1. The assignee in bankruptcy of the estate of an individual
partner of a debtor copartnership cannot maintain a suit to recover
back money previously paid to a creditor of the copartnership upon
the ground that the money was paid to such creditor in fraud of the
other creditors of the firm and in fraud of the provisions of the
Bankrupt Act. The suit should be by the assignee of the
partnership.
2. The mere fact that one partner of a firm composed of two
partners, after a stoppage of payment, suffered the other, who had
put in two-thirds of the capital and who was in addition a large
creditor of the partnership for money lent, to manage the
partnership assets apparently as if they had been his own,
proposing to creditors a compromise at seventy cents on the dollar,
taking the partnership stock, transacting business in his own name,
buying some new stock, selling old and new, and mingling the funds
-- though keeping separate accounts -- does not, of itself,
dissolve the partnership and vest such acting partner with the
partnership property in such way as that on a decree of bankruptcy
against him
individually, the partnership assets pass to
his assignee in bankruptcy.
The Bankrupt Act enacts in its thirty-sixth section that persons
trading as partners may be decreed bankrupt as well as persons
trading as individuals, and that when a partnership is decreed
bankrupt, all the joint stock and property of the partnership and
also all the separate estate of each of the partners shall pass to
the assignee, who by the said section is to keep separate accounts
of the two estates. Creditors of the firm and the separate
creditors of each partner may prove their respective debts, and the
net proceeds of the joint stock is to be appropriated to pay the
former and the net proceeds of the separate estate to pay the
latter. If there be any balance of the separate estate of any
partner after payment of his separate debts, it is to be added to
the joint stock to pay the joint creditors, and if there be any
balance of the joint stock after payment of the joint debts, it is
to be divided and appropriated to and among the separate estates of
the several partners, according to their respective right and
interest therein, and as it
Page 89 U. S. 396
would have been if the partnership had been dissolved without
any bankruptcy. [
Footnote
1]
But the act does not contain any provisions by which, when one
member alone of a partnership is decreed bankrupt and there is no
decree against the partnership itself, the property of the
partnership passes as does the partner's individual property.
In this state of the law, on the 15th of February, 1869, a
partnership composed of two persons, named respectively Kintzing
and Lindsey and trading at St. Louis, Missouri, as Kintzing &
Co. -- Kintzing being the senior partner, a contributor of
two-thirds of the capital, and a large creditor of the firm for
money lent -- becoming embarrassed in their affairs, and having
numerous creditors, including one named Amsinck (a large one,
resident in New York) stopped payment.
From the date of this stoppage, Kintzing seemed to have
proceeded as if the partnership had been dissolved. The assets of
the firm with the tacit assent of Lindsey, the other partner,
passed into the exclusive possession of Kintzing.
He then
submitted a written proposition to the partnership creditors, to
pay them in discharge of existing debts, seventy percent -- in
the firm notes, however -- at six, twelve, and eighteen
months, the arrangement not to bind any creditor until agreed to by
all.
Amsinck directed his agent in St. Louis to sign the agreement in
behalf of him, Amsinck, on condition, to be privately made with
Kintzing & Co., that they should "discount" the notes thus to
be given, paying for them on such so-called operation of discount
one-third cash and the residue in thirty and sixty days -- an
arrangement which if Kintzing & Co. could not get on,
ultimately would prove more favorable, of course, to Amsinck than
that proposed to the other creditors and accepted by about
two-thirds of them. Kintzing & Co. agreed to this, and the
fifty percent was paid to Amsinck, making a payment in cash of
$16,275. The six, twelve, and eighteen months' compromise notes
were sent
Page 89 U. S. 397
to those creditors who had agreed to accept them, though
conditionally; the six months' notes maturing August 18, 1869.
In the meantime, Kintzing went on trying to get the other
creditors to accept the terms of compromise proposed; he alone, as
it seemed, administering the partnership assets for the benefit of
the creditors as contemplated by the agreement of compromise.
He took the partnership stock, made new purchases on his
own account, transacted the business in his own name, and sold the
old and new stock, mingling the funds as if all were his own,
except that he kept separate books for each business. The $16,275
(the amount paid to Amsinck) was derived from such mingled
funds.
As already observed, about two-thirds of the creditors had
signed the compromise agreement when the agent of Amsinck signed it
for
him. Kintzing continuing to make exertions to get the
remaining creditors to sign, transacted business with the old
assets and some new ones in the way mentioned for a certain time.
However, finding that all the creditors would not sign, and so that
the plan of compromise would be defeated, he made to the state
assignee of Missouri, on the 21st of August, 1869 -- the six
months' notes, which had matured three days before, being still
unpaid -- a general assignment under the laws of Missouri of
his property for the benefit of
his
creditors.
