FARMERS' & MECHANICS' NAT'L BANK V. RIDGE AVE. BANK

• Decision Date: 03 April 1916
• Citation: 240 U. S. 498
• Court: U.S. Supreme Court

Farmers' & Mechanics' National Bank v. Ridge Avenue Bank

No. 291

Argued March 15, 1916

Decided April 3, 1916

240 U.S. 498

CERTIFICATE FROM THE CIRCUIT COURT OF APPEALS

FOR THE THIRD CIRCUIT

Syllabus

Under subsection f of § 5 of the Bankruptcy Act of 1898, and after reviewing conflicting authorities in regard to its construction, held that, when a partnership as such is insolvent and when each individual member is also insolvent, and when the only fund for distribution is produced by the individual estate of one member, the individual creditors of that member are entitled to priority in the distribution of the fund.

The facts, which involve the construction of the provisions of § 5 of the Bankruptcy Act of 1898 relative to the individual assets of a member of a bankrupt partnership and who are entitled to priority in sharing therein, are stated in the opinion.

Page 240 U. S. 501

MR. CHIEF JUSTICE WHITE delivered the opinion of the Court.

The essential facts stated in the certificate of the court below are these: the firm of William Gray & Sons and its three partners, William J. Gray, Peter Gray, and Alexander J. Gray, were adjudged bankrupts. The same person was appointed trustee of the four estates. It resulted from charging separately against each estate the mere necessary and unquestioned expenses of administration that there was nothing whatever in the estate either of the partnership, of that of William J. Gray or of Peter Gray -- indeed, in the latter, there was nothing to defray the expenses of administration. As to the estate of Alexander J. Gray, after charging the expenses of administration, there remained ,597.26. Creditors of the firm proved their debts against it, the Ridge Avenue Bank of Philadelphia being among the number, while only one creditor, the Farmers' & Mechanics' National Bank of Philadelphia, proved a debt against the individual estate of Alexander J. Gray, that debt exceeding the total sum of the estate. No creditor proved against the individual estate of William J. Gray or that of Peter

Page 240 U. S. 502

Gray. Under these conditions, the dispute which arose was whether the estate of Alexander J. Gray was to go wholly to the Farmers' & Mechanics' National Bank, the individual creditor, or was to be proportionately applied to the individual and firm creditors because of the absence of any firm estate for distribution. The district court directed the fund to be distributed between the Farmers' & Mechanics' National Bank, the creditor of the individual estate, and the creditors of the firm, and the question of law which the court below propounds to enable it to review this action of the district court, is as follows:

"When a partnership as such is insolvent, and when each individual member is also insolvent, and when the only fund for distribution is produced by the individual estate of one member, are the individual creditors of such member entitled to priority in the distribution of the fund?"

The solution of this question primarily depends upon an interpretation of subsection f of § 5 of the bankruptcy Act of 1898, and secondarily upon a consideration of all the pertinent subsections of the section -- indeed, of all the relevant provisions of the context of the act. Subsection f is as follows:

"f. The net proceeds of the partnership property shall be appropriated to the payment of the partnership debts, and the net proceeds of the individual estate of each partner to the payment of his individual debts. Should any surplus remain of the property of any partner after paying his individual debts, such surplus shall be added to the partnership assets and be applied to the payment of the partnership debts. Should any surplus of the partnership property remain after paying the partnership debts, such surplus shall be added to the assets of the individual partners in the proportion of their respective interests in the partnership. "

Page 240 U. S. 503

Let us first sift the respective contentions so as to reach the ultimate proposition required to be decided. In the first place, in favor of the right of the creditor of the individual partner to be paid, under the facts stated, out of the individual estate, to the entire exclusion, if necessary, of the creditors of the partnership estate, it is urged that such result is so unambiguously commanded by the rule of distribution established by the text of subsection f that there is no room for construction, but the simple duty arises to enforce the text, as to do otherwise would amount to judicial legislation. It is undoubted that this proposition is supported by largely the greater weight of opinion of the courts of the United States in enforcing subsection f. In re Wilcox, 94 F. 84 (1899); In re Mills, 95 F. 269 (1899); In re Daniels, 110 F. 745 (1901); In re Janes, 133 F. 912 (1904), rev'g 128 F. 527; In re Henderson, 142 F. 588 (1906); Euclid National Bank v. Union Trust Co., 149 F. 975 (1906), aff'g In re Henderson, supra; Mills v. Fisher, 159 F. 897 (1908); In re Hull, 224 F. 796 (1915).

On the other hand, to refute the proposition and to avoid the effect of the authorities sustaining it just referred to, three contentions are relied upon. (a) It is said the absence of ambiguity in the general rule as stated in subsection f is conceded and the soundness of the authorities cited recognizing that fact is not disputed, but these concessions, it is declared, are negligible, since the fact that there were no partnership assets and no solvent partner causes this case to be an exception to the rule expressed in subsection f, hence not governed by it, and therefore makes it clear that the authorities cited are inapposite because they mistakenly applied the general rule to an exceptional case which that rule did not govern. (b) That this is demonstrated first by the fact that the general rule

Page 240 U. S. 504

was as unambiguously expressed in the previous bankruptcy acts (§ 14 of the Act of 1841 and § 36 of the Act of 1867), and yet, under those acts, the exception stated, which unquestionably governed in bankruptcy in England, where the general rule was the same, was also held to be controlling by judicial decisions in this country. This being true, the argument insists the inference is that Congress, in adopting the Act 1898 without any expression excluding the continued operation of the exception which prevailed under the previous acts, must be considered as having impliedly recognized the continued force of that exception -- that is, must be held to have substantially made that exception a part of the rule established under the Act of 1898. And this view, it is insisted, is expressly sustained by the following decided cases under the Act of 1898: In re Green, 116 F. 118 (1902); In re Conrader, 118 F. 676 (1902); Conrader v. Cohen,, 121 F. 801 (1903), aff'g In re Conrader, supra; In re Janes, 128 F. 527 (1904), rev'd in 133 F. 912, and by the present case, In re Gray, 208 F. 959 (1913), and is in reason supported by the adjudged cases which upheld the asserted exception under the prior acts.

(c) That, even if this be held to be not the case, as there is nothing in the Act of 1898 repudiating the application and existence of the exception which prevailed under the previous acts therefore as a question of original investigation, that exception should be held to be equally applicable and controlling under the act now in force as it was under the previous bankruptcy acts, since the general rule was as clearly stated in those act as it is in this.

A two-fold reply is made to these contentions: first, although admitting that the alleged exception prevailed in England, it is denied that it was authoritatively recognized in this country under the previous acts, and second, by insisting that, even if it was, it is not applicable under

Page 240 U. S. 505

the Act of 1898, because the terms of that act make manifest that it was drawn for the purpose of preventing the method of distribution provided in subsection f from being subject to the exception relied upon.

As we are of opinion that it is to be conceded that, if, under the prior acts, it was settled authoritatively and conclusively that the exception relied upon obtained and was fully recognized in practice, it would follow that the enactment of the same general rule without anything indicating a departure from the exception would justify the conclusion that it was the legislative intent to continue the exception, it results that, in order to answer the question propounded, the whole case comes to two inquiries: was there such an authoritative exception to the general rule under the prior laws, and, if not, was the continued existence of such exception compatible with the rule of distribution established by subsection f of the present act as considered in the light of the context of § 5 of which it forms a part, and of the scope and operation of the Act of 1898?

1. Undoubtedly in England, with the development of the general rule for the distribution of partnership and...