PERIN et al. v. MEGIBBEN et al., 53 F. 86

TAFT, Circuit Judge, (after stating the facts.) The first error as- signed to the finding and decree of the circuit court is based on the claim that the contract cannol be specifically enforced, because it is for the purchase and sale of personal property. The point has not been pressed, either in the brief or on the argument, and hardly needs consideration. The agreement was in form a contract to buy all the shares of stock in the incorpoi a ted companies.

The language of the contract shows that the real agreement was to bay certain real estate, together with the personal pro] lerty connected with its use for milling and distilling purposes. Without discussing the question whether the sale of shares of stock can be specifically enforced in equity, it is sufficient to say that the sale here was in fact a sale of real estate, and the circumstance that personalty was included in the sale would nob affect the power of a court of equity to afford relief by requiring specific performance. See Leach v. Fobes, 11 Gray, 510.

The second error assigned, that the coart did not have jurisdiction, for the reason that James K. Megibben, a resident of Kentucky, was a necessary party defendant, is not of weight. Megibben is a party plaintiff. Me is one of the vendors; and even if he were, under the facts of the case, also one of the vendees, he is willing to comply with Ms part of the contract. The language of the court below upon this point meets our concurrence: ‘•Jamos K. Megibben is not a. party defendant, nor can he in any way be regarded as such.

It is true that h • is one of the associates of the defendant Perm, but lie is ready and willing to perform the contract. The decree is sought against Perm and his associates who are unwilling, and it would not be against Mm, but against them, to compel «hem to join in receiving and paying for tho capital stock which represents the real property involved.

He is therefore properly a complainant, and as mu -h interested in securing a decree against the defendants as are his co-complainants.” The assignment of error upon which the decision of the case must turn is based on the holding by the court below that the title of the distillery companies to the rea! estate was good and sufficient. It is an express stipulation of the agreement that the money was to be paid upon the delivery of the deed, and after examination and approval of tho title. This required, ol course, that the title should he good. The distilling companies have all the title of James K.

Megibben and wife and the widow and adult heirs of T. J. Megibben. The only question in the case relates to the undivided interest in each tract, the legal title to which, by the death of T. J. Megibben, was cast upon his three minor heirs. The argument upon appellees’ behalf is that the land so bought by T. J. and J. K. Megibben was purchased with partnership funds, and was used for partnership purposes, under an implied agreement that it should be personal property out and out; that by the law of Kentucky, on the death of T. J. Megibben, tlie full equitable title to this property vested in J. K.

Megibben,. the surviving partner, in trust to discharge the debts and obligations of the partnership, and to adjust the equities between the partners, and with power to sell the equitable title for these purposes; that,, after the satisfaction of such debts, obligations, and equities, or at once upon T. J. Megibben’s death, if it should be found no such' debts or equities existed, the equitable title passed to the personal representatives of T. J.

Megibben for' distribution as personal property; that nothing but the naked legal title to the undivided interest, of the deceased partner descended to the heirs, and that this a court of equity, in a proper proceeding, might compel them to convey a.s' either the surviving partner or the personal representative, in his lawful right to transfer the whole beneficial interest, should direct;: that the personal representatives and the surviving partner have united in conveying the equitable title to the distilling companies; that the adult heirs have also conveyed their title; and that by the Harrison chancery court proceedings the legal title of the mihor heirs has been divested and transferred to the two companies, thus making in the latter a perfect title to the entire property. : If the court of appeals of Kentucky have clearly laid down in their decisions a principle affecting the devolution of the equitable title to partnership real estate upon the death of one partner, it is a rule of property which the federal courts will respect and follow, instead of exercising their independent judgment, as they do with reference to questions involving the general common law of the state.

