Nill v. Chidester

Headnote

Fraudulent Conveyances—Proof of Fraud—Partnership.

A firm consisting of defendant and another as equal partners was dissolved by mutual consent. The interest of the retiring partner in the firm property was ascertained, and it was agreed that defendant should take the property and furnish an amount of money equal to twice the interest of the retiring partner, pay the firm debts, and, if any surplus remained, pay one-half of it to the retiring partner. There was no evidence of any fraudulent intent in the partners, or that they knew that the firm was insolvent.' Defendant, having furnished and applied to the firm debts the amount agreed on, transferred the property received from the firm to his mother, partly in consideration of an advancement, to pay firm debts, and partly in payment of existing debts to the transferee. Held, that the transfer to defendant’s mother would not be set aside as in fraud of the firm creditors.

Appeal from special term, Jefferson county.

Action in the nature of a creditor’s bill by John Hill and others, to set aside a bill of sale of a stock of goods, made by the defendant Herbert B. Chidester to the defendant Betsey Chidester, as void, because made with intent to hinder, delay, and defraud the creditors of the vendors. The action is based upon a judgment in favor of plaintiffs and against the defendants Dickson and Herbert B. Chidester, docketed in Jefferson county June 2, 1886, for $80.72 damages and $21.55 costs; total, $102.27. Upon this judgment an execution has been issued, and returned wholly unsatisfied. This judgment was for an indebtedness of defendants as members of the firm of Chidester & Dickson, for goods sold and delivered to and used by them in their business. This firm was formed June 2, 1886, for the carrying on of the business of a grocery and general store at Philadelphia, Jefferson county, H. T. July 14, 1887, the firm was dissolved by mutual consent, and an inventory of the goods was then made, amounting to $2,400, and defendant Dickson then transferred his interest in the stock of goods and personal property, aside from the book-accounts, to his partner, Chidester. Herbert B. Chidester continued the business until August 5,1887, sold some goods and purchased some, and added to the stock, and on this latter day he, by bill of sale, transferred to the defendant Betsey Chidester, his mother, the whole stock of goods and personal property, and this bill of sale was filed in the town clerk’s office of the town of Philadelphia, August 6,1887. At the time this bill of sale was given, the firm was not indebted to the defendant Betsey Chidester in any sum whatever. This bill of sale was made without the knowledge or consent of defendant Dickson. After the dissolution of the firm, the book-accounts were assigned and transferred by the firm to secure payment of various debts owing by them other than the debt of the plaintiffs herein.

The facts so far stated are admitted by the pleadings. There are other facts .about which there is controversy, and which must be determined by the court from the evidence. Ho answer ismade by Dickson. First. The plaintiffs allege the agreement at the time Dickson transferred his interest in the stock of goods to Chidester was that Chidester should use the stock of goods in paying the firm debts, while the defendants Chidester deny this, and allege that Chidester purchased from Dickson his entire interest in the goods and personal property, except the book-accounts, upon the agreement that Chidester would pay debts existing against the firm amounting to $1,426.54. Second. The bill of sale from Chidester to his mother recites a consideration of $1,000, and other sums owing to, and obligations incurred and paid by, the mother for the son. The allegations of plaintiffs as to the consideration are that the bill of sale was given to secure the payment of promissory notes given by the son and mother for the son’s benefit, and more than a year before the firm was formed; while the- defendants allege that the real consideration was .$2,350, which the mother on that day paid him, a large part of which was to

pay the debts of the firm. Third. The plaintiffs allege that, at the time of the giving of the bill of sale by the son to the mother, the firm was insolvent, and had been for some time; while the defendants deny this. Fourth. The plaintiffs allege that the bill of sale by the son to his mother was given with intent to hinder, delay, and defraud the creditors of the firm and the plaintiffs; while the defendants deny this, and allege it was given honestly and in good faith. The usual prayer for relief in such an action is made in the complaint. The following is the opinion of Mr. Justice Williams, delivered at special term, May 29, 1888:

