Case Name: Albert Paul Smith et al. v. Franklin Dennison, Receiver, etc.
Court: Illinois Supreme Court
Jurisdiction: Illinois
Decision Date: 1881-06-20
Citations: 101 Ill. 531
Docket Number: 
Parties: Albert Paul Smith et al. v. Franklin Dennison, Receiver, etc.
Judges: 
Reporter: Illinois Reports
Volume: 101
Pages: 531–550

Head Matter:
Albert Paul Smith et al. v. Franklin Dennison, Receiver, etc.
Filed at Ottawa June 20, 1881
Rehearing denied September Term, 1881—
A second petition for rehearing dismissed March Term, 1882.
1. Evidence—credibility, when contradictory statements are shown. Although contradictory statements by a witness as to immaterial matters may tend to cast suspicion upon his testimony, they will not authorize its entire rejection, when he is corroborated by another witness, and not contradicted * by any other evidence in the case.
2. Assignment for the benefit of creditors--what constitutes— rights under a transfer as between partners. Where one partner transfers and delivers to another all the assets of the firm, to collect the debts due the firm and pay and discharge its liabilities, giving such managing partner all the powers possessed by both, for the purpose of settling the partnership affair's and a division of the proceeds after payment of the debts, this is not an assignment for the benefit of creditors of the firm, but one for the benefit of the parties, and will not prevent the partner taking the assignment from securing one creditor to the prejudice of others.
3. CoizdatebaiiS—may be given to secure more than one debt. Where a firm has given collaterals as security for a loan, and procures a further loan upon additional collaterals, the firm may, in. obtaining such new loan, contract with the person advancing the money that he may hold the securities as collateral to both debts, or his entire claim.
4. Pabtneb—his power to pledge collaterals for money. Where one partner entrusted with the winding up of the business of the firm was authorized, by agreement, to trade any part of the assets, and to do all and everything for settling its affairs that might be deemed expedient, it was held, that such partner was authorized, on borrowing money to pay a liability of the firm, to pledge notes of the firm as collaterals to secure not only the new indebtedness so created, but also a prior indebtedness of the firm to the same creditor.
Writ of Error to the Appellate Court for the First District ;—heard in that court on writ of error to the Superior Court of Cook county; the Hon. S. M. Moore, Judge, presiding.
Frisbie and Eappleye were partners, doing business as such, in Chicago. John Seely Wallace was the father-in-law of Eappleye. The firm borrowed money from Wallace, and having made some payments had a settlement with Wallace, and on the 28th of December, 1875, found the balance due Wallace was $7662.44, and on that day gave him the note of the firm for that amount, payable in ninety days, with ten per cent interest until paid, and at the same time deposited with him other notes of other persons as collaterals to secure the payment of the note to Wallace.
On the 18th of April, 1876, this firm stopped business, and an agreement was executed between Frisbie and Eappleye that Eappleye should wind up the business, collect the assets, and from the proceeds pay the firm debts, if the assets were sufficient; that in payment of the debts, when any assets can, in the judgment of Rappleye, he better disposed of without first being converted into money, or can be traded to secure that end, he shall pursue that course; and finally agreed that all the assets and property should be turned over to Rappleye, and declared that the same were thereby transferred, indorsed and assigned to him, “as trustee, for the purposes mentioned, ” that is to say, “realizing the most out of the same, and paying the debts; ” and Frisbie authorized Rappleye “to do all and every the matters and things that may be necessary or expedient in settling the affairs of the firm; ” and that after the payment of all of the debts the balance of the money or assets on hand should be divided equally between the parties. Frisbie was to give his advice and assistance in the settlement of the affairs, and neither of them should charge or receive any compensation for his services.
On the 20th of April, 1876, the firm having not long before collected money as agents of an eastern insurance company, and improperly applied the same to their own use, Rappleye borrowed from Wallace $4539.16 for the purpose of discharging that liability of the firm to the insurance company, and gave to Wallace a promissory note, signed “Frisbie & Rappleye, ” for that amount, payable on demand, with interest at the rate of ten per cent per annum until paid, and deposited with him notes of other persons, payable to the firm, as col-laterals to secure the payment of the same. Afterwards Frisbie was informed that Wallace held these, and made no objection thereto. In the language of the witness, “he neither assented nor dissented. ”
At the August term, 1876, of the circuit court, Frisbie filed a bill in chancery against Rappleye & Wallace, charging that Rappleye was collecting of the assets of the late firm moneys, and using the same in his own private business, and not applying the same to the payment of firm debts, and charging that Rappleye induced him to make the agreement of April 18, 1876, by representing to him that Wallace would, in such case, “at once come to his aid with such pecuniary assistance as would enable him, with said assets, to pay off the debts and wind up the business;” and charging that Rappleye, in bad faith, had turned over to Wallace a large amount of notes belonging to the assets of the firm, as collateral and additional security to Wallace upon an old debt, which was already fully secured by other collaterals sufficient in value to pay the old debt, .and that the old debt was without consideration; that Wallace had not assisted Rappleye in paying off the debts, as Rappleye said he would; that the indebtedness of the late firm to Wallace has not increased except by the interest, and that said securities were placed in Wallace’s hands to deprive him and the creditors of the late firm of the same, and for the personal benefit of Rappleye, and ¿heating Frisbie out of the same, and that Rappleye had no authority to make such use of the assets; that the securities so held by Wallace are excessive, and that Rappleye was insolvent, and asking that that agreement be set aside, and the affairs of the firm settled by having a receiver appointed, and that Wallace be required to surrender the collaterals, and praying for a temporary injunction. That suit was afterwards dismissed by the complainant therein.
