Arnold v. Hagerman

The opinion of the court was delivered by Dixon, J.

On July 17th, 1883, John C. Farr, having a lumber business in Hoboken, and a wood manufacturing business in Asbury *193 Park, formed a copartnership in the latter business with John H. Hagerman and John S. Fielder, under the name of J. C. Farr & Co., to continue for four years. Under their agreement Hagerman and Fielder each gave to Farr his note for $7,500, and thereupon property already in the business at Asbury Park became the capital of the new firm, owned one-half by Farr and one-quarter by each' of the others. Each partner was to draw out a stated sum annually, and the profits and losses were to be divided in proportion to their respective interests, but the profits accruing to Hagerman and Fielder were to be applied toward the payment of the notes aforesaid. The firm also assumed the debts of' Sullivan & Co., a concern of which the new partnership was haid to be a continuation.

On October 29th, 1883, the new firm, being embarrassed, dissolved, and Hagerman and Fielder assigned all their interest in the business and property of the partnership to Farr, Farr surrendering to them the notes aforesaid and agreeing' to pay the debts owing by the firm, and which were assumed by the firm from the firm of Sullivan & Co., and to save Hagerman and Fielder harmless therefrom.

On November 30th, 1883, Farr assigned all his property to Benjamin W. Arnold for the purpose of securing to his creditors an equal distribution of his property and effects, pursuant to the directions of the statute of this state, entitled “An act to secure to creditors an equal and just division of the estate of debtors who convey to assignees for the benefit of creditors,” and the supplements thereto.

In January, February and March, 1884, the Second National Bank of Red Bank recovered several judgments in the supreme court against the members of the firm of J. C. Far-r & Co. for partnership debts, and caused executions thereon to be levied upon what had been the property of said firm.

On March 3d, 1884, Hagerman and Fielder filed their bill in the court of chancery against Farr, Arnold, the bank and others, to set aside their assignment of October 29th to Farr, alleging that they had induced them to make the same by fraudulent representations, and for a fraudulent purpose; and on March 10th, *194 1884, the bank filed its bill in said court against Parr, Hagerman, Pielder, Arnold and others to have said assignments, by Hagerman and Fielder to Farr, and by Parr to Arnold, set aside as fraudulent against the creditors of J. C. Farr & Co., so that the property of said firm might be applied to payment of the bank's executions, and also praying that, if necessary, a receiver might be appointed to take charge of the business, assets and effects of John C. Parr, and also those which were of J. C. Parr & Co., to manage, control and dispose of the same under the_ direction of the court.

These bills and the answers thereto of the defendants above named present the issues now, to be decided. The causes have throughout been tried and argued together, since they aim at similar results ; nevertheless their proper decision can be reached only under the guidance of principles which are quite dissimilar.

The complaint of Hagerman and Pielder will be first considered.

The statements relied upon by them as the ground for setting aside their transfer to Parr are, substantially, these, as gathered from the testimony of Hagerman, to whom alone any statements were made by Farr : In a casual conversation about business, held in the streets of New York at an indefinite time, before any discussion was had about Parr’s buying out the partnership property, Farr said to Hagerman that his Hoboken business had made $10,000 a year, and that he could pay his debts and have $30,000 left. About the 1st of October, 1883, the creditors of Sullivan & Co. were pressing J. C. Farr & Co. for payment, and Hagerman went to see Farr about it, and told him that unless they got funds to meet the debts their notes would be protested, and they would get on bad credit with the bank. Parr promised that he would borrow $10,000 from Mr. Arnold. Subsequently Parr sent Hagerman word that Arnold would not let him have the money, because he was not satisfied with the Asbury Park business, and wanted a settlement of his accounts (Arnold being a large creditor, mainly of the Hoboken business). Hagerman again called on Farr, who said that his Albany creditors (Arnold being one) were urging him, and that he could get along a, great *195 •deal better with them if he had the Asbury Park business in his •own name; Hagerman replied that he would be perfectly willing to assign his interest over to him, if it would be of any benefit in getting him out of his trouble, and thought Mr. Fielder would be willing to do as he did; Farr thereupon promised that he would then go ahead and straighten out his affairs, and there would be no more trouble about it; afterwards, a committee of the Albany creditors having come down to Hoboken, the assignment was prepared and executed, with their concurrence.

