Bell v. Skellen — 47 N.Y. St. Rep. 807

Majority

p. 807

James C. Bell, Resp’t, v. George W. Skellen et al., Ex’rs, Impl’d, App’lts.^[1]

(Court of Appeals, Second Division,

Filed October 1, 1892.)

Headnote

2. Mortgage—Foreclosure.

H. & C. were partners under an agreement by which in ease of' the-' death of either the business was to be continued until the expiration of five years, the estate to share in the profits and losses. C. died and appointed defendants Skellen and Colwell his executors. H. carried on the-business, and to secure plaintiff for the purchase price of real estate contracted for by the firm during C.’s life gave him a purchase money mortgage thereon, paying the balance of the price out of partnership fu ds. The mortgage in suit was given with the written consent of the executors-for money borrowed by H. of plaintiff to be used in the business, H. at. the same time giving a mortgage upon his individual property for the same debt, and three years later made a ge eral assignment. ■' eld. that H. held_ the title to the real estate as survivor, and had the power to mortgage it in aid of the proper business of the survivorship, and that the. mortgage as between the plaintiff, who loaned his money on it, and C.’s estate, whose representatives approved the loan, was valid and binding according to its terms, and not subject to any defense based upon a repudiation of the consent expressly written upon it by such representatives.

2. Same.

That equity required that the debt thus contracted should be satisfied from the mortgaged property of the firm before a recourse be had to the individual property of H., also at the same time mortgaged for the same debt.

Appeal from a judgment of the general term of the second department, affirming a judgment of foreclosure and sale, entered upon the decision of 'the court upon the trial at the Westchester special term.

The action was to foreclose a mortgage made to the plaintiff by the defendant Samuel S. Hepworth, as survivor of the firm of S. S. Hepworth & Co., June 26, 1884, to secure the payment of $23,000 and interest. Joseph Colwell in his lifetime and Samuel S. Hepworth were co-partners in business under the name of S.. S. Hepworth & Co., in the manufacture and sale of certain machinery, at first under articles of agreement made February 22„

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1878, which provided that the partnership should continue for five years from January 1, 1877, and containing the provision that “ should either partner die during the term of said co-partnership," the firm shall not be deemed dissolved thereupon, but the wife and children of the decedent shall immediately succeed to his interest, which thenceforward shall be prosecuted for the-remainder of the term for the benefit of them and the surviving partner. Either partner may designate by will what interest his wife and children, as between themselves, shall have in his said .co-partnership interest in the event of his death as aforesaid.”

On the 18th of October, 1881, and before the expiration of the five years, the parties made a further agreement that the co-part-, nership should continue until dissolved by mutual consent, or terminated by six months notice in writing by one party to the other, and that “ in the event of the death of either, the business shall be continued by the survivor until the expiration of five years from the first day of February next'succeeding such death, the estate of the deceased partner to have the same share and interest in the profits, and to bear the same share of the losses of the business as would have been received and borne by the deceased partner had he lived.”

. The firm business was thereafter continued under these agreements until June 1,1882, when Colwell died leaving children, and .a will made subsequent to the last mentioned agreement. He appointed these appellants and one Robinson executors and trustees, and gave them, in trust for his children, the greater part of his estate. The will made no reference to the firm business, but gave his executors power to continue any existing investments and revoked all former wills. After Colwell made his will, the partners made a contract with the plaintiff to purchase from him the premises covered by the mortgage in question.

After Colwell’s death, Hepworth as survivor continued the partnership business. Colwell’s executors did not participate in carrying it on, nor did Colwell’s children. The plaintiff gave the deed of the premises in question Hovember 80, 1882, after Col-well’s death, to “ Samuel S. Hepworth, survivor of the firm of S. S. Hepworth & Co." The consideration was $18,000, $15,000 of which was secured by a purchase money mortgage to the plaintiff, made by “ Samuel S. Hepworth survivor, of the firm of S. S. Hep-worth & Co.,” and the balance was paid by said Hepworth out of the funds of the partnership estate. The mortgage in suit was given about two years later for money borrowed by Hepworth of the plaintiff to be used in the business still carried on by him under the name of S. S. Hepworth & Co., and the money was used in said business.

Hepworth continued to carry on the business as survivor until October 4, 1887, when he made a general assignment both individually, and as survivor, for the benefit of both his individual .and the firm creditors.

. At the timé of Colwell’s death the value of his interest in the firm property and business was $50,000.

