COBBiN II. BOIES.
693
ber 28.1882, and January 20, 1883. the bank accepted unsecured notes of the general partners to a large amount in settlement Of notes of the limited partnership maturing between those dates. On January 20,1883, judgment was oonfes8ed by the partners in favor of the bank, and the special partner, and execution so leVIed on the stock in trade that the bank got the first lien and G. the second; thus shutting ont unsecured creditors of the limited partnership. The attorney of the partners, both special and general, was also the attorney of the bank. Held, that the bank had knowledge of the insolvency of the limited partnership. and was a party to the scheme to protect G.. 8S against creditors of that firm, and that the judgment confessed in its favor was therefore void, under 2 Starr & C. St. Ill. c. 48. § 22, forbidding prefer· ences by such partnerships in contemplation of insolvency.
the concern got Into trouble, the bank would be protected. Between Decem,
In Equity. Bill by Chester C. Corbin, an unsecured creditor of Boies, Fay & Conkey, to set aside certain judgments confessed by them, as in fraud of the Illinois limited partnership act, (2 Starr & C. St. Ill.c. 84, pp. 1564-1568.) Wm. J. Manning, for complainant. . Ffnwer, Re:rny « Gregory" and Turnbull, Washburn & Robbim, for retlpondent bank. GRESHAM, J. On March 30, 1882, William A. Boies, Benjamin B. Fay, Lucius W. Conkey, anqJulius K. Graves, formed a limited partnership under the firm name of Boies, Fay & Conkey, to carryon the busmess of wholesale grocers for five years, at Chicago. Graves, a special partner only, was a resident of Dubuque, Iowa, where he remained; and, whether the business proved profitable or unprofitable, interest was to be paid on his capital of $50,000, at the rate of 20 per cent. per annum. Fay and Graves were brothers-in-law, and the former became financial and chief manager of the firm. In August, 1882, about five months after Graves became a limited partner, an inventory was taken of the assets, from which the book-keeper made a statement, showing the firm's financial condition. This statement embraced all the bills receivable, and although some of the debts due to the firm were then uncollectible and worthless, no deduction was made on that account. If such deduction had been made it would have appeared that the liabilities exceeded the assets. If the partners did not then know that the firm was insolvent, they must have known it was seriollsly threatened with insolvency and bankruptcy. This statement has not been produced, and Fay testified that a copy of it which was furnished him by the book-keeper had been lost or destroyed. under which this limited partnership was formed The Illinois provides that it shall not be lawful for any such firm, or allY member thereof, in contemplation of bankruptcy o'r insolvency, and with the intention of preferring or securing one or more creditors to the exclusion of others, to make any sale, transfer, or assignment of their property or effects, or to confess any judgment, or create any lien all the \)roperty or assets, and that· all preferences so made shall be utterly 'Void. Instead of suspending in August, 1882, and holding 1
(2 Starr 8; C. St.
m. p. 1568, 0. 84, I 22.)
