Reyburn v. Mitchell

Macfarlane, J. This is a suit by plaintiff, as administrator of the trustee of certain creditors of a. dissolved partnership, composed of Mitchell and Robertson, to subject to the payment of their debts certain property, formerly held by the partnership, but which had been transferred to defendant Kilgour, an individual creditor of Mitchell, for the satisfaction or. security of his debts. About the first of September, 1881, Mitchell and Robertson entered into a partnership. At the time — 371 — Mitchell owned a thirty years’ lease upon alotin the city of St. Louis upon which the People’s Theater was situated. The lease was in the name of Mitchell, and the theater had been built for him during the year, under the direction and supervision of Robertson, who had advanced a part of the money therefor. On the fifteenth of September, 1881, in settlement for the money advanced, Mitchell conveyed to Robinson an undivided one-third of this property, the express consideration being $35,000. This leasehold and buildings constituted all the property of the firm. Previous to the formation of this partnership, defendant Kilgour had loaned to Mitchell, at different times, sums which then aggregated $25,000, about $23,000 of which had also been used in the construction of the theater. On the twenty-third of September, 1881, Mitchell •made to Kilgour a mortgage on all his “right, title and interest” in said property, to secure the $25,000 indebtedness due to him. This deed was not recorded until May, 1883, and Robertson had no notice of it until then. On the eighteenth of October, 1882, Mitchell and Robertson made a deed of trust to Wolf and Oapin to •secure a partnership debt for $35,000 for money borrowed from defendant Rea. This deed was at once recorded. April 28,1883, Mitchell made to his mother, Rebecca Mitchell, a mortgage on his “right, title and interest” in the property, to secure a note for an individual indebtedness to her for $10,000. This note was subsesequently assigned to Kilgour. Luring the partnership, the firm borrowed considerable sums of money from the Franklin Bank of Cincinnati, by means of the accommodation indorsement of Kilgour. At the dissolution, this indebtedness remaining unpaid amounted to $2,000 to $4,000. In June, 1882, in settlement of partnership balances, Mitchell conveyed to Robinson an additional one-sixth of the property, thus making their interests equal. — 372 — The firm having become largely indebted, some of the debts having been reduced to judgments, and being unable to pay on June 17, 1884, Robertson conveyed by quitclaim deed to Mitchell, and on the fifth day of June, 1884, Mitchell conveyed by quitclaim deed to Kilgour ; the former of these deeds was recorded July 22, 1884, and the latter the next day. Under the contract of sale by Robertson to Mitchell, the latter assumed the payment of the partnership debts. The additional consideration was $9,000, which was divided into four notes of $1,800 each which Kilgour indorsed. Prior to the delivery of the deed from Robertson to Mitchell, the judgments standing against the partnership and against Robertson individually had been satisfied. By this suit the creditors of the firm of Mitchell and Robertson undertake to subordinate the mortgages and interest of Kilgour to the payment of their debts. The various creditors assigned their debts to Samuel Colville, in whose name the suit was commenced. Colville, having died, the suit was revived in the name of his administrator, in whose name it has since been prosecuted. The suit was commenced against Mitchell, Kilgour and Mrs. Mitchell. Pending the suit, the property was sold by the trustees under the Rea deed of trust, and Kilgour purchased at $48,000. Previous to the dissolution July 19, 1884, Kilgour paid off one of the Rea notes amounting to $10,000 which was secured by the deed of trust to Wolf and Capin. Before the trustee’s sale an amended petition was filed making Rea, Capin and Wolf parties, the prayer being to apply the surplus if any after the trustee’s sale to the payment of the claims of plaintiff. The proceeds of the sale were paid in satisfaction of the Rea deed of trust, $27,000, and the surplus, less expenses of the sale, was paid to Kilgour, and applied by him in satisfaction of the individual debts owing him by Mitchell. Wolf and Capin took from Kilgour an — 373 — indemnifying bond, before the .money was paid him. Of the partnership demands held by plaintiff, some had been reduced to judgments, and some were simple contract debts. The most important contention on the part of plaintiffs is that the mortgages made to Kilgour and Mrs. Mitchell by Mitchell, one of the partners, and the quitclaim deed made by Mitchell to Kilgour to secure individual debts of Mitchell were void as against partnership creditors. They were so held by the circuit court. Other less important questions are involved. I. It is well settled, in this state, as well as in other jurisdictions, that one partner cannot transfer the partnership property for the satisfaction of his individual debt without the consent or acquiescence of the other partners. Each partner has the right, in equity, to have the property of the firm applied to the payment of the partnership debts. Through these equities, among the partners, firm creditors derive the right to have the partnership