In these statements there is nothing to warrant the rescission of the assignment. So far as they purported to represent existing facts, the evidence shows that they were all true, except the .■allegation that Farr was worth $30,000 above his debts. That allegation was made in a casual conversation in the streets of New York before the assignment in question was thought of. It was uttered, we think, bona fide, and in view of circumstances quite different from those which presented themselves when the negotiations for this transfer were in progress, and therefore Hagerman and Fielder had no right to regard it as entering into ■those negotiations. Indeed, it is plain that those negotiations proceeded, not upon the idea that this statement was accurate or reliable, but upop the fear that Farr’s assets were unequal to his debts, and his financial difficulties were almost, if not quite, insurmountable. Whatever of these so-called misrepresentations related to the future were but promises honestly made, and Farr’s inability to fulfill them does not at all invalidate the assignment.

The fraudulent purpose which the complainants by their bill impute to Farr, as prompting him to obtain this transfer, was a design to secure the property of J. C. Farr & Co. for the payment of his personal creditors, and so to leave the complainants without the means of discharging their obligations as members ■of the firm. But we have failed to discover any grounds for •saying that this was Farr’s motive, except such as were substantially known to the complainants when they conveyed to him their interest in the firm property. They may not, indeed, have been apprised of the precise proportion which Farr’s assets bore to his liabilities, but they knew that he was insolvent, that *196 his notes were under protest; and if the court, from the circumstances now disclosed, should infer that Farr’s purpose was as-charged, the complainants, from the facts then patent to them,, ought to have drawn the same inference. Consequently, if we are satisfied of the existence of this imputed design, we must also-be satisfied that the complainants were cognizant of and acquiesced in the scheme. In that case, the transaction did them no wrong, and they have no standing to complain of its effect, upon others. Schenck v. Hart, 5 Stew. Eq. 774.

But, even if Hagerman and Fielder were at the time deceived as to Farr’s responsibility and purpose, their subsequent conduct was such as to deprive them of the right to rescind their transfer on that account. Upon discovery of fraud which has induced a contract, the party defrauded must promptly elect whether he will rescind or not, and if he then evinces an intention not to-rescind, the contract becomes as to him irrevocably established. In the present case, when Farr made his assignment to Arnold for the benefit of his creditors, his inability to extricate himself, and his plan for disposing of his affairs were plainly revealed toHagerman and Fielder; yet, so far from repudiating their conveyance, upon the ground that this assignment was a fraudulent perversion of it, they actually took part in perfecting and carrying out this assignment, Hagerman acting as appraiser in making Arnold’s official inventory and valuation, and both Hagerman and Fielder being employed by Arnold for some weeks afterwards to-manage the Asbury Park business in his behalf. This conduct shows an election to stand by their transfer, after they were fully apprised of all the circumstances, because of which .they now seek to avoid it.

Their bill should be dismissed, with costs.

The bill of the Second National Bank raises questions requiring the application of different principles. It insists that the. transfer from Hagerman and Fielder to Farr, as also that from Farr to Arnold, were void with respect to the creditors of J. C. Farr & Co., because they were contrived of fraud, covin or collusion, with intent to hinder, delay or defraud those creditors.

The earlier assignment will be first dealt with.

*197 In equity, a partnership is for some purposes deemed a single entity. Thus, when the property involved in the business of a partnership is to be applied by a court of equity to the payment of debts, that property is treated as belonging, not to the persons composing the firm, but to a distinct debtor, the partnership, and is used first to liquidate the debts contracted in the business of that debtor, and only the surplus, if any, is surrendered to the individual partners. This equitable practice rests upon the presumed intention of the partners themselves, and hence is primarily considered as their equitable right against -each other. Consequently, since the decision of Lord Eldon in Ex parte Ruffin, 6 Ves. 119, it has been generally held that the partners could put an end to this right, and that if, by their agreement, the partnership is dissolved and its property is assigned to one of their number, or to a stranger, as his own, without reservation of the right, the right to have partnership debts paid out of that property is extinct.

Growing out of this right of partners has arisen a corresponding equity in partnership creditors to have their debts first satisfied out of the firm property, which is now deemed a substantial -element of their demands. Generally, it may be said that this ■equity of creditors continues only so long as the right of the partners against each other subsists, and perishes when that terminates; but this is not universally true, for this equity may .survive the right to which ordinarily it is attached. In this re.spect it resembles the claim which the general creditors of an individual have upon his property; it is neither an estate nor a lien; it is ordinarily but a right, by lawful procedure, to acquire .-a lien during the ownership of the debtor; yet under certain circumstances, that lien may be acquired after the debtor’s ownership has ended. This results from the provisions of the ancient ■statute for the prevention of frauds and perjuries, by force of which, when a person has alienated his property with intent to hinder, delay or defraud his creditors, the rights of those creditors remain as if no alienation had taken place, except against the claims of bona fide purchasers for good consideration, without notice.

