Level v. Farris

Philips, P. J. There is no lack of adjudications bearing upon the question involved in this record. They are multitudinous. An attempted review of them would be as laborious as unprofitable. It is sufficient to say that from a careful examination of all the authorities accessible to us, I am satisfied that the great weight of authority is in favor of the conclusion reached by the trial judge. Whatever doubts may have been expressed by some judges as to the rule in England, from the fluctuations of the earlier decisions, there can be little room for question that it is now firmly settled: That partnership' creditors shall in the first instance be satisfied from the partnership estate ; and separate or private creditors of the individual partners from the separate or private estate of the partners with whom they have made private and individ ual contracts ; and that the private and individual property of the partners shall not be applied in extinguishment of partnership debts, until the separate and individual creditors of the respective partners shall be paid. Murray v. Murray, 5 Johns. Ch. 60; see note to Brock v. Bateman, 15 Am. Law Reg. 218. The Supreme Court of the United States, in Merrill v. Neill (8 Howard, 421, 426), state this to be the English practice, and it is approved by said court. Daniel, J., who delivered the opinion of the court, observed: “ The reason and foundation of this rule,- or its equality and fairness, the court is not called on to justify. Were these less obvious than they are it were enough to show — 453 — the early adoption and general prevalence of this rule to stay the hand of innovation at this day; at least under any motive less strong than the most urgent propriety.” It is equally certain that this is recognized as the better sustained rule in this country. Chancellor Kent in his Commentaries (vol. 3, p. 65), says: “The joint •creditors have the primary claim upon the joint fund in the distribution of the assets of bankrupts or insolvent partners ; and the partnership debts are to be settled before any division of the fund takes place. So far as the partnership property has been acquired by means of partnership debts those debts have, In equity, a priority •of claim to be discharged ; and the separate creditors .are only entitled in equity to seek payment from the surplus of the joint fund after satisfaction of the joint debts. The equity of the rule, on the other hand, •equally requires that the joint creditors should only look to the surplus of the separate estates of the partners after payment of the separate debts. It was a principle of the Eomaii law, and it has been acknowledged in the equity jurisprudence of Spain, England and the United States, that partnership debts must be paid out of the partnership estate; and private and •separate debts out of the private and separate estate, until private and'separate creditors are satisfied; nor have the creditors of the individual partners any claim on the partnership property until all of the partnership ■creditors are satisfied.” Story on Partnership [2 Ed.] 465, says: “The general rule would seem to be, as it is in bankruptcy, that the joint creditors have a priority of right to payment out of the joint estate and the separate creditors a like right of priority to payment; and the surplus, if any, is divisible among the other class of creditors. In •cases where there is both a joint and separate estate the rule may not be unreasonable, as at most it only puts the joint creditors of the partnership to an election; whether — 454 — they will proceed against the joint estate, or against the separate estate, where both estates are insolvent.” Parsons on Partnership [2 Ed.] 465, says: “The estate of the partnership would be settled in a case of dissolution by death, entirely on equitable principles; and we should have no doubt that they would require that the claims of the several creditors and those of the joint creditors should be kept entirely distinct: each having its separate fund and passing over to the other only in case of surplus. Indeed, as we have already intimated, we consider the decided tendency of common» law adjudication to be in that direction. But the question seems to be not so fully settled by authority as we think it to be on principle.” Lindley on Partnership (vol. 2, pp. 1054-5), says: “It is a rule in bankruptcy that the debts of a firm shall be paid out of the assets of the firm, and the separate debts of each partner out of his separate estate ; and ini administering the insolvent estate of a deceased partner the same rules are now to be adopted. Accordingly the separate estate of a deceased partner must be applied in payment of all principal and interest due to his .separate creditors before any part of such estate can be touched by the creditors of the firm; and this rule ajoplies even-although the surviving partners may be bankrupt. If, indeed, there is not and never was since the death of the deceased any joint estate whatever, and no solvent partner, it seems that the joint