1. Leave to amend the affidavit, by inserting a new ground for
an attachment sued out in Mississippi, is not the subject of a
valid exception, it not appearing that the defendant was thereby
prejudiced.
2. Where a firm is dissolved by the death of one of its members,
and no bill is filed by his representatives, or by the firm
creditors seeking the intervention of a court of equity to wind up
the business of the firm, marshal its assets, and apply them to the
firm debts, the surviving partner may, by paying his individual
indebtedness with those assets, make a disposition of them which is
not a fraud in law upon the firm creditors nor, in the absence of
an actual intent to defraud, a just ground for suing out an
attachment under the statute of Mississippi.
3. Section 1420 of the Code of Mississippi of 1871,
post, p.
106 U. S. 658,
did not forbid an insolvent debtor to give a preference to one or
more of his creditors, if it were
bona fide and with no
intent to secure a benefit to himself.
4. A continued recognition of his liability, and his agreement
to discharge it after he has a full knowledge of all the facts in
relation to which the alleged false representations were made at
the time of his original promise, estops the party from setting
them up as a defense to an action on that promise.
6. According to the practice of the Circuit Court in
Mississippi, the judgment sustaining the attachment and the
personal final judgment on the merits against the defendant are
separate, and may be considered here separately on a writ of error
brought to review the latter judgment.
The facts are stated in the opinion of the Court.
Page 106 U. S. 649
MR. JUSTICE MATTHEWS delivered the opinion of the Court.
This is an action of assumpsit commenced by Charles M. Flannagan
and George M. Flannagan, co-partners doing business under the firm
name and style of C. M. & G. M. Flannagan by the issuing of a
writ of attachment according to the practice as prescribed by the
laws of Mississippi, the plaintiffs below being citizens of
Missouri. The process of attachment was founded on an affidavit,
which set forth that John J. Fitzpatrick, as the surviving partner
of the firm of Fitzpatrick Brothers, composed of himself and his
brother, James C. Fitzpatrick, deceased, was the legal owner of the
partnership property; that the defendant, as such survivor, was
indebted to the plaintiffs in several sums, evidenced by
partnership obligations, as well as in a sum of $6,000, for a debt
contracted by James C. Fitzpatrick and Eugene A. Forbes, then
partners under the name of Forbes & Fitzpatrick, and which had,
on the dissolution of that firm by the retirement of Forbes, been
assumed by the firm of Fitzpatrick Brothers, which debt was
evidenced by the promissory note of Forbes & Fitzpatrick, held
by the plaintiffs. The whole indebtedness, for which suit was
brought, was alleged to amount to $15,936.55. The affidavit then
charged that
"The said John J. Fitzpatrick has property or rights in action
which he conceals, and justly refuses to apply to the payment of
his debts, and that he has assigned or disposed of, or is about to
assign or dispose of, his property or rights in action, or some
part thereof, with intent to defraud his creditors, or give an
unfair preference to some of them, and that he has converted, or is
about to convert, his property into money or evidence of debt, with
which to place it beyond the reach of his creditors."
And suggesting that John McGinty, Edward McGinty, and George M.
Klein, cashier of the Mississippi Valley Bank, are indebted to the
defendant or have property of his in their hands, etc., the
affidavit prays for a summons against them as garnishees.
The statutory bond having been given, a writ of attachment was
issued, which the marshal returned as served by levying upon and
taking possession of certain personal property, according to an
inventory attached, as the property of the defendant, and that
afterwards Edward McGinty, having made claim that he was the owner
of the property attached, and the same
Page 106 U. S. 650
having been valued, and a claimant's bond given and accepted, he
had turned said goods over to said McGinty, and had summoned the
defendant and the garnishees.
The defendant below then in due time filed a plea in abatement
to the writ of attachment, denying the several grounds thereof as
alleged in the affidavit, and on the same day the plaintiffs, by
leave of court, filed an amendment to the affidavit setting
forth
"That the firm of Fitzpatrick Brothers, composed of defendant
and James C. Fitzpatrick, deceased, and of which he is the
surviving partner, fraudulently contracted the debt or incurred the
obligation for which suit has been brought."
