In re the General Assignment of Price, McCormick & Co. for the Benefit of Creditors

O’Brien, J.: Assuming the premises upon which the refereé acted, it is difficult to escape from the general reasoning by which, in liis able opinion, he reaches the conclusion that the petition of Mr. Crocker should be dismissed; but we differ from him because of our view that by the dissolution of the' firm there was brought about a radical change in -the relationship of the' parties. Section 37 of the Partnership Law (Laws of 1897, chap. 420) provides that “ a special partner may * * * loan money to and advance and pay money for the partnership * * * -and has the same rights and remedies in these respects as other creditors might have. * * * If such partnership become insolvent or bankrupt, a special partner shall not, except for claims contracted in pursuance of' this section, be allowed to claim as creditor until the claims of all the other creditors of the partnership are satisfied.” In construing this section, we must keep in mind what was evidently -intended to be effected by it, namely, to prevent any claim of a special partner which arose out of dealings with the partnership during its life, other than in the exceptional instances specified, from being paid at its death through insolvency or bankruptcy, until the claims of other creditors were satisfied. The general assignment for the benefit of creditors amounted to a suspension or dissolution of the partnership itself [41] (Welles v. March, 30 N. Y. 350); and any claim which the special partner then had as creditor was undoubtedly to be deferred under the statute. Upon the dissolution of the firm, however, the rights became fixed and the relations between the partners were severed; and although the transactions between Mr. Crocker and the firm up to that time were clearly governed by the statute, this in no sense prevented him thereafter as an individual from obtaining a new status, growing out of subsequent transactions. This view, we think, finds support in Hayes v. Heyer (35 N. Y. 330). In that case Ketchum was a special partner in the firm of Hayes & Heyer, which had given promissory notes of the firm for various amounts, and these notes at the time of its dissolution were outstanding. After such dissolution another firm with . which Ketchum was connected, upon his agreement to indemnify it, took up the notes, and Ketchum thereafter, in fulfillment of liis guaranty, reimbursed that firm. In discussing the claim of the defendant Ketchum individually against the partnership of Hayes & Heyer it was said: “ This was not acquired by him until after the dissolution of said partnership, or, in other words, after it had ceased to exist. The acquisition of this debt by the defendant Ketchum cannot rightly be regarded as transacting any business on account of or with said partnership. He was not a special partnér at the time he became the creditor of the limited partnership, or, more strictly speaking, of the general partners thereof, and acquired the right to participate in its assets. Hone of the evils which the legislature intended to guard against could arise, from the fact that the special partner became a creditor after the dissolution of the partnership. The statute did not prohibit his becoming such, and it was only debts he might have as special partner, accruing while he sustained that relation, which, by the terms of the statute, are to be postponed to the claims of other creditors. "Ketchum by the purchase or transfer of this debt was subrogated to the rights of the creditors holding the same, and is equally entitled with them to participate in the distribution of the.assets of the partnership. Those from whom he purchased would have been entitled to share therein, and Ketchum having acquired their rights after he ceased to be such special partner, no reason appears why he has not the same right.” Applying the reasoning of that case to the facts here, we find that [42] at the date when the general assignment was made which resulted in the dissolution,-Mr. Crocker was a debtor to the'firm of Price, McCormick & Co. to the extent of $114,811.99, and that as security ■therefor they held certain of his stocks. He was not. a creditor in any sense, nor had he any. claims- against them, unless we extend the meaning to be given to the word “claim” so as.to include the right which he then had, upon the payment of his indebtedness to the firm, to get back his securities. This right he could have asserted against the assignee if the latter under the assignment had received the stocks; but, although the petitioner tendered the amount due and made a demand, the assignee was unable to respond for the reason, as stated, that prior to the assignment the securities had been repledged by Price, McCormick & Co. to various bankers, who then held them as collateral to loans made to the firm. This being the situation at the date of the assignment and when the assignee took possession of the assets of the .firm, any claim which the special partner had as creditor would have been covered by •the statute. As we have said, however, he was not then a creditor, but a debtor, and having by the dissolution ceased to be a partner, there was nothing to-prevent him as an individual from becoming subsequently a creditor of the firm. As pointed out by the learned referee, the petitioner had several courses open to him in order to protect his interests and obtain his securities. It would, however, serve no