Case ID: ohio_6/html/0107-01.html
Source: Caselaw Access Project
Author: {"author": "Judge Lane", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Seth Grosvenor & Co. v. Administrators of S. Austin and C. Austin.
    Creditor may maintain a bill in chancery for distribution of decedent’s assets, against executor or administrator, before obtaining judgment.
    The separate individual creditors of one deceased member of a firm can not claim a preference in the decedent’s individual estate, against the creditors of the firm.
    This was a bill in chancery, reserved for decision here in the county of Geauga. The facts, in brief, were these: Seymour Austin and Calvin Austin had transacted business in partnership, as merchants. Both were deceased, and both deceased insolvent. There were no funds of the firm, but Seymour Austin left individual separate property. The complainants, ^creditors of the firm, [104 filed a bill in chancery, against Seymour Austin’s administrator, for a distinct share of his individual effects. The individual and separate creditors of Seymour Austin interposed a claim to be preferred, and first paid; and this was the point brought up for consideration.
    Hitchcock, for the complainants:
    The only question now before the court for consideration is, •whether the partnership creditors of the late firm, of Calvin Austin & Co. shall be permitted to claim a pro rata dividend of the estate-of Seymour Austin, one of the firm, who is now deceased.
    On examination of the master’s report, it will be seen that long before the death of either of the partners, the partnership was dissolved ; that the partnership funds are entirely exhausted; that both the partners are now dead; that their estates are insolvent; and unless the creditors of the firm can come upon the separate estate, they are entirely without remedy. It will be further seen that the estate of Seymour has been increased by the amount which he received for his share of the stock in trade at the dissolution of the partnership. Under these circumstances, we are persuaded that the court will not refuse us relief, unless driven to it by some positive rule of law in equity. That no such rule exists, I hope to be able to satisfy the court.
    It is urged by defendants’ counsel, that the question was determined previous to the order of reference, and this is inferred from the terms of that order. Nothing, however, could be further from the truth. The court directed the particular mode of inquiry, so that, upon the coming in of the report, a final decree could be made upon any hypothesis which the court should think proper to assume. The question is still open, and is one of no little importance, as it relates to the settlement of decedent estates.
    It is well established that partnership effects shall be first applied to the payment of partnership debts. This, I apprehend, is rather a rule of equity than of law. But the converse of the proposition will not hold true; otherwise we run into this absurdity,, that he who has given credit, upon the joint and several responsibility of two or more, has in fact less security than he who has-given credit upon the responsibility of one alone of the number.
    In maintaining the proposition, that a partnership creditor can 105] claim his ratable proportion of the insolvent estate of one *of the deceased partners, especially whore there are no partnership effects, and where the other partners are insolvent, we assume the principle that partnership debts are, in equity, joint and several; and in law, so far joint and several, that when a judgment is once recovered, the money may be made of the joint stock of both, or of the separate property of both or either. What, then, would have been the situation of the parties in this case were Calvin and Seymour Austin still living ? Grosvenor, the complainant, might haveTecovered a judgment against the two, and have enforced that judgment against either. Had there been a sufficient fund to satisfy this judgment, belonging to the firm, and at the same time separate judgment creditors, a court of equity would probably, upon the principle of marshaling assets, have compelled the partnership creditor to resort to the partnership fund; but in the absence of such fund, a court of equity would not interfere.
    The correctness of this principle is not controverted by the defendants’ counsel, as applicable to courts of law, but it is denied as a correct principle in chancery. To us, it seems that they are mistaken. In the case of Hammersly v. Lambert, 2 Johns. Ch. 508, Chancellor Kent says expressly, “it is in equity a joint and several debt.” And in Gow on Partnership, 460, it is said, “at law, a partnership contract is joint only, but equity adopting the law merchant to its full extent, holds it to be both joint and several.” If, therefore, there be a survivor, and the proceeding be at law, that survivor must be sued. But if he can not respond the amount of the judgment, a court of equity will charge whatever remain due upon the estate of the deceased partner. Or if the survivor be insolvent, the creditor may in equity proceed against the property of the deeendent in the hands of his representatives, without any suit against the survivor. 2 Johns. Ch. 508; 5 Ohio, 355; Gow on Part. 461.
