Case Name: Lewis et al. v. Harrison et al.
Court: Supreme Court of Indiana
Jurisdiction: Indiana
Decision Date: 1881-11
Citations: 81 Ind. 278
Docket Number: No. 7407
Parties: Lewis et al. v. Harrison et al.
Judges: 
Reporter: Indiana Reports
Volume: 81
Pages: 278–292

Head Matter:
No. 7407.
Lewis et al. v. Harrison et al.
Paetneeship. — Ghaltel Mortgage. — Lien.—Principal and Surety. — Where, by the contract of copartnership, it is stipulated that one partner shall hold a lien upon the property of the firm, as indemnity for any liability he may incur as surety for the other, and afterwards the other partner mortgages his interest in the partnership property to a third person, without notice of this stipulation, the mortgage will be postponed in favor of the lien created by the stipulation, the mortgagee being charged with notice of the latter. Woods, J., dissents.
From the Morgan Circuit Court.
W. S. Shirley, J. V. Mitchell, T. A. Hendricks, C. Baker, O. B. Hord and A. W. Hendricks, for appellants.
J. H. Jordan, W. R. Harrison and W. E. McGord, for appellees.

Opinion:
Niblack, J.
The complaint in this case was by James A. Lewis, Perry F. Douglass and Calvin F. Sims, against Henry Sims and Felix A. Rinehart, upon two chattel mortgages, executed by Rinehart to the plaintiffs upon his interest in certain partnership property, owned and held by the said Rinehart and Henry Sims, as partners in the business of farming, to secure the plaintiffs as the endorsers and sureties upon a bill of exchange held by Samuel M. Mitchell, on which Rinehart was principal, alleging that the plaintiffs had been compelled to pay the bill of exchange; that Rinehart had no other property than that so mortgaged by him, and praying a settlement of the partnership business, and a foreclosure of the mortgages on Rinehart's separate interest in the partnership property.
Rinehart made default. The defendant Sims answered in .general denial, and by way of cross complaint claimed a lien upon Rinehart's interest in the partnership property to secure him in money loaned to Rinehart on partnership account, and the individual account of the said Rinehart; also to secure him as surety on a bill in bank, the private debt of Rinehart, which lien the saidi defendant Sims averred was reserved to him by the articles of partnership between him and Rinehart.
The defendant Sims, after filing his answer and cross complaint, died, and William R. Harrison, having been appointed .administrator of his estate, was substituted as defendant in his stead.
Issue being joined, the cause was submitted to the court for trial, and, at the request of the plaintiff, the court made a special finding of the facts, which may be summarized as follows :
That on the 1st day of February, 1864, Henry Sims and Felix A. Rinehart entered into partnership in the business of farming, for the period of one year, for the purpose of having farmed, for their joint benefit, a certain farm belonging to the said Henry Sims, known as the Jackson farm, and situate near Martinsville, Indiana, the said Sims to furnish the farm, and .the said Rinehart the labor, and the proceeds to be divided equally, in accordance with written articles of partnership mutually signed by the parties; that on the same day Rinehart executed to the said Henry Sims a mortgage on his interest in certain personal property then on the Jackson farm and belonging to him and the said Sims as partners, as above stated, to secure the payment of a note of even date and payable one year after date, for $265.26, which mortgage was • duly recorded on the next day after its execution; that said mortgage has since been fully satisfied and discharged; that, during the progress of the partnership, entered into as above, to wit, some time in the year 1866, Rinehart became indebted to the-First National Bank of Martinsville, upon his private account, and made a note to such bank for such indebtedness, with the' defendant Sims as his surety; that all the stock, implements, and other personal property used in carrying on their partnership business, were owned and held by the defendants Sims and Rinehart equally; that they also owned and held all the stock raised on, and the products of, the farm equally; that their partnership business was continued and carried on under their articles of partnership, herein above referred to, until the 16th day of August, 1871, when a new agreement in writing, concerning such partnership, covering the period of one year, was mutually executed by them, by which the partnership was extended to, and made to embrace, another farm, known as the Holbrook farm; that, by this new agreement, the defendant Sims was described as the party of the first part, and the said Rinehart as the party of the second part, it being stipulated therein that Rinehart was to do all the work, and to make all necessary repairs, on both farms, such repairs to be made under the direction, and with the consent, of the said Sims, and to extend to the farming implements and everything else used by the firm, and that Rinehart was not to cut any timber, nor to sell or otherwise dispose of any stock, grain or other property, on either of said farms, without the sanction of the said Sims; that this new agreement concluded as follows: "The party of the first part to hold and have a lien on all property now belonging to said firm, until the operation of the year is settled up between the said Sims and Rinehart, consisting of stock, corn, implements