*198 Equity applies this statute to a partnership, its property and creditors, just as it would in case of an individual; and therefore, while generally it is true that a partnership may defeat the-equity of its creditors by the alienation of its property and consequent extinguishment of the right of its partners inter sese, yet if the alienation be effected with intent to hinder, delay or-defraud the firm creditors by defeating their equity, the claims of creditors will be unimpaired, and the property will be treated as partnership assets, unless it shall have passed into the hands of those whom the statute protects. This doctrine has repeatedly been recognized in the courts of New Jersey. Thus, in Matlack v. James, 2 Beas. 126, two members of a firm consisting of four persons conveyed their undivided half of land, held for partnership purposes, to an outsider, in payment of their individual debt to him. Chancellor Green, finding that the conveyance was designed to defeat the equitable claim of partnership creditors, adjudged it void, and applied the whole proceeds of the land to paying those creditors. In National Bank of the Metropolis v. Sprague, 6 C. E. Gr. 530, 544, Mr. Justice Van Syckel, speaking for this court, plainly intimated an opinion (the case not calling for a decision on the point) that an insolvent firm could not defeat this equity of partnership creditors by giving to creditors of the individual members a prior lien on partnership property, and referred to Chancellor Walworth’s opinion in King v. Schoonmaker, 3 Barb. Ch. 46, 50 , as supporting that doctrine by sound reasoning. The language of the chancellor thus approved was: “ The copartners certainly have the right to dissolve the partnership and divide the property of the firm between them, provided there is no intention of delaying or hindering their creditors in the collection of debts. * * * The case would have been entirely different if copartners, who were insolvent,"and unable to pay the debts of the firm, either out of their copartnership effects or of their individual property, had made an assignment of the property of both to pay the individual debt of one of the copartners only. For an insolvent co-partner, who was unable to pay the debts which the firm owed, would be guilty of a fraud upon the joint creditors, if he author *199 ized his share of the property of the firm to be applied to the payment of a debt for which neither he nor his property was liable, at law or in equity.” So, in Vandoren v. Stickle, 9 C. E. Gr. 331, affirmed by this court, 12 C. E. Gr. 498, it was declared that a voluntary transfer by a firm of notes owned by the partnership to the wife of one of the partners, was fraudulent as to partnership creditors, and the notes in the hands of the wife were decreed to be partnership assets. To the like effect is the language of Mr. Justice Depue, delivering the opinion of this court in Clements v. Jessup, 9 Stew. Eq. 569, 572: “Partnership creditors, in equity, have an inherent priority of claim upon partnership property over individual creditors, and a transfer of partnership property by one partner, with the consent of the other partners, or by all the partners, to pay individual debts, is fraudulent and void as to firm creditors, unless the firm was then solvent and had sufficient property remaining to pay the partnership debts.”

The case before us comes clearly within the reach of this principle. At the time of the transfer by Hagerman and Fielder to Farr, the insolvency of each of these persons and of the firm of J. C. Farr & Co., was patent to them all, and, indeed, was the moving cause of the transfer. They all knew that, in the condition of affairs then existing, none of them could meet maturing obligations, and it was in the hope of facilitating an extension or compromise with creditors, that the transfer was made. The transfer embraced all the partnership property. If valid in all respects, it appropriated the shares of Hagerman and Fielder to the payment of the debts of Farr, for which those shares were previously not liable, and left Hagerman and Fielder without any property whatever, as we gather from the testimony, to pay their debts. Inevitably, therefore, by defeating the equity of the partnership creditors, it would hinder them in the collection of their just claims. It is a reasonable inference that these partners intended this manifest effect of their act, and, consequently, the assignment by Hagerman and Fielder to Farr must, according to the terms of the statute, be deemed void as against the partnership creditors.