    The authorities cited by the defendants’ counsel do not sustain them in the position that the principle or rule of law is more favorable to the partnership creditor than that of equity. If there be any difference it is the other way. But this may be said in ' truth, that both in law and equity, as well as in common parlance, the individual partners are considered as debtors to the partnership creditor. And so long as the partners or either of them live, the collection of this debt may be enforced through the medium of a court of law; although, in case of the ^insolvency of a [106 survivor, it will be necessary to resort to chancery to charge the estate of a decedent.
    If, then, such be the effect of the partnership, as to the claims of its creditors upon it, and upon its several members, for their respective dues while the partners are living, shall the creditor lose any of his rights by the death of one of the partners. To enforce those rights, it is admitted that a different form of remedy must be resorted to. But is the right extinguished; or, in other words, is the individual any less the creditor of the estate of the deceased partner than he was of that partner himself when living ?
    Upon principle, it would seem to me that his relative rights are the same. It must be recollected that we have no bankrupt lawv so that, during the life of all the partners, there is no possible way in this country of preventing the creditor from enforcing his claim against the individuals of the firm, except by a resort to chancery Y and chancery will interfere no further than to compel the exhaustion, in the first instance, of the partnership effects. When-these are gone, the creditor will be permitted to proceed against separate property. If there are no partnership effects, chancery will not interfere. -During the life of the several parties, then, there can, in this country, be no such thing as appropriating partnership effects to the exclusive payment of partnership debts, and separate effects to the exclusive payment of separate debts. If the debtors be insolvent, all creditors may come in for a pro rata distribution.
    It has, ever since the first organization of our state government, been an invariable rule in the settlement of estates, whether testate or intestate, that in case of insolvency the estate should be divided pro rata among the creditors. No preference is given to-one description of debts over another, any further than is necessary to secure to the individual care and attention during his last sickness, and a decent burial after his death.
    But adopt the proposition contended for by the defendants’ counsel, and this principle of equity is destroyed, unless the court are prepared to say that a partnership creditor is not, to a certain, extent, a separate creditor ; or, in other words, that a partnership-creditor can not, under any circumstances, enforce his claim against separate estate. It seems to be admitted by the defendants’ counsel, that if there be a sufficiency of asssets, both separate and partnership debts shall be paid. But they claim a preference 107] for separate debts. This is an ^interpolation upon the statute. That _ provides that all debts, of whatever description, shall be paid ratably. Counsel made a provision, excluding a certain description of debts, unless all can be paid.
    Suppose, for a moment, we adopt their principle. How would' it operate in practice? Take the case under consideration with a small variation. Here are partnership and separate creditors and a separate fund. Suppose that fund was sufficient to pay the separate creditors and leave a surplus, but not sufficient to pay the partnership creditors — what would be done with this surplus? Counsel will say, divide it ratably among those partnership creditors. But why? Upon what principle? Is it because they are creditors to the estate ? If they are creditors to the estate, then the statute secures to them an equality, and by adopting the rule contended for by defendants’ counsel, both the letter and spirit of this statute would be violated. This will not be done by the court, unless, as before observed, there is some precedent to require it. I apprehend that all the doubt, which can by possibility arise upon this subject, will be found to have originated in certain English decisions under their bankrupt law — decisions which ought not and can not have any influence here, because made under certain statutes which are unknown, as of any binding efficacy, in this country, and intended for a people whose laws for the settlement of estates are dissimilar to our own.
    Our law for the settlement of estates is founded in the principles of abstract justice, and the principle for which I contend is equally founded in justice. Grosvenor, the complainant, gave credit to both Seymour and Calvin Austin ; he now asks for nothing more than to be placed upon an equality with those who gave credit to but one of these individuals.
    Whether, then, we look to the principles of equity and justice, or whether we look to our own positive law for the settlement of estates, it would seem to me that the case upon the question submitted to the court is with the complainant.
