Kirby v. Ingersoll , 1 Harr. Ch. 172 ( 1840 )

The Chancellor.

This case presents the broad question of the right of one partner to make an assignment of all the partnership effects, without the consent or concurrence of his, ...... - . co-partner, who is on the spot, and acting in the business ot the co-partnership. Perhaps no question has been presented to this court, of greater practical importance, than the present; and it has been considered with a full and deep conviction of the responsibility imposed upon the court in its decision.

The authority of one partner to make such an assignment, if sustained in the present case, must be sustained in its broadest form. The two partners were both, at the time of the assignment, in town, and attending to the business of the firm. The complainant, on proceeding to the usual place of business, finds the brother of the other partner in possession, and is informed that an assignment of all the partnership effects has been made, and is denied all access to the books, and all interference with the property or business of the firm.

The allegation in the answer, that the subject of an assignment had been mentioned to the complainant, to which he made no objection, cannot aid the assignment. It is not pretended that, at the time of actually making the assignment, he was advised of it, or was in any manner consulted as to either the assignee, the terms and conditions of the assignment, or any thing else; but that the first notice to him was the information, that he no longer had any thing to do with the partnership property or business.

Yery different views seem to have been entertained upon this subject, and it has become necessary to examine it with care and attention.

It will be found that the dicta relied on to sustain the powers of one partner to make such an assignment, have been thrown out under special circumstances, and that the reports, upon a careful examination, do not sustain the exercise of the power in cases like the present. The elementary writers, Goto and Collyer. state the rule to be, that one partner may bind the others in all matters within the scope of the co-partnership, and the implied authority of one partner to bind another, is generally limited to such acts as are, in their nature, essential to the general objects of the co-partnership. Does this rule contemplate the authority here contended for?

Is it intended, that when both partners are on the spot, and where no difficulty exists in consulting each other as to the assignee, and the terms and conditions of the assignment, that, by the law of partnership, they are placed in such a position that one partner, on repairing to the place of business, may find all he possesses, together with the books and accounts of the firm, transferred to a third person, placed entirely beyond his reach, himself utterly excluded, and the business of the firm ended without his knowledge or assent? This cannot be contemplated.

Do the authorities cited, sustain the position ? The case which has gone as far as any other, and much relied on in the argument, is the case of Harrison vs. Sterry, 5 Cranch, 289. In that case tlie question'did not turn upon this point. But a question was raised upon the validity of an assignment made by one partner.

The court say in delivering the opinion: “The whole commercial busihess of the company in the United States was necessarily committed to Robert Bird, the only partner residiug in the country. He had the command of their funds in America, and could collect or transfer the debts due to them/’ And it is manifest from the case, that the assignment was made of a portion only of the assets, to obtain aid in carrying on-the concern. This case, from the entire showing, manifests clearly, that this is an exception rather than the rule, and that it was made under special circumstances; and such will be found to be the case in 2 Cowper, 445, also much -relied upon.' Indeed, I have been unable to find any case-, where the broad power here asserted, has been sustained. Chancellor Walworth, it is said, has countenanced this principle in the case of Egbert vs. Woods, 3 Paige, 517; and it is unjustly, I think, said, that he virtually decreed both ways, and that there is a discrepancy between the above case and that of Havens vs. Hussey, 5 Paige, 81.

In the first case he says: “I do not intend to express an opinion in favor of the validity of such an assignment of the partnership effects to a trustee, by one partner, against the known wishes of his co-partner, and in fraud of his right, to participate in the distribution of the partnership funds among the creditors, or in the decision of the question which of those creditors should have a preference in payment, out of the effects of an insolvent concern.” Showing clearly, that after an examination of the whole subject, that he did not believe in the validity of such an assignment.” In the case of Havens vs. Hussey, he says: “Upon the most deliberate examination, he was satisfied that the decision of the Yice Chancellor was correct, that such an assignment is both illegal and inequitable, and cannot be sustained.” And further he says: “It is no part of the ordinary business of a co-partnership to appoint a trustee of all the partnership effects, for the purpose of selling and distributing the proceeds among the creditors, in unequal proportions. And no such authority can be implied. On the contrary, such an exercise of power, by one of the firm without the consent of the other, is, in most cases, a virtual dissolution of the co-partnership, as it renders it impossible for the firm to continue its business.

