Consalus v. McConihe — 17 N.Y. St. Rep. 538

Majority

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John Consalus, App’lt. v. Isaac McConihe et al., Resp’t.

(Supreme Court, General Term, Third Department,

Filed July 3, 1888.)

Headnote

1. Partnership mortgage—Extent op lien—When a lien on buildings, etc.

On the trial oí an action brought to have a certain mortgage upon an undivided third of certain real estate declared to attach as a lien only to the land and not at all to the buildings and improvements made upon the land, it appeared that the firm of McDonnell, Kline & Co. had a large manufacturing establishment built upon real estate which had been purchased in parcels from time to time, the title to which stood in the individual names of the several members of the firm, as tenants in common. The erections upon the real estate and the machinery were made and obtained by the firm by means of the firm funds and credits. This firm was dissolved by the death of John McDonnell, and his interest in the "firm, not including real estate, was sold to one O’Brien, subject to the payment of one-third of the debts and liabilities of the firm. The real estate was not supposed to be worth more than the encumbrances thereon. O’Brien assigned the interest to Lucy McDonnell, and she and one Willard McDonnell, entered into copartnership with the surviving members of the old firm, with the name of the first firm, they agreeing to pay McDonnell’s share of the old firm’s liabilities. Thereafter Willard McDonnell died, and Lucy succeeded to his property, and she, with Kline and Harvey, formed a new or third firm, under the old name, the third firm assuming the obligations of the preceding firms. Thereafter, it appearing that John McDonnell’s estate was insolvent, his real estate was sold to pay his debts, and under such sale his interest in the real estate used by the firm was sold to Edward McDonnell (who was not and never became a member of the firm), for twenty-five dollars. The firm continued business, paying up old debts and making new ones, etc., until Lucy McD. sold all her interest in the firm and property of the third firm to A. Clark, he assuming her share of the firm liabilities. Edward McD. at the same time sold Clark the real estate he had acquired as aforesaid, Clark agreeing to pay $20,500 for both Lucy and Edward’s interests. • He paid $10,500 cash, and gave Edward a mortgage for $10,000, This is the mortgage in question, and of which the defendant became owner by successive assignments. The conveyance of Edward and the mortgage are of an undivided one-third of the mill premises. The third firm was solvent when Clark bought Lucy McD’s interest. Clark now entered the firm in Lucy McD’s place, and the fourth firm of the same name was formed, it assuming the liabilities of the previous firms. There were no debts of the first firm now outstanding. Afterward, Harvey (one of the partners) sold his interest to the other partners, who formed the fifth firm, assumed to pay the debts of the preceding firms, also to pay Harvey, the retiring partner, a certain amount, to secure part of which they gave him a mortgage on the mill premises. This fifth firm continued in business about a year, when it failed and made a general assignment for the benefit of creditors. The assignees sold the mill premises and machinery to one Fales, subject to all liens and incumbrances. Fales had notice of ■tim $10,000 mortgage given to Edward McDonald by Clark. Fales and wife thereafter sold two-thirds of the premises and property purchased by

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him to the plaintiff, who had notice of the $10,000 mortgage, giving a mortgage. The defendant, McConihe. obtained a judgment in an action in the supreme court in which he was plaintiff, and this plaintiff and others defendants for the foreclosure of the $10,000 mortgage, and for the sale of the premises. Eeld, that the p'aintiff was not entitled to the relief sought; that the mortgage was a valid lien on the land and the buildings, etc.

U. -Same—Election oe ¡remedy—What amounts to.

The plaintiff, a creditor of the several firms, recited in his complaint that he had placed his demands in a judgment against the latest firm. Held, that having elected to proceed against the last firm, he could not now stand upon his old equities against the first firm.

Appeal by the plaintiff from so much of the judgment as denies the prayer of the plaintiff to adjudge that a certain mortgage upon an undivided third of certain real estate ■attaches as a lien only to the land, and not at all to the buildings and improvements made upon the land. The action was tried at the Montgomery circuit before the court without a jury.

The complaint alleged that the real estate and property was in equity the personal property of the late insolvent firm of McDonnell, Kline & Co., at the death of John McDonnell, one of the members of the firm, and also at the time the mortgage was given, and therefore was only upon the surplus after payment of the firm debts; that as the firm was insolvent there was no surplus, and therefore the mortgage attached upon nothing and the. surplus, after payment of admitted prior mortgages, should be paid to the plaintiff as the owner of the equity of redemption under purchase from the assignees of the insolvent successor firm, which had assumed the payment of the debts of the prior firm. The facts are sufficiently stated in the opinion.

