Case Name: Straus v. Kerngood & als.
Court: Supreme Court of Virginia
Jurisdiction: Virginia
Decision Date: 1871-11
Citations: 21 Gratt. 584
Docket Number: 
Parties: Straus v. Kerngood & als.
Judges: The other judges concurred in the opinion of Staples, J.
Reporter: Virginia Reports
Volume: 62
Pages: 927–930

Head Matter:
Straus v. Kerngood & als.
November Term, 1871,
Richmond.
Partnership — Separate Assets — Garnishment—Case at Bar. — K recovers a judgment against F & H as partners, and sues out an execution of fi. fa. upon it which is returned “no effects.” Afterwards S recovers a judgmentagainstHforanindividualdebt of H. There are no assets of the partnership of F & H, but G is indebted to E. K summons G as garnishee and obtains a judgment for the amount of his debt against G-. S also summons G and obtains a judgment; the summons of S being after that of K, but he obtains his judgment first. S then files his bill to enjoin K from receiving and G from paying to K the debt of G to H. Held :
Same — Same— Same — Priority.—K having first recovered his judgment against 3? & H and sued out execution thereon, has the prior lien upon the debt due from G to H; and a court of equity cannot deprive him of it.
On the 9th of May 1868, Kerngood & Brother recovered a judgment in the Hustings-court of the city of Richmond, against Wm. Fleishman and Jonas Heller, as partners under the name of Fleishman & Heller, for six hundred and ninety-seven dollars and thirty-five cents, with interest and costs. On this judgment the plaintiffs sued Out an execution of fieri facias, on the 12th of May 1868, which was returned by the sergeant of the city, “no effects.” On the 21st of September following they sued out similar executions, one directed to the sergeant of the city of Richmond, and another to the sergeant of the city of Williamsburg, returnable to November rules; and both were returned, “no effects.” On the same 21st of September the plaintiffs suggested that by reason of the lien of their writ of fieri facias there was a liability on the Eastern Bunatic Asylum, and a summons was .issued to bring the said Asylum *before the court to answer, on the first da3r of October- term, 1868 of the Hustings court of Richmond. This process was executed on the Eastern Bunatic Asylum on the 29th of September. And on the 29th of July 1869, there was a judgment in favor of the plaintiffs against the Eastern Bunatic Asylum, for $697.34, with interest and costs, in full of the -judgment of the plaintiffs against Fleishman & Heller.
On the 28th of October 1868, Julius Straus obtained a judgment in the County court of Augusta against Jonas Heller, for twelve hundred and fifty dollars, with interest and costs, for the individual debt of Heller. And on a suggestion, &c., Straus, at the November term of said court, obtained a judgment against the Eastern Bunatic Asylum for $775.13, with interest and costs.
It appears that on the 30th of May 1868, Jonas Heller recovered a judgment in the 'Circuit court of • Williamsburg and James ■City county, against the Eastern Bunatic Asylum for the sum of seven hundred and .■sixty-five dollars and eighty-six cents, with ■'interest and costs'. And this is the debt which was the foundation of the judgment against the Bunatic Asylum in both of the •above named cases.
In November 1869, Julius Straus presented his bill to the judge of the Circuit court of •the city of Richmond, praying for an injunction restraining Kerngood & Brother from collecting, and the Eastern Bunatic Asylum from paying, the judgment recovered by the former against the latter. In his bill he sets out the foregoing facts, and Insists that though the execution of Kern-good & Brother was first sued out, his judgment against the Eastern Bunatic Asylum was first recovered; and therefore he was entitled to have the debt due to Heller from the Bunatic Asylum, applied to pay his debt. And he further insisted that his judgment being against Heller individually, and the judgment in favor of Heller against *the Bunatic Asylum being due to him individually, whilst the judgment of Kerngood & Brother was against the firm of Fleishman & Heller, for which Heller was only bound as a member of the firm; he was entitled, on this ground, to have the debt due from the Bunatic Asylum to Heller applied <to the payment of his judgment in preference to Kerngood & Brother. And he stated that Heller was wholly insolvent. He made Kerngood & Brother, The EasternjBunatic Asylum, and Jonas Heller parties defendants; and prayed for-an injunction, and for general relief.
The injunction was granted: And Kern-good & Brother answered, contesting the claim of Straus to preference in the application of the debt due from the Bunatic Asylum to Heller. They said there was no partnership estate of Fleishman & Heller, out of which satisfaction of their debt could be obtained; and they were entitled to have their debt paid out of the separate estate of Heller, on which by their superior diligence they had acquired a lien superior to that of Straus.
The cause came on to be heard on the 11th day of November 1869, when the court dissolved the injunction and dismissed the bill, with costs. And thereupon Straus applied to this court for an appeal; which was allowed.
Meredith, for the appellant.
Johns, for the appellees.