The granting of this leave to amend the affidavit was objected
to by the defendant, and is the subject of an exception and
assigned for error. But sec. 1483 of the Code of Mississippi of
1871 expressly authorizes amendments to defective affidavits, and
we see no objection on principle, under such a provision, to an
amendment adding a new ground for the attachment. There was no
claim on the part of the defendant of being taken by surprise or
put to any disadvantage by reason of the amendment, and we fail to
perceive how in any way he could have been prejudiced. In point of
fact, he immediately filed his plea in abatement to the amended
affidavit, traversing the additional allegations, and the cause,
being at issue upon the pleas in abatement, was submitted to a jury
according to the practice authorized by the statute. There was a
verdict finding "that the attachment herein was rightfully sued
out," and the defendant thereupon had leave to plead to the merits,
and filed with a plea of nonassumpsit several special pleas which
it is not necessary now to notice. The cause having been tried to a
jury upon these issues, there was a verdict and judgment for the
plaintiff. The present writ of error brings up for review these
proceedings and judgment, errors having been assigned upon bills of
exception duly taken to the rulings of the court upon both
trials.
Upon the trial of the issues of fact arising upon the pleas in
abatement, evidence was introduced, as appears by the bill of
exceptions, by the respective parties tending to prove the
following state of facts:
"In March, 1878, defendant had purchased the interest of
Page 106 U. S. 651
Forbes in the firm of Forbes & Fitzpatrick, wholesale
grocers, forming with the latter the partnership of Fitzpatrick
Brothers, who, by the terms of the purchase, assumed the
liabilities of Forbes & Fitzpatrick, including, among others,
about $15,000 due to the plaintiffs. These liabilities, as was
afterwards ascertained, exceeded the value of the assets of the
original firm. James C. Fitzpatrick died in September, 1878,
leaving in the hands of the defendant, as surviving partner, the
partnership property, and the concern insolvent. The defendant
continued the business, sold out in part the old stock, purchased
other goods to replenish it to the amount of more than $12,000,
partly on credit, partly for cash, putting the goods
indiscriminately in stock with those on hand. During the existence
of the firm of Fitzpatrick Brothers, the firm paid part of the debt
due to the plaintiffs, assumed by them, and contracted other
indebtedness with them for goods bought and money loaned for about
the same amount as that paid. The deceased partner, before his
death, had drawn out of the partnership more than his interest
therein and was indebted to it. On December 3, 1878, the defendant
being very much pressed to pay some maturing bills of the firm to
the Mississippi Valley Bank, being debts created by the firm of
Fitzpatrick Brothers, borrowed $5,700 from John McGinty, giving his
note at one day's date, verbally promising to repay the amount
speedily out of the assets of the late firm. This money was used by
the defendant in paying partnership debts. Fitzpatrick Brothers
owed John McGinty, besides, two notes, one for $2,500 and one for
$5,200. Being unable to repay the borrowed money to John McGinty,
the defendant, on December 19, 1878, sold to Edward McGinty, a
relative of John McGinty, his entire stock of goods, amounting to
$6,633.46 at cost and ten percent added, and the partnership
accounts, amounting to $10,222.06, for which Edward McGinty paid
$8,200 in cash and assumed to pay obligations due in part from
Fitzpatrick Brothers and in part from Fitzpatrick, the surviving
partner, for commercial debts contracted by him since the death of
his partner, to the amount of $6,974.16. This price was a full and
fair value for the goods and accounts, and in fact Edward McGinty
paid out several thousand dollars more on the debts assumed than he
had collected out of the assets transferred. "
Page 106 U. S. 652
This sale to Edward McGinty was made with the knowledge of John
McGinty, who in fact advanced the money to complete it, Edward
being without means, and upon an understanding that the money
should be paid to John McGinty on account of the debts due to him,
and accordingly the $8,200 cash was returned to him in payment of
the two notes for $2,500 and $5,700 respectively. Immediately after
the sale, Fitzpatrick was employed by Edward McGinty as a clerk to
carry on the business at a salary of $2,500 per annum, and shortly
afterwards a partnership between them was advertised. The assets of
the firm of Fitzpatrick Brothers on hand at the time of the death
of J. C. Fitzpatrick, together with after-acquired goods and
moneys, were applied indiscriminately by the defendant to the
payment of debts of the firm and of those contracted by him in the
subsequent course of business, and it appeared that he had paid as
much at least on account of partnership debts as he had realized
from partnership assets, and that he had applied all the proceeds
of the business, after paying its necessary expenses, to the
payment of the debts of the late firm and of his own, contracted in
carrying on the business as surviving partner.