the assets.$!la·specill,l. fund for the paymept, of its debts ratably as tbefirmshould have done,; it continued in busamong came to Cliicflg6; and assumed Fay"s duties as financial manager,thattbe latter might. go and buy more goods on tbe firm's credit. , During the fom bl" six weeks that Graves thus remained in the store, he had access to and ,exan1it{ed the private ledger and other books andpapers;which disc1osed'the firm's condition. An account was kept witb the First National Bank of Chicago, of L. J. Gage was vicepresident and general manager, arid in September, during Fay's absence, Gra ves called at the bankailld told Gage that he would be personally responsible forall checks drawn by the firm's cashier during Fay's absence, and whenthe latter returned he assured Gage that, shauld the firm have trouble, the bank would be protected. The Commercial Nutional Bank of Dubuque, of which Graves was a director, kept an account with the First National Bank of Chicago, and Graves and Gage had a personal ac-· quaintance,if they were not personal friends. The evidence shows that in September, after Graves bad promised that all the firm's checks should be paid, the bank permitted the firm to overdraw its account. On the 14th of Octoberthe firm nE)Elcledmoney to pay an overdraft at the bank, and to meet paper which wo'uld soon become due; and Gage accommodated the firrhwith a demand, loan Of $10,000, for which amount he took th warehouse receipts for merchanthe judgment note of the dise recently bought on the fi¢l's credit, as collateral security. It is claimed that' three days later;-october 17th,-the four partners signed an agreement dissolving the limited partnership, and that two days still later,Boies soldhis interest in the firm to Fay & Conkey, (In which day Boies, Fay & Cqnkey-Graves having retired three days before-,signed the following agreement: "It j.s hereby stipulated and agreed by and between, the parties hereto that the partnership heretofore eXisting between William Benjamin B. FaJ', and. Lucjus W. Conkey, under the firm name of Boies, Fay &Conkey, is this day dissolved by mutual con's'ent. The said dissolution shall date from the 1st day of N'ovembel', 1882, and lep;al notice thereof shall be published on or before thelGth day of Novembet, 1882." This paper or notice was published for the first· ·Ume in the· Chicago 2dj and the paper by which itis Daily Evening Journal, on claimed the partnership wllf'l,dissolved two days before, was pub-· lished oil the same day in the Chicago Legal News,. a legal publication read by few besides lawyers. 01;1 the 18th of October, the day after the alleged dissolution of the limited partnership, the bank, through Gage, made another dllnland loan·of $10,000 to the limited partnership, receiving as se,curhy other wareho;usereceipts of the same character. At the time of !the dissolutiopof ,the limited partnership, and the by his to Fay & Conkey"a large amount qf the paper was about to mature, and the firql was still. limited p,urcbasinggood,s; andth,e that .thepartners deemed;it unwise to then give notice of the alleged withdrawal of Graves and Boies. The business was continued in the name of the limited partnership.
CORBIN ". BOIES.
with Graves' knowledge, and checks were signed in the firm name until December 2. From October 6 to December 6, the over-drafts ranged from $557 to $10,126; and from December 4 to December 16, the bank paid checks drawn in the name of the limited partnership, payable to Graves, amounting to a large sum, and up to December 6, at least, (Jharged such payment to the account of Boies, Fay & Conkey. The goods which were pledged to the bank were part of the purchase made by Fay after the firm had become insolvent, and they were hauled direct from the freight depot to a warehouse, instead of to the store or warehouse of the firm. On December 7, the bank, through Gage,' made a demand loan of $8,000 to Fay & Conkey, taking in pledge therefor part of the new goods bought in the name of the limited partnership. A note of Boies, Fay & Conkey, payable to Graves, for $5,000, was protested at Dubuque on the 14th of December, and sent to the First National Bank of Chicago for collection; and on January 20, 1883, Gage, for the bank, discounted customers' notes for Fay & Conkey, amounting to $3,459; and on the same day, with the firm's money, Graves paid the bank, through Gage, two notes of the limited partnership for $5,000 each, due in seven and nine days, respectively, before maturity; the bank then holding, with the knowledge of Gage, a 85,000 note-of Fay & Conkey, indorsed by Graves, and payable two days later, and also other notes of Fay & Conkey, unindorsed and unsecured, for more than that amount. It will thus be seen that paper of the limited partnership, which was not then due for seven nine days, was paid in preference to a note of Fay & Conkey, on which Graves was liable as indorser, as well as unsecured notes of Fay & Conkey. This payment was made after it had been determined that the firm should suspend, and prefer part of its creditors; and on the !:lame day Graves and Fay & Conkey went to the office of Flower, Remy & Gregory for legal advice, which firm then was, and for some time had been, the general counsel of the bank and of the insolvent firm. During the consultation which occurred with Mr. Remy, he visited the bank, and on his return stated that Gage would be satisfied with a judgment in favor of the bank for$40,000, for which amount a judgment note was accordingly prepared, and signed by Fay & Conkey. It was thought that with the warehouse re· eeipt!!! and the customers' discounted notes, this would amply secure the bank. Two judgment notes,'-one for $17,500, and the other for $27,· OOO,-were also executed by Fay & Conkey at the same time and place, payable to Graves; and it was agreed between Graves, Gage, and Remy that, when 'the judgments were confessed, including 5 per cent. for attorney's fees, executions should immediately issue, and that the ba.nk's ilxecution should be first levied, and that Graves' execution for $17,500 should be next levied, so that the bank and Graves might have liens prior to -all other creditors. Before leaving the store, on the evening of the same day, Fay & Conkey divided the firm money on hand, each re<leiving 8566, and the next morning (Sunday) the Same parties again met by appointment at the office of Flo\ver,Remy & Gregory, where the book-keeper and cashier brought the finn's mail, which contained drafts
696
FEDERAL REPORTER.
