Case ID: wis_29/html/0363-01.html
Source: Caselaw Access Project
Author: {"author": "Cole, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Day vs. Wetherby and others.
    
      Parties — Partnership—Trusts—Fraudulent Oomeyanee.
    
    1. In an action to have real estate, which had been conveyed by A & Co. to W in trust, sold, and the proceeds applied to the payment of debts due from A & Co. to the plaintiffs, where the sole issues were, whether the conveyance was made to secure the indebtedness of the firm of A & B or that of their successors, A & Co., to the cestui que trust, and, if either, whether the conveyance was valid as against the creditors of the latter firm — Wbeing made a defendant; Held, that on his motion the cestui que trust should also be made a party.
    2. The general rule in equity is, that in suits respecting trust property the cestui que trust is a necessary party; and the exceptions allowed to the rule do not apply to this case.
    3. The firm of A and B dissolved, being indebted to a bank; and was sue. ceeded by the firm of A & Co., composed of the members of the old firm and C, a new partner. Subsequently A, B and C conveyed to W by a deed absolute on its face, real estate, acquired mostly with the assets of the old firm, but partly with money contributed by C. This conveyance was in trust to secure the indebtedness of one or both the firms to said bank. There being evidence to show that the understanding and intention in the execution of said deed by C was, that his interest in said property should be applied to secure the indebtedness of the new firm, it seems that equity would enforce this understanding for the benefit of the creditors of said firm.
    5. The mere fact that a partnership is embarrassed and unable to meet its debts at the time real properly thereof is conveyed to secure a particular indebtedness, is not sufficient ground for avoiding the conveyance.
    6. A conveyance by the members of the new firm of real property thereof made in good faith to secure debts due from the old firm at its dissolution, (said property having been mainly purchased with funds of said old firm), held valid as against the creditors of the new firm.
    7. Where a partnership is administering its affairs in good faith, its creditors have no lien on the partnership fund; and the equities between the joint and separate creditors of the firm depend solely on the equities between the partners themselves and must be worked out through them.
    APPEAL from tie Circuit Court for St. Croix County.
    The plaintiff, as assignee of a judgment in favor of Lester Sexton and otters, brought this action in behalf of himself and other judgment creditors, who might choose to join, against B. Dore, P. Dwyer and B. Joyce, co-partners, under the firm name of Dore & Go., and P. Wetherby and J. M. Whaley, to set aside a deed, absolute in form, of a store and lot alleged to be partnership property, given by such co-partners to said Wetherby as security for a debt of the firm to the First National Bank of Hudson, and also a deed subsequently executed by Wetherby to said Whaley; alleging such deeds to have been executed in pursuance of a fraudulent arrangement between the parties to hinder and delay creditors, and to be inequitable and fraudulent impediments to the satisfaction of their judgment, and that the judgment debtors had no property out of which it could be satisfied. .
    The defendants, Wetherby and Whaley, answered, admitting the plaintiff’s judgment, the execution of the conveyances mentioned in the complaint, and the payment of the debt of Dore & Go., but denying all the allegations of fraud, and averring that the deed to Wetherby was given for the purpose of paying a debt due from Dore and Dwyer to the bank, and not for the purpose of paying or securing any debt of the firm of Dore & Go., and that he received it solely as agent for the bank, and that the deed to Whaley was made for a valuable consideration.
    At the trial, the defendant Wetherby moved, upon his affidavit, showing that in all the transactions relating to the land he acted merely as agent for the First National Bank of Hudson, that such bank be made a party to the action; which motion was denied.
    The defendant Joyce, as a witness for the plaintiff, gave testimony tending to show that he entered into partnership with the defendants Dore and Dwyer, after the dissolution of the firm previously existing under the name of Dore & Dwyer, and was jointly interested with them in the store and lot conveyed to Wetherby, and that, when he executed the deed to Wetherby, he understood it to be given for the purpose of securing a debt due from tbe new firm of Dore & Go. to tbe bank, and not for tbe purpose of securing any debt of tbe old firm, altbougb sucb debt was mentioned during tbe negotiations. He also testified tbat be owned one-tbird interest in tbe business of tbe firm of Dore & Go., and tbat tbe debt of tbat firm to tbe bank was paid out of tbe proceeds of its goods sold on execution. Tbe testimony of tbe defendant Dore also tended to sbow tbat tbe deed was given to secure tbe debt of Dore & Go., and tbat tbe debt of tbe old firm was secured by notes and accounts; but, on cross-examination, be acknowledged tbat be bad testified in another action tbat tbe deed was beld also as security for tbe debt of tbe old firm, and tbat a paper to tbat effect, wbicb was produced, was signed by bim. There was also testimony tbat the lot conveyed to Wetherby was bought for Dore & Go., and paid for by their funds, and tbe store building was erected for their use, but was mostly paid for by tbe funds of Dore & Dwyer.
    
