Sterrett v. Third National Bank — 10 N.Y. St. Rep. 818

Majority

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William B. Sterrett et al, Resp’ts, v. The Third National Bank of Buffalo, App’lt.

(Supreme Court, General Term, Fifth Department,

Filed October 21, 1887.)

Headnote

1. Partnership—-Extent op individual interest op partner.

This action was brought to recover for the conversion of four Pipe Line certificates, each representing one thousand barrels of oil. The answer puts in issue the material allegations of the complaint, and alleges by way of justification the levy of an attachment upon the interest of one of the plaintiffs, the recovery of a judgment against him, and sale by virtue of an execution issued thereon. The plaintiffs were partners in business in the state of Pennsylvania, and in September, 1882, gave their notes to defendant, depositing with it Pipe Line certificates as collateral security for their payment. On December 8, 1882, the defendant held as such collateral twelve of these certificates; and on that day the defendant caused the levy thereon of an attachment against the property of one of the plaintiffs, issued in an action in its behalf against him upon his note. On December

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eleventh the plaintiffs paid their notes held by the defendant, and demanded possession of the twelve certificates, which was refused. On December fifteenth, eight of the certificates were delivered to the plaintiffs pursuant to an arrangement whereby it was agreed that the interest of the plaintiff against whom the attachment was issued should be treated as embraced in the four certificates withheld, without prejudice to the plaintiff’s right therein. The defendant afterward recovered judgment in the action above mentioned brought by it, and caused these four certificates to be sold by the sheriff by virtue of an execution upon said judgment Held, That if the plaintiffs firm was insolvent, the plaintiff against whose property the attachment and execution were issued had no individual interest in the firm property because the co-partnership as such has rights and interests distinct from those of the several members, and the latter have no individual interest except in such surplus, if any, as may remain after the adjustment and settlement of the partnership affairs.

8. Same—Right of appropriating it to payment of firm debts may

BE ASSERTED BY FIRM.

T ,e right of property for the purpose of paying the partnership debts as against the appropriation of it to the payment of debts of the individual members, whether voluntary on their part or by means of legal process In. behalf of their creditors, may be asserted by the firm; and' it is through the equities of the members in support of such right that the partnership creditors may by their action take the preference in respect to its property.

8. Interest of attaching creditors of partner’s interest.

Held, That at the time of the levy of the attachment the plaintiff owned the four certificates in question, subject to the defendant’s lien as collateral to the notes it then held, and that the defendant in that action could not then have effectually transferred title to the corpus of that property in payment of his debt due it, nor could the defendant take by the process, levy and sale, any right other than such as should be derived from the share in the surplus of "the firm assets to which its debtor members otherwise would be entitled upon an accounting after payment of the partnership debts.

4. Solvency—Defined—Insolvent—Defined.

Solvency imports adequate means of a party to pay his debts, which embraces within its meaning the opportunity by reasonable diligence to convert and apply to such purpose. A person is deemed insolvent who at the time in question is unable to pay his debts in the ordinary course of business.

5. Partnership property—Right to devote it to partnership debts—

Substantial.

Held that the right of a firm and its members to protect itself by devoting its property to the payment of the partnership debts, and not to be subjected to a deficiency in that respect by its appropriation to the individual debts of the partners, was substantial, and that the rule must be practicable.

8. Same—When of fluctuating value—Rule for determining part- ■ ner’s interest.

Held, that when the property of a firm is of such a character that it has a constantly fluctuating market price, the financial condition of the firm owning it is not necessarily established by the fact that the price for a short period, is such as to exceed its liabilities, so as to furnish an interest in the individual partners, and subject the firm property to the process of their respective creditors; that especially was this the fact where the property is so situated, that the firm cannot make such transitory market available.

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7 Same— Question to be considered in applying rule in present

CASE.

Held, that, therefore, in the case in question the situation within the time, when that could be done, was entitled to consideration upon the question of value at the time when the process was levied upon the partner’s interest.

8. Same—Present case—Conclusion warranted that partner had no

individual interest.

Held, that upon the evidence the conclusion was permissible that the partner, defendant in the suit in which the attachment was levied, did not at the time of its levy, have any individual interest in the firm property.

