Jackson v. Cornell and others.

JACKSON V. CORNELL and others.

The rule of equity is uniform and stringent, that the property of a co-partnership shall be applied to the partnership debts, to the exclusion of the creditors of the individual members of the firm; and the creditors of the latter are to be first paid out of the separate effects of their debtor.

A general assignment of his separate property, made by an insolvent co-partner, which prefers the creditors of the firm to the exclusion of his own, is fraudulent and void as to the latter.

So held, where the insolvent partner executed an assignment to his co-partner, (the firm being in doubtful circumstances,) and directed a large debt of the co-partnership to be first paid out of the property assigned.

An assignment by a co-partnership, preferring the creditors of the individual copartners to those of the firm, would be invalid against the latter, on the same \ principles.

The possession of real estate assigned, continuing in the assignor, is evidence of fraud.

Nov. 11, 1843; Feb. 29, 1844.

THE bill in this cause was filed by a judgment creditor of William Cornell, whose execution had been returned unsatisfied, for the purpose of setting aside an assignment of all his property, real and personal, made by him to Benjamin and Elijah Farrington, on the 9th of September, 1841.

Cornell and Benjamin Farrington were co-partners. The assignment directed the payment, in the first instance, of a debt due to B. F., and of the deficiency, if any there should be, on a debt of the co-partnership to Moses Taylor, which was also secured by Cornell's mortgage on his real estate.

The assignment was executed during the sitting of the court at which the complainant's suit at law was brought to trial, on the day before the verdict was taken, and it was recorded on the same day that the verdict was rendered.

On the 4th of September, 1841, Cornell executed the mortgage to Mr. Taylor, and two days after he executed another to Phebe Gwyer; both of which the bill alleged to be fraudulent.

Other circunstances will be found stated in the opinion of the

court.

Jackson v. Cornell and others.

J. A. Lott, for the complainant.

A. D. Logan and A. Crist, for the defendant B. Farrington.

S. F. Cowdrey, for the defendant Taylor.

THE ASSISTANT VICE-CHANCELLOR.-The mortgage exe cuted to the defendant Taylor, in September, 1841, is assailed in the bill, on the ground that there was much less than $10,000 due to Taylor when it was given, that it was intended to cover the property of Cornell, and to defraud the complainant, and that the mortgage was usurious. All of these allegations are explicitly denied in the answer of Mr. Taylor, and there is no proof whatever to sustain either of them. As to him, therefore, the bill must be dismissed with costs.

The assignment made by Cornell to the two Farringtons, is alleged to be fraudulent, on various grounds.

1. The situation and doubtful solvency of the principal assignee, B. Farrington. It does not appear that the other assignee, E. Farrington, ever acted as such, or accepted the assignment, and the bill was taken as confessed against him as a non-resident defendant. I will therefore speak of B. Farrington as the assignee.

He was the partner of Cornell, and the bill charges that he was in doubtful circumstances as to his pecuniary means. The answer in substance admits this allegation, but it amounts to nothing, because it relates to the time of filing the bill, which is eight months after the date of the assignment.

2. The time and occasion of the assignment. It was executed on the same day that the complainant recovered his verdict in his action at law; and thus it is argued, made in reference to the verdict, and with a design to defeat the recovery.

This design is not necessarily to be inferred from the coincidence of dates. It is consistent with the legalized object of such assignments, the preference of other debts to the one which was about to be put into judgment.

3. The assignment devoted Cornell's individual property to

Jackson v. Cornell and others.

the payment of the partnership debts due from him and his assignee, in preference to his individual debts.

The first preferred debt is that to Moses Taylor, which is a partnership debt of the firm of Farrington and Cornell. The payment of whatever deficiency there may be in the mortgaged premises discharging that debt, and the payment of the sum of $740 to Farrington himself, are provided for by the assignment, before any other debts are to be paid.

The effect of the mortgage and assignment together, is to pay the whole $10,000 to Mr. Taylor out of Cornell's separate property, in preference to all of his individual creditors, except the assignee who comes in with Taylor on the liquidation of the deficiency. The mortgaged premises are Cornell's sole property, and what those fail to pay, the assignment first of all is to make good.

It is not denied that the rule of equity is uniform and stringent, that the partnership property of a firm shall all be applied to the partnership debts, to the exclusion of the creditors of the individual members of the firm; and that the creditors of the latter are to be first paid out of the separate effects of their debtor, before the partnership creditors can claim any thing. See Wilder v. Keeler, (3 Paige's R. 167;) Egberts v. Wood, (3 id. 517;) Payne v. Matthews, (6 id. 19;) Hutchinson v. Smith, (7 id. 26 ;) 1 Story's Eq. Jur. 625, 675.

