Jackson Bank v. Durfey

• Decision Date: 20 May 1895
• Citation: 18 So. 456,72 Miss. 971
• Court: Mississippi Supreme Court
• Parties: JACKSON BANK v. R. W. DURFEY ET AL

18 So. 456

72 Miss. 971

JACKSON BANK v. R. W. DURFEY ET AL

Supreme Court of Mississippi

May 20, 1895

FROM the chancery court of the first district of Hinds county. HON. H. C. CONN, Chancellor.

The opinion sufficiently states the case.

Decree reversed and cause remanded.

Nugent & Mc Willie, for appellant.

The evidence leaves no doubt that the firm of Durfey & Ascher and both its members, were insolvent. They were unable to pay their debts in the ordinary course of business. 159 Mass 363; 72 Me. 489; 2 Am. & Eng. Enc. L., 172.

It was not allowable for each member of the firm, while insolvent as a firm and as individuals, to give a trust-deed on his individual half interest in the firm assets to secure his individual debts. See Williams v. Gage, 49 Miss 777; Bass v. Estill, 50 Ib., 300; Irby v Graham, 46 Ib., 425. In Schmidlapp v. Currie, 55 Miss. 597, a conveyance was upheld, the court saying that there was no showing made of insolvency at the time. The utterance of the court in Bank v. Klein, 64 Miss. 141, that insolvency would make no difference, is obiter dictum. The cases of Case v. Beauregard and Roach v. Brannon, relied on by appellee, are inapplicable. See, also, Marks v. Bradley, 69 Miss. 1.

There is no lack of authority to sustain the proposition that a transfer of the assets of an insolvent firm, or any member of it, to pay individual debts, is fraudulent in law, and fraudulent in fact, when coupled with proof of insolvency. 84 Iowa 671; 45 N. J. Eq., 186; 106 Mo. 365; 13 Col. 329; 52 Ark. 556; 21 N.H. 462; 52 N.Y. 146; 101 Ib., 265; 33 W.Va. 246; 15 Neb. 73; 29 Md. 311; 1 Jones on Mort., § 120; 114 Pa. St., 353; 60 Wis. 622; 80 Ala. 440.

Williamson & Potter, for appellee.

1. The proof wholly fails to support the charge that the trust-deeds were executed with intent to defraud. It is not disputed that the debts were in each case valid, and that the money borrowed went into the partnership. It purchased the property which the partners put into the firm when the partnership was formed. The bank officials knew of the existence of these debts, and, when the debt of the bank was contracted,

Durfey & Ascher were in possession of all the property. There was no effort at concealment.

2. Appellant's contention is that it is not competent for a member of a firm to mortgage his interest in firm assets for individual debts. It has been uniformly held by our court that firm creditors have no lien on firm assets, and that a member of the firm can, with the consent of other members of the firm, apply firm assets to individual debts. Freem. Ch. Rep., 231; 41 Miss. 138; Schmidlapp v. Currie, 55 Ib., 597; Bank v. Klein, 64 Ib., 141. The same doctrine is held in other states. Sigler v. Bank, 8 Ohio St., 511; 5 Ib., 96; 11 Ohio 394; Case v. Beauregard, 99 U.S. 119; 34 Kan. 35; 21 Conn. 130; 49 Wis. 379; 20 Tex. 688; 17 Ind. 463; 17 Am. & Eng. Enc. L., 971; 5 Johns. Ch., 390. The solvency or insolvency of the firm or the partners makes no difference. Bank v. Klein, supra; 21 Conn. 130; 5 Ohio St. 96.

E. E. Baldwin, on the same side.

The giving of the trust-deeds by the partners on their respective interest in the firm property was not unlawful. Whitton v. Smith, Freem. Ch. R., 231; Freeman v. Stewart, 41 Miss. 138; Schmedlapp v. Currie, 55 Ib., 597; Bank v. Klein, 64 Ib., 141; 34 Kan. 35; 8 Ohio St. 511; Case v. Beauregard, 99 U.S. 119; 21 Conn. 130; 49 Wis. 379; 20 Tex. 688; 17 Ind. 463; 4 Jones (N. C.), 58. The cases all start out on the principle laid down by Lord Eldon in Ex parte Williams, 11 Ves., 3, and repeated in Ex parte Ruffin, 6 Ib., 119, that the equity of the creditors is merely that of the partners, and if they consent to the application of the firm assets to Pay bona fide debts either of the firm or of the individuals, the firm creditors have no equity to enforce.

Where, as in this case, the partners make, at different times, sale of their respective interests in certain partnership property, with intent to pass the whole property, it is, in effect, a conversion of partnership into individual assets, and the rights of firm creditors are gone. 5 Johns. Ch., 320; 13 Metc. (Mass.), 283.