creditors may tank.pari passu with the separate creditors of the deceased against his separate estate. Again, the rule which in bankruptcy precluded one partner from proving against the separate estate of his co-partner, whilst the joint debts are unpaid, also applies in administering the-estate of a deceased partner. * * * Whilst, therefore, the separate creditors of the deceased are entitled to be first paid out of his separate estate the creditors of the firm are entitled to be first paid out of its assets.” Such eminent authors do not state inconsiderately — 455 — the result or tendency of the adjudications touching so important a matter. The observations of the great jurist, whose opinions so justly challenge universal respect, Mr. Justice Gibson, in Bell v. Newman (5 S. & R. 91), commend themselves to my approval: “Why should any class of creditors, in preference to the rest, be exclusively entitled to the joint fund and concurrently entitled to the-separate estate % Equality is equity ; and the joint creditors have already an immense advantage over the separate creditors, in being exclusively entitled to the partnership fund': it is the largest; for men in trade usually embark their all in it and seldom have much separate property. And, independent .of distributive rights, the joint creditors have a degree of security for their debts and facilities for recovering them which the separate creditors have not; they can sell both joint and separate-estate on an execution, while the separate creditor can sell only the separate estate, and the interest in the concern that may remain to the partner after the accounts-of the debts and effects of partnership are taken, as between the partners and their creditors, and as between the partners themselves. * ' * * Concede the present question to the joint creditors and you give them in effect a monopoly of the insolvent’s whole estate.” He then proceeds to demonstrate by argument and fact that the joint creditors possess no greater merit than the separate creditors as to the manner and extent to which the one estate is created and built up at the expense of the other; that, if anything, the partnership estate is rather created out of the private estate than by the diminution of the latter. He then says: “The claim of each class is, therefore, equally meritorious, both as. to the motives for giving credit, and as to creating or increasing the respective funds, out of which each is to be satisfied; if, then, the policy of trade requires that the-joint fund shall be appropriated, in (he first instance, to payment of the joint debts, justice, equity and con — 456 — science, on the other hand, without interfering with that policy, demand that the separate creditors should, at least, have the miserable advantage of the same priority as regards the separate estate. It is unconscionable that one class should have the exclusive benefit of one fund, and come in concurrently on the other, when .both equally trusted to all the insolvent’s estate, whether joint or separate, and when there is no reason, peculiarly applicable to either, to presume the credit given by one, had a tendency to create or increase the fund appropriated for the other.”’ This reasoning is pursued with some amplification, and, to my mind, with irresistible logic, by another jurist, who is taking high rank on the bench, Simrall, J., in Irby v. Graham (46 Miss. 425). There can be neither reason nor good conscience in the rule of law which would permit one man, from the accident of being a creditor of a partnership concern, to collect fifty cents on the dollar of his claim- from the partnership assets, to the entire exclusion of the claims .of the creditor of the separate estate of the deceased partner, and then allow him to come in on equal terms with the separate creditor agaiust the separate estate, when the latter can only pay a like pro rata share to its individual creditors. In other words, to so operate that the joint creditor shall receive seventy-five cents on the dollar, while the separate creditor receives only twenty-five cents on the dollar. The imperfection, inseparable from any mere human system, may render exact equality impracticable. But that system of administering justice which more universally approaches equality, while establishing known ■and fixed rules of practical application, is the nearest to the perfection of human reason and uniform justice. As observed by us, in Walker v. Deavor (79 Mo. 679): It is vastly more important sometimes that the rules of law, affecting the rights of contracts, should be — 457 — stable than shifting about to find ultimately the basis of wisdom — “Hard cases are the quicksand of the law.” Accordingly, Simrall, J., supra, observes: “It is impossible, without overturning established principles, that absolute, unvarying equality, should obtain between these classes of creditors. If the partnership property yields ninety cents on the dollar to its creditors, and the private estate produces only twenty-five •cents on the dollar for its debts, we have