COFFIN' ".:r>AY.
6'87
the case at, bar defendant eould not file his appearance before the Febni. ary rule-day" nor his answer before March 5th. The default should be opened, and complainant allowed to file replication nunc pro twnc,upon proper stipulations as to expediting the trial, the details of which may be arranged upon settlement of the order.
CoFFIN
et al.
11. DAY
et aZ.
tmat-mt
D. illinois. April 18, 1888.) PItEFERENOEIJ.
A transfer' by an insolvent firm of its property to one who had indorsedfthe paper of the fino. and of Its indivi<iual members to a large amount. and who, ;iD consideratil>n ,of tbe transfer. agreed to pay the obligations of the firmandof its individual members toa sp'ecified amount. incltlding the paper on which bewasirldorser.-beingmade in good faith, and for an adequate price, is not fraudulent as to firm creditors. 1 I,SAHE., " " , , ; , ; , Creditors of an insolvent firm have no leA'sl claim onllrmassets nntU'they 'have acquired Ii vested lien by jUdgme,nt r otherwise, ,and by consen,t of ,all its members such assets maybe applied to the payment of individual credit ora of the pa!:'tners. 1 0,
1.PARTNERBliIP':"'FmH AND PRIVATE
fendants.
, Irwin, Fwwer, Remyk for complainants., ",' , Puterbaugh &' Son, Hcpki'¥jJJ&: Hammond, alid McCuUoch'&; sOn, for, dt>· ' '
In Equity.
Bill to'set aside alleged fraudulent preferences. '
BLODGETT, J. This cllSenow embodies fiv,e creditors' bills, or bills in the nature ofcreditors'bUls, filed by creditors of DlloY Bros. & Co., to set aside certain alleged unlawful preferential payments made by ,said' The first case was brought by Coffin et al. v. Day et al., by a bill filed in tpe circuit courtof Peoria couhty, in June, 1885, !LUd removed tathis ,court, and was for the collection Of judgments at law recovered by the oomplainan,ts against Day Bro!!. &00., between February 13,1886, and June 2, 188,5. 1he fl.ecOnd was brought by Dornanet aZ. v,, Day et,al., in 1886, for the collection of two judgments at1a:W,reIldered in Jam,lluy,'lS85, against Day Bros.& Co. The third case was brought by Parker et aZov. Day et al., in J atluary, 1886, for the collection of a judgment at law rendered in July" 1885. ,The fourth,C!ise was brought by Simpson et al. v. Day et al., in March, 1885, for the of a judgment in December, 1884. And the fifth caSe was brought I;>y Richard, et al. v. Day et al., in May, 1886. for the <;lollection of a judgmellt rendered ill., May, 1886. O'n May 24, 1886, all these cases were, by an order of court, coosolidattl<i, with the provision "that Said suits henceforth 'proceed as one cause" without prejuqJ.ce to
case
lSee note at end
or 'case.
688
FEDEBAL REPOBTER.
the priority of the respective creditors therein." It appears from the pleadings and proofs in the case that the firm of Day Bros. & Co., the principal defendants in this case, was organized about the 1st of January, 1882, and consisted of Luoius L. Day, Gordis R. Cobleigh, Normand S. King, William G. Marsters, Samuel H. Van Sickler, and Herbert F. Day, and from the time of its organization up to September 23, 1884, said firm conducted a wholesale dry-goods businel"s in the city of Peoria, and also had two retail stores in said city, and a retail store in Canton, Fulton county, in this state, and an overall manufactory in the city of Peoria. From some time in the spring of 1884 said firm had been in embarrassed circumstances, and had been obliged to obtain extensions upon its commercial paper, and in obtaining such extensions they had secured the indorsement of the defendant Charles B. Day, so that on the23d of September Charles B. Day was indorser for the firm and its individual members to' the amount of about $100,000jand on the last-named date the entire stock of the wholesale store was sold to Charles B. Day at the rate of 75 cents on a dollar, and the ,stock of, the two retail stores in Peoria were sold to him at the rate of 621 cents on a dollar. There was' also sold to him ,certain 40rses,trucks, ,,,,agons, etc., used in and about the firm business, the aggregate of the purchase amounting to $228,550. For the payment of these goods Oharles B. Day assumed the pa.yment of paper and obligations of the firm, and of the individual members thereof, to the. amount of 8214,043.88, and gave hitt notes for the balance of said purchase money, $14,506.12, payable in. one and two'years. The transaction was by a bill of sale signed by' the members of the firm, and a bond of Charles B. Day in which he obligated himself to pay a schedule of indebtedness aggregating $214,043.88, and to save said firm ha,rmless therefrom;. the reciting that all the indebtedne,ss included in the schedule forming a part of the bond was the indebtedness of the firm of Day Ems. & Co., and that upon the greater portion thereof the said :bay was liable as indorser or guarantor for saidfirnij and within a day' or fwo after the purchase of the stock of goods as above mentioned, Charles B. Day also bought of the firm the stock of.. II;lanu{actured goods at t4eir overall factory, amounting to $2;302.06, for which he executed bis note to the firm,payah1Ei six mothsfrom date. While, as before stated, the bond recited that all the indebtedness which was assum'ed paid by Charles B. Day was the indebtedness of Day Bros.,& Co., there was in said schedule one note held by one of the banks.lntbe city of Peoria for $5,000, which was the'ihdividual indebtedness of Van Sickler, one of the members of the tirill, and one note of $5,000, and 'another of$1,300, which was the individual indebtedness of W. G.Marsters, another member of the firm; andanothet 'note of $7,453, which was the individual indebtedness of Day, another member pf'the firm, but whi"ch was indorsed by L. the firm" the saletoqhArles B.Day, King, one of the members of the firm, WIth the consent of the other members of the firm, took the two notes of Charles B. Day, amounting togetherto $14,506.12, ?,nd
