Case Name: Grasswitt's Ass'nee, &c. v. Connally & als.
Court: Supreme Court of Appeals of Virginia
Jurisdiction: Virginia
Decision Date: 1876-11
Citations: 27 Gratt. 19
Docket Number: 
Parties: *Grasswitt’s Ass’nee, &c. v. Connally & als.
Judges: 
Reporter: Virginia Reports
Volume: 68
Pages: 378–381

Head Matter:
*Grasswitt’s Ass’nee, &c. v. Connally & als.
November Term, 1876,
Richmond.
Partnership — unrecorded Agreements between Partners. — R, J & G form a partnership for the manufacture of tobacco, and in their article of co-partnership they say, it is understood that G shall contribute for the purposes of the business such an amount of capital as he may be able to command, which, when contributed, is to be placed to his credit on the books of the concern, to be used only in conducting the business, and to bear interest of six pgr cent, per annum. * * And in order to protect G against any losses that may arise from the business, hereby pledge and assign to him all the present and future interest in thé stock, machinery, fixtures and claims of the concern.
G put in $4,200, the others put in nothing. The business proved unprofitable, and the firm failed, and the partnership was dissolved.
About the commencement of the partnership they bought machinery, &c., giving the notes of thé firm, and a deed of trust upon the machinery, &c., to secure them, and on their failure the trusted sold, and after satisfying the trust there was a balance left. On a contest between the creditors of the partnership and G — Held:
1. Same — Same—Possession of Property — Partnership Creditors. — The property never having passed to the separate possession of G, but remaining in the possession of the partnership, the unrecorded executory agreement aforesaid is fraudulent as to creditors of the firm without notice.
2. Same — Negotiable Notes — Dissolution.—About the time the firm failed, to secure G f or his advances, they made a note payable to their own order for $4,500, secured by deed of trust on the machinery, &o.; but the note was not endorsed or delivered to G. The note not having been endorsed or delivered to him by the other partners, though he took possession of it after the dissolution, G is not entitled to it. It creates no liability without: negotiation, and neither G nor either of his partners could afterwards negotiate it; and consequently the deed made to secure it is a nullity.
*By an article of agreement bearing date the 21st of January 1870, J. B. Royster, M. W. Grasswitt and J. J. Royster formed a partnership for the manufacture of tobacco in the city of Richmond, under the name and style of Royster & Grasswitt. This agreement is set out in the opinion of Judge Anderson.
At the time this agreement was entered into, the parties were negotiating with James Gunn, and had agreed with him to purchase his machinery, fixtures, &c., for the manufacture of tobacco, and they executed to him their notes, in the name of the firm, dated February 1st, 1870, to the amount of $6,890, and also a deed of trust to Thomas H. Gunn upon the said fixtures to secure the purchase money.
In February, Grasswitt put £2,100 into the concern, and in March he put in the like sum, making $4,200. The Roysters put in nothing during the continuance of the partnership. And the business proving unprofitable, the partnership was, by mutual consent, dissolved in October 1871. A short time previous to the dissolution however, James B. Royster, who was the financial manager of the business, seems to have suggested to Grasswitt the necessity of the partnership’s doing something to secure him the money he had advanced, and, after consulting counsel, a note for $4,500 was made in the name of the partnership, payable to their own order, and the tobacco fixtures were conveyed in trust to secure it, and this conveyance was put upon record. The note, however, does not seem to have been endorsed by the partnership, and was kept by Royster in their own chest until it was taken possession of by Grasswitt, as Royster says without his knowledge or consent. After this note and deed was made, they wrote to their creditors saying they had done nothing which would compromise their interests.
*Soon after the partnership stopped business, Thomas H. Gunn, the trustee in the deed to secure James H. Gunn, sold the tobacco fixtures; and, after paying James Gunn the amount due him, there remained of the proceeds of the sale, after paying all expenses, the sum of £1,149.19. This money, or a part oi it, was claimed by Zenas B. Stearns, the owner of the building in which the business of the partnership was conducted, for rent, and by Grasswitt; and Thomas H. Gunn filed his bill, making Stearns, Grasswitt and the Roysters defendants, and asking the court to direct him in the disposition of it. In this case Con-nally & Co., of New York, asked leave to file their petition, in which they claimed to be large creditors of the partnership, and insisted that the fund in court should be applied to satisfy their debt. The cause came on to be heard in February 1872, when the court refused to permit the petition of Connally & Co. to be filed, and made a decree, directing that after the payment of the costs of the suit Stearns should be paid $900 in satisfaction of his claim for rent; and then the balance of the fund should be paid over to Grasswitt, with any other property conveyed in the deed to Gunn which had not been sold; “it appearing from the pleading and evidence in the cause that said Grasswitt, as one of the said partners, is entitled to said surplus (which appears to be a part of the partnership assets)- by virtue of the article of co-partnership and an assignment subsequently made by said concern in pursuance of said co-partnership agreement.