Certain of the creditors of the partnership now getting wind of
the secret arrangement between Amsinck and Kintzing & Co., and
that the $16,275 had been actually received by Amsinck, filed a
petition in the District Court at St. Louis representing that they
were creditors of Kintzing, "a member of the late firm of Kintzing
& Co.," that the said Kintzing had committed various acts of
bankruptcy specified (one of the acts specified being the payment
to Amsinck), and praying the he, Kintzing (not Kintzing & Co.,
nor Lindsey, but Kintzing), might be decreed a bankrupt, and he was
so decreed accordingly, one Bean being appointed his assignee in
bankruptcy.
Page 89 U. S. 398
Thereupon Bean filed a bill in chancery -- the bill in this case
-- against Amsinck in the court below, praying that the payments
made to Amsinck might be decreed to have been made in fraud of
other creditors and of the Bankrupt Act, and that Amsinck might be
decreed to account for and pay them over to him, Bean, the
assignee. The answer denied fraud &c., and set up in addition
the point that the bankruptcy proceedings were against Kintzing
alone, and not against Lindsey also, and not against the firm; that
the complainant, Bean, was the assignee only of Kintzing
individually, and not the assignee of the firm; that the
co-partnership had never been dissolved; that the complainant did
not represent the interest of Lindsey in the claim sought to be
recovered in the suit, and that Lindsey had an interest in it which
did not pass to the complainant.
The court below did not, however, regard the objection as of
force. It said:
"It is apparent, from the evidence that the firm was regarded as
dissolved by all parties concerned, by Kintzing, by Lindsey, and by
the creditors, including the defendants, and that the assets and
effects of the firm were regarded as being put into Kintzing's
hands in trust to settle up the business as the appointee of the
creditors, and pay the compromise notes. Kintzing passed into the
hands of the state assignee all that was left of such assets, as
being part of the estate of Kintzing. From the state assignee they
passed to the plaintiff, as the assignee of Kintzing, as part of
the estate of Kintzing."
It said in addition:
"The composition deed does not appear to have been assented to
in any manner by Lindsey. He is not named in it, nor was he, so far
as appears, a party to it potentially. . . . There does not seem to
have been any authority, so far as Lindsey was concerned, to sign
the firm name to the compromise notes so as to bind him by them.
The compromise notes, therefore, signed by Kintzing with the firm
name, were the individual notes of Kintzing. Having given them, he
was to have the assets to administer with which to pay them."
This objection arising from the fact of the decree in
bankruptcy
Page 89 U. S. 399
being against Kintzing alone, being thus disposed of, and the
transaction between Amsinck and Kintzing & Co. having been, as
the court considered, a clear fraud on the other creditors of that
firm, the court decreed a recovery. It said:
"Whether the money could or could not be recovered back by the
debtor, the fourteenth section of the Bankruptcy Act
especially vests in the assignee all property conveyed by the
bankrupt in fraud of his creditors, and authorizes him to sue for
and recover the same. This applies to conveyances fraudulent at
common law, and to transfers of property such as that in the
present case. [
Footnote 2]"
From that decree Amsinck brought the case here, where three
assignments of error -- two of them not material to be stated --
were made, the third one, and the one on which the decision in this
Court was rested, being this:
"That the decree was erroneous in deciding that the assignee of
Kintzing individually could maintain this action, the appellants
alleging that if they were liable at all, they were liable to
Kintzing & Co. or to
their assignee. "
Page 89 U. S. 400
MR. JUSTICE CLIFFORD, having stated the case, delivered the
opinion of the Court.
Waiving the first two errors assigned, the single question
presented for decision is whether the complainant, as the assignee
of the estate of an individual partner of a debtor co-partnership,
can maintain a suit to recover back money
Page 89 U. S. 401
previously paid to a creditor of the co-partnership, upon the
ground that the money was paid to such creditor in fraud of the
other creditors of the firm and in fraud of the provisions of the
Bankrupt Act.
Assignees in bankruptcy of the estate of an insolvent
co-partnership may, perhaps, maintain such a suit for such a claim,
even though the money was paid by an individual partner under such
an agreement to compromise his separate debts, as the assignees in
such a case are required to keep separate accounts of the joint
stock or property of the co-partnership and of the separate estate
of each member of which the co-partnership is composed, and the
provision is that the net proceeds of the joint stock and property
shall be appropriated to pay the creditors of the co-partnership,
and that the net proceeds of the separate estate of each partner
shall be appropriated to pay his separate creditors.
