Chadwick v. Burrows — 5 N.Y. St. Rep. 185

Majority

p. 185

John Chadwick, Appl’t. v. Decimus R. Burrows, and John E. Potts, Resp’t.

(Supreme Court, General Term, Fifth Department,

Filed October, 1886).

Headnote

1. PARTNERSHIP — SALE OP PARTNERSHIP PROPERTY BY SURVIVING PARTNER.

The surviving partner of a firm has power to sell the partnership property and apply the avails to the debts of the firm.

2. Same — Assignment for the benefit op creditors.

Where the surviving partner of a firm sold the firm property and the vendee “ agreed to pay each of the creditors of the said firm of B. and L. forty per cent of the indebtedness of each creditor, in full of such debt,” there being no reservation in the property or proceeds to enure to the benefit of the debtor firm in any event other than that derived from the payment. It was held, that if an assignment had been made in trust for creditors, and it had required them to satisfy their claims as a condition of receiving stated sums less than the full amount of their debts, the instrument would have been fraudulent and void as against any creditors, who had not consented to such a disposition of the property. Held, that such an agreement, as far as it applied to those creditors who had consented, was valid. Held, that this agreement gave a creditor the right to the stipulated rate to apply on his claim, without any undertaking on his part to discharge the residue of his demand.

Appeal from judgment entered on decision of Niagara special term, dismissing the complaint on the merits.

Decimiis R. Burrows and Calvin G. Lane were partners, carrying on the lumbering business at Tonawanda, N. Y., in the firm name of Burrows and Lane.

The firm became insolvent, and Lane absconded. A meeting of the creditors of the firm was called; they met, examined its property and ascertained the amount of the liabilities of the firm; and all the creditors except the plaintiff, joined in an arrangement that the defendant Potts should take the property and pay the creditors forty per cent, of their claims.

Thereupon Burrows in the name of the firm sold and transferred all its property to Potts, in consideration that he take it and pay the creditors forty per cent, of the amount of their debts and satisfy the liability of the firm to him of $18,000.

In performance of the agreement Potts made such payments to all the firm creditors except the plaintiff. And the court found that the latter had declined to receive such payment. The plaintiff proceeded to judgment on his claim. And execution thereon having been returned unsatisfied, he, by this action, charges that such sale and the sales of .other property by Burrows individually to Potts were fraudulent as against creditors. Also that the defendant Potts has other property, etc., in his hands, belonging to the firm, etc. Lane and George W. Sherman, were named as defendants.

The former was not served, and both he and Sherman after-wards died. And the action proceeded against the appellants only.

p. 186

A K. Potter, for appl’t; Creo. Wing, for resp’ts.

The action is in the nature of a creidtor’s bill, to set aside the sales made by the firm of Burrows and Lane, and by Burrows to the defendant Potts, upon the charge that they were fraudulent as against the plaintiff, a creditor of the firm. The trial court found and determined that the allegations of fraud were not supported, and dismissed the complaint. The value of the. property of the firm transferred to Potts is not, nor is the amount of its liabilities found by the court. The evidence on those subjects was mainly that of the plaintiff, and in view of his relation to the action, it did not conclusively establish the facts to which he testified. The court was not requested to find on those propositions of fact; and inasmuch as no finding was made in those respects, no question of the comparative amount in value of the property, and of the liabilities of the firm is presented on this review to the prejudice of the result given by the decision of the trial court. The inquiry therefore arises whether the legal effect of the sale of the firm property to Potts in view of the purpose and consideration, was such as to charge the parties to it with the intent to hinder and delay the plaintiff in the collection of his debt, and thus render it fraudulent as against him. The one member of the firm had the right to sell the partnership property, and apply the avails on the debts of the firm. Mabbett v. White, 12 N. Y., 442 ; Grasser v. Stellwagen, 25 N. Y., 315 . The sale to Potts was absolute in terms. There was no reservation in the property or proceeds to enure to the benefit of the debtor firm in any event, other than that derived from the payment by Potts upon its debts in performance of the consideration of the sale to him, unless an advantage may be found to have been reserved in the fact as found by the court that Potts “ agreed to pay each of the creditors of the said firm of Burrows and Lane forty per cent, of the indebtedness of each creditor in full of such debt.” If an assignment had been made to him in trust for the creditors, and it had required them to satisfy their claims as a condition of receiving respectively stated sums less than the full amount of their debts, the instrument would have been fraudulent and void as against any creditors who had not consented to such a disposition of property. Hyslop v. Clarke, 14 John, 458 ; Grover v. Wakeman, 11 Wendell, 187; Armstrong v. Byrne, 1 Edw., 79 ; Spaulding v. Strang, 37 N. Y., 139 .