amounting to $2,215.38. These drafts were indorsed and delivered toGraves. At this interview Remy appears to have prepared notes upon which judgments were to be cOJ;lfessed in favor of other creditors. The· mail brought to the firm on Monday morning ab(}ut$1,300, which was divided between Fay, Conkey, and Graves, aftel' which judgments were confessed in one of the state courts /lnd in this court, ip. favor of the bank, previously executed, Graves, and other creditors, on thl'judgment amounting inthe aggregate to $233,709.09, of which $10,658.65, represented attorneys' tees. Executions were immediately issued on the state co-qrt judgments, and handed to Remy, who delivered them to the sheriffof Cook county in such order' as to secure to the bank the first lien,and, Graves the second. These executions were levied upon the entire stockqf merchandise of the firm, and the proceeds of the sale paid the bank's judgment in full, and something less. than $10,000 on the Graves $17,500 judgment. The executions which were issued upon the judgmellts confessed in this court in favor of Graves,. the Commercial National Bank ofDubuque, the Dubuque County Bank, and the Importers & Traders National Bank, were the same day returned nulla bona, and these parties joined in a cre,ditors' ,bill, against Fay & Conkey, with whose appointed receiver. consent"Dnthe following day., Bradford Hancock Hancock immediately qualified,and took possessioJ;l ,of the firm's office, books, and bil,ls receivable, without interfering with the sheriff's posesssion. Onth9 lst of March following, Chester C.Corbin, an unpreferred creditol"qfLhe limited partnership,for himself and such other creditors as might be willing to unite wHh hini, commenced .this suit against all the. parties ip. whose favor j!Jdgments had been confessed, for the purpose of setting them 8!lide, and having ,the assets of the insolvent limited partnership ,eqq!1lly divided among the creditors. On March 31, 1883, a subpcena tecum was servedupop Hancock, the receiver, to appear on April 4, before the examiner, with the books of the firm, and testify as a witness, and the evidence shows that ltfter the service of this subpama; and before the 4th day of April, he sold as old paper all the letter-press except one, the bank-books, check-book, and ..statements and bills checks back of November, 1882 1 the payable book prior to July,anl1 other books which'were regarded as important by the expert book-keeper. This fact is all the more significant as Flower, ;Remy& Gregory also the receiver's counsel. Why was it:thought necessary to dissolve the limited partnership on the 17th ofOctober, and keep the fact a secret from the public until the 2d of December? And if there was no intention on the part of Graves and his partl1ers to take advantage of any portion of their ereditors, and allow Graves, to escape liability as a partner, why was the agreement of dissolution pUhlished in the Chicago Legal News, a legal publication read by few except lawyers, instead of in the Evening Journal, a paper of much wider general circulation? And why did the notice which appeared in .the Evening Journal of the same day say nothing about theretirement of Graves? What occurred prior and subsequent to October17 fairly slww8 that the dissolution was a pretended one, and that the-
CORBIN t7. BOIES.