Immediately upon the making of this decree, and before the money was paid over, Connally & Co. filed their bill in the chancery court of the city of Richmond in behalf of themselves and all the other creditors *'of the partnership of Royster & Grasswitt, claiming that the fund in the hands of the trustee, Gunn, was assets of the partnership, and liable to pay the partnership debts; charging that the note for $4,500, and the deed of trust to secure it, were fraudulent, and asking that the said fund might be so applied, and that Gunn might be enjoined from paying it over. The injunction was granted.
Grasswitt answered, denying that the note and deed were fraudulent, and insisting that they were intended by being put upon record to secure to him the benefit of the provision in his favor in the article of agreement in relation to the money he might advance for the partnership.
Pending the cause Grasswitt was adjudged a bankrupt, and his assignee was made a party. And the cause was referred to a commissioner, who was directed to report of what the assets of Royster & Grasswitt then consisted, and take an account of the debts due by them, and their priorities if any, and particularly whether the funds then in the hands of the receiver of the court (to whom by a former decree Gunn was directed to transfer them) were partnership assets or the individual property of Grasswitt; and if the assets of Royster & Grasswitt were insufficient to pay their debts, then to apportion them among the creditors.
The commissioner reported the amount in the hands of the receiver to be $1,775.72, subject to the order of the court in the cause, and this embraced all the available assets of the firm, and was subject to the creditors of the concern, and was not the individual property of Grasswitt. He reported three debts of the firm, amounting to §13,486.83, and apportioned the fund pro rata among them.
This report was recommitted to the commissioner, *with instructions to take such further evidence as might be offered by any of the parties, and report upon the questions referred to him by the former decree. And the commissioner' returned his report, in which he adhered to the opinion expressed by him in his first report. And to this report Grasswitt’s assignee excepted. Because,
1st. It erroneously reports that the fund and the property from which it was derived was, at the commencement of this suit, partnership property of the late concern of Royster & Grasswitt.
2d. It reports that the assignment or pledge of the partnership property by the other two members of the firm, in the article of partnership, did not create a separate and individual estate in Grasswitt in said property.
3d. It reports that from the evidence in ,the. cause, the claim o± Grasswitt, as to the nóte of ’$4,500, and the deed of trust securing; it, is not sustained.
4th. It fails to report among the debts of Royster & Grasswitt, entitled to share in the distribution of their assets, the claim of Grasswitt for $4,200, advanced to said firm.
The cause came on to be finally heard on the 4th of March 1873, when the court made a decree overruling the exceptions to the report, and confirming it; and it appearing that the fund in court was $1,952.89, it was distributed pro rata among the three creditors of the partnership reported by the commissioner. And thereupon Grasswitt and his assignee applied to a judge of this court for an appeal; which was allowed.
Cannon & Courtney, for the appellants.
Guy & Gilliam, for the appellees.

Opinion:
* Anderson, J.,
delivered the opinion of the court.
Joint creditors as such have no lien upon the partnership property. They have no equity'to appropriate it to their debts. If they proceed against the firm to a judgment at iaw; they may levy an execution upon the partnership effects, or upon the separate property of the partners, and thus acquire a lien upon the partnership property and also the separate property of the copartners. Their remedy is a legal one, and. until the statute authorizing creditors in certain cases to sue in equity before they obtain judgment, &c., they must exhaust their remedy at law before they are entitled to invoke the assistance of a court of equity, and can only reach the partnership effects before they have acquired a lien upon them through the equities- of the copartners.
Each' partner has an equity to have the social effects appropriated as far as necessary to the payment of the joint debts towards the discharge of his individual liability for them. He has consequently an equity to prevent their diversion from that object by his copartner to his separate use. But he may bona fide, and for a valuable consideration, transfer the partnership effects to his copartner. By so doing he relinquishes his aforesaid equity, and cannot afterwards insist that they shall be subjected to the payment of the joint debts. The joint creditors in this case seek to enforce the aforesaid equity of the co-partners.
The appellant, Grasswitt, contends that his co-partners, the Roysters, relinquished this equity by a stipulation in the articles of copartnership, whereby his copartners transferred to him the partnership effects to be his property until he was repaid the money he advanced. And his claim is to be repaid the money he *advanced out of the fund in question, which he claims as his separate property. The clause in the articles of c.o-partnership, upon which this claim is founded, is as follows: "It is understood that the said M. W. Grasswitt shall contribute, for the purposes of the business, such an amount of capital as he may be able to command, which, when contributed, is to be placed to his credit on the books of the concern, to be used only in conducting the business, and to bear interest of six per cent, per annum. Should the said J. B. Royster and J. J. Royster (the other parties to the agreement), or either of them, make any contribution of capital, the same to be placed to their credit on the books of the concern, and to bear a like interest. But until they shall do so (this is the language relied on as making the transfer), and in order to protect the said Grass-witt against any losses that may arise from the business, hereby pledge and assign to him all their present and future interest in the stock, machinery, fixtures and claims of the concern; this assignment to be relieved and abated as the respective interests of the said J. B. Royster and J. J. Royster in the profits of the business will justify."