COFFIN
V. DAY.
689
the note whichC. B. Day had given for the purchase of the overall stock, amounting to $2,302.06, and a note which had been given by W. P. Day for for the purchase of the overall factory, and turned them over to the defendant Mrs. Elizabeth Griswold, as collateral security for the sum of nearly $50,000, which King individually owed Mrs. Griswold; and Gordis R. Cobleigh, one of the members of the firm, being individually indebted to the said Charles B. Day, with,drew from the as,sets of the fir.m two notes of L.. B. Day for $2,314, which he turned over to Charles B. Day in payment of his individual indebtedn,ess to. Charles B. Day. The bill charges that the sale to Charles B. Day of the stocks of goods was fraudulent and void, and made to hinder and delay creditors, and alsQ attacks.theseveral transactions where the assets of the firm were applied for payment of the individual indebtedness of the members of the firm, on the ground that these creditors, as copartnership creditors, had a first and prior lien upon these copartnership assets for the payment of their debts before any individual indebtedness of the members of the firm could be paid. I see nothfng in the proof, or in the character of the transaction itself, which should render void or inoperative the sale of the stock of goods. There is no proof that the sale was for an inadequate price, or that it was made in bad faith. Charles B. Day had, at the request of the firm, involved himself to It very large amount as the indorser of this firm; and they had the right, undoubtedly, under the law, fu prefer him, and sec that he was protected as against their other creditors; and no challenge is made but that the price .which he gave for the goods was as much as they would have brought if sold ioany other manner. Nor is any question made'in the proof as toibe validity and good faith of the indebtedness which was assumed by C. B. Day. This leave's us to consider thequestion of the validity of these transactiont> so far as they relate to the payment of the individual debts of the members of the firm. out of the assets of the firm, and to determine whether these complainants are entitled to have those transactions set aside, and to recover these assets so applied to the payment of individual debts. In making their terms for the sale of their stocks of goods to the defendant Charles B.Day, the. firm required him fu pay as part of the purchase price the debt of L. L. Day for $7,453, upon which the firm was liable as indorser; the notes of Marsters for $6,500, upon $5,000 of which C. B. Day was indorser, and $1,300 of which was indorsed by the firm; and the note of Van Sickler for '$5,000, which the pleadings state was also indorsed by the firm, but of which I do not find any evidence in the record; so that we may assume that the appropriation of the assets of the firm for the payment of these individual debts was the act of all the partners,-that is, the firm assets are applied to the payment of these individuals debts with the consent of all tht;lpartners,-and by such application said firm assets become individual property. The transfer by King to Mrs. Griswold of the C. B. Day v.34F.no.9-44
llotesandthe W. P. Day notes was, as the proof shows, with the consent of the firm; and the transfer by 'Cobleigh of the, L. B. Day notes to C. B. Day in payment of his (Cobleigh's) individual aebt to C. B. Day was with the knowledge and if not the direct consent, of the ,firm; so that We have as conceded orproven facts il'l the case that the partners all conseJited to this 'application of the assets of the firm to the payment of the individual debts of its several members. It seems to the tha.t the questio'J;ls involved in this branch of the case are fully met and answered 'by the decision of the supreme court of the United Stl!otes in Case v. Beauregard, 99 U. S. 119, where Mr. Justice S'1'RONG, speaking for the court, 'says: "The object of, this bill is to fOllow and subject to the payment of a partnersbip debt, propel't)' which, forrrie'rly belonged to the partnership, but which, before the bill was fil':!d, had' been transferred to the defendants. No doubt the effects of: apartnel'ship' belong to it so long as it continues in existence, and,llot tothe individuals whocQmpose it. Th., right of each partner extends only to,a share ,of what may relJll'\in after payment of the debts of the tirm and the settlement of its accounts. Growing out of this right, or, rather, included in it, is the right to have the partne,rship property applied to the payment of the to those of any individual partner.Thisis'an equity the pattnel's have as 'between themselves, and in certain circumstances it Inures to the, benefit of the creditors of. the ,firm. 