Case ID: ny-super-ct_32/html/0491-01.html
Source: Caselaw Access Project
Author: {"author": "Monell, J. McCunn, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

ALBERT B. CORY, Plaintiff and Respondent, v. WALTER P. LONG, Defendant and Appellant.
    
      [Decided June 30, 1870.]
    A naked transfer from one partner to another of his interest in the partnership property vests the title absolutely in the latter, discharged of all lien or equity of the former.
    It is only where the outgoing partner has reserved to himself the right to have the partnership property applied to the payment of the partnership debts that a court of equity will compel such application.
    An outgoing partner may secure such equity by sufficient covenants on the part of the regaining partner. Such covenants must require the remaining partner.to apply the partnership property to the payment of the debts. Upon such a covenant, a lien arises in favor of the outgoing partner, which a court of equity will enforce.
    But a mere covenant by the remaining partner to pay the partnership debts, and to indemnify the outgoing partner against them, raises no equity in his favor. Upon such a covenant the outgoing partner can look only to the personal indemnity, and cannot require the application of the partnership property to the payment of the debts.
    Before Monell, McCunn, and Freedman, JJ.
    Appeals from two orders.
    The plaintiff was a member of the firm of W. P. Long & Co., which was composed of the plaintiff and defendant.
    In 1869, by an instrument in writing, signed by and under the seals of the respective parties, the copartnership was dissolved, the right, title, and interest of the plaintiff in the copartnership property and effects sold, conveyed, and delivered by him to the defendant, who in consideration thereof agreed, in and by said instrument, “ that he would pay all and every debt, claim, and demand against the firm, and would hold the plaintiff free and clea/r of and from all claim and demand whatever thereon.”
    The plaintiff alleged, as a violation of the agreement by the defendant, that the defendant was appropriating such partnership property to his own individual use; that he refused to pay any of the partnership debts, which amounted to about $10,000; that the partnership assets remaining in the defendant’s possession were about equal to that sum; that the defendant was insolvent and unable to indemnify the plaintiff, or to make contribution towards payment of such debts.
    A preliminary injunction was granted restraining the defend- ■ ant from disposing of or interfering with the partnership property, and a receiver was appointed.
    Motions to dissolve the injunction and to vacate the appointment of the receiver were denied at Special Term.
    The defendant appealed from both orders to the General" Term.
    
      Mr. James K. Hill for appellant.
    The right in equity of a partner to have partnership property applied for the payment of partnership debts, is lost when the property by a bona fide transfer ceases to be partnership property, whether the transfer is made to a stranger or to a partner.
    This point is specifically decided in the case of Dimond v. Hazard (32 N. Y., 65), where the court, in treating of' a transfer from one partner to his copartner, says,: “ When one of two part ■ ners retires from business, relinquishing to the other all his interest in the partnership property, the reniaining partner has the same dominion over it as if it had always been his own separate estate.”
    This position is fully supported by the authorities (Sage v. Chollar, 21 Barb., 596; Parish v. Lewis, 1 Freeman’s Chan., 299; Bullett v. Meth. Ep. Ch., 26 Penn., 110; Howe v. Laurence, 9 Cush., 555; Robb v. Mudge, 14 Gray, 534; Story on Part., sections 358, 359; Ex parte Ruffin, 6 Vesey, 119; 11 Vesey, 3; 10 Vesey, 347; Collyer on Part., sections 174, 894, 903).
    The covenant on the part of the defendant to pay the partnership debts, and hold the plaintiff harmless, cannot operate in such a way as to make the former partnership property a trust fund for the.payment of the partnership debts (Sage v. Chollar, 21 Barb., 598; Story on Part., section 359; Ketchum v. Durkee, 1 Barb. Ch., 480; Kirby v. Schoonmaker, 3 Barb. Ch., 46).
    