Partnership — Separate Assets — Garnishment—Priority. — In Pitts v. Spotts, 86 Va. 72, 9 S. E. Rep. 501, the court said: “The appellant (partnership creditor) having obtained a lien by his judgment, and the ap-pellees (individual creditors) being only open account creditors, he is entitled to the benefit of that lien and ought not to be deprived of it. The case of Straus v. Kerngood, 21 Gratt. 584, is, upon this point, | a decisive authority.” See also, the principal case ¡ cited in Robinson v. Allen, 85 Va. 731, 8 S. E. Rep. 835.

Opinion:
STAPLES, J.
. It is universally conceded that partnership creditors are entitled to the preference over separate creditors in the administration of partnership assets. But. the converse of the proposition, that separate creditors are entitled to the preference in the administration of the separate estate, involves other considerations, and is by no means ' universally conceded. Upon this proposition the authorities are conflicting and irreconcilable. In *this state the question has never been decided. It was the subject of an elaborate and exhaustive discussion in Morris v. Morris, 4 Gratt. 293, between Judges Allen and Daniel; the former insisting that the rule which confines the creditors of the partnership to the partnership estate until the claims of the separate creditors are satisfied, is peculiar to the English courts in bankruptcy, and is utterly destitute of support from the general principles of equity. Judge Daniel, on the other hand, maintained the rule as founded on the general jurisdic-. tion of courts of chancery, to be enforced whenever, from any cause, the estate of a deceased partner is brought within the cognizance of a court of equity. It will be ob served, that the point of controversy between these judges, related to the proper distribution and application in equity of the separate estate of a deceased partner, which was insufficient to discharge both partnership and private debts.
The question under consideration here, whether a court of equity can deprive a joint creditor of a bona fide lien upon the separate estate of a partner, did not arise in that case. Judge Allen, however, said that a partnership creditor might levy his execution upon the separate estate of a partner, and that such levy could not be avoided by a separate creditor having no specific lien, was a proposition not to be controverted. Judge Daniel conceded it was perfectly competent for either partner to secure the payment of a firm debt, by giving a lien on his separate estate, which may wholly exclude his separate creditors, during his life and after his death, till such lien was satisfied. And I think it might be demonstrated, both on reason and upon authority, that when the joint creditor has by his superior diligence secured such a lien, a court of equity will not interfere to prevent his enforcing it, upon a mere suggestion of the insolvency of the partnership or the individual members composing it; and that it is only when *the creditors are compelled to resort to a court of equity to obtain possession of the assets, that the rule will be adopted, which confines the joint creditors to the social assets until the separate creditors are satisfied. However this may be, that rule is subject to several very important exceptions. One of these exceptions is, that the separate creditor is only entitled to priority when there is partnership property, or a living solvent partner. When there is neither one nor the other, the joint creditors are entitled to participate pari passu, with the separate creditors in the separate estate. In such case all the creditors, joint and several, stand upon common ground without a preference accorded to either. They are, however, mere equities, duly respected and enforced in courts of chancery in cases appropriate to the jurisdiction of those courts. But when the partnership creditor, by virtue of his judgment or execution, acquires a lien upon the separate estate of a partner, he has obtained a legal advantage of which he cannot be deprived by any one having only equal equity with himself. The equities being equal, the legal priority must be respected by every court.
I have seen but one case in which this precise point was involved. In Bardwell v. Perry, 19 Verm. R. 292, 302, Redfield, J., delivering the opinion of the court, uses this language: "In this particular case, there being no joint estate or solvent partner, the orators could not exclude the defendants from a share in the separate estate of each partner, even under the English bankrupt laws. The parties, therefore, standing precisely equal in point of equity, and the defendants having first attached the property, and thereby gained a prior right at law, must be permitted to pursue that right.
In this case the appellees sued at law, obtained a judgment and execution against both partners, and thus acquired a lien upon the joint and separate estate of their debtors.
This lien was fully consummated by ^process of garnishment against a debtor of one of the partners, and a judgment against such garnishee. The appellant is a separate creditor of the same partner, and has also a judgment and execution, but subsequent to that of the appel-lees. It is to be inferred, and was conceded in the argument, that the partnership and the individual partners are insolvent. It will thus be seen that the appellees have the prior statutory lien, the legal validity of which cannot be questioned. Their equity to the payment of that debt is equal to that of the appellant. Upon what principle is it they are to be deprived of this lien? It is said that the insolvency of the partners raises an equity in behalf of the private creditors. Is not this practically a repeal of the statute giving the lien of an execution, or can the courts incorporate into that statute an exception the legislature has omitted? Can they annul a lien fairly obtained, wrest the property from the custody of the law, and proceed to distribute it upon certain arbitrary equitable rules, because the debtor happens to be in failing circumstances? Suppose the joint creditor acquires his lien when the partner is perfectly solvent. It will scarcely be maintained that his subsequent insolvency will invalidate the lien. If the rights of the joint creditor depend upon the pecuniary condition of the debtor, the courts must accurately determine, not only what constitutes insolvency, but precisely when it commences, in order to determine the validity of the respective liens : certainly a difficult undertaking in States having neither bankrupt laws nor statutory insolvencies.