assets appropriated to the satisfaction of their debts in preference to creditors of the individual partners. The rights of the firm creditors, being derived through the equities of the partners among themselves, can necessarily only exist so long as the partnership itself continues. It necessarily follows that a bona fide waiver of their equitable rights by the partners cuts off the derivative equities of the creditors. These principles are announced in the following recent decisions: Sexton v. Anderson, 95 Mo. 381, and cases cited; Huiskamp v. Wagon Co., 121 U. S. 310 ; Purple v. Farrington, 119 Ind. 164; Pepper v. Peck, 20 Atl. Rep. 16; Coakley v. Weil, 47 Md. 277 ; Bank v. Klein, 64 Miss. 141; Sickman v. Abernathy, 23 Pac. Rep. 447; Caver Gin & Machine Co. v. Bannon, 85 Tenn. 712; Woodmansie v. Holcomb, 34 Kan. 35. If by his mortgages to Kilgour and his mother, Mitchell undertook and intended in good faith to withdraw from the partnership its property for the purpose — 374 — of appropriating it to the payment of his individual debts to them, and Robertson at the time gave his assent, or afterwards acquiesced thereto, the mortgages would have defeated the rights of the firm creditors to have the property first applied to the payment of their debts. But we do not think such was the intention of the partners as evidenced by their conduct, nor do we think the mortgages themselves can be given such construction. There can be but little doubt that Robertson acquiesced in the mortgages, after he received notice of them, but there is as little doubt that he only understood them to be merely intended to transfer the interest of Mitchell in the property that might remain after paying the debts and settling the accounts of the partnership, and that they were, and would be, subject to the rights of the creditors, .prior and subsequent. The mortgage itself only undertook to convey the ‘ ‘ right, title and interest” of Mitchell in the property. As between the partners, each had the “right” to have the whole property appropriated, tif necessary, to the payment of the firm debts. The exclusive interest of each partner was only the right to receive a share of what might remain after the partnership liabilities should be settled. It is, therefore, held, no contrary intent appearing, that the mortgage of partnership property, of the character of that held by this firm, made by an individual member to secure an antecedent debt, though with the consent of the other partners, will not overreach the general lien of the partners, or the priority of partnership creditors. 1 Bates on Partnership, secs. 186, 291; 1 Jones, Mortgages, sec. 120; Morse v. Gleason, 64 N. Y. 204; Conant v. Frary, 49 Ind. 530; Cunningham v. Ward, 30 W. Va. 572 ; Lewis v. Anderson, 20 Ohio St. 281; Hiscock v. Phelps, 49 N. Y. 97; Priest v. Chouteau, 85 Mo. 408. That it was not the intention that these mortgages should have the effect of overreaching creditors is manifest from the conduct of the parties in withholding — 375 — the instruments from record for such a length of time, and taking no steps to foreclose, though Kilgour, wko held both mortgages, was fully advised that the firm was daily becoming more and more involved. II. It is insisted that, though these mortgages only had the effect of transferring to Kilgour Mitchell’s surplus in the partnership property, after payment of the debts of creditors, yet the quitclaim deed made by Robertson to Mitchell in July, 1884, conveying to him all the partnership property, had the effect of dissolving the partnership and- of cutting off the derivative equities, of the creditors to follow the property into the hands of Kilgour, the vendee of Mitchell. It is, as a general proposition, true, that after the dissolution of a partnership, even though it may be insolvent, by the sale and transfer of all its property, the creditors cannot follow the property into the hands of the purchaser, but that proposition is subject to the very material, and often controlling, qualification that the transaction must have been in good faith and not for fraudulent purposes. • If these transfers, which undertook to lodge the property in Kilgour, were-fraudulent, the rights of creditors were not affected by them, and the property in the hands of Kilgour was not beyond their reach. The question was considered with great care in the case of Sexton v. Anderson, 95 Mo. 381, and Black, J., speaking for the court, reaches the following conclusion: -‘With us each partner is liable for all the partnership debts. The partners may, so long as the firm exists, do with their property as they see fit. The firm creditors have no lien on the partnership property for the payment of their debts while the firm continues to exist. Partners have a right to have the partnership property applied to partnership purposes but this is a right or lien which they may waive. Hence the great majority of adjudicated cases are to this effect, that all the partners may, by their joint act, dispose of partnership property in — 376 — liquidation and payment of a debt owing by an individual member of the. firm. The qualification is, that the transaction must be in good faith, and not for fraudulent purposes.” This conclusion is undoubtedly sound in principle, and is sustained by the highest authority. Huiskamp v. Wagon Co., supra; Case v. Beauregard, 