E. F. Bullard, for pl’ff and app’lt; Orin Gambell, for def’ts and resp’ts.

When John McDonnell died, February 5, 1878, he was, and since 1863 had been, a member of the partnership firm of McDonnell, Kline & Co., consisting of McDonnell, Perry Kline and Thomas Harvey, manufacturers of knit goods. His death dissolved that firm. The firm had a large manufacturing establishment built upon real estate which had been purchased in parcels from time to time, the title to which stood in the individual names of the several members of the firm as tenants in common, except a small strip used for a right of way, the deed for which was taken' in the name of the firm. The erections upon the real estate and the machinery were made and obtained by the firm by means of the firm funds and credit. If this action were in behalf of the creditors of the firm, or of its surviving members, to enforce their demands against it, or claims to contribution, it might be important to ascertain whether the entire property should not be regarded as partnership property, if necessary so to treat it, to protect ■either creditors or surviving members. But on the 25th day

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of February, 1878, the administrators of John McDonnell made an inventory of the machinery, fixtures, shafting and stock in the mill, and estimated the one-third surplus overall liabilities at $443.66. The administrators, on the same-day, by an assignment under seal, in consideration of $4,440, sold the interest owned by the late John McDonnell in the firm, not including real estate, to one O’Brien, subject to-the payment of one-third of the debts and liabilities of the-firm. O’Brien, on the same day, transferred the same to Lucy McDonnell, the widow of John, and to their son, Willard, and the sum of $4,440 was then paid to the-administrators.

The court finds that the firm was solvent upon John McDonnell’s death. No account was then taken of the real estate and buildings, because they were incumbered by a. mortgage for $25,000 then, and still outstanding, and were not supposed to be worth any surplus. The indebtedness of the firm, independent of the mortgage, was then estimated, at $95681.72, and probably was larger.

Lucy and Willard McDonnell now entered into copartnership with the surviving members of the first firm, and formed a new or second firm, but with the name of the first firm, they agreeing to pay John McDonnell’s share of the old firm’s liabilities.

In November, 1878, Willard McDonnell died, and Lucy succeeded to his property, and she, with Kline and Harvey, formed a new or third firm, under the old name, the third, firm assuming the obligations of the preceding firms.

In October, 1879, it appearing that John McDonnell’s individual estate was insolvent, his real estate was, under the surrogate’s decree, sold to pay his debts, and, under such sale, his interest in the real estate used by the firm was sold, to Edward McDonnell for twenty-five dollars, and a conveyance given him. Edward never joined the firm. -

The firm continued doing business, paying up old debts, and making new ones and buying new machinery and makimprovements, until August, 1880, when Lucy McDonnell sold all her interest in the firm and property of the third firm to Augustus Clark, he assuming her share of the firm liabilities.

Edward McDonnell at the same time sold Clark the real estate he had acquired upon the surrogate’s sale. Clark agreed to pay $20,500 for both Lucy and Edward’s interests. He paid $10,500 cash and gave Edward a mortgage for $10,000. This is the mortgage now held by the defendant, McConihe, who became its owner through successive assignments. The conveyance by Edward and the mortgage are of an undivided one-third of the mill premises. The third firm was solvent when Clark bought Lucy McDonnell’s interest. This fact is found, but it rests upon the assumption that the buildings and improvements were partnership property. Clark now entered the firm in Lucy McDonnell’s

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place, and the fourth firm of the same name was now formed, it assuming the liabilities of the previous firms.

The court finds that there is no proof that any debts of the first firm were now outstanding. If any remained unpaid they had been renewed by the subsequent firms. The •fourth firm continued the business until January 31, 1882, when Harvey, one of the partners, sold his interest to the -other partners, Clark ana Kline, who, under this name, formed the fifth firm, assumed to pay the debts of the preceding firms, also to- pay Harvey, the retiring partner, $22,500, to secure $15,000 of which they gave him a mortgage, upon the mill premises.

This mortgage is now owned by the defendant, Julia, wife of the plaintiff. Whether the fourth firm was solvent when it was succeeded by the fifth, the court does not find. Clark & Kline, the fifth firm, continued the business until December, 1883, when being insolvent, they made a general assignment to Hinman & Crane, for the benefit of their creditors, making preferences. These assignees sold the mill premises and machinery to Francis A. Fales, subject to all liens and incumbrances for $35,000. Fales had notice -of the $10,000 mortgage given to Edward McDonnell by Clark, now held by McConihe. Fales and wife then sold two-thirds of the premises and property purchased by him to the plaintiff, who also had notice of the $10,000 mortgage. Fales sold the remaining one-third to one Bicknell, and Bicknell and plaintiff gave Fales a mortgage for $43,143.