From a review of all the cases, it is clear that this power, if sustained at all, must be sustained upon the implied authority for that purpose from his co-partner, resulting from the nature of the contract of co-partnership. There is no such implied power. The authority impliedly vested by each partner in the other, is for the purpose of carrying on the concern, and not for the purpose of breaking it up and destroying it. One partner does not, by any implication, confer a power upon his co-partner, of divesting him of all interest in, or authority over, the concern. The elementary writers upon the subject, do not sustain this position. The adjudged cases, when carefully examined, do not sustain it; and, assuredly, it is not sustained by the reason of the thing, or the dictates of justice. Every consideration of public policy or commercial convenience, is against it. The result to which I have arrived is, that a partner may transfer'a portion of the assets or obligations, for the purpose of paying or securing debts, or to raise means to carry on the concern; but that the power here asserted, of divesting entirely one partner of his interest, appointing a trustee for both, and breaking up the concern, is not one of the powers either contemplated or implied by the contract co-partnership; and it is best that it should be so. Else, who could, with safety, enter into such a connection. On the other hand, if partners cannot agree, and one partner is violating his duty or endangering the rights of the other, the remedy is plain and adequate.

This assignment is partly for the purpose of securing the debts and liabilities of the firm to the assignee, as well as for the purpose of making him a general trustee for the firm. It was urged at the hearing, that if' the assignment was void in other respects, it must be carried into effect thus far. I am inclined to the opinion, that effect may be given to the assignment to that extent, but it is not now necessary to decide this question.

From the views I have taken of this'case, it must result in the appointment of a receiver, and the application of the assets must be under the direction of the court.

There are other considerations which render the appointment of a receiver appropriate in this case. It is contemplated by the assignment, to secure the assignee from his liability for the payment of money due upon a lease having some twenty-five years to run, and clearly not within the scope of the partnership.

The amount of the indebtedness of the firm to the assignee, is a disputed one. It will follow then, that a receiver must be appointed, and the assignee directed to deliver over to such receiver the partnership property and effects, and account with the receiver for whatever shall have come to his hands by virtue of such assignment.

The counsel for the defendants requested to be further heard upon the question of the appointment of a receiver; which request was granted.

A. D. Fraser, for defendants.

The court having decided that the assignments ought to be ^ aside, by the bill in this case, is valid as respects the interest of the defendant, Nchemiah Ingersoii, but inoperative as to all others. The complainant now insists that the property embraced in the assignment, must go into the hands of a receiver. This position is denied by the assignee, who insists that it necessarily follows from the decision which has already been made, that the trust shall remain with him, on whom the assignment conferred it. He submits that he cannot be deprived of it, unless the case falls within some of the exceptions to be found in adjudged cases upon this subject. The assignee contends that the only legal operation and effect of the decision which has been made, must be to render inoperative that part of the assignment which purports to create a trust for the benefit of those mentioned in the assignment, other than the assignee. If the assignment is good for any beneficial purpose, the assignee cannot be divested of the power and rights conferred on him by it, unless the. fund be in danger, or some other strong ground urged which would justify the appointment of a receiver; and while he acts as assignee, he is as much under the control and direction of this court, as a receiver would be, and bound to execute the trust, modified, limited and qualified, as the court have already decided it must be.

Under these circumstances, it"is contented that a receiver will not be appointed unless the property is shown to be in danger; that the trustee is irresponsible, or where the plaintiff’s. right is not shown to be clear; must show some evil actually existing or danger to the property, or a strong.special case of fraud. Edw. on Receivers, 2 Ch.; Willis vs. Corlis, 2 Edw., 286, 287, 288; Orphan Asylum.vs. Me Cartee, 1 Hopk., 429; Verplanck vs. Caines, 1 J. C. R., 58; Hugonin vs. Baseley, 13 Ves., 105; Middleton vs. Dodswell, Id., 266; Lloyd vs. Passingham, 16 Ves., 59.