and everything else on said farm, to secure the said Sims for money advanced and endorsing bank notes, etc., or any other liability; " that afterwards it was mutually agreed that this new contract of partnership should run for an indefinite period of time; that the increased assets of the firm, under the new contract of partnership, were owned and held as before, by both partners equally; that the bank debt of Rinehart, referred to as above, had been renewed from time to time, by Rinehart, with Sims as his surety, and remained then unpaid; that said firm carried on its farming operations under said last named articles' of partnership, until the death of Sims, which took place on the 11th day of October, 1877; that said new articles of partnership were neither acknowledged nor recorded, as is provided by law for the acknowledgment and recording of mortgages, or other conveyances, nor in any other manner whatever ; that since the death of Sims, to wit, in May, 1878, the said Harrison, as his administrator, was compelled to pay, and did pay, the bank debt of Rinehart, for which said Sims was surety, as above set forth, the bank having taken judgment against Sims as such surety; that, in the execution of said new articles of partnershij), it was the intention of both Rinehart and Sims that such articles should create a lien in favor of Sims on all the partnership property, to secure him in his suretyship for Rinehart on said bank debt, and that it was understood that such a lien had been created, up to and until the commencement of this action; that Rinehart has never repaid to the estate of Sims the amount of money, or any part thereof, paid by Harrison, as the administrator of such estate, in discharge of the bank debt of the said Rinehart, and that there was then due to said estate for money so paid by the said Harrison, the sum of $1,367.50; that, in carrying on the partnership business, Rinehart was compelled to employ persons to assist him in doing the work on the farms, which he had obligated himself to perform; that he paid these'persons in part by orders on merchants for goods, which were given and accepted upon his individual credit; that he also borrowed money with which he hired laborers to assist him on the farms; that in this way he became indebted to Samuel M. Mitchell in the sum of $730, about $300 of which was for goods so furnished on orders, and the rest for money borrowed; that, on the 21st day of January, 1876, Rinehart gave his in dividual note to the said Mitchell for the sum in Avhich he had so become indebted, with the plaintiffs as his sureties; that aftenvards, to wit, on the 20th day of April, 1877, the said Rinehart gave the plaintiffs the first mortgage sued on, and on the 17th day of May, 1877, he executed the second mortgage in suit, to secure the plaintiffs on account of their liability as sureties on said note to Mitchell; that the plaintiffs, at the time they took said mortgages, had no notice or knowledge of the existence _ of the new or last named articles of partnership entered into between Sims and Rinehart, as herein-above described; that, when Rinehart executed these mortgages, he represented to the plaintiffs that there Avere no prior liens on the property included within them; that both of these mortgages to the plaintiffs were recorded within ten days after they were respectively executed; that, as such sureties for the said Rinehart, the plaintiffs have been compelled to pay, and have paid, said note to the said Mitchell; that Rinehart has in no manner repaid to the plaintiffs the amount paid by them for him to the said Mitchell, or any part thereof, and that there was then due to the plaintiffs from Rinehart, on account of their payment of said note to Mitchell, the sum of $851.19; that, at the time of the execution of the mortgages to the plaintiffs, and at the time of the trial, the condition of the partnership business was as follows:
Its total assets were of the value of two thousand, eight hundred and fifty-three dollars, and the value of the particular property named in the mortgages was two thousand six hundred dollars; that the firm of Sims & Rinehart owed no debts save such as it OAved to its own members, Sims and Rinehart, respectively; that during the transaction of their partnership business the said Sims & Rinehart had, from time- to time, reckonings of their mutual accounts so far as to adjust their several advancements to, and charges against, the firm, and against each other; that on the 6th day of January, 1876, they had such a reckoning, and Sims was found to be in debted to Rinehart upon partnership transactions, which had mot been previously adjusted in the sum of $287.98, for which sum Sims executed his due-bill of that date to Rinehart, which amount it was agreed should be credited on notes held by Sims on Rinehart; that Sims acted as treasurer and cashier of the firm, and received all the money for property .sold, and when Rinehart wanted money he drew it from Sims; that Sims would sometimes charge his advances to Rinehart on the partnership books, and at other times these charges on the books would be. settled by notes from Rinehart to Sims; that in this way Sims held notes on Rinehart at the time this .action was commenced as follows:
One for $350, dated June 14th, 1873, and due one day after -date.
Another for $100, dated August 2d, 1873, and also due one day after date. -
Another for $78, dated August 22d, 1873, and also due one day after date.