None of the proceeds of the separate estate of the individual
partners can be appropriated to pay the partnership debts unless
the proceeds from that source exceed what is necessary to pay the
separate debts of the partner, nor can any part of the proceeds of
the joint stock or property of the co-partnership be appropriated
to pay the separate debts of the individual partner unless there is
an excess from that source beyond what is required to pay the
partnership debts. [
Footnote
3]
These regulations show that in cases where they apply, the
assignees in bankruptcy of the joint stock and property of a
co-partnership are required to administer the separate estate of
the individual members of the firm or company as well as the
described estate of the co-partnership, but the Bankrupt Act
contains no regulations of a corresponding character applicable in
a case where an individual member of a co-partnership is adjudged a
bankrupt without any such decree against the co-partnership or the
other partner or partners of which the co-partnership is
composed.
Instead of that, the Bankrupt Act provides that in all
Page 89 U. S. 402
other respects, the proceedings against partners shall be
conducted in the like manner as if they had been commenced and
prosecuted against one person alone. Partners are not entitled in
any case to come in competition with the joint creditors upon the
partnership funds, whatever may be the rights and equities which
would otherwise attach between them and the bankrupt partner or
partners.
Where all the partners become bankrupt, the general rule is that
the separate estate of one partner shall not claim against the
joint estate of the partnership in competition with the joint
creditors, nor shall the joint estate claim against the separate
estate in competition with the separate creditors. [
Footnote 4]
Doubt upon that subject cannot be entertained, and it is equally
clear that a solvent partner cannot prove his own separate debt
against the separate estate of the bankrupt partner, so as to come
in competition with the joint creditors of the partnership, for the
plain reason that he is himself liable to all the joint creditors,
which is sufficient to show that in equity he cannot be permitted
to claim any part of the funds of the bankrupt before all the
creditors to whom he is liable are fully paid. [
Footnote 5]
Neither can a solvent partner prove against the separate estate
of the bankrupt partner in competition with the separate creditors
of the bankrupt until all the joint creditors of the partnership
are paid or fully indemnified, for if a dividend were reserved to
such a party on such proof, the joint creditors might be injured by
such solvent partner's stopping the surplus of the separate estate,
which would otherwise be carried over to the joint estate, or the
separate creditors might be injured by the funds being stopped and
the transmission of the same be delayed. [
Footnote 6]
Two exceptions are admitted to that rule:
1. Where
Page 89 U. S. 403
the property of a partner has been fraudulently applied for the
purposes of the partnership.
2. Where a distinct trade is prosecuted by one or more of the
members of the firm. [
Footnote
7]
Subject to the preceding rules, as explained, the solvent
partners retain their full right, power, and authority over the
partnership property after bankruptcy in the same manner and to the
same extent as if no bankruptcy of a particular partner had
occurred. Their lien also remains in full force, not only to have
the partnership funds applied to the discharge of the partnership
debts and liabilities, but also to the discharge of all the debts
due by the partnership to them or anyone of them, as well as for
their own distributive shares, if any, in the surplus. [
Footnote 8]
Debts due by the bankrupt partner to the partnership are
entitled to priority in preference to the debts due by him to his
separate creditors, and if the joint funds prove insufficient to
discharge his debt to the partnership the solvent partners have a
right to prove the deficiency against the separate estate of the
bankrupt
pari passu with the separate creditors. [
Footnote 9]
Bankruptcy, it is said, when decreed by a competent tribunal,
dissolves the co-partnership, but the joint property remains in the
hands of the solvent partner or partners, clothed with a trust to
be applied by him or them to the discharge of the partnership
obligations and to account to the bankrupt partner or his assignee
for his share of the surplus. [
Footnote 10]
Exceptions undoubtedly exist to that rule where it appears that
the partnership or all the partners are insolvent, even though some
of them may not be in bankruptcy. [
Footnote 11]
Assets are to be marshaled between the creditors of the
Page 89 U. S. 404
co-partnership and the separate creditors of the partners only
when there are partnership assets and separate assets of individual
partners, and proceedings have been instituted against the
partnership and the individual members, as provided in the
thirty-sixth section of the Bankrupt Act. [
Footnote 12]
Certain exceptions also exist to that rule where both the joint
and separate estates are administered by the assignees of the
co-partnership. [
Footnote
13]
Many decided cases support the proposition that the bankruptcy
of one partner operates as a dissolution of the co-partnership, but
such an adjudication obtained by one partner against another will
not be sustained if the real object of the petitioner is to
dissolve the firm and the adjudication is not required for any
other purpose. [
Footnote
14]
Involuntary proceedings in bankruptcy were instituted in this
case against the senior partner of the co-partnership, and it is
conceded that no such proceedings have ever been commenced against
the co-partners or the other partner. Proofs were introduced to
show that the other partner was largely indebted to the firm, and
it may be conceded that the proofs are sufficient to show that the
firm is insolvent, but there is nothing in the record to show that
the complainant possesses any other authority to maintain the suit
than what he derives by virtue of his appointment as assignee of
the estate, real and personal, of the bankrupt senior partner of
the co-partnership.