Burgess v. Seligman, 107 U. S. 20, 2 Sup. Ct. Rep. 10. The law as to the disposition, distribution, or descent of the interest of a deceased partner in partnership real estate has been considered by the court of appeals of Kentucky in the cases of Galbraith v. Gedge, (1855,) 16 B. Mon. 631; in Cornwall v. Cornwall, (1869,) 6 Bush, 369; in Bank v. Hall, (1871,) 8 Bush, 672; in Lowe v. Lowe, (1878,) 13 Bush, 688; in Holmes v. Self, (1881,) 79 Ky. 297; in Caskey v. Caskey, (1884,) 5 Ky. Law Rep. 775; and in Flanagan v. Shuck, (1885,) 82 Ky. 619. In Cornwall v. Cornwall, Lowe v. Lowe, Holmes v. Self, and in Caskey v.

Caskey, the question was between the heirs and distributees of the deceased partner, as to whether in equity the partner ship, real estate, after the payment of the debts of the partnership, should descend to the heirs or should pass to the distributees. From these cases it is clear that for 30 years the rule of property governing the descent and distribution of partnership real estate on the decease of a partner has been as follows: First. The legal title to partnership real estate held in the names of the partners descends to the widow and heirs of each, exactly as it would were the partners tenants in common.

Second. Where real estate is purchased with partnership funds for partnership purposes, it is partnership property, to which the surviving partner has an equitable title, and which he. may sell to pay partnership debts or settle partnership equities, compelling, by aid of a court of equity, the heirs of the deceased partner to perféet the sale by deeding such title. Third.

In the absence of any agreement between the partners, express or implied, to the contrary, both the legal title and the beneficial interest in the surplus of such partnership real estate, after the debts and the equities of iho partnership are satisfied, descend to the heir at law. Fourth.

When, however, there is an express agreement between the partners, or one which can he clearly implied from, the circumstanc' s, to consider and treat such real estate as part of the personal property stock of the partnership, then, though, the legal title to Re deceased partner’s interest descends to the heir under the statutes of descent, the equitable title, and the full beneficial interest, after the payment of the partnership debts and adjustment of the equities between the partners, vest in the personal representatives of the deceased partner for distribution as personal property, and to this end a court of equity may force a conveyance of the legal title from the heirs to the vendee of I he personal representatives.

In December, 1891, the court of appeals of Kentucky decided the case of Carter v. Flexner, 17 S. W. Rep. 851. In that case the surviving partner of a firm which had been engaged in buying and selling real estate made a contract to sell certain of the real estate bought by the firm with partnership funds in the course of partnership business. There were debts of the firm to he paid by the proceeds of sale. The contracting purchaser refused to comply with the contract, on the ground that the surviving partner was not invested with the legal title to the real estate.

The court held that the surviving partner could not conyey a good title except to his one-half interest, and that the heirs of the deceased partner should be required to convey tbeit legal title to the purchaser, if an advantageous sale, or one of fair value, had been made in good fa itli by the survivor. There was nothing in the conclusion reached which required a departure from the principles already laid down in the cases to which we have referred.

The learned judge who delivered the opinion, however, used language emphatically indicating a desire to break away from the rule stated in the fourth paragraph above, under which partnership real estate, by agreement, express or implied, between the partners, may be converted into personalty “out and out.” The report of the case in the Southwestern Reporter contains a memorandum from the files of the court of appeals that the case is not to he officially reported, dust what (lie considerations are which lead that court to order cases not to he reported we do not know, but it would seem clear that, if if were ini ended by this decision to reverse and obliterate the doctrine (if the conversion of real estate into personalty “out and out,” which lias been in force in the state for more than 35 years as a rule of property, the court; would have ordered the case to he officially reported.

In the case of Turman v. White’s Heirs, 14 B. Mon. 450, 461, Chief Justice Marshall refers bo a decision of the court ¡of appeals as of doubtful authority because withheld from publication.

But, whatever the inference to be drawn from the fail-tire to officially report a case in the court of appeals, we do not feel at liberty to disregard the line of authorities referred to, and to depart from the rule so clearly laid down in cases where the exact point was involved, by reason of language in a subsequent opinión, which, however forcible and weighty, must nevertheless be regarded as obiter dictum in the case in which it was used.