'file latter are said to have,a privil\38l'Ulr, preference, sometimes loosely denominate<i a 'lien.' to have the due to them paid. out Qf the assets of a firm in course ,oflilluidation, to the eXclllsion of the creditors of its several memuers" Their equity. however. is a derivative one. It is not held or enforceable in their own right. It is 'practically a subrogation to the equityofthe jndividnal pal'trier. to be made effeetive only thrOllgh him. Hence, if he is not in condition to enforce it.. thecreditol's of the firm cannot be. Rice ,v. Barna1'd, 479:.1ppealqf:Bq,nk, 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 alia. partner, a «:ourt, wiII allow the cl'editors of the firm to avail themselves of bis equity. and enforce, through it. the application of those assets' primarily to payment of. the debts due them, whenever the arty coIIlesunder· its administration:,' It is indispensable, however, to such relief, when the creditol'Sarllj,aS in the present 'case, simple-contl'acLcl'edip.. ors, that the· partnership 'PJ.':OPflty should be within tinl control of the court, J\nd, in the course of adminiBtfiltion, brought there by the bankruptcy oUhe firm, or by an assignment. or. by the creation of a tru,st in some mode. This is because neither of the pal'tners nor the joint creditors have any specific lien, nor is there any trust that 'can: be enforced until the property has passed in custodia 'legis. Other property can be followed only after a judgment at law has been obtained, and an execution has proved fruitlells. So, if before the interpollition, of, the «::ourt.is asked the property has ceased to belong to the partm'rship, if, by a bona transfer, it has become ,the several property either of one Ol' of a third person, the equitiei:l of the partners are exarid consequently thederivati ve equities of the creditors are at an end. It is, therefore, always essential to any preferential right of the creditors that ,there shall bep1;'operty,owned by the partnership when the claim for preference is sought to be enforced. '* . . * The join t estate is converted jpto the separate estate of by force of the contract of asSignment. And it makes no difference whether the retiring partner sells.to tlle other partner or to a third person, or whetlter the sale is made by him or under a judgment against him. In either case his equity is gone." .
.OOFFIN V. DAY.
691
And this doctrine is fully su pported by Ladd v.. Gruwold, 4 Gilmal) , 25; Reeves v.Aye-ra, 38 Ill. 418, and Jfclntire v. 104 Ill. 491There can be no doubt, I think, that this firm had.the right to priate its partnership' assets to the payment of the individual indebtedness of its members; that is, the individual creditor to whom payment was made had the right, with the consent of the partners, to take the firm assets in payment ofhis debt. The individual indebtedness was a sufficient consideration to support the payments, and the creditor became vested with the money or property so appropriated to him. When these transactions took place, and these individual creditors of the members of the firm were paid or secured, the complainants in this suit had no judgments or liens upon the partnership assets. The assets were entirely within the control of the firm, and any disposition which the firm made of them was binding upon the creditors of the firm who had not some specific or vested lien thereon at the time of such appropriation. These complainants did not recover their judgments until months after this transaction had occurred; and, at the time these bills were filed, this firm did not own the property which these bills now seek to reach. The transactions cannot be said to hnvebeen fraudUlent, because there was a good consideration to support them; and most it was but a payment of individual creditors of the members of the firm out of copartnership assets, where the debts thus paid were bonafide debts; and it was only a diversion of the ass.ets of the firm from the firm creditors to an individual creditor. .These. complainants, at the time of these transactions, were in no position to challenge or prevent them.· As a:lready said, they had no lien upon these assets; and 1here was, at most, only a sort of ethical or theoretical right in the firm'" creditors to insist on the payment of the firm's debts out of the firm's assets. That, however, did'notdefeat the right of the firm to appropriate its assets, in the exercise of its own judgment, in such manner as that the personllto whom they sold, or delivererl, or paid their money or assets took a good and valid title as tne creditors of the firm, and gives no right to creditors who subsequently obtained judgments against and have them applied upon their judgthe firm to retrieve these ments. Suppose, for illustration, that Charles B. Day had paid cash for these stocks of goods into the possession of the firm, and the firm had then paid this individual indebtedness of its several members out of the cash thus received, can there have been any doubt that this would have been a good and valid payment to which the creditors' of the firm who had no judgme11ts or other vested lien could make no valid objection or resistance? And if they could pay these individual debts outoOhe cash or assets, I can see no reason Why they could not satisfy them with the same legal effect out of the commercial paper or securities received for the goods. And the fact that this firm was insolvent at the time of these transactions,and was known to be such by Charles BoDay and Mrs. Griswold, does not, as it seems to me, affect this question. Without further discussion I may say that it seems to me when this firmfound,itself in .· an insolvent condition with these ass,ets on hand ,the. right to
FEDERAL REPORTER.
