Davis v. Cobb

Citation83 N.W. 505,81 Minn. 167
Decision Date07 August 1900
Docket Number12,047 - (222)
PartiesALICE B. DAVIS v. ALBERT C. COBB
CourtSupreme Court of Minnesota (US)

Appeal by Albert C. Cobb, as assignee of the estate of A. F. Kelley insolvent, from a judgment of the district court for Hennepin county, allowing the claim of Alice B. Davis for $4,960.75 and interest against said estate, entered pursuant to the findings of Elliott, J. Affirmed.

SYLLABUS

Insolvency -- Promissory Note of Firm.

A partnership indebted to a third person before assignment in insolvency gave a note in payment of a partnership debt which was signed by one of the members of the firm, who was also insolvent, but had made no assignment. Such indorsement was given in contemplation of insolvency, but without actual fraud or connivance between the parties. Held:

Preference.

1. That there was no preference in the benefit which the partnership creditor obtained, so far as the firm was concerned.

Indorsement by Partner.

2. That the indorsement of the individual member in the regular course of business, before assignment, was not an actual fraud at common law.

Unlawful Preference -- G.S. 1894, § 4243.

3. That the indorsement of the note was not a conveyance and payment from the partnership or private funds of the individual member or a security given, which, under G.S. 1894, § 4243, constituted an unlawful preference.

Cobb & Wheelwright, for appellant.

In bankruptcy or insolvency proceedings partnership creditors have a primary and exclusive claim on partnership assets, and individual creditors have a similar claim on individual assets. Hawkins v. Mahoney, 71 Minn. 155; 3 Kent, Com. 65. If a firm and all its members are insolvent, it is not lawful for one member, in contemplation of insolvency, to divert firm property to payment of an individual debt due a creditor to whom the insolvency is patent, even though all the partners consent. Such transfer will be considered as made with intent to hinder, delay, and defraud creditors. Arnold v. Hagerman, 45 N.J.Eq. 186; Wilson v. Robertson, 21 N.Y. 587; Bulger v. Rosa, 119 N.Y. 459; Jackson v. Durfey, 72 Miss. 971; Darby v. Gilligan, 33 W.Va. 246; Pease, Chalfant & Co. v. Rush, 2 Minn. 89 (107). An individual creditor who accepts firm assets or a firm obligation in payment of his debts, with knowledge, or in contemplation of insolvency, receives an unlawful preference contrary to the insolvency act. Phillips v. Ames, 5 Allen, 183. An insolvent partner in an insolvent firm cannot pay or secure a firm debt out of his private property. Strictly an insolvent has no property, and therefore has no natural right to dispose of his property without the consent of his creditors. Jackson v. Durfey, supra. When respondent, knowing the insolvency of all the parties, secured A. F. Kelley's note in payment of a past-due firm debt, she perpetrated an actual fraud on his individual creditors; and Kelley's act in giving her the note should be treated as done with intent to hinder and delay his private creditors. See Jackson v. Cornell, 1 Sanf. Ch. 348. Though there was no actual fraud, by securing the note she obtained a preference over private and firm creditors. Miller v. Keys, 3 N.B.R. 224; Jackson v. Cornell, supra; In re Parker & Morris, 6 Saw. 248. All conditions necessary to constitute a preference were found, except intent. Under the facts intent must be presumed. Hastings Malting Co. v. Heller, 47 Minn. 71; Thompson v. Johnson, 55 Minn. 515; In matter of Stevens, 38 Minn. 432; In matter of Howes, 38 Minn. 403; Toof v. Martin, 13 Wall, 40, 48; Bump, Bankr. (9th Ed.) 802, 803.

Charles J. Tryon and Charles A. Willard, for respondent.

In absence of a law against preferences, until a court of bankruptcy has actually seized the property of the partnership the partners can deal with it as they see fit, and can even devote partnership assets to payment of private debts of the partnership. Case v. Beauregard, 99 U.S. 119; Selz v. Mayer, 151 Ind. 422; Vietor v. Glover, 17 Wash. 37; Thayer v. Humphrey, 91 Wis. 276. It is not necessary, however, to determine here whether this proposition is correct. There is no such question in this case. Taking firm assets to pay private debts is altogether different from a partner taking his individual property to pay a firm debt. Gallagher's Appeal, 114 Pa. St. 353. There can be no actual fraud in an agreement by a partner to bind his private estate to pay a debt for which he is already bound as partner. There is nothing to show fraudulent intent or knowledge on the part of Davis. It is not sufficient that the effect be to hinder, delay, or defraud creditors in the collection of their claims. It must be a fraudulent contrivance for that purpose, and the grantee or person to be benefited must be privy to the fraudulent design. Hempstead v. Johnson, 18 Ark. 123, 140; Cornish v. Dews, 18 Ark. 172, 181; Mandel v. Peay, 20 Ark. 325, 329; Marbury v. Brooks, 7 Wheat. 556, 566; Brooks v. Marbury, 11 Wheat. 78; Tompkins v. Wheeler, 16 Pet. 106; Prewit v. Wilson, 103 U.S. 22, 24; Jaeger v. Kelley, 52 N.Y. 274; Starin v. Kelly, 88 N.Y. 418, 421; Grunsky v. Parlin, 110 Cal. 179. See Wait, Fraud. Conv. § 199.

