Cleghorn v. Insurance Bank

By the Court. Lumpkin, J. delivering the opinion. The Insurance Bank of Columbus, holding an execution against the firm of Calhoun & Bass, which firm was composed of James S. Calhoun and Charles L. Bass, moved a rule against James G. Johnston, Sheriff of Baker County, to show cause why he should not pay over to the plaintiffs, certain money in his hands, arising from the sale of the property of James S. Calhoun, one of the defendants. The Sheriff, in return to said rule, showed that a ji. fa. from Muscogee Superior Court, of William Foster vs. Charles L. Bass, James S. Calhoun and others, and transferred to Charles Cleghorn, was placed in his hands hy R. K. Hines, Jr. as attorney for the assignee, with direction to levy the same upon certain lots of land in said County; that in pursuance of said instructions, he levied upon and sold said lots as the individual property of James S. Calhoun; and that, after deducting costs, it left in his hands the sum of $233, subject to the order of the Court. Upon this answer and argument had thereon, Judge Warren determined that the fund should be paid over to the execution in favor of the Insurance Bank, it having the oldest judgment lien, and there being a return of nulla bona thereon as to any joint property. To which opinion counsel for Cleghorn excepted. [1.] The conflicting claims of copartnership and separate [322] creditors have been a fruitful source of litigation, both in England and in this country. The main point of contestation is, whether the rule, that joint creditors have a primary claim upon the joint estate, and only the surplus goes to the separate creditors, and vice versa as to separate creditors and separate estate, is a general rule in Equity, or restricted to cases of bankruptcy and founded upon the Statutes of Bankruptcy ? I forbear to inquire into the origin of this rule, or to trace its history and fluctuations since its introduction. Chancellor Kent declares that he feels no hostility to the doctrine, even as a general rule of Equity, and thinks that it is, upon the whole, reasonable and just. To doubt, under such circumstances, might well expose one to the charge of temerity, were it not that the rule has been discarded, after great consideration, by many of the Courts of this country, as well as by the ablest transatlantic jurists. Ex parte Hayden, 1 Bro. C. C. 454. Ex parte Hodgson, 2 Bro. C. C. 5. Ex parte Copland, 1 Cox, 420. Ex parte Page, Ib. 119. Lodge vs. Fendall, 1 Ves. Jr. 196. Ex parte Bauerman & Christie, 3 Deacon, 476, 484. Bell vs. Newman, 5 Serg. & Rawle, 78. In the matter of the estate of Perry, 1 Ashmead, 347. Reed vs. Shepherdson, 2 Vermont Rep. 120. White vs. Dougherty et al. Martin & Yerger, 309, 321. Grosvenor Co. vs. Austin’s adm’r, 6 Ohio, 103. Dahlgren vs. Duncan et al. 7 Smede & Marshall, 280. Lord Eldon, in Barker vs. Goodan, (11 Ves. 786,) stated that this rule was practiced upon in Chancery every day, but admitted that he did not know how it became law. He remarked that they had in some degree pursued it in the administration of assets, though very tenderly. And Judge Story admits, also, that the rule rests on as questionable and unsatisfactory a foundation as any in the whole system of our jurisprudence, but concludes that it had best not be overthrown, as it would be difficult to substitute any other that would work with perfect equality and equity. Story on Partnership, 530, 541. The learned commentator concedes, however, that if the true doctrine be that avowed by Sir William Gh'ant, in the case of Devaynes vs. Jfohle, (1 Meriv. 529,) and afterwards affirmed by Lord Brougham, (2 Russ. & [323] Mylne, 494,) that a partnership contract is several 'as well as joint, then there seems no ground to make any difference whatsoever in any case between joint and several creditors as to payment out of joint or separate assets. 1 Story's Eq. Jur. 626, notes. In Tuckers vs. Oxley, (5 Cranch, 35,) Judge Marshall considered that even in bankruptcy, the rule when properly understood, was nothing more than the equitable principle of compelling the joint creditors, as having two funds, to exhaust the fund which was appropriated to them before coming upon the fund to which the separate creditors were also entitled. Now, I can very well understand why the rule should be maintained upon the principle of two funds, whenever the facts will justify its application; that is, if there were partnership effects in this case, which had not been exhausted, it might be equitable to force the joint creditors to proceed first against these partnership effects; or, if Cleghorn’s fi. fa. was against Calhoun only —that of the Insurance Bank being against Calhoun & Bass— Chancery would interfere and compel the latter to go against Bass, provided he was solvent. But where, as in the present case, the partnership is insolvent, and where the claim of the separate creditor is against each of the joint debtors, I should be exceedingly reluctant to recognize a rule which was adopted as one of convenience merely, and which excludes a creditor of the partnership from all share of the separate estates of the partners until the separate debts are paid, or which would, on the other hand, exclude a separate creditor from all share of his debtor’s joint property until the joint debts are paid. On the delivery of this opinion, and before I had had an opportunity of consulting any of the American authorities, I ventured the opinion that the rule under discussion was founded upon a basis radically unsound, namely : that the funds are to be liable on which the credit was given — that in contracting with a partnership, the credit is supposed to be given to the firm; but those who deal with an individual member, rely on his sufficiency. I insisted that we trusted everybody for what he is supposed to be worth; and I am gratified to discover that Chief Justice Tilgh [324] man in Bell vs. Newman, took the same view of this subject. He says, “ The truth is, that persons who trust the partners, either in their separate or partnership character, generally do it on the credit of their whole estate, both joint and separate.” “ When men,” he continues, “ enter into partnership, they often borrow money on their private accounts for the very purpose of creating partnership stock; and this they may continue to do during the partnership. And on the other hand, the individuals of a partnership often withdraw money from the joint stock and convert it to separate property, in Such a manner that it cannot be traced or identified. In such cases,” he adds, “ it is evident that this rule in bankruptcy works cruel injustice.” That such a rule should have been yielded to, (for it appears never to have been firmly established,) in a country where the bankrupt system has been “ in full blast” ever since the reign of Henry the Eighth, is not surprising. It saves a vast amount of trouble in settling intricate accounts between partners in the disposition of the bankrupt’s estate; but, as a new question, the rule never could have obtained in a country like ours. [2.] But conceding the rule to be settled as contended for, and the weight of authority, if not of justice, is perhaps in its favor, especially in Chancery adjudications in Britain before the revolution; and grant, moreover that it is applicable not only in bankruptcy, but upon general equity; There is another feature in this case which withdraws it from its operation. It is in a Court of Equity only that the joint creditor can be restrained from proceeding against the separate estate. The equity in favor of the separate creditors will never be enforced to control or take away a right acquired by legal execution on the part of joint creditors against the separate estate. [3.] And itis only when the legal recourse of the joint creditor against the separate estate is terminated, and they have no claim against these assets, except in Equity, as in case of the death, bankruptcy (or perhaps statutory assignment in insolvency) of a partner, that the joint creditors are postponed. And this is agreed to be law even in those Courts which recognize the rule I have [325] been considering as a principle of general equity.. 1 Amer. Lead. Cases, 325. Allen vs. Wells, 22 Pick. R. 455. 1 Har. & Gill, 96. 1 Stor. Eq. Jur. 625. Inasmuch, then, as the Insurance Bank is not invoking the- aidi of Equity to inforce its lien, but is asserting in a Court of Law its legal rights against the legal estate of one of the partners,, there is no reason why its judgment lien should be excluded or' postponed in behalf of the separate creditors. We consequently hold that the rule, as applicable to the facts- and circumstances of this case, was correctly stated by the presiding Jndge on the circuit. Judgment affirmed.