make such distribution of their assets as they chose, provided that it waC! not a fraudplent disposition; and it was not fraudulent for them to provide for the payment of the creditors of the individual I:nembers of th'.) firm out of the assets, as was done in this case. The rule invoked by tile complainants, that the copartnership creditors are to be paid out of the copartnership, is, of course, the rule followed by the courts, either in bankruptcy or in chancery, when the assets of the firm, and the a,i'sets of the individual members of the firm, are in the hands of the CI)L:rt rot· distribution; but until the assets come into the hands of the c011rt, ,tnt! while the firm is in possession and control thereof. such disposition the firm makes of its assets is hinding so long as it is not an actual fraudulent disposition, with intent to hinder and delay creditors; and the fact that the copartnership creditors did not get as much as they would have got had not provision been made for the creJitors of the individual members of the firnl,does not of itself constitute a fraud. These bills are, therefore. dismissed for want of equity. NOTE. PARTNERSHIP-FIRM PROPERTY-!NDIVIDUAL DEBTS. So long as a firm is solvent aU its members assenting, the individual debts of the parties may be pRid out of the firm assets, Roop v. Herron, (Neb.) 17 N. W.·Rep. 353; and, there beiujl; no fraud ill faot, a partnership creditor cannot impeach as fraudulent in law, a conve,yanC'e of partner ship property in trust to secure an individual debt of the partners, GIn Co v. BanUOll. (Tenn.) 4 S. W. Rep. 831; but if the firm is insolvent at the time ihe transfer of the firm property to mllke such payment is made, it is fraudulent and void as to ex:sting creditors of the firm, Goodbar v. CaJ;'Y 16 Fed. Rep. 317; and one paJtn"r may not pay his private debts out of the assets of the firm, for this would be a fra1..d upon his partners, Gallagher's Appeal, (Pa.) 7 Atl. Rep. 237i....CaldweU v. Furniture Co., (Neb.) W. Rep. 336; Willis v. Bremner, (Wis.)' 19 N. w. Rep. 403; VerDOu v. Upson, ld. -1.01,; Powers v. Paper Co., (Wis.) 18 N. V!. Rep. 20. See, also, Johnston's Appeal, (Pa.1 9 At!. Rep. 76),. and note; Crook v.Rlndskopf, (N. Y.) 12 N., E. Rep. 174; Saunders '\. Reilly, ld. 1,0; Tait v. Murphy, (Ala.) 2 South. Rep. 317. An insolvent firm sold the firm effects to a creditor in consideration of a certain sum in cash, a.nd a further sum which was recited to be the indebtedness of the firm to the but which in fact embraced indebtedness of the individual members of the firm. tleld that, in thus securing a. pecuniary benefit beyond tha.t which the law would secure, the transaction was fraudulent as to other creditors, and void, not only as to the benefit thus reserved, but in toto. Pritchett v. Pollock, (Ala..) 2 South. Rep. 735.
CORBIN V. 130IES
et ale
(Oircuit Oourt, N. D. Illinois. April 30, 1888.)
P ARTNERSHIP-LIMI'l'ED P ARTNERsHIPS-INsoLVENCY'-PREFERENCES,
A limited partnership, practically insolvent ill August. 1882. was uissolved Octoher 17th following, but the notice of dissolution .was not published until December 2d following, and then only in a legal publication read by few persons besides lawyers. The remaining partners dissolved October 19th. nnd the notice of this dissolution was published aflhe sallle time as the other, but in a paper of extensive circulation. The busillcssstill went on,llOwever. and the defendant bank cashed the firm's checks. although their account was overdrawn, and advanced them money on goods as' collateral. This bank was friendly to G., the special partner, and it had been assurefl by hIm. as far back as:Angust. that he·.G., would see that the checks were Ulade good. an-i had received further assurances from F., the managing pUl'tJJ.cr, that. In case