Case ID: miss_83/html/0335-01.html
Source: Caselaw Access Project
Author: {"author": "CalhooN, I.,", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Holloway & McRaney Co. v. Lex Brame, Jr., Trustee, etc.
    1. COPARTNERSHIP. Corporation. Bankruptcy. Fraudulent Conveyance,
    Where a copartnership transferred all of its assets to a corpora- ■ tion formed to carry on the business in which the copartnership had been engaged, the stockholders being the late partners,interested in the same proportion as they had been in the co-partnership, and the corporation assumed the debts of the co-partnership, it is liable to the creditors of a bankrupt on account of a fraudulent conveyance by him to the copartnership, shortly preceding its formation, to the same extent as the partners.
    2. Same. Parties to suit.
    
    In a suit by the trustee of the bankrupt to enforce such liability the members of the copartnership are not necessary parties, since the judgment against the corporation affords them protection against any further liability to the bankrupt’s creditors.
    3. Same. Fraud in fact. Consideration. Credit to fraudulent purchaser.
    
    Where a sale by an insolvent, within, four months of bankruptcy was fraudulent in fact, the purchaser is liable for the value of the property sold without credit on account of the consideration for the fraudulent sale.
    EeoM tbe chancery court of Covington county.
    HoN. StoNE Deavours, Chancellor.
    
      McWülie cf: Thompson and McIntosh Bros., for appellant.
    The case of Morrison v. American Snuff Company, 79 Miss., 330, was much relied upon by the appellee’s counsel in the court below, but it has nothing whatever to do with this case. That was a case of the consolidation of corporations. No such question is presented here, there being no such thing as a consolidation between a copartnership and a corporation. There can be no such thing as a merger of a copartnership into a corporation. The co-partnership of Holloway & McRaney is not shown to have been dissolved; tbe corporation was a creation, and it became an artificial person. It batli nothing whatever to do with the previous transactions of its stockholders. It purchased from them the stock of goods which they had on hand and it assumed the liabilities, but it carried on an independent business and a new business. Certainly Brame is not entitled to a personal decree against the corporation. He ought to have sixed, if anybody, the individuals who composed the copartnership.
    If the corporation could in any event be held liable, then the members of the copartnership are necessary parties to a suit against the corporation. All of this was plead in the court below, but was ignored, and it is now presented to this court, and we earnestly insist that the final decree is erroneous as against the corporation for the reasons above stated, and for the reason, too, that Holloway and the two MeBaneys were not made parties to the suit. The demurrer to the amended bill ought to have been sustained for all the reasons above stated.
    It is laid down, 1 Clark and Marshall on Private Corporations, sec. 112, p. 340, that “When persons who have been doing business as a partnership become incorporated, the corporation and the fonner partnership are distinct in the law, and the rights and liability of the one are not the rights and liabilities of the other. And it can make no difference that the members of the corporation and those of the partnership are the same, or that the corporation is formed for the express purpose of continuing the business carried on by the firm. Georgia, Co. v Oastleburg, 43 G-a. 789; Franh v. Drenhhahn, 76 Mo., 508. The same is true when any other unincorporated association becomes incorporated.”
    If the corporation agreed with the partnership to assume the partnership debts, it does not follow that the corporation is liable for the torts and wrongs of the partnership. The partnership, if liable at all to Brame, was not liable on contract. But if so liable a creditor of the partnership cannot sue upon the promise to assume such debts, because of a want of privity with the contract. If mistaken in this, surely the purchasers were necessary parties to the suit. The complainant cannot establish a debt against the partnership otherwise than by suing the debtors.
    The corporation cannot be liable if the partnership perpetrated the fraud charged, and it cannot be liable of course, if the partnership did not do so. Assuming that the partnership be liable, let us consider the situation if the partners should be sued by Brame, or by Shia’s creditors who have not proven their debts in bankruptcy. Could the partners plead the decree in this case in bar of such a suit ? If not the decree appealed from must be reversed.
    Surely, if the corporation be liable at all, it is not subject to greater responsibility than that to which the partnership might have been subjected, and even the partnership would have been entitled to credit on the value of the goods for the debt from Shia to it, extinguished by the sale, and for the actual money paid to Shia for the goods.
    
