Jackson Bank v. Durfey

Cooper, C. J., delivered the opinion of the court. The appellant, a firm creditor of the appellees, Durfey & Ascher, exhibited its bill in chancery, seeking to annul as fraudulent two certain deeds of trust, whereby the firm assets were incumbered to secure the individual debts of the partners. The evidence, fairly construed, discloses these facts: Durfey, one of the partners, was indebted to the defendant, Caldwell, in the sum of five thousand dollars, and Ascher, the other partner, was indebted to' Hart in the sum of five thousand five hundred and fifty dollars. The firm, and the individuals composing it, were insolvent. On October 3, 1893, Durfey executed a deed of trust on all property owned by him individually, and upon his undivided half interest in certain property, specifically described, owned by the firm, to secure the debt due by him to Caldwell. On the same day Ascher executed a deed of trust, conveying his individual property and his undivided half interest in certain property specifically described, owned by the firm, to secure the debt due by him to Hart. The book accounts, and certain horses which had been bought for resale, were not included in the conveyances, but the stock kept in livery, the carriages, feed and other appurtenances were all incumbered. Forfeiture of both conveyances was fixed for the same date, January 1 following, at which time, the secured debts remaining unpaid, the trustees were authorized and directed to make sale of the mortgaged property, and out of its proceeds to pay the secured debts. The members of the firm testified that they expected, by the collection of the outstanding book accounts, by the sale of the stock not included in the — 975 — deeds and from the profits of the business, to pay the firm debts, but a careful consideration of the evidence satisfies us that, at the time the deeds were executed, the firm and its members were hopelessly insolvent, and that no expectation could reasonably have been entertained that the firm debts could be paid after the firm property had been devoted to the individual debts of the partners. What followed the execution of the deeds was, at best, the struggle of mere, hoping against hope and postponing for a short time the inevitable end. The issue is thus sharply presented whether it is lawful for the members of an insolvent firm to convert the joint estate into severalty and appropriate it to the payment of the individual debts of its members, leaving the firm debts unpaid. The question has never, so far as we are advised, been before the court, though expressions may be found suggestive of the inclination of some of the. judges who have been members of the court, to the view that the dominion of the partners over firm property is not limited by the existence of firm debts and the insolvency of the firm. In Schmidlapp v. Currie, 55 Miss., 597, a case of a solvent firm, Judge Chalmers, while carefully limiting the decision to the question involved — -/. e., the right of a solvent firm to devote firm assets to the payment of the debts of one of the members — cites with apparent approval the cases of Rice v. Barnard, 20 Vt., 479; Bank v. Sprague, 20 N. J. Eq., 13; Alten v. Center Valley Ch., 21 Conn., 130, and Sigler v. Bank, 8 Ohio St., 511, which clearly hold that an insolvent firm may devote firm assets to the debts of its individual members; and, also, Whitton v. Smith, Freeman’s Ch. R. (Miss.), 231; Freeman v. Stewart, 41 Miss., 138; Carter v. Beaman, 6 Jones’ L. (N. C.), 44; Ex parte Ruffin, 6 Ves., 119; Campbell v. Mullett, 2 Swan’s Ch., 553, which are sometimes cited as supporting the same view. In Hanover Bank v. Klein, 64 Miss., 141, it was sought by the creditors of a banking firm to subject to their demands the proceeds of insurance policies upon the life of — 976 — one of the members in favor of his wife, the premiums on which the bill averred had been paid with firm money while the firm was insolvent. The answer denied the insolvency of the firm at the times the premiums were paid, and there was no evidence on the point. The case was decided on this point. Judge Arnold, however, in delivering the opinion of the court, gave expression to an emphatic dictum that the insolvency of the firm and its members would not have changed the result. In addition to the cases cited by Judge Chalmers in Schmidlapp v. Currie, he referred to the cases of Case v. Beauregard, 99 U. S., 119, and Roach v. Brannon, 57 Miss., 490. In neither Whitton v. Smith, 1 Freem. Ch.; Freeman v. Stewart, 41 Miss.; Roach v. Brannon, 57 Miss.; Schmidlapp v. Currie, 55 Miss., nor Bank v. Klein, 64 Miss., was the question now involved presented for decision. In all of them the nature of the right of partnership creditors to resort to firm assets for the satisfaction of their demands was considered, and the decisions in the cases in which the point was involved were that the right, being a derivative one, and resting on the rights of the partners, had been lost by the waiver of the partners, under the circumstances of the particular cases. The question involved is res nova in this state, and we deal with it as such. The authorities, with practical uniformity, agree that the right of partnership creditors to have the partnership property applied to the payment of partnership debts is a derivative one, resting upon the equities of the partners as between each other. The conflict of decision arises with the question, whether the partners may, by convention, waive their rights and convert the joint estate into severalty, thus subjecting it to the debts of the individual members, or, by direct appropriation, apply the joint estate to such debts. It is quite generally held that this may be done, so long as the partnership is a solvent and going