    Tbe defendant introduced proof tending to show tbat tbe bank, for wbicb the defendant Wetherby acted, beld a debt against tbe firm of Dore & Go., to secure which they confessed a judgment, which was subsequently collected on execution, and also a debt against tbe firm of Dore & Dwyer, to secure wbicb tbe three partners united in giving tbe deed of tbe store and lot to bim, all understanding tbat it was given to secure that debt; and tbat be promised to give them back a paper stating what tbe deed was given for, and afterward did deliver one to Dore, whereby be acknowledged tbat be received tbe deed in trust to secure tbe indebtedness of Dore & Dwyer to tbe bank, and agreed to bold tbe property and, if necessary, sell it at public or private sale for tbe best interests of Dore & Dwyer, and render to them tbe surplus after paying tbe debt to tbe bank; tbat Joyce's interest in tbe lot did not exceed $100, and tbat Joyce consented to execute tbe deed upon Wetherby's agreeing to apply bis interest in tbe lot on tbe debts of Dore & Go.. A paper signed in tbe firm name of Doré & Dwyer, 
      assigning all. tbeir remaining interest in tbe store and tbe boobs and accounts, after payment of tbe bank debt, to certain other creditors, was also introduced. There was some testimony tending to show that tbe defendant Whaley bad notice that tbe deed to Wetherby was given merely as security for tbe debt of Dore & Co. Tbe title remained in Wetherby about three years before be conveyed it to Whaley. Evidence offered by plaintiff, after defendants bad rested, to show tbe recovery and docketing of bis and other judgments against Dore & Co., and that they remained unsatisfied; that all tbe assets of that firm were exhausted and applied in tbe payment of valid and subsisting debts, immediately after tbe execution of tbe deed to Wetherby; and that they were at that time entirely insolvent, to tbe knowledge of defendant Wetherby, was ruled out.
    Tbe action was tried by tbe court, which found all tbe issues in favor of the plaintiff, and rendered judgment that tbe deeds to Wetherby and Whaley be canceled; and those defendants appealed therefrom.
    
      L. P. Wetherby, in person, for appellants,
    argued that tbe First National Bank, for which be was a mere trustee, was a necessary party, and could not be deprived of its rights unless before tbe eourt, and tbe refusal to make it a party was error, citing R. S., chap. 122, sec. 22; Gelpelce v. Mil. and Hor. B. B. Co., 11 Wis., 454; Miner v. Medbury, 7 id., 100; Carney v. Mnmons, 9 id., 114; that this action is based upon tbe allegations that tbe store and lot were owned by Dore & Go., as partnership property, and turned out by them to secure a partnership debt which was subsequently paid, .and that after such payment Wetherby conveyed away tbe property in fraud of tbe creditors of said firm; all of which allegations were specifically denied by tbe answer, which affirmatively averred that tbe deed was given to secure or pay tbe debt of tbe firm of Dore & Dwyer and for no other purpose, and such answer was fully proved; that tbe store and lot were not partnership property, tbe lot having been purchased before tbe partnership commenced, and tbe defendant Joyce, having merely an interest in it as tenant in common with the defendants Dare & Dwyer, by whom the store was built; that the findings were not justified by the issue made by the pleadings, which was, whether the deed was given to. secure the debt of Dore é Co., which had been paid; and that the judgment rendered was not authorized by the finding that it was not given to secure that debt, except so far as Joyce's interest was concerned.
    
