Sheppard v. Bridges , 1912 Ga. LEXIS 108 ( 1912 )

Lumpkin, J.

We will first consider a leading question 'presented, on authorities outside of this State, and then with more special reference to our own statutes and decisions.

Two general rules have grown up on the subject of the enforcement of a contract by a person for whose benefit it was made, though he was not a party to it, known respectively as the English and American rule. In England some of the earlier decisions looked in the direction of allowing a suit by a beneficiary for a breach, under certain special circumstances. The later decisions in that country deny the existence of such a right of action; though it is held, that if'the contract is of a character which constitutes the promisor a trustee for the third person, such person may enforce his rights in equity. Of course if there is, by agreement of all parties, a novation, or substitution of one. debtor for another, the case is different.

In. America, the courts of a few States follow the English rule more or less closely. But the great weight of authority is to the effect that if the promise is made for the purpose of conferring a benefit on a person, though he be not a party to the contract, or furnish the consideration for the promise, he can bring suit upon it. In the application of the rule to particular facts, and the determination of whether certain eases fall within or without it, there is much conflict, not only in the decisions of the courts of different States, but frequently in those of the same State. Some of this confusion has arisen from a failure to consider carefully what is meant by the rule, and the foundations of the liability declared by it. Nor have the courts always kept clearly in view the difference between several questions: (1) Has there been a novation or substitution of one debtor for another by agreement? • (2) If one person conveys property to another, and the latter agrees to assume and pay the debts of the former, do the creditors acquire any right or interest enforceable either at law or in equity? (3) As to partnerships, if one member of a firm retires, and the remaining member, or a new firm formed by him and another, purchases the assets and assumes the debts of the old firm, as among themselves the'assuming partner or firm ranks as principal, and the retiring partner as surety. How far can they affect former creditors by tliis arrangement, by notice to them? Or must a creditor not only have notice, but also assent ? And if he can be affected by notice, can he not assent for his own benefit, if he so desires ?

The benefit which is referred to as giving a right of action by a beneficiary, under the American rule, must not be an indirect or incidental one; but the contract, properly construed, must exhibit an intent to confer a benefit on the third party. Whether particular contracts were primarily for the benefit of the parties thereto, or whether they were intended to confer a benefit on third persons, though also operating for the benefit of the immediate parties, has given rise to many decisions. In New York, which was the leading State in establishing the American rule, it was said that it was not every contract for the benefit of a third person which could be enforced by him; but that two things must concur, — the intent to benefit the third party, and the owing of some obligation by the promisee to the third party. When this combination occurs, it has been considered sufficient to create a right or interest in the beneficiary, which has sometimes been analogized to a trust, sometimes called an equity, and sometimes treated under other legal heads. In a full and valuable note to Baxter v. Camp, 71 Am. St. R. 169, 175 et seq. (71 Conn. 245, 41 Atl. 803, 42 L. R. A. 514), both rules are discussed, aud the modifications of them in different jurisdictions. On page 187 (referring to the American rule), it is said: “The rule has been variously stated as resting upon: 1. A trust relationship; 2. The equitable right of subrogation; 3. Agency; 4. Privity of contract by substitution; and 5. The broad equity of the transaction.” The equity and justice underlying the rule is emphasized, where a debtor conveys his property subject to the payment of his debts, and as part of the consideration receives a promise to pay his creditors.^ Where acceptance by the creditor of the promise of the purchaser has been held to be required, express acceptance has not been deemed necessary, but it has been said that this could be shown by circumstances. And in some States, the bringing of a suit has been deemed sufficient. Motley v. Manufacturers’ Insurance Co., 29 Me. 337 (50 Am. D. 591); Copeland v. Summers, 138 Ind. 219 (35 N. E. 514, 37 N. E. 971). It has also been urged that it should not be assumed that the seller had a purpose to defraud his creditors, or to place his property beyond their reach, or to escape payment, but that it should rather be inferred that such a contract contemplated a direct benefit to them by furnishing. to the buyer assets and requiring a promise to pay debts. It is generally held in America that the creditor has a right of action at law; but in some jurisdictions, and under some circumstances, the remedy in equity, or by equitable proceedings, has been held to be more complete. Agreements to indemnify the seller against loss or against creditors might perhaps be different.

In cases where a person in business takes in a partner, or one member of a firm sells his interest to a third party, and the new firm takes the assets and assumes and agrees to pay the existing debts of the old one, there is an additional reason in certain jurisdictions for holding that such creditors may have a right of action, at law or in equity, against the new firm.

