Thorpe v. Pennock Mercantile Co.

• Court: Supreme Court of Minnesota (US)
• Citation: 108 N.W. 940,99 Minn. 22
• Parties: THORPE et al. v. PENNOCK MERCANTILE CO. et al.
• Decision Date: 20 July 1906

99 Minn. 22

108 N.W. 940

THORPE et al.

v.PENNOCK MERCANTILE CO. et al.

Supreme Court of Minnesota.

July 20, 1906.

Appeal from District Court, Ramsey County; Geo. L. Bunn, Judge.

Action by Lars O. Thorpe and another, as trustees, against the Pennock Mercantile Company and others. Finding for plaintiffs. From an order denying a new trial, certain defendants appeal. Affirmed.

Syllabus by the Court

A partnership, being insolvent, obtained new capital from outside parties, with the understanding that a corporation would be organized and the business continued. A corporate form and name were adopted, stock certificates were issued to the partners and parties furnishing the new capital in proportion to their respective interests, and for a short time the business was carried on under the form of a corporation. Thereafter incorporation was legally effected, and the stock already issued was treated as the stock of the corporation. The property of the partnership was transferred to the corporation without compliance with chapter 291, p. 357, Gen. Laws 1899. The corporation purchased additional merchandise, incurred new debts, and carried on business until it became insolvent. The assets were by agreement transferred to trustees who reduced them to cash. In an action to determine the respective rights of the partnership and corporation creditors, held, that the creditors of the corporation are entitled to full payment of their claims before the creditors of the partnership are entitled to participate in the fund.

The right to have partnership property applied to the payment of partnership debts is a right which each partner has against the other partners. It may be terminated by agreement, or by a good faith sale and transfer of the partnership property.

Partnership creditors have no lien upon the partnership property.

But partnership creditors may be substituted to the rights of the partners to have the property of the partnership applied to the payment of partnership debts before it is used to pay the individual debts of the partners or otherwise improperly disposed of. This right of the creditors, ceases, however, when the rights of the partners against each other are lost by the disposition of the property.

The members of a partnership have the right to dispose of the property of the partnership, and thus destroy this equity of creditors. But the rights of creditors cannot be defeated by the sale of partnership property which is made for the purpose of defrauding the creditors.

Chapter 291, p. 357, Gen. Laws 1899, entitled ‘An act to prevent sales of merchandise in fraud of creditors,’ which declares that sales made without compliance with its provisions ‘will be presumed to be fraudulent and void’ makes such sales presumptively fraudulent only. The statute merely prescribes a rule of evidence.

Chapter 291, p. 357, Gen. Laws 1899, is constitutional.

When stock certificates are issued in contemplation of incorporation, the issue of stock may, after incorporation, be adopted by the corporation, and the holders thereby become stockholders without the formal issue of new certificates. Otterness & Downs, George N. Otterness, Samuel Porter, and O'Brien & Albrecht, for appellants.

A. E. Boyesen, Brown & Kerr, J. A. Larimore, Gilbert & Greenman, Henderson & Sharp, Reynolds & Roeser, Geo. F. Porter, Dan. E. Richter, Chas. R. Fowler, F. W. Barton, Clapp & Macartney, A. E. Horn, and Dodge & Webber, for respondents.

ELLIOTT, J.