    How is it upon authority? The counsel for defendant have cited a variety of authorities, both English and American, to prove that partnership effects must first be applied to the payment of partnership debts, and separate effects to the payment of separate debts. Of the American cases, but one gives color to this position, while all the others are against it. Of the English cases, unless I am much" mistaken, there is but one that *did not arise under [108 their bankrupt laws, and that is the case reported in 9 Tesey, 118, and in this case tho chancellor says, while speaking of the distribution of bankrupt estates, at page 124, “it is extremely difficult to say upon what the rule in bankruptcy is founded.” Of the truth of this assertion, any one will be satisfied who will examine the authorities, and, it seems to me, will he led to doubt whether in fact there is any certain rule upon the subject. It is curious to see the various courses which have been pursued by the different chancellors, according to their different views of justice, and all striving to maintain their positions by precedent.
    In the time of Lord Hardwicke, it was allowed to joint creditors to prove under a separate commission against one partner, but they could come in for a dividend only of the surplus after separate creditors were satisfied. Gow on Partnership, 379, supposes this rule continued until the time of Lord Thurlow, who held that the contrary course was best, and allowed joint creditors to take dividends under a separate commission. Gow, 380. And he likened the proceedings in bankruptcy to an execution. Thus it continued until the year 1796, when, in the case of Ex parte Elton, 3 Vesey, 237, the other rule seems to have been restored.
    But it will be observed by the court, that all these cases go upon the supposition that there are two funds; and the inference is clear, that if there be no partnership fund, then the partnership creditors may go upion the separate fund. Gow, 381, 382. And the rule as now established in England, if any one can be established, is, that “if there is a joint fund, or there are solvent partners, a joint creditor is not entitled to prove his debt under a separate commission, for the purpose of receiving a dividend, without the chancellor’s order.” Gow, 382. But if there be no joint fund, then I apprehend the proof may be made, and a dividend claimed. Gow, 382, 383. Upon the principles then established under the bankrupt laws ot England, we should have a right to prove our debt, and receive a dividend from the separate estate, it appearing clearly from the master’s report that there is no joint fund.
    Under the bankrupt law, as it once existed in the United States, the same would have been the case. The case of Tucker v. Oxley, 5 Cranch, 34, is cited by defendants’ counsel; for what purpose I can not conceive; for it is an authority, if I can understand it, 109] directly against them. The court are referred *to the opinion of Chief Justice Marshall, commencing at page 39, as conclusive upon the whole subject.
    But suppose we should admit that under the English bankrupt law, the complainant could not prove his debt against, and receive a dividend from the separate estate of S. Austin, until separate debts were paid — does it follow that the same rule is to be applied in the settlement of estates, and especially in Ohio, where the statute has so carefully provided that all creditors shall be paid in proportion to their respective demands.
    It was not formerly so considered in England. For even there a joint creditor, of equal degree, might come in pari passu with a separate creditor. Glow, 437. And so it seems to have been holden until 1803, when the lord chancellor varied the rule, upon the supposed analogy between the ease of death and bankruptcy. 9 Ves. 118.
    But two American cases are cited upon this subject by the defendants’ counsel, which are properly applicable in the point of view in which I am now considering it, and I have not been able to find any others directly in point.
    The first is reported in 3 Dessausure, 203, and the other in 5 Serg. & Rawle, 78.
    In the first of these cases, it is said by the chancellor to have been settled in South Carolina by repeated decisions, “that the private property is primarily liable to the private creditors, and the copartnership effects to copartnership creditors.” Upon what principles these decisions are founded it is not stated, but we know that in South Carolina there is the same rule as to priority of debts as in England.
    In Pennsylvania, however, the rule is different. Their statute is substantially like ours; and the court, in the case cited from 5 Serg. & Rawle, decide, that partnership creditors may come in for a share of the separate estate, being careful, however, that there shall be a pro rata distribution of all the effects, both partnership and separate. This case, if considered as authority, is decisive of the present question in favor of the complainant. These, as I before observed, are the only two cases directly in point, but, as being relative to the subject, I will refer the court to 5 Ohio, 355; 2 Johns. Ch. 508.
    Upon the whole, it will be seen that the question, so far as respects this state, is a new one. That it involves, measurably, the construction of one of our most important statute laws; that there is no precedent which can be considered as obligatory. *And [110 I trust the court will make such a decision as will not only do justice in the present ease, but in all others of a similar nature which may arise.
    