It is, however, contended that each partner, before a lien attaches by judgment, execution, or creditor's bill, has a right with his individual property, to give such preferences to and amongst his creditors, as he pleases, whether several or partnership creditors.

This is the principal question in the case, and it is one of great importance in commercial law. The defendant's proposition embraces the right, not merely to pay the money or deliver the property of the individual debtor to the partnership creditor in discharge of his claim; or to secure him with a specific parcel of individual property. But it extends to a general assignment of all the partner's separate estate. And if he may by such an assignment, prefer one partnership creditor to his own, there is no stopping short of

Jackson v. Cornell and others.

permitting him to prefer all the creditors of the firm to the entire exclusion of the individual creditors.

The question has not been decided so far as I can learn, and I regret that it has not fallen into abler hands for adjudication. Its decision is not to be avoided in this case, and I am not to shrink from it, although it be difficult and momentous.

I will first see what may be gathered from the cases in which the equitable rule has been discussed.

In Egberts v. Woods, before cited, the Chancellor said that upon the insolvency of a firm, its property is considered in equity, as a trust fund for the payment of the partnership creditors rateably. But either of the partners before the dissolution of the co-partnership, and all the partners afterwards, may apply the partnership funds to the payment of one creditor in preference to another.

Of course the converse of these propositions is equally true of the separate property of an insolvent member of the copartnership. And the right of every failing debtor to give preferences is unquestionable. Egberts v. Woods, therefore, does not aid us in our investigation. It does not say that the copartners may prefer their individual to their joint debts, in a general assignment of the property of their firm.

Payne v. Matthews, cited above, contains the opinion of the Chancellor, that equity will not allow the creditors of a co-partnership, after exhausting the assets of the firm, to reach the separate property of a deceased partner to the injury of his own creditors, by using the name of the surviving partner, as being a creditor of the deceased, for the balance of such copartnership debts.

In Hutchinson v. Smith, (7 Paige's R. 26,) the assignment of the effects of the firm, was attacked on the ground that an individual debt of one of the partners was preferred to debts owing by the firm. The Chancellor held that under the circumstances, it was a co-partnership debt. He said, if it were the private debt of the partner, "the assignment so far as it provides for the payment of that debt, before the payment of all the debts of the firm, could not certainly be sustained."

In Robb v. Stephens, (1 Clarke's Ch. R. 195,) Vice-Chan

Jackson v. Cornell and others.

cellor Whittlesey, said, "one partner cannot assign the partnership property for the payment of his individual debts, as that would work a wrong to the other partner," &c.

In Bogert v. Haight, (9 Paige's R. 297,) the assignment of the partnership property was made to pay the co-partnership debts, and there was an assignment by one of the partners of his own property to pay his private debts, and the surplus to go to the creditors of the firm, save the first preferred class. One question arose on this exception of the first class, and it was disposed of on a ground which I need not state here. And I only refer to the case as one in which the parties followed the equitable rule in making their assignments.

In the great case of Wakeman v. Grover, (4 Paige's R. 23, 35; S. C. on appeal, 11 Wend. 187,) one of the objections to the assignment, was the preference of a private debt of the co-partners in the appropriation of the co-partnership estate. The Chancellor, after noticing the point and its great importance, forbore to express any opinion upon it.

In the Court for the Correction of Errors, Sutherland, J., treated it in the same manner; while Senator Edmonds, after expressing his opinion that the debt alluded to was a co-partnership debt, proceeded to say that if it were otherwise, it did not follow that the assignment was fraudulent, or that the direction giving such a preference to a private debt, was any badge of fraud. He said also, that "such direction might, as to partnership property, be held void as to partnership creditors; but this would be on the principle that partnership property must first go to pay partnership debts, and not on the principle that it was made with a fraudulent intention, and therefore void."

In the case of Deveau v. Fowler, (2 Paige's R. 400,) the question was raised by one of the partners, against his co-partner, who after obtaining all the assets on an agreement to pay all the debts of the firm, became insolvent, and threatened to appropriate the assets to his own use. The court restrained him from so doing.

But in Robb v. Stephens, above cited, the vice-chancellor refused to extend this relief to a simple contract creditor of the co-partnership.