Ransom v. Van Deventer

By the Court, E. Darwin Smith, J. The judgment in this case was obviously based upon the principle that the joint creditors of a copartnership are entitled to priority of payment from its assets, before the private creditors of any of the separate partners. This is the settled rule in bankruptcy and in equity, where courts of equity have acquired control of the assets of a copartnership. Chancellor Walworth states the rule with much carefulness and precision in Kirby v. Schoonmaker, (3 Barb. Ch. R. 49,) as follows: “Where a partnership is dissolved by the death of one of the copartners, or where one or both of the copartners become bankrupt, or they are discharged under the insolvent acts, so that their property is placed in the hands of the assignees appointed by law to make distribution thereof, it is administered in courts of equity by applying the copartnership funds in the first place to the payment of the debts of the firm, and the individual funds of the several copartners to pay their individual debts respectively, before paying joint debts out of the same.” But when the copartners are administering their own funds the copartnership creditors have no lien upon the private funds, nor have the individual creditors any lien or priority of claim upon the separate funds of the debtors. The rule is sometimes stated as though the right of the copartnership creditors was in the nature of a lien, and attached as such to the partnership assets. But this clearly cannot be maintained. Partnership creditors at large have clearly no more lien upon partnership property than private creditors have in respect to the separate property of the individual partners. This can scarcely be pretended while the property of copartners is in their own posession, before the insolvency of the firm. But every partner has a lien upon the partnership property for the payment of the partnership debts, and for the payment of any balance — 314 — that may he due him after the payment of such debts. It is in respect to this lien, and for the purpose of an accounting between the partners and the adjustment of their affairs, that courts of equity have jurisdiction over cases of partnership; and it is through this lien that the creditors of the copartnership can maintain suits in equity to enforce the right to have the partnership property first applied to the discharge of partnership debts ; but independently of this lien of the co-partners inter se, no suit in equity could be maintained by the creditors of the copartnership to reach and distribute the copartnership effects upon equitable principles.. But this is not such a suit. The plaintiffs are judgment creditors of the defendants Van Deventer and Smithyman, with an execution returned unsatisfied, and this action is a creditor’s bill to reach the note in question as the property of the copartnership. It is not a suit to enforce any partnership lien, at the instance or with the concurrence of one of the partners; nor is it an action for the benefit of the copartnership creditors, to reach copartnership assets for distribution amongst the copartnership creditors. The question in regard to the promissory note in question in this action is therefore purely one of title. The plaintiffs by force of the commencement of the suit and the lis pendens thereby created, claim to reach the said promissory note as among the equitable assets of the firm of Van Deventer & Co., and to have acquired an equitable lien thereupon. And they have clearly acquired such lien, if the note at the time of the commencement of such suit was legally or equitably the property of the firm, of Van Deventer & Co. From the facts found by the learned judge who tried the cause, it appears that the note was given upon the sale of the partnership property of Van Deventer & Co. That William Van Deventer, one of the firm, was owing on the 8th of August, 1861, to the defendants Jacob and Stephen Van Deventer the sum of §10,000, for which they held his note, being an individual indebtedness from him to them. That on that day William Van Deventer with — 315 — the consent of Smithyman his partner, took and charged to himself on the hooks of the firm the note in question, made by A. F. Whitaker for $1000. That on the same day William Van Deventer turned out said note to the defendants Jacob and Stephen Vandeventer in payment of the debt owing by him to them, and that upon the receipt of the said note for $1000, Jacob and Stephen surrendered up to the said William the note so held by them against him, which said note was canceled and discharged. That at the time of such transfer of the note Stephen and Jacob Van Deventer had no notice that the firm of Van Deventer & Co. was insolvent, or in /ailing circumstances; and further, that the note was taken by William and charged to himself on the books of the firm, for the purpose of equalizing their individual account between themselves; Smithyman having drawn out of the firm $6800 and William $2630, and that Smithy-man put into said firm $2600, and William Van Deventer had put in $2200. It further appears that the firm was at the time in fact insolvent, in the sum of from $4000 to $5000. Upon these facts, the delivery to the defendants Stephen and Jacob Vandeventer of the note in question clearly transferred to them a