9. Attaching creditors—Officer or purchaser on sale under attach-

ment—May attack fraudulent tranfer by debtor.

Held, that when property, subject to original levy and sale by execution has been transferred by the debto,', in fraud of his creditors, the officer subsequently levying an attachment upon the property, the attaching creditor or the purchaser, at the sale, finally made upon the execution, may, in defense of the attachment lien, or the title derived from its execution, defeat such transfer by showing that it was fraudulent as against the creditors or such debtor

10. Same—Rule not applicable in certain cases.

Held, that this rule was not applicable to choses in action upon which attachment was levied after a transfer of them, when no interest as between the parties to it, remained in the debtor.

11. Transfers—Absolute.

Held, that the pipe line certificates treated as certificates of deposit, were choses in action merely, and that a transfer of property represented by them, which had been made, was absolute between the plaintiffs and another party, and that the former had no interest in the property or its . proceeds.

18, Partnership property—Rights of partner at sale under execution against partner’s interest.

Held, that the purchaser at a sale under an execution against the interest of a partner in firm property, had a right to an accounting and to the extent of his purchase, to take the place and interest of the partner in the result, but not a right to the posses ion of the property.

•Appeal by the defendant from an order of the circuit court of Erie county, denying motion for a new trial made upon the minutes. The cause of action alleged was for the conversion of four certificates of the United Pipe Line Company, each representing 1,000 barrels of petroleum oil. The answer puts in issue the material allegations of the complaint, and alleges, by way of justification, the levy of an attachment upon the interest of the plaintiff Sterrett, the recovery of a judgment against him and sale by virtue of an execution issued thereon.

And it appears that the plaintiffs were partners, engaged in the business of producers of and dealers in petroleum oil at Titusville in the state of Pennsylvania; that in September, 1882, they gave their notes for $7,500 and $2,000 to the defendant, and as collateral security for their, payment deposited with it Pipe Line certificates; that on the 8th day of December, 1882, the defendant held as such collateral

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twelve of those certificates representing 1,000 barrels of petroleum oil each. And on that day the defendant caused the levy thereon of an attachment against the property of the plaintiff Sterrett, issued in an action in its behalf against him upon his note; that on December 11 the plaintiffs paid their notes held by the defendant, and demanded of it the possession of the twelve certificates, which the defendant refused to deliver. And that on the 15th day of December eight of the certificates were delivered to the plaintiffs pursuant to an arrangement then made, whereby it was agreed that the interest of Sterrett in the twelve should be treated as embraced in the four certificates not delivered, without prejudice to any rights of the plaintiffs in respect to the latter. The defendant afterwards recovered judgment in its action against Sterrett, and caused the four certificates to be sold by the sheriff by virtue of execution upon such judgment. This action was brought for the alleged conversion of those certificates, and the plaintiffs recovered.

Adelbert Moot, for app’lt; C, D. Murray, for resp’ts.

—The proposition in controversy at the trial was whether Sterrett had any interest in the certificates in question at the time the attachment was levied, which depended upon the question of fact submitted to the jury whether the plaintiffs’ firm was solvent or insolvent. Because the co-partnership, as such, had rights and interests distinct from those of the several members, and they severally had no individual interests except in a surplus that should remain after adjustment and settlement of the partnership affairs. And if the firm was insolvent the member" Sterrett had no interest in the firm property. Staats v. Bistow, 73 N. Y., 264 ; Menagh v. Whitwell, 52 id., 146; Morss v. Gleason, 64 id., 204; Tarbell v. West, 86 id., 280.

And the right of property for the purpose of paying the partnership debts as against the appropriation of it to the payment of debts of the individual members, whether voluntary on their part, or by means of legal process in behalf of their creditors, may be asserted by the firm; and it is through the equities of the members in support of such right that the partnership creditors may, by their action, take the preference in respect to its property. Saunders v. Reilly, 6 N. Y State Rep. 452.

