Blair v. Black

The opinion of the court was delivered by Mr. Justice McGowan. On January 29, 1839, James W. Black and Jacob K. Carpenter, of the old mercantile firm of Black & Carpenter, and also of its successor, Black, Carpenter & Davies, made an assignment of both their individual and partnership property, for the payment of their debts, to John G. Black as assignee and trustee. J. L. Davies, one of the latter firm, did not sign the original deed of assignment, being absent at the time it was executed, but ratified it some days later, and, indeed, executed another deed, conforming substantially to the first. The assignment provided that the property and assets of the individual members of the respective firms should be first applied to the payment of the individual debts of the members of the firm; and that the property and assets of the firms respectively should be first applied to the debts of the partnership; and that if a surplus should remain after paying the debts of the one class, then such surplus should be paid to debts of the other class, and so reciprocally of the other class. The assignment also provided, that if there should not be sufficient funds to pay the debts, the assignee should pay them ratably, or such as should, within thirty days — 355 — from the date of the assignment, agree to accept the terms of it, and to release the parties from all liability on their debts and claims, &c. The cases stated above were instituted by creditors of the respective firms for the purpose of setting aside the deed of assignment, and, being identical in object and purpose, were consolidated and heard together. Several grounds were urged, sufficient, as alleged, to set aside the assignment and subject the property to the claim of creditors according to law, but, from the view which the court takes, it will not be necessary to consider any of the objections, except the one chiefly relied on by the assailing creditors, viz., that, in violation of section 2014 of. the General Statutes, which denounces assignments giving preferences as “absolutely void,” this assignment gives undue and illegal preference to individual over copartnership creditors, in excluding the partnership creditors (after exhausting the partnership assets) from coming in and participating with the individual creditors in the individual property of the members of the different firms; the proposition relied on being, that, under the law of this State, the individual creditors are not entitled to be paid first out of the individual property, but have only an equity to require that the partnership creditors should exhaust the assets of the firm, and after that is applied, they are then entitled, as to any balance due them, to share equally and ratably with the individual creditors in the individual assets. While, on the other hand, in support of the assignment, it is urged that the rule is, that the joint debts are primarily payable out of the joint effects, and are entitled to a preference over separate debts; and so, in the converse case, the separate debts are primarily payable out of the separate effects, and, as to that, possess a like preference; and the surplus only, after satisfying such priorities, can be reached by the other class of creditors. So that really the only question involved is one purely of law. What was the law of this State upon the subject when the assignment was executed? The cause came on to be heard by Judge Kershaw, who, making a full and interesting review' of the authorities, both in the English and American courts, in law and in equity, held that the question as to the priority of the individual over the partnership — 356 — creditors in the individual property of the members of the firm, was still an open question in this State, and, “furthermore, that the departure from this settled rule of administration of partnership assets, where there are individual claims and individual property, is wholly founded upon the case of Wardlaw v. Gray (Dudley Eq., 110), and that wholly upon a total misconception of the English cases cited to support it. With great deference to the opinions of the eminent jurists whose decisions are here reviewed, I am impelled to the conclusion, that, in the case under consideration, the individual property is first applicable to the individual debts, and that the provisions upon that subject in the assignment are in strict conformity to the established rule, and, therefore, constitute no improper preference"’ — and dismissed the complaints. From this decree the plaintiffs, pai’tnership creditors, appeal to this court upon the ground, inter alia, that it was error of lawr to hold, “that as between the partnership creditors of a firm, and the individual creditors of its members, the individual assets are first liable to individual debts before any application thereof may be made to partnership debts ; and for not holding that if, after applying partnership assets to partnership debts, any portion of such debts should remain, unsatisfied, such portion should como in ratably with the individual debts of the several members as against their individual assets,” &c. The question is certainly an important one, which in the affairs of business life may arise daily, and it should be, if it has not already been, clearly and fully settled, so that all may know what the law is to which their actions should be conformed. It is true that there has been much discussion, and some difference of opinion, on the subject involved, not, as it seems to us, arising so much from the inherent difficulty of the subject, as from an artificial rule originally adopted in the English Bankrupt Courts mainly, as it would" seem, on account of its simplicity and convenience of application, viz., that partnership creditors are entitled to partnership property, and, e converso, individual creditors are entitled to individual property, a rule of which Judge Story says: “It is not too much to say that it rests on a foundation — 357 — as questionable and unsatisfactory as any fule in the whole system of our jurisprudence.” Story Part., 577. As we understand it, no rule upon the subject has ever been declared by positive statute, either in England or America ; but whatever rule there may be has grown up entirely from the dicta of elementary writers and adjudications of the courts, supposed to be founded on some principle. But so far as concerns this “rule of reciprocity,” as it is sometimes called, it does not seem to us to have been based upon any principle or general equities of the parties. All agree that the partnership creditors have an equity to exhaust the partnership assets, for the double reason that they have two funds, and the individual members have no interest until the partnership is settled. But the same cannot be said of the individual creditors. They are not