      The insolvency of the defendant occurring subsequently to the transfer, even if established by the plaintiff, cannot revive the lien of the retiring partner so as to render the partnership property still remaining in specie, primarily liable for the payment of partnership debts (Ex parte Ruffin, 6 Ves., 119; Ex parte Freeman, Buch., 471; Ex parte Williams, 11 Ves., 3; Ex parte Fell., 10 Ves., 347; Ex parte Fry., 1 Glyn and Jam., 96).
    The case of Deveau v. Fowler (2 Paige, 400) is very meagrely reported, and appears to have been decided on the authority of Smith v. Haviland, an unreported case. It must be distinguished from this case as disclosing some element of fraud in the transfer, or else it is contrary to principle and the current of authorities,' and has been overruled by Sage v. Chollar (21 Barb., 596) and Dimond v. Hazard (32 N. Y., 65).
    
      Mr. Roger A. Pryor for respondent.
    That the plaintiff has a natural equity to the interference of the court, is obvious enough on the facts disclosed by the plaintiff’s papers.
    The agreement to indemnify the plaintiff against the copartnership debts—the assignment of all the plaintiff’s interest in the copartnership in consideration of such indemnity—the refusal of the defendant to pay the copartnership debts, and consequent actions against the plaintiff—the instigation of these actions by the defendant—the dissipation of -the copartnership assets, and the insolvency of the defendant—these circumstances not only raise a natural equity, but give a technical equity to the relief prayed in the complaint. This equity is based on the right of the partners, as between themselves, to have the partnership property first applied to the discharge of the partnership debts (Story, 1 Equity Juris., secs. 676, 675; Wilson v. Robertson, 21 N. Y., 592; Havens v. Hussey, 5 Paige, Ch. R., 30; Greenwood v. Broadhead, 8 Barb., 593; Lindley on Partnership, passim).
    
    On the right of the plaintiff to marshal the partnership property (securities) so as to protect him, a surety (Hayes v. Worth, 4 Johns. Ch. R., 132; Willard, Equity Juris., 333, 337; 1 American Leading Cases, 369; 1 Story Eq. Juris., secs. 633, 645).
    On the right of the plaintiff, as surety, to be subrogated to all the remedies of the creditors against the defendant (Willard Eq. Juris., 110, 340).
    On the right of the plaintiff, as surety, to compel a resort,'in the first instance, to the defendant as principal (Willard Equi. Juris., 346).
    On the principle of quia timet, to protect the partnership property, as clothed with a trust to pay the partnership debts (Willard Eq. Juris., 332; Story on Partnership, sec. 360). This principle is applicable in favor of sureties (Ranelaugh v. Hayes, 1 Vernon, 190; Hoyes v. Ward, 4 Johns. Ch. R., 132; King v. Baldwin, 2 Johns. Ch., 562; Champion v. Brown, 6 Johns. Ch., 406).
    On the right of the surety, in equity, to compel payment by the principal, when the surety has been brought under liability by the debt falling due, although he may not have actually been sued (Willard’s Eq. Juris., 109; Antrobus v. Davidson, 1 Merivall, 569, 588; 1 American Leading Cases, 363).
    On the right of a party, in the precise situation of this plaintiff to compel specific performance of a general' covenant of indemnity, though it sounds only in damages (Champion v. Brown, 6 Johns. Ch. R. 405, and cases cited; 1 Story’s Eq. Juris., secs. 130, 350).
    And on the fundamental ground of equity jurisdiction, that equity will interpose to redress fraud, and prevent irreparable damage.
    In Deveau v. Fowler (2 Paige Ch. R., 400), the. precise point in contention here was ruled by Chancellor Walworth, who, under circumstances essentially the same as the present, refused to vacate an order of injunction and of receivership. He declared it to be “ the settled law of the court ” to grant the relief prayed in this complaint, and under the circumstances here exhibited. (Ketchum v. Durkee, 1 Hoffman Ch. R., 537).
   By the Court:

Monell, J.

The right of the plaintiff to retain the injunction and receiver in this case depends upon the effect which is to be given to the sale and transfer to the defendant of the partnership property, and his agreement to pay the partnership debts, and hold the plaintiff free therefrom.