This suit was instituted in January, 1877, and is a bill in chancery, brought against John Seely Wallace, by Dennison, stating that judgments had been rendered against Rappleye & Frisbie, one in favor of one Sutor, and one in favor of one Eldred, and that upon cieditors’ bills filed by these judgment creditors, complainant had been appointed by the court receiver of the assets of said judgment debtors, and charging that before and at the time of filing this bill Wallace had in his possession and custody securities belonging to Frisbie & Rappleye, which he claims to hold as collateral security upon certain indebtedness of Frisbie & Rappleye upon -certain notes; that such pretended indebtedness is merely colorable, and no consideration ever existed for the same, and claiming that complainant is entitled to the custody of such collaterals, and asking an account of the same may be taken, and if it should appear that Wallace has any lien upon the same, that the amount thereof may be ascertained, -that complainant may redeem. Wallace answered the bill, setting out the two principal notes above mentioned, and a list of the collaterals deposited with him at the giving of the first note, and also a list of the collaterals deposited with him at the giving of the second note, and stating, at the time of loaning the money for which the last note was given it was a part of the agreement (and the inducement on which he acted) that he should retain “all of said collaterals, and proceeds thereof, until the amount of all his indebtedness, represented by the two principal notes, should be fully paid. ” To this answer was filed a replication, and the case was heard on the pleadings and proofs.
Pending the suit, all the collaterals remaining in the hands of Wallace, and not collected, were by consent placed in the hands of complainant, as receiver, for collection, without prejudice to the ultimate rights of either party.
The Superior Court, on final hearing, found the equities in favor of complainant, and held that Wallace was not entitled to apply any of the' proceeds of the collaterals deposited at the making of the last note upon the indebtedness evidenced by the first note, and held that he should account to complainant for all proceeds of such collaterals in excess of the amount due upon the last note, instead of applying the same towards the payment of the first note. After the death of Wallace the case was taken to the Appellate Court by his legal representatives, and there the decree of the Superior Court was affirmed. To reverse that judgment of the Appellate Court this writ of error is brought.
Messrs. Small- & Moore, for the plaintiffs in error:
1. Where a promissory note, to which other notes are deposited as collateral security, contains a provision authorizing the payee to sell the collateral notes at his discretion, and apply the proceeds to the payment of the principal note, but is silent as to the disposition to be made of the surplus of such collaterals after the principal note is paid, the application of such surplus, with the maker’s consent, to the payment of another indebtedness owing by the maker to the payee, will be upheld against other creditors of the maker, if no fraud is shown. In such a case, if a contest, arises as to the application of the surplus of collateral notes, the proceeds thereof, the creditor having the superior equity will prevail, or “where the equities are equal, the first in time is the first in right.” Adams’ Equity, 148; Bispham’s Equity, 50.
2. The equitable title to a promissory note may, and often does, pass by mere delivery. Garvin v. Wiswell, 83 Ill. 215.
3. In the absence of a provision in the principal promissory note requiring the surplus of collateral notes to be returned to the maker of the principal note, after it is paid, the law would presume such a duty to be cast upon the payee; but such a presumption may be rebutted by parol evidénce of an agreement, contemporaneous with the principal note, that such surplus of collaterals should be applied to the extinguishment of another indebtedness owing by the maker to the payee. All presumptions may be rebutted by parol testimony. Davenport v. Mason, 15 Mass. 89; Barker v. Prentiss, 6 id. 433; 1 Greenleaf on Evidence, sec. 484 a; 2 Parsons on Contracts, p. 553; 3 id. p. 280; Jeffrey v. Walton, 1 Starkie, 267; Story’s Eq. Jur. secs. 1202, 1531.
