A member of a firm assigned and transferred in good faith his
interest in the partnership property in payment of a just debt for
which he was solely liable. The creditor took possession of it and
sold it to A., who, by an act of sale in which the other member of
the firm united, transferred it for a valuable consideration to B.
The firm and the members of it were insolvent. C., claiming to be a
simple contract creditor of the firm, then filed his bill to
subject the property to the payment of his debt.
Held that
C. had no specific lien on the property, and there being no trust
which a court of equity can enforce, the bill cannot be
sustained.
This suit was brought July 10, 1869, by Frank F. Case, receiver
of the First National Bank of New Orleans, against Gustave T.
Beauregard, Thomas P. May, Augustus C. Graham,
Page 99 U. S. 120
George Binder, Alexander Bonneval, Joseph Hernandez, the New
Orleans and Carrollton Railroad Company, and the Fourth National
Bank of New York to recover a debt of $237,000.89 which he claimed
was due from and had been contracted by Beauregard, May, and Graham
while they were partners and carrying on business as such, and to
have certain transfers of partnership property set aside and
subjected to the payment of the debt. Beauregard leased, April 12,
1866, from that company its railroad tracks, its rolling stock, and
corporate privileges for twenty-five years. The lease, although
made to him individually, was entered into on his part in view of a
partnership to conduct the enterprise which on the first of that
month was formed between him, May, and Graham for operating under
that lease the road. By the terms of the partnership, which was to
continue for twenty-five years from the date of the lease, he was
charged with the management of the road, was to receive only a
salary for his services, and when the capital furnished by May and
Graham was reimbursed to them with eight percent interest, the
partners were to share the profits equally, and all losses were to
be equally borne by them. On their part, May and Graham were to
furnish the requisite capital, fixed at $300,000. Locomotives had
been used on the road, but after the date of the lease, the tracks
were adapted to horse cars, important changes effected, and large
purchases of property made for the uses and better equipment of the
road, all of which involved a heavy expenditure of money.
May 16, 1867, May assigned his interest to the United States.
Graham, on the 8th of that month, assigned his interest to the
Fourth National Bank of New York. The bank failed in that month,
and was a creditor of the partnership. The latter had overdrawn,
between Sept. 6, 1866, and May 1, 1867, the account kept in that
institution in the name of Beauregard as such lessee. At that time,
May was president of the bank. He directed the treasurer of the
partnership to draw upon the bank without regard to the state of
the accounts, and instructed the paying teller to honor the checks,
promising to make good the deficit. It amounted to the sum for
which this suit was brought. No part of it has ever been paid to
the bank. At one time, May deposited with it, as cash, a demand
note for
Page 99 U. S. 121
$40,000, drawn by him as attorney for Beauregard. At another
time, he drew a draft upon Graham for $125,000, which was also
credited upon the account as cash. Neither the draft nor the note
was paid. Both were held by the bank, and were overdue at the time
of its failure.
May had obtained from the assistant treasurer of the United
States at New Orleans public moneys, he knowing them to be such,
for his individual uses. In part payment of this indebtedness he
assigned, with other property, the balance to his credit on the
books of the bank, amounting to $315,779.10, and his interest in
the railroad company, its property and appurtenances, and bound
himself to execute any further acts or instruments necessary to
give a complete title to the property transferred. A few days
thereafter, May 16, 1867, he, claiming to act under a power of
attorney from Graham, conveyed, by an act passed before a notary
public of New Orleans, to the United States
"all and singular the right, title, interest, share, property,
claim, and demand of every nature and kind whatsoever, of them, the
said May and Graham, and each of them, in and to the New Orleans
and Carrollton Railroad, the lease and other franchises thereof,
and the railroad tracks, rolling stock, engines, cars, livestock,
and other appurtenances thereunto belonging or in any wise
appertaining,"
the same having been acquired under the lease and the articles
of partnership aforesaid. The United States was to give him credit
for all that should be received from the proceeds of the sale or
other disposition of the interest conveyed.
