Hawkins v. Mahoney
| Decision Date | 12 January 1898 |
| Docket Number | 10,898 - (199) |
| Citation | 73 N.W. 720,71 Minn. 155 |
| Parties | ALPHONSO B. HAWKINS and Others v. STEPHEN MAHONEY |
| Court | Minnesota Supreme Court |
In the matter of the assignment of Arthur H. Ives and Amos P Ireland, copartners as Ives, Ireland & Co., insolvents, in the district court for Hennepin county, the assignee Alphonso B. Hawkins, filed his final account, the substance of which is stated in the opinion, and applied to the court for an order of distribution of the proceeds among the creditors entitled thereto.
Among the claims proved was one of the Irish-American Bank, of which Stephen Mahoney was the assignee in insolvency, upon a note for $4,000, for money lent to the firm, signed both by the firm and by Ireland individually.
Upon this application an order was made by Russell, J., directing the assignee to distribute the firm assets first among the firm creditors, including the Irish-American Bank; the individual assets of Ireland first among his individual creditors, including the Irish-American Bank upon the full amount of its claim; and the individual assets of Ives among his individual creditors.
From this order the assignee and certain firm creditors appealed. Modified.
Insolvency -- Partnership and Individual Assets -- Rule of Distribution -- Equity Rule -- Kentucky Rule -- Surplus from Either Fund.
In insolvency proceedings, where there are both partnership and individual assets for distribution, the firm assets will be first applied to the payment of the 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 will be carried to the other fund, and distributed as a part thereof.
Insolvency -- Proof of Claim -- Dividends from Both Funds.
In a case where the claim of a creditor is based upon a promissory note given for money loaned to the partnership, and signed by the firm and an individual partner, such creditor is entitled to receive a dividend from the firm assets, and a dividend from the individual assets of such partner on the balance, only, of his claim, after deducting the amount of the firm dividend.
J. B. Phelps, for the assignee, appellant.
The Kentucky rule for distribution of partnership and individual assets is the only method which will do equal justice and is in accordance with all of the provisions of the Minnesota statutes. Fayette v. Kenney, 79 Ky. 133; Hill v. Cornwall, 95 Ky. 512; Northern v. Keizer, 2 Duv. 169; Whitehead v. Chadwell, 2 Duv. 432. Firm creditors have a preference out of firm property, because the individual partners are not entitled to anything from the firm until after payment of the firm debts; but it does not follow that the individual creditors of one partner shall have a preference out of his private property, because the firm creditors are at the same time creditors of the individual partners. The case is one for the application of the equitable rule of distribution that, where there are two funds, the creditor having a claim upon both funds is compelled first to resort to the fund in which the other has no claim, but only so far as it does not operate to his prejudice.
The result of distribution under the general equity rule is to give individual creditors a preference over firm creditors, which is against the letter and spirit of the Minnesota insolvent law. Metropolitan v. Northern, 61 Minn. 462; Andress v. Miller, 15 Pa. St. 316. In Minnesota firm creditors are allowed to come in equally with individual creditors upon the death of a member of the insolvent firm. In none of the states where the general equity rule prevails is this the case. 2 Bates, Partn. § 828; Hundley v. Farris, 103 Mo. 78. It is evident from this that it was not the intent of our legislature to give individual creditors any preference over firm creditors in the distribution of the private property of an individual partner. So in Massachusetts. Sparhawk v. Russell, 10 Metc. 305; Allen v. Wells, 22 Pick. 450; Bush v. Clark, 127 Mass. 111. The distribution in case of the deceased partner of an insolvent firm should be the same as the distribution in insolvency. Wilder v. Keeler, 3 Paige, 167.
In many states besides Kentucky it is held that the individual creditors of one partner have no preference over the partnership creditors in distributing the estate of that partner. Blair v. Black, 31 S.C. 346; Hutzler v. Phillips, 26 S.C. 136; Bardwell v. Perry, 19 Vt. 292; Camp v. Grant, 21 Conn. 41; Pearce v. Cooke, 13 R.I. 184; White v. Dougherty, 8 Tenn. 309; Pettyjohn v. Woodruff, 86 Va. 478; Ashby v. Porter, 26 Gratt. 455; Dahlgren v. Duncan, 7 Smed. & M. 280; Cox v. Miller, 54 Tex. 16; Wiggins v. Blackshear (Tex. Civ. App.) 24 S.W. 918. Favoring this rule are Brock v. Bateman, 25 Oh. St. 609; Fullam v. Abrahams, 29 Kan. 725.