At the date of this agreement, the 21st of January 1870, the company had no effects. At least it was after that date that the purchase of tobacco fixtures was completed by giving notes and a deed of trust to secure their payment to James Gunn, from whom they were purchased, to wit: on the first of February 1870. But J. B. Royster testifies that the said purchase was contemplated about simultaneously with a verbal agreement to form the partnership. Subsequent to the purchase of the fixtures, &c., to wit: on the 23d of February 1870, Grasswitt contributed or advanced *$2,100, and the same amount on the 5th of March following.
By the articles of co-partnership, the Roysters do not, in terms, undertake to repay or to refund to Grasswitt the money to be advanced by him. That does not seem to have been contemplated. On the contrary, when contributed, it was to be placed "to his credit on the books of the concern," to be used only in the business, and he was to receive six per cent, interest. And a like provision is made-with regard to it, should the Roysters, or either of them, make a contribution to the capital. Nor do they pledge or assign the partnership effects then owned or to be acquired to secure the repayment of the same — that we have seen was not contemplated — but for the purpose of protecting said Grasswitt "against any losses that may arise from the business." And this pledge or assignment was to be abated or relieved (which seems, though not clearly expressed, to have been their meaning) accordingly as the Roysters may make con-tri butions. If their contributions were equal to Grasswitt's, they were entitled to be relieved from the pledge or assignment; if not equal, then to an abatement from the pledge, in proportion to their contributions.
The partnership effects, shortly before the dissolution, were sold under the deed of trust to Gunn, and applied to the payment of rents, &c., due from the co-partnary and to the debt due to James Gunn, from whom they were purchased, which left a balance of $1,873.12, which, tog-ether with the interest thereon, is the fund in dispute. Grass-witt claims that he is entitled to it under the co-partnership agreement; and the joint creditors contend that it should be applied to the payment of their debts. Has Grass-witt the right to the conversion of this fund, under the agreement aforesaid, *to his separate use? or, is it applicable to the payment of the joint debts?
The court is of opinion, that the unrecorded executory agreement between copart-ners, such as is hereinbefore described, pledging or assigning all the partnership effects, then owned or which should after-wards be acquired, to indemnify or save harmless one of the partners, who has advanced money to carry on the business, the property never having passed to the separate possession of the pledgee or assignee, but remaining in the uninterrupted possession of the co-partnary, is fraudulent in law as to creditors without notice. In this case the partners themselves seemed to have regarded their agreement as only binding inter se. The property was bought by the copartners, and was held and treated by them as copart-nership property after the said agreement was made; and shortly before the dissolution was conveyed by them (including Grass-witt) in trust as partnership property; and in their correspondence with the joint creditors, they (including Grasswitt) gave assurance that they had done nothing which would compromise their interests; and never an intimation made that the -partnership effects were held by one of the copartners in pledge, or by assignment for his indemnity; and the court is of opinion, that to give effect to said agreement now, so as to convert the fund in question to the separate use of Grasswitt, and to divert it from the payment of the joint debts, all the partners being insolvent, and there being no other partnership property, would be fraudulent as to the joint creditors. And although the Roysters may have no equity against Grass-witt, to require the application of the partnership effects to the payment of the joint debts, and the joint creditors, therefore, can have no relief in equity through their ^equities, yet, under the statute, a court of equity will give aid to a creditor even before he has obtained a judgment or decree for his claim, to avoid an assignment or transfer of, or charge upon, the estate of his debtor, which he might institute after obtaining such judgment or decree. (Code of 1860, chap. 179, § 2, p. 736.) These creditors have, therefore, in this case, though not having obtained judgment, the right to seek relief in a court of equity.
The court is further of opinion that the appellants cannot maintain their claim under the deed of trust to Dottier to secure a note for $4,500, made payable to their own order. Said note was never negotiated. It was never ordered to be paid to Grasswitt, or delivered to him. It came into his possession without the consent of his copart-ners, and he is not entitled to it. The said note creates no liability without negotiation, and Grasswitt nor either of his copartners could now negotiate it; and consequently the deed made to secure it is a nullity. Upon the whole, the court is of opinion that the assignment of Grasswitt in bankruptcy does not invest his assignee with the fund in question as the separate property of Grasswitt, but that it is liable to the joint debts of the copartnership; and that the decree of the chancellor must be affirrped.
Decree affirmed.