The United States, Oct. 31, 1867, in consideration of $228,000,
conveyed the property so acquired by said act to Binder, Bonneval,
and Hernandez, and further stipulated to save them harmless from
any claim that might be set up by the bank for $112,009.09,
apparently standing to the debit of Beauregard, as lessee of the
road, but which the act declares was due by May, and to defend the
transferees from an assignment of Graham's interest to the Fourth
National Bank of the City of New York. The transferees assumed the
liabilities due and owing by Graham and May, as lessees, on account
of the railroad, as set out in a schedule of direct debt, amounting
to $122,852.58, and of prospective debt for additions, $40,000 --
making $162,852.58.
Page 99 U. S. 122
Oct. 15, 1867, Binder, Bonneval, and Hernadez joined Beauregard
in an agreement or act of fusion with the railroad company, whereby
they surrendered to the latter all interest they had in the lease
of the road and property of the partnership, and the company, being
thus restored to the property and franchises with which it had
parted, entered into the possession thereof. May, Graham, and
Beauregard are insolvent.
An act of the legislature was passed, by which the company was
authorized to scale its present stock, issue additional shares of
its capital stock to the extent of the value of the improvements
placed on the road during the partnership, and to consolidate its
interests with the other parties. Accordingly the company increased
its stock so as to make it $800,000, of which one equal moiety, or
$400,000, was awarded to Binder, Hernandez, Bonneval, and
Beauregard, as representing in their right the value of the
improvements put on the road by the late partnership, whose
interests to the extent of two-thirds had passed to the purchasers
from the United States, the other one-third being owned by
Beauregard, and for and in consideration of the $400,000 of its
capital stock, the New Orleans and Carrollton Railroad Company
acquired and was put into possession of all the real estate and
other property acquired by the late partnership of May, Graham, and
Beauregard.
For the amount mentioned in his assignment, as standing to his
individual credit, May gave a "certified" check, of which the
United States is the present holder and owner. Of the amount
transferred from the bank to the sub-treasury in New Orleans,
enough was applied to take up a check drawn by May on the bank,
dated Feb. 15, 1867, and forming part of the assets of the
assistant treasurer at New Orleans, and the remainder, $10,378.28,
was credited on his check for $315,779.10.
The complainant charges that the First National Bank, being the
creditor of the partnership, had a lien or privilege on its
effects, and was entitled to be paid therefrom to the exclusion of
the creditors of any member of the partnership; that the
partnership was insolvent; that none of its members was able to pay
his individual debts, or authorized to dispose of the partnership
property for the payment of such debts; that the deed to the United
States, its deed to Binder, Bonneval, and Hernandez,
Page 99 U. S. 123
and the deed of the latter parties and Beauregard to the
railroad company, are in fraud of the rights of the bank as a
creditor of the partnership, and that the same should be cancelled
and the partnership property sold to satisfy the prior and
privileged claim of the bank. He prays that Binder, Bonneval,
Hernandez, and Beauregard be enjoined from transferring or
encumbering their stock in the company, and that the latter be
enjoined from recognizing or permitting such transfer, and for
general relief.
Bonneval, Binder, Hernandez, and the Carrollton Railroad Company
answered, and pleaded the existence of the debt due from the bank
to May as a bar to any claim upon them under the allegations of the
bill.
The Fourth National Bank also answered.
The bill was dismissed on a final hearing, and the complainant
appealed here.
Page 99 U. S. 124
MR. JUSTICE STRONG delivered the opinion of the Court.
The object of this bill is to follow and subject to the payment
of a partnership debt property which formerly belonged to the
partnership, but which, before the bill was filed, had been
transferred to the defendants. There is little if any controversy
respecting the facts, and little in regard to the principles of
equity invoked by the complainant. The important question is
whether those principles are applicable to the facts of the
case.
No doubt the effects of a partnership belong to it so long as it
continues in existence, and not to the individuals who compose it.
The right of each partner extends only to a share of what may
remain after payment of the debts of the firm and the settlement of
its accounts. Growing out of this right, or rather included in it,
is the right to have the partnership property applied to the
payment of the partnership debts in preference to those of any
individual partner. This is an equity the partners have as between
themselves, and in certain circumstances it inures to the benefit
of the creditors of the firm. The latter are said to have a
privilege or preference,
Page 99 U. S. 125
sometimes loosely denominated a lien, to have the debts due to
them paid out of the assets of a firm in course of liquidation, to
the exclusion of the creditors of its several members. Their
equity, however, is a derivative one. It is not held or enforceable
in their own right. It is practically a subrogation to the equity
of the individual partner, to be made effective only through him.
