In re Terens

• Decision Date: 13 January 1910
• Citation: 175 F. 495
• Parties: In re TERENS.
• Court: U.S. District Court — Eastern District of Wisconsin

175 F. 495

In re TERENS.

United States District Court, E.D. Wisconsin.

January 13, 1910

This is a proceeding to review the order made by Referee Denison declining to require the marshaling of assets as provided in section 5 of the bankruptcy act (Act July 1, 1898, c. 541, 30 Stat. 547 (U.S. Comp. St. 1901, p. 3424)). The facts in the case may be briefly summarized as follows:

Terens & Oswald had for 12 or 14 years been carrying on the business of selling hardware and farm machinery at Mishicot, Wis Terens was the outside man, while Oswald looked after the books, such as they were, and attended to the financial and office business of the concern. The books were crude; no annual inventories were made; no balance sheets were taken. The firm were borrowing money from time to time, and the business drifted along in that slack way, so that neither partner had any accurate idea of the financial status of the concern. In a general way both partners supposed the firm was solvent, but subsequent events have shown that the partnership was hopelessly insolvent, as was each of the partners, for a considerable time before December 15, 1908. On the 15th of December, 1908, Oswald desired to retire from the firm, and the parties on that day entered into the following agreement in writing:

'Whereas Nicholas Terens and William Oswald, both of Mishicot Wisconsin, now are and have been for a long time prior hereto partners, under the firm name and styled Terens & Oswald, and as such now are and have been engaged in the general retail hardware business at Mishicot, Wisconsin; and

'Whereas said Nicholas Terens and Ephraim Oswald as such copartners have resolved as copartners to separate and to dissolve said copartnership, and to that end the said partner, Ephraim Oswald, for a valuable consideration does hereby sell assign, and transfer all his right, title, and interest in and to said partnership, and in and to all their stock of general hardware, farm implements, and machinery of every kind and nature, and in and to all and every account, chose in action, note, and security of every description, and the good will and name of the business over unto his copartner, Nicholas Terens, who is to continue the business hereafter.

'In consideration of the premises, and the transfers to him of the aforesaid right, title, and interest by his said copartner, Ephraim Oswald, in and to the property herein conveyed, the said Nicholas Terens accepts the property herein conveyed, and assumes and obligates himself to pay all of the now existing firm debts, claims, and liabilities of every kind, and hereby exonerates his copartner, Ephraim Oswald, from any liability thereunder.

'In further consideration of the premises, and the transfer of the property herein named, and the obligation assumed by the said Nicholas Terens, it is hereby mutually agreed, contracted, and stipulated by and between the parties to this contract that the firm and partnership of Terens & Oswald is forever dissolved and separated.

'Dated this 15th day of December, 1908.

'(Signed) Nic. H. Terens.

'(Signed) Ephraim D. Oswald.

'Signed and delivered in presence of

'I. Craite.

'J. G. Sawall.'

The parties, however, had a further agreement and understanding that a complete inventory of assets and liabilities should be at once prepared, with a view of determining the exact financial status of the firm, and whether Oswald, the retiring partner, had any interest in the concern after providing for its debts and liabilities; and it was understood that by this method they should arrive at the compensation, if any, which Terens should pay Oswald for a transfer of his interest. As soon as the formal agreement was signed, the work of taking a complete inventory of assets and liabilities was undertaken. After several days of such investigation, it became apparent to Oswald that there would be nothing coming to him, because the debts were far in excess of the assets. Terens, however, who had certain property of his own, continued the work of the inventory, in the hope that he might be able to make a fresh loan and swing the business. By the 10th of January the inventory had progressed so that Terens' attorney advised him that the firm was hopelessly insolvent and would have to be wound up, and therefore, on the 12th day of January, 1909, Terens, after a conference with Oswald, filed a voluntary petition in bankruptcy and was adjudicated on the same day. The assets of the firm aggregated about $7,000; the bankrupts' individual estate, over and above any incumbrances, $6,950. The partnership indebtedness amounted to $13,000; the individual indebtedness of Terens, $2,000. Oswald had nothing in the way of assets and was owing a considerable sum.

After the written agreement of December 15th, the firm property remained in statu quo until bankruptcy supervened. During the meeting of creditors and other proceedings in bankruptcy, Oswald was present from time to time, and has made no objections to the custody of the trustee, and thus practically consented to the administration.

Among the other liabilities of the firm, the Bank of Two Rivers held four promissory notes, each for $2,000, signed by the partnership, and each guaranteed by the partners individually, and one promissory note for $1,000, executed by Terens alone. The bank, having proved its claim as a partnership debt, filed a petition that for the purpose of an equitable distribution the assets should be divided into two funds, one fund representing the proceeds of the individual property of the bankrupt, the other representing the proceeds of the partnership property, and that such a marshaling of assets should be had as is contemplated by section 5 of the bankruptcy act.

The referee held, in substance, that there was no partnership fund, but that by virtue of the assignment of December 15th the assets in the hands of the trustee became the individual assets of the bankrupts and that all creditors should go against the fund pari passu.

Nash & Nash, for petitioner.

F. W. Dicke, for certain creditors.

Isaac Craite, for bankrupt.

QUARLES, District Judge (after stating the facts as above).

The doctrine known as 'marshaling assets' has long been familiar in equity jurisprudence. Lord Romilly, M.R., in Re Professional Life Insurance, 3 L.R.Eq. 668, defines the doctrine as follows:

'It is a settled principle that when there are two classes of creditors and two funds, and one class of creditors can only go against one fund, while the other class of creditors can go against both, the court will marshal the assets, restricting the creditors who have a double security from touching the fund applicable to the payment of the first class of creditors until they are paid in full.'

Congress has borrowed this doctrine from the court of equity and has incorporated it into the present bankruptcy act, section 5f of which reads as follows:

'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.'

The contention of the petitioner is that we have here a proper case for the application of the doctrine, there being two funds and two classes of creditors, within the meaning of the rule. On the other hand, it is contended, and the referee ruled, that by virtue of the dissolution agreement of December 15th Terens became the sole owner, and that there is now no partnership fund to be administered. It is apparent, therefore, at the outset, that this dispute hinges largely upon the construction to be imposed upon this dissolution agreement, and to that subject we may first give our attention.

It is important in the first instance to consider the situation of the parties at the time this contract was entered into. It is conceded on all hands that the firm of Terens & Oswald was hopelessly insolvent on the 15th day of December, 1908, and that it had been insolvent for several years, although from the slack business methods pursued and crude books kept the real situation had never been presented so as to amount to demonstration. Terens swears that he never would have assumed the debts of the firm if he had not supposed that he was getting assets sufficient to liquidate the firm debts. Oswald was without assets and quite heavily involved on his own account. Terens, although he had some individual property, was heavily incumbered and insolvent. The firm had not been meeting its obligations promptly, was hard pressed for ready money, and had been sued by firm creditors. It appears from the evidence that, while neither partner believed that the firm was insolvent, it must have been understood by all parties concerned that a crisis was approaching. Conferences were held with the bankers who held their paper, and with lawyers, and the dissolution was hit upon as a prudential step to meet the difficulties with which they were confronted.

This written agreement of December 15th is to be read in connection with a further oral agreement whereby an inventory of assets and liabilities was to be prepared, and the consideration moving to Oswald for his transfer to Terens was to be measured by the surplus shown by such inventory of assets over and above the firm liabilities.

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