Coming now to the application of the principles relating to partnership real estate in Kentucky to the facts of this case, we must first consider the contention of counsel for appellees that there were partnership debts and obligations which conferred upon the surviving partner an equitable title and trust to sell the property to the distillery companies. There was a mortgage of $2,700 on one of the distillery tracts and of $7,000 on the other at the time of the death of T. J. Megibben, but it does not appear that there was not enough personal property to pay these debts.

The firm was under contract to make whisky and feed cattle, and liable in damages for nonper: formalice. Such a condition of the affairs of the firm would doubtless authorize a continuance of the business by the surviving partner for the purpose of discharging those obligations at the joint risk of the living partner and the estate of the deceased partner. See 2 Bates, ■ Partn. § 730.

It might also, if by the sale of the property those obligations could be discharged, confer the right on the surviving partner to sell the whole partnership stock, including the real estate; but such a sale, as against minor heirs having a beneficial interest in the same, must be a sale for cash. No authority has been cited which justifies the claim that a surviving partner may exchange the partnership stock and real estate for shares in a corporation, even though the shares represent an interest in the real estate originally held.

The control and management of the property under a corpora-, tion and under partnership ownership are quite different. This so-called “sale for stock” is in fact an exchange of one kind of property, for another, and there is no rule of law or precedent conferring such power on the surviving partner. The difficulty arising from the, internal revenue laws could not be obviated in that way.

It might, perhaps, have justified a sale for a money consideration. , It remains to consider the last and chief contention of appellees, that in equity the undivided interest of the deceased partner in this real estate was personal assets descending to the personal representatives. If so, then, by deed of the administrators, who were the complainants below, the full equitable title to this undivided interest might have been conveyed to the purchasers here.

It is true there is no such deed shown in the record from the administrators to the distillery companies, but such omission could be easily supplied by making .the execution of such a deed the condition of a decree for specific performance, and we may consider the case on the theory that such a deed has in fact been executed. There is no doubt, we presume, of the general power of the administrators, under the law of Kentucky, to reduce to money an undivided equitable interest in real estate held by them as personalty, provided such sale is not; fraudulent, or grossly inadequate. Cook v.

Burton’s Adm’r, 5 Bush, 66; Anderson v. Irvine, 6 B. Mon. 233; Ward v. Lewis, 3 J. J. Marsh. 505; Haddix v. Haddix, 5 Litt. 201. We have still to consider, therefore,whether the circumstances in the case at bar are such, with reference to the two distillery tracts, that) in accordance with the Kentucky law of partnership, above stated, an agreement can be clearly implied between the partners to treat the two distillery tracts as personalty out and out. With reference to the Sharpe distillery tract, there will he little difficulty in implying such an agreement.

That tract was bought wdth partnership funds for the purpose of being used in the partnership business. The business was a manufacturing and trading business. The evidence would seem to show that the naked real estate, in point of value, was an insignificant part of the firm capital invested in the business. Kineteen twentieths of the partnership capital was in the plant, improvements, and good will of the distillery. The value of a distillery is largely dependent on the circumstance that the brand of whisky which is manufactured there is kept on the market.

It would seem to he a reasonable inference from these facts and others in connection with the business that the real estate, the plant, the improvements, aud the personal property, together with the good will, the brands, secret processes, etc., all went to make up an entire thing, which, if separated into its parts, would diminish in value, aud lose its usefulness as a money-making investment.

It would be to the interests of the partners, therefore, to have the rea) estate treated as a part of the personalty on the dissolution of the firm, in order to secure a prompt and profitable disposition of the firm assets, aud the presumption may well be indulged that such was their intention and tacit agreement. In reaching a similar conclusion in respect to the Megibben distillery tract, however, we encounter a serious obstacle.

The land upon which the distillery stands was not purchased with partnership funds, and by all the Kentucky cases this is indispensable to a conversion of real estate held by partners into partnership personalty “out and out.” The distillery lot was, as we have before said, part of a 227-acre tract bought by T. J. Megibben a year before the jiartnership was formed. Some five years after, he aud his wife conveyed an undivided one third oí' the lot to his partner, J. K. Megibben. The remaining undivided two thirds, T. J. Megibben held just as he held the rest of the 227 acres.