      W. W. Mounger, for appellee.
    Whenever a party has the possession of the goods of another fraudulently he is liable to the owner for the value of the same and the owner may replevy or sue in a common law court for a conversion. Bishop on Contracts, sec. 226. On the question of fact as to whether or not there was fraud on the part of Holloway & McBanev, the partnership and the notice of the same by Holloway & McBanev Company, the corporation, the chancellor decided for appellee on both points. Under the bankruptcy law of 1898, the title to the goods in controversy was in the trustee, Brame. He therefore had a right to sue for them and to sue in a chancery court because he prays for a discovery and an accounting. Clearly, on these principles alone the case ought to be affirmed.
    The corporation wras to pay all the liabilities of the copartnership and the decree ought to be affirmed also on this ground.
    
      
      Brame. & Brame and Watkins & Easterling, on same sides.
    There was no merit in the demurrer. It is unnecessary to aver or show that the individual members composing the partnership of Holloway & McRaney, which was merged into the corporation, were insolvent, or that they had gone out of business. All this was wholly immaterial. The bill shows that the partnership was merely merged into the corporation and that it undertook to paj' all the debts and obligations of the firm. Under these circumstances the assets of the former partnership could be subjected to the demand asserted in this case even in an action at law. Morrison v. American Snuff Go., 79 Miss., 330.
    Clearly the corporation is liable in equity. Telephone Go. v. Telephone Go., 79 Miss., 341.
    But further, the averment is that the corporation assumed all the liabilities of the partnership. Therefore, this made the obligation asserted here the original debt of the corporation. Even the partners themselves can insist that the corporation shall be first made liable. Lee v. Newm-an, 55 Miss., 365; Sweaíman v. Parker, 49 Miss., 19; Jones v. Hughes, 66 Miss., 413.
    Aside from the allegations of the bill to the effect that the corporation assumed all the debts and liabilities of the firm, there was no consideration for the transfer of the assets from the partnership to the corporation which would constitute the latter a tona 'fide purchaser and therefore entitled to hold the same. American Sugar Refining Go. v. Rancher, Assignee, 145 N. Y., 5.52; s. c. 27'li. R. A., 757.
    The fraud of Shia being established, the burden of proof was then on the purchasers to show that they purchased without notice. 14 Am. & Eng. Enc. Law, 490, and numerous authorities cited. Richards v. Vacarro, 67 Miss., 516.
    A sale of goods made out of the ordinary course of business is a badge of fraud, and, being shown, it is a question of fact for the jury or court to determine whether or not the sale should be vitiated as fraudulent. 14 Am. & Eng. Enc. Law, 516.
    
      Means of knowledge, with, tbe duty of using them, are deemed equivalent to knowledge itself. 21 Am. & Eng. Enc. Law, 584.
    It is assigned for error that the court should have credited the defendant with $604.40 paid Shia by Holloway & McRaney and with $236.32, the amount of their debt against him. But this involves the whole case. It assumes that the transaction was fair and honest. As well, let the parties take the goods in violation of the bankruptcy law and the general rule against fraudulent conveyances, as to put them in statu quo. The court having found that the sale was fraudulent in fact, the fraudulent vendee cannot ask to be reimbursed. McLean v. Letchford, 60 Miss., 169; Ricketts v. Jolliff, 62 Miss., 440; Hamhlet v. Harrison, 80 Miss., 118.
   CalhooN, I.,

delivered the opinion of the court.

