Farley, Spear & Co. v. Moog , 79 Ala. 148 ( 1885 )

SOMERTILLE, J.

Upon the dissolution of a partnership, the assets of the firm pass to the surviving partner, the legal title and possession becoming vested in him. For many purposes he is, at law, the legal owner of such property, with power to sell or transfer it ad, libitum. But, in equity, he occupies the relation of quasi trustee, towards both the personal representative of the deceased partner and the creditors of the partnership. It is said by Mr. Parsons, that “surviving partners are held strictly as trustees, and their conduct in discharging their trust is carefully looked after by courts of equity.”—Parsons on Partnership, 442; Davis v. Sowell & Co., 77 Ala. 262. Other authorities regard them as trustees in a more modified sense. This trust originates from the duty imposed on them by law, which is to appropriate the partnership projrer’ty to the payment of the partnership debts, and to wind up the business of the concern with due diligence and good faith. His powers are accordingly commensurate with this duty, and,-so long as he continues faithful to his trust, his exclusive right of possession and management will not be interfered with by the court, but will be protected. But, if he be unfaithful to his trust, or be guilty of any negligence, waste, misconduct, mismanagement, or other wrong, prejudicial to the right of any party interested, a court of equity will often intervene to afford relief. The circumstances under which this will be dono can not be stated with greater certainty by any general rule, which is applicable to all cases.—Parsons on Partnership (3d Ed.), *440, *446; 3 Kent’s Com. (12th Ed.) *64; Case v. Aberly, 1 Paige, 398.

In this State, the principle prevails, in accordance with the general weight of authority, that, where the interest of one partner in partnership property is levied on and sold under attachment or execution, based on the individual debt of such partner, the sale can be made only subject to the equitable lien of the firm debts and liabilities; and the purchaser acquires nothing more than what remains of the individual partner’s interest, after a settlement of the partnership affairs, and the payment of the debts of the concern out of its assets thus subjected to sale. In other words, the effects of a partnership can not be taken by attachment or execution to satisfy a creditor of one of the partner’s, except to the extent of his interest in the effects after settlement of the partnership debts. He thus purchases a mere right in equity to call for an account, and thus to entitle himself to the interest of the partner in the property which may be ascertained to exist upon a settlement — which may be something or nothing.—Warren v. Taylor, 60 Ala. 218; Andrews v. Keith, 34 Ala. 722; Daniels v. Owens, 70 Ala. 297; Parsons on Partnership (3d Ed.), *350, *351; Collyer on Part. (Wood’s Ed. 6th), 187, note; 2 Story’s Equity Jur. § 677.

The creditors of a partnership, as such, can not be said, ordinarily, to have any lien upon the partnership assets for the payment of their claims against the firm. Such a lien or equity, strictly speaking, exists only in favor of the partners themselves, or their personal representatives; and they alone can assert it, as a general rule. Yet there are circumstances, under which, according to the better view, a court of equity will aid partnership creditors in asserting a priority of payment out of partnership property, in preference to individual creditors, even though the latter may have acquired a lien by attachment, or otherwise, as in this case, on the interest of one of the partners. This right of creditors to a quasi lien, when it exists, it is true, can be worked out only through the partners themselves, being derivative, and in the nature of a right by subrogation. It is commonly held, for this reason, to be lost, whenever the partners themselves part with their interests in the partnership effects, by making a bona fide sale of them for a valuable consideration, or, as is sometimes said, “ a sale bona y?rfeand upon a full and fair consideration.”—Mayer v. Clark, 40 Ala. 259; Story on Partnership (7th Ed.) § 360, note 3.