“ As to the transfer of Dickson’s interest in the goods to Chidester. The exact amount of the inventory was $2,430.10. These goods were worth about 75 cents on a dollar of this inventory, except $131, full value, or $1,855.33. Dickson testifies this amount by agreement was to be used in paying firm debts; that he had, and was to have, no part of these goods, or the proceeds of the sale thereof, except in the way of their application to the payment of the firm debts. Chidester testifies they figured up what the interest in the goods of Dickson then was at 75 cents on a dollar of the inventory price, except the $131, which were called full value, and made his interest, after deducting an amount owing by him to Chidester, $713.27. These figures were arrived at by deducting $131 from the above inventory price, $2,480.10, as not being subject to deduction of 25 per cent., leaving balance of $2,299.10. Seventy-five per cent, of this is $1,724.33. Then adding the $131 again, makes $1,855.33 as the real value of the whole goods. One-lmlf of this was Dickson’s, $927.66; Dickson’s indebtedness was $214.39; and, deducting this, leaves the $713.27. Chidester testifies the agreement was that he should put with this sum a like amount, making $1,426.54, and should use such sum in payment of firm debts; and the balance of the firm debts were to be paid out of the book-accounts, or by the parties. It will be observed that the difference in the amount to be applied to payment of firm debts, whether the one or the other was the real arrangement, was $428.78, and arises entirely from the $214.39 deducted for indebtedness of Dickson. This amount taken from Dickson’s one-half the goods, and a like amount from Chidester’s one-half, makes the difference in question. It does not seem to be disputed but that this deduction from Dickson’s one-half was proper; at least I must find from the evidence it was. And therefore, without reference to the form of the transaction, the'result, so far as the partneis are concerned, is correctly stated by Chidester. All the interest fairly that Dickson had in the goods was $713.27, and all he could therefore ask Chidester to put with it to pay on the firm debts, so as to keep the accounts square between them, was a like sum; making in all $1,426.54. I find by examining the evidence of Dickson taken on his examination before Atwell, that he there testified just as Chidester does upon this trial. He said there that Chidester figured up the amounts and said there was $214 short of his (Dickson’s) having furnished as much money in business as he (Chidester) had, and that Chidester was to raise as much more money as was coming to him, (Dickson,) and with the whole to pay off the firm debts. If there was any surplus it was to be equally divided. If there was not sufficient, then the book-accounts were to be used to pay balance. So that I must regard this transaction as fair and honest, and as creating a fund of $1,426.54 with which to pay firm debts.

“And this brings me to consider the second question of fact,—the consideration of the transfer of the goods from Chidester to his mother. There seems to be no doubt but that the real and actual consideration for the transfer was $2,350, of which $1,350 was old individual indebtedness by him to his mother, and $1,000 was money advanced at the time, which was actually paid upon firm debts. The $1,350 may have been advanced at that time to take up old notes on which the mother was liable merely, or she may theretofore have paid and taken up the notes, or the bill of sale may have been collateral security for the liability. I don’t see how it is very material which way it was.

The consideration for the transfer was $1,000 paid on firm debts, and $1,350 paid or secured on Chidester’s individual indebtedness.

“The next question relates to the solvency or insolvency of the firm at the time of the transfer by Chidester to his mother. The liabilities of the firm when the dissolution took place were $5,364.33. The stock and personal property, aside from book-accounts, were then worth $1,855.33, leaving a balance to be paid from book-accounts of the sum of $3,509. The question then remains, what were the book-accounts worth? The evidence upon this subject is not very satisfactory, but I should say they were worth not to exceed about $3,000, and therefore the firm must have been insolvent in the sense that it had actually not enough property to pay its debts, even if time was given to raise the money from the firm assets, and a fair price was obtained for such assets, and fair opportunity afforded to collect the accounts, and fair success had in such collection; and such must have been the condition of the firm later, when the transfer in question was made to the mother.

“ We come now to examine the sole remaining question in the case,—whether the transfer to the mother was valid, or invalid for fraud. The question is easily stated, but a determination of it requires a consideration of the facts already settled, some others not yet referred to, and more or less matters of law applicable thereto. The parties seem to have acted in entire honesty and good faith at the time of the dissolution of the copartnership. The legal title to the goods was then transferred to and vested in Chidester under the agreement he should therefrom raise $1,426.54, and pay the same on the firm debts. It is not claimed by plaintiffs there was in this arrangement any intent to defraud creditors, or that there was then any intent to transfer the property to the mother of Chidester. So far, therefore, I think I must hold the transactions valid, and the creditors would seem, therefore, to have had the right only to require,this amount to be raised from the property, and to be paid upon the firm debts. If this was done, then I fail to see any reason why the defendant Chidester did not acquire and have an absolute right to the property, to dispose of as he saw fit. This is a pretty important proposition in this case, because the proof is that under this arrangement Chidester did raise out of the transfer to his mother in question $1,000 of this $1,426.54, and paid it upon the firm debts, and he did also pay, from moneys secured by him from other sources, substantially the balance of the money, $426.21. In these ways it would seem that, while Chidester assumed to dispose of this property for his own benefit, he applied the moneys in part received from it, and other moneys of his own, of the value of the balance of it, towards the payment of firm debts. I fail to see how, in view of these facts, the creditors suffered in any way from Ohidester’s appropriation of the property to his own use. It amounted practically to a purchase by him of the property, and the payment of full value therefor, by paying the moneys upon the firm debts.