The plaintiff at the time of talcing the mortgage in suit was

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acquainted with the facts. Colwell’s executors and trustees did not object to Hepworth’s carrying on the firm business as survivor. September 30, 1884, they loaned him of the astets of Colwell’s estate $35,000 to be used in the business of S. S. Hepworth & Co., and took from him individually and as survivor a mortgage upon the premises in question as security fór the payment thereof. The defendants and Bobinson as executors and trustees were parties to the mortgage now sought to be foreclosed, not, however, to the obligations thereof, but for the purposes expressed in the following recital contained therein: “And, whereas, the business of the said copartnership has, since the decease of said Joseph Colwell, been continued and is now continued by the said Samuel S. Hepworth, as survivor as aforesaid, who alone is charged with the conduct and management thereof. And, whereas, it has become necessary in conducting, managing and continuing the said business to the best advantage as well to the said Samuel S. Hepworth as to the interest of the estate of the said Joseph Colwell that the real estate and. property of the said firm, hereinafter particularly described, should be mortgaged for the purpose of securing the payment of the loan hereinafter particularly referred to. And, whereas, the said George ‘ H. Bobinson, George W. Skellen and Frank W. Colwell, executors and trustees as aforesaid, as parties of the second part, have consented and do hereby consent to the loan hereinafter particularly referred to, made by the party of the third part hereto, and have consented and do hereby consent to the mortgaging of the real estate and » the property of the said firm hereinafter particularly described for' the purpose of securing to said party of the third part the sum or sums hereinafter mentioned, and at the times and in the manner hereinafter mentioned and described, and have stated and declared and do herein and hereby state and declare that the moneys secured by these presents are for the uses and benefit of the business of said firm, as aforesaid; and that the said Samuel S. Hep- • worth, as survivor as aforesaid, is alone fully authorized and empowered to make, execute and deliver this instrument securing the loan herein mentioned and binding the property herein described with its payment, to all intents and purposes, as herein provided.”

The defendant Hepworth at the time of giving the mortgage in suit also gave a mortgage to the plaintiff for the same debt upon certain of his individual real estate.

The appellants insisted that the mortgage in suit was the individual debt of Hepworth, and that the mortgage given by him upon his individual estate should first be foreplosed and the proceeds applied upon the debt Also that the mortgage in suit was subject to the lien of $50,000, which the trial court found was the value of Colwell’s interest in the partnership at the time of his death.

The trial court refused so to hold, and directed the usual judgment of foreclosure and sale. The general term affirmed the judgment entered upon the decision of the trial court.

Wm. B. Ellison, for app’lts; Wm. Allen Butler, for resp’t.

—In Stewart v. Robinson, 115 N.Y., 328 ; 26 St. Rep. 117 , an action in which was involved the effect of the partnership agreements between Colwell and Hep worth upon the right of Hep-worth to continue as survivor the partnership business after the death of Colwell, and upon the liability of the assets of his estate outside of the firm business to be charged with the debts created . by the survivor after Colwell’s death, this court passed upon several questions material to the decision of the present appeal. It was held in that case that the partnership ended with the death of "Colwell; that Hep worth, as survivor, could not thereafter bind •Colwell’s estate outside of his interest in the assets of the late firm; that the will of Colwell did not by its terms authorize his executors and trustees to embark in the partnership business with Hep-worth, and they had not done so, and therefore no new partnership was created; that whether the agreement between Colwell and Hepworth for the continuance of the business of the firm for five years after the death of either partner, was or was not binding upon the estate of Colwell, if the estate had chosen to resist it at the outset, it was not unlawful for the executors and trustees to acquiesce in it, and await for five years the winding up of its affairs ; that in such case only the capital and property which the deceased partner had put into the firm business could be compulsorily continued in it' after his death ; that the survivor, from the moment of Colwell’s death, became'the sole and absolute owner of the assets of the late film, and was charged with the duty of winding up the firm estate, and doing all the acts relating to it, and thereupon accounting to Colwell’s estate for its proper share of the net proceeds. The court then said: “ The estate of Colwell had a pecuniary interest in the winding up of the concern, and so that period did not exceed the limitation of five years from their testator’s death, they (the executors and trustees) were not required to: interfere. They might do what they could to promote its sue-, cessful business.”

Mothing appears in the present case tending to impeach the soundness of these conclusions. It follows that the acts of Hep-worth, as survivor in continuance of the firm business after the death of Colwell, done with the consent of the executors and trustees with the view to promote the success of the business, were not unlawful, and that the mortgage in question being one of such acts of the survivor, executed for the purpose and with the consent mentioned, was, as between the plaintiff, who loaned his money upon it, and Colwell’s estate, whose representatives ap- . proved it, valid and binding according to its terms, and not subject to any defense based upon a repudiation of the consent expressly written in it by such representatives.

