Hawkins v. Mahoney

START, C. J.

Arthur H. Ives and Amos P. Ireland, partners under the firm name of Ives, Ireland & Co., duly made an assignment of all of their partnership and unexempt individual property, for the benefit of their creditors, under the insolvent laws of this state.

The net assets of the partnership for distribution amount to. *160 $3,151.65, and the partnership debts are $19,736.34. Ireland’s net individual assets are $4,000, and his individual debts $2,997.47. Ives’ net assets are $100, and his personal debts $415.40. Included in the firm debts proved is that of the Irish-American Bank for $4,078.89, which is based upon the notes of the firm given to the bank for a loan by it to the firm, in the sum of $4,000, signed by the firm and by Ireland in his individual name. There is also included in the firm debts that of the St. Anthony Falls Bank for $5,512.50, which is based upon notes executed by the firm to it for a loan of $5,500, but none of these notes were signed by either of the individual partners. Each of these banks made the loan to the firm in express reliance upon the individual property and credit of Ireland.

The trial court, by its order of distribution, directed the assignee to pay the net assets of the firm, pro rata, to the firm creditors, including the Irish-American Bank, the net individual assets of Ireland, pro rata, to his individual creditors, excluding the firm creditors, except the Irish-American Bank, which was included therein to the full amount of its debt, without any deduction for the dividend thereon it was to receive from the firm assets; and the net assets of Ives to his individual creditors. The assignee and certain-firm creditors appealed from this order.

The appeals present two general questions for our decision. They are: Did the trial court err, (a) in distributing the firm assets to-the firm creditors, and the individual assets to the individual creditors? (b) in directing a dividend to be paid to the Irish-American Bank from both funds?

1. The trial court adopted the general equity rule in insolvency and bankruptcy for the distribution of firm and individual assets, respectively, which is, that, where there are both partnership and individual assets for distribution, the partnership assets will be first applied to the payment of partnership debts, and the individual assets, in like manner, to the payment of the individual debts of the-partners. If there is a surplus in either fund after paying in full the creditors to whom it primarily belongs, it is carried to the other-fund and distributed as a part thereof. The rule seems to be limited to cases where there are substantial firm assets for distribution. This we do not decide. The first half of the rule, that equity *161 gives to the firm creditors priority in the firm assets over the creditors of the individual partners, is conclusively settled, and everywhere accepted as the law; but the other and reciprocal half of the rule, that the separate debts of the partners are to be first paid from the individual assets, has been controverted by able courts in this country, while those which have adhered to it have not always agreed as to the reasons for its adoption.

The principles upon which the rule rests are clearly stated in the dissenting opinion of Chief Justice Gribson in the case of Bell v. Newman, 5 S. & R. 91, and the opinion of Chief Justice Bartley in Rodgers v. Meranda, 7 Oh. St. 179. The latter wrote thus of the rule:

“That it is, however, more equal and just, as a general rule, than any other which can be devised consistently with the preference to the partnership creditors in the joint estate, cannot be successfully controverted. It originated as a consequence of the rule of priority of partnership creditors in the joint estate, and, for the purposes of justice, became necessary, as a correlative rule. With what' semblance of equity could one class of creditors, in preference to the rest, be exclusively entitled to the partnership fund, and concurrently with the rest entitled to the separate estate of each partner? The joint creditors are no more meritorious than the separate creditors, and it frequently happens that the separate debts are contracted to raise means to carry on the partnership business.”

Judge Story, in his time, declared the rule to be firmly established. He, however, questioned its equity and propriety, but added:

“Such as it is, however, it is for the public repose that it should be left undisturbed, as it may not be easy to substitute any other rule which would uniformly work with perfect equality and equity in the mass of intricate transactions connected with commercial operations.” Story, Partn. §§ 877, 382.

The rule was expressly approved by Chancellor Kent, who declared it to rest upon just and obvious principles of equity, and to be settled by a series of English and American decisions. 3 Kent, Com. *65. Prof. Parsons declared it to be distinctively settled, and a simple rule, eminently practical, and founded upon obvious principles of policy. Parsons, Partn. §§382, 383. Whatever question *162 there may have been as- to this rule half a century ago, it is now thoroughly and decisively established by the great weight and number of adjudged cases, and must be followed, unless it is contrary to the letter or spirit Of our insolvency law.