shown that the .administrator has not, nor through him, have the creditors, any color of right to claim anything out of the partnership estate, because the interest of the intestate was limited to the residuum, after joint liabilities were paid off. Yet gross ‘inequality’ exists between the ■creditors. If the joint creditors could come in with their balances against the private estate, the inequality would be seriously aggravated. So, on the other hand the private creditors may receive a large dividend from the administrator, while the joint creditors have got a very small one out of the joint property. Yet in the long run the experience of ages has demonstrated, that more of practical utility is attained, a more equal administration of justice is assured, by adhering to the ancient, well’approved, principle.” It is confidently asserted by appellant’s counsel that the holding of our Supreme Court is opposed to the rule above maintained. The opinion cited is that of Commissioner Martin, in which I concurred, in Shackelford, Adm’r, v. Clark, 78 Mo. 491. There may be expressions in that opinion justifying, measurably, the construction placed upon it by counsel. But when applied to the facts of that case, the conclusion was correct, while there may be dicta in it to which I cannot, on fuller investigation, subscribe to as a general rule. That was an action, among all the original parties to the contract, to have the court direct that, under a foreclosure sale of a deed of trust, given by an insolvent — 458 — member of a co-partnership to secure pari passu both the firm creditors and his individual creditors, the proceeds should be applied first to the payment of the separate debt of the grantor. The facts show that there were no partnership assets at all, and that there had been no dissolution of the partnership by the death oi one of the parties. It was held that the individual creditor had no such priority over the joint creditors ^ there being no firm assets, and the^ other partners were insolvent. Whereas the rule involved in the case at bar, arises where the partnership is dissolved by the death of one of the partners, and the estate of the partners, as such, is not sufficient to satisfy the joint debts; in which case the matter goes into distribution upon equitable rules or principles. While the law preserves the joint estate as a primary fund for the liquidation of the joint debts, to the exclusion of the separate debts of each individual member, yet the joint creditors have no actual lien on-this property. It is only a quasi lien “worked out through the equity in favor of the partners.” It is a lien, therefore, secured to the creditor by judgment obtained or suit instituted, ordinarily, and is recognized by the courts in administering the estate on the death of one of the partners, or the artificial death of the concern by bankruptcy. Story on Part., sects. 358, 364. The lien arises only on dissolution by death or bankruptcy. So, Story on Partnership, section 361, says: “The joint creditors of the partnership, while the partners are living and solvent, can enforce no claim against the joint effects of the partners, except by a common action at law. It is only in cases where there is a dissolution by the death or bankruptcy of one partner that the right of the joint creditors can attach, as a quasi lien, upon the partnership effects, as a derivative, subordinate right, under and through the lien and equity of the partners.” So, while Commissioner Martin contends that it does — 459 — not logically follow from the admitted priority of the partnership creditors upon the partnership funds, that the individual creditors have a like priority as to the separate fund, he is careful to note the exception that the rule is limited to the lifetime of the partners, and the absence of commercial death by bankruptcy; and further on concedes that the priority of the separate creditor as to the separate estate has been recognized by high authority, “but it has been generally applied, after death or bankruptcy, in the marshaling of assets.” He was, as we have already shown, in error in stating that this rule has not been recognized with uniformity in England, as it is by the great weight of authority in this country. Much stress is placed, on those provisions of our statute making all contracts joint and several, and giving a creditor under the joint obligations or assumptions of partners the right to sue and proceed against them jointly or severally. As applied to the facts of that case it, perhaps, was pertinent. But I must be indulged to say that those provisions of the statute are, in my opinion, misconceived, if it be supposed they were in any wise designed to overthrow -or interfere with the rule of equity under consideration. At law the sole right of action by the joint creditors was against the surviving partner; while the ancient doctrine was, that the joint creditors had no claim even in equity against the separate estate of the deceased partner, except where the surviving partner was insolvent or