Repeated decisions have settled the rule that an assignee of the
estate of an individual partner has no such title as will enable
him to call third parties to an account for partnership property,
and it is difficult to see why that rule does not dispose of the
case before the court. [
Footnote
15]
All of the debts embraced in the compromise agreement
Page 89 U. S. 405
were partnership debts and the payments made to procure the
signature of the appellants were made to discharge those debts; nor
is the question affected in the least by the fact that some small
part of the fund used to make those payments was earned by the
senior partner in transacting the business of the co-partnership
subsequent to the time when the firm suspended payment. Most of the
amount, it is conceded, was taken from the partnership assets, and
the whole was paid as being the money of the co-partnership.
Money paid under such circumstances, if it can be recovered back
at all, must be claimed by the partnership in whose behalf it was
paid, or by an assignee duly appointed to administer the joint
estate, as it is quite clear that neither an individual partner nor
his assignee can call the party to whom such a payment has been
made to an account for such a payment any more than he could for
any other debt due to the co-partnership. If liable in fact, a
voluntary payment to the appellee would not discharge the
obligation, as the liability, if it exists, is to another party;
nor would a judgment in this case, even if satisfied, be a bar to a
subsequent suit in the name of the partnership or their duly
appointed assignees.
Two principal suggestions are made in support of the theory set
up by the appellees:
1. That all the parties concerned in the attempt to effect a
compromise between the debtors and their creditors proceeded as if
the co-partnership had previously been dissolved and as if the
assets and effects of the debtor firm had been placed in the hands
of the senior partner in trust to settle up the affairs of the
debtors with their creditors and to pay the compromise notes.
2. That the other partner never assented to the compromise
agreement nor was he in fact a party to the final arrangement, and
that the co-partnership name was signed to the compromise agreement
and to the notes without his authority.
Issuable matters are certainly involved in those propositions,
but suppose they are fully proved -- they are not sufficient to
show that the other partner ever conveyed his
Page 89 U. S. 406
interest in the assets and effects of the co-partnership to the
bankrupt partner, or that he ceased to be a joint owner of the same
when the estate of the bankrupt partner was assigned and conveyed
to the complainant below as his assignee. [
Footnote 16]
Nothing is exhibited in the record to warrant the conclusion
that the co-partnership was ever in fact dissolved before the
decree in bankruptcy against the senior partner, and as the
compromise notes were given in the name of the co-partnership, the
other partner remained liable for their payment.
Decree reversed and the cause remanded with directions to
dismiss the bill of complaint.
[
Footnote 1]
14 Stat. at Large 534.
[
Footnote 2]
Knowlton v. Moseley, 105 Mass. 136;
Bean v.
Brookmire, 1 Dillon 151, 154.
[
Footnote 3]
14 Stat. at Large 535.
[
Footnote 4]
McLean v. Johnson, 3 McLean 202.
[
Footnote 5]
Emery v. Bank, 7 N.B.R. 217.
[
Footnote 6]
Story on Partnership 406; Robson on Bankruptcy (2d ed.) 621;
Ex Parte Lodge & Fendal, 1 Vesey Jr. 166;
Ex Parte
Maude, Law Reports, 2 Chancery Appeals 555.
[
Footnote 7]
1 Deacon (3d ed.) 852.
[
Footnote 8]
Bump on Bankruptcy (7th ed.) 660; Collier on Partnership (3d Am.
ed.) ยง 860.
[
Footnote 9]
Bump on Bankruptcy (7th ed.) 220.
[
Footnote 10]
Ex Parte Norcross, 5 Law Reporter 124;
Harvey v.
Crickett, 5 Maule & Selwyn 339.
[
Footnote 11]
Ayer v. Brastow, 5 Law Reporter 501;
Murray v.
Murray, 5 Johnson's Chancery 60;
Barker v. Goodair,
11 Vesey 86;
Smith v. Stokes, 1 East 367;
Parker v.
Muggridge, 2 Story 348.
[
Footnote 12]
Ex Parte Leland, 5 N.B.R. 222;
Ex Parte
Downing, 1 Dillon 36.
[
Footnote 13]
Ex Parte Warren Leland, 5 N.B.R. 229.
[
Footnote 14]
Shelford on Bankruptcy (3d ed.) 186;
Ex Parte
Christie, Montague & Bligh 314;
Ex Parte Browne,
1 Rose 151;
Ex Parte Johnson, 2 Montague, Deacon & De
Gex 678.
[
Footnote 15]
Bump on Bankruptcy 660.
[
Footnote 16]
Harrison v.
Sterry, 5 Cranch 302.