99 U. S. 124; City v. Willey, 35 Iowa, 323, and the authorities cited under the first paragraph of this opinion. The question then arises as to what effect the conveyance of the partnership property .from Robertson to to Mitchell, and from him to Kilgour, had upon the rights of the creditors. If the transfers were fraudulent, their rights were not affected thereby ; if in good faith, their equities as firm creditors were at an end. There can be no doubt from the evidence that, at the time of the transfer of the property by Robertson to Mitchell, the firm and each member thereof were wholly insolvent. Neither can it be doubted that Kilgour was fully aware of such insolvency. Mitchell, in his purchase from Robertson, having assumed the payment of the partnership debts, the property in his hands should have been applied to that purpose, and diverting it from such purpose to the payment of his private debts to Kilgour raises a very strong, suspicion of an intended fraud upon Robertson and the firm creditors. It must also be concluded, under the evidence, that Kilgour had knowledge of the transaction between Robertson and Mitchell, and all its details. It is evident from all the evidence that Mitchell and Kilgour undertook to so deal with Robertson as to destroy the equities of the firm creditors in the partnership property, and divert it from its legitimate course. The transaction must be held in fraud of the partnership creditors. Phelps v. McNeely, 66 Mo. 554; Bulger v. Rosa, 119 N. Y. 459 ; Stanton v. Westover, 101 N. Y. 265; Arnold v. Hagerman, 45 N. J. Eq. 186; Darby v. Gilligan, 33 W. Va. 246; Caldwell v. Scott, 54 N. H. 414; Roop v. — 377 — Herron, 15 Neb. 73; David v. Birchard, 53 Wis. 492 ; Flack v. Charron, 29 Md. 311. Some of these authorities hold that the transfer of partnership property by one member of an insolvent firm to another, and the transfer by the latter to secure an individual creditor, is fraudulent in law. In this case we hold the transactions to be fraudulent in fact. III. Upon the death of a trustee of an unexpired trust of personal property, the trust estate descends to his executor or administrator. Hill on Trustees, 303; Hook, Adm’r, v. Dyer, 47 Mo. 214. A cause of action affecting the trust estate, pending at the death of the trustee in his own name, may be revived and prosecuted in the name of his executor or administrator. 1 Perry on Trusts, sec. 343; Maulden v. Armstead, 14 Ala. 702. Colville, being the trustee of an express trust of personal property, was authorized to prosecute the action in his own name (R. S. 1879, sec. 3463), and upon his death the suit was properly revived in the name of his administrator, it not appearing that a successor had been agreed upon or appointed. IV. The general rule undoubtedly is that before a creditor can call upon a court of equity to interfere in his behalf, in the collection of his debt, he must show that he has a demand certainly ascertained by having been reduced to a judgment at law, and that he has exhausted all his legal remedies. Mullen v. Hewitt, 103 Mo. 639 ; Crim v. Walker, 79 Mo. 335 ; Humphreys v. Milling Co., 98 Mo. 548. This rule, of course, applies to claims which are purely legal, and for the satisfaction of which the creditor has no lien or equitable claim upon specific property. While the creditors of a partnership, strictly speaking, have no lien on the assets of the firm, they have the equitable right to have the assets appropriated to the payment of their debts in preference to the creditors of the individual partners. As has been seen, the equities of the creditors were not defeated by the conveyance of Robertson to — 378 — Mitchell, for the reason that, when Mitchell took the property, in consideration thereof he assumed the payment of the partnership debts. The rights and equities of the creditors to the appropriation of the specific property can only be determined and enforced by proceedings in equity; but can these rights be declared and enforced in one proceeding in the exercise or original equity jurisdiction? It has been held that, under such circumstances as appear in this case, the aid of a court of equity can be invoked to remove obstructions from the title, adjust the equities between the parties and subject the property accordingly even before a judgment at law has been obtained by the creditor. Olson v. Morrison, 29 Mich. 395; Case v. Beauregard, 101 U. S. 688; Pom. Eq., sec. 358. The weight of authority, however, holds the contrary, and requires the demands of the creditor to be reduced to judgments at law, creating a lien upon the estate, before a court of equity will take jurisdiction. Wait, Fraud. Conv. 120, sec. 75; Young v. Frier, 9 N. J. Eq. 466 ; Dunlevy v. Tallmadge, 32 N. Y. 457; Parrish v. Lewis, Freeman Ch. 306 ; Reese v. Bradford, 13 Ala. 847. Without, undertaking to reconcile the conflicting authorities we deem it sufficient in this case, to say that, a number of the demands held by plaintiff having been reduced to judgments, the court thereby obtained jurisdiction over the subject-matter; and, under the familiar principle that when a court of equity once acquires jurisdiction over the subject-matter it will proceed to do full and complete justice between the parties, we must conclude that the court had jurisdiction to dispose of the whole matter before it. Real-Estate