund which, as such, chancery can reach and administer.” Each individual composing a partnership is individually liable for the partnership indebtedness. He may appropriate his individual property for the payment of the partnership debt, and his property can be seized by execution issued upon a judgment for a partnership indebtedness to satisfy the same. An individual member of a partnership is not only liable in law for the indebtedness of the firm, but a partnership debt is regarded in equity as both joint and several. (Matter of Gray, 111 N. Y. 408.) The assignor has an undoubted legal right to appropriate by general assignment his individual estate for the ratable payment of his individual and partnership debts. (Citizens’ Bank v. Williams, 128 N. Y. 77; Crook v. Rindskopf, 105 id. 484; Royer Wheel Co. v. Fielding,. 101 id. 504; Becker v. Leonard, 42 Hun, 221.) The Court of Appeals, in Matter of Gray (111 N. Y. 408), uses this language: “ But as a partnership debt is regarded in equity as both joint and several, there is an apparent inconsistency in excluding in equity the right of the partnership creditor to share with the separate creditor, where, as in this case, there is no. joint estate and the surviving partner is insolvent.” The object and purpose of the statute of 1887 is stated by the Court of Appeals in the case of Berger v. Varrelmann (127 N. Y. 281) as follows: “ Before this section was added in 1887 to the General Assignment Act of this state, the practice which had become so prevalent that it may be said to have become a custom for failing debtors to devote by general assignment the whole or a large part of their estates to the payment of a few ¡^referred creditors, often near relatives, resulted in so much hardship and injustice that the section above quoted was adopted to mitigate the evils arising from the practice.” Although this statute is remedial in its nature, it is in derogation of the common-law right of an insolvent debtor to appropriate his property to the payment of his joint and individual debts, or to one or more of either or both classes. The statute, therefore, should only have a liberal construction so far [389] as is necessary to carry out the remedial purpose for which it was enacted. (Tompkins v. Hunter, 149 N. Y. 117.) This statute does not in terms prohibit an assignor from providing preferences to the extent of one-third of the assigned estate and then directing that the residuary of his assigned estate be paidyw rata on his individual and partnership debts and liabilities. The purpose for which the statute was enacted does not require that it be construed as prohibiting any such direction. The creditors of Thomas Lape had no fixed interest or lien upon his individual property.' The direction contained in the assignment does not create a legal preference, because both classes of debts are at law considered equal. Such direction by the assignor is at most a destruction of a preference that might thereafter be created by the application of an equitable rule. The statute should be construed without reference to the equitable rule and wholly with reference to the common-law right of a debtor to prefer his creditors without restriction. I do not think it can be said that Thomas Lape in and by his assignment created a preference over and above the amount allowed by law. The decree appealed from should be modified so that it will direct the distribution of the remaining fund jm-o rata among the individual and firm creditors of the assignor, with costs to the appellants payable out of the fund before distribution. All concurred, except Kellogg, J., dissenting in an opinion.