Case Name: Jacob Kreis v. Hezekiah Gorton and John Merrill, Executors of John Ault
Court: Supreme Court of Ohio
Jurisdiction: Ohio
Decision Date: 1872-12
Citations: 23 Ohio St. 468
Docket Number: 
Parties: Jacob Kreis v. Hezekiah Gorton and John Merrill, Executors of John Ault.
Judges: 
Reporter: Ohio State Reports, New Service
Volume: 23
Pages: 468–473

Head Matter:
Jacob Kreis v. Hezekiah Gorton and John Merrill, Executors of John Ault.
1. The preference which creditors of a partnership may have over those of an individual partner, in the distribution of the assets of the firm, can not he defeated by a mere executory agreement between the partners, for the sale, or transfer, of the assets of the firm to one of them, unaccompanied by any actual delivery or transfer.
2. A delivery, or transfer, in such cases will not be presumed, hut must he' shown, in order to defeat this right of the creditors of the firm; and, therefore, where such purchasing partner dies before the time fixed for the delivery or transfer of the property, assets of the firm subsequently found in the hands of the surviving partner, who is also executor of the deceased, will be presumed to he held by him in his character of surviving partner, and not as executor.
3. Two partners, A. and G., agreed that the firm should he dissolved at a specified future time, and that A. should then take and own all its property and effects, and should pay all its debts. Before the time named A. died insolvent, having by his will appointed G. and another, person his executors. Money belonging to the firm was placed by G. in hank in the name of the firm, subject to he checked out in that name, and was so cheeked out by G. in payment of debts of the firm with the knowledge and consent of his co-executors. Held, that so-far as regards the rights of creditors so paid, the money is to be considered assets of the firm, notwithstanding any private agreement or understanding between the executors that it belonged to the estate.
Reserved in the District Court of Marion county.
The original action was brought by the defendants in' error against the plaintiff in error. In this they allege that Ault’s’estate is insolvent,’and that they have paid to Kreis, under the mistaken belief that the estate was solvent, the full amount of his claim against the estate; and they seek to recover back the excess of the payment over and above Kreis’ fro rata dividend of the assets. The facts-disclosed by the pleadings and evidence are substantially these: On the 5th of September, ,1868, Morton and the testator (Ault), who then were, and for years had been,, partners in a mercantile business, entered into an agreement to the effect that the said partnership should continue- till the 1st of January, 1864, and that Ault should then take possession and become the owner of all the partnership property and effects, and pay all the debts of the firm, .and that he should pay a stipulated sum to Gorton in full of his claims and demands upon the concern. On the same day Ault executed his will, in which he appointed said Gorton and Merrill his executors, and authorized them, as such executors, to continue and carry on the business for three years from and after the 1st of January, 1864, Ault died on the 6th of September, the next day after making this agreement and will. Gorton, as surviving partner, continued in possession of the assets of the firm, and as such carried on the business, making purchases as well as sales in the name of the firm of “Ault & Gorton,” as had been done prior to the death of Ault. The executors never qualified as such till the 7th of January, 1864, 'The claim of Kreis was for money loaned to the firm of Ault & Gorton in May, 1863, and was evidenced by their .note signed “Ault & Gorton.” In December, 1863, Gorton, who still continued to carry on the business in the old firm name, requested Kreis to bring the note and receive his money, which Kreis agreed to do, but delayed the matter till the 14th of January, 1864, when he delivered up the note and received from Gorton his pay in full. Kreis at this time had no knowledge of the agreement, or of the will, made on the 5th of September, 1863, or that Ault had acquired any individual or exclusive interest in the assets of the concern, and the payment was made to him by a bank check drawn by Gorton in the firm name of Ault & Gorton. No change of the account of Ault & Gorton in the bank was made, either at the death of Ault, or at the date of the qualification of the executors, the funds therein still standing in the name of Ault & Gorton. Gorton, it seems, was the only acting executor, and when he paid this note he supposed the estate of Ault to be solvent, but it was in fact, and now is, insolvent. IIow or whence the funds in bank at the time this check was drawn were derived, does not appear otherwise than from the fact that they were the proceeds-of the mercantile business, and not derived from» the individual property of Ault not put into the concern. The business was carried on in the name of the old firm until May or June, 1864, when it was ascertained that the estate was-insolvent, and the business was closed. Gorton then placed all his individual property in the hands of the executors, to her used as assets of the estate in payment of its debts. Nearly all the debts of the estate are debts contracted in the name of Ault & Gorton — some of them contracted before and some' after the death of Ault. Whether any of them were contracted after the qualificaion of the executors does not appear. Nor does it appear whether any money was deposited-in the bank between the date of their qualification and the payment to Kreis. Kreis knew nothing of any change in the ownership or management of the business, and supposed that it was still in fact, as it was ostensibly, under the control and management of Gorton.