The defendant, McConihe, obtained judgment in an action in the supreme court, in which he was plaintiff, and this plaintiff and others, defendants, for the foreclosure of the $10,000 mortgage given to Edward McDonnell by Clark, and for the sale of the premises.

This action is brought by the plaintiff for a partition by sale of the premises. The issue in the case presented by this appeal, respects the validity and priority of the $10,000 mortgage. The plaintiff prays that it be declared to be a lien only upon the naked real estate in its order of priority, but not at all upon any of the improvements upon the property; that an account of these improvements be taken and their value be paid upon the other incumbrances and the balance to the plaintiff. The effect of such a judgment would be that nothing would be applicable to the $10,000 mortgage. The judgment appealed from denied this re lief, and established the validity of this mortgage.

We think the judgment should be affirmed.

The very question whether this mortgage was a valid and subsisting lien upon the premises described in it, was tried and determined in the action brought to foreclose the

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mortgage by the defendant McConihe against Fales and this plaintiff. It was there determined that as between the parties to that action it was a valid lien to some extent. That issue cannot be again litigated between the same parties in this action. McConihe v. Fales, 107 N. Y., 404 ; 12 N. Y. State Rep., 279. Consaulus, the plaintiff here and the defendant there, tendered to McConihe, the owner of the mortgage, .certain issues respecting the extent of the property covered by the mortgage.. One of those issues-was whether the machinery and fixtures in the mills were covered by the mortgage, and the decision was they were.. Another issue was whether the real estate itselr, including all the improvements upon it, was not partnership property subject to the partnership debts of the first firm, it being insolvent, and was therefore purchased by Edward McDonnell, and sold by him to Clark and by Clark mortgaged to-McDonnell, subject to the lien of the creditors of the firm, which debts having been assumed and renewed by the succeeding firms were still liens upon the property prior to the mortgage to an extent that left no surplus to which the lien of the mortgage could attach. That issue was decided against this plaintiff.

That case was tried before a referee. Had the referee decided against this plaintiff in the former action upon the ground that in such an action the issue tendered by him could not be tried, then this plaintiff could now urge that he did not there have his day in court, and therefore was not precluded from having it here. Helck v. Reinheimer 105 N. Y., 470 ; 14 N. Y. State Rep., 465. But he did then have it, and the referee found fully upon the issues and upon the requests he presented. It is true that when the case was reviewed upon the appeal, the court of appeals said, among other things in their opinion, that Fales, the purchaser, being in the undisturbed possession of the premises, which he purchased subject to all incumbrances, could not resist upon the ground of failure of title, the foreclosure of a mortgage given by his grantor to secure the payment of the purchase-money for that title (McConihe v. Fales,. supra); that the title which supports a possession is presumed valid so long as the possession under it is undisturbed; that the court, in such a case, will not inquire what extent of interest the mortgagee actually acquired by his mortgage. But the court goes further and holds that upon the facts found by the referee, which, it says, the evidence amply supports, Clark, by his deed from Edward McDonnell, acquired all the property bargained for, and the precise consideration of this mortgage; that Edward McDonnell had the legal title to the estate he sold to Clark; that if there were any existing equities which could defeat that title, or narrow its extent, there was not any evidence that they

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ever would; that even if the assignees of Clark and Kline could have questioned the lien of this mortgage, they did not attempt to do it; they did not reserve the right to do it, nor transfer it to Fales, but impliedly made the title of Fales depend upon the payment of this mortgage. Consaulus, this plaintiff, as the grantee of Fales, stands in his shoes.

We do not discover any material issue in this case which this appeal brings up for review which did not exist in the foreclosure case. It is true this plaintiff, in his complaint, alleges that he sold each of the five firms, wool upon credit, but he does not allege any existing indebtedness of the first firm to him nor of any firm except the last. The referee finds that the debts of the first firm were paid. The theory of his action appears to be, that having taken title under the assignees of Clark and Kline, he succeeds to their rights as trustees to enforce the equities of partners and creditors among themselves and against each other, and because by possibility such equities, if adjusted,, would override the McDonnell mortgage; therefore it should be overridden and displaced, not for their benefit, but solely for his own. The decision in 107 N. Y., 404 , is fatal to such a contention. Whatever right the plaintiff might have as a creditor of Clark and Kline he would have to obtain through their assignees. Crouse v. Frothingham, 97 N. Y., 105 . He has not made them parties. If it were true, therefore, that the improvements upon the real estate were partnership property purchased by Clark, of Lucy McDonnell, and the real estate were only the naked one-third of the land purchased by Clark of Edward McDonnell, the plaintiff, in order to-draw that line of distinction between the two properties, would need to do it through the assignees for the benefit of the creditors at large. Clark, as the owner of both the land and the improvements thereon, gave a mortgage which covered both so far as, between mortgagor and mortgagee, the improvements formed part of the real estate, and this plaintiff purchased the real estate subject to this mortgage; he stands in the same position as any other purchaser purchasing upon like conditions. For aught we6 know, this mortgage reduced the consideration he paid for the property. At any rate, he has no title to the sole benefit of the equities due to the creditors at large, and as this action is an unwarranted attempt to appropriate to himself the sole benefit of them, it must fail.