697
Corm was gone through for the purpose of having Fay &; Conkey, as general partners, confess judgments as they did, to protect Graves against his liability as special partner, and as indorser of the firm's paper. Prior to the secret dissolution of the limited partnership, the firm had placed in the hands of brokers in Chicago, New York, and Boston, its commercial paper for sale on the market; and three days before the same time the firm had pledged to the First National Bank goods bought by Fay on the credit of the insolvent firm, as collateral security for a demand loan of $10,000; and on the day following the secret dissolution they made another pledge of merchandise purchased in the 8ame way, as security for another demand loan of the same amount. Between the time of the secret dissolution and the 2d of December a still larger amount of the firm's commercial paper was put upon the market for discount, and during the same time the firm was unable to pay its employes, its rent, and bills for current purchases in Chicago. The substitution of a large amount Qf the notes of Fay & Conkey for the notes of Boies, Fay & Conkey, furnishes still further evidence of a previously formed purpose to enable Fay & Conkey, as general partners, to confess judgments by way of preferences, and thus shield Graves. The judgment confessed in favor of the Commercial National bank of Dubuque, represented in part four notes Qf$2,500 each, drawn by Fay & Conke)' in fav()l" of Graves, for his ae-commodation. These notes did not represent an indebtedness of the firm, .and yet Graves caused them to be treated as part of the firm's indebtedness, and that amount was paid out of the assets of the limited partnership. This was not done through inadvertence or mistake, for Graves knew the facts; and in the argument his counsel admitted that this was the debt of Graves, and not the debt of the firm. The judgment confessed at Graves' instance in favor of the Dubuque County Bank exceeded the indebtedness of the firm to that bank by about $3,000. The bank -declined to receive more than the amount ofits debt, and Graves collected .and retained the excess. These circumstances are damaging to Mr. Graves' integrity. This, the Corbin suit, came to a final hearing on November 17,1885, when the court decreed that on the 20th of August, 1882, the limited partnership was insolvent, with the knowledge of each of the partners, and so continued until the termination of its business on the 22d of January, 1883, when Fay & Conkey, the pretended successora of Boies, Fay .& Conkey, confessed the judgments already mentioned; that the acts of the partners. whereby they pretended to dissolve the limited partnerwere done with intent to defeat and evade the provil'lions of the statute of Illinois which prohibited preferences by such partnerships, and that all such acts were void; that the judgments were confessed by Fay & Conkey for the purpose of p.rotecting Graves against loss as a·member of the limited partnership, and as an indorser for it; that the judgments in favor of the Commercial National Bank for $14,396.49, the Dubuque County Bank for $12,002.38, the Importers & Traders National Bank of New York for $15,126, were confessed at the special instance Qf Graves, and that they, as well as the Graves' judgment in this court,
in all amounting to $68,758.24, were paid in full out of the equitable. assets oftbelimited partnersq.ip; that Graves also received out of the assets ofthEjl;i.mited partnership $9,781.18 on the judgment confessed in his favor jn the state court,-$5,900 as profits,. although the firm made ne profits, and' $2,741.38, being the amount. taken by him on Sunday and Monday, January 21st and 22d. Graves was required by thi\> decree to pay into court for the .benefit of the creditors of the limHed partnership, within 30 days, $100;796.71, which was the amount s!} received by him, or for his benefit, with 6 per. cent. interest thereon from the date: of payment.. FJower, Remy & Gregory received upon the several confessed judgments, as· attorneys' fees, $8,559.80, for which amount the court also entered adeoree against,them, with interest thereou at 6 per cent., the total decree ,being $9,886.57, which they were aIs!