bankrupt. But the courts of equity soon over-, turned this doctrine, as to the administration of the ' assets of the individual deceased partner, and held that' in equity all partnership debts .or obligations, are to be deemed joint and several; “and consequently the joint creditors have in all cases a right to proceed at law against the survivors, and an election also to proceed in, equity against the estate of the deceased partner, whether the survivors be insolvent, or bankrupt, or not. — 460 — 'The consequence is that the joint creditors need not now. wait until the partnership affairs are wound up, and a •final adjustment thereof is made ; but they may at once proceed, as upon a joint and several contract, in equity .against the estate of the deceased partner.” Story Part., sect. 362. So it is manifest that the right of the partnership creditors to proceed against the separate estate was not first conferred by the statute in question, authorizing :suits to be prosecuted on all joint contracts and assumptions of partners as to joint and separate liabilities. The obvious intent and effect of the statute is to relieve the joint creditor from resorting to a bill in equity to reach the separate estate, and to allow him to sue at law, in the first instance, as if against the joint debtors. The statute of Mississippi contains a similar provision, and it is held in Irby v. Graham (supra), that it was merely intended to regulate the remedy or pleading, making •partnership contracts, for the purpose of suit, several as well as joint; and that it “did not mean to interfere with the marshaling and distribution of assets between these several classes of creditors.” Under either system — in equity when the decree was to be made under the statute where the joint creditor comes in at law to have his claim allowed against the separate estate — no question would arise as to priority, except when the estate of the deceased partner was insolvent. When the claim is presented, as in this case, where the separate estate is unable to pay over fifty cents on the dollar, the separate creditor may interpose the equitable principle of adjustment and priority. It would, in my judgment, be a broad and sweeping office to give to the statute in question, authorizing the party to sue at law instead of in equity, to hold that, therefore, it was designed to take away a substantial and valuable right of defence, founded in equity and good conscience. Such a rule of construction is not recognized in like instances ; and I do not believe the legislature — 461 — meant to work such, a radical and unreasonable change-'by the provisions in question. It would seem to follow, as a logical sequence, that if the statute respecting joint and several contracts is to be construed so as to upset the equity rule respecting priority of the creditors of the individual estate of the deceased partner, it should likewise overturn the rule as to the priority of the joint creditors to the joint estate. In Phelps v. McNeely (66 Mo. 558), Norton, J., distinctly recognized the existence of the rule contended for in this opinion. For he said: “ In the distribution ,of partnership assets, partnership creditors have a preference over individual creditors, and individual creditors have a corresponding preference in reference to individual property.” It is, therefore, quite apparent that it was not designed, by the opinion in Shackelford v. Clark, to-declare a different rule, under circumstances allied to this case, or there would have been some reference to the doctrine, in terms of disapproval, to what the court-seemed to announce as indisputable in Phelps v. McNeely. Our probate courts are authorized to hear such defence on the presentation of demands for allowance. Section 192, Revised Statutes, declares : “The probate court shall have jurisdiction to hear and determine all suits and other proceedings instituted against executors- and administrators, upon any demand against the estate of the testator or intestate, and of all off-sets and otherdefences, allowed by law, set up thereto by the administrator or executor.” It is not defences at law, but such as are allowed by law — the law of the land, as recognized by statute, the common law, or equity jurisprudence. Jeffries v. Ferguson, 87 Mo. 244. I also quite agree with the opinion of Mr. Justice Gibson, in Bell v. Newman (supra), that this right is-not to be controlled by the provisions of the statute res — 462 — pecting the classification of demands against estates. To give it such effect would be outside of the reasonable intent of the legislature. “They-had nothing more in view than the administration of a single fund among its own peculiar creditors. The first was a matter easily subjected to a set of simple rules ; but the second could not be touched by a hand so-violent, without throwing the whole into inextricable confusion, and destroying all justice and equitable distribution.” It follows that the judgment of the circuit court should be affirmed. The other judges concurring, it is accordingly so ordered.