      P. L. Spooner, of counsel for appellants,
    argued that, assuming Joyce to have owned an undivided one-third of the real estate as a tenant in common, the transaction amounted to a mortgage of that third as security for the debt of Dore & Co., and of the other two-thirds as a security for the debt of Dore & Dwyer, and the utmost the court could do on that theory was to so declare, and adjudged the mortgage satisfied as to his third, and leave that subject to the plaintiff’s execution; that the plaintiff cannot be allowed to change this action on the trial from one to set aside a mortgage on the ground that it has been satisfied, to one for the same purpose, on the ground that it was given by members of a firm to secure their individual debts, in violation of the rights of the creditors of the firm to have the property applied to the partnership debts, citing Lackner v. Turnbull, 7 Wis., 105; Newton v. Allis, 12 id., 878; Sweet v. Mitchell, 15 id., 641; that the equity of the joint creditors depends on, and must be worked out through that of the partners, and the firm may, by common consent, apply a portion of the joint assets to the liquidation of the private debts of one or more of its members, although the necessary result would be to postpone or frustrate the claims of joint creditors, citing 2 Leading Cases in Equity, 327-333 ; that, on that principle, the court should have inquired what was the understanding of the parties as to the amount of Joyce's interest in the store and lot, and could apply only that sum to the debts of Dare & Co.; that it was contrary to equity to appropriate the whole property to the debts of Dore & Co., to tbe exclusion of those of Dore & Dwyer; and that, if tbe interest of Joyce was to go to tbe creditors of Dore & Co., to set aside tbe deed was not tbe proper remedy, but, perhaps, under the prayer for general relief, alien in favor of tbe plaintiff to that extent might be declared.
    
      II. A. Wilson, G. Clinton and J. F. Clover, for respondents:
    1. Tbe sheriff’s return of tbe execution unsatisfied, is conclusive of the right of tbe plaintiff to maintain this action. Sperling v. Levy, 16 Abb. Pr. R., 426. 2. In an action to remove a fraudulent or inequitable incumbrance, tbe creditors need only show that a lien or quasi lien has been obtained upon tbe property in suit, by docketing a judgment in tbe proper county as against real estate, or by issuing an execution against personal property. Parshallv. Tillon, 13 How., 7; Greenwood v. Brodhead, 8 Barb., 593 ; Clarkson v. DePeyster, 3 Paige Ch., 320; Brinlcerhojf v. Brown, 4 Johns., 671,677; Spear v. Wardell, 1 N. Y., 144; McCartney v. Bostwich, 32 N. Y., 53; Gates v. Boomer, 17 Wis., 455; Connell v. Radway, 22 id., 260. 3. It is not necessary that there should be no remedy by execution. 2 Yan Santf. Eq. Pr., 129. 4. Tbe evidence to prove fraud required in equity is not so great' as in cases at law. Story’s Eq., 187, 373. 5. A party coming into possession of trust property with notice' of tbe trust, will be held to be a trustee. Mechanics' Bank of Alexandria v. Seton, 1 Peters, 309; Murray v. Ballou, 1 Johns. Ch., 566; Heathy v. Pinsier, 2 id., 157; Shepherd v. McMvers, 4 id., 136; Frost v. Beekman, 1 id., 301; Johnson v. Fleet, 14 Wend., 181; and see, in analogy, Long v. Fuller, 21 Wis., 121; Oliver v. Piatt, 3 How. (U. S.),. 333; Wormley v. Wormley, 8 Wheat., 422; Gilchrist v. Stevenson, 9 Barb., 9; Will. Eq., 559, 608. And a court of equity will relieve a creditor against him. McCartney v. Bostwich, 32 N. Y., 53. 6. Where property is conveyed before judgment, in fraud of creditors, the lien will still attach. Fastman v. Schett-ler, 13 Wis., 324; see also Gates v. Boomer, 17 id., 455. 7. Equity will assist creditors in reaching property held under a nominal trust. Willard’s Eq., 421. 8. Partnership creditors have a preference over individual creditors. Parsons on Part., 842; Pierce v. Jackson, 6 Mass., 242; Trowbridge v. Cushman, 24 Pick, 310. 9. Where a new partner is taken into the concern, the old partnership ceases to exist, and a new one arises. Parsons on Part., 406. 10. Creditors of a partnership have no specific lien on partnership property, (Parsons on Part., 342); and where a partnership is changed, retaining the assets of the old one, the creditors of the new firm are to be preferred. Smith v. Howard, 20 How., Pr. R., 121. 11. Real estate of partnerships is regarded in equity as partnership assets, subject to the claims of partnership creditors. Parsons on Part., 441, note “P; ” Burnside v. Merrick, 4 Met, 537 ; Parsons on Part., 371, 372; Buchan v. Sumner, 2 Barb. Ch., 165; Buckley v. Buckley, 11 Barb., 43. 12. Equity, however, will apply personal property to the payment of firm debts first. 13. It is a fraud upon partnership creditors for partners to convey partnership assets in payment of individual debts, where the partnership is insolvent.1 Kirby v. Schoonmalcer, 3 Barb. Ch., 46; Wilson v. Bobertson, 21 N. Y., 587. 14. It is not necessary to allege that the debt was contracted prior to the transfer. In an action by a creditor to reach equitable assets, a supplemental bill may be filed to reach property subsequently acquired. Hager v. Price, 2 Paige, 333. 15. Where there is an actual intent to defraud or hinder prior creditors, subsequent creditors will be relieved. King v. Wilcox, 11 Paige, 589. 17. Where a trust is constituted, and title conveyed to the trustee for the benefit of a third party, and the purpose of the trust fails, a resulting trust arises in favor of the person creating the express one. 2 Story’s Eq., §§ 1195-6 a; Will. Eq., 599.
   Cole, J.

