Washburn v. Bank of Bellows Falls

The opinion of the court was delivered by Redfield, J. This is a bill, brought by the creditors of a partnership, on the part of themselves and so many as may join in the suit, claiming a preference over the separate creditors of the partners, and that the latter may be restrained from levying upon the partnership effects, until the claims of the plaintiffs are satisfied. The Bellows Falls Bank is the first in the order of the attachments, and that and the other creditors of the separate partners are sufficient to absorb all the funds of the partnership, which have been reduced to cash by the receiver. The other separate creditors have attached subsequently to the bank; and the plaintiffs, who are partnership creditors, have also attached, subsequent to the bank and some other of the separate creditors. All these claims have gone into judgments, and the sum of the plaintiffs’ claims, united, is also sufficient to absorb the partnership funds. So that the controversy in the present case is to the full extent of all the property attached. No question can be reasonably made, I think, in regard to the failure and utter insolvency of the partnership, at the time of the first attachment by the bank, although there is some, testimony ii? — 284 — the pase, going upon the basis of a very imperfect and unequal estimate of assets and liabilities, which would lead to the contrary result. The only real difficulty in this case is, to determine whether the partnership creditors are entitled to a preference over the separate creditors of the partners, in the distribution of the partnership funds. And this, I apprehend, could not now be esteemed a question of any difficulty, upon the principles of the English common law. By that law the separate creditors are indeed entitled to execution against the partnership property, but in that case can only sell the interest of that partner, against whom they have obtained judgment. As Lord Alvanley declares the law, in Chapman v. Koops, 3 B. & P. 289, “ By the law of England the creditor of any one partner may take in execution that partner’s interest in all the tangible property of the partnership, and the purchaser will thereby become a tenant in common with the other partners.” And the purchaser would not have a right to molest the other partners, until all accounts between them have been settled. But if the other partners wish to take advantage of this circumstance, they ought to file a bill in equity against the vendee of the sheriff.” Chancellor Kent (3 Com. 37) says, “ The interest of each partner in the partnership property is his share in the surplus, after the partnership accounts are settled and all just claims satisfied.” This doctrine is fully sustained by the English cases. It follows, then, that while a partnership creditor may sell the entire interest in all the tangible property of the firm, the creditors of the separate partners can sell only the interest of that partner, which may be something, or nothing, as the concern shall prove solvent, or insolvent, on a final settlement of all its concerns. So that in this way the entire property of the partnership might be sold upon execution, against each separate partner, and still nothing accrue to any of the purchasers, since all must purchase subject to the claims of all the joint creditors. This, then, being the rule, it is useless to attempt to exclude the preference of joint creditors, since every sale, upon a separate execution, must he made subject to their claims. So that if this subject is put upon the basis of the English common law, the rights of the joint creditors are evidently preferred, even in a sale, upon execution, of the interest of the separate partners. It is evident, too, that, in ordinary eases, such a sale could — 285 — not much avail the separate creditors and would not often be resorted to. And when it is done, it is always in the power of the other partners to resort to chancery, for the purpose of having a final account- taken and the concern closed. It is not, perhaps, very important to go into any abstract reasoning to show the grounds upon which this rule is founded, or its justice, or propriety. It is certain, that no rule in English jurisprudence is better settled. Almost every case upon the subject speaks of this rule as one long settled. Mr. Justice Story [1 Eq. Jurisp. 