A. O. Sather & Co., a partnership composed of A. O. Sather, O. P. Sather, and O. F. Johnson, was engaged in the general mercantile business at Pennock, Minn. In the spring of 1904 the firm was indebted to various creditors, and was insolvent in the sense that it was unable to pay its debts in the ordinary course of business, although apparently the book value of its assets exceeded the amount of its liabilities. In March, 1904, Albert Nelson and Peter Ellingson agreed to put $2,000 each into the business, and it was understood between them and the members of the partnership that a corporation should be formed, the stock of merchandise of the firm transferred to the corporation, and corporate stock issued to the partners and to Nelson and Ellingson in proportion to their respective interests. Nelson and Ellingson each paid the $2,000 to A. O. Sather in March or April, 1904, and the money was deposited in the bank to the credit of A. O. Sather & Co. After May 1st the business was conducted under the name of the Pennock Mercantile Company, although the corporation was not organized until June 1st. When the corporation was organized the stock of merchandise of the firm, valued at $20,789.02 was transferred to it without complying with the so-called ‘bulk law,’ and in payment therefor the corporation issued its capital stock to the amount of $20,000 to the members of the partnership and to Nelson and Ellingson in proportion to their respective interests in the partnership. Of this stock A. O. Sather received $10,000, Johnson $4,000, and O. P. Sather, Nelson, and Ellingson $2,000 each. The corporation assumed the debts of the firm to the amount of $789.02, and this, together with the stock issued, amounted to the agreed value of the merchandise. After its organization the corporation continued to carry on the business. New goods were purchased at a cost of about $10,000 and added to the stock which had been received from the partnership. Until September, 1904, the bank account of the old firm of A. O. Sather & Co. was continued and used as the bank account of the new corporation. In it was deposited funds of the corporation and money of the old firm, and out of it debts of both were paid. The books of account of the corporation attempted to keep straight these financial transactions. In September, 1904, the corporation found it impossible to continue business. It was indebted in about $10,000 for merchandise bought about June 1, 1904, and creditors of the old firm of A. O. Sather & Co. were also seeking payment of their claims from the copartners. On September 27, 1904, the company ceased business and entered into a trust agreement under which the trustees took possession of the assets and thereafter sold the same for $14,000. This action was brought, pursuant to the terms of the trust agreement, to determine the respective rights of the corporation creditors and the firm creditors in the money in the hands of the trustees. The partnership creditors claim that they are entitled to share on an equality with the corporation creditors for the reason (1) that the corporation assumed and agreed to pay the debts of the partnership in part consideration of the transfer; (2) that the transfer was made with intent to defraud the partnership creditors; and (3) that the assets of the partnership constitute a trust fund for the payment of the partnership creditors. The trial court found against the claims of the partnership creditors and from an order denying a new trial plaintiffs appeal to this court.

1. The finding that the corporation did not agree to pay the partnership debts is clearly sustained by the evidence, and no good purpose will be served by reviewing the facts at this time.

2. We are also entirely satisfied that the evidence fails to show intent to defraud the partnership creditors either in the formation of the corporation, or in the transfer to it of the partnership assets. Certainly neither Nelson nor Ellingson intended to defraud when they put their money into the concern. It is very apparent that the object of all those interested was to get new capital into the business, reorganize, and continue the business without any purpose or design of defrauding creditors. In fact as the partnership was insolvent, the parties may well have reasoned that the interests of the creditors would be advanced by the organization of the corporation under conditions which would render solvent the holders of the stock who were responsible for the partnership debts.

(a) But it is contended that the transfer to the corporation was fraudulent and void because of the failure of the parties to comply with the provisions of chapter 291, p. 357, Gen. Laws 1899. Section 1 of this statute provides as follows: ‘A sale of any portion of a stock of merchandise otherwise than in the ordinary course of trade in the regular and usual prosecution of the seller's business, or a sale of an entire stock of merchandise in gross will be presumed to be fraudulent and void as against the creditors of the seller, unless the seller and purchaser shall at least five (5) days before the sale make a full and detained inventory showing the quantity and so far as possible, with the exercise of reasonable diligence, the cost price to the seller, of each article to be included in the sale; unless such purchaser shall at least five (5) days before the sale in good faith make full and explicit inquiry of the seller as to the names and places of residence or places of business of each and all of the creditors of the seller and the amount owing each creditor; and unless the purchaser shall at least five (5) days before the sale in good faith notify or cause to be notified, personally or by registered mail, each of the seller's creditors of whom the purchaser has knowledge, or can with the exercise of reasonable diligence acquire knowledge, of said proposed sale and of the said cost price of the merchandise to be sold and of the price proposed to be paid therefor by the purchaser. The seller shall at least five (5) days before such sale fully and in writing answer each and all of said inquiries.’ The appellants contend that this statute renders the sale of the merchandise in question absolutely void, while the respondents contend that the statute must be construed as creating a presumption only which may be overcome by evidence and further that if the statute is to be construed as rendering the sale void, it is unconstitutional.

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