4. A receiver, appointed in supplementary proceeding's, to enforce the claims of certain judgment creditors for certain fixed sums against the estate of an insolvent debtor, is limited in his recovery to an amount sufficient to cover such claims, and interest, together with the costs of the proceeding. Bostwick, Receiver, v. Menck, 40 N. Y. 383.
The receiver’s right of action in such cases is “precisely such as the creditors themselves might have maintained, and no more.” High on Deceivers, sec. 455.
Mr. J. L. High, for the defendant in error:
1. The dissolution of the partnership terminated the power of both partners, and Dappleye had no authority thereafter beyond that specified in the article» of dissolution. By those articles he was made a trustee for all the creditors, without priority, and no power or authority was conferred upon him to secure one creditor to the prejudice of the others. He could not use the firm name in giving new obligations, and had no authority to pledge the firm assets. Story on Partnership, sec. 322; 3 Kent’s Commentaries, 63, and notes; Hicks v. Russell, 72 Ill. 230.
2. The existence of a former debt due to Wallace did not authorize him to apply thereon the securities received for the subsequent debt. The mere existence of another debt does not authorize the pledgee to detain the pledge as security for that debt, unless such was the intention of the parties. Story on Bailments, sec. 304; 2 Kent’s Commentaries,,584.; Baldwin v. Bradley, 69 Ill. 32; Jarvis v. Rogers, 15 Mass. 389.

Opinion:
Mr. Chief Justice Diceey
delivered the opinion of the Court :
Two questions are presented for decision in this case: First, the question of fact, whether the collaterals deposited at the making of the note of April 20, 1876, were pledged as collaterals in Wallace's hands to secure not only that note, but also to secure the payment of the .preexisting debt upon the note of December 28, 1875; and second, whether Eappleye had lawful authority to make such pledge, if it were in fact made.
After a most careful consideration of. the evidence on the subject, we are brought to the conclusion that the pledge was in fact made to secure both of these notes. Wallace and Eappleye both swear positively that this is the truth, and no witness contradicts them in this respect. Not only so, but there is such inherent evidence of the truth of this testimony arising out of the circumstances of the ease, as to give great strength to-it. Eappleye and his partner were not in -harmony. The affairs of the firm had just been turned over to Eappleye for management. The money of the insurance company had been wrongfully applied to the payment of a debt of the firm, in the expectation that the demand of the insurance company could be met by money expected from another source. Eappleye, in his solicitude to get rid of a partner not in harmony with him, had (as Frisbie claims) represented to him that if he alone had the management, Wallace (his father-in-law) would furnish the ready money necessary to carry the debts of the firm until their resources could be made available. He may have hoped that this would be.so. When applied to for a further loan, however, Wallace was found to be very cautious, and probably somewhat suspicious as to the discretion and capacity for success of his son-in-law. He was not disposed to lend any more money in that direction, but was at length induced to do so by the consideration that the collaterals offered were more than sufficient for the present loan, and he would thereby strengthen his security upon his first note. The conversations and discussions on this subject, sworn to in detail by both Wallace and by Eappleye, are so natural and probable, and so fully in harmony with the ordinary course of affairs with men of like relative conditions under similar cir cumstanees, as to render it very improbable that they could have been invented in all their details.
It seems to be supposed by counsel for the receiver that certain circumstantial evidence in the case rebuts the conclusion that Bappleye had agreed with Wallace that he might retain these notes as collateral to the old debt as well as to the new, and for this purpose the fact is supposed to be established that in the chancery suit of Frisbie, both Wallace and Bappleye made oath that these collaterals were held by Wallace for the new debt only, and for no other debt, and that in a prosecution against Frisbie, instituted afterwards, Bappleye so testified. It may be conceded that Bappleye did so swear, but he now swears that his former statements were not correct on this question. This identical question now presented was not a material question in issue in either of those cases. The substantial allegations on which the chancery suit was based were, that the assignment of these collaterals was made without consideration, and that the first debt was fictitious and fraudulent, and not real, and if real, was already well secured, and hence the pledge for the old debt was unwarranted. The material allegation of the answer in that case was, that the pledge was made to secure the new debt, of which Frisbie had made no mention. The material question was not whether the pledge extended over the old debt, but was whether it rested upon a real, valid, subsisting debt. It was material to show the new debt, and the pledge therefor. This being shown, it was not material in that case whether the pledge covered the old debt or not. Bappleye's affidavit and his testimony, therefore, were not as to matter material to the issues in the proceedings in question. These circumstances, therefore, are not sufficient to authorize the rejection entirely of the testimony of Bappleye in this case. Contradictory statements by a witness as to immaterial matters do tend to cast suspicion upon the testimony of a witness, but do not authorize its entire rejection, where he is corroborated by another witness, and not contradicted by any evidence in the case.
