Towne v. Leach

Aldis, J. The plaintiff summons L. A. Edgell and H. Phelps as trustees of one George Leach. Edgell files a disclosure in which he states that the goods and moneys in his hands were delivered to him by Phelps as his ; that afterwards Phelps said they belonged to Leach and Phelps as partners. He also states that Leach claims that they belong solely to him, and prays that Phelps may be cited in as claimant to maintain their rights. Upon the disclosure the question as to the liability of the trustee would be, first, are the goods the sole property of Leach? if so, the trustee would be liable ; second, are they the partnership property of Leach and Phelps, and if so, can they be held by trustee process to answer upon Leach’s individual debt? third, are they the sole property of Phelps, or has he such a joint interest as to defeat their being held for the debts of Leach ? In this state of the case Phelps also enters as claimant. The case is then referred to a commissioner, and the commissioner summons the parties who appear before him, Phelps appearing as claimant as well as trustee. The commissioner reports that Leach owned a patent; that he and Phelps entered into an agreement for the sale of it to different districts of territory, and for incurring expenses in the business, and that the proceeds of the sales should be applied, first, — 753 — to pay expenses, and then to be divided between them ; that there were various other stipulations in the agreement; that the goods and funds in the hands of the trustee were the proceeds of the sales of the patent under this contract, and were delivered by Phelps to the trustee, and that Phelps after that continued to do business under the contract till Leach put an end to the agreement. The contract between Leach and Phelps as to this business was in writing, and is set forth in the report. These facts are found by the commissioner, and do not appear to have been objected to by any of the parties, upon any ground. Phelps then insisted that the contract between him and Leach was a partnership, and that therefore the trustee could not be held liable for partnership funds upon the individual debt of one of the partners; but the commissioner, pro forma, overruled this point. Phelps then offered to prove that he and Leach, for a period before and after they acquired these goods, continued to do business under the contract, and incurred debts, large liabilities for castings and expenses, made various sales of the patent, and had unsettled accounts and dealings under the contract, and that on a just settlement there would be a balance due him from Leach. The commissioner construed the contract to mean that each transaction under it must be settled by itself, and that Phelps had no lien upon the balance of profits derived from any one operation to secure him for advances in any other, and therefore so construing the contract, held that in this one operation there was a balance coming to Leach, and which might be treated as belonging to Leach solely, and therefore that Edgell was liable ; and he excluded the evidence for the purpose of presenting to the court the question as to the construction of the contract. Upon the facts as found, and upon the contract as set forth, the counsel for Phelps contend, first, that Phelps and Leach were partners, and if so, their partnership funds cannot be applied to pay the individual debts of one of the partners, or be held liable by trustee process in a suit against one partner, when the other objects ; second, that if the contract does not create a partnership strictly, still, the goods belonged to them jointly, and could not foe divided or held as the separate property of either party, until — 754 — after a settlement, and till all their debts and expenses, whether joint or several, had. been paid out of the joint fund, and the balance then on hand had been severed and divided between them, and that the funds in the hands of the trustee, being thus their joint property and liable for the subsequent expenses and transactions of Phelps, could not be held liable on Leach’s debts. The plaintiff, on the other hand, contends that by the contract the proceeds of the sales of the patent were the sole property of Leach, and so liable on his debts. Hence, the first question is as to the true construction of the contract. We think that the intention of the parties in making the contract was, that the proceeds of the sales should belong to them jointly, and not to Leach individually. This is fairly inferable from the considerations, first, that such proceeds were the products of their joint means, one furnishing the patent right, the other the necessary expenses to present it for sale, and contributing his time and labor to effect the sales; secondly, the expenses were to be taken out of the proceeds of the sales, and then the remainder was to be equally divided between them, and one-half of such remainder to be delivered to and become the property of each one of them. This fairly implies that before division the ownership was to be joint. The property was to be liable for all debts and expenses, and could not be divided till they were first deducted. This is the express provision of the contract. By this provision an express lien on all their property was created for the payment of all debts and expenses, and forbidding a division till such payment had been made; a lien similar to that which is implied in law between partners. The referee assumes that each separate transaction in the sale of the patent was to be settled by