Another for $40, dated November 18th, 1873, and also due one day after date.
Another for $22.13, dated December 13th, 1873, and also due one day after date.
Another for $160, dated December 24th, 1873, and also due one day after date. That these were the notes referred to in the due-bill executed by Sims to Rinehart on the 6th day of -January, 1876; that the money received by Rinehart on these notes, with the exception of $140, was expended by him in carrying on the business of the firm; that after crediting the amount of the due-bill on these notes, there yet remained due to Sims on such notes the sum of $343; that in adjusting the partnership accounts the said sum of $343 should be treated as having .been advanced by Sims out of his private means; that Rinehart was insolvent, and aside from his interest in the firm had no property subject to execution; that by mutual agreement the stock, grain and the other property of the firm of Sims & Rinehart have been sold and con verted into money, subject to the rights of the several parties hereto in such stock, grain and other partnership property, which money, by further agreement, has been placed in the hands of the defendant Harrison, as administrator of the estate of Henry Sims, subject to the order of court in this cause; that the sum of $2,853 was realized from the sale of' the entire partnership property, and that the specific articles enumerated in the plaintiff's mortgages sold for the aggregate sum of $2,600.
As conclusions of law from the foregoing facts, the court found:
1st. That of the said sum of $2,853, one-half, to wit, the sum of $1,426.50 should be paid to the estate of Henry Sims.
2d. That the sum of $343, the balance due to Sims on notes held against Rinehart, ought to be paid to the estate of the said Henry Sims out of the remaining half of said sum of $2,853.
3d. That the remainder of said last named sum, to wit, the sum of $1,083.50, ought to be retained by the defendant Harrison, as administrator of the said Henry Sims' estate,, and credited upon the amount paid by him, as such administrator, on the bank indebtedness of Rinehart, for which the said Sims was surety.
To these conclusions of law the plaintiffs excepted, but the court, disregarding their exceptions, rendered judgment in accordance with the conclusions at which it had thus arrived.
The principal, and indeed the controlling, question in this case is, did the plaintiffs below, who are the appellants here, by their mortgages in suit, acquire a priority of lien upon the mortgaged property over that claimed by Henry Sims under the concluding clause of the new articles of partnership set out as above in the special finding?
Collyer on Partnership, vol. 1, p. 186, in treating of the separate interests of the several partners in a firm, and quoting from Lord Hardwicke, says that, " When an account is to be -taken, each, is entitled to be allowed against the other everything he has advanced or brought in as a partnership transaction, and to charge the other in the account with what the other has not brought in, or has taken out more than he ought; and nothing is to be considered his share, but the proportion of the residue on the balan¡ce of the account." This proportion of the residue to which each party is entitled upon final settlement is obviously what remains to him after all his obligations to the firm, and to the other members thereof respectively, arising out of the contract or articles of partnership, have been fully discharged.'
Each partner has a- specific lien on the partnership stock for moneys advanced by him more than his share, for the use of the copartnership, and the lien of each partner exists not only as against the other partners, but also against all persons claiming through them or any of them. Lindley on Partnership, 681.
The note to the First National Bank of Martinsville, upon which Henry Sims was surety for Rinehart, being the private and individual debt of Rinehart, the estate of Sims would have had no lien against the interest of Rinehart in the firm, in the absence of some express agreement conferring such a lien; but we know of nothing against the competency of Rinehart to stipulate as a part of the contract of partnership for -the creation of such a lien in favor of his copartner, to guard against any loss or defalcation which might, incidentally or otherwise, injure the business of the firm, or might injuriously affect Sims as a member of the firm.
Sims and Rinehart having beeu in the joint possession of the partnership property in the prosecution of their business as partners, their individual creditors were required to take notice of their respective rights and interests in such partnership property, and of the prior claim which any other person, interested in the business of the partnership, might have had .against such property.
No record of the articles of partnership was necessary to charge individual creditors with notice of such rights and interests, and such prior claims.
The circumstances under which the appellants took their mortgages necessarily put them upon inquiry as to the terms by which Rinehart held an interest in the mortgaged property, and charged them with notice of any prior claim which Sims,, as the partner of Rinehart, may have had upon it.
We are, therefore, of the opinion that the lien of the estate' of Sims upon the partnership property had precedence of the-liens conferred by the mortgages, and that the court below did not err in the conclusions of law at which it arrived., Donellan v. Hardy, 57 Ind. 393; Over v. Hetherington, 66 Ind. 365.
The judgment is affirmed, with costs.