The second issue, upon the pleas in abatement, was upon the
allegation of the affidavit that
"The defendant had assigned and disposed of, or was then about
to assign or dispose of, his property or rights in action, or some
part thereof, with intent to defraud his creditors, or give an
unfair preference to some of them."
Upon the first branch of this issue -- whether the defendant had
disposed of any of his property with intent to defraud his
creditors -- the court charged the jury as follows:
"If you shall find from the evidence that the defendant sold or
transferred any of the property or assets of the late firm of
Fitzpatrick & Brothers with intent to prevent the creditors of
the firm of Fitzpatrick & Brothers, or any of them, from
collecting their debts, such sale or disposition will sustain this
ground of attachment. It was the duty of the defendant as such
surviving partner to apply all of the assets of the firm to the
payment of the debts due by the firm, and if he appropriated any
part of them to the payment of his individual
Page 106 U. S. 653
debts, it was a fraud upon the firm creditors, whether he so
considered it or not, and if established by the proof, will sustain
this ground of attachment, as the law will presume that he intended
the natural result of his act. The defendant, being liable for the
debts of the firm, could not, by borrowing the money and paying the
debts of the firm, create himself a creditor of the firm, or
subrogate himself to the rights of the creditors as paid."
And to the giving of this instruction an exception was
taken.
The ground on which this part of the charge appears to rest is
that a surviving partner, although invested with the legal title to
the partnership property on the dissolution of the firm by the
death of his co-partner, is not the beneficial owner, but a mere
trustee to liquidate the partnership affairs by selling the assets
and applying them to the payment of the partnership debts; that the
continuance of the business by means of the partnership assets is a
breach of that trust, and if it results in diverting any of the
partnership property from the creditors of the firm, is a fraud
upon them. And yet upon that supposition it deserves consideration
whether the allegation made in the affidavit as the ground of the
attachment -- that defendant has disposed of his own property to
defraud his creditors -- can be supported by proof of a disposition
of property belonging to the firm in order to defraud the creditors
of the firm, especially in view of the result that if the
attachment is sustained, it not only subjects the partnership
property, but also takes the individual property of the defendant
from individual creditors for the payment of the firm debt. The
writ runs against his individual property alone, and upon the sole
ground that he has sought fraudulently to withdraw it from the
claims of his individual creditors. This incongruity is sufficient
at least strongly to suggest the suspicion that the proceeding
itself, and the grounds on which it has been sustained, are based
upon a misconception of the law which governs the case. And this
will be confirmed by a critical examination of the charge.
Upon the state of the evidence, as disclosed by the bill of
Page 106 U. S. 654
exceptions, the jury may have found that the defendant, as
surviving partner, with the assent, either express or tacit, of the
personal representatives of his deceased co-partner, had been left
in possession of the firm property for the purpose of continuing
the business; that in doing so, in good faith he raised money upon
the individual credit given him on the faith of his possession and
control of property, which he was allowed to deal with as his own,
and applied it to the purpose of paying the debts due from the firm
of which he was the surviving partner, and yet felt compelled,
under this charge, to find that an appropriation out of the
property which had come to him as such survivor, to pay such a
loan, without any actual fraudulent intent, would be a fraud in law
upon every creditor of the partnership, justifying a seizure on
attachment for that cause of all his property, whether formerly
belonging to the partnership or since acquired, and that although
his individual additions to his stock in trade were at least equal
to what had been taken for the payment of individual debts.