The bill of appellee Brame, as trustee of the bankrupt estate of one Shia, charges that in December, 1901, Shia was insolvent, and, being so, sold his mercantile stock to what was then a mere partnership styled Holloway & McRaney, and was adjudged bankrupt in the February following, the sale being less than four months before the adjudication; that this sale was upon a conspiracy between him and them to defraud his creditors; that he delivered to them $10,000 worth of goods for a nominal sum, which goods he had bought on credit, which credit he got by exaggerating his rating as a merchant, in which they collusively joined; and the prayer is for discovery, and that Holloway & McRaney be charged as trustees ex maleficio for the value of the goods. An amended bill sets up further that on the day of the alleged fraudulent sale, December 18,1901, Holloway & McRaney were organizing themselves into a corporation, which was completed December 31, 1901, and that Shia owed the firm, and the transfer of the goods was a performance denounced by the bankrupt act; that the corporation was simply a merger of the firm; that its incorporators were the same people, that it got all the firm property, and assumed all the firm debts; and the prayer is for discovery and for decree bolding tbe corporation liable for any debt paid tbe firm as a preference, and charging it with tbe value of tbe goods so fraudulently conveyed. Tbe defendant corporation filed a general denial of tbe charge of fraud, without particular answer to particularized charges, and then filed to tbe whole bill a general demurrer on the grounds detailed: (1) That tbe bill shows that it is not a proper party; (2) that it fails to show that tbe members of tbe old firm are insolvent; (3) because tbe bill shows that tbe acts complained of were those of a solvent partnership, etc. This demurrer was very properly overruled. Tbe answer admits that on December 18, 1901, tbe date of tbe transfer of tbe goods, Shia did owe tbe partnership, but says it was only to tbe amount of $236.32; denies knowledge of Shia?s insolvency, but admits that be paid this debt with goods, which it says was at reasonable valuation, this being true as to other goods then bought of him to the amount, they say, of $604.40; and admits that tbe corporation assumed the debts of tbe firm; and it pleads “in bar” that tbe members of tbe firm, all solvent, are not made parties. Tbe answer denies fraud, and declines to make discovery. Evidence was beard, and on it the chancellor decreed the sale fraudulent, and on the case made this court will not disturb bis conclusion. Mr. Shia seems to have been lost in tbe mix-up. ITe is not beard from. Tbe morning after the night of tbe sale be disappeared from the usual scene of bis operations and customary haunts. It was shown that tbe corporation, styled Holloway & MeRaney Co., was composed of only the identical persons who composed the partnership of Holloway & MeRaney, with tbe same interest of each, and with no other change of name or place of business than the addition of tbe word company to tbe partnership name; and that tbe only apparent change ever made was that sixteen days after* tbe incorporation stock was taken, and a new system of books opened. On these new books tbe assets of tbe firm were charged up to tbe corporation, which simply kept possession of them, including the unsold part of the goods tbe firm had got from Sbia. Tbe decree is against tbe corporation for the amount of tbe value of tbe goods.

As against then existing creditors, represented by tbe trustee of Shia’s estate in bankruptcy, no title passed by tbe fraudulent transaction between bim and tbe firm, botb being mala fide., and tbe liability of Sbia to tbe extent of tbe value of tbe goods delivered is enforceable in equity against tbe firm receiving them, and against tbe corporation, composed only of the same persons, taking tbe assets with full knowledge and assuming tbe liabilities of tbe firm. Vicksburg v. Citizen's Telephone Co., 79 Miss., 341; s. c., 30 South., 725 ; s. c., 89 Am. St. Rep., 656 — a milder case than this. Sbia was liable to bis creditors. The firm who fraudulently got bis goods became liable to bis creditors for their value; and tbe corporation, composed of tbe members of the firm only, which took tbe goods of tbe firm without consideration and with full notice, is also liable. If tbe contention of counsel were to prevail, in a case like this, that tbe court should have credited on the value of tbe goods.tbe account of tbe firm against Sbia for which it took goods, and tbe cash it paid bim at a very inadequate valuation, it would be a legal condonation of a gross fraud designed by botb parties to enable Sbia to- cheat bis creditors. In fact, these were tbe very incentives to tbe accom-; plisbment of tbe fraud, and without which it would not have been perpetrated. Neither law nor reason assents to the contention. Neither so encourages actual fraud. Botb denounce it. There is nothing, as we think, in tbe contention that tbe members of tbe firm of Holloway & McHaney were tbe parties, to be sued, on the ground that tbe other creditors might sue tbe firm, and not tbe corporation, about tbe same thing, and that tbe firm then could not set up tbe recovery for tbe corporation. It could set it up. Brame, Jr., has recovered as trustee for all tbe creditors of Sbia, tbe value of all bis goods which went from bim to tbe firm and from tbe firm to tbe corporation, and none of tbe creditors can get from either tbe value of the goods any more.

Affirmed.