useful purpose to discuss what might have been his rights had he pursued some other course, since we are concerned with what rights he has in view of the action he actually did take. In going with the assent of the assignee to the bankers who held his stocks and paying them the full market value", he thereby not only paid what he owed his former-firm, but to the extent of .the excess over and above his indebtédness, he paid the debt of that firm, and the surplus which the bankers returned to the assignee was swelled to that amount. Ho doubt, had.he required the- bankers to sell the other securities in payment of the firm debt first, or had he notified them not to sell his securities, he might have regained them upon the payment of his own indebtedness. .That there was other collateral sufficient to pay the entire debt of the firm without the contribution which the petitioner thus 'made, is evident from the large surplus turned over to the assignee. [43] It is true that the bankers had a claim or lien superior to that of the firm, and, to the extent of their advances, superior to that of Mr. Crocker; but this did not deprive him of his right to redeem, nor did it destroy his title.to the stocks or change his claim as owner to a claim as a creditor, within the meaning of the statute. The effect of his tender and demand upon the assignee was to release his securities, or the proceeds thereof, from the lien of the firm; and the action of the assignee in assisting Mr. Crocker to get his stocks was not coupled with any waiver on the part of the latter of any of his rights, nor can it be construed as a consent that, to the extent of the excess which he paid of $62,286.73, * he should be deprived from sharing in the fund from which the assignee was to pay the other creditors. That one who endeavors to reclaim his own property which has been wrongfully placed in the hands of a third party, and who pursues his legal rights in that endeavor, should be penalized in such a large amount seems manifestly unjust. Nor do we think, however strictly the statute relating to the rights of special partners is construed, that it can be regarded as supporting the conclusion reached by the referee. Had the petitioner adopted one of the other methods suggested he could have obtained his securities upon, paying his debt; or, if obliged in the first instance to pay the market price, then to the extent of the difference he could have recovered. And although, for the reasons stated by the referee, the course he pursued prevented his getting the benefit of the right to be subrogated to the position occupied by the bankers, and, therefore, prevented his recovering this difference in full, it resulted, in our opinion, in establishing a new and independent relation after the firm had been dissolved which entitled him as a creditor to share with the other creditors equally in the assets of the firm. This right accrued for the reason that when he made the payment to the bankers and became a creditor and his claim arose he was no longer a special partner. Were we, however, to regard all his dealings as comprising a single transaction which terminated upon his payment to the bankers, then it may well be argued why, under this aspect, was he not entitled by virtue of the statute to be considered as a creditor with the same [44] rights and remedies as other creditors ? Section 37 of the Partnership Law expressly provides that a special partner may “ pay money for the partnership,” and to that extent share in the rights and remedies of other creditorsand although Mr. Crocker made the payment in. the effort to get back his own securities, the fact remains that as a result of the negotiation he did pay money for the partnership and in discharge of its indebtedness. The effect,- therefore, as contended by the appellant, was that the firm received from the petitioner, upon the redemption of the stock, $62,286.73 more than he owed.-the firm. That sum went directly to pay the debts of Price, McCormick & Co., and we do not see why it should not be regarded as a payment of.money “for the partnership,” and thus within the exception of section 37 of the statute. The illustration used by the appellant we think apt. Suppose the firm had given promissory notes upon which Mr. Crocker, was indorser, and these notes had become due after the insolvency of the firm, and Mr. Crocker as indorser was compelled to pay them, would not such payment have been an advance of money for the firm, entiling Mr. Crocker under this section of the statute to share witLother creditors? We prefer, however, to rest our decision, not upon this exception stated in section 37 of the Partnership Law, but upon the ground that the assignment worked a dissolution of the firm which ended the partnership relation, and thereafter, to the extent that the petitioner was obliged, in order to obtain his property, to pay in excess, of his indebtedness, he is entitled to share equally with the other creditors-in the distribution of the assets of the firm. We think, therefore, that the order should be reversed, with.costs; and, as the facts áre undisputed and there would be no advantage, in a new reference, the petitioner’s application, to the extent that he be paid joro rata with the other creditors by the assignee, should be allowed. Patterson and Laughlin, JJ., concurred; Van Brunt, P. J., dissented. Order reversed, with costs, and petitioner’s application granted to extent, stated in opinion. Footnotes [*] Sic.