Sav. Inst. v. Collonious, 63 Mo. 290 ; Baile v. Ins. Co., 73 Mo. 384. V. One of the firm debts held by plaintiff as trustee had been reduced to judgment against the partners prior to Robertson’s conveyance to Mitchell. In order to effectuate the trade between Robertson and Mitchell, — 379 — and with the understanding that the partnership debts were thereafter to be paid by the vendee, Adkins, one of the creditors, paid-this judgment and took the individual note of Mitchell for the amount. Defendants now insist that taking the note from Mitchell constituted a release of the partnership. The court allowed the debt as a claim against the partnership. We can see no reason for disturbing the finding of the court in doing so. It does not appear that, when Adkins released his judgment and accepted the individual note of Mitchell, he intended to release the partnership from its liability. Leabo v. Goode, 67 Mo. 126; Appleton v. Kennon, 19 Mo. 637. VI. We do not think the court committed error in permitting the amendment to the petition, making it correspond to the changes which had occurred since the commencement of the suit, nor in allowing new parties who had become interested in the property to be brought in. Amendments are favored, and should be liberally allowed in furtherance of justice. R. S. 1879, secs. 3568, 3572. VII. It is insisted that, by claiming the surplus arising from the trustees’ sale, plaintiff admitted its validity, and for this reason the court improperly made the decree in the alternative, so as to require a sale of the property in case the amount of the surplus was not paid in discharge of the claims of plaintiff. We do not think that defendants stand in a position to raise this objection. It appears on Kilgour’s own admission, that this sale was made for the purpose of cutting out all claims in this suit. All the parties to the sale Were parties to the suit, when the sale occurred. The trustees and beneficiary knew the complaint of the creditors. While there is no doubt of the validity of the deed of trust held by Rea, and that he nor his rights were affected by subsequent dealings between the partners and Kilgour whom they were trying to prefer, yet, when he voluntarily comes in and lends his aid in the — 380 — efforts of Kilgour and Mitchell to defeat the firm creditors, he will have to bear the taint of their companionship. The evidence shows that an agreement was perfected, prior to the sale, that the amount of the mortgage debts should, as soon as Kilgour bought in the property, be reloaned to him, and a new deed of trust upon the same property taken to secure it. The sale was, therefore, in its effect, only a sham, and made for the preconceived and admitted purpose of defeating an anticipated decree of the court. Under such circumstances there is nothing inequitable in allowing the plaintiff all the advantages the sale may give him, without being estopped to deny its validity. VIII. Defendant Kilgour insists that he should be given priority over the general firm creditors for the amount of the note for $10,000, which was secured by the Rea deed of trust, and which he paid off prior to the trustees’ sale. This claim is based upon the equitable principle, that, in paying this note, he relieved the property from an incumbrance having priority over the rights of pártnership creditors, such payment being necessary to protect his own interest in the property, and he thereby became, as between himself and the creditors, entitled to be subrogated to the priority of the incumbrance discharged. It is a well-recognized principle of equity, that a creditor, who, in order to preserve his own security, is compelled to pay a prior incumbrance, held by another creditor, will be subrogated to the rights of such creditor, to the extent necessary for his own protection. 3 Pom. Eq., sec. 1211 ; Aldrich v. Cooper, 2 Eq. Lead. Cases, 228 ; Sheldon on Subrogation, sec. 3 ; Evans v. Halleck, 83 Mo. 376; Allen v. Dermott, 80 Mo. 56; Wolf v. Walter, 56 Mo. 292: Orrick v. Durham, 79 Mo. 174. At the time this note was paid by Kilgour, he held Mitchell’s subsequent mortgages on the property, — 381 — subject to tlie rights of creditors, to the amount of about $35,000. This note for $10,000, secured by a prior deed of trust covering the whole property, was due and the property was liable at any time to advertisement and sale thereunder. In order to prevent a sale, and in order to secure an extension of time and a reduction of interest on the remaining $25,000 of the debt, he paid this note. In doing so he not only protected his own interest in the property, but also that of the firm creditors. Under the circumstances, we feel no hesitancy in concluding that he was entitled to be reimbursed for the amount so paid and interest thereon from such payment, in preference to the claims held by plaintiff. After a careful examination of the evidence, we find no reason for disturbing the finding and decree of the circuit court in any other particular. Judgment reversed and cause remanded with directions to order a credit, as of the date of the trustee's’ sale, to defendant Kilgour, or the trustees, Wolf and Capin, for $10,000, the amount of the Rea note paid by Kilgour, with interest thereon from the time of its payment to the date of the trustees’ sale at the rate the remaining unpaid notes bore. All concur.