#### T. Ellett Hodgskin, as Trustee in Bankruptcy of the Estate of Adolph Kuffler, Plaintiff, *v.*Ralph Heim et al., Defendants.

(Supreme Court, Kings Special Term,

January, 1901.)

Action by trustee in bankruptcy to follow funds fraudulently transferred by the bankrupt — After dissolution, firm property in the hands of a continuing partner is subject to his individual debts.

At a time when a Arm -and both of its partners were Insolvent, one partner withdrew, the continuing partner afterwards and before making a general assignment and with intent to give tibe retiring partner a preference, returned him his capital, the latter paid the money to his wife for a pretended debt and she loaned it to a third party. Subsequently, the continuing partner alone was thrown into bankruptcy.

*549Held, that, in equity, his trustee could follow the money, fraudulently transferred and identified in the hands of the third party, as the dissolution had made it the individual property of the continuing partner and therefore subject to his individual debts.

Action "by tihe trustee in involuntary bankruptcy of the defendant Adolph Huffier to have declared fraudulent against the creditors of the bankrupt various payments aggregating $10,020.66, made by the bankrupt to the defendant Ralph Heim; or, failing in that, that $7,000 thereof he adjudged to have been so paid by way of unlawful preference under the bankruptcy law, in that the same was paid within four months prior to' .the filing of the petition in bankruptcy, and that the bankrupt was then insolvent to the knowledge of the said defendant-Heim, and that the money was paid and received with the intention of giving him a preference; and in either case to trace the said money and get it back. It is alleged that the said defendant Heim paid the said money to his wife in discharge of a pretended indebtedness by him to her, and that she loaned the same to the defendant Pentlarge, who still owes it to her; and they are made defendants.

George W. Wingate for plaintiff.

Ira Leo Bamberger and Roger M. Sherman for defendants.

Gaynor, J.:

The defendants Huffier and Ralph Heim were partners in the wholesale tobacco trade from January 1st, 1896, to January 1st, 1899, under the firm name of A. Huffier & Co. Heim’s contribution of capital was $10,000 in cash. At the end of 1898 Heim went out of .the firm, leaving all of the assets with Huffier, who continued the business under the firm name until May 10th, 1899, when he made a general assignment for the benefit of his creditors under the state law. On June 9th following, a petition in bankruptcy was filed against him, and he was adjudicated a bankrupt. The firm was insolvent at the time Heim went out, and so was each partner, nevertheless between then and the filing of the petition in bankruptcy Huffier paid back to Heim out of the assets of the business as it was then being conducted by Huffier individually the $10,000 which Heim had put into the partnership as capital; viz., on January 21st $1,000, and on February 1st two checks by Huffier, one for $2,020.66 and one *550for $2,000,' the former being cashed at once and the latter on. February 18th; and the balance by three promissory notes of Kuffler dated January 21st and for $1,666.67 each, payable February 12th, March 4th and March 18th, respectively; and they were paid after maturity. These three notes and the said check for $2,000 malee up the sum of $7,000 which the plaintiff claims was paid in unlawful preference within four months prior to the filing of the petition in bankruptcy. The said sum of $1,000 was paid and all of the checks and notes were given and subsequently paid with knowledge by both parties of the insolvency of the firm and of the partners individually, and with the intention of both parties to give a preference to the said Heim over the creditors of the firm and also those of Kuffler. If the dates of the said check ■and notes which make upi the said sum of $7,000, and not the daites of the payments thereof, are to be taken as the times of payment, then such payments were not made within four months prior to the filing of the bankruptcy petition, and recoverable back by the trustee in bankruptcy under section 40 of the bankruptcy law. But it is not material to eon-' eider this point, for I find that the payment of the entire sum of $10,020.66 was a fraudulent transfer of his assets by Kuffler as against the said creditors, irrespective of the bankruptcy law.