626, § 677] lays down the rule in regard to the right of separate creditors to sell only the interest of the partner, who is their debtor, after the final account shall be taken, almost in the same terms above quoted from Lord Alvanly’s opinion in Chapman v. Koops, referring to West v. Skip, 1 Ves. 237, 239; Barker v. Goodair, 1 Ves. 85; Dutton v. Morrison, 17 Ves. 205; Nicoll v. Mumford, 4 Johns. Ch. R. 522; Fox v. Hanbury, Cowp. 445, and many others, in addition to those already cited, — most of which, more or less directly, involve that point, and all recognize it, as a well established rule upon the subject. This rule gives the creditors of the separate partners the power over the partnership effects, which their debtors themselves possess, that is, to control their own interest, which consists in what shall remain of their share, after all debts of the concern are liquidated. But in the following section of the same work, (pages 627 and following,) it is explicitly declared, that equity will interfere to restrain the sale of the interest of one of the partners, until that interest can be definitely ascertained; and that this injunction will be granted at the suit of the other partners, or the partnership creditors, or the debtor, whose share is levied upon; and that this will be done equally, whether the interest of the partner is seized by the sheriff, by the assignees in bankruptcy of the separate partner, by his assignee by contract, or by his executor or administrator. In the case of Brewster v. Hammet, 4 Conn. 540, such an injunction, at the suit of the other partners, they being also insolvent, was denied; but the general principle above stated was fully recognized, and likewise the right of the partnership creditors to maintain such a bill. See also Taylor v. Field, 4 Ves. 396, and note to Sumner’s edition, and the other cases cited by Mr, Justice Story. — 286 — ' It is indeed true, as declared by Lord Eldon, in Waters v. Taylor, 1 Ves. & B. 301, that the old law before the time of Lord Mansfield was somewhat different. Then, in a sale at law, the equities of the other partner were not regarded, but the aliquot proportion of the partner was disposed of by the sheriff, without regard to the ultimate balance; Heydon v. Heydon, 1 Salk. 392; Jackey v. Butler, 2 Ld. Raym. 871. The same rule at law is recognized in this state, so far as the rights of separate creditors at law are concerned. Reed v. Shephardson, 2 Vt. 120; Clark v. Lyman, 8 Vt. 20. But this rule at law was never intended to limit the equities of the other partners, or of the partnership creditors, but to refer them to a court of equity, as is said in Chapman v. Koops, 3 B. & P. 289 and in Whitney v. Ladd, 10 Vt. 165, and in Clark v. Lyman, 8 Vt. 290. The books are all so full to this point, that it seems needless farther to discuss it. It is found in all the English books, where the subject is named, and in most of the American States. Pierce v. Jackson, 6 Mass. 242; Rice v. Austin, 17 Ib. 197; Wilson v. Conine, 2 Johns. 282; Tappan v. Blaisdell, 5 N. H. 190; Remarks of Dewey, J., in Allen v. Wells, 22 Pick. 150; Moody v. Payne, 2 Johns. Ch. R. 548; Burrall v. Acker, 23 Wend. 606. This, too, is but the rule of the civil law upon this subject, 1 Story’s Eq. Jur. 632, 1 Domat, B. 1, tit. 8, § 3, art. 10. Unless, then, we are prepared to put the law of this state upon a different basis from the law of any other state, almost, upon this subject, we must recognize the right of these partnership creditors to be first paid. It is true, that they prevail here over the separate creditors by virtue of a lien, which each partner is supposed to have, by implied contract, upon all the partnership effects, until all •the partnership debts are paid. This gives him an equity prior to that of the separate creditors ; and it is only by calling this equity to their aid, that the partnership creditors are enabled to maintain their claims in this case. But this is not a new principle in equity, for one man to prevail in a suit, not by his own superior equity, but in consequence of that which resides primarily in some third party, who is indeed generally a necessary party to the bill. This is the case where a creditor claims to have the benefit of securities put in the hands of his debtor by some other debtor, the two debtors -standing, perhaps, in the same relation to the creditor, but one being — 287 — principal and the other surety, as between themselves. So, too, in all cases where one holds funds, which are ultimately to go in a particular channel, equity will interfere on behalf of the party ultimately to be benefitted by such appropriation, notwithstanding he may not be a party to the original transaction. This is always more or less the case, where a court of equity interferes in marshalling assets. But if it were necessary to test the soundness of this rule by the reason upon which it is founded, I should have no doubt of its prevailing. Mr. Justice Story seems [1 Eq. Jurisp. 626, in notes,] to apprehend, that the case of Devaynes v. Noble, [1 Merivale 529, before Sir William Grant, at the Rolls, S. C. on appeal before the Chancellor, Lord Brougham, 2 Russell & Mylne 495,] which recognizes a partnership contract as joint and several, and not joint only, has wholly subverted the principle, upon which any distinction has ever been made between joint and several creditors, as to their right to a preference in regard to joint and several funds. I do not find any such doubts, in regard to the soundness or the continued existence of this right of preference of joint creditors in regard to joint funds, notwithstanding the case of Devaynes v. Noble, in any other book, except the one above referred to. And with all reasonable distrust of my own