The creditors may, in our opinion, avail themselves of this quasi lien, in cases where there has been a dissolution of the firm by death of one of its members, and the insolvency of the surviving partner has supervened. We need not carry the principle farther than this at present, as the necessities of the case do not require it, although the authorities, perhaps, go even further. Mr. Story argues it to exist in cases where there is a dissolution by either the death or bankruptcy of one partner. “In case of a dissolution,” he says, “each partner holds the joint property, clothed with a trust to apply it to the payment of the joint debts, and subject thereto to be distributed among the partners according to their respective shares therein ;” and he adds, that “ it is only in cases where there is a dissolution by the death or bankruptcy of one partner, that the right of the joint creditors can attach, as a quasi lien, upon the partnership effects, as a derivative subordinate right, under and through the lien and equity of the partners.”—Story on Partnership (7th Ed.), §§ 360, 361. In Pearson v. Keedy (6 B. Monroe, 128; s. c., 43 Amer. Dec. 160), it is said: “The creditor of the firm has no such lien in himself, but only a derivative equity based upon the rights of the partners themselves, in virtue of which he may, in case of the death of one of the partners, and the insolvency of the survivor, be substituted to the rights of the deceased, or his represenatives, to have the partnership effects appropriated to the partnership debts. But this right of substitution is based on necessity arising from the insolvency of the survivor, and the consequent insufficiency of the legal remedy.” Mr. Parsons also recognizes tire existence of such an equity upon the supervening dissolution and insolvency of a partnership, and asserts that, while it may not be created by this status of the firm, it is brought into prominence, and the courts of equity often recognize and enforce such a preference. “If the private creditor,” he observes, “ levies on the joint property, and, on an account being taken to find the amount covered by the levy — viz., the debtor’s share — if it appear that there is enough to satisfy both the joint and separate creditors, the former can not be said to be preferred. If there is not enough to satisfy both, then there is an insolvency, and the joint creditors are preferred. So, in the case of marshalling assets.” . “This, therefore,” he adds, “ seems to be the sense in w;hich the numerous cases are to be taken which admit the equitable lien only in case of insolvency.” — Parsons on Part. (3d Ed.), 375, 378 (*346, *349), and note (g) on page 375. The doctrine, that firm assets must first be applied to the payment of the firm debts, has been said to be “ a principle of administration,” adopted by the courts where they are called on to intervene in winding up the partnership business ; and it is applied where no valid charge upon, or disposition of the assets, has been created or made by the firm.—Schidlapp v. Currie (55 Miss. 597); s. c., 30 Amer. Rep. 530. It can not, therefore, be said to rise to the dignity of a strict lien, in the full sense of the word. It is an eqitity of preference or privity closely approximating a lien, based upon obvious principles of justice; and is a fit correlative of the other principle, now settled in this and some other States, that, in cases of insolvency, the separate creditors have a primary claim upon the separate property of the partners, and that partnership creditors are not entitled to share with them, y?aripassu, in the estate of a deceased partner, when insufficient to pay separate debts, and the surviving partner has a joint fund in his hands.—Smith v. Mallory, 24 Ala. 628; Story on Partnership, § 363. The justice of the rule is commonly said to consist in the fact, that the joint and several debts were each incurred upon the faith of the joint and several funds respectively.

In view of these principles, we are of opinion that the complainants’ bill had equity in it, and should not have been dismissed. The attachment levied on the property by the individual creditors might, at law, it is true, reach the entire assets in the hands of the surviving partner, the legal title of which has vested in him. In equity, it reached only his interest in the firm property after the payment of the firm debts; and no remedy existed to ascertain this, and afford protection to complainants’ rights, except in a court of equity. The surviving partner, being a trustee of these assets, was liable to account for them ; and he being insolvent, an equity would be enforced in favor of partnership creditors, by which they would have priority of payment out of the partnership assets, no valid alienation having been previously made of such property, and no valid incumbrance having been created on it at the time of the filing of the bill. Equity will assume jurisdiction, not only upon the idea of a trusteeship in the surviving partner, and of his alleged misconduct in the mismanagement of the partnership effects, but of the existence of a quasi lien in the partnership creditors, brought into existence by the dissolution of the partnership, and the insolvency of the surviving partner; to which may be added the complication likely to arise from a sale under the attachment proceedings, and the inadequacy of a court of law to ascertain the interest of the surviving partner in the partnership effects, and afford protection to its creditors. Hubbard v. Curtis, 8 Iowa, 1; Washburn v. Bank, 19 Vt. 278; Parsons on Partnership (3d Ed.) 282-283; Freeman v. Stewart, 41 Miss. 138; Menagh v. Whitwell, 52 N. Y. 146; s. c., 11 Amer. Rep. 683; Bank v. Wilkins, 9 Me. 28; Skidmore v. Collier, 15 N. Y. 50; Blackwell v. Rankin, 7 N. J. 152; Pearson v. Keedy, 43 Amer. Dec. 160; Tenny v. Johnson, 43 N. H. 144; Tillinghast v. Champlain, 4 R. I. 173.

We cite the foregoing authorities without intending to indorse some of them, which carry the doctrine of a creditor’s lien further than sound principle would probably justify.

The complainants would be entitled to reach only such assets as originally belonged to the firm, or such as were purchased with trust money belonging to the firm, which may have come into the hands of the surviving partner, as the proceeds of sale of the partnership goods or otherwise. • We do not construe its purpose to extend further.

The demurrer was improperly sustained to the bill; and the decree of the chancellor must be reversed, and the cause remanded.