It is fair to consider this charge, although not so qualified,
in connection with the facts, in reference to which there was
evidence, that the firm of Fitzpatrick Brothers and its individual
members were insolvent in the sense of not being able to pay their
debts during the whole period of its existence, and the additional
fact that the deceased partner had before his death drawn from the
partnership more than his interest therein, and was indebted to the
firm.
The legal right of a partnership creditor to subject the
partnership property to the payment of his debt consists simply in
the right to reduce his claim to judgment and to sell the goods of
his debtors on execution. His right to appropriate the partnership
property specifically to the payment of his debt, in equity, in
preference to creditors of an individual partner is derived through
the other partner, whose original right it is to have the
partnership assets applied to the payment of partnership
obligations. And this equity of the creditor subsists as long as
that of the partner, through which it is derived, remains -- that
is, so long as the partner himself
"retains an interest in the firm assets as a partner, a court
of
Page 106 U. S. 655
equity will allow the creditors of the firm to avail themselves
of his equity and enforce through it the application of those
assets primarily to payment of the debts due them, whenever the
property comes under its administration."
Such was the language of this Court in
Case v.
Beauregard, 99 U. S. 119, in
which Mr. Justice Strong, delivering its opinion, continued as
follows:
"It is indispensable, however, to such relief, when the
creditors are, as in the present case, simple contract creditors,
that the partnership property should be within the control of the
court, and, in the course of administration, brought there by the
bankruptcy of the firm, or by an assignment, or by the creation of
a trust in some mode. This is because neither the partners nor the
joint creditors have any specific lien, nor is there any trust that
can be enforced until the property has passed
in custodio
legis."
Hence it follows that
"If, before the interposition of the court is asked, the
property has ceased to belong to the partnership, if by a
bona
fide transfer it has become the several property either of one
partner or of a third person, the equities of the partners are
extinguished and consequently the derivative equities of the
creditors are at an end."
In that case, it was held in respect to a firm admitted to be
insolvent that transfers made by the individual partners of their
interest in the partnership property converted that property into
individual property, terminated the equity of any partner to
require the application thereof to the payment of the joint debts,
and constituted a bar to a bill in equity filed by a partnership
creditor to subject it to the payment of his debt, the relief
prayed for being grounded on the claim that these transfers were in
fraud of his rights as a creditor of the firm.
Another case between the same parties came again for
consideration before the court, which reaffirmed the decision and
held that in such a case the bill might be properly filed by a
creditor without first reducing his claim to judgment.
Case v.
Beauregard, 101 U. S. 688.
The same doctrine has been fully sanctioned by the Supreme Court
of Mississippi in
Schmidlapp v. Currie, 55 Miss. 597,
where it is said, that
"The doctrine that firm assets must first be applied to the
payment of firm debts and individual property
Page 106 U. S. 656
to individual debts, is only a principle of administration
adopted by the courts where from any cause they are called upon to
wind up the firm business, and find that the members have made no
valid disposition of or charges upon its assets. Thus where, upon a
dissolution of the firm by death or limitation or bankruptcy or
from any other cause, the courts are called upon to wind up the
concern, they adopt and enforce the principle state; but the
principle itself springs alone out of the obligation to do justice
between the partners."
In that case, one of two partners, but with the assent of the
other and without any fraudulent intent, transferred the whole
business and stock of the firm to a third person in payment of an
individual debt. A creditor of the partnership sued out a writ of
attachment against them and caused it to be levied on the goods in
the possession of the purchaser upon the ground that the transfer
of the firm goods in satisfaction of the individual debt of one of
the partners was fraudulent and void as against firm creditors. The
right to do so was denied.
The same principle applies in case of a dissolution of the
partnership. "It is competent," says Mr. Justice Story,
Partnership, sec. 358,
"for the partners, in cases of a voluntary dissolution, to agree
that the joint property of the partnership shall belong to one of
them, and if this agreement be
bona fide and for a
valuable consideration, it will transfer the whole property to such
partner, wholly free from the claims of the joint creditors. The
like result will arise from any stipulation to the same effect in
the original articles of co-partnership in cases of a dissolution
by death or by any other personal incapacity."