Hence, if he is not in a condition to enforce it, the creditors of
the firm cannot be.
Rice v. Barnard, 20 Vt. 479;
Appeal of the York County Bank, 32 Pa.St. 446. But so long
as the equity of the partner remains in him, so long as he retains
an interest in the firm assets, as a partner, a court of 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.
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
custodiam
legis. Other property can be followed only after a judgment at
law has been obtained and an execution has proved fruitless.
So, 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. It is therefore always essential to any
preferential right of the creditors that there shall be property
owned by the partnership when the claim for preference is sought to
be enforced. Thus, in
Ex Parte Ruffin, 6 Ves. 119, where
from a partnership of two persons one retired, assigning the
partnership property to the other, and taking a bond for the value
and a covenant of indemnity
Page 99 U. S. 126
against debts, it was ruled by Lord Eldon that the joint
creditors had no equity attaching upon partnership effects, even
remaining in specie. And such has been the rule generally accepted
ever since, with the single qualification what the assignment of
the retiring partner is not
mala fide. Kimball v.
Thompson, 13 Metc. (Mass.) 283;
Allen v. The Centre Valley
Company, 21 Conn. 130;
Ladd v. Griswold, 9 Ill. 25;
Smith v. Edwards, 7 Humph. (Tenn.) 106;
Robb v.
Mudge, 14 Gray (Mass.) 534;
Baker's Appeal, 21 Pa.St.
76;
Sigler & Richey v. Knox County Bank, 8 Ohio St.
511;
Wilcox v. Kellogg, 11 Ohio, 394.
The joint estate is converted into the separate estate of the
assignee by force of the contract of assignment. And it makes no
difference whether the retiring partner sells to the other partner
or to a third person, or whether the sale is made by him or under a
judgment against him. In either case, his equity is gone. These
principles are settled by very abundant authorities. It remains,
therefore, only to consider whether, in view of the rules thus
settled and of the facts of this case, the complainant, through any
one of the partners, has a right to follow the specific property
which formerly belonged to the partnership, and compel its
application to the payment of the debt due from the firm to the
bank of which he is the receiver.
The partnership, while it was in existence, was composed of
three persons, May, Graham, and Beauregard, but it had ceased to
exist before this suit was commenced. It was entirely insolvent,
and all the partnership effects had been transferred to others for
valuable considerations. None of the property was ever within the
jurisdiction of the court for administration.
On the 8th of May, 1867, Graham, one of the partners, assigned
all his right and interest in any property and effects of the
partnership, and whatever he might be entitled to under the
articles thereof, together with all debts due to him from the
partnership or any member thereof, to the Fourth National Bank of
the City of New York. By subsequent assignments, made on the 14th
and 16th of May, 1869, May, the second partner, transferred all his
interest in the partnership property
Page 99 U. S. 127
to the United States, and by the same instruments transferred to
the United States, by virtue of a power of attorney which he held,
the interest of Graham. On the 21st of August, 1867, the United
States sold and transferred their interest obtained from May and
Graham in all the partnership property, including real estate, to
Alexander Bonneval, Joseph Hernandez, and George Binder. On the
15th of October next following, an act of fusion was executed
between the New Orleans and Carrollton Railroad Company,
Beauregard, Bonneval, Hernandez, and Binder, by which the rights of
all the parties became vested in the railroad company, subject to
the debts and liabilities of the company, whether due or claimed
from the lessee or the stockholders.
The effect of these transfers and act of fusion was very clearly
to convert the partnership property into property held in
severalty, or, at least, to terminate the equity of any partner to
require the application thereof to the payment of the joint debts.
Hence if, as we have seen, the equity of the partnership creditors
can be worked out only through the equity of the partners, there
was no such equity of the partners, or any one of them, as is now
claimed, in 1869, when this bill was filed. No one of the partners
could then insist that the property should be applied first to the
satisfaction of the joint debts, for his interest in the
partnership and its assets had ceased.