views, in consequence of the doubt there suggested, it still seems to me, that the difficulties of Mr. Justice Story are wholly without foundation, so far as the right of joint creditors to a preference is concerned. I take it to be a well established rule, in regard to the law of partnership, that all their contracts, so far as the creditors are concerned, are joint and several, binding each member for the whole debt, and that such is' the general light in which partnership contracts have always been regarded. When such contracts have been spoken of as joint only, it has been with reference to bankrupt or insolvent laws, or the marshalling of assets in courts of equity, and not because the claims of the creditors and the obligations of the debtors were not several,, as well as joint. The general rule, at law certainly, and in equity, unless it is controlled by an intervening insolvency, either of the partnership or some of the partners, is, most undoubtedly, that the partnership creditors have a right to go, not only against the joint, but also the separate, property of each partner, and may take their — 288 — entire debt, either out of the estate of a deceased partner, or out of the property of a living partner, unless injustice is thereby likely to be done to others, in consequence of a burden, which might be made to rest either upon one, or the other, of two funds, being taken out of one fund, to the exclusion of other claims, which cannot be made to rest upon the other fund. It is not meant here to assert, that a several suit may be maintained, at law, against one of the partners; for the contract is technically joint only, — but no more so than any other joint contract, which binds each contractor for the whole debt, or in solido as it is termed. And when the death of one of the joint contractors intervenes, the entire debt may be taken out of his estate. The same is true as to the estate of a deceased partner. Wilkinson v. Henderson, 1 Mylne & Keene 582; Devaynes v. Noble, 1 Mer. 529; Thorpe v. Jackson, 2 Y. & Col. 553; Braithwaite v. Britain, 1 Keene 219 and note. It is upon this very principle, of the law of partnership, that each partner is bound for the whole debt of the partnership, and so, as to the share of the other partners, is virtually a surety, that a court of equity will suffer one partner to maintain a lien upon the partnership property, until he is released from such suretyship, when all the debts of the firm are paid. In this it is not perceived there is anything unjust, or unusual, so far as it regards separate creditors even. Nor is there anything singular, in enabling partnership creditors to enforce this lien, which is thus created upon the partnership funds in favor of the creditors of the partnership, although not created primarily for their benefit, but for the security of the other partners. This is but carrying out the most familiar principles of the law of principal and surety, as well between themselves, as between each and their common creditor. Authorities upon this point might be multiplied almost indefinitely, both in England and this country. This is the recognized and decided law of all the New England States, with the exception of Rhode Island, of which state we have no reports, and has been recognized there, we think, by the circuit court. Most of the other states have also recognized it; and no one has expressly denied its existence or obligation, so far as we know, with the exception of Pennsylvania and Georgia. The following cases may be named — in addition to those already cited: Witter — 289 — v. Richards, 10 Conn. 37. Egberts v. Wood, 3 Paige 517. Fereday et al. v. Wightwick et al., 5 Eng. Cond. Ch. R. 377; 1 Tomlyn, 250; S. C., 4 Eng. Cond. Ch. R. 317; 1 Russell & Mylne 45. M’Culloh v. Dashiell, 1 Har. & Gill 96. Hall v. Hall, 2 M’Cord’s Ch. R. 302. 2 Dessau. 270. Woddrop v. Wards, 3 Dessau. 203. Smith v. Johnson, 2 Edw. 28. Commercial Bank v. Wilkins, 9 Greenl. 28. Arguments, which have been, or which may be, drawn from the possible or probable abuses of this rule, apply with equal force to other cases, where the same or analogous principles are recognized. It has long been settled, that the debtor has the right to prefer any of his creditors to any extent. He may do this even upon the eve of insolvency, unless expressly or impliedly restrained by some express statute, or by the general scope of the insolvent or bankrupt laws of the state. He may, top, at the time of contracting, as is often done, appropriate a portion of his estate, real, or personal, by mortgage, or pledge, to secure the fulfilment of that particular obligation. One may, too, appropriate a portion, or all, of his estate, unless restrained by express law, for the security of some one, who may have become, or is about to become, his surety. And in none of these cases will the rules of law, or equity, interpose any hindrance. And this property, thus set apart for the security of the surety merely, may, in case of the insolvency of the surety, be reached by the creditor, in a court of equity, before