perfectly valid title to the note, unless the plaintiffs are entitled to impeach such title on the ground of fraud. It is not pretended, or is not found by the judge who tried the cause, that the transaction relating to the transfer of the note in question to the defendants presents a case of fraud in fact. In the case of Burtus v. Tisdall, (4 Barb. 580,) which was a case like this where the partners sold out their assets for promissory notes and divided the notes between them, the decision of the court was put and can, I think, be sustained on the ground of fraud in fact. In that case the debt of the private creditor was impeached, and the case was put upon the ground that it was in fact fictitious, or paid and extinguished before the receipt of the notes turned out to him by one of the partners. No doubt — 316 — could exist in this case, if the debt of William Van Deventer to Stephen and Jacob were fictitious, or previously satisfied, that the transfer of the $1000 note to pay such debt would be a fraud, and the note in that case would remain partnership property. The division by solvent partners of their assets would be entirely valid, and the transfer by one partner of partnership assets thus acquired to pay his personal debts would also be entirely valid. The question therefore is, and this case turns upon the point, whether the division by partners of the assets between themselves and the transfer of such assets by the individual partners in payment of their private debts, when the partnership is insolvent, is or is not in point of law a fraud upon the partnership creditors. I think it is such a fraud, and that such transfer is invalid as against the partnership creditors'; and that the property remains partnership property in such cases, till it comes to the hands of a bona fide purchaser for a valuable and new consideration. In the case of Burtus v. Tisdall, (supra,) Judgé S. B. Strong so asserted the rule. He says insolvent partners should be considered as holding their joint property for the benefit of their joint creditors, and a misappropriation should be deemed in fraud of the implied trust. In the case of Wilson v. Robertson, (21 N. Y. Rep. 587,) the court of appeals expressly held, that the appropriation by an insolvent firm of partnership property to the payment of the individual debts of one partner is not simply void, but is fraudulent, and avoids the deed of assignment. This was the case of an assignment in trust for the benefit of creditors. The principle thus asserted covers this case. Judge Wright, in giving the opinion of the court, says: “An appropriation of the firm property to pay the individual debt of one of the partners is in. effect a gift from the firm to the partner—a reservation for the benefit of such partner or his creditors, to the direct injury of the firm creditors.” In Kirby v. Schoonmaker, (3 Barb. Ch. Rep. 51,) Chancellor Walworth says also: “Dor an insolvent — 317 — copartner who was unable to pay the debts which the firm owed would be guilty of a fraud upon the joint creditors, if he authorized his share of the property of the firm to be applied to the payment of a debt for which neither he nor his property was liable, in law or in equity.” This would be readily admitted, if the question were unmixed with the question of a partnership consisting of two or more partners. No one would pretend that a single debtor who was insolvent could give away his property in defiance of the rights of his creditors, and to their prejudice. This has been held a fraud as long as there has been any common law. And what is a partnership but a single person in law, having, as such, debts and credits and rights as a single person ? The assignment, or transfer without assignment, of the property of an insolvent partnership, is precisely the same violation of the rights of creditors that it would be if it were in fact a single person, and the gift to one of the partners or to his creditors or for his benefit does not vary or affect the principle. It is the giving away in either case of the property of an insolvent debtor at the expense of, and in fraud of the rights of his creditors. We must therefore consider the transfer of the note in question to the defendants as a fraud upon the creditors of the copartnership of Van Deventer & Co., and that the defendants Jacob and Stephen Van Deventer acquired no title thereto as against the creditors of the copartnership, unless they possess the character and are entitled to the protection of bona fide purchasers. Clearly the defendants are not bona fide purchasers or holders of this note. They knew it was given for partnership property, and belonged to the firm. One of the defendants, Stephen Van Deventer, testified that he “heard Smithyman tell his brother that he might take the note and do as he pleased with it. William said he wanted to pay him and his father, and he said he might do so.” This was distinct notice that this note belonged to the copartnership. With such notice the defendants could not be bona fide holders of the note; and besides, they gave no — 318 — new consideration for it, but simply gave up therefor the notes of William Yan Deventer long previously over due. The judgment should be affirmed with costs. [Monroe General Term, September 7, 1863. E. Darwin Smith, Johnson and Welles, Justices.]