concern. Some courts seem to hold that, if the partnership, though insolvent, is yet engaged in the prosecution of its business, it may thus deal with the partnership estate, — 977 — and others that this may be done even though the partnership is insolvent, contemplates dissolution and converts the joint into separate estates for the purpose of applying it to the individual debts of its members. In Case v. Beauregard, 99 U. S., 119, the individual members of an insolvent firm had applied all the partnership property to the payment of their respective individual debts. The firm’s creditors sought to subject it to their demands, but relief was denied, upon the ground that the right of firm creditors was a derivative one, and could not be enforced, except so long as the partners themselves retained their lien upon the property. Speaking on the precise point, the court said: “The bill, it is true, charges that the several transfers of the partners was illegal and fraudulent, without specifying wherein the fraud consisted. The charge seems to be only a legal conclusion from the fact that some of the transfers were made for the payment of the private debts of the assignors. Conceding such to have been the case, it was a fraud upon the other partners, if a fraud at all, rather than upon the joint creditors — a fraud which those partners could waive, and which was subsequently waived by the act of fusion. ’ ’ The clear effect of this decision is, that it is not a fraud upon partnership creditors for an insolvent firm to devote the joint estate to the payment of the separate debts of the partners, leaving no provision for firm creditors. In no other case we have seen has the question been presented where the conversion of the whole assets into separate estates, or the devotion of all of them to individual debts, was involved. The reasoning of other courts, however, in the following cases, would seem to conduct to the same conclusion as that reached in Case v. Beauregard, viz.: Sigler v. Bank, 8 Ohio St., 511; Rice v. Barnard, 20 Vt., 479; Allen v. Center Valley Co., 21 Conn., 130; Winslow v. Wallace, 116 Ind., 317; People v. Farrington (Ind.), 4 Law. Rep. Ann., 535; Fletcher v. Sharpe (Ind.). 1 Law. Rep. Ann., 179. See, also, other cases probably holding to the same effect, cited in notes to § 560, 1 Bates on Partnership. — 978 — But the decided weight of authority is that, while the right of firm creditors to go against the firm property in postponement of the right of the creditors of the individual members is a derivative right, and rests on the right of the members of the firm, and while that right is lost by the bona fid<- waiver of their rights by the partners, it is not lawful for the members of the firm, in contemplation' of insolvency, to divert the firm property and apply it to the payment of the debts of the individual members, or to convert the joint estate into estates in severalty, to piWent its being subjected by firm creditors. Ex parto Mayon, 4 DeG., J. & S., 663; Ex parte Snowball, L. R., 7 Ch. App. Cas., 534; Crow v. Crow, 56 Mich., 8; Cribb v. Morse, 77 Wis., 322; Willis v. Brenner, 60 Ib., 622; Menagh v. Whitwell, 52 N. Y., 146; Phelpx v. McNerly, 66 Mo., 554; Reyburn v. Mitchell, 106 Ib., 365; Roop v. Herron, 15 Neb., 73; Arnold v. IIagerman, 45 N. J. Eq., 186; Darby Gillighan, 33 W. Va., 276; Shackleford v. Shackleford, 32 Gratt. (Va.), 481; Bank v. Sprague, 21 N. J. Eq., 530; French v. Lorejoy, 12 N. H., 458; Fluck v. Charron, 29 Mo., 311; Clement v. Jexxop, 36 N. J. Eq., 569; Elliott v. Stevens, 38 N. H., 311; Gallagher's Appeal, 114 Pa. St., 353; Patterson v. Beaton, 70 Iowa, 689; Parsons on Principles of Partnership, 106; Bates on Partnership, $ 563; Jones on Mortg., § 120; Beach on Modern Eq., 787, 788; Horr & Wallace’s note to Silk v. Prime, Ldg. Cas. in Eq., vol. 11, part 1, 353. The principle controlling in these cases is stated with precision by Judge Dixon delivering the opinion of the court in Arnold, v. IIagerman, 45 N. J. Eq., 186 (14 Am. St. R., 712). We quote from that opinion at large, as we adopt and approve the reasoning of the court: “In equity a partnership is, for some purposes, deemed a single entity. Thus, where partnership property invested in the business of a partnership, is to be applied by a court of equity to the payment of debts, that property is treated as belonging, not to the persons composing the firm, but to a distinct debtor, the partnership, — 979 — and is used, -first, to liquidate the debts contracted in the business of that debtor, and only the surplus, if any, is surrendered to the individual partners. This equitable practice rests upon the presumed intentions of the partners themselves, and hence is primarily considered as their equitable right against .each other. Consequently, since the decision of Lord Eldon in Ex parte Muffin, 6 Ves., 119, it has been generally held that the partners could put an end to this right, and that if, by their agreement, the partnership is dissolved and its property is assigned to one of their number, or to a stranger, as his own, without reservation of the right, the right to have partnership debts paid out of that property is extinct. . . Growing out of this right of partners has arisen a corresponding equity in partnership creditors to have their debts first satisfied out of the firm property, which is now deemed a substantial element of their demands. Generally, it may be said that this equity of creditors continues only s'o long as the right of the partners against each other subsists, and perishes when that terminates; but this is not universally true, for this equity may survive the right to which it is ordinarily attached. In this respect it resembles the claim which the general creditors of an individual have upon his