We think the circuit court erred in refusing to make the First National Bank of Hudson a party to the action on the application of the trustee, Judge Wetherby. The bank was the real party interested in the controversv. Both the debts of Dore & Co. and of Dore & Dwyer, belonged to it, and it is conceded on botli sides that tbe conveyance made to Judge Wetherby, wbieb it is songbt to bave set aside and cancelled, was given to secure tbe payment of one of those debts. Although Judge Wetherby was a stockholder in the bank at the time the conveyance of December 4th, 1866, was executed, yet it is perfectly manifest that he acted in the matter merely as the agent or trustee of the bank, taking the title for its benefit, and not for himself. The bank then is the real party in interest, and its rights, and not those of the trustee, are directly involved in the litigation. The sole issue raised by the pleadings is, whether the store and lot in controversy were conveyed for the purpose of securing the indebtedness of Dore & Dwyer, or of Dore & Co., and if either, whether the conveyance was valid as against the creditors of the latter firm. That is the issue; and it is very plain that the bank, which is the mortgagee, should be before the court. The answer of the defendants admits that the debt of Dore & Co. to the bank is paid in full, but insists or alleges that the property was conveyed to Judge Wetherby (who was acting solely as agent for the bank) to secure a valid indebtedness of Dore & Dwyer to the bank, which remains unpaid. In the determination of that question, it is evident that the bank is a necessary party. The general rule in equity is, that in suits respecting the trust property brought against the trustee, the cestui gue trust is a necessary party, because the beneficiary owns the equitable and ultimate interest affected by the decree. Story’s Eq. Pleadings, § 207, and authority cited in the notes; The Board of Supervisors v. The Mineral Point R. R. Co., 24 Wis., 94-128. It is true, this general rule has its exceptions; but those exceptions have no application to the case before us. There is no practical difficulty in ¡bringing before the court the bank, the owner of the debt and .of the mortgage given to secure its payment. Indeed, we do not well perceive how any adjudication can be had affecting the validity of the conveyance to Judge Wetherby, or the one made by bim to tbe defendant, Whaley, unless tbe bank is made a party to tbe action. For tbe bank is interested in having tbe mortgaged property applied to tbe payment of tbe debt of Dore & Dwyer, to tbe exclusion of tbe creditors in tbis suit, wbo are seeking to subject it to tbe payment of tbeir debts. Tbis view therefore, of tbe error of tbe circuit court in refusing to make tbe bank a party on tbe application of tbe agent or trustee Wetherby, necessarily involves a reversal of tbe judgment. But, notwithstanding tbis is so, still it becomes necessary and proper to indicate our views upon some other questions arising upon tbe record and discussed by tbe counsel, in order that tbe court below may have tbe benefit of them on tbe final disposition of tbe cause.