The plaintiffs’ firm owned these four certificates at the time the attachment was levied subject to defendant’s lien as collateral to the notes it then held of which the defendant was advised. The partner Sterrett could not then effectually have transferred title to the corpus of this

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property to the defendant in payment of his debt due to it. Dob v. Halsey, 16 John. 34 .

Nor could the defendant take, by the process, levy and sale, any right other than such as should be derived from the share in the surplus of the firm assets, to which its debtor member otherwise would be entitled upon an accounting after payment of the partnership debts. In view of this, much evidence was given bearing upon the financial condition of the firm.

The plaintiffs gave evidence tending to prove that the partnership debts on the 8th and 11th of December, 1882, amounted to $100,085.35, and its assets consisted of 89,000 barrels of petroleum oil and $221.24 in accounts, and nearly or quite all the certificates for the oil were hypothecated as security for the payment of its debts.

_ There was some conflict of evidence as to the quantity of ofi the plaintiffs had at that time, and a question in that respect upon the interpretation of the testimony of one of the* plaintiffs who remarked to the effect that the 89,000 barrels did not include the 12,000 barrels represented by the certificates held by the defendant, but the jury were permitted to find in view of the further evidence that the remark referred to was inadvertently made. The conflict on the question arises out of the statement of the „ quantity produced by the plaintiffs and the account put in evidence of their purchases and sales, which presented for the jury the question of fact whether the quantity they then had was or not greater than 38,000 barrels. In that respect the evidence was sufficient to support their conclusion.

The financial situation of the plaintiffs depended upon the price of oil. On December 8th the highest price was $1.1 Yi and the lowest $1.12. On December 11th the price was $1.12 and $1.08^, and on December 15th, at the time the eight certificates were delivered to the plaintiffs, it was 96|c. and 93c., and the average price daily was still lower during the residue of that month. The lowest price on the 8th and the highest on the 11th December would make the value of oil about equal to the firm liabilities, but after that during the month the prices would make it less. The certificates have the recognized quality of negotiability in the trade, and its custom in the deal requires their delivery as soon as the day following their sale. The certificates were not in the possession or under the control of the plain tiffs, and without payment of the amounts for which they were held as collateral they were not conveniently available for the market. And the fluctuation in price was such that it could not be known how much they would at any future day produce by sale in the market. The plaintiffs’ property consisting as it did of oil, or the certificates

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giving a right to it, might one day have a value exceeding and the next day below the amount of their liability. The market was available each day for sale of oil at the then market price, and the sales were usually made through brokers. Assuming that on December 8th, the day the attachment was levied, the market price was such that the plaintiffs’ oil, if sold, would have produced a sum exceeding the amount of their firm liabilities, the question arises whether under the circumstances the firm will be treated as solvent as of that day, so as to furnish an interest in Sterrett subject to and in support of the levy of the attachment. The margin in excess of the value that day was comparatively small, and the Pipe Line certificates being held by various banks and bankers as collaterals on account of the commercial paper of the firm, were not available to it for the purposes of sale at that time.

Solvency imports adequate means of a party to pay his debts, which embraces within its meaning the opportunity by reasonable diligence to convert and apply to such purpose. In other words, a person is deemed insolvent who at the time in question is unable to pay his debts in the ordinary course of business. Shone v. Lucas, 3 Dow. & Ry., 218; Thompson v. Thompson, 4 Cush., 127 ; Lee v. Kilburn, 3 Gray, 594 , 600; Herrick v. Borst, 4 Hill, 650 .

The situation of the plaintiffs’ property did not enable them to put it into market on the day the attachment was levied, or the two or three days following, when the price would exceed or equal their liabilities. This right of the firm and its members to protect itself by devotion of its property to the payment of the partnership debts and not to be subjected to a deficiency in that respect by its appropriation to the discharge of the individual debts of the partners is substantial, and the rule applicable to the production of such result must be practicable, else the right may be defeated. When the property is of such character that it has constantly a fluctuating market price, the financial condition of the firm owning it is not necessarily established by the fact that the price for an hour or a day would produce an excess of its liabilities so as to furnish an interest in the individual partners and subject the firm property to the process of their respective creditors, especially if it is so situated that the firm cannot make such transitory market available, because the interest of the partners severally is only in the surplus which may remain after the winding up its business and the payment of its partnership debts, and is dependent upon the result, which requires an. opportunity to do it. It would, therefore, seem that the situation within the time when that can be done may be entitled to consideration upon the question of value at the

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time when the process in such case is levied upon the partner’s interest. And it appears that after the 11th of December, 1883, the highest price of oil any day was insufficient to make 89,000 barrels produce a sum equal to the amount of the firm liabilities until the last day of May, 1883.