A naked transfer from one partner to another of his interest in partnership property vests the title absolutely in the latter, discharged of all lien or equity of the former; and it is only where the outgoing partner has reserved to himself the right to have the partnership property applied to the payment of the partnership debts that a court of equity will compel such application. An outgoing partner who transfers the whole partnership property to the remaining partner has a right thus to protect himself; and upon sufficient covenants on the part of the remaining partner, to devote the partnership property to the payment of the partnership debts, a lien may arise, which a court of equity may possibly enforce on behalf of the outgoing partner. The reason in such a case would be that, notwithstanding the dissolution of the partnership and the transfer of the partnership property, the outgoing partner remains liable for the partnership debts, and, therefore, would have a right to require their payment by the remaining partner out of the partnership property, the consideration for which being the transfer of the partnership property, and which right he could secure by suitable and sufficient stipulations on the part of the remaining partner.

But I am not aware that it has anywhere, except in two eases, been held that a mere agreement on the part of the continuing partner to pay th!e partnership debts and to indemnify the retvring partner, was sufficient to enable such partner to invoke the aid of a court of equity to enforce such agreement, by compelling the application of the property to the payment of such debts.

In Deveau v. Fowler (2 Paige, 400), upon a dissolution of a copartnership, it was agreed that one partner should take all the stock and effects and pay the partnership debts, and indemnify the retiring partner against them. Upon allegations that the defendant was insolvent, and that he threatened to dispose of the property and appropriate it to his own use, leaving the debts unpaid, an injunction was granted and sustained. That case is referred to and sanctioned by the vice-chancellor (Whittlesey) in Rebb v. Stevens (Clark 191, 195), where creditors sought to enforce the equity of the retiring partner.

These are the only cases which go to the extent of upholding the injunction in this case, and the former loses much if not all its force as an authority by the doubt subsequently expressed by the chancellor in Ketchum v. Durkee (1 Barb. Ch. R., 480), that he was not quite certain that the court gave the proper construction to the agreement of the parties in that case, in supposing that the intention was that the copartnership debts should be first paid out of the proceeds of the property, before the purchaser should be permitted to apply any part of that property to other purposes. And the latter case, in which the vice-chancellor followed Deveau v. Fowler, must be considered as correspondingly weakened.

The general principle, as stated by elementary writers, is, that it is competent for partners, in cases of a voluntary dissolution, to agree that the joint property shall belong to one of them; and if such agreement be bona fide, and for a valuable consideration, it will transfer the whole property to such partner, wholly free from the claims of the joint creditors (Story on Part., sec. 358; Collyer on Part., sec. 174; Gow on Part., 3d ed., 237 to 241).

And this is so, although the whole or a part of the consideration of the transfer is, that the partners taking the property shall pay the debts of the partnership. The reason is, that in such a case the retiring partner, who so transfers his share, has no lien on the property for the discharge of the debts; for, by his voluntary transfer, he has parted with it and trusted to the personal security and personal contract of the other partners. Story on Part., sec. 359, and Collyer on Part., sec. 894, where the leading English case of Ex parte Ruffin (6 Ves., 119), and the case of Ex parte Freeman (Buck, 471), and Ex parte Fry (1 Glyn and Jam., 96), are referred to as authorities in support of the text.

In Ex parte Williams (11 Ves., 3) Lord Chancellor Eldon declared there was no equity in favor of a retiring partner where the consideration for the transfer was wholly or in part a covenant to pay the debts and indemnify the retiring partner, “ so conceived as not to leme any Men v/pon theproperty.”

The English cases are, I think, entirely uniform, and sustain the proposition that unless a lien on the property is expressly preserved in favor of the retiring partner, the remaining partner takes an absolute title discharged of all equity.

In Sage v. Chollar (21 Barb., 596) this precise question was involved and decided. There a sale had been made and a covenant of indemnity given. Judge Harris says (p. 598): “ If the partner taking the transfer has agreed to pay the partnership debts, the partner making the transfer, though he still remains liable for those debts, can only look to the personal security of his copartner for indemnity.”

Judge Hasten (of the Buffalo Superior Court), in a carefully considered opinion in Smith v. Howard (20 How. Pr. R., 121), entertains the same view. He says, when the partner sold, he did not reserve any lien upon the property, but took merely the personal undertaking of his vendees to pay the debts. Had he reserved a lien upon the property for the payment of the debts, the creditors of the firm might have availed themselves of that lien.