The assignee is subject to the control and direction of this court, as much as a receiver would be. Shaftsberry vs. Arrowsmith, 7 Ves., 486, 487; Beaufort vs. Berty, 1 P. Wms. 702.

H. N. Waklei?, in reply.

The complainant insists in this cause, that'the dbcd'of assignment is void, ab initio, for the following reasons.

I. That one "partner cannot assign the partnership goods without the assent of his co-partner. This position having, as a general rule,-.already been settled by this court, it is unnecessary to say. any thing upon it. The case of Havens vs. Hussey, 5 Paige. Ch. R., 30, lays down the true doctrine.

2. But this-case is sought tobe taken oufof the .rule on-the ground-that the deed of assignment constituted Nehemiah-Ingersoll, the brother, a trustee, as. resppets .all. the creditors of the firm of Ingersoll & Kirby, but himself, and that he acquired an individual right-to, the-goods-assigned,, they having been assigned to. him tp secure , the-amount due .him. from-the firm,- and his liability for them as-an endorser.' . .

The decision that one partner cannot-assign -the -partnership, effects, seems to settle this question. The doctrine contended for by the counsel opposed, is that the deed may be good in part and bad in part. This doctrine does not apply in this case; It is only applicable, where there are'different clauses or-covenants in a déed which do not depend on each other. But where the deed is entire, and the-several-clauses depend upon each other, then, the distinction ceases, and it must either be good for thh wholemr badTor the whole. 1 Shep. Touchstone; 70, 71.

It is a necessary requisite that the person making the deed be able to contract: "This is not the case. here. Havens vs. Hussey; 5 Paige Ch. R., 30; 1 Shep. Touohstone, 54.

It is a well-established-rule'imeourts of equity, thafinterésts of third persons gained by the fraud, imposition; or even-undue influence over others, cannot bel held by them. The interest of-the assignee herepif he. has any has been gained by the fraud of Justus Ingersbll. Hugonin vs. Baseley, 14 Ves., 273, 289; Bridgeman vs. Green, Wilmot, 64; Hildreth vs. Sands, 2 John., Chan. Report, 35, 42; Shepherd’s Touchstone, 66, 67.

In cases of alledged fraud, the answer of the party is not to be relied upon as to any advances, but positive proof is required. 3 P. Wms. R., 228; 2 Ves., 516.

ín the case of Sands et. al. vs. Codwise et. al., 4 John: R., 536, the court said that no right can be deduced from an act founded in actual fraud. The cases in which a deed is set aside on terms, is not at all analagous to this. Page 599.

The Chancellor. Upon a former occasion, it was held that the assignment in question could not be sustained, so far as it purported to be a general one, to a trustee, for the payment of his own debt, in the first instance, and also as a general trustee for all the creditors. It was then said that it would follow, that a receiver must be appointed.

The reasons that induced the court to come to that conclusion, were then stated. A further reason is urged, that it appeared by the answer, that a considerable portion of the property of the concern had been sold before filing the answer, notwithstanding the injunction.

On that occasion the court remarked, that it was not contemplated to decide the question whether the assignment could be sustained, so far as it purported to constitute a security to the assignee, he being a creditor; but it was said that the court was inclined to the opinion, that it could be so far sustained, on the authority of the case in 10 Peters, 363. The counsel for defendants requested to be further heard, on the question of the appointment of a receiver, and it has also been urged, that a decision upon the validity of the assignment, should be now entered; so that, if the defendants desire to enter an appeal, it may be done, and a decision had in the appellate court. This is certainly proper and desirable. In a question of this importance, both in regard to principle and amount, every proper facility for an appeal should be afforded. This has compelled the court to examine this question, which, as it was not contemplated then, to dispose of it as it had not before done. In the case of United States vs. Bradley, 10 Peters, 363, which was a case arising on a paymaster’s bond, it was held, that when the covenants and conditions are severable, that bonds and other deeds may be good in part, and void as to the re sidue. In Hyslop vs. Clarke, 14 Johns. Rep. 464, Van Ness, in giving the opinion of the court, says: “ The better opinion seems to be, that even at common law, a deed fraudulent in part, is altogether void.” This view seems to have been sustained and carried out in the subsequent decisions in New York.