The transaction is not a preference as to partnership creditors. Hawkins v. Mahoney, 71 Minn. 155. In re Parker & Morris, 6 Saw. 248, in holding that the giving of the individual note was a preference against firm creditors, was expressly based on the fact that a large surplus in the individual estate would have remained for firm creditors. A conveyance otherwise fraudulent will not be set aside where the property conveyed is incumbered for more than its value, or is exempt, and nothing remains for the creditor. Aultman & Taylor Co. v. Pikop, 56 Minn. 531; Baldwin v. Rogers, 28 Minn. 544; Horton v. Kelly, 40 Minn. 193; Blake v. Boisjoli, 51 Minn. 296. The creditor's equity is uniformly based on the partner's equity against his copartners. Thayer v. Humphrey, supra; 17 Am. & Eng. Enc. 1199; Case v. Beauregard, supra.

Under G.S. 1894, § 4243, nothing can be a preference which does not take away something from the tangible assets of the insolvent. The signing of this note was not a "conveyance made" nor a "security given." Grant v. Minneapolis Brewing Co., 68 Minn. 86. The conveyance made or security given must have been on account of a "pre-existing debt." This was a new transaction, and the law against preferences does not prohibit the debtor, though insolvent, from having dealings with persons not his creditors, even if they know that he is insolvent. Henderson v. Kendrick, 72 Minn. 253; Joseph Schlitz Brewing Co. v. Childs, 65 Minn. 409; Stewart v. Platt, 101 U.S. 731, 743; Douglass v. Vogeler, 6 F. 53; Stewart v. Hopkins, 30 Oh. St. 502; In re Montgomery, Fed. Cas. No. 9,732, 12 N.B.R. 321; Cook v. Tullis, 18 Wall. 332, 340; Coffin v. Day, 34 F. 687; Tiffany v. Boatmans Institution, 18 Wall. 375, 388. Under no law has it been held that an increase of the debtor's liabilities constitutes a preference. O'Connor v. Parker, 23 Mich. 22. In like manner, securities given within a short time preceding bankruptcy, and in contemplation of it, are not preferences, where they are in renewal of existing securities, even if the mortgagee knows of the insolvency, since nothing is withdrawn from the estate. Brackett v. Harvey, 91 N.Y. 214; Sawyer v. Turpin, 91 U.S. 114; Cook v. Tullis, supra; Clark v. Iselin, 21 Wall. 360; Dalrymple v. Hillenbrand, 62 N.Y. 5; Cook v. Peoples, 29 Misc. (N.Y.) 30. The requirement for the surrender of the security held by the creditor as a condition for proving claim relates solely to the security on the property of the bankrupt. Citizens Nat. Bank v. Minge, 49 Minn. 454; In matter of Baxter, 24 Blatch. 122; In re Thomas & Sivyer, 8 Biss. 139; In re Anderson, 7 Biss. 233; In re Dunkerson & Co., 4 Biss. 253, 257; In re May, Fed. Cas, No. 9,327. That which as a security need not be surrendered is not a preference.

There was consideration for the signature of A. F. Kelley, and hence the note is a binding obligation, and the holder may share in his individual assets. The note extended the time of payment of the demand till November 1, 1896. Flenniken v. Liscoe, 64 Minn. 269. This extension was sufficient consideration. Nichols & Shepard Co. v. Dedrick, 61 Minn. 513; Simpson v. Evans, 44 Minn. 419; Minneapolis Land Co. v. McMillan, 79 Minn. 287. Moreover, there was the further consideration which arose from the acceptance of the note in payment of the account. See Hanson v. White, 75 Minn. 523. It is too late now to inquire into the adequacy of the consideration. Minneapolis Land Co. v. McMillan, supra.

While intent to prefer may result as a necessary inference from facts, it is nevertheless essential, and must actually be found. Bean v. Scheffer, 68 Minn. 33; Fisher v. Utendorfer, 68 Minn. 226; Dalrymple v. Hillenbrand, supra. The note was given in hope that by that and similar means Kelley might be enabled to continue in business. And this, even when insolvency exists, and the creditor has reasonable cause to believe the debtor insolvent, does not constitute a preference. Baumann v. Cunningham, 48 Minn. 292, 296; Campbell v. Waite, 9 Ben. 166.

OPINION

LOVELY, J.

This action arose on an appeal from the disallowance of a claim by the assignee of the insolvent estate of A. F. Kelley. The trial court allowed the claim, upon which judgment was duly entered. The assignee appeals to this court.

A. F and L. E. Kelley were partners, and carried on the business of loaning money for outside investors, one of whom was Alice B. Davis, the respondent. The Kelleys also as a firm made an assignment in insolvency. About a month previous to the assignment of the firm, an indebtedness of such firm to respondent was estimated upon a...

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