property. It is neither an estate nor a lien. It is, ordinarily, but a right by lawful procedure to acquire a lien during the ownership of the. debtor, yet, under certain circumstances, that lien may be acquired after the debtor’s ownership has ended. This results from the provisions of the ancient statute for the prevention of frauds and perjuries, by force of which, when a person has aliened his property with intent to hinder, delay or defraud his creditors, the rights of those creditors remain as if no alienation had taken place, except against the claims of bonn ¡tille purchasers, for good consideration, without notice. “ Equity applies this statute to. a partnership, its property and creditors, just as it would in the case of an individual; and, therefore, while it is generally true that a partnership may de — 980 — feat the equity of its creditor a by the alienation of its property and consequent extinguishment of the right of. its partners inter Hese, yet, if the alienation be effected with intent to hinder, delay or defraud the firm creditors by defeating their equity, the claims of creditors will be unimpaired, and the property will be treated as partnership assets, unless it shall have passed inth the hands of those whom the statute protects. ’ ’ In Clements v. Jessops, 36 N. J. Eq., 569, it was said: ‘ ‘ Partnership creditors in equity have an inherent priority of claim upon partnership property over individual creditors, and a transfer of partnership property by one partner, with the consent of the other partners, or by all the partners, to pay individual debts, is fraudulent and void as to firm creditors, \m-less the firm was then solvent, and had sufficient property remaining to pay the partnership debts. ’ ’ The recognition of this equity in favor of firm creditors does not impair any proper exercise of the power of the partnership over its property or affairs, nor bring within the control of a court of equity all partnerships which are insolvent in fact, or in a condition of temporary inability to meet their obligations. The apprehension of this result seems to have been influential in leading the court, in Sigler v. The Bank, 8 Ohio St., 511, to adopt the opposing view; but the statute against fraudulent conveyances does not operate to control the lawful dominion of individuals, though insolvent, over their property, nor does mere insolvency confer jurisdiction upon equity to take char'ge of and administer their estates; and yet it cannot be denied that the statute does restrain the insolvent from disposing of his estate for the purpose of withdrawing it from liability to his creditors. Why should a different rule be applied to an aggregation of individuals than to them separately % The inquiry must, in either case, be whether the purpose and effect of the act is lawful or forbidden. If lawful, it may be done by the individual, or by a firm; if unlawful, the act is equally void as to the creditor injured, whether it be done by the one or the — 981 — other; but it is again said that*it cannot be a fraud for one to devote whatever right or property he has to the payment of an honest debt. This is true if one devotes his own property to his own debts, but is it not a fraud in law if A appropriates his property to pay B's debt, leaving his own creditors unpaid ? Take the case at bar. Durfey and Ascher appropriate one-half of their joint estate to pay Ascher’s debt. Now, if this was all that had been done it would be manifest that the creditors of Durfey could treat the conveyance as fraudulent, because it would have been a clear donation by Durfey to the creditors of Ascher, at the expense of his creditors, he being insolvent. But it is said that Ascher, at the same time, conveyed his interest in the other half of the joint estate to the creditors of Durfey, and so each conveyance became a consideration of the other, and each partner received a full consideration for his release of his right as a partner. The reply is that a full consideration does not make a contract, otherwise unlawful, valid. If A agrees to do one unlawful act if B will do another, of what avail is it that each will reap a benefit from such act of the other? Durfey had a light t[> have the partnership property applied to the partnership debts, and Ascher had a like right. While these reciprocal rights existed, they were of value as property rights of the debtors to a certain class of creditors — i. e., firm creditors. Now, it is manifest, that for the very purpose of preventing these creditors from resorting to these rights for the satisfaction of their demands, the rights themselves were waived, and attempted to be-obliterated. We are unable to perceive any just principle upon which the right of a debtor can be recognized to thus deal with his estate for the very purpose of obstructing his creditors. It is to be noted, also, that neither partner could make a cent by the transaction. Five thousand dollars’ worth .of property will pay only five thousand dollars of debts, whether its proceeds be applied to partnership or individual liabilities. The partners would, in either event, after the payment of debts — 982 — of either class, owe precisely the same sums. To permit the consummation of the scheme would be-of no benefit to them. Its sole effect would lie to withdraw the property from one class of creditors who had created the joint estate, had given credit on the faith of it, and had a right to resort to it, and to permit its appropriation to another class, who dealt with the individuals composing the firm with a full knowledge that all they could get out of the partnership assets was what remained after-payment of the partnership debts. The complainant is entitled to the relief prayed by its bill. The decree Is reversed and- came- remanded.