As between the parties to the mortgage it was the act of the survivor of the firm holding the title to the property and charged with the administration of the business and assets of the late firm, and therefore binding the mortgaged property, and that any lien of Colwell’s estate upon the firm property was thereby postponed to the lien of the mortgage. Hoyt v. Sprague, 103 U. S., 613 . Equity requires that the debt thus contracted should be satisfied

p. 811

from the mortgaged property before recourse be had to the individual property of Hepworth, also at the same time mortgaged for the same debt.

The discussion would rest here except that we think it proper to notice some of the positions taken by the appellants. They assail the validity of the provision of the partnership agreement between Colwell and Hepworth which authorized the surviving partner to continue the partnership business for five years after the death of either partner. They claim that this is in effect a testamentary provision without the statutory formalities of execution, and if that objection is invalid, that its effect is to suspend unlawfully the alienability and absolute ownership of personal property of the estate continued for five years in the business of the survivor. The general question thus presented is an open one in this court. National Bk. of Newburgh v. Bigler, 83 N. Y., 51 .

It may, however, be remarked with respect to this partnership agreement that, if valid, its effect would be, as held in Stewart's case, to leave in the partnership business for five years the amount which Colwell had in it at the time of his death. That would practically be a loan of that amount to the survivor for five years, subject to the gain or loss of the business. The survivor would be the sole owner and manager of the business and property, and Colwell’s estate would not, beyond the amount thus continued in the business, be liable for new debts. Thus the estate would have an investment in the business, and as in the case of other investments having five years in which to mature, the executors could sell or otherwise dispose of it in the course of due administration whenever opportunity offered. The value of the asset, but not its disposability, would be affected by the conditions of its investment

But the case does not require us to hold that the contract for the continuance of the partnership business was valid. It was not necessary in Stewart’s case, and is not necessary now. The court in Stewart's case assumed that a provision for the continuance of the partnership business, if made in the will of the deceased partner, would be valid, and held that if the like provision in the contract of partnership was also valid, its terms must necessarily be construed as strictly as in case of a will, and the court ascertained the measure of that strictness of construction with respect to a will, and applied the same measure to this contract, and thus found that if the contract were valid, its terms did not give creditors in respect of debts .incurred by the survivor after Colwell’s death any recourse against his estate other than the part thereof continued in the firm business, and gave them none against the executors and trustees, for they were not partners in any new firm.

But the court was clear in its expression that although the executors and trustees might not have been bound by the contract, and might have taken instant steps to compel Hepworth, as survivor, to wind up the partnership business, they were not bound to do so.

p. 812

This was said in respect of the rights of general creditors who became such -after the death of Colwell, and with the view of ■showing why their recourse was limited to the firm property, and that acquired by the survivor. It was' based upon the assumption that the continuance of the business was lawful as to those interested in it either as lienors or actors so long as they assented to it.

While the strict duty of the survivor is to wind up the firm business and not to continue it any further than is necessary for that purpose, it is obvious that the continuance is not unlawful as to those who consent to it. It may be beneficial to all parties in interest that it should be continued. But of course there are hazards, and the most hopeful prospect of gain may result in loss. In the present case, the survivor apparently had the right to continue the business under the firm articles. The executors and trustees apparently thought so.' They were vested by the will with the title to the lien of the estate upon the firm business and property. They were authorized by the will to retain, without change, the testator’s investments as they existed at his death. They knew that the business had been prosperous. They were not simply executors charged with administering Colwell’s estate, but were trustees holding title to.the lien upon the film assets, and were acting with the view of increasing its value. They were not limited by the restrictions imposed upon executors, Schmittler v. Simon, 101 N. Y., 554 , but they had the larger powers of owners of the lien. For their own personal protection, they needed to act with prudence and discretion, and the facts just referred to would be pertinent to the consideration of that question, but as between themselves and the other parties to the mortgage they had the legal right as trustees and owners of the lien upon the firm assets to give or withhold their consent to the mortgage. Hepworth held the title to the real estate as survivor, and had the power to mortgage it in aid of the proper business of the survivorship. Williams v. Whedon, 109 N. Y., 333 ; 15 St. Rep., 265 ; Durant v. Pierson, 124 N. Y., 444 ; 36 St. Rep., 463 . Whether the continuance of the business for a time before winding it up was a proper business was, so far as the plaintiff’s rights were involved, to be determined by the survivor and the -trustees. By executing the mortgage they determined it in plaintiff’s favor, and as between Hepworth and Colwell’s estate they determined it in favor of Hepworth.

The effect of the transaction was that the mortgage became a lien upon the mortgaged property in preference to the lien of Col-well’s estate, and to the extent of the moneys to be realized upon it in exoneration of Hepworth’s individual property.

The judgment shotild be affirmed, with costs.

All concur.