It is not improbable that if an exact account could be taken of the condition of these successive firms at the time of their successive dissolution, it would be found that they were insolvent, and that Edward McDonnell, when he purchased the interest of John McDonnell’s estate in the partnership real estate, really purchased only a legal title, subject to be wholly defeated in equity, if the affairs of the first firm had been wound up, and hence that the mortgage he took back from Clark was liable to be wholly defeated. It is also

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probable that the debts of the first firm were not paid from the assets of that firm, but were renewed and transferred in the course of business by the successive firms, the aggregate never diminishing, but always increasing; but it is nevertheless true that all the debts of that firm were retired to the satisfaction of its creditors.

The successive firms therefore did not have a scintilla of equity to keep on foot against the first firm, whatever of its obligations it assumed over and above the means it received from it to pay them with, for they were bound by their agreement to pay the debts of the old firm in consideration of obtaining its assets, and whether such a bargain was good or bad, they could not escape its hardships. Nor does any equity survive to the creditor of the first firm. Equity follows the law. The first firm we may assume was indebted to this plaintiff for wool. When the second firm succeeded the first, the plaintiff sold it more wool, and the second firm with the proceeds of this second installment of wool, paid him what the first firm owed him; or we may assume he took the paper of the second firm for the debt of the first. However it was arranged, he was content to substitute a new creditor, or a new credit for the old, and to repeat such transactions with the successive firms. The first firm had been dissolved more than seven years before this action was commenced. No legal representative of any member of that firm, or of any of the firms, is a party to this action. The provision made by the first and successive firms for the payment of debts is, so far as we know, a provision accepted and ratified by the creditors, including this plaintiff. That provision may have been adequate or not; it may have failed through the misfortunes of the last firm after complete ratification and acceptance by the creditors -of the provisions in their favor.

Be this as it may, the burden would rest upon the creditor, if this were a proper action in which to do it, to show that he still has an equity, and that, although he accepted his legal remedy against each firm, he did not thereby waive his equity against any of them. It is not only shown that he accepted a new creditor for the old, that he delayed pursuing his remedy against him until it became impaired, but "that new rights intervened and this mortgage was placed on the market, and new parties sunk their fortunes in trying to provide for the old debts, under the belief which his acceptance of the new creditors induced, that the real estate purchased of Edward McDonnell was -free from old equities and worth the obligations assumed in consideration of its purchase. Clearly this plaintiff, as creditor, must stand upon his old equity against the first firm, or upon the new obligations of subsequent firms, given upon the faith that because the new obligation is pledged the old equity is superseded. But this plaintiff recites in his complaint that he has placed his demands in a judgment against the latest

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firm. The remedies are inconsistent, for if the equity survives, the consideration upon which the judgment rests fails.

We do not overlook the fact that Lucy McDonnell, in succeeding to the interest of John McDonnell in the first firm, was properly understood to succeed to all the interest in the improvements upon the real estate which the firm property or credit created. That Edward McDonnell, in purchasing the real estate interest for twenty-five dollars, was supposed to be purchasing a naked title which embraced little or no actual value. These interests stood separate until Clark bought them both. They might well have been a source of ■disquietude to the other members of the firm and to its ■creditors.

But upon such purchase they were merged in one owner, subject to this mortgage of $10,000. Clark did not purchase without inquiry. His purchase apparently placed the ■creditors and members of the new firm, of which he was a member, in an improved condition. The disquieting condition was removed.

All the property was now merged in the firm. Whether "that was a good transaction or not is not material; it was competently made and it brought to the creditors new security, and imposed upon Clark new burdens, to their .apparent benefit. The plaintiff, with his judgment against Clark and Kline, has adopted whatever benefit can accrue to him from his judgment against them. Can we have a judgment which binds the individual estate of Clark, upon the debt of a firm of which Clark was not a member, and repudiate the transaction by which Clark became surety for that debt ? We think not.

The judgment shonld be affirmed, with costs.

Learned, P. J., and Ingalls, J., concur.