Opinion
March Term, 1901.
Henry J. Speck, for Bank of D. Powers Sons, appellant.
Benjamin E. De Groot, for the National Bank of Troy, appellant.
James S. Wheeler, for the Union National Bank of Troy, respondent.
The assignor, by the 5th paragraph of the assignment, expressly provides for the pro rata payment of individual and partnership debts and liabilities out of the assigned estate. ( Smith v. Perine, 17 N.Y. St. Repr. 226; S.C., 121 N.Y. 376; Mills v. Parkhurst, 30 N.Y. St. Repr. 138; S.C., 126 N.Y. 89; Boss v. Marion, 129 id. 536.)
This paragraph of the assignment not only directs payment of "all the debts and liabilities now due or to grow due" from the assignor, but directs their payment "without any priority or preference whatsoever." That the assignor intended to include in this paragraph of the assignment the debts and liabilities of the firm of Lape Dunlop is further shown by his providing in the 6th paragraph of the assignment that after the payment of the said debts and liabilities the assignee should return to the assignor any proceeds of the assigned property remaining in his hands. It is not claimed that the assignor intended to exclude firm creditors from all benefit under the assignment. By section 30 of the General Assignment Law (Laws of 1877, chap. 466, amd. by chap. 503 of the Laws of 1887) it is provided that in all general assignments of the estates of debtors for the benefit of creditors hereafter made, any preference created therein shall not be valid except to the amount of one-third in value of the assigned estate. It is claimed by the individual creditors of the assignor that as paragraph 4 of the assignment provided preferences to the extent of one-third of the assigned estate, the power of the assignor over the assigned estate had ceased, and that his direction to the assignee to pay the balance remaining in his hands upon the debts and liabilities of the assignor, including partnership debts and liabilities, is void.
In the distribution of the estates of debtors, where there is no lawful direction by the assignor in regard to the same, partnership creditors are entitled to be first paid out of the partnership property, and individual creditors out of individual property. In the absence of express directions by the assignor, it is presumed that he intended a distribution of the estate according to recognized equitable rules. Partnership assets constitute a trust fund for the benefit of partnership creditors. It is well settled that an insolvent firm has no right to use its assets for the benefit of the individual members of the firm. The members of a firm having indebtedness that they are unable to pay in full are guilty of a fraud upon their creditors if they authorize or assent to the property of the firm being used or applied to the payment of a creditor of an individual member of the firm. Such application of the partnership property would be a payment of an indebtedness that the firm and the individual members of the firm, other than the one owing the indebtedness, was neither bound in law nor in equity to pay. The individual property of a person has never been held to be a trust fund for the payment of individual indebtedness, and it is said in the case of Nicholson v. Leavitt (4 Sandf. 252), "We know not that the separate property of a partner, even when he is insolvent, has ever been considered as a trust fund which, as such, chancery can reach and administer." Each individual composing a partnership is individually liable for the partnership indebtedness. He may appropriate his individual property for the payment of the partnership debt, and his property can be seized by execution issued upon a judgment for a partnership indebtedness to satisfy the same. An individual member of a partnership is not only liable in law for the indebtedness of the firm, but a partnership debt is regarded in equity as both joint and several. ( Matter of Gray, 111 N.Y. 408. ) The assignor has an undoubted legal right to appropriate by general assignment his individual estate for the ratable payment of his individual and partnership debts. ( Citizens' Bank v. Williams, 128 N.Y. 77; Crook v. Rindskopf, 105 id. 484; Royer Wheel Co. v. Fielding, 101 id. 504; Becker v. Leonard, 42 Hun, 221.)
The Court of Appeals, in Matter of Gray ( 111 N.Y. 408), uses this language: "But as a partnership debt is regarded in equity as both joint and several, there is an apparent inconsistency in excluding in equity the right of the partnership creditor to share with the separate creditor, where, as in this case, there is no joint estate and the surviving partner is insolvent." The object and purpose of the statute of 1887 is stated by the Court of Appeals in the case of Berger v. Varrelmann ( 127 N.Y. 281) as follows: "Before this section was added in 1887 to the General Assignment Act of this state, the practice which had become so prevalent that it may be said to have become a custom for failing debtors to devote by general assignment the whole or a large part of their estates to the payment of a few preferred creditors, often near relatives, resulted in so much hardship and injustice that the section above quoted was adopted to mitigate the evils arising from the practice." Although this statute is remedial in its nature, it is in derogation of the common-law right of an insolvent debtor to appropriate his property to the payment of his joint and individual debts, or to one or more of either or both classes. The statute, therefore, should only have a liberal construction so far as is necessary to carry out the remedial purpose for which it was enacted. ( Tompkins v. Hunter, 149 N.Y. 117.) This statute does not in terms prohibit an assignor from providing preferences to the extent of one-third of the assigned estate and then directing that the residuary of his assigned estate be paid pro rata on his individual and partnership debts and liabilities. The purpose for which the statute was enacted does not require that it be construed as prohibiting any such direction. The creditors of Thomas Lape had no fixed interest or lien upon his individual property. The direction contained in the assignment does not create a legal preference, because both classes of debts are at law considered equal. Such direction by the assignor is at most a destruction of a preference that might thereafter be created by the application of an equitable rule. The statute should be construed without reference to the equitable rule and wholly with reference to the common-law right of a debtor to prefer his creditors without restriction. I do not think it can be said that Thomas Lape in and by his assignment created a preference over and above the amount allowed by law. The decree appealed from should be modified so that it will direct the distribution of the remaining fund pro rata among the individual and firm creditors of the assignor, with costs to the appellants payable out of the fund before distribution.
All concurred, except KELLOGG, J., dissenting in an opinion.
The 4th clause of the written assignment of Thomas Lape, fairly construed, has reference only to the promissory notes "made or endorsed" by Thomas Lape, the assignor.
The 5th clause refers only to the individual indebtedness of the assignor.
If the assignment should be otherwise construed and made to include copartnership debts, then the creditors of the copartnership are preferred to the individual creditors of the assignor. They take all the copartnership assets to the exclusion of the individual creditor and then share equally in the assets of the individual assignor. At common law this was permissible and solely on the ground that the assignor had a right to prefer one creditor over another, disregarding all equitable rules. It was only by the voluntary exercise of that common-law right that this could be done. By the exercise of this preferential power the individual creditor might be stripped of all individual assets which by the rules of equity he was entitled to. This power to prefer was, by the law of 1887 (Chap. 503), limited to one-third of the estate; as to the remainder the assignor was made powerless to defeat the existing laws as to equitable distribution. Any different construction would work great hardship to the individual creditor. If the individual creditor could be permitted to share with the copartnership creditor it would be different, but in favor of the copartnership creditor the equitable rule prevails and copartnership property must go to pay copartnership debts. The equitable rule that individual property shall go to pay individual debts is well understood and the trading world acts upon it in its dealings with the individual. This rule could not be defeated except by the debtor himself, and his power to defeat it as curtailed by the act of 1887 leaves the rule in force, as it properly and equitably should be, as to that portion of the assets of the individual set free from the debtor's power to determine to what creditors it should go.
Decree modified as per opinion, and as so modified affirmed, with costs to appellant payable out of the fund. Order to be settled by CHASE, J.