Hanover National Bank v. Klein

ARNOLD, J., delivered the opinion of the court. It is but the reiteration of well-settled principles, by no means peculiar to Mississippi, to affirm that the right of copartnership [150] creditors to have assets of the firm applied first to the payment of firm debts is a rule of administration adopted and exercised only by courts of equity when they are called upon to administer the affairs of a partnership, and that the equity of firm creditors in this behalf is a derivative one, growing out of the right of the partners as between themselves to do the same thing, and that if the partners for any cause could not enforce such right as between themselves, the creditors of the firm cannot do so. Schmidlapp v. Currie, 55 Miss. 597; Loeb v. Morton, 63 Ib. 280; Case v. Beauregard, 99 U. S. 119; Fitzpatrick v. Flannagan, 106 Ib. 648. In this view of the law, the decree below is readily affirmed. Appellants had no lien on the funds of the firm sought to be reached by the bill, and these funds had been converted by John A. Klein to his own use, with the knowledge and consent of his partner, before the bill was filed. These funds, therefore, did not then belong to the partnership, and neither of the partners could at that time have insisted that they should be applied to the satisfaction of firm debts. The equities of the partners as to the particular funds had been extinguished by their joint act, and consequently the derivative equities of creditors were at an end. There was nothing upon which the equities of creditors could then operate, and no case for the application of the rule invoked, unless the disposition of the funds was rendered invalid as to creditors by the alleged insolvency of the firm or the fraud of the parties. There is no testimony as to the insolvency of John A. Klein or the firm until the failure in November, 1883. It is true that the insolvency of both prior to that time is alleged in the bill upon information and belief, but this is denied on information and belief in the answer of Mrs. Klein, and appellants were thereby put upon proof of the allegation. Whatever may be the value of such answer as evidence, it at least required proof by appellants. 1 Dan. Ch. Pl. and Pra. 844, note 7 ; 846, note 1; Buttrick v. Halden, 13 Met. 355; Dugan v. Gittings, 3 Gill. 138; Drury v. Conner, 6 Har. & J. 288; Watson v. Palmer, 5 Ark. 501 ; Lawrence v. Lawrence, 21 N. J. Eq. 317. If it be said that the matter of the insolvency of the firm may [151] fairly be presumed, without a charge to that effect, to have been in the personal knowledge of George M. Klein, who adopted the answer of Mrs.' Klein, and that the insolvency, by such answer, was admitted by him, the obvious reply is, that his answer is not evidence against his co-defendant. She had not adopted or referred in any manner to his answer as being correct, nor was she so connected with him as to be bound by his confessions, admissions, or declarations, and the general, rule therefore prevailed that the answer of one defendant is not evidence against another. 1 Dan. Ch. Pl. and Pra. 841, note 7; Hardesty v. Jones, 10 Gill. & J. 404; Blakeney v. Ferguson, 14 Ark. 640; Christie v. Bishop, 1 Barb. Ch. 105; Salmon v. Smith, 58 Miss. 399. But the insolvency of John A. Klein, or the firm, or both, if shown, would not, on the facts of record, change the rights of the parties. An individual debtor, whether solvent or insolvent, may unquestionably, under the laws of the State, make preference among his creditors, or pay one or more, to the exclusion of the rest, if it is done in good faith, and without the reservation of any benefit to himself, or' make a bona fide sale of his property without violating the legal rights of creditors, and a partnership or the members thereof, whether solvent or insolvent, may do the same. The law imposes no restrictions on the power of a partnership or its members as to the acquisition or disposition of property which are not common to other persons. Schmidlapp v. Currie, 55 Miss. 597; Sigler v. Knox Co. Bank, 8 Ohio 511; Case v. Beauregard, 99 U. S. 119 ; Roach v. Brannon, 57 Miss. 490. The application of the funds of the partnership by John 'A. Klein, with the consent of his partner, to the payment of premiums on insurance for the benefit of his wife, to whom, it is admitted, he was largely indebted, was prima facie valid, and it devolved upon appellants to show that it was fraudulent. Kimball v. Thompson, 13 Met. 283; Case v. Beauregard, 99 U. S. 119; Parkhurst v. McGraw, 2 Cush. 134. They failed to do this, and there was no cause for relief. Affirmed.