Not only upon the ground of a common intent to hinder part *200 nership creditors, thus inferred from the knowledge which all parties must have had of the necessary consequences of the transfer itself, but, also, upon the ground that the transfer was made without valuable consideration, was voluntary in the legal sense, it should be decreed invalid against the partnership creditors, all of whose debts were then in existence. Haston v. Castner, 4 Stew. Eq. 697. The consideration nominally given by Parr to Hagerman and Fielder was the surrender of their notes, and his covenant to indemnify them against firm creditors. But according to the testimony, those notes were payable only out of the profits accruing to Hagerman and Fielder from the firm of J. C. Parr & Co., and as that firm had failed and was dissolved without realizing any profits,' the notes had become absolutely valueless. Parr’s covenant to indemnify does not constitute a valuable consideration, since he may be relieved therefrom on the total failure of the transfer for which it was made. 2 Pom. Eq. §§ 751, 969; Notes to Basset v. Nosworthy, 2 Lead. Cas. Eq. 82; Haughwout v. Murphy, 7 C. E. Gr. 531.

It thus appearing that, notwithstanding this transfer, all the rights and remedies of the creditors of J. C. Parr & Co. remained against the firm property in the hands of Farr, we are brought to consider the assignment to Arnold for the benefit of Farr’s creditors.

With respect to this assignment, the following propositions may, I think, be maintained: first, that the creditors of J. C. Parr & Co. are included among its beneficiaries; second, that it conveyed, not only the property of Parr as an individual, but also that which had been the property of J. C. Parr & Co. ; third, that it conveyed this latter property subject to the equity of the creditors of that firm ; and, fourth, that, so construed, the assignment cannot be successfully impeached by the complainant.

The first proposition is unquestionable. The creditors of J. C. Parr & Co. were all creditors of Parr, for whose benefit the assignment was expressly made.

In considering the second proposition, it must be remembered that, at the time of this transfer, Parr was in reality the owner of the property previously belonging to J. C. Farr & Co.; he *201 liad become so by the conveyance from his partners, which then nobody had disputed; so that the assignment to Arnold of all the property owned by Earr included in its terms the firm property. This was made still clearer by the inventory annexed, which specified, in detail, the property at Asbury Park. Even if the transfer from Hagerman and Fielder to Farr be disregarded, still it will appear that the assignment to Arnold included the property of J. C. Farr & Co.; for, in view of the fact that it purported to convey such property, the conduct of Hagerman and Fielder precludes their denial of its efficiency. They both knew that Farr was about to assign the firm property to Arnold; they both, without objection, delivered over that property to Arnold, in pursuance of Farr’s assignment; they both took part in the management of that property under Arnold as assignee, :and neither of them raised any question as to Arnold’s title, until after creditors of J. C. Farr & Co. had proved their debts ■under the assignment. Whether in these circumstances we look for a ratification by Hagerman and Fielder of the transfer of firm property by Farr, as their partner and agent, or for a transfer directly by the joint act of all the partners, or for an ■estoppel preventing Hagerman and Fielder from denying that the -assignment conveyed the effects inventoried and delivered, in .any view the property of J. C. Farr & Co. passed to the assignee.

Touching the third proposition, that this property was conveyed subject to the equity of the firm creditors, it would be beyond cavil, had the assignment shown upon its face a conveyance of the property of Farr and also of J. C. Farr & Co. for the benefit of creditors. As was said by Chief-Justice Hornblower in Scull v. Alter, 1 Harr. 147 , 150: “If it is an assignment, not only of the partnership effects and property of the firm, but also an individual and several assignment by the members of their respective and separate estates, then it must be treated as such. The estates and debts must be marshaled, the partnership effects applied, in the first instance, to the partnership debts, and the effects of each member applied, in the first instance, to payment of his separate debts.” See, also, Garretson v. Brown, 2 Dutch. 425, 435. But. as this assignment speaks of all the *202 property embraced in it as belonging to Farr alone, a different view might be taken of it. Usually, indeed, courts have held that an assignee for the benefit of creditors is not a purchaser for value, but takes the property subject to all equities that would have been valid against the assignor. Notes to Basset v. Nosworthy, 2 Lead. Cas. Eq. 87. Many of the decisions to this effeet, however, have gone upon the theory that debts proved under the assignment are not extinguished, except so far as they are-paid by dividends, or that a pre-existing debt is not a valuable-consideration for a conveyance; and as neither of these theories is tenable in New Jersey, there may be found sufficient reasons-for holding, in this State, that a creditor, proving under an assignment, should be regarded in equity as favorably as a purchaser for value, although in Vandoren v. Todd, 2 Gr. Ch. 397, the opposite doctrine prevailed.