Even if it he conceded that the recital in the deed to J. K. Megibben shows that the transaction was in reality intended between the partners to be a transfer of the land from T. J. Megibben as an individua l to himself and his partner as a firm, each partner contributing his pro rata share of the consideration, still wo cannot infer any intention on the part of T. J. Megibben to treat the real estate as persons Ity for the purposes of distribution on his death.

The dower right or his wife in the undivided two thirds of the tract was exactly the same as it had been before the partnership was formed, and by no principie of law or equity could she he deprived of her beneficial interest in it.

The equitable doctrine of the “out and out” conversion of partnership real estate into personalty, under which the widow is deprived of benefit from her dower estate in the land, is worked out on the theory that, the land having been acquired with partnership funds, there is imposed on those on whom the legal title is cast, a trust to execute the purposes for which the partners bought it; and, if one of these purposes was an “out and out” conversion into personalty, this excludes any beneficial dower interest.

But here, where the fee vested in the husband before there was a partnership, there is no ground for imposing such a trust on the widow, and no room, therefore, for the application of the doctrine. To deprive her, either in law or in equity, of all beneficial dower interest in the Megibben distillery tract, she must have released it to the firm. In the absence of such a release, we cannot infer an intention on her husband’s part that, this land should be treated as personalty for distribution by his administrator. It is true that the widow has now deeded her interest in the land to the distillery company.

That, however, does not change the fact that on her husband’s death she had a beneficial interest in it as his widow, and that he intended she should have. If so, it follows that his children had a beneficial interest in it as heirs, for it would be absurd to say that the deceased partner intended the land to be real estate as to the widow and personalty as to the heirs. For these reasons we cannot hold that the Megibben distillery tract passed as personalty to the administrators of T. 3. Megibben for distribution.

The result is that the legal and equitable title to an undivided interest in the Megibben distillery tract is outstanding in the minor heirs, unless it has been transferred to the Megibben Distillery Company by the Harrison chancery proceedings. With reference to the Sharpe distillery tract, the naked legal title to an undivided interest in that tract is outstanding in the minor heirs, unless it has been transferred to the Sharpe Distillery Company by the same chancery proceedings. It only remains to examine and determine the validity and effect of the proceedings in the Harrison chancery court.

First, as to the Megibben distillery tract. It is established by the cases of Barrett v. Churchill, 18 B. Mon. 387; Henning v. Harrison, 13 Bush, 723; Walker v. Smyser’s Ex’rs, 80 Ky. 620, — “as the settled rule of Kentucky, that the powers of the courts of equity simply to sell and reinvest infants’ real estate are statutory, and not inherent” The case of Thompson v.

Pettibone, 79 Ky. 319, relied upon by appellants, has no application here, because it involved an exchange of •one form of personal property for another, and was really justified under the statutes authorizing the guardian to compound the claim •of his ward with the permission of a court of equity. It follows that, unless the power of the Harrison chancery court to exchange the beneficial interest of the minor heirs in real estate for shares of stock in a corporation can be found in the statutes of the state, the action of the chancellor and the whole proceeding are void.

It is not a question of irregularity, but, the power given being statutory and specific, limitations of its exercise must be strictly followed, or "the proceeding is a nullity. This conclusion is abundantly sustained by many decisions of the court of appeals. See Carpenter v. Strother’s Heirs, 16 B. Mon. 289; Barrett v. Churchill, 18 B. Mon. 387; Woodcock v. Bowman, 4 Metc. (Ky.) 40; Barnett v. Bull, 81 Ky. 127. There is no authority conferred upon a court of equity by the statutes of Kentucky, under which the beneficial interest of infants in real estate may be exchanged for shares of stock.

