Potts v. Schmucker
| Decision Date | 05 January 1897 |
| Citation | 36 A. 592,84 Md. 535 |
| Parties | POTTS ET AL. v. SCHMUCKER. |
| Court | Maryland Court of Appeals |
Appeal from the circuit court of Baltimore city.
A bill was originally brought by John M. Carter and M. K. Aiken trustee of J. H. R. Nicholson, individually and as surviving partner of J. J. Nicholson & Son, against the Baltimore Publishing Company. Samuel D. Schmucker, having been appointed permanent trustee in insolvency, filed a supplmental bill, claiming to share in the assets of the Baltimore Publishing Company in the receiver's hands. The supplemental bill was opposed by James Potts & Co. and others, creditors of the publishing company. From a decree for the trustee, the creditors appeal. Reversed.
Argued before McSHERRY, C.J., and BRISCOE, BRYAN, RUSSUM, BOYD, and PAGE, JJ.
Hinkley & Morris, Gans & Haman, Wm. J. O'Brien, Jr., and W. Burns Trundle, for appellants.
Saml. D. Schmucker and George Whitelock, for appellee.
This is another of the many cases which have resulted from the failure of the banking house of J. J. Nicholson & Son, in January, 1892; but it differs widely from those that have preceded it, and involves quite distinct and dissimilar principles and doctrines. In 1884, Johns H. R. Nicholson, one of the members of the firm of J. J. Nicholson & Son purchased the assets, the good will, and the business of John B. Piet & Co., who had recently theretofore failed, while largely indebted to Johns H. R. Nicholson individually. Mr Nicholson thereafter continued the business of Piet & Co. on his own account, but under the name of the Baltimore Publishing Company, until March, 1885, when he procured a certificate of incorporation, in which the capital stock was fixed at $25,000. The whole of this stock was taken by Johns H. R. Nicholson, but to effect an organization of the corporation, whose charter name was the Baltimore Publishing Company, he allotted four shares of the stock to four of his employés, to be held by them only so long as they remained in his service. He was the treasurer of the company, signed all notes and checks given by it, and furnished all the money needed to conduct its business. He owned the whole of the assets of the concern, and the business carried on in its name was his business, confessedly no one else having any interest therein whatever. He was in reality himself the Baltimore Publishing Company, and this fact was so stated and represented to the various persons who became, on the faith of this assurance, its creditors. When the banking house of J. J. Nicholson & Son failed, on January 14, 1892, it was discovered that there appeared upon its ledgers an overdraft indebtedness of $76,000, apparently due to it by the Baltimore Publishing Company. The members of the firm were aware, as this overdraft indebtedness grew, that Johns H. R. Nicholson was overdrawing in the name of the Baltimore Publishing Company. When the Nicholsons suspended, they appointed trustees under a deed of trust for the benefit of creditors; but being proceeded against under the insolvent law, and being adjudged insolvents, a permanent trustee in insolvency was elected, who displaced the conventional trustees. Before, however, the conventional trustees were superseded, they filed a bill in equity against the Baltimore Publishing Company, alleging that the company was insolvent, and praying that it be so declared, and asking that receivers be appointed to take charge of its assets, and to reduce them to money, for the settlement of its indebtedness. To this bill an answer was filed, and subsequently receivers were appointed, who converted the assets into money, which they now have in the equity court for distribution. Later on, Nicholson & Son and Johns H. R. Nicholson were adjudged insolvent, as already stated, and Mr. Samuel D. Schmucker was elected their trustee in insolvency. Mr. Schmucker then filed a supplemental bill, wherein he made two alternative claims with respect to the funds in the hands of the publishing company's receivers. These claims were--First, that the charter of the publishing company was invalid, and that, therefore, the funds belonged, not to the corporation, but to Johns H. R. Nicholson individually, and consequently the title to them passed, upon his being adjudged an insolvent, to his trustee, Mr. Schmucker;and, secondly, if the charter was valid, then Mr. Schmucker, as trustee in insolvency of the firm of J. J. Nicholson & Son, claimed to be a creditor of the publishing company to the amount of the above-mentioned overdraft, and, so claiming, asserted his right to participate pari passu with all other creditors of the publishing company in the distribution of the funds in the possession of the receivers. This supplemental bill was answered. At the hearing, the evidence taken under the original bill, as well as that taken under the supplemental bill, was considered, and is in the record now before us. This evidence shows that Johns H. R. Nicholson treated this overdraft, not as a debt due by the publishing company, but as capital of his own, advanced to the company; and there is nothing in the record to contradict this, apart from the form of the entries on the books of the firm. The circuit court of Baltimore city decreed--First, that the Baltimore Publishing Company's charter was valid; and, secondly, that the insolvent firm of Nicholson & Son, through the trustee, Mr. Schmucker, was entitled, as a creditor of the publishing company to the extent of the overdraft, to share pari passu in the receivership funds with the creditors of the publishing company. From the latter or second clause of this decree, the creditors of the publishing company have appealed.