      Whittlesey and Newton, for administrators of S. Austin:
    The court, at a previous term, having considered the law and equity to be with the complainant, but being unadvised of the separate and partnership property of Seymour Austin and Calvin Austin, due from them separately, or as partners, ordered that it be referred to the master commissioner, to hear and take proof of the separate- and partnership property of said Calvin and Seymour, and that-he take an account of the debts due from each separately and as-partners.
    It appears, from the phraseology of this interlocutory decree, that the court recognized the doctrine that where there were different sets of creditors,- each estate should be applied exclusively, in the first instance, to the payment of its own creditors; the joint estate to the joint creditors, and the separate estate to the separate creditors; for, otherwise, it is not perceived why the particular matters contained in the orders were referred at all. The master, at this term, has reported on the several subjects referred to him,, and the report is resisted by the complainant, not because the-master has mistaken the facts, or committed any error in reporting them; but he resists the report because he. contends he ought to be permitted, when he has a debt against a firm, to take the separate property of one of the partners, without regarding the separate debts ; or, in other words, he contends, the court should retrace its steps, and, in effect, abrogate its order, overthrow old and well-established principles and adopt new ones. Henry Phelps, one of the defendants, wishes the court to establish the report, and carry out the principle recognized in the interlocutory decree. The rule at law is as contended for by the complainant, and a judgment creditor has the right to go upon either estate; but this complainant is not a judgment creditor, and he has come into a court of chancery to collect his debt, without having attempted to enforce it at law; and being here, he is subjected to the rules and principles established by courts of chancery.
    It has long since been established as a ruis oí that court that where there are different sets of creditors, each estate shall be applied exclusively, in the first instance, to the payment of its own 111] creditors, the joint estate to the joint creditors, and the *separate to the separate. Watson on Partnership, 195, top page, and in 265 on the margin.
    A creditor is not only confined to the particular estate, the more effectually to protect the rights of other creditors who may have-debts to be enforced against a different estate, but he is confined to the separate estate of one partner to collect an individual debt, and can not take the partnership estate until the other partner is-satisfied for his debt against the partnership.
    Therefore a judgment and execution against one partner, for his-separate debt, does not put the other in a worse condition, for he must have all allowances made to him before the judgment creditor can have the share of the other applied to him. Mad. 76.
    As between one partner and the separate creditors of the others,, the separate creditors can not effect the stock any further than that partner could, whose creditors they are; and if they proceed against the partnership property, the partners may file a bill to be-quieted in the possession of the partnership effects, and pray for an account of what is due to the partner so giving a security, and for an injunction in the meantime. 1 Mad. 77.
    Debtor by bond to the separate estate of a deceased partner,, not allowed in equity to set off his bond debt, in respect of acceptances for which he had become liable to the partnership estate, and which were proved by him under a joint commission. 2 Meriv. Ch. 115. In the case of bankruptcy, the usual directions-are to apply the funds respectively; the joint to the joint debts, the separate to the separate debts, the surplus of each to the creditors remaining on the other. Ex parte Elton, 3 Ves. Jr. 238.
    The same principle is admitted by the Supreme Court of the-United States to govern courts of equity, but not those of law. 5 Cranch, 34; 2 Peters’ Cond. 182.
    The rule established in the English courts in case of bankruptcy was fully recognized by Chancellor Kent in the case of. Murray v. Murray, 5 Johns. Ch. 60.
    It was well established, in the time of Lord Hardwicke, that joint creditors, under a separate commission of bankruptcy, were not allowed to prove their debts for the purpose of receiving dividends with the separate creditors. But the principle was that joint creditors had a preferable claim upon the joint effects, and the separate creditors upon the separate estate, and therefore the joint creditors could not come in upon the ^separate estate [112. ■until all the separate creditors were -pai d. And this was upon the-plain rule of equity, that he who has two funds to resort to shall not satisfy his debt out of that one of them,- to which another creditor can resort, until he has exhausted the other fund. Per Chancellor Kent in Murray v. Murray, 5 Johns. Ch. 72.
    The copartnership creditors are entitled to nothing from the estate of the deceased partner until all his separate debts are paid. Gow on Partnership, 386; see also cases referred to in note 9 to Ves. 118; 5 Serg. & Rawle, 78; 1 Des. Ch. 203; 2 McCord Ch. 302.
    The doctrine of set-off might be investigated to elucidate the point in controversy; but the counsel for the defendant, Phelps, think the court will not hesitate to sanction the report, and will not permit the joint creditors to participate in the separate property of Seymour Austin until his separate debts are paid.
   Judge Lane