Argued orally by T. A. Mc Willie and W. L. Nugent, for appellant, and C. M. Williamson and E. E. Baldwin, for appellees.

OPINION

COOPER, C. J.

The appellant, a firm creditor of the appellees, Durfey & Ascher, exhibited its bill in chancery, seeking to annul as fraudulent two certain deeds of trust, whereby the firm assets were incumbered to secure the individual debts of the partners. The evidence, fairly construed, discloses these facts: Durfey, one of the partners, was indebted to the defendant, Caldwell, in the sum of five thousand dollars, and Ascher, the other partner, was indebted to Hart in the sum of five thousand five hundred and fifty dollars. The firm, and the individuals composing it, were insolvent. On October 3, 1893, Durfey executed a deed of trust on all property owned by him individually, and upon his undivided half interest in certain property, specifically described, owned by the firm, to secure the debt due by him to Caldwell. On the same day Ascher executed a deed of trust, conveying his individual property and his undivided half interest in certain property, specifically described, owned by the firm, to secure the debt due by him' to Hart. The book accounts, and certain horses which had been bought for resale, were not included in the conveyances, but the stock kept in livery, the carriages, feed and other appurtenances were all incumbered. Forfeiture of both conveyances was fixed for the same date, January 1 following, at which, time, the secured debts remaining unpaid, the trustees were authorized and directed to make sale of the mortgaged property, and out of its proceeds to pay the secured debts. The members of the firm testified that they expected, by the collection of the outstanding book accounts, by the sale of the stock not included in the deeds and from the profits of the business, to pay the firm debts, but a careful consideration of the evidence satisfies us that, at the time the deeds were executed, the firm and its members were hopelessly insolvent, and that no expectation could reasonably have been entertained that the firm debts could be paid after the firm property had been devoted to the individual debts of the partners. What followed the execution of the deeds was, at best, the struggle of mere hoping against hope and postponing for a short time the inevitable end. The issue is thus sharply presented whether it is lawful for the members of an insolvent firm to convert the joint estate into severalty and appropriate it to the payment of the individual debts of its members, leaving the firm debts unpaid. The question has never, so far as we are advised, been before the court, though expressions may be found suggestive of the inclination of some of the judges who have been members of the court, to the view that the dominion of the partners over firm property is not limited by the existence of firm debts and the insolvency of the firm.

In Schmidlapp v. Currie, 55 Miss. 597, a case of a solvent firm, Judge Chalmers, while carefully limiting the decision to the question involved--i. e., the right of a solvent firm to devote firm assets to the payment of the debts of one of the members--cites with apparent approval the cases of Rice v. Barnard, 20 Vt. 479; Bank v. Sprague, 20 N.J.Eq. 13; Allen v. Center Valley Co., 21 Conn. 130, and Sigler v. Bank, 8 Ohio St. 511, which clearly hold that an insolvent firm may devote firm assets to the debts of its individual members; and, also, Whitton v. Smith, Freeman's Ch. R. (Miss.), 231; Freeman v. Stewart, 41 Miss. 138; Crafter v. Beaman, 6 Jones' L. (N. C. ), 44; Ex parte Ruffin, 6 Ves. 119; Campbell v. Mullett, Swan's Ch., 553, which are sometimes cited as supporting the same view. In Hanover Bank v. Klein, 64 Miss. 141, 8 So. 208, it was sought by the creditors of a banking firm to subject to their demands the proceeds of insurance policies upon the life of one of the members in favor of his wife, the premiums on which the bill averred had been paid with firm money while the firm was insolvent. The answer denied the insolvency of the firm at the times the premiums were paid, and there was no evidence on the point. The case was decided on this point. Judge Arnold, however, in delivering the opinion of the court, gave expression to an emphatic dictum that the insolvency of the firm and its members would not have changed the result. In addition to the cases cited by Judge Chalmers in Schmidlapp v. Currie, he referred to the cases of Case v. Beauregard, 99 U.S. 119, 25 L.Ed. 370, and Roach v. Brannon, 57 Miss. 490.

In neither Whitton v. Smith, 1 Freem. Ch.; Freeman v. Stewart, 41 Miss.; Roach v. Brannon, 57 Miss.; Schmidlapp v. Currie, 55 Miss. nor Bank v. Klein, 64 Miss. was the question now involved presented for decision. In all of them the nature of the right of partnership creditors to resort to firm assets for the satisfaction of their demands was considered, and the decisions in the cases in which the point was involved were that the right, being a derivative one, and resting on the rights of the partners, had been lost by the waiver of the partners, under the circumstances of the particular cases. The question involved is res nova in this state, and we deal with it as such. The authorities, with practical uniformity, agree that the right of partnership creditors to have the partnership property applied to the payment of partnership debts is a derivative one, resting upon the equities of the partners as between each other. The conflict of decision arises with the question, whether the partners may, by convention, waive their...