} required to pay to the clerk of the court within 30 days, for the benefit of the creditots.of the limited partnership, it being thought that these sums would be sufficient topay,tbe claims of the un,preferred creditors;. and the court reserved the right to thereafter decree against the First National Bank of Chicago, as the proof mightjustify. . At and before the hearing, Gtaveawas represented by Flower,Remy &Gregory, anp, not the time limited, an exeGution was issued against and returned nulla bona, after which an alwexecution was issued, upon which the marshal indorsed a return that he had made a personal demand upon Graves for money or property to pay or satisfy the same. and he had refused to do either_. An order was then entered on the application of the complainant, requiring Graves to personally appear befote the court on o.ctober 30, 1886, and show cause why he should not' be attached for contempt in failing to comply with the decree·of the court. This he did not do, although personally served with a copy of the ol'der. On NO\'ember 1,1886, it was adjudged that Graves had willfully disobeyed the orders of the court; that he was guilty of contemptofits authority; and that a.writ be directed to the marshal of the Northern district of Illinois, commanding him to arrest Graves, and commit him to the jail of Cook county until he complied with the orders of the court, or was discharged by due process of law. Not'finding Graves within his district, the marshal proceeded to Dubuque, where Graves resided, and there presented the writ to the district judge of the Northern district of Iowa, and requested that the proper process should be issued for his arrest and identification, in order that he might be removed to this district. ,This request was deniedafterargument of counseL In re Graves, 29 Fed. Rep. 60. The jurisdiction of this court, both as to subject-matter and the parties, including Graves, is not denied;' and' until the decree and orders are reversed they are binding upon him. .When Graves refused to obey the orders and process of the court, and thus defied its authority, he was rightfully adjudged guilty dfcoiitempt. Section 725, Rev. St., declares thaftbe courts6fthe United Statesahall have power to punish, by fine or imprisonment, persons guilty of contempt of their authority by disobedience to any lawful writ,process, order, rule, decree, or command.
· .... 1X>RBIN V. BOUle.
699
By his willful disobedience of the orders and process of the court, Graves committed an offense against the United States for which he stands cohvicterl and sentenced; and he is no more entitled toimm.unity in another jurisdiction than if he had escaped after conviction and sentenee for a. felony. In Wartman v. Wartman, Camp. Dec. 262, Chief Justice TANEY says: "Disobedience to the legitimate authority of the court, is by law a cohtempt, unless the party can show. sufficient caUse to excuse him." In speaking of this offenae in Fanshawe v. Tracy, 4 Biss. 497, JUdge DRUMMOND says: "It is not a crime, in one sense, but it partakes of the nature and character of a crime; and I do not see why, if a man is imprisoned for a contempt of a court of the United States, and bl'eaks jail and escapes into another state, he cannot be'arrested and returned to his imprisonment under the authority of the United States." In NeUJOrleans v. Steam/-ship 00., 20 Wall 392, Justice SWAYNE sayS: "Contempt of court'is a specific criminal offense." On this subject see, also, In re Chiles, 22 Wall. 157. Graves should have paid into court the amount adjudged to be due from him, if he was able to do so; and if he was insolvent, or unable to satisfy the decree, he could and should have exonerated himself by personally appearing and showing that fact. It cannot be that the law is so impotent as to allow a party to resist a suit step by step, and, when a decree is entered against him, disobey it with impunity, by removing beyond the court's territorial jurisdiction. Graves having thus, for the time being, at least, successfully defied the authority of the court, the complainant now asks for a decree against the First National Bank of Chicago for $40,000, paid to it in satisfaction Qf the confessed judgment, and also for $10,000 of the firm assets, paid to it on January 20, with interest on these amounts. This relief is asked on the ground that the limited partnership became insolvent as already stated; and, knowing that fact, the bank, through Gage, co-operated with Graves in his scheme, which had for its object the latter's protection against liability as special partner and as indorser. Graves needed the aid of 1)1e bank to accomplish his purpose, and it co-operated with him through Gage. The bank was apparently willing, if not desirous, that Graves should be protected against threatened loss, provided it did not suffer thereby. Gage testified that it was not until after the judgments had been confessed that he knew a limited partnership could not prefer Qne or more creditors to the exclusion of others. We have already seen that while Fay was absent buying goods, and Graves was occupying his place in the store, the latter told Gage he would see that all checks drawn by the firm's book-keeper were paid; that when Fay returned he promised Gage that if the firm got into trouble the bank should be protected; and that two days before the judgments were coufessed it was agreed between Graves and Gage and Fay & Conkey, in the office of Flower, Remy &. Gregory. who acted as counsel for aU the parties. that the bank's judgment and execution should be a firet lien and first paid, and that Graves' judgment shOUld stand next in priority. After the proceeds of the sale had
700
FEDERAI., REPORTER.