Upon the trial of the cause, the court instructed the jury that if they should find that Ault and Gorton did enter' into said agreement of September 5, 1863, “ then, upon the-death of Ault, all the property belonging to the business-conducted in the name of Ault & Gorton became absolutely the property of Ault.” Under this instruction the' jury found for the plaintiff; and the court, after overruling a motion for a new taial, predicated upon the ground of the misdirection of the court, and the insufficiency of the testimony, gave the executors a judgment for the amount of their claim.
The errors assigned are, substantially, that the court misdirected the jury, and that the verdict is not supported by the evidence.
W. Z. Davis, with whom was J. H. Godman, for plaintiff in error:
C. K. Watson and J. & S. H. Bartram, for defendants in error.

Opinion:
Welch, J.
We are unable to see on what principle this instruction of the court, or the finding of the jury in the case, can be sustained. The agreement of September 5, 1863, was merely executory; the firm was still subsisting at Ault's death, and by that event all its property and effects became legally vested in Gorton as surviving partner. . This would have been the result, even had the agreement contained no provision postponing its execution till the 1st of January following. As such surviving partner Gorton had a right to apply the. assets of the firm in payment of its debts, and to deliver over to the executors of Ault only what should remain, if anything, after payment of those debts, including the sum stipulated to be paid to him. Nay, in case of the insolvency of Ault's estate, or of reasonable ground to suspect such insolvency, it was his duty so to do; and any creditor of the firm, by alleging such insolvency, could have compelled the performance of that duty. Had Ault survived till January 1, 1864, when the partnership was to terminate, the fact of such insolvency would have been a sufficient ground to enable Gorton himself, as well as his creditors, to institute the necessary proceedings for compelling the application of the assets of the firm to the payment of partnership debts, in preference to the individual debts of Ault. By the agreement between the parties, Ault was to take the firm property and pay the firm debts. He took the benefit with the burden — a burdeu which the law itself, in case of supervening insolvency, would impose, to the extent of the assets, in the absence of any express provision to that effect in the contract. It is quite clear to us, therefore, that the court erred in its instruction to the jury, to the effect that by virtue of the agreement of September 5, 1863, the property, upon the death of Ault, ipso facto, became the absolute property of Ault's estate. We are of opinion also that the evidence did not warrant the finding of the jury. It is true that the right of preference which equity gives to the creditors of a firm over those of an insolvent partner may be, and often is, defeated by the wrongful act of the part» ners, in converting the assets of the concern to the individual use of the insolvent partner; but such wrongful conversion will never be presumed, and must be clearly proven, in order to defeat the rights of the creditors. We think the evidence here shows no such wrongful act of conversion, and that we are fairly left to the inference that Kreis was paid, as in equity he should have been paid, out of the assets of the firm. He so understood it at the time, and rested in that understanding. He was paid out of funds standing in bank to the credit of the firm, and not of the executors, and by a check drawn in the firm name by its surviving partner. There is nothing to show how or when these funds were placed in bank, or whether they were the proceeds of Gorton's unauthorized continuance of the business after Ault's death, or funds accruing in the management of the business during the seven days which intervened between the qualification of the executors and the day of payment. I say Gorton's "unauthorized" continuance of the business, because he had no authority as .surviving partner to continue it. His only power as such was to wind up the concern, by applying its assets to the payment of its debts, and handing the remainder of the assets, if any, over to the executors. The power given by the will to carry on the business was given to the executors, and could not be exercised until they were qualified as such. Debts contracted by Gorton, in the management of the business between September 6th and January 7th, were his own individual debts, and did not bind the estate. Money received by him for goods purchased on his credit during that time, and placed in bank, would seem to be his own money. Such money, or money derived from the assets of the firm, when so placed in the bank as partnership funds, can not be considered as actually delivered to the executors, by any mere private agreement or understanding between them. While such private agreement might bind them, it would not constitute an actual delivery of the money so far as the rights of third persons were concerned. To constitute such delivery, some act, such as the transfer or placing of the funds in bank to the credit of the executors, was necessary, •in order to affect the rights of third persons,'and especially third persons ignorant of the private agreement. As to such persons the rights of the estate to the funds were no greater, or other, than they were by the executory agreement of September 5, 1868.
The fact that the creditors of Ault's estate were also creditors of the firm, has no significance, in the case. The law applicable to it is the same it would have been, had they been creditors of Ault alone. As creditors of Ault and Gorton they have no right to insist on a pro rata distribution. Gorton had the right to pay the claims against the .firm in the order of llieir presentation, and to pay them in full, t,o the exclusion of those hot presented. It is only as creditors of Ault that they can insist upon a pro rata distribution, and it is in their interest as such alone that this action can be maintained.
For the error of the court in charging the jury, and in refusing a new trial, the judgment must be reversed, and -the cause remanded for further proceedings.
Judgment accordingly.