The assignee claims that it is so, in that it violates the fundamental principles of equal distribution and no preferences, upon which the insolvency law rests, and asks us to adopt the Kentucky rule, which is, in effect, that where a firm is insolvent, and there are both firm and individual assets to be distributed to firm and individual creditors, the partnership assets are to be distributed exclusively to the -firm creditors; then the individual creditors are to receive from the individual assets a percentage on their claims equal to that received by the firm creditors from the partnership assets on their claims; and the balance, if any, is to be distributed to all of the creditors pro rata. Northern v. Keizer, 2 Duv. 169 . The original of this rule seems to be the rule adopted in Pennsylvania, in Bell v. Newman, 5 S. & R. 77, for the distribution of firm and individual assets, in a case where a surviving partner died, leaving both partnership and separate creditors, and firm and separate assets in the hands of his administrator. Gibson, J., dissented, and in his opinion ably vindicated the equity rule, and in these words tersely stated, at page 98, the objections to the rule laid down in the opinion of the court:

“It is evident, therefore, the rule would operate unequally, by making the separate creditors share their fund with the joint creditors, where it happens to be the largest, without subjecting the latter to share theirs under like circumstances. It may be said, it is impossible to put them on a footing in this respect. I grant that it cannot be done on any plan of participating in the same fund, but you precisely put them on a footing by making each fund bear the burden of its own debts;.and, if that of the separate creditors should happen to be the most productive, I know not on what principle of equity they can be deprived of the advantage.”

Bell v. Newman was practically overruled in Black's Appeal, 44 Pa. St. 508, and the equity rule adopted. The objections to the now discarded rule of Pennsylvania apply precisely to the Kentucky rule, which has not, so far as we are advised, been followed by any other court.

*163 As to the claim that the equity rule is contrary to the express prohibition of our insolvency law as to preferences, it is to be noted that the equity rule is the unquestioned rule in England for the distribution in bankruptcy of the firm and separate assets, and was expressly adopted by section 14 of the federal bankruptcy act of 1841 2 and section 36 of the act of 1867. 3 This is significant, for the prohibition of preferences is a pronounced feature of all bankrupt laws, and especially so of the bankrupt acts of 1841 and 1867. If it be held that the prohibition of preferences in our insolvency law abrogates any part of the equity rule, the whole thereof is annulled, and firm and individual assets constitute a single fund, to be distributed to firm and individual creditors pro rata. It is clear that the law cannot be so construed, and that the prohibition as to preferences relates to, and is directed against, the acts of the insolvents.

The same suggestions apply with equal force to the claim that the requirement of the insolvency law of equality in the distribution of the net assets to the creditors abrogates the equity rule. It is difficult to see upon what principle we can consistently hold, as we are, in effect, asked to do by the assignee, that the equity rule is annulled by the provisions of the insolvent law forbidding preferences and requiring equality of distribution, and adopt in place of it the Kentucky rule; for the latter permits the firm creditors to have the exclusive benefit of the firm assets, if they are greater and pay a greater dividend to firm creditors than the individual assets do to individual creditors; but, if they are less, then, and only then, the two classes of creditors share equally. The firm creditors never share their fund with the separate creditors, but the latter must share theirs with the former, whenever it is the larger. If one of these rules is forbidden by the insolvency law, the other is also.

The fact that the insolvency law contains no directions for marshaling the assets of insolvents where there are different classes of creditors and different funds, indicates that it was the intention of the legislature to leave the settled equity rule in force. The *164 requirement, in the insolvency law, of equality and no preferences is subordinate to the settled equities and priorities of partnership creditors in and to the firm assets, and the correlative equities and priorities of the separate creditors in and to the separate assets, when the assets are marshaled and distributed by the court in insolvency proceedings. The direction of the statute for the equal distribution of the insolvent’s property means a distribution in accordance with the recognized rules of equity. See Hanson v. Metcalf, 46 Minn. 25 , 48 N. W. 441 ; Kells v. McClure, 69 Minn. 60 , 71 N. W. 827 .