But conceding to the assignee and to the individual creditors of Farr who have proved their debts, the rights of purchasers for value, they still are bound by the equity of the firm creditors, for they had notice of that equity. “The rule,” says Prof. Pomeroy (2 Pom. Eq. § 753), “ is universal and elementary that if a purchaser in any form receives notice of prior adverse rights in and to the same subject-matter, before he has completely acquired or perfected his own interest under the purchase, his position as bona fide purchaser is thereby destroyed, even though he may have paid a valuable consideration.” That Arnold, before the assignment, and all the personal creditors of Farr, before they proved their claims, were notified .that the Asbury Park property had belonged to J. C. Farr & Co., and had been transferred toFarr when that firm and all its members were insolvent, is fully established by the evidence in the cause. This notice before the assignment was acquired by Arnold from conversations with Farr, and by Arnold and many, if not all, of Farr’s individual creditors, through inquiries made by Eaton and Lawson, a committee appointed by the creditors to investigate the affairs of Farr and J. C. Farr & Co. After the assignment, but before any debts were proved, such notice was still more definitely communicated to all of Farr’s creditors, through the report of their- *203 committee (Exhibit D 5), in which the assets and liabilities of Farr, and of J. C. Farr & Co., respectively, are distinctly stated. This report also plainly indicates an understanding or expectation that the property assigned would be marshaled between the creditors of Farr and the creditors of the firm. It was made January 19th, 1884, while the first claim proved was presented: to the assignee January 28th, 1884. Fuller notice- than this report contained, of the equity of the firm creditors, could not well be given. Hence, those creditors are still entitled to have the partnership property applied to the payment of their debts, in preference to the debts of Farr’s individual creditors.

The fourth proposition denies the right of the complainant to-impeach this assignment.

The assignment was in the form sanctioned by our statute; it was for the benefit of all creditors who were entitled to any share in the property assigned; it created no preferences, and it provided for no delay beyond what was necessary for the execution of the trust which it properly declared. Although such assignments do hinder creditors from obtaining that priority of lien which otherwise their vigilance might secure, yet they are not on that account within the meaning and scope of the statute, which avoids transfers to defraud creditors. 2 Pom. Eq. § 994, n. The assignment was perfected before the entry of complainant’s judgments, and, as it operated to divest the legal title of the debtors, the complainant’s executions did not become a lien. The assignment, as we construe it, placed all creditors of the same-class upon an equal footing, and in such cases equality is equity. Consequently, both in law and in equity, the complainant is bound.

The conclusion of the matter is,‘that the property of Farr, and the property of J. C. Farr & Co., should be marshaled between the creditors of those two debtors respectively.

It only remains to consider whether the parties and pleadings in the cause are such as will warrant a decree to the foregoing effect.

The parties are Hagerman, Fielder, Farr, all their judgment creditors, and Arnold, the assignee, who represents the other *204 creditors in all questions relating to the property assigned. Pillsbury v. Kingon, 6 Stew. Eq. 287. These include all parties necessary for such a decree.

The primary design of the bill of complaint was to have the .partnership effects subjected to the lien of the complainant’s executions, and, consequently, it was filed on behalf of the complainant alone; while, in our judgment, the complainant has no peculiar lien, and has only a right, in common with all other partnership creditors, to have the partnership assets marshaled .for their benefit; and, therefore, the bill should have been exhibited on behalf of the complainant and all other creditors of •the same class who might come in under it. But the bill sets out all the facts upon which our conclusion is founded, and one of its prayers is :

“That if necessary, a receiver may be appointed to take charge of the business, assets and effects of the said John O. Farr, and also those which were of the said J. O. Farr & Co., and which are claimed by said Arnold, by virtue of •said pretended deed of assignment, to manage, control and dispose of the same ■ under the direction of this honorable court.”

This prayer is appropriate for the relief to which we think the complainant and the other firm creditors are entitled, and the lack of an averment that the suit is prosecitted on behalf of all such creditors may be remedied by so framing the decree as to secure, for all who come in, a ratable distribution of the partnership assets among them. Hendricks v. Robinson, 2 Johns. Ch. 283, 297 ; Wetherbee v. Baker, 8 Stew. Eq. 501, 508.

Let the decree appealed from be reversed, and a decree be entered in accordance with these views.