Guggenheimer & Co. v. John S. Martin & Co.

Buchanan, J., delivered the opinion of the court. On the 20th day of March in the year 1893 the firm of John S. Martin & Co. made a general assignment of their assets for the payment of their liabilities, without preference. On that day Jacob L. Moon, one of the members of that firm, executed a deed of trust upon a portion of his property to secure and indemnify Thomas S. Martin as endorser on four negotiable notes made by the firm and discounted by the State Bank of Virginia. On the same day he (Moon) executed another deed of trust to secure the payment of his individual creditors upon certain property, in which were embraced the same property conveyed in the deed of trust to secure and indemnify Thomas S. Martin, as endorser upon the notes held by the State Bank, and also upon a judgment and certain shares of stock which he had theretofore assigned to Thomas S. Martin as collateral to secure and indemnify him as endorser upon the notes named, and as collateral for the payment of a negotiable note which John S. Martin & Co. owed him, the said Thomas S. Martin, but they were conveyed subject to the lien of Thomas S. Martin. The assets of the firm were administered and distributed pro rata upon its debts, including the negotiable note which it owed Thomas S. Martin, and the four negotiable notes upon which he was endorser. The assets of J. L. Moon are insufficient to pay his individual debts and the residue of the social debts remaining unpaid after exhausting the social assets. The appellants, who are creditors of John S. Martin & Co., claim that the social creditors are entitled to be subrogated to the rights of Thomas S. Martin in the balance of [639] the proceeds of the items of the individual assets, conveyed and assigned by Jacob L. Moon to secure Thomas S. Martin, after the said Martin shall have obtained full satisfaction of the debt due him, and has been fully indemnified as to the notes upon which he was endorser, to the extent that those claims were paid out of the social assets of John S. Martin <fc Co. The Circuit Court was of opinion that they were not entitled to substitution as claimed, and so decreed. From that decree this appeal was taken. The ground upon which the appellants based their right to substitution is that where one creditor holds a security upon two funds or estates, with liberty to resort to either for the payment of his debt, and another creditor holds a junior security upon one of these funds only, equity will compel the creditor who has two funds to exhaust the fund upon which he alone has security, before coming upon the latter fund, and, if the creditor who has a lien upon the two funds exhausts the only fund upon which the other •creditor has a lien, the latter is entitled to be subrogated to the lien of the former upon the other fund, or to any balance thereof remaining after full payment of the prior lien, of which the senior creditor might and ought to have availed himself. The same question involved in this case arose and was decided by this court in the case of Rixey, Trustee, v. Pearre Bros. & Co., reported in 89 Va. 113. That case was carefully considered, and the conclusion reached that, in order for a creditor who had a lien upon one fund to be entitled to substitution to the right of a creditor who had a lien upon that and another fund, it was a necessary condition, among other things, that both funds upon which the prior creditor’s claim was secured should be the property of the same debtor, and that this condition does not exist where the assets of a partnership constitute one of the funds, and the individual property of a member of the [640] partnership constitutes the other fund, unless that partner has in equity beeome entitled to the partnership assets and become primarily liable for the partnership debts; and under the facts of that case, which are identical with the facts of this case in all material points, so far as they affect the question under consideration, it was held that the partnership creditors who only had a lien upon the one fund were not entitled to he substituted to the rights of the creditor who had a lien upon the two funds. That decision is conclusive of this case, and the decree appealed from must therefore be affirmed. Affirmed.