been paid to the bank and Graves, :Q.othing was left from this source for other creditors, nor was it expected that anything would be. On December 28 the bank, through Gage, accepted an unindorsed and unsecured note of Fay & Conkey in renewal of a note of the limited partnershilJ on that day. On December 29 the bank, through Gage, accepted another unsecured note of Fay & Conkey for $5,000 in renewal of a note of the limited partnership, for the St1-me amount, due the same day. On December 30 the bank, through Gage, again accepted an unsecured note of Fay & Conkey of $5,000 in renewal of a note of the limited partnership, dated October 23, and payable 65 days after date. On Janu·· ary 9, 1883, the bank, through Gage, discounted an unstlcured note of Fay & Conkey for $5,000; and paid to Graves $1,900 oithe proceeds all! a check of Fay & Conkey, and applied, the residue in payment of debts of the limited partnership and in satisfaction of an overdraft of Fay & Conkey.. On January 10 the bank, through Gage,discounted another unsecured. note of Fay & Conkey for the same amount, and on the same day paid to Graves two checks drawn by Fay & Conkey in his favor, for $2,500 each. The testimony, including that of Gage, fairly shows that he doubted the solvency of Fay & Conkey as early as December 28, when he accepted the first of their unsecured notes in exchange for enote of the limited partnership for a like amount, and thus released Graves from liability. This conduct of Gage is strong evidence in itself that he had. been made acquainted with some plan for the protection of Graves at the expense of the .creditors of the limited partnership, andl that something had been done or promised, upon the faith of which the bank was willing to take unsecured paper of two men, not entitled t() credit, in renewal of paper of the limited partnership. The firm had lost money from the time it co.mm.enced business, and, after the inven· tory was taken in August, if not belore, it was slow in meeting its payments. Its account was repeatedly overdrawn at the bank both before and after Graves' alleged withdrawal. Remy wrote the dissolution contracts, and. Flower, Remy &. Gregory were the general counsel for the firm, madeC9llectionsfor it, and froPl time to time gave the partners legal advice. It does not appefLr the testimony that the members of the limited partnership had any reason for keeping their counsel ignorant of the firm's condition and purposes, or of Graves' retirement as III partner. It was]mownto thermel;nbers of the limited partnership and to the banj.{ that Flower, Remy & Gregory were counsel for both' .,md it is not unfair to assume, as I d(), that any information that the counsel had of the condition and purpose of the insolvent firm, which it wasmaterial for the bank to know , was communicated to Gage. If the counsel knew that the limited partnership was insolvent, or threatened with insolvency, as I think they did, and that it had been dissolved, and did not communicate that information to the bank, they were unfaithful to it. . The mere fact that Flower, Remy & Gregory continued to maintain the relation of counsel to the limited partnership as well as to its alleged successor, and also to the bank, indicates that the latter knew the financial condition of the former, and that there was co-operation between
MARTIN II. BARBOUR.
701
them. But even if the bank in good faith continued to deal with the lim' ited partnership, and afterwards with Fay & Conkey as its successor, without knowledge of anything indicating insolvency, or threatened insolvency on the part of either, and that Graves had ceased to be a special partner, it was bound by the knowledge which its counsel had upon these subjects. A decree will be entered against the bank for the amount it has received in satisfaction of the judgment confessed in its favor, with interest.
MARTIN 'l'. BARBOUR
et al. 1 April, 1888.)
(Oircuit Oourt, E.
n. Arkansas.
RepOl'ted by Messrs. Stepbenson & Trieher, of tbe Helena bar.