And in the first place we remark, that, to our minds, tbe evidence is perfectly clear and satisfactory that tbe object and intention of giving tbe conveyance in question to Judge Wetherby, were to secure tbe payment of tbe debt of Dore & Dwyer. At all events, we are entirely satisfied that tbis was the' intention so far at least as Dore & Dwyer were concerned. It is true, there is some conflict of testimony upon that point, even. But tbe decided weight of testimony supports tbis conclusion; and especially is this so in respect to tbe written evidence bearing upon tbe question. It appears that tbe next day after tbe conveyance was made to Judge Wetherby, be executed and delivered tbe written declaration, which clearly states that tbe property was conveyed to bim u in trust, to secure an indebtedness owing by Dore & Dwyer to tbe First National Bank of Hudson.” Now, it is incredible that Dore should have received tbis paper unless it bad been bis understanding that tbe object of tbe con veyance was to secure tbe payment of that debt. It is true that Bore testified that be bad no knowledge of tbis paper, and never saw it until it was produced on tbe trial; but the' evidence was overwhelming that be is mistaken, and that tbe paper was read over and delivered to bim at tbe time it was executed. And, moreover, there is tbe written notice served upon Judge Wetherby and tlie bank a few days thereafter, winch recited that the property was conveyed to secure the payment of the debt of Dore & Dwyer, and which paper Dore admits he signed. These written declarations, which were made deliberately about the time the deed to Judge Wetherby was executed, are decisive upon the question as to what debt that conveyance was intended by Dore & Dwyer to secure. It was most indubitably given by them to secure the payment of the debt of Dore & Dwyer to the bank, and not the debt of the firm of Dore & Co. It is possible that there was a further understanding on the part of Joyce, that whatever interest he, as partner of the firm of Dore & Co., had in the property, should be applied to the payment of the debt which the bank held against that firm. We do not say that evidence shows to our satisfaction that Joyce understood that his interest was to be so applied; but there is much more doubt upon this point than as to what must have been the intention and understanding of the other grantors, Dore & Dwyer. It appears that the interest of Joyce, as partner of the firm of Dore & Co., in this property was small; still, whatever it was, if he appropriated it to the payment of the debts of the new instead of the liabilities of the old firm, it is probable that a court of equity would make that application of his interest. And this the court might do, upon the principle which is sometimes applied in partnership cases, that where a partner has reserved a lien upon the partnership assets for the payment of the debts of the firm of which he is a member, or where he has applied a portion of the joint property to the payment of such debts, there the creditors of that firm may avail themselves of this lien, and work out their equities through him. Counsel on both sides have referred to cases, where that principle is sanctioned and enforced. So that, if the understanding of Joyce was that his interest in the store and lot should be applied to the discharge of the debts of the firm of Dore & Co. to the bank, then, since that debt has been paid, he may insist that this application shall be made of it, and the creditors of that firm may work out tbeir equity through him by the aid of this equitable doctriue. It seems to us that this is as far as a court of equity will go in the distribution of this property, upon the facts appearing in evidence.

