Opinion
June Term, 1858
Solomon G. Havens, for the appellant.
Chauncey Tucker, for the respondent.
It is a settled rule of equity that, as between the joint and separate creditors of partners, the partnership property is to be first applied to the payment of the partnership debts, and the separate property of the individual partners to the payment of their separate debts; and that neither class of creditors can claim anything from the fund which belongs primarily to the opposite class until all the claims of the latter are satisfied. This, however, is a rule which prevails in courts of equity in the distribution of equitable assets only. Those courts have never assumed to exercise the power of setting aside or in any way interfering with an absolute right of priority obtained at law. In regard to all such cases, the rule is equitas sequitur legem. (1 Story Eq. Jur., § 553.)
In Wilder v. Keeler (3 Paige, 171), Chancellor WALWORTH says: "Equitable rules are adopted by this court in the administration of legal assets, except so far as the law has given an absolute preference to one class of creditors over another." So, in the case of Averill v. Loucks (6 Barb. S.C.R., 470), PAIGE, P.J., says: "Courts of equity, in the administration of assets, follow the rules of law in regard to legal assets, and recognize and enforce all antecedent liens, claims and charges existing upon the property, according to their priorities." This is also conceded in the case of McCulloh v. Dashiell (1 Har. Gil., 96), where the whole doctrine of the distribution in equity of the joint and separate property of partners is very elaborately examined. ARCHER, J., by whom the opinion of the court was delivered, there says: "At law, the joint creditors may pursue both the joint and separate estate, to the extent of each, for the satisfaction of their joint demands, which are at law considered joint and several, without the possibility of the interposition of any restraining power of a court of equity." But especially must it be beyond the power of such courts to interfere where an absolute right of legal priority is given by force of a positive statute, as in case of a judgment. Chancellor WALWORTH, in Mower v. Kip (6 Paige, 88), says: "The rule of this court is to give effect to the lien of a judgment upon a legal title, so far as it can be enforced by execution at law."
As there is no doubt that at law the judgment for a partnership debt attaches and becomes a lien upon the real estate of each of the partners, with the same effect as if such judgment were for the separate debt of such partner, it is obvious from the preceding authorities, that the theory upon which the complaint in this case was drawn is erroneous. The principle that the separate property of an individual partner is to be first applied to the payment of his separate debts, has, as we have seen, never been held to give priority as to such property to a subsequent judgment for an individual over a prior judgment for a partnership debt. It is true, that courts of equity will sometimes give to a mere equitable lien, which is prior in point of time, a preference over a subsequent judgment; but this will be done only where such prior lien is specific in its character, as in the case of White v. Carpenter (2 Paige, 219). The mere general equity of the separate creditors to have their debts first paid out of the individual property of the partners does not amount to a lien at all, much less a lien of the kind necessary to give it a preference over a judgment for a partnership debt.
The plaintiffs cannot under the averments in the complaint avail themselves of that principle of equity which enables a creditor having a lien upon one fund only, to compel a creditor who has a lien not merely on the same fund, but also upon another, to resort first to the latter to the end that both may be paid. If the complaint had averred that there was sufficient partnership property upon which the defendant's judgment was a lien, to satisfy such judgment it is possible that under the principle referred to the plaintiffs might have been entitled to some relief; and in that event it would not have been a valid objection to the complaint that it did not ask for the relief appropriate to the case. But the averment in the complaint is simply that there is sufficient estate of the deceased partner, Hiram Pratt, to satisfy the defendant's judgment.
This averment brings the case directly within the doctrine laid down by Lord ELDON in ex parte Kendall (17 Vesey, 520.) He says: "If A. has a right to go upon two funds, and B. upon one, having both the same debtor, A. shall take payment from that fund to which he can resort exclusively, that by those means of distribution both may be paid. That takes place where both are creditors of the same person, and have demands against funds the property of the same person. But it was never said that if I have a demand against A. B., a creditor of B. shall compel me to go against A. without more, as if B. himself could insist that A. ought to pay in the first instance as in the ordinary case of drawer and acceptor, or principal and surety, to the intent that all obligations arising out of these complicated relations may be satisfied. But if I have a demand against both, the creditors of B. have no right to compel me to seek payment from A., if not founded in some equity giving to B. the right for his own sake to compel me to seek payment from A."
The point has also been expressly decided in this state in the case of Dorr v. Shaw (4 John. Ch. R., 17.) The only difference in principle between that case and this is that there it did not appear that the joint debtors were partners. This however is a difference which operates against the claim of the plaintiffs here. Where two individuals not partners are jointly indebted it might seem to be just to presume that each owed one-half the debt, and to that extent therefore there might be an equity in favor of the one owing an individual debt to have so much of the joint debt paid by his co-debtor. But in regard to partners it is now well settled upon an analogous question, that no such presumption can be indulged. Formerly a judgment creditor of one of two partners might levy his execution upon property belonging to the firm, and, upon the presumption that the interests of the partners were equal, might proceed to sell and appropriate one-half the avails to the satisfaction of his debt. This however was long since overruled.
In the case of Dutton v. Morrison (17 Vesey, 193), Lord ELDON, in discussing this question, says: "It may be represented that the world cannot know what is the distinct interest of each ( i.e., each partner), and therefore it is better that the apparent interest of each should be considered as his actual interest. But courts of equity have long held otherwise." He then lays down the rule ever since acted upon, that the creditor in such a case must wait until the partnership accounts are settled before he can claim anything from the partnership property.
The principle here asserted by Lord ELDON is directly applicable to the present case. It is, that no inference can be safely drawn from the mere external relations of partners to the world as to the situation of their affairs inter se, and that in all judicial proceedings involving the latter an investigation is first to be made; and such is the variety and frequent complexity of partnership dealings that any other rule would obviously lead to gross injustice. It is impossible therefore in this case to assume, without any averments on the subject in the complaint that the estate of the deceased partner Pratt ought, in equity, to pay any portion of the defendant's judgment. Hence, upon the principles laid down by Lord ELDON, and universally acted upon by courts of equity, the complaint is clearly insufficient.
The judgment of the Supreme Court therefore should be affirmed with costs.
All the judges concurring,
Judgment affirmed.