even the right of the surety to appropriate it attaches. In all this we see but an exemplification of that portion of the law of partnership which we have been discussing. And of this rule of law, by which a principal may assign property to secure his surety, or by which the creditor, in certain contingencies, may reach that property through an equity, which resides in another primarily, we hear no one complain. It has been supposed, too, that, if joint creditors have a preference as to joint funds and separate creditors as to separate funds, of which we do not speak now, there will be afforded great facilities for shifting funds from one portion of one’s estate to the other, as may comport with the fancy or caprice of the debtors, more than with the just claims of the creditors. But this will always be the case, when any preferences are allowed 1.o be made by debtors. It matters not how these preferences are to be effected by the debtors. They will be — 290 — likely always to be unjustly exercised in many cases. The only effectual cure is to prohibit them altogether. But such a prohibibition, to be effectual, must reach all mortgages and pledges; which would operate far too great an incumbrance upon the free spirit of commercial enterprise. Such a law could not be endured, probably, for any long time, especially in this age and country. We think, therefore, that, in this case, the partnership creditors fire entitled to a preference over the separate creditors, who first attached, The decree of the chancellor is therefore reversed, and the Cause remanded to him, with directions to enter up a decree for the orators to be paid their debts out of the partnership funds, to the full extent, if the money in the hands of the receiver is sufficient for that purpose, and the residue, if any, to be paid to the creditors of the separate partners, until expended, in the order of their attachments ; and if the funds in the hands, of the receiver are not sufficient to pay all the orators’ claims, then to be paid to them, in proportion to the amount of their demands, as far as it will go. Something has been said, in argument, in regard to the uncertainty of the state of the proof as to the actual state of the funds of the partnership; and it is suggested, that possibly, if a full account of all the assets were taken, it might' appear, that the concern was in fact solvent, and that there was no necessity for the plaintiffs to resort to this fund for payment. If that were So, doubtless the plaintiffs’ bill must be dismissed. But if the defendants have any confidence in being benefitted by having such an account taken, they should have filed a cross bill for that purpose, and then the account could have been taken, — but at their expense. But where the plaintiffs are able, as they have done in this case, to make out a prima facie case of insolvency, we do not think they should be compelled to ask an account of all the partnership dealings, so as to determine the exact state of the liabilities and assets, and the precise interest of each partner, — which doubtless they might do, by making all the partners parties to the bill. And in ordinary cases the chancellor will exercise a discretion, whether to pass a decree for the orator, before this is done. But in the present case such indubitable proof of insolvency is already in the case, as to leave no reasonable doubt that .such must be the fact, upon a final account. We do not therefore recommend the chancellor to subject the par — 291 — ties to that expense and delay, unless the defendants desire it, at their own expense. It is possible the partnership creditors may think themselves entitled to full pay, in the order of their attachments; and so they would be by the Massachusetts law, when the partnership attachments defeat the attachment in favor of the separate creditors. Pierce v. Jackson, 6 Mass. 242. But at common law the attachment of the separate creditor is valid, so far as the interest of his debtor is concerned. And Chancellor Kent held, in Moody v. Payne, 2 Johns. Ch. R. 548, 549, that .the sheriff could not be restrained, by injunction, from proceeding to sell the interest of the partner; but the contrary doctrine is now held. 1 Story’s Eq. Jur. 629. Skipp v. Harwood, 2 Swanst. 586, 587. And as it is only by the aid of a court of equity that the orators can prevail, we think they must take the fund according to the rules which prevail in such courts, that is, that “equality is-equity.” For at law, in this state, the claim of the separate creditors is perfectly valid, to the full extent. Reed v. Shephardson, 2 Vt. 120. Hitherto we do not think costs should be allowed the plaintiffs in the court of chancery, for the reason, that the defendants, from the decisions which had been made in this state, were fully justified in contesting the matter. In this court, as the plaintiffs have succeeded in reversing the decree of the court of chancery, they are entitled to costs, as matter of right. Future costs will be under the control and in the discretion of the chancellor.