George F. Edwards and Taylor & Edwards, for certain firm creditors, appellants.
The general equity rule of distribution is utterly subversive of two objects sought to be attained by the insolvency law, namely, to secure the equal distribution of the property of debtors among their creditors, and to prevent creditors from gaining a preference. The equal distribution sought to be secured by the insolvency law is not attained unless there is equality between the classes of creditors as well as between the individuals of a class, and under this order the individual creditors of Ireland receive a larger dividend than do the firm creditors. A creditor upon a note signed by the firm and indorsed individually by one of the partners is not entitled to receive concurrently a dividend from both firm assets and individual assets upon the full amount of his claim. The consideration for the notes and the use of the money determines the character of the debt as a firm debt no matter how the note was signed. Ireland's separate signature upon the note to the Irish-American Bank neither added to its strength nor increased his liability, nor entitled the bank to a preference in his individual assets. In re Blumer, 13 F. 622; Fayette v. Kenney, 79 Ky. 133. In any event, taking the note most strongly in favor of the bank, it gave it simply the right to elect against which fund it would prove. Ex parte First, 70 Me. 369.
Walter C. Tiffany, for an individual creditor of Ireland, appellant and respondent.
The general equity rule is thoroughly established by authority and is based upon the well-known rule that equality is equity. To deny separate creditors the same rights in separate property, which the firm creditors have in the firm property, is to ignore this principle of equity. Jarvis v. Brooks, 23 N.H. 136; Rodgers v. Meranda, 7 Oh. St. 179. In Minnesota the rule that firm creditors have priority in the firm assets is recognized in Hanson v. Metcalf, 46 Minn. 25; Masterman v. Lumbermen, 61 Minn. 299. The question as to the rights of individual creditors in the separate estate of the partners has never been expressly passed on, yet the rule contended for has been assumed to be law in Kells v. McClure, 69 Minn. 60.
In Minnesota partnership contracts are joint merely, not joint and several. Whitney v. Reese, 11 Minn. 87 (138); Fetz v. Clark, 7 Minn. 157 (217); Town v. Washburn, 14 Minn. 199 (268); Davison v. Harmon, 65 Minn. 402. Even if it be conceded, for the sake of argument, that the statutes of Minnesota make the liabilities of partners joint and several, yet such statutes affect merely methods of procedure, and do not affect or vary the well-settled equitable priorities of creditors. 2 Bates, Partn. § 828; 3 Kent, Com. 64; Hundley v. Farris, 103 Mo. 78, 86; Irby v. Graham, 46 Miss. 425; Level v. Farris, 24 Mo.App. 445, 459.
The general equity rule is law in 23 of the 27 states where the question has arisen, including the great commercial states of New York, Massachusetts, Pennsylvania, Ohio and Illinois. To allow the Irish-American Bank to take a dividend from each fund is to ignore the nature of the debt, which was money loaned to the firm. In equity the bank is entitled to a dividend in the first instance only from the fund to which it has contributed, and it cannot share equally with individual creditors in a fund which they have created. Fayette v. Kenney, 77 Ky. 139.
Stephen Mahoney, for respondent, assignee.
The bank took the precaution to require one of the partners to guaranty individually by his indorsement the note of the firm. The bank is a firm creditor and must have the same rights as other firm creditors; it is also a private creditor and must have the same rights as other private creditors. Under the national bankruptcy law the federal courts have uniformly allowed double proof and not required creditors to elect between two estates. Ex parte Farnham, 6 Boston Law Rep. 21; Emery v. Canal, 7 N.B.R. 217; In re Bradley, 2 Biss. 515. This rule has also been adopted in certain state courts. Williams v. Hall, 160 Mass. 171. The English rule has been changed by statute. 32 and 33 Vict., c. 71, § 37. See, also, Union v. Bank, 94 Ill. 271; Ex parte Nason, 70 Me. 363.
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 $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...
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