As to the claim that Wallace made any statement in his affidavit at variance with his present testimony, it is not sustained. The only evidence on this" question is that of Mr. Cooper, who drew the affidavit of Wallace, referred to. He says as to Wallace's affidavit, that it was about the same as that of Rappleye. This was the recollection of Mr. Cooper as to the contents of an affidavit drawn by him in another suit, near three years before he gave his testimony. An examination of Rappleye's affidavit, referred to by the witness, shows that it contains nothing directly on the question as to whether Wallace had an agreement from Rappleye to hold these securities as collateral to the first note. There is one expression which contains that idea by implication. There is nothing in this record indicating that Mr. Wallace was not a man of unquestioned standing in the community as a man of wealth, caution and integrity. He was not interrogated at all as to this affidavit. We are satisfied his testimony in this case is true.
The next question relates to the power of Rappleye to pledge these collaterals to secure the first debt. Counsel for the receiver seems to construe the contract of April 18, 1876, between Frisbie and Rappleye, as an assignment of the assets of the firm for the benefit of creditors, and hence insists that Rappleye became "a trustee for all the creditors, without priority, " and that he therefore had no power or authority to secure one creditor to the prejudice of others. In the absence of this agreement between these partners, it will not be denied that Frisbie and Rappleye, in winding up their affairs,' could have made a valid contract with Wallace that if he would . make the second loan he might hold the securities as collateral to both debts, or to his entire claim. This contract differs from an ordinary assignment for the benefit of, creditors in its whole character.and structure. It was made for the benefit of the parties to it, and Rappleye was given the largest powers and discretion. The end to be accomplished for the benefit of the parties was, that the debts and liabilities should be extinguished out of the assets, without sacrifice of the assets, and. a surplus divided. To "secure that end" Rappleye was authorized "to trade any part of the assets, and to do all and every the matters and things that may he expedient in settling the affairs of the firm." It was plainly the design and effect of this contract to clothe Rappleye with powers to this end equal to the combined power of both Frisbie and Rappleye,—that he was to be in that regard in full the representative of the late firm. Frisbié plainly undérstood that Rappleye had power in some way to borrow money, for in his bill he said he was expected to get advances from Wallace, and his complaint was that this was not done; and he also understood that Rappleye had power to pledge assets to secure old debts, even without any new consideration. He was told by Wallace that he held this second parcel of securities. At that time he did not know of the new loan by Wallace, and yet he made no objection and did not then find any fault with the arrangement.
In an ordinary assignment to a trustee for the benefit of creditors, the title to the assets is passed from the debtors, so that the same can not be reached by creditors except by virtue of their rights under the assignment. Here the title was placed in Rappleye, and in his hands these assets were as open to appropriation by creditors as if the assignment had not been made. Their rights were in no way affected by the transfer. The object and legal effect of this contract was that the prosecution of the business should cease, and that Rappleye should have vested in him all the powers which both the partners would otherwise have had in the management of the property, to the end that they should both be relieved from liability as debtors. This case does not involve the question of the personal liability of Frisbie upon the last note. The validity of the debt for which that note was given, and of the note as the note of Bappleye, may be, and no doubt is, involved. Bappleye had authority to apply the assets to pay the debt of the insurance company, or to pledge assets in its security to procure extension of time for the payment thereof; or, under the powers given in the agreement, he had power to borrow money to pay that debt, upon his own note, and pledge the assets in security, if the pledgee was given no power to sell the assets in violation of the limitations in the agreement. Treating, then, this new note merely as the note of Bappleye alone, it is a' debt of such character that the pledge of collaterals was in that regard valid.
The remaining question relates to Wallace's right to a lien on the collaterals for the payment of the first note. Obviously Frisbie understood that he had by this contract clothed Bappleye with power to pledge assets to secure the payment of old debts. He was told by Wallace that he held this second parcel of securities. At that time he did not know of the new loan, and yet he made no objection thereto. Afterwards, when he got the notion that this first indebtedness was not real, he filed his bill charging that there was no foundation for this old indebtedness, that it was merely colorable, and that Bappleye had no lawful authority to pledge the col-laterals to secure a fictitious claim of indebtedness.
We are fully convinced that the pledge was made as claimed by Wallace, and that in equity Wallace's estate should be fully paid from the proceeds of the collaterals in question, before the application thereof to any other debts of the late firm.
The judgment of the Appellate Court is therefore reversed, and the decree of the Superior Court of Cook County is also reversed, and the cause remanded to the Appellate Court, to be remanded thence to the Superior Court, with directions to enter there a decree in conformity to the views herein expressed.
T 7 7 Judgment reversed.
Mr. Justice Walker : I concur in the conclusion reached, but not in all that is said in the opinion.
At the time this opinion was delivered Mr. Justice Dickey was Chief Justice.