“But again, 1 think I must find the partners at the time of the dissolution were not aware they were insolvent. The complaint does not allege they were insolvent, and the agreement, as practically sworn to by the partners, was that, if there remained any surplus after Chidester paid the firm debts from the property, it should be equally divided between them, and, if there was a deficiency, the books of account should be used, so far as necessary, to pay the balance of the firm debts. It is very evident they did not doubt they had sufficient property to pay their debts.' In Dimon v. Hazard, 32 KST. Y. 65, it was held when one of two partners retires from business, relinquishing to the other all his interest in the partnership property, the remaining partner acquires the same dominion over it as if it had ever been his own separate property; the assignment being made in good faith, the title vests in the assignee as his own private estate, free from any lien or equity in favor of co-partnership creditors, and such assignee may lawfully transfer such property in payment of his individual debts. In Menagh v. Whitwell, 52 BT. Y. 146, the case last cited was quoted and approved, the court saying: * There is a

class of cases in which the copartnership effects have been held to be liberated from liability to be applied to partnership debts in preference to the separate debts of one partner; that is, where a bona fide sale has been made by a retiring partner in a solvent firm of two members, the latter assuming the debts. In such a case it is settled that the property formerly of the partnership becomes the separate property of the purchasing partner, and that the partnership creditors are not entitled to any preference as against his individual creditors, in case of his subsequent insolvency. But in those cases the joint property was converted into separate property by the joint act of all the members of the firm. They had power to dispose of the corpus of the joint property, and the exercise of that power, when free from fraud, divested the title of the firm as effectually as if they bad united in a sale to a stranger.’ Again, in Stanton v. Westover, 101 E. Y. 265, 4 E. E. Rep. 529, the earlier case was approved and followed, and the later case was considered and distinguished; and in a case where one of two partners, on retiring from the business, transferred to his copartner his interest in the firm property, each agreeing to pay one-half the firm debts, the firm being solvent, but the remaining partner being insolvent, this fact being, however, unknown to him or to the retiring partner, and the transfer made in good faith, and where the creditors of the firm claimed a preference over the individual creditors of the remaining partner, it was held that by the transfer the title vested in the remaining partner as his own private estate; that he had acquired dominion over it, the same as if it had always been his own separate property, free from any lien or equity, on the part of partnership creditors; and that transfers by him of the property in payment of individual debts were lawful. The court said: ‘By this arrangement neither party retained any equity against the other. By their joint consent the goods became the individual property of the remaining partner, and the $900 in notes and accounts the individual property of the retiring partner, and no partnership property remained. Each, by the agreement of transfer, substituted for the partner’s equity the personal contract of the other to pay, and had left only the right to enforce that contract against the individual contracting. The property * * * thus lost its character of partnership property, and became the separate property of the individual. * * * The insolvency of the purchasing partner, if known to him and to the seller, might very well be strong evidence of an intent to defraud the partnership creditors, and become conclusive upon that question if there was no explanation. But here the purchasing partner supposed himself to be solvent, and was so believed to be by the seller. * * * It was found there was no fraud, and we think correctly.’ In Saunders v. Reilly, 105 E. Y. 12, 12 E. E. Rep. 170, Stanton v._ Westover was approved, the court saying that all the members of a firm may sell the partnership property, though the firm be insolvent, to pay a firm debt; and they may sell the firm property to pay a joint debt for which they are liable jointly, outside the business of the firm, .and the joint creditor will obtain good title to the firm property. So, after a sale of partnership property upon a judgment against the partners for a joint debt outside the business, no equity is left in either member of the firm to have the property thereafter applied in discharge of firm debts. All the equities of both members of the firm in the property as against each other are wiped out, and it is only through the equity which one member of a firm has in the firm property, or against his copartners, that firm creditors, on the principle of subrogation, can enforce their claims against the firm property. Creditors have no lien upon the partnership effects for payment of their debts. Their equity is the equity of the partners operating to the payment of the partnership debts.

“It seems to me, in view of these principles of law, that Chidester acquired & good title to this property, and, at the time the transfer to bis mother was made, had as good right to transfer it as though it had always been his indi

vidual property. There is no proof the arrangement between the partners was not made in entire honesty and good faith. They did not consider or think of the question of solvency or insolvency; did not make the arrangement in view of insolvency, or with the view to a subsequent transfer to the mother, or with any intent, so far as the proofs show, to hinder, delay, or defraud their creditors. Their nominal assets and accounts were, in the aggregate, largely in excess of their actual liabilities, and they seem not to have known what the-extent of their actual liabilities were, even. Finding good faith in that arrangement, I must find actual title passed to Chidester, which he had a right to transfer subsequently to his mother, the same as though the property had always been his individual property. When the transfer to the mother was-made, the son and mother may very well have botli been aware of the insolvency of the firm, and of its individual members; but that would not invalidate the transfer. The son had a legal right to make a preference in favor of his mother. I am thus brought to the conclusion the bill of sale sought to be set aside is valid, and should not be set aside; and this leads to a dismissal of plaintiffs’ complaint, with costs of the action. Formal findings and decision may be prepared by defendants’ counsel, and submitted to plaintiffs’ counsel for approval as to form, and then to me for signature.”

Plaintiffs appeal.