Section 489 of the Civil Code of Kentucky (Carroll’s Code Ky. 1888, p. 235) provides that infants’ real estate may be sold by a court of equity (1) to pay debts of an ancestor; (2) to pay bis own debts; (3) in an action by tbe guardian for tbe ward’s maintenance and education; (5) in an action against the infant by his guaridan for the sale of real estate and investment in other property. The proceedings in this case are said to be for reinvestment, and the authority therefor must be found, if at all, in the fifth paragraph of

section 489. But, if so, the decree of the court is void for two reasons: First, because

section 493 requires that before a sale shall take place in accordance with

article 5, § 489, the guardian shall execute a bond to the infant, with at least two sureties, worth not less than double the value of the estate ro be sold; and, unless such bond be given, a,ny order of sale and any conveyance made under such order shall he absolutely void. Ko bond was given here. And, second, because

section 19, art. 2, c. 48, of the General Statutes of Kentucky, (Bullitt & Ft4and,) as amended March, 1884, limits the investments which courts of equity may authorize guardians to make of the money of their wards to real estate or stocks or interest-bearing bonds of the United States, state of Kentucky, or some county or town of the commonwealth. Of course, no reinvestment can he made except in these named securities. Another contention of the appellees, and'one which met with favor in the court below, was that these proceedings could he sustained under

section 490 of the Kentucky Civil Code. That

section (Carroll's Code Ky. p. 236) provides that a vested estate in real property jointly owned hv two or more persons may be sold by order of a court of equity in an action brought by either of them, though the plaintiff or defendant be of unsound mind or an infant, (1) if the share of each owner he worth less than §100; (2) if the estate he in possession, and the property t annot he divided without materially impairing its value, or the value of the plaintiff’s interest therein.

Section 497, p. 240, provides that — - “In tlie action mentioned in subsection 2 oí

section 490 the share of an infant or of a person of unsound, mind shall not bo paid by the purchaser, but sliall remain a lien on the land, bearing interest, until the infant come of age, or the person of unsound mind come of sound mind, or until the guardian of the infant or the committee of the person of unsound mind execute bond as is required by

section 493.” It is clear that

section 490 does not authorize a sale for anything hut a money price. It is true, no bond is required, but that is because the infant’s interest is, under

section 497, to remain a lien on the hmd until a bond is given. The provision that the share of the infant shall remain a lien on the land, hearing interest, excludes entirely the idea that anything hut a sale for money is authorized by

section 490. We should reach this conclusion on the words of

section 490 alone, for a statutory authority to sell means a sale for money, either cash or on credit, and not a barter or exchange. More than that,

section 19, art. 2, c„ 48, of the General Statutes of Kentucky, already referred to, limiting the character of investments for infants, would prevent such an exchange. For the reasons given, the Harrison chancery court proceedings, as to the Megibben Excelsior Distillery tract, must be field to be void. Even if they were valid, tfie shares of stock, by the force of the decree, would belong to tfie minor heirs, and there would be no power in tfie administrators to contract to sell their shares of stock, and there would be no right of action in the administrators, as complainants, to enforce such a contract.

Nor do we think that the proceedings as to the Sharpe tract may be taken as an application of the personal representatives of T. J. Megibben to a court of equity to require the minor heirs to part with their naked legal title in order to bring about a reduction of the assets to money. The administrators, who alone could bring such a proceeding, were not parties to the petition in the Harrison chancery court. The petition was based on the theory that the heirs of T. J.

Megibben had a beneficial interest, as heirs, in the partnership real estate, and that the court, as a chancery court, had power to order' a sale of that interest for shares of stock in the company.

The answer admits such to be the case, and the decree expressly finds the interest, and confirms the exchange for shares of stock in the new company as a beneficial investment It is difficult to see how such a proceeding can be made to serve the purpose of an action to compel the transfer of the naked legal title on the ground that there was no beneficial interest, especiálly when, as an attempt to sell the beneficial interest of infants in real estate, the proceeding is a nullity. With the defects in the title to the two distillery tracts, we cannot force the property upon an unwilling purchaser.

The decree of the court below must be reversed, with instructions to dismiss the bill.