Titus v. Maxwell

• Citation: 281 F. 433
• Decision Date: 14 July 1922
• Docket Number: 3661.
• Parties: TITUS v. MAXWELL. In re HAMDEN.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

281 F. 433

TITUS v. MAXWELL.

In re HAMDEN.

No. 3661.

United States Court of Appeals, Sixth Circuit.

July 14, 1922

Lincoln H. Titus, of Kalamazoo, Mich. (Roscoe G. Goembel and Albion B. Titus, both of Kalamazoo, Mich., on the brief), for appellant.

Robert L. Campbell, of Kalamazoo, Mich., for appellee.

Before KNAPPEN, DENISON, and DONAHUE, Circuit Judges.

KNAPPEN Circuit Judge.

Appeal from an order denying priority. The bankrupt and one Johnston were partners in a retail meat business at Kalamazoo, Mich under the name of the 'Liberty Cash & Carry Market.' On January 10, 1921, Johnston sold to the bankrupt the former's interest in the partnership business for $700 and received therefor from the bankrupt the latter's seven negotiable notes, of $100 each, secured by a chattel mortgage upon the entire assets of the former partnership. This mortgage was duly recorded on the next day after it was given. On February 18, 1921, Johnston sold and transferred the notes and assigned the mortgage to appellant; the assignment being on the same day duly recorded. The bankrupt conducted the business in his own name from January 10, 1921 until June 10, 1921, when he was adjudicated bankrupt on his voluntary petition. On July 29, 1921, the trustee in bankruptcy sold the assets of the bankrupt's estate free and clear from all liens of every kind, under agreement between the trustee, the referee, appellant, and another mortgagee that the liens of the two mortgages (if any) should attach to the proceeds of the sale. Thereafter the trustee filed petition to discharge the proceeds from the lien of appellant's mortgage, upon the grounds that at the time the chattel mortgage was given the partnership was insolvent that the mortgage was given to cover up the assets of the bankrupt, and to hinder, delay, and defraud creditors of the partnership; on information, that 'the money to pay said Johnston the amount of the mortgage was furnished by said bankrupt, and was taken out of the business and his assets for that purpose'; that appellant took no greater rights under the mortgage than bankrupt had; and that appellant's mortgage claim should be postponed until the payment in full of all partnership debts. ^[1]

Upon the question of insolvency the referee found that the bankrupt's testimony showed that the firm was 'hard pressed' at the time he purchased Johnston's interest; that about three months later bankrupt realized that he did not have sufficient property to pay his creditors in full, but that if the partnership was insolvent when the Johnston chattel mortgage was given bankrupt was not aware of it; that Johnston was sworn as a witness for the trustee, and testified in effect that when the mortgage was given he and the bankrupt did not know whether they owed $1,500 or $3,000; that one of the large creditors was notified of the transfer, but he recollected notifying no other. The referee further reported that, while there was grave doubt of the solvency of the firm, he was unable to say from the testimony produced that the firm was insolvent. He was, however, satisfied that, if the firm was insolvent, neither bankrupt nor Johnston 'were aware of the fact or had knowledge of the same. ' The referee further reported that there was no testimony whatever that the chattel mortgage was not given in good faith, and found that appellant paid on February 17 or 18, 1921, a cash consideration of $525 for the assignment to him by Johnston of the chattel mortgage. The referee accordingly found that it could not be said, as matter of law, that the mortgage was given in bad faith, and found, as matter of law, that the same was not a fraud upon the firm's creditors, and that the firm at the time of the giving of the chattel mortgage from Hamden to Johnston was not insolvent. The referee further found that the copartnership had not been adjudged bankrupt, and that it was conceded at the time of the hearing that Johnston was not bankrupt. The referee accordingly concluded, as matter of law, that without determining whether appellant has greater rights as assignee of the notes and mortgage than Johnston would have had, he is entitled to priority under his mortgage over creditors of the former firm or the individual creditors of the bankrupt. Aside from appellant's mortgage and the prior mortgage, which, as before said, is now conceded priority over partnership creditors, none of the claims, partnership or individual, appear to have been secured.

The District Court reversed the action of the referee and denied appellant's right to share in the assets until after the claims against the partnership were paid in full. This appeal is from that order of the District Court. The District Judge filed no opinion, and the reason for his conclusion does not appear. While the order of the District Judge recites his consideration, among other things, of the 'summary of the evidence,' no summary was sent to this court, except so far as contained in the referee's findings of fact and conclusions of law before referred to. Neither party refers to such summary, and neither asked to have it sent up under the appeal. We therefore think we should assume that the summary (if there was a separate summary) contained substantially no more than shown by the referee's findings; and it is said in appellant's brief, without dispute, so far as we have discovered, that 'the proofs taken before the referee were not transcribed, and therefore were not returned to the District Court, and were not before the court at the time of hearing.'

In his brief in this court, appellee does not assail the referee's conclusion that the firm was solvent at the time the mortgage in question was given, treating that question as unimportant, but plants his rights upon the broad proposition that the partnership having been in debt (whether solvent or insolvent) when the chattel mortgage was given, its creditors must be paid in full before the partnership property or assets may be diverted into any other channel, as by the mortgage in question; that appellant, as assignee, took no better title than Johnston, the assignor; and that there was no consideration for Johnston's release to bankrupt of the former's interest in the partnership property. For the purposes of this review, and taking into account the referee's findings, it should be assumed that the partnership was solvent when the chattel mortgage was given; that the mortgage was taken and given in good faith on the part of both bankrupt and Johnston; and that appellant purchased the mortgage in good faith, and in fact while but one of the seven notes secured thereby was past due. It is apparent, from the bankrupt's schedules and the original proofs of claims, which have been sent up, that (aside from the two chattel mortgages) the much greater part of the debts were originally partnership obligations, the remainder having been contracted after Johnston's retirement; also that Hamden had made substantial payments upon some of the partnership debts, making further purchases from a number of the original partnership creditors, who practically are the same creditors named in the bankrupt's schedules, except one or two additional creditors. It is perhaps inferable that bankrupt had assumed payment of the partnership debts. His bankruptcy schedules are entitled:

'In the matter of T. Irven Hamden, Individually and as a Member of the Firm of Hamden & Johnston, Composed of T. Irven Hamden and Albert O. Johnston.'

It is the general equity rule that, in the administration and distribution of the assets of a partnership and of its individual members, partnership debts should in the first place be paid out of partnership assets, and individual debts out of individual assets, and that partnership creditors cannot resort to individual assets, nor individual creditors to partnership assets, except in case of surplus of assets of the given class over the debts of that class; and subdivision 'f' of section 5 of the Bankruptcy Act (Comp. St Sec. 9589) merely applies to distribution in bankruptcy, the rules theretofore existing in courts of equity. In re Telfer (C.C.A. 6) 184 F. 224, 106 C.C.A. 366; International Co. v. Cary (C.C.A. 6) 240 F. 101, 105, 153 C.C.A. 137. It is also now the settled rule that when a partnership, as such, is insolvent, and the only fund for distribution is produced by the estate of one member, the individual creditors of that member are entitled to priority in the distribution of the fund. Farmers' & Mechanics' Nat. Bank v. Ridge Ave. Bank, 240 U.S. 498, 36 Sup.Ct. 461, 60 L.Ed. 767, L.R.A. 1917A, 135. Appellant's debt was not a firm debt, but was the individual debt of the bankrupt. It therefore follows that appellant, as a secured creditor of Hamden, is entitled to priority in the administration below, as against both partnership and individual creditors, unless the assets in question, notwithstanding the bankrupt's...