delivered the opinion of the court:

The court have heretofore decided, in this ease, that a bill in chancery may be sustained, at the instance of a creditor, before judgment, to compel the distribution of the estate of a decedent, because it is a trust; and that such a bill may be filed against a deceased partner’s administrator for such a purpose. An account has been taken, and the report of the master shows that there are creditors of Seymour Austin separately, and of Seymour Austin and Calvin Austin jointly; also, that the estate of Calvin Austin is insolvent.

It is now insisted, on behalf of the separate creditors of Seymour Austin, that as any property of the firm of C. & S. Austin, if found in the hands of the administrator or executor, must be first exclusively applied to the payment of the partnership debts; therefore, the separate property of Seymour Astin shall be first applied to the discharge of his separate individual debts, which, in respect to the creditors of C. & S. Austin, have a preference. In support of this proposition the following cases are cited: Gow’s Part. 386; 10 Ves. 118; 5 Serg. & Rawle, 18; 2 Des. (S. C.) 203; 2 Mad. Ch. 302.

This court are of opinion that if any such rule exists it must have been of frequent application, and thus have become familiar to the profession. Yet no case is found in the books except the one in 10 Yesey and the South Carolina case. That 113] ^'touches such a doctrine, unless cases founded on the statutes of bankruptcy. A claim so novel, in a case necessarily ■of such common occurrence, must be listened to with caution amounting to jealousy. Its unavoidable tendency is to disturb and overthrow the settled policy of our law for the disposition of decedent’s assets, which seeks to make equal distribution of them to every creditor.

A creditor of two debtors, not partners, is at liberty to enforce satisfaction from either. If either die, the claim becomes a separate debt, to be satisfied on terms of equality with the decedent’s other debts. But if the debtors were partners, holding a joint fund, the creditor is permitted a specific preference to subject that joint fund to the payment of his joint claim or debt; and this, not because the creditor’s rights are enlarged by the existence of a joint fund, but because the interests of the partners are so connected with its distribution, that it is necessary to adopt this rule,, to secure the rights of the debtors between themselves. Hence the doctrine has been introduced, that the partnership property should be first applied in satisfaction of the partnership debts; not for the creditor’s sake, but because there is a fund which both parties have reciprocally a right to apply for the benefit of a third party.

But where the question is merely between the creditor and the surviving debtor, and no trust fund exists in which the other-debtor or his representative have an interest, the reason does not obtain, and the creditor stands in the relation of any other creditor, to be paid in the same proportion with them. This happens to be the position of the complainants in this case, who make no-claim to any such trust fund, for none such exists; but set up against the estate of Seymour Austin a joint and several debt with Calvin Austin. The question does not seem to avail in any ease, except where there are two funds for distribution, and two classes of creditors.

But, even if such a case were presented, we should long hesitate-before we should introduce an element into our system of jurisprudence so calculated to render more complex the equal distribution of decedents’ estates among creditors. The statute plainly endeavors to make that distribution equal, conformable to the dictates of the soundest equity. We can not resist the persuasion, that the distinguished chancellors, in the cases referred to, have unwarily adopted, as a general doctrine, one rather applicable to cases under a statute of bankruptcy. We ^consider that [114 its introduction here would lead to embarrassing consequences,, and therefore reject it.

The case is again referred to the master.