We think, upon the evidence, the conclusion was permitted that Sterrett had no interest in the firm property at the time the defendant’s attachment was levied upon the certificates in question. The plaintiffs’ partnership was formed about October 1, 1880. No capital was put in by the members.

They purchased a tract of fifty-two acres of land for $23,701, borrowed the money to pay for it, proceeded to put down eleven wells, produced oil from it until July 5, 1882, when they; sold and conveyed it to the Second National Bank of Titusville for $16,000, in payment of that amount of debt the firm then owed that and another bank in that city. The plaintiff Hyde was cashier of the Second National Bank, and Sterrett was one of its directors. There is evidence tending to prove that the price for which the sale was made was then the fair value of the property. The price of oil then was about fifty cents per barrel, and one reason given for making the sale was that Sterrett, who had been regarded the financial man of the firm, had become financially embarrassed. The bank operated the property, and about January, 1884, disposed of it, and in its operation and sale realized a profit of about $9,000, which it gave to the plaintiff Hyde in January, 1884, and he put it to the credit of the firm.

The defendant’s counsel requested the court to charge “that if the jury are convinced that this conveyance to the Second National Bank of Titusville was made for the purpose of hindering, delaying and defrauding the creditors of the firm, or the creditors of Mr. Sterrett, in collecting their debts, they were at liberty to consider that property at what they deem its fair valuation as assets of the firm on the 8th day of December, 1882, for the purpose of ascertaining whether it was solvent or insolvent,” and to the refusal of the court to so charge, excepted. The court in the charge in referring to that subject did not distinctly affirm or negative that proposition. While the direct evidence tends to prove that the sale was made in good faith, there are some circumstances which may have given the opportunity to parties, situated so as to permit, to raise the question of the bona fides of the sale. But we do not see how that question is available to the defendant in this action. When Eroperty subject to original levy and sale by execution has een transferred by the debtor in fraud of his creditors, the officer subsequently levying an attachment upon the prop

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erty, the attacking creditor or the purchaser at the sale finally made on execution may, in defense of the attachment lien or the title derived from its execution, defeat such transfer by showing that it was fraudulent as against the creditors of such debtor. Rinchey v. Stryker. 28 N. Y., 45 ; Frost v. Mott. 34 id., 253.

This rule is not applicable to dioses in action upon which attachment is levied after a transfer of them, when no interest as between the parties to it remains in the debtor. Anthony v. Wood, 96 N. Y., 180 . Treating the certificates as in the nature of certificates of deposit, and embracing" an undertaking of the Pipe Line Company to deliver the oil to the holder of them on demand, they would seem to be choses in action merely. This may not be important, because no transfer of them or its effect is in this case. The sale and conveyance referred to were absolute in terms and as between the bank and the plaintiffs, the latter had no interest in the property or it proceeds.

The defendants had no charge upon the land by force of their proceeding to reach the interest of Sterrett in the firm assets. The question simply was whether they were sufficient in due course of appropriation to pay the firm creditors and produce a surplus, and for the purpose of the defense in this action that depended upon the then existing rights of property in the firm. And if there are interests not available for the purposes of accounting between the members themselves arising out of transfers of property alleged to have been made in fraud of creditors, the creditors of the respective partners, as well as those of the co-partnership, may, in a proper action, bring all the necessary parties to the controversy into court with a view to the requisite remedy and relief. We are inclined to think that the question is not within the defense of this action, and, therefore, the exception not well taken. This view renders it unnecessary to refer to other considerations founded upon the evidence or the want of evidence bearing upon the proposition and in support of the ruling of the court.