The question, then, is: Are the funds derived from the sales of the publishing company's assets applicable, under the facts above stated, to the payment, in the first place, of the debts due by the Baltimore Publishing Company, exclusive of the alleged overdraft indebtedness; or does the overdraft stand on the same footing with the undisputed debts of the publishing company, entitled to be paid pari passu with them? If there had been no corporation, and if the business of the publishing company had been conducted openly and ostensibly as the individual business of Johns H. R. Nicholson, in his own name, there can be no doubt, according to firmly-settled principles, that the creditors of the firm of J. J. Nicholson & Son, of which firm Johns H. R. Nicholson was a member would not have been entitled to be paid out of the funds arising from the sales of Johns H. R. Nicholson's individual property until his individual creditors were first paid therefrom in full. And this is so because the individual property of a member of a firm is applicable, in the first instance, to the payment of his individual creditors. Just as the social assets are liable for the firm debts in preference to the debts due by the co-partners personally. This doctrine is so generally accepted, and so familiar, that we need not pause to demonstrate it. M'Culloh v. Dashiell's Adm'r, 1 Har. & G. 96; Hull v. Deering, 80 Md. 424, 31 A. 416. The application of this doctrine to varying conditions of facts has logically led to the development of a corollary, with which we are, on this appeal, more immediately and directly concerned. It has often happened in the diversity of business enterprises that one of the partners of a firm has also been engaged in a separate venture of his own, and that in the latter business he became a debtor to his own firm for advances or loans of money made by the firm to him. In other words, as an individual, he was a debtor to himself and his co-partner, besides being a debtor to others on account of his separate business. Upon becoming insolvent in his individual venture, and owing creditors, as well as owing his own firm, for money advanced to him, the question has arisen as to whether his own firm (the firm of which he was a member, and to a portion of the assets of which, including his own debt, he was entitled) could compete or stand on the same footing with his individual creditors in the distribution of his individual assets; and the courts, certainly since the time of Lord Thurlow, who broke through previous rulings of Lord Hardwicke, have quite uniformly held, when the debt to the firm was not surreptitiously or fraudulently created, that, until the individual creditors were first paid in full, the firm of which the insolvent was a member, though it was also one of his creditors, could not be permitted to claim satisfaction out of his individual assets. There are two conditions under which the creditor firm of which the insolvent is a member may prove in competition with the individual creditors; and these are--First, where money or effects have been fraudulently abstracted from one estate, and applied for the benefit of the other; and, secondly, where some of the members of a partnership form an entirely distinct firm, carrying on a distinct trade from that of the general partnership, and where the articles of one trade have been furnished by one firm to the other. Colly. Partn. § 991. There was no fraudulent abstraction of the funds of J. J. Nicholson & Son by Johns H. R. Nicholson for the benefit of the publishing company. The overdraft account...
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