It is claimed, however, that this suit cannot he maintained, for the reason that the plaintiff is the trustee in bankruptcy of Kuffler only, the partnership not having been put into bankruptcy; and a trustee in bankruptcy of an individual partner cannot maintain a suit to recover back partnership money paid away preferentially under the bankruptcy law, or in fraud of the partnership creditors (Amsinck v. Bean, 22 Wall. 395). But if it could he deemed the fact that the money paid to Heim came out of the assets of the firm taken over by Kuffler on the dissolution, still the point is not well taken, for such assets became the individual property of Kuffler upon the dissolution. Heim on going out left all of the assets with him, and the evidence shows that this was intended to be and was a transfer of them by Heim to him. After that the firm creditors had no equitable right of recourse to the firm assets over the individual creditors of Kuffler. The equitable right of firm creditors to have their claims satisfied out of the firm property in preference to claims against the partners individually, in a liquidation of the firm business, is a derivative right only; *551*i. e.,*it is derived from the similar equity which belongs to each partner as against his copartner. Each partner has the right to have the firm property applied to the payment of the firm debts in preference to the individual debts of his copartner, so that he may ascertain the net assets and get his share thereof and not have it taken by the creditors of his copartner. From this equity which partners have as between themselves, the firm creditors derive their equity to have the firm assets first applied to the payment of their claims. They are able to subrogate themselves to the said equity of the partners. When by agreement one partner transfers his share of the assets to his copartner and goes out of the firm, and the firm ceases, such equity of the partners of course ceases also, for it cannot survive the partnership; and from this it follows that the said derivative equity of the firm creditors must cease also (Ex parte Ruffin, 6 Ves. Jr. 119; Case v. Beauregard, 99 U. S. 119; Fitzpatrick v. Flannagan, 106 U. S. 648; Huiskamp v. Moline Wagon Co., 121 U. S. 310). It is sometimes mentioned .as an exception to this rule that the assignment of his interest by the retiring partner and the dissolution must be *bona fide.*But this is no exception to the rule, for if the assignment and dissolution be only a fraud and sham, then they do not exist at all in contemplation of law, and to such a case the rule does not apply, any more than, if there were no semblance of an assignment and dissolution. It seems needless to say that in the present case the defendants do not claim that the dissolution, was *mala fide.*On the contrary, they contend that it was *bona fide,*and that the firm was solvent at the time, and that Kuffler was solvent when he paid the money to Heim.

The other rule, that in case a business is continued under the firm name by one or more of the partners after dissolution of the firm, the partner who retired is liable with them for the debts contracted in the business after the dissolution, unless actual notice of the dissolution was given to those who had dealt with the firm tad notice by publication to all others; or the subsequent creditors had actual knowledge of it before becoming such (3 Kent’s Com. 66; Ketcham v. Clark, 6 Johns. 144; Graves v. Merry, 6 Cow. 701; Clapp v. Rogers, 12 N. Y. p. 288; Austin v. Holland, 69 N. Y. 571; The Bank v. Herz, 89 N. Y. 629), is consistent with the rule stated -above. In such a case the partnership does not-in fact exist between the persons so liable, and therefore the equity with *552regard to the application of partnership assets to partnership debts-first does not exist. Such a subsequent creditor without notice or knowledge of the dissolution may hold the former partners for the payment of his claim, hut he is entitled in equity to no preference in the assets of the business over those who had notice or knowledge of the dissolution, and became creditors of the partner who continued the business only.

There seems to be no difficulty about a court of equity entertaining this suit as one to follow money fraudulently transferred, instead of remitting the plaintiff to an action at law against the defendant Heim, for the money is traced and cornered in the hands of the defendant Pentlarge. That makes a plain ease for equity,, and does not need the citation of extreme cases concerning equitable jurisdiction over cases of fraud; like *Slim*v. *Croucher*(1 De Grex F. *&*J. 518), which would uphold this suit in England if it were-against the defendant Heim alone. The complaint is that the defendant Heim paid the money to his wife (who is also a defendant) in satisfaction of a pretended debt by him to her, -and that she loaned it to the defendant- Pentlarge, and that he holds it. The answer of Pentlarge does not deny that the money was loaned to him, or that he has it; and the proof is that Heim loaned it directly to Pentlarge and holds his notes therefor. This suit is therefore necessary in order to reach the fund in Pentlarge’s bands-

Judgment for the plaintiff, with costs.