But the more recent case in the Court of Appeals, Dimon v. Hazard (32 N. Y. R., 65), must, I think, be considered as controlling. In that case, the continuing partner received all the assets of the firm and “ assumed ” all the debts, and the court held that, as the transfer had been honestly made, and for a valuable consideration, the property had thereby become his separate estate, wholly free from any claims of joint creditors.

The clear weight of authority, therefore, seems to be, that unless the retiring partner reserves a lien upon the partnership property, so as to require its application to the payment of the partnership debts, the vendee will take an absolute title; and that a mere personal covenant to pay, or of indemnity, will not give such a lien.

These questions have usually arisen in actions instituted by the joint creditors to enforce the equity of the retiring partner. In those cases it has been held that such creditors might be substituted in equity to the rights of the' partners, as being the ultimate cestui que trusts of the fund to the extent of the joint debts. But no such equity can be worked out by creditors except through some equity of the partners, and if the partners have none the creditors can have none.

I confess that my first impressions were strongly in favor of sustaining the injunction in this case; but the examination of the cases to which I have referred has satisfied me that such impressions were erroneous.

It was made a point by the plaintiff that under the agreement of indemnity he, as between himself and his partner, became a surety merely, and therefore had a right to compel payment of the partnership debts by the principal debtor. But I do not perceive how that helps this case, which is not to compel a performance of the defendant’s covenants, but to compel the application of property to which the defendant has an absolute title to the payment of the firm’s debts. It may be that the plaintiff, without either paying or waiting to be prosecuted for the partnership debts, might have a judgment against the indemnitor, requiring him, as the principal debtor, to satisfy such debts. But in such an action he could not reach the partnership property, nor would he be entitled to an injunction restraining its •disposition.

The order appealed from should be reversed, with costs.

McCunn, J.

(dissenting). About the facts of this case there is no controversy. It is either admitted, or else is established by a clear preponderance of proof, that the plaintiff sold his interest in the copartnership, of which the plaintiff and defendant were the component members, to the defendant, and took back from the defendant an agreement that he would pay all the copartnership debts, and would indemnify this plaintiff against all liability in respect of them; that, in pursuance of such sale, the plaintiff delivered to the defendant the custody and control of all the copartnership effects; that various suits have been instituted against the plaintiff to recover of Mm the very debts which the defendant assumed and agreed to pay, in consideration of the transfer to him of the plaintiff’s interest in the copartnership; that, except the court interfere by an exertion of its equity powers, the entire copartnership property will be diverted to the defendant’s individual use, and the plaintiff be compelled to pay all the copartnersMp debts, without the possibility of relief or indenmity from the defendant, who is utterly insolvent.

On this state of facts, Chief-Justice Barbour appointed a receiver of the copartnership property, with the usual injunction, and the appeal is from those orders of injunction and receivership.

If tMs court have no power to grant the relief required by the exigency of the case, then is there a defect in our system which I had not supposed to exist. To say that the plaintiff has no resource but upon his contract of indemnity, and that he must permit all the copartnership property to be dissipated, and then seek redress of an insolvent individual, is not only a mockery of administrative justice, but a plain violation of the spirit of our law, which abhors multiplicity and circuity of action, and pretends to accord complete relief in every instance of appeal to its protection. I find no difficulty in establishing the plaintiff’s right to relief, and that, too, upon familiar principles of equity jurisprudence. Confessedly, as between the plaintiff and defendant, and in respect to the copartnersMp debts, the defendant, by virtue of his contract of indemnity, is'the primary debtor, and the plaintiff a mere surety. The plaintiff’s equity to relief is founded then on the following elementary principles:

1. On the right of the partners, as between themselves, to have the partnership property first applied to the discharge of the partnership debts (Story, 1 Equi. Juris., secs. 675-676; Wilson v. Robertson, 21 N. Y., 592; Havens v. Hussey, 5 Paige Ch. R., 30; Greenwood v. Broadhead, 8 Barb., 593; Lindley on Partnership, passim).