And in case of dissolution by death of one of the partners
without any previous agreement as to the mode of liquidation, the
only difference is that the joint creditor may, at his election,
institute proceedings by filing a bill in equity against the
personal representatives of the deceased partner and the survivors
to wind up the partnership business, to marshal the assets, and
appropriate the partnership property to the payment of the joint
debts. Story on Partnership, secs. 347, 362. Although in
Mississippi it is denied that a court of equity has jurisdiction to
entertain a suit on behalf
Page 106 U. S. 657
of a firm creditor at large against a partnership, whether it be
an existing one or one that has ceased by limitation or by the
withdrawal or death of one of the partners.
Roach v.
Brannon, 57 Miss. 490;
Freeman v. Stewart, 41 Miss.
138.
And unless a partnership creditor or the personal
representatives of the deceased partner commence such a proceeding,
to liquidate the affairs of the partnership, there is nothing to
prevent the surviving partner from dealing with the partnership
property as his own and, acting in good faith, to make valid
dispositions of it.
Locke v. Lewis, 124 Mass. 1. And if in
like good faith, with the acquiescence of the personal
representatives of the deceased partner, he uses the firm property
to continue the business on his own account and in his own name, he
does it without other liability than to be held accountable to the
estate of his deceased partner for a share of the profits, or, as
we have seen, upon a bill filed for that purpose, by the personal
representatives of the deceased partner or a partnership creditor,
to wind up the firm business and apply its assets to the payment of
its debts. Any intermediate disposition of the property made in
good faith, even although it may have been specifically a part of
the partnership assets and even if it has been applied to the
payment of his individual obligations, will be valid and effectual,
and without circumstances showing an actual intention to defraud
cannot be treated as a fraud in law upon partnership creditors.
Accordingly, in
Roach v. Brannon, 57 Miss. 490, the
Supreme Court of Mississippi said:
"If, then, a firm creditor may sue out and levy an attachment
upon firm assets in the hands of a surviving partner, upon what
grounds must he proceed? Must he aver and prove one of the specific
grounds of attachment laid down in the statute, or will it be
sufficient to show that the surviving partner is acting in
violation of that
quasi-trust imposed upon him by law for
the benefit of firm creditors? We have no hesitation in saying that
he must bring his case strictly within the letter of the
statute."
The next assignment of error is based on an exception to the
following instruction, being in continuation of that just
considered:
"5th. The latter clause of this issue is as to whether or
not
Page 106 U. S. 658
the disposition made by the defendant of the assets was with the
intention or giving an unfair preference to some of his creditors
over others. It is difficult to determine what particular acts will
constitute such preference. I am of the opinion that the
legislature meant something by this expression, but it has never
been construed by the supreme court of the state. In the absence of
such construction, I will instruct you that when a debtor is
insolvent, and knows that he will be unable for a great length of
time to pay all his debts, and disposes of his means to one or more
of his creditors, to the exclusion of others, and with the design
that those unpaid shall remain so, it will constitute an unfair
preference, within the meaning of this clause of the statute. You
will therefore apply this rule to the facts in proof under this
issue."
The language of the Mississippi Code of 1871, describing one of
the grounds for which an attachment might issue, was that
"the debtor has assigned or disposed of, or is about to assign
or dispose of, his property or rights in action, or some part
thereof, with intent to defraud his creditors or give an unfair
preference to some of them."
Code 1871, sec. 1420. This provision, it is said, so far as it
relates to an "unfair preference," was first introduced into the
statutes of the state by the Code of 1857, art. 2, p. 372. It is
said by the Supreme Court of Mississippi in
Eldridge v.