creditors of the firm at all, but only of their individual debtor, whose individual property, including his clear share of the firm, is liable for all his debts alike, both partnership and individual. It strikes us that there is nothing in the relations or the equities of the respective classes to authorize or justify the application of the convenient Procrustean rule of “reciprocity.” But it is argued that the Circuit decree is in conformity with the English rule, and we should follow it without regard to its reason or equity, and disregard our own cases which hítve made a departure from it, for the sole reason that it was error to make that departure, and it should be corrected by returning to the rule. Without going back to ascertain what is the precise rule adopted in the English Courts of Bankruptcy and Chancery, it is .quite clear that as far back as the case of Wardlaw v. Gray (1837), cited in the Circuit decree, the doctrine was announced in this State “that a partnership creditor has the right to resort either to the partnership property or to the separate property of the parties; but as a party having two funds, he may be compelled by the.separate creditors of one of the partners to exhaust the partnership property before he proceeds against that of an individual partner,” &c. Whether this decision did or did not run counter to what is said to be the English rule upon the subject, it is quite as clear that it has never been expressly overruled ; but, on the contrary, has been recognized and followed, — 358 — and at the time of the execution of the assignment under consideration was, as we think, the law of the State. In Gowan v. Tunno et al., Rich. Eq. Cases, 369 (1832), it was held that “though partnership effects should be first applied to partnership debts, yet after these are exhausted a judgment against the partners as such binds the separate estate of each partner from its date.” In Fleming v. Billings & Belk (1856), 9 Rich. Eq., 149, it was held that “copartnership creditors are first to be paid out of the copartnership fund, and if that prove insufficient, then they are to come in with the private creditors (respect, being had to liens) as against the individual property of the copartners.” In Gadsden v. Carson et al., 9 Rich. Eq., 252 (1857), it was held that “the individual creditors of a partner have not such exclusive right to be paid out of his individual property as to render fraudulent an assignment of it for the benefit of the creditors of the firm. Partnership creditors having two funds to which they can resort, and individual creditors of the partners having but one — the private property of the debtor (including any balance which may remain to him from the firm, after its affairs are settled) — such individual creditors have an equity to compel the partnership creditors to resort first to the partnership assets; but after they are exhausted, the partnership creditors have as good right to be paid out of the private property of a partner as his individual creditors,” &c. In this case Chancellor -Johnston remarked that it “was in conformity to Wardlaw v. Gray, with which we see no reason to be dissatisfied.” In Wilson v. McConnell, 9 Rich. Eq., 500 (1857), it was held that “where a copartner, having a separate estate, dies, the copartnership creditors have the right first to exhaust the copartnership estate, and if that proves insufficient to pay their demands, then they are to be paid from the separate estate of the copartners pro rata with his separate creditors.” In Adickes v. Lowry, 15 S. C., 128 (1880), it is true that an intimation is given that the question might be still open, but that was not intended to decide anything. The remark was : “But even if this were so, there would still remain the very important and interesting question, whether the separate creditors of Bratton — 359 — would not have in equity a preference over the partnership creditors to the separate assets of Bratton, &c. But inasmuch as this question was not raised in the court below, and has not been argued here, we do not propose to enter upon its consideration now,” &c. In Hutzler Bros. v. Phillips, 26 S. C., 136 (1886), it was held “that partnership creditors, after exhausting partnership assets, are entitled to share the separate property of the partners pro rata with unsecured individual creditors.” The Chief Justice reviewed all the authorities, saying, among other things: “We think the true doctrine is as stated by the Circuit Judge with respect to the right of the separate creditors, if any equity exists in his behalf, such as two funds, * * * to throw the copartnership creditors on the partnership assets in the first instance, but after the partnership assets have been fully and fairly exhausted, to come in pro rata with the separate creditor. This seems to be the weight of authority with us. Besides, a debt contracted by a copartnership is not only a debt of the firm, but a debt, in substance, of each individual member of the firm, and the property of the firm and of each member is liable for it. But the property of the firm is not liable for the separate debt of a member; only the interest of a member is liable, which is nothing until the firm debts are paid,” &c. We think this case finally settled the law in this State. But, as if to put the matter beyond all dispute, the very last work upon the subject of partnership, published this year (1889), expressly approves and cites from this case, as containing the proper exposition of the law upon the subject, both on principle and authority. The author says : “The insolvent, by his inability to meet his liabilities, is not the less, but all the more, a debtor. He owes to his creditors not the property itself, nor any other asset, but merely the price of the property. The debt is personal, without any lien or preference for its payment out of the debtor’s estate. The individual partner is, however, not less liable for a firm debt than is the firm itself. The several liability of the partners is no less a constituent of the partnership obligation than is their joint obligation. Both spring from the root of partnership. The joint creditors, therefore, are entitled at law to — 360 — share the separate estate of a partner with his individual creditors,” &c. See Parsons on “Principles of Partnership,” section 108, citing Hutzler Bros. v. Phillips, and other cases. We have not the least idea that the parties intended to do anything wrong, but the assignment was not in conformity with the law as we understand it, and had the effect of creating preferences not allowed by law. The judgment of this court is, that the judgment of the Circuit Court be reversed, and the cases remanded to the Circuit Court for such further proceedings as the parties may be advised, in accordance with the conclusions herein announced.