Upon the death of a partner, the joint creditor loses all remedy against his estate at law, and must resort to a court of equity for payment. In such case there may be some foundation for the rule requiring him to submit to an equitable administration of the assets. And so, where there are two funds, joint and several, the courts will not allow a creditor, having control of both, to *attach himself upon one fund, to the prejudice of him who has nd other. This is upon the familiar principle of marshalling assets, and is no interference with vested rights. When, however, the creditor is not seeking the assistance of a court of equity; when he has acquired a valid legal right to satisfaction from the estate of his debtor, it is impossible to take that estate from him and appropriate it to another creditor, without a judicial repeal of the statute.
I shall not stop to examine the only two cases cited by counsel, in which this doctrine was broadly maintained. One of them was decided by a chancellor of South Carolina, and the other a vice-chancellor of New York. Opposed to these cases, there is an array of authorities imposing in number and respectability. Meech v. Allen, 17 New York R. 300; McCulloh v. Dashiel's adm'or, 1 Harris & Gill R. 96; Cleghorn v. Insurance Bank of Columbus, 9 Georgia R. 319; Kerby v. Schoonmaker, 3 Barb. Ch. R. 46; Allen v. Wells, 22 Pick. R. 450; 1 Am. Lea. Cases, edition of 1871, page 472. In regard to the case of Jackson v. Cornell, decided by the vice-chancellor of New York, Judge Joynes, in Gordon v. Cannon, 18 Graft. 387, 415, said that case was overruled by Judge Scarburgh in the Circuit court of Petersburg in 1850, upon the ground that there was no such rule in equity as that announced by the vice-chancellor; and upon an application to this court for an appeal, the appeal was refused. In McCollough v. Somtnerville, 8 Heigh, 415, the social and separate effects were conveyed for the payment of partnership and separate debts indiscriminately. This court reformed the deed, applying the social effects to the joint debts, and the separate estate to the separate debts, according to the presumed intention of the parties.
The learned counsel for the appellant insisted that as a bankrupt system now prevails in the United States, the proceedings in the State courts should conform to the *rules in bankruptcy in respect to the administration of partnership and separate assets. It would certainly be going very far to say, that in any case of an insolvent partnership, a State court should assume jurisdiction to administer the assets by analogy to the rules in bankruptcy. But it is unnecessary to discuss - that question. It is true that according to the practice in 'the United States courts, under the provisions of the statute, when the partnership is in bankruptcy, the social effects are applied to the social demands, and the separate effects to the'individual claims. But those courts adopt the rule of excluding the partnership creditors from the separate estate, only where there are partnership assets, or a living solvent partner. They also recognize and enforce all liens bona fide acquired by any creditor under the State laws, prior to the commencement of proceedings in bankruptcy. But if the State courts may disregard all such liens in cases of insolvent partnerships, so far from conforming to the rules of the bankrupt courts, they would repudiate legal priorities which the latter courts respect in the administration of partnership assets. It seems to me, therefore, that the learned counsel for the appellant derives no support from the bankr rupt laws of the United States.
It was also insisted, that as the partnership creditors have'a prior right to the partnership assets, a similar preference should be given the separate creditors with respect to the private property of the individual partners. It is true, that upon the dissolution of the partnership by the death or bankruptcy of one of the partners, the joint creditors have a quasi lien upon the joint effects. This lien, however, does not result from any preference accorded to them, but from the equities existing between the partner's themselves. Each partner may insist upon the application of the joint effects to the joint creditors, and that the separate creditors shall be excluded until the joint liabilities are fully satisfied. In this way the joint creditors must be first paid in order to the administration *of justice to the partners. Whatever equities the joint creditors have, arise out of the equities between the partners themselves ; whatever liens they assert depend upon the lien of the partners upon the partnership funds for the payment of the partnership debts. Whether the separate creditor may insist upon his priority when the separate estate of a deceased partner is in a court of equity for distribution, which was so elaborately discussed in Morris v. Morris, is a question not necessary nor intended to be decided now.
If, however, the appellant were correct in his view of the law, his bill is not framed in accordance with the principles he invokes. There being no partnership assets, and no solvent partner, according to the equitable doctrine all the creditors should be permitted to participate pari passu in the separate estate, and with that .view all of them should have been parties to the bill. The appellant has brought the appel-lees only before the court; and by his pleading presents the single issue, whether he is not entitled to satisfaction out of the fund in controversy, notwithstanding the legal priority of the appellees.
I think the Circuit court did not err in dissolving the injunction, and dismissing the bill.
The other judges concurred in the opinion of Staples, J.
Decree affirmed.