The court below, however, held that this conveyance to Judge Wetherby was fraudulent and void as to the creditors of the firm of Dore & Co. That firm was composed of Dore, Dwyer and Joyce. It commenced business in July, 1866, succeeding the firm of Dore & Dwyer, which had previously been doing a mercantile business at Hudson, and which owed the First National Bank a debt of about $1,700. It appears that Joyce contributed little or no means to the capital of the firm, though the fact is established that he paid a small amount to purchase the lot upon which the store was erected. The store was erected sometime during the summer and fall of 1866, and the lot was principally paid for, and the building was mostly, if not entirely, paid for out of the means of the old firm of Dore & Dwyer. It is probable that the means of Dore & Co., to a small extent, were contributed to pay for work and material used in the erection of the store. The court below held that the legal title to the store and lot was in Dore, Dwyer and Joyce as tenants in common; but that, as they were purchased with partnership funds for partnership purposes, each partner held his interest in trust for the company until the accounts were settled and partnership debts were paid. And further, because the firm of Dore & Co. were in embarrassed circumstances and unable to meet their liabilities when the conveyance was made to Judge Wetherby, that the title never vested in favor of the •creditors of Dore & Dwyer, but that the property must be applied to the discharge of the debts of the new firm. We do not perceive upon what principle this superior equity of the creditors of the new firm rests. We have already remarked that the evidence shows that the store and lot were mostl-y paid for out of the assets of the old firm. Under such circumstances, equity and justice would seem to require that the pro-ceels of tbe property sbould be appropriated to tbe payment of tbe debts of Dore & Dwyer, at least, so far as tbe assets of tbat firm contributed to its acquisition. Especially sbould this be so in view of tbe fact tbat tbe partners themselves bave charged it with tbe payment of a valid debt owing by tbe old firm. We bave already alluded to tbe equitable doctrine, sanctioned in many cases, which would devote tbe interest of tbe partner Joyce, to the payment of tbe debts of tbe firm' of Dore & Co., providing be executed tbe conveyance with tbe understanding it sbould be so applied.. But' why sbould a court of equity go farther than this, and give tbe creditors of tbe new firm a preference in tbe distribution of tbe property? In this case, tbe bank surely acquired a priority at law by securing tbe mortgage. Its equity was equal, if it was' not in fact superior, to tbe equities of tbe new firm, because tbe mortgaged property was principally acquired by the assets of Dore & Dwyer. And as tbe partners, by common consent, appropriated it to tbe liquidation of tbe debt due tbe bank, it sbould not be taken from tbe bank and given to tbe creditors of tbe new firm. Such a distribution of tbe property would be contrary to tbe principles of natural justice. It is giving the creditors of Dore & Co. a preference to which they have' no equitable right. Tbe transfer by tbe partners to tbe bank seems to bave been made in tbe utmost good faith. There is no pretense tbat there was any intent on tbe part of any one to defraud other creditors by giving this conveyance. But the1 partners, in tbe management of their own affairs, saw fit to give tbe bank a mortgage upon a part of tbe partnership property, and what principle forbids them to make this disposition of it ? It must be admitted tbat only a small amount of tbe assets of tbe new firm was contributed to tbe acquisition of this property. It was almost entirely acquired by tbe assets of tbe firm of Dore & Dwyer. And to take it from a creditor of tbat firm, who by diligence has obtained a transfer of it to secure tbe payment of a valid debt, and appropriate it entirely to tbe payment of tbe debts of tbe new firm, seems to ns a violation of all principles of equity and justice.

It is said that where a partnership is changed, retaining the assets of the old one, the creditors of the new firm are to be preferred; and the case of Smith v. Howard, 20 How. Pr. R, 121, is referred to in support of this position. This case, however, merely decides that the creditors of an old firm have no equity against the partnership property of the old firm in the hands of the new firm or their assignee; and that, while the partners are administering their own affairs, they may prefer one set of creditors in an assignment. And this case very clearly states the rule, that, when partners are thus administering their own affairs, the partnership creditors have no lien upon those funds, and that the equities between the joint and separate creditors of the partnership depend solely upon the equities of the partners themselves, and must be worked out through them. An application of this principle would doubtless require the interest of Joyce in the mortgaged property to be applied in the manner he intended when he executed the conveyance to Judge Wetherby. Further than this we do not think a court of equity should go in the distribution of that property.

It follows from these views that the judgment of the circuit court must be reversed, and the cause remanded for further proceedings in accordance with this opinion.

By the Court— So ordered.