itself. But this does not seem to be warranted by the contract. The settlements and division between Phelps and Leach were to be at as early a time as could reasonably be, and be made from time to time as property or money should be received by Phelps. It is obvious that large sales and numerous transactions were contemplated, and these might be upon credit. Large expenses might be incurred, and these, as for the castings, could not be /separately applied to any one sale of the patent, but were intended — 755 — for many, if not for all. The territory within which the right to use and vend the patent was to be sold comprised New England, Ohio and part of New York. The expenses to be incurred for the sale of the patent would, to a great extent, be the same for one county, district or State as for another, and no distinction could be made as to the expenses incurred for any particular sale. It is obvious that the settlements and divisions of property would be regulated by periods of time, and would comprise all transactions and expenses up to such times, and that it would have been difficult, if not impossible, to settle by separate transactions, for the expenses could not be so distinguished. Again, they could not tell that there would be any future sales, and hence all expenses ought to be deducted up to the' time of each settlement. This being the agreement of the parties, each settlement would include a full accounting up to the time of settlement, and all expenses would be a charge upon the avails, and there could be no division of the fund or avails till all the debts and expenses had first been deducted. Upon this construction of the contract it results, first, that Leach has no separate interest in the funds in the hands of the trustee, but his interest, if any, is joint with Phelps ; second, that whether he has any interest at all can only be determined by an accounting and settlement with Phelps of all their transactions growing out of the contract for the sale of the patent. In this view it is needless to inquire whether they were strictly partners or not, for if their contract gave them a joint interest in the proceeds of the sale, and subjected the proceeds to the payment of all debts and expenses before they could be severed as -between the parties, the result as to the liability of the trustee must be the same as if they were partners in the strictest sense. The plaintiff is a creditor of Leach; he has no debt against Phelps, or against Phelps and Leach jointly, and his debt does not appear to have had any connection with their enterprise as to the vending of the patent right. He can have no greater right to the fund in the hands of the trustee than Leach has. Clearly then, he cannot claim to hold the half of the net profits arising from the single transaction now in question, and the decision of the pojqmissi.oner and of the county court, that the balance com — 756 — ing to Leach upon this separate transaction might be so held without reference to the other dealings and transactions of the parties, was erroneous. While the goods thus jointly owned were in the hands of Edgell, they might have been attached at law by a separate creditor of Leach, although in equity the creditor would be restrained from proceeding to sell them until the joint creditors had been first paid; Washburn v. B. F. Bank, 19 Vt. 272; can they be held by trustee p'rocess upon the separate debt of a creditor when the other part owner objects, as in. this case? If so, then the judgment should be reversed, and the case remanded to the commissioner to take the account and ascertain the balance. Objections are very obvious to such a proceeding, both from the nature of the trustee process and the evils which would arise from the practical application of the rule. 1. The trustee is not liable to Leach alone, he is only liable to Leach and Phelps. He has no goods or credits belonging to Leach. Leach could not maintain an action against him for the funds he holds. Strictly then, he has no goods, effects or credits of the principal debtor. It has been held that one summoned as a trustee is not bound to disclose as to funds of the principal debtor which a partnership, of which he is a member, holds, and a debt due from the partnership is not thereby attached; Knapp v. Levenway and trustee, 27 Vt. 298. There is an analogy between that case and the one at bar in this, that there is the same want of legal privity between the parties here as there, an attempt to hold a joint fund by virtue of a several and separate liability, of one of the owners of the fund. 2. If the separate creditor of Leach proceeds to take an account-, ing, clearly his lien to the particular fund in the hands of this trustee ceases, and he pursues only the balance due Leach on a settlement of this and all other transactions. This, in effect, annuls the lien by this suit and changes it into a bill in equity, to settle the partnership. Such an application of the trustee process to the exercise of chancery powers for the settlement of partnerships and other joint adventures would be impracticable, full of mischiefs, and could never have been intended by the Legislature. A separate creditor of one partner or joint contractor, — 757 — could at any time by the trustee process compel the application of partnership funds to the payment of the separate debt of the partner (which the partner himself could not do without fraud,) or else force the partnership into a liquidation and settlement of all their affairs, in order to ascertain the several interests of one