2. On the right of the plaintiff to marshal the partnership property (securities) so as to protect him, a surety (Hayes v. Worth, 4 Johns. Ch. R., 132; Willard Equity Juris., 333-337; 1 American Leading Cases, 369; 1 Story Eq. Juris., secs. 633-645.)

3. On the right of the plaintiff, as surety, to be subrogated to all the remedies of the creditors against the defendant (Willard Eq. Juris., 110-340).

4. On the right of the plaintiff, as surety, to compel a resort in the first instance to the defendant as principal (Willard Equi. Juris., 346).

5. On the principle of quia timet, to protect the partnership property, as clothed with a trust to pay the partnership debts ; (Willard Equi. Juris., 332; Story on Partnership, sec. 360). This principle is applicable in favor of sureties (Ranelaugh v. Hayes, 1 Vernon, 190; Hoyes v. Ward, 4 Johns. Ch. R., 132; King v. Baldwin, 2 Johns. Ch., 562; Champion v. Brown, 6 Johns. Ch., 406).

6. On the right of the surety in equity to compel payment by the principal when the surety has been brought under liability by the debt falling due, although he may not have actually been sued (Willard’s Equi. Juris., 109; Autrobus v. Davidson, 1 Merivall, 569-578; 1 American Leading Cases, 363.)

7. On the right of a party, in the precise situation of this plaintiff, to compel specific performance of a general covenant of indemnity, though it exceeds only in damages (Champion v. Brown, 6 Johns. Ch. R., 405, and cases cited; 1 Story Equi. Juris., secs. 130-358). And

8. On the fundamental ground of equity jurisdiction, that equity will interpose to redress fraud and prevent irreparable damage.

In Cranston v. Plunet et al. (54 Barbour, 59), a husband had made a settlement on Ms wife and had taken back a covenant of indemnity against liability for her support. It was urged that the husband had no redress but in the trustees’ responsibility, but the General Term of the Supreme Court held that the contract of indenmity gave him a right to require that the property settled should be specifically appropriated to the purposes of the trust. Mills v. Watson, decided at General Term of this court in May, 1869, and reported in Transcript of 12th April, 1870, was an action in equity in the nature of a bill, quia timet, to compel the defendant specifically to perform a covenant of payment and indemnity. Mr. Justice FitMan, delivering the unanimous judgment of the court, propounded the following principles, and adduced in their support the authorities cited:

By the covenant in the deed from the plaintiff to the defendant, the latter for a good consideration undertook to pay plaintiff’s debt to a third person. The defendant thereby, as between Mm and the plaintiff, became the principal debtor, and the plaintiff his surety. It is a well settled rule in equity that a suit in equity may be instituted and maintained by a surety to compel payment by the principal upon a covenant of indemnity; and, unless there be some good reason shown to the contrary, the court will decree specific performance, upon the same principle that they entertain a bill of quia twnet (2 Story Equi., sec. 880, p. 194; Marsh v. Pike, 2 Sand. Ch., 210; 10 Paige, 395).”

In principle it is impossible to distinguish the plaintiff’s right from the equity to relief established and illustrated in Mills v. Watson.

But the very point in contention has been adjudicated, and the relief here sought accorded, by the weightiest judges in the State. In Deveau v. Fowler (2 Paige Ch. R., 400), Chancellor Walworth refused to vacate the appointment of a receiver made upon precisely the facts here developed, and, in doing so, de-. dared it to be the settled rule of the court, under these circumstances, to appoint a receiver. And in the case of Davis v. Morris (36 N. Y., 574), Deveau v. Fowler was quoted against the opimon of the court. Grover, J., adverting to the case (Deveau v. Fowler), does not question its authority, but, on the contrary, recognizes it, and distinguishes it from the case then sub judice.

In Smith v. Haviland (2 Paige, 401), Chancellor Jones made a similar decision upon identical facts. In the course of my reading I have been unable to find any adjudication.in hostility to* the judgment of these eminent lawyers. Upon principle, then, as well as authority, the orders should be affirmed.