The validity of an assignment in trust for the benefit of creditors requires that the assignor part with all control over the property assigned, and that it be unqualifiedly devoted to the payment of his debts, without, any reservation for his own advantage. This is the condition on which he is permitted to withdraw it from the ordinary process of the law. Although the

p. 187

sale bere was m terms absolute, it was made under an arrangement that the vendee should apply the purchase price upon the debts of the vendors. And if such application was by the agreement, without the consent of the creditors, made to depend upon the condition that the creditors should discharge the entire debts due them on receipt of the prescribed rate of forty per cent., their respective amounts, it would seem to be a stipulation for the advantage of the vendor in the agreement of sale, which might not legally be sanctioned. The debtor firm was at liberty to sell Its property for an adequate consideration, and direct the payment of the purchase money on a portion only of the debts, and in that manner give a preference to creditors. The consideration to be paid for the property here was the amount of the particular percentage of all the debts, to be paid by the purchaser to the creditors. So far the agreement was vabYL

And so far as the agreement to pay that amount in full satisfaction of the debí-¡ applied to those creditors who had consented to such arrangement, it was also valid. In view of the circumstances, a fair construction of the agreement makes it in that respect applicable only to those creditors who, by their consent, adopted it. It certainly could not affect or apply to others.

This arrangement was brought about at a meeting of nearly all of the creditors, and made pursuant to their request. They were willing to take fortyper cent, in satisfaction of their claims. It was in view of the arrangement by and with them, that the sale and purchase were made. And Burrows was probably induced to make the transfer by reason of the understanding thus made with such creditors so far as they could do it, that the firm property should go in satisfaction of. the partnership liabilities.

The title passed to Potts and he assumed the obligation to pay for it, by paying to all the creditors pro rate, a sum equal to such percentage of'their debts against the firm.

This would seem to give to the plaintiff the right to the stipulated rate to apply on his claim without any undertaking on his part to discharge the residue of his demand. The expeoi-2-tUiu_ (if it existed) of Burrows, that the discharge of all the debts could be produced by such payments, and" the arrangement in that respect in the agreement of sale could not affect the liability of Potts to make the payments which he undertook to. make.

The evidence tends to prove that the creditors, ur some of them, who received such amounts^-assigned their claims to Potts. This evidently "«¡ngBsLoRe tircarry out such arrangments to discharge the debisr“'*The defendant Potts was nota trustee, and the payments required of him were not made in the execu-

p. 188

. tion oí a power, but in the performance of an original obligation to pay his own debt created by his purchase. This liability of Potts was property within the reach of the several creditors .to the extent of their rights respectively to appropriate it to the payment of their claims. And is distinguished from a power arising out of a trust in its legal effect as against the creditors of the vendor if free from fraud in fact. The finding of the trial court that the sale and purchase of the firm property and the conveyance by Burrows to Potts of the Canada property, and his' interests in the house and lot at Tonawanda, were without any intent to hinder, delay, or defraud the creditors of the firm, seems to be supported.

The view thus taken here leads to the conclusion that the disposition made of the case in that respect at special term' was not- error. But the rights of the plaintiff may properly be settled by the judgment in this action, and they should be, in view of the difficulty which may otherwise arise elsewhere, so as to declare his right to the pro rata sum of the proceeds of the sale of the firm property by way of the abatement to that extent of the amount of his claim. The matter of the construction before mentioned as to him, of the agreement of purchase and for the payment to the creditors, may not be so clear as to obviate discussion, but his right as a creditor to that portion of the purchase money (as it remains unpaid) whether pursuant to the agreement to pay him forty per cent, or as a fund arising out of liability to pay for firm property purchased, seems clear.

The complaint contains allegations which would have permitted the special term to treat the case as within the statute providing for creditors’ actions not resting in fraudulent disposition of property, as well as the common law creditors’ actions founded upon'the latter. And the court may have given such relief. Code Civ. Pro., § 1871. This has taken the place of 2 R. S. 173, § 38. And ii; is very likely that this relief would have been given if the attention of the court had been specifically called to it, which the jecovd does not show was in any manner done.

The judgment should be so modified as to direct the payment Jpp-ifcé defendant Potts, to the plaintiff of the portion of the purchase price of the firm property which he undertook to pay on account of the debt due to the plaintiff, that is to say, forty per cent of such debt to be applied in abatement thereof to the extent only of such payment. And as so modified, affirmed without costs to any party.

Smith, P.J. Barker and Haight, JJ., Concur.