In 1836 the ease of Oakeley v. Pasheller, 4 Cl. & F. 207, was decided by the House of Lords. That decision was quite generally supposed to have held, in effect, that if a firm dissolves, and one of the partners (or he and a new partner) takes the assets and assumes the liabilities, the retiring partner, or new firm, thereafter occupies the position of a surety, not only as between the partners themselves, but as to creditors of the old firm to whom notice of such contract has been brought; that such a creditor with knowledge is required to treat the retiring partner as a surety; and that if he extends the time for the payment of his debt, without the knowledge or consent of the retiring partner, the latter will be released. Subsequently in Swire v. Redman, L. R. 1 Q. B. 536, the former decision was explained by Coekburn, C. J., who said that the House of Lords did not intend to rule as stated above, but that in the case of Oakeley v. Pasheller, supra, there were facts tending to show consent by the creditor to the arrangement between the parties. Many courts, however, did not think that the decision of the House of Lords was founded on any assent by the creditors; and such decision furnished a basis for the rule as to affecting a creditor who has notice.

In an exhaustive note to Dean v. Collins, 9 L. R. A. (N. S.) 49 et seq. (15 N. D. 535, 108 N. W. 242), after discussing the ruling in the majority of the cases that an assumption of partnership liability is a promise made for the benefit of the partnership creditors, of which such a creditor is at liberty to take advantage, and which he may enforce against the assuming partner or partners, and after referring to the.difference in the decisions as to whether a retiring or indemnified partner occupies the position .of a surety, not only as to the succeeding partner or firm assuming the debts of the old firm, but also as to a creditor with notice, the annotator says: “So, another difference of opinion, running largely along the same lines, appears with reference to the right of a partnership creditor to take advantage of an assumption of partnership debts. Generally speaking, but with'some exceptions, the courts, which regard assent by the creditor as necessary to make an assumption effectual as against the original rights of creditors and the original liabilities of the retiring or indemnified partner, hold that the creditor can not proceed against the assuming debtor alone on his assumption without joining his codebtors, unless he assented to, or became a party to, the assumption."

Let us now consider the decisions and codified law in this State. In Bell v. McGrady, 32 Ga. 257, a firm engaged in a livery-stable business purchased a horse and buggy, giving therefor a promissory note, which was transferred for value by the payee to another person. A short time thereafter the firm sold all of its property, including its stables, business, horses, buggies, books of account, and other appurtenances (among the property sold being the horse and buggy for which the note was given), and the purchaser agreed in writing to pay all the debts and liabilities of the firm. The holder of the note filed a bill in equity against the members of the partnership and the purchaser. He alleged, that the prime consideration of the purchase by the person who bought the property of the firm was his agreement to pay their debts; that the purchaser did pay to the complainant a small amount on the note; that the written agreement was inaccessible to the complainant, and he believed it had been destroyed by the purchaser; that the firm and its members were insolvent; that one. of them had absconded; and that the purchaser refused to pay the balance due on the note, notwithstanding he had collected from the credits of the firm more than enough for that purpose. The bill prayed for discovery, and that the purchaser from the firm be compelled to pay to the complainant the principal and interest due on the note. At the trial a motion was made on behalf of the defendant to dismiss the bill, for want of equity, and because the complainant had an adequate remedy at law. The trial judge dismissed the case. This court reversed the judgment. It was held that the purchaser of the assets of the firm, by virtue of his agreement with them, stood in the position of a trustee to pay their debts, and that it was proper for the creditor to go into equity to enforce this agreement.

In Dallas v. Heard, 32 Ga. 604, a married woman and her children were interested in certain property. They entered into an agreement by which it was stipulated that such property (except certain specified articles) should be “all sold, and that the proceeds of the sale, and the negroes (after payment of all debts for which said property is legally bound) be divided among said children, in consideration of which the children should each pay to the said Lucinda [the woman] annually the one sixth part of $3'50 during her natural life.” Under this agreement the property was sold and a division made. A short time thereafter the woman died insolvent, leaving no estate of any kind, and no administrator was appointed. A creditor of the woman, who held a note made before the date of the agreemént, filed a bill in equity against the children, alleging that the debt was a charge upon the estate of the woman, and that, as the children had the property, each should pay a proper proportion of the debt. On demurrer the bill was dismissed. This court reversed the judgment, holding that the question as to whether the plaintiff, who was not a party to the agreement, conld enforce it in equity was no longer an open one, after the decision in Bell v. McGrady, supra. It was also held, that, the original debtor having died leaving no property, and no administration having been granted, this was a sufficient excuse for not making her, or a representative of Her estate, a party to the bill. The decisions in these two cases have never been reversed or formally modified, though in some decisions the cases under consideration were distinguished from those cited above. If there should be an irreconcilable conflict between them and some later decision, without any overruling or changing of the earlier decisions, under our statute the older decision would stand. Civil Code (1910), § 6207.