partner. This would be unjust and intolerable. And although the evil would be less where the partnership or joint adventure was dissolved, still the process is wholly unsuitable for and could never have been intended to apply to such a purpose. Upon the facts as found by the commissioner, we think the trustee could not be held liable to the separate creditor of Leach. Objection has been made upon this hearing that the claimant does not appear to have filed any allegations of his claim, and so no issue can properly have been formed as to his rights. Nothing appears as to whether allegations have or have not been filed, though counsel seem to admit now have been filed. The statute provides that a claimant may allege and prove any facts material to his claim. The form and mode of alleging the facts is not prescribed by statute, but must be governed by the rules of practice and subject to the discretion of the court; and if all the parties waive all questions as to the forms of proceeding and proceed cither in the county court, or before the commissioner, in a case where the commissioner can try the question, to a trial of the claimant’s rights upon their real merits ; and if on such trial the substantial claims of the claimant fully appear in the report of the commissioner on the case as stated by the court, and have been adjudicated upon as to their merits without objection to the form of proceeding, we think the party can not, for the first time in this court, raise the objection to the irregularity in the mode of presenting the claim by the claimant. Such appears to us to be this objection in this case. Had it been made in the court below the defect would, doubtless, have been cured by amendment by leave of the court. It is said, however, that by the statute of 1853, the commissioner has no power to try the rights of the claimant; but they must be tried in the county court, and by court or jury. — 758 — That act provides that the commissioner shall take the disclo-sure of the trustee and hear and examine testimony in respect to the liability of the'trustee, and determine all questions arising in respect to such liability, and report to the court the facts in respect to such liability with his decision thereon. As the commissioner is to hear all testimony and determine all questions in respect to the liability of the trustee, it seems to us that he is not confined to the sole question of whether there are funds in the hands of the trustee. The liability of the trustee is not to be understood in this narrow and restricted sense. His liability depends not upon that sole question, whether he has funds, but upon the further question, do those funds belong to the principal debtor. If the trustee knows facts which show they do not belong to the principal debtor, he is not protected unless he disclose them. So if he knows there are different claimants and doubtful questions as to the character and ownership of the funds, he should, as he has done in this case, set forth the facts in his disclosure and pray that the parties interested may be cited in to assert their rights. If they are cited in, or appear voluntarily, and their claims affect or determine the question of the liability óf the trustee, then, we think, the statute of 1853 applies and the question may go to a commissioner. Here the question as to the liability of the trustee depends upon whether the funds are the separate property of Leach, or the joint property of Leach and Phelps, and subject to an accounting under their contract. This question is raised by the disclosure, and its decision determines whether the trustee is or is not liable. The question is not as to the proportions in which Leach and Phelps may be interested in the fund, but whether the fund can be held by a creditor of Leach. It does not establish Phelps’ claim to the fund as between him and Leach ; it only defeats the claim of the plaintiff to hold the trustees liable to him for the fund. As the whole claim of the claimants affects only “the question arising in respect to the liability of the trustee,” (to use the words of the statute) we think the statute of 1853 applies, and that the commissioner had authority to try and decide the question. In Russell v. Thayer, 30 Vt. 526, the court held that as the — 759 — question which, settled the rights of the claimant was the same as that which settled the liability of the trustee, the commissioner had authority under the act of 1853 to decide the point. There the claimant and the trustee were the same person. The court in that case says : “The question of Thayer’s liability as trustee involved, covered and exhausted the entire ground on which his right as claimant rested.” So we hold in this ease, that , the question of the liability of the trustee covers the entire ground on which the right of the claimant rests : if the one is established the other must fail. It can make no difference whether the trustee and claimant are one and the same, or different persons, provided, that the question as to the right of one involves and settles the liability of the other. We think, therefore, that the commissioner had jurisdiction of the subject matter, and that his report must be held as settling the facts upon which the decision of the case must turn. And upon the construction we give to the contract, and the view which we take of the law, we think that the trustee can not be held liable, and that the judgment must be reversed and judgment rendered, that the trustee is not liable, and that the claimant, Phelps, recover his costs of the plaintiff.