Phillipson, 58 Miss. 270, that
"The right of a debtor, insolvent or in failing circumstances,
to give a preference to one or more of his creditors, if it be
bona fide and with no intent to secure a benefit to
himself, is a firmly established rule in the jurisprudence of this
state,"
and many cases are cited, occurring both before and after the
adoption of the Code of 1857, in support of the statement. It was
well settled, therefore, that whatever else the prohibition against
unfair preferences might be supposed to include, it certainly did
not make all preferences illegal. But the necessary result of
preferring one or more creditors by a debtor unable to pay all
would be that the rest should remain unpaid, and for an indefinite
length of time, and as the preference is supposed to have been
designed, it could well be said in every such case that the debtor
making it also designed its natural and expected consequences. It
follows, therefore, if the part
Page 106 U. S. 659
of the charge of the court now under examination be correct,
that all preferences are unfair, and being unfair, are illegal -- a
conclusion which we have seen is opposed to the settled law of
Mississippi.
In the case just referred to of
Eldridge v. Phillipson,
the question was presented directly for decision for the first time
to the supreme court of that state. It was then decided that no
preference could be held to be unfair which, tested by the rules of
law, is legal, and that as, to be illegal, it must be fraudulent,
and as all fraudulent dispositions of his property by a debtor are
prohibited in other words, the clause relating to unfair
preferences is mere surplusage. This construction is confirmed by
the fact that the words in question have been omitted from the Code
of 1880 by the Legislature of Mississippi.
In our opinion, this interpretation of the statute is correct,
and we accordingly adopt it. The ruling of the circuit court to the
contrary we adjudge therefore to be erroneous.
The cause came on for further trial upon the issues raised by
the pleas to the merits. Besides the general issue, the defendant
pleaded as to the note for $6,000 made by Forbes & Fitzpatrick,
the defense of the statute of frauds, that the alleged promise was
not in writing, and that the promise to pay the same as one of the
debts of that firm was procured from him by means of false and
fraudulent misrepresentations made to him by Forbes as to the value
of that interest.
On the trial, as appears from the bill of exceptions, there was
evidence tending to show that although the original assumption by
the firm of Fitzpatrick Brothers of the debts of Forbes &
Fitzpatrick was verbal, yet that afterwards it was repeated in
writing in sundry letters by the defendant, written after he had
full knowledge of the character and condition of the assets,
property, and business which he had purchased from Forbes.
The court instructed the jury as follows:
"The plea of the defendant alleges, as to the $6,000 note of
Forbes & Fitzpatrick, that its payment was assumed as part
consideration of a purchase by him from Eugene A. Forbes,
Page 106 U. S. 660
and that said purchase was made on fraudulent misrepresentations
as to the character and value of the things sold. If you believe
this and that the defendant was thereby injured you will deduct
from said note the amount of his damages by reason of such
misrepresentations, unless you shall find that the defendant, after
he had a full knowledge of the misrepresentations, continued to
recognize his liability to plaintiffs and promised to pay after he
had acquired such knowledge, in which case he will be estopped to
make such defense."
To this portion of the charge an exception was taken and
instructions of an opposite tenor asked to be given, which were
refused but which it is not necessary to notice especially as they
are directly negatived by the instruction given and are disposed of
if that be correct. And of its correctness we have no doubt. A
subsequent promise, with full knowledge of the facts, is certainly
equivalent to an original promise made under similar circumstances,
and no one acting with full knowledge can justly say that he has
been deceived by false representations.
Volenti non fit
injuria.
We are advised that according to the practice in Mississippi as
authorized by its statutes (Code of Miss. of 1880, sec. 2434),
which, by secs. 914 and 915, Rev.Stat., are adopted as the practice
of the circuit court of the United States in that district, the
proceeding which resulted in the verdict sustaining the attachment,
and the verdict and judgment on the merits of the cause of action,
are separate, and consequently may be separately considered on
error. The judgment on the plea in abatement is not final in the
sense that it may be reviewed before the final determination of the
cause, but a writ of error upon the final judgment brings up the
whole record and subjects to review all the proceedings in the
cause. As we find no error in the personal judgment against the
defendant ascertaining the existence and amount of the debt due
from him and awarding execution therefor, the same is accordingly
affirmed, but the judgment overruling the pleas in abatement and
sustaining the attachment is reversed and the cause is remanded
with instructions to set aside the verdict upon the issues arising
upon the pleas in abatement of the writ of attachment, and to grant
a new trial thereof.
Judgment accordingly.