Court Opinion

ID: 6576445
Source: CourtListenerOpinion
Date Created: 2022-07-20 19:34:45.019643+00
Date Added: 2024-06-11T15:57:07.058943
License: Public Domain

Church, Ch. J.
These plaintiffs have similar interests, but not a joint one, in the object of their application.
The controversy here is between the plaintiffs, as copartnership creditors of the firm of Hodges & Sage, and the defendants, as the separate creditors of, or claimants under, Hodges and Sage, individually. The plaintiffs go especially for the steam engine, boiler, &c., which were, confessedly, joint copartnership estate, when their debts were contracted, and prior to the sale and delivery of them to the Center Valley Company; or they claim the stock, which was the avails thereof, notwithstanding the manner in which it was subscribed for and taken.
The claim of the plaintiffs is based upon what they supposed to be the true doctrine of courts of equity on this subject—that the creditors of a copartnership have a lien, or such an equitable claim, upon its assets, that upon its insolvency, they can make them applicable to the payment of *135their joint debts in preference to any claims which the separate and individual creditors of the respective copartners can make to them.
There certainly is very strong language found in the books in support of this general claim of the plaintiffs. Thus, it is said, in Brewster v. Hammett, 4 Conn. R. 540. that “the equitable property in the goods attached is vested in the creditors of the copartnership;" and in Witter v. Richards, 10 Conn. R. 37. the court says, “that the partnership creditors generally have a right to the partnership effects, in preference to the creditors of an individual partner, has not been disputed.” And in Filley v. Phelps, 18 Conn. R. 296. the doctrine is declared to be, “that partnership debts are to be paid out of partnership funds, in preference to debts against any individual member of the company.” In the case of Burtus v. Tisdale, 4 Barb. Sup. Ct. Rep. 588. Strong, J. says, “It is clearly settled, that the joint creditors have then the first equitable claim upon the whole for the satisfaction of their debts.” Sometimes the copartnership property is called a trust fund for the benefit of creditors, and sometimes it has been said, that the copartnership creditors have a lien, or a quasi lien, upon it. But whatever may be the exact nature and extent of their rights, we think it certain, that they have at least a claim of priority of payment out of the joint funds, so long as they continue to be joint, 2 Sto. Eq. § 1253.
That copartnership creditors have no specific lien, legal or equitable, a priori, upon the joint funds, we consider to be well settled ; no more than any individual creditor has a lien upon the private estate of his debtor. In either case, the lien is created by the levy of the writ of attachment or of execution upon the property of the debtor. The partners have the lien, and especially the solvent ones, and have a right to insist, that the joint funds shall pay the joint debts, and in this way and by enforcing the equities or lien of the partners, the creditors of the copartnership come to their rights, whatever they are, and thus these rights are worked out, as the authorities say. This has been the received doctrine on this subject ever since the case of ex parte Ruffin, 6 Ves. 119. decided by Lord Eldon, in 1801. Campbell v. Mullett, 2 Swanst. Ch. R. 550. Bissett on Part. 106. Gow *136on Part. 296. Collyer on Part. 337. Story on Part. § 326. 2 Sto. Eq. § 1253. If therefore, the partners have the lien, the creditors cannot have it.
As the plaintiffs had no specific lien on the steam engine, &c., on the 1st day of September, 1849, when it was sold and delivered to the Center Valley Company, their attachments not having been levied until several weeks after this, why are not this sale and its consequences to be approved and sustained? The plaintiffs say, because, at that time, Hodges & Sage were in fact insolvent, and had no right to withdraw the company assets from the reach of the copartnership creditors, and convert the avails into separate estate, to the prejudice of the joint creditors, as they have done, by the sale of the joint property, and by their separate and individual subscriptions for the stock received in payment. If this had been done fraudulently, in contemplation of actual and open insolvency, and with a design to defeat the claims of the plaintiffs or other copartnership creditors, and with the knowledge and assent of the Center Valley Company, or these defendants, this claim of the plaintiffs could not be resisted—it would be sustained by the general and conservative principle, that the fraud of the parties would have destroyed the legality of the sale.
But here no fraud is proved. It is found only, that at the time of the sale, the company assets did not exceed in value the amount of the company liabilities; but Hodges & Sage were prosecuting their business, in the usual manner, and perhaps without a knowledge of their exact condition; and, as in other cases of declared insolvency, which have been preceded, by a length of time, and sometimes, by years, wherein a comparison of assets with liabilities, would shew an insolvent condition. And whatever Hodges & Sage might have suspected or even known, it is not found, that these defendants had any knowledge of their pecuniary state: they knew only, that, when the steam engine, &c., was purchased, it was copartnership property.
While the business of a copartnership is going on, and no dissolution by death, bankruptcy, insolvency, &c., requiring the marshalling of assets, there is no legal objection to a bona fide distribution of the copartnership funds among the members of the firm, or a change of them from joint to sep*137arate estate. Indeed, it is the purpose of all business operations, whether copartnership transactions or otherwise, to benefit individuals. And copartners always act for the ultimate advantage of themselves individually, and with the intent that the property and its avails shall, at some day, become separate estate.
The leading case of Ex parte Ruffin, before cited, fully recognises the right of copartners to convert joint into separate property, even to the very time and by the very act of dissolution. Lord Eldon says, “Therefore a bona fide transmutation of the property, is understood to be the act of men, acting fairly, winding up the concern, and binds the creditors.” And again, “To say this, seems to me a monstrous proposition, that, which, at any time during the partnership, has been part of the partnership effects, shall, in all future time, remain part of the partnership effects, notwithstanding a bona fide act.” Considerations of public policy were strongly urged, by Sir Samuel Romily, in that case, in opposition to this view of the Lord Chancellor; but he resisted them, and expressed the opinion, that a contrary doctrine would, in the absence of fraud, put a stop to all commercial transactions. Bisset, a respectable writer on the law of Partnership, says, in view of all the authorities on the subject, “ that notwithstanding the rights of the joint creditors, the partners may convert the joint property into separate property; for having no lien on the property, the joint creditors, when notice of dissolution is given, cannot prevent the partners from effectually transferring it, by bona fide alienation,” &c. And again, he says, “The partners may, during the partnership, convert joint into separate property, or separate into joint, and the property will, at the dissolution, be held to possess that character which is then impressed upon it.” Bisset on Part. 108. 111. Gow on Part. 296. Collyer on Part. 334. 511. Story on Part. 527. Kimball v. Thompson, 13 Metc. 283.
Let these principles be applied here. Hodges & Sage, about the 1st day of September, 1849, while pursuing the copartnership business, sold and delivered to the Center Valley Company the steam engine, boiler, &c., in question, and received in payment the stock of the company, as separate estate, which has since been transferred to and attached *138by Josiah H. Sage, a separate creditor ; and all this, some time before the actual failure and open insolvency of the copartners, and several weeks before the plaintiffs had any of lien upon it, by their attachments.
It must follow, we think, that there was no trust attached to this property in the hands of these defendants. To hold otherwise, would defeat the operation of the principles we have recognised, and be equivalent to the doctrine, that, what has been, must ever be, copartnership property, until all joint debts are paid, and thus obstruct ordinary copartnership dealings.
Had fraud been proved, and the rights of these creditors recognised, a further question suggested in the argument, would have claimed more of our attention : whether these plaintiffs, as copartnership creditors, could have enforced their prior rights in this way ?
The language of the books is, that the rights and equities of the joint creditors are to be worked out only through the lien or equities of the partners.
That this is generally true, we admit; and especially, where there is to be a settlement of a partnership concern, either by the partners themselves, or by a solvent partner, or a surviving one, or by an administrator, assignee, or receiver, &c. But there are cases of a different character; and this is one of them; and so were the cases of Brewster v. Hammett, 4 Conn. R. 540. and Witter v. Richards, 10 Conn. R. 37. Here, the partners, Hodges and Sage, are both insolvent, and take no interest in the settlement of their former business, but leave the creditors of the copartnership to take care of themselves; and here have been no proceedings, by any body, in the way of making distribution or marshalling assets. In the case of Brewster v. Hammett, this court refused to take the copartnership effects out of the hands of a separate attaching creditor, and place them back again into the hands of insolvent partners, because that would defeat the rights of joint creditors; and in such a case, it was supposed, that the copartnership creditors had an equitable property in the goods attached by a separate creditor, which they could themselves enforce, independently of the insolvent partners. And in the case of Witter v. Richards, the court recognized and enforced the preferable *139claim of copartnership creditors to the joint effects against a prior attaching creditor of one of the copartners upon
their own application, where both partners were insolvent. In such cases of insolvency, it may well be said, we think, that the joint effects, then remaining, may be treated as a trust fund for joint creditors, who will be substituted in equity to the rights of the partners, and be permitted to pursue the proper remedies to enforce their prior rights, as was done in the above cited case of Witter v. Richards, 10 Conn. R. 37. 2 Sto. Eq. 500. § 1253. But, as we have seen, the facts of this case do not call for the application of such a principle, inasmuch as the plaintiffs have not clearly established a prior or preferable right: so that we must advise, that their bill be dismissed.
In this opinion the other Judges concurred.
Bill dismissed.