This case is somewhat novel in this state. And we have proceeded to the conclusion on the merits upon the acquies • cent theory of the parties upon which the action was tried at the circuit, and has been argued here, that if the firm was shown to have been insolvent on December 8,1882, the plaintiffs were entitled to recover, otherwise not, without expressing what views may otherwise have been entertained in respect to the remedy sought by the action. But it is proper to say that for the purposes of an action like this one, and in its support, the question is not satisfactorily

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settled by authority. There is a conflict of adjudication in the different states in respect to the right of the officer making the levy and sale in such case to take the property and to deliver it into the possession of the purchaser.

In Phillips v. Cook (24 Wendell, 389), it was held that the property may be delivered to the purchaser who takes the place and relation of a tenant in common, may have an accounting of the partnership matters to ascertain the debtor partner’s interest in the surplus, if any, of the partnership assets, and in the meantime and subject to the accounting, retain the possession of the property. This has the support of other cases in this state. Walsh v. Adams, 3 Denio, 125 , Smith v. Orser, 42 N Y., 136 ; Bead v. McLanahan, 15 J. & S., 275. And to carry this doctrine to its legitimate result it may be said that such should be the right of the creditor or purchaser rather than to be subjected to an action for the recovery of the property or for its alleged conversion dependent upon the proof of value of assets as compared with the amount of Habilities, especially unless insolvency of the firm is not questioned. The question of the right on sale by execution, of the interest of a partner in firm property, of the officer to take and deliver the property to the purchaser was not in Menagh v. Whitwell ( 52 N. Y., 146 ), although there are in the leading opinion some remarks which might possibly be so construed as to import to the contrary, but no reference is there made to. Phillips v. Cook. And so far as we have observed no adjudication to the contrary of it has been had in this state. And in Atkins v. Saxton ( 77 N. Y., 195 , 199), the same doctrine is recognized and stated obiter. But in Deal v. Bogue ( 20 Penn. St., 228 ), it was held that in such case the officer making the levy had no right to remove the property or to deliver it to the purchaser, and that the latter takes by his purchase merely the contingent interest of the debtor partner depending upon the result of an accounting and adjustment of the partnership affairs which does not take with it any right to the possession of the .corpus of the firm property in which the interest of the partner is sold. This is put upon the ground that the creditor, and through the execution of the process the purchaser can take no greater right and interest than the partner had, which did not include the right to the possession of the property, and therefore the officer can neither take (except for the purpose of making his inventory) nor give the possession of it to the purchaser.

In support of which are cited Taylor v. Fields (4 Ves., 396), and other cases, to which may be added Morrison v. Blodgett ( 8 N. H., 238 ), Vandike v. Rosskam ( 67 Penn. St., 330 ), Sirrime v. Briggs ( 31 Mich., 443 ), Treadwell v. Brown

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( 43 N. H., 290 ). The right of the purchaser to have an accounting, and to the extent of his purchase, to take the place and interest of the partner in the result, is the well recognized rule of all the cases. And on such accounting the purchaser, it may be, could bring the necessary parties into court and attack any fraudulent transfers of property made by the firm. Webb v. Helion, 3 Rob., 625 ; Wade v. Rusher, 4 Bosw., 537 . But the difference in the two classes of cases before cited relates to the right of the officer to take and deliver the possession of the property to the purchaser, and of the latter to retain it for the purposes of the accounting which he may proceed to have made. The doctrine which permits the delivery of the property to the purchaser enables the creditor of a single partner to place the partners not sued in a worse condition than the partner could place them, which is one of the reasons against it given by the courts in denying the right to delivery of such possession. By the application of that doctrine there would seem to be nothing in the way of the maintenance of an action to recover the firm property or as for its conversion when so taken from its possession on account of the individual debt of a partner without reference to the question of solvency or insolvency of the firm. But as we have seen, such is not the rule hitherto adopted in this state.

Farther than this it is not necessary to express any opinion for the purposes of this case other than that embraced in the views already given.

The several exceptions taken to the reception of evidence we have examined, and think no error was committed in the rulings to the prejudice of the defendant; and that none of the other exceptions were well taken.

The order should be affirmed.

Smith, P. J., Barker and Haight, J. J.,concur.