In Empire State Insurance Co. v. Collins, 54 Ga. 376, a domestic fire-insurance company issued a policy. Afterward another domestic insurance company, whose principal office was in a different county, purchased from the insuring company its business and assets, and assumed the payment of its indebtedness due or to become due on its policies. No contract was made by the purchasing company with the holder of the policy, and nothing occurred to establish any relation between them, or to give the person assured any claim on the second company, except such equitable rights as he might have growing out of the contract between the two corporations. After a loss by fire, the assured brought an action at law 'against both companies in a county where the original insurer had no office or agent. It was held, under the statute as it then stood in relation to venue, that suit could not be brought against the insuring company in that county; and, this being so, that the action at law could not be sustained separately against the purchasing company, as there was no such privity or relation between it and the assured as would entitle him to such action against that company on the contract made between the two companies. In the opinion it was said: “No contract was made between the plaintiff and the Home Company [the purchasing company], no premium had been received by it from him, and the only claim he had on that company was the equitable right growing out of its contract with the company which issued his policy. It is true, he might enforce this agreement by bill: 32 Ga. 257; ibid. 604; or at law, with proper pleadings. But to have asserted it against the Home Company, it would have been necessary to have made the Empire Company a party, and had it legally served.” Here is a distinct recognition of the equitable right of the assured.

In Bracken & Ellsworth v. Dillon, 64 Ga. 243 (37 Am. R. 70), it was sought to bind an incoming partner for the debts and liabilities of a former firm, which had been succeeded in business by an individual, and by the debts of this individual, who had been succeeded by another firm, against which the suit was brought.’ It was held that the plaintiffs must show some agreement on the part of the incoming partner, upon a sufficient consideration, to assume such liabilities and pay such debts, before he could be bound, through the new firm, to pay the old indebtedness. This decision accords with the general rule that one can not be made liable for a debt which he neither incurred nor agreed to pay. The mere entrance of a new partner into a firm does not render him liable for pre-existing debts. But this does not affect the question of what legal or equitable rights pre-existing creditors may have, if the new partner, in acquiring an interest in the firm, agrees that the new firm will assume the debts of the old. Some of the language in the opinion in that ease may be broad; but there is no ruling that, in case of such an assumption, pre-existing creditors would have no rights, legal or equitable.

In Morris v. Marqueze & Varney, 74 Ga. 86, the ruling was repeated. It has since been codified. Civil Code (1910), § 3174. In connection with the expression, “ on sufficient consideration,” it is to be noted that in this State a consideration does not have to move from the person to whom the promise is made. In Civil Code (1910), § 4249, it is declared: “If there be a valid consideration for the promise, it matters not from whom it is moved; the promisee may sustain his action, though a stranger to the consideration.” If the creditors may not technically be designated as promisees, the principle is recognized that a person may enforce a contract, though he did not furnish the consideration. Besides, the obligation of the original firm to pay its creditors, and the fact that the assets subject to the debts are transferred, and as a part of the transaction the obligation is assumed by the new firm, must not be overlooked.

In Gunter v. Mooney, 72 Ga. 205, a woman and'another entered into a written agreement, whereby the other party was to take the son of the woman, feed and clothe him, and give him a common school education, and a horse, bridle, and saddle when he became twenty-one yeays of age. After becoming of age, the son brought suit against the third party, alleging a breach of covenant, in that the defendant failed to give him a common school education. It was held that he was not a party or privy to the contract, but a mere stranger, and could not maintain an action of covenant upon it. It will be seen that this involved no' transfer of assets subject to debts, no assumption of pre-existing debts, and no question of partnership. In fact there was no legal duty on the part of the parent to furnish a common school education, and no assumption of the performance of such a duty by the other contracting party.

In Pfeiffer & Co. v. Hunt, 75 Ga. 513, a surviving partner of a firm sold the entire partnership property, and as a part of the consideration the purchaