Hutchinson vs. Smith and others, 7 Paige Ch. 26

The Chancellor. This is an appeal from a decree of thé vice chancellor of the eighth" circuit, dismissing the complainants’ bill with costs as to the defendants, who appeared and answered. The facts upon which the rights of the parties depend are, for the -most part, undisputed. It appears that Samuel M. Smith of Rochester purchased a stock of goods, and commenced the business of merchandise on the first of January, 1827; at which time, and down to the time of his death, he was the treasurer of Monroe county.

That in the spring of the same year, he made a con-about the first of August in the same year Smith agreed to take into partnership with him, in the business, L. A. Phelps, who had previously been his clerk; that they agreed that the partnership should be deemed to have commenced on the first of January; that the stock of goods which Smith had then on hand should be put into the concern; and that the debts due from Smith on account of goods subsequently purchased, and before the first of August, should be paid out of the proceeds of the sales thereafter to be made and the debts due for goods already sold.

Phelps was to put $1000 into the firm, and Smith was to draw certain specific sums out' of the proceeds of the sales, for his own private use. Smith was then to be permitted to retain $500 out of the profits of the business; and the residue of the profits were to be divided equally between the partners. The business was continued under this arrangement until the latter part of July, 1829, when Smith died; at which time, as it after-wards appeared, the firm was insolvent. Immediately after the funeral, the defendants Cuyler and P.

Smith, who were liable for large sums as endorsers for the firm, and as sureties in the bond to the county for the faithful performance of S. M. Smith’s duties as treasurer, persuaded Phelps, the surviving partner, to make an assignment of all the partnership property and "effects to them and J. Caldwell, to be applied to the payment of those debts, and to distribute the residue, if any, ratably among the other creditors; which was done accordingly. And a few days thereafter letters of administration on the estate of S. M. Smith were granted to the defendant Cuyler, one of the assignees.

The funds assigned were not sufficient to pay the debts of the firm by several thousand , dollars. And the complainants, who were not among the preferred creditors, having obtained judgments for their debts and issued executions thereon, filed their bill to set aside the assignment and to have the partnership effects applied to the payment of their debts. siderable addition to his stock of goods; a part of which was paid for by money in his hands as county treasurer.

That One of the objections made to the assignment is, that the money due to the county is not a debt for which the partnership was liable; but that it was the private debt of S. M. Smith, the deceased copartner. If this were so, the assignment, so far as it provides for the payment of that debt before the payment of all the debts of the firm, could not certainly be sustained; for upon the death of one of the partners, the copartnership funds must be applied to pay the debts of the firm before the separate creditors can have any claim thereon.

I think, however, upon the pleadings in this case, and neither of the parties have introduced any proofs to sustain their respective allegations, the debt to the county must be considered as a partnership debt. It is stated in the assignment to be a debt due from the firm. And the defendants in their answer state upon their information and belief facts, which if they really existed at the time of the death of S. M. Smith, would have rendered the copartnership liable for the monies which had come to his hands as the treasurer of the county. (Smith v. Jameson, 5 Term Rep. 601. In the case oí Jaques v.

Marquand, (6 Cowen’s Rep. 497,) the supreme court very correctly decided that my agent to whom I have entrusted monies, or who has received monies for my use, cannot, by putting those monies into a mercantile firm in which he is a copartner, destroy my claim against him individually, and make me a creditor of the firm without my consent.

But the court in that case did not decide that if my money is applied to the use of the firm, with the knowledge and consent of all the copartners, although without my consent, I may not elect to consider the firm as my debtors, and recover the money they have thus received, in an action for money had and received to my use. The case might perhaps be different if the partner had used the money in the business of the firm, and credited himself with it in the accounts of the firm without any knowledge on the part of his copartners that the money thus used belonged to another person.

Although the facts set up in this part of the answer are not stated as matters within the knowledge of the defendants, they are sufficient to put in issue the allegation in the bill that this was not a debt for which the partnership was liable ; so as to require some evidence on the part of the complainants to sustain that allegation in the bill, and to show that the recital contained in the assignment was false.

Again; as I understand the terms of the copartnership, as stated in the bill, it appears by the complainants’ own showing that the firm was liable for the money of the county which had been applied to the purchase of goods for the firm in the spring of 1827. Although this purchase was made previous to the formation of the copartnership, yet when it was formed, by the express agreement of the parties it was to have relation back to the first of January, 1827.

The stock of goods then on hand was to be considered as put into the firm, and the goods which had been theretofore purchased were to be paid for by the firm; or rather, the debts contracted for goods after the first of January, 1827, were to be thus paid. If the funds of the county, therefore, had been applied for the purchase of goods subsequent to the first of January, 1827, that debt, by the terms of the copartnership articles, was to be paid by the firm out of the proceeds of the sales of the goods.

On the whole, there can be very little doubt that this debt to the county was one for which the partnership was liable; and which for that reason might properly be provided for in the assignment, if the assignment itself was proper in other respects. It does not appear to be settled what is the precise nature of the interest of the surviving partner in the personal property of the firm in possession, at the death of his co-partner.

Some writers appear to consider the surviving partner as a mere tenant in common with the personal representative of the deceased partner in the goods, at law as well as in equity; while others consider him as having the whole legal title, but subject to the claims of the creditors of the firm, and to the equitable rights of the personal representatives of the decedent. In the recent case of Newell v. Townsend, (6 Sim.

Rep. 419,) the vice chancellor considered the legal title as vested in the survivor from the death of the copartner; and therefore restrained the judgment creditor of the deceased partner from taking the goods in execution, by a fieri facias, tested before but not actually issued until after the death of the deceased partner.

Wherever the legal title may be, there is no doubt that for certain purposes, the partnership continues, and that the surviving partner, in virtue of the confidence originally reposed in him by his copartner, retains the right, as the sole acting manager of the joint concern, to collect the monies due and convert the property of the firm into money and pay the debts. (Philips v. Atkinson, 2 Bro.

Ch. 272. 3 Kent's Com. 57.) And the representatives of the deceased partner cannot take the closing up of the affairs out of the hands of the survivor, if he is perfectly responsible and proceeds with fairness and due diligence in the discharge of that duty.

In the present case, however, it cannot be material to enquire whether the legal interest in the property in possession was in the surviving partner solely, or in him and the personal representative of the decedent jointly as tenants in common; as one of the defendants who has answered, sustains the character of personal representative of the decedent as well as that of assignee of the survivor.

And as this transaction took place before the adoption of the revised statutes, when the personal representative had a right to retain for his own debts or for those which were due to him jointly with others, and when he had the legal right to prefer one creditor of the same class over another, the rights of the preferred creditors under the assignment are the same as if the personal representative of the decedent had joined in an assignment to trustees, giving them the same preferences; the personal representative having acted with the other assignees in the execution of the trust, and thereby sanctioned the assignment made by the surviving co-partner.

I am inclined to think that the principles adopted by the revised statutes in prohibiting preferences from being given in the distribution of the estate of a deceased person among his creditors, and depriving insolvent debtors of the benefit of the insolvent laws where they give such preferences after they have become insolvent, might to be applied to the case of a surviving partner who is insolvent, and who should attempt, even with the consent of the representative of the decedent, to make a general assignment of the property of the partnership for the benefit of favorite creditors, to the exclusion of others whose claims upon the the property are equally meritorious.

It is not necessary, however, to determine that question here, as this case must be decided according to the legal principles which prevailed when this assignment was made, and when the administrator of S. M. Smith assented that such preferences should be given. There is no admission of fraud in the answer of the defendants, or of facts from which fraud can be legally inferred, if the assignment is not of itself evidence of fraud.

The .inducements held out to the surviving partner to persuade him to make the assignment, are those usually employed by creditors who wish to obtain a preference in payment out of the property of an insolvent debtor. In all such cases it is urged upon the debtor as a duty to give the desired preference ; when in nine cases out of ten it would be his duty, as an honest man, to resist such importunities, and to place all his creditors upon an equality.

But until the legislature interferes to prevent these general assignments and preferences and to compel insolvent debtors to render equal justice to all their creditors, no court is authorized to say that arguments of this description, although in themselves unsound, if merely used to induce the debtor to do what he has the legal right to do, can render his act fraudulent and void as against other creditors.

The complainants’ bill is not properly framed for an account and distribution among all the creditors under the assignment, as it is filed in behalf of the judgment creditors only, with a view to set aside the assignment as fraudulent and void, and to have the proceeds of the assigned property applied to the payment of the judgment creditors. The bill was therefore properly dismissed. (Cunningham v. Freeborn, 11 Wend. Rep. 240.) And the decree of the vice chancellor must be affirmed, with costs.