By the term fraud, it should be remembered that the legal intent and effect of the acts complained of, is meant. The law has a standard for measuring the intent- of parties, and declares an illegal act, prejudicial to the rights of others, a fraud upon such rights, although the parties deny all intention of committing a fraud. 11 Wend. 224.

The principle upon which assignments of this kind, have been declared void is, that one partner has no authority to make a general assignment of the partnership effects, in fraud of the rights of his co-partner, to participate in the distribution of the partnership effects among the- creditors. Havens vs. Hussey, 5 Paige, 31.

The implied authority of one co-partner is, that he may perform any act within the scope of the co-partnership, which may be necessary to carry on the concern. Under this implied power, it has been held, that one partner may assign such portion of the partnership effects as may be necessary in payment of a debt, or to secure a creditor. But this is a general assignment, and if sustained at all, breaks up and puts an end to the co-partnership. If sustained, and the assignee is authorized to go on and close up the affairs of the concern, does it not necessarily lead to all the consequences intended to be guarded against in the decision in the case of Havens vs. Hussey ? One partner, by selecting a creditor, large or small, as the assignee, may effectually put the other partner out of the possession of his property, and end the business withopt the knowledge or assent of his co-partner. He is deprived of the right to which the decision in 5 Paige, 31, declares he is entitled.

The preferred creditor has been selected without his knowledge or consent, and a party who has been illegally placed in possession of the entire partnership effects, if the views urged by the counsel of the defendants are sustained, is entitled to the custody, and has the right to settle and wind-up the concern. One good trust could always be inserted, and thus the partner would do indirectly what could not directly be done. Whatever view may be taken of the question, as to whether this assignment may be void in part only, or in toto, it seems 'to me inevitable, that, as the case now stands, a receiver should be appointed. But, as it is urged that a decision be how entered upon the validity of the assignment, and it seems but just and proper that it should be done, I shall do so according to the best reflection I have been able to give it. •

A distinction seems to have been taken, in some of the cases, between instrúmenti void by statute, and at common law.

In the ca‘se in Peters, cited in support of this assignment, it is said, quoting the opinion of Chief Justice Gibbs, that if an act be prohibited, tho construction to be put upon a deed conveying property illegally, is, that the clause which so conveys it, is void, equally whether.it be by statute or at common Taw. This is undoubtedly the true rule,. and there is no reason for aiiy distítfcli'ón, except where the statüté goes further, and'declares the whole instrument void. Iflie cases where instruments have been declared good in part, and bad as to the residue, seem t’o have been bonds which were variant from the statute, or deeds which purport to convey lands, some portion of which the party could not lawfully convey. In the one case, the bond may be valid in part only. The rights of no one are interfered with. Effect is given to the bond so far as it is in conformity with the statute. If it contains other conditions or requirements, they are declared void.

So with deeds. The grantor may have title to nine hundred out of a thousand acres of land, and may have no right to convey the residue. Still, it would be unjust to deprive the grantee of that to which the grantor had a title, and by giving if effect, frotanto, the rights of no one are violated.

Is it so here? The partner has been deprived of all control over, or voice in the disposition of the effects of the co-partnership/without his consent.

Shall effect be given to this proceeding! Can the court say, where the whole effects are mingled together, that it shall take effect as to certain portions of the property, and be void as to the residue! One good trust is inserted, but that cannot make an illegal instrument a valid one. The legal and illegal are so mixed and commingled, that if assignments of this character are sustained to the extent asked, they may as well be sustained in toto.

A grantee who voluntarily becomes a party to a deed which is fraudulent in part, forfeits his right to claim a benefit from another part that would otherwise have been good. 14 Johnson's Reports, 465. Here the assignee takes a general assignment from a party not authorized to make such an instrument, and 1 think it cannot be sustained.

The order is, that the assignment be set aside and declared void, and that it be referred to a master to appoint a receiver; and that said Nehemiah Ingersoll deliver over to, and account with, said receiver, for whatever shall have come to his hands by virtue of said assignment.