Baker's Appeal, 21
Pa.St. 823. That was a case where a firm had consisted of five
brothers. Two of them withdrew, disposing of their interest in the
partnership estate and effects to the other three, the latter
agreeing to pay the debts of the firm. Sometime after, one of the
remaining three sold his interest in the partnership property to
one of the remaining two partners. The two remaining, after
contracting debts, made an assignment of their partnership property
to pay the debts of the last firm composed of the two, and it was
held that the creditors of the first two firms had no right to
claim any portion of the fund last assigned and that it was
distributable exclusively among the creditors of the last firm. So
in
McNutt v. Strayhorn & Hobson, 39
id. 269,
it was ruled that though the general rule is that the equities of
the creditors are to be worked out through the equities of the
partners, yet where the property is parted
Page 99 U. S. 128
with by sale severally made, and neither partner has dominion or
possession, there is nothing through which the equities of the
creditors can work, and therefore there is no case for the
application of the rule.
See also Coover's Appeal, 29
id. 9. Unless, therefore, the conveyances of the partners
in this case and the act of fusion were fraudulent, the bank of
which the complainant is receiver has no claim upon the property
now held by the New Orleans and Carrollton Railroad Company arising
out of the facts that it is a creditor of the partnership, and was
such a creditor when the property belonged to the firm.
The bill, it is true, charges that the several transfers of the
partners were illegal and fraudulent without specifying wherein the
fraud consisted. The charge seems to be only a legal conclusion
from the fact that some of the transfers were made for the payment
of the private debts of the assignors. Conceding such to have been
the case, it was a fraud upon the other partners, if a fraud at
all, rather than upon the joint creditors -- a fraud which those
partners could waive, and which was subsequently waived by the act
of fusion. Besides, that act made provision for some of the debts
of the partnership. And it has been ruled that where one of two
partners, with the consent of the other, sells and conveys one half
of the effects of the firm to a third person, and the other partner
afterwards sells and conveys the other half to the same person,
such also and conveyances are not
prima facie void as
against creditors of the firm, but are
prima facie valid
against all the world and can be set aside by the creditors of the
firm only by proof that the transactions were fraudulent as against
them.
Kimball v. Thompson, 13 Metc. (Mass.) 283;
Flach
v. Charron, 29 Md. 311. A similar doctrine is asserted in some
of the other cases we have cited,
and see 21 Conn. 130. In
the present case, we find no such proof. We discover nothing to
impeach the
bona fides of the transaction, by which the
property became vested in the railroad company.
Thus far we have considered the case without reference to the
provisions of the Louisiana Code, upon which the appellant relies.
Art. 2823 of the Code is as follows: "The partnership property is
liable to the creditors of the partnership in preference to those
of the individual partner." We do not
Page 99 U. S. 129
perceive that this provision differs materially from the general
rule of equity we have stated. It creates no specific lien upon
partnership property, which continues after the property has ceased
to belong to the partnership. It does not forbid
bona fide
conversion by the partners of the joint property into rights in
severalty, held by third persons. It relates to partnership
property alone, and gives a rule for marshaling such property
between creditors. Concede that it gives to joint creditors a
privilege while the property belongs to the partnership, there is
no subject upon which it can act when the joint ownership of the
partners has ceased. Art. 3244 of the Code declares that privileges
become extinct "by the extinction of the thing subject to the
privilege."
What we have said is sufficient for a determination of the case.
If it be urged, as was barely intimated during the argument, that
the property sought to be followed belongs in equity to the bank,
or is clothed with a trust for the bank, because it was purchased
with the bank's money, the answer is plain. There is no
satisfactory evidence that it was thus purchased. It cannot be
identified as the subject to the acquisition of which money
belonging to the bank was applied.
The bank has, therefore, no specific claim upon the property,
nor is there any trust which a court of equity can enforce; and it
was well said by the circuit justice, that, without some
constituted trust or lien,
"a creditor has only the right to prosecute his claim in the
ordinary courts of law, and have it adjudicated before he can
pursue the property of his debtor by a direct proceeding"
in equity.
Decree affirmed.