It is further urged that the rule of distribution and priority in the insolvency court and probate court should be the same, and that the equity rule cannot be followed in the probate court, in the allowance and payment of claims against the estate of a deceased partner, because the Probate Code (G. S. 1894, § 4521) provides, in effect, that when two or more persons are indebted on a joint contract, and one of them dies, his estate is liable thereon, and it may be allowed by the probate court as if it were joint and several. We are not called upon here to construe this statute, or determine what the rule of distribution in the probate court would be. It may, however, be suggested, without deciding the question, that it seems to be well settled in other states that statutes making partnership debts joint and several, and statutes providing for the allowance of joint claims in the probate court as if joint and several, are not intended to abrogate all equitable priorities of partnership and individual creditors, respectively, in the partnership and individual estates, or to introduce any new rule for marshaling the assets of the joint and separate estates. 2 Bates, Partn. § 828.

2. The claim of the Irish-American Bank was based upon promissory notes executed by the firm of Ives, Ireland & -Co., and by Ireland in his individual name; and for this reason the trial court permitted the bank to receive a dividend on the full amount of its claim, from both partnership and individual funds. The trial court’s order in this respect is claimed to be erroneous, for the reason that the consideration of the notes determines the character of the debt, which was for money loaned to, and used by, the firm; hence it is immaterial whether or not the individual name of the *165 partner is on the notes, for with or without it they represent a partnership debt, for which he is liable; consequently the bank has no equities superior to the other firm creditors.

The question of double proof in such a case is not a new one. It was at one time the rule in England that a creditor holding a note signed by the firm and an individual partner must, in bankruptcy, elect which estate he would prove his claim against. The rule is, and always has been, otherwise in this country, and it is settled by a very decided weight of authority that such double proof is permissible. Parsons, Partn. § 390; 2 Bates, Partn. § 841; 17 Am. & Eng. Enc. 1210; Emery v. Bank, 7 N. B. R. 217 , Fed. Cas. No. 4,446; In re Bradley, 2 Biss. 515 , Fed. Cas. No. 1,772; Ex parte Nason, 70 Me. 363 ; Roger v. Hall, 160 Mass. 171 , 35 N. E. 666 . It is true, as claimed, that the federal bankrupt law of 1867 provided for double proof in certain cases; but Judge Clifford, in Emery v. Bank, clearly indicates that, independently of the statute, where a creditor has taken the precaution, before parting with his money, to secure an express written contract for its repayment from both the firm and the individual partner, his right is clear, in ’ case of bankruptcy, to the benefit of his caution, and he is entitled to prove his claim against, and receive a dividend from, both the fund belonging to the partnership, and also the estate of the individual partner. This precise question was involved in the cases of Ex parte Nason and Roger v. Hall, supra, and in each the rule as to double proof was maintained on principle. In the last-named case the court, after citing the authorities in support of the rule, concludes thus:

“In view of the modern decisions, and the general agreement of opinion, we think it unnecessary to argue elaborately for the right of a creditor who has required two contracts, binding two distinct estates, to insist upon both.”

Our conclusion on this question is that the Irish-American Bank was entitled to receive a dividend on its claim from both funds. The trial court, however, directed a dividend to be paid to it from both funds, concurrently, on the full amount of its debt. There are authorities sustaining this part of the order, but it is manifestly inequitable to other creditors. When the bank receives a dividend *166 from the firm assets, the primary fund for the payment of its claim, its debt is paid pro tanto; and to permit it to receive a dividend from the individual assets, on the part of its debt paid from the firm assets, to the prejudice of other creditors, is not just, and therefore not legal, in the absence of any statute declaring it to be so.

It follows that the order appealed from must be modified so as to permit the bank to receive a dividend from the individual assets of Ireland only on the balance of its claim after applying as a payment its dividend from the firm assets, and that this case must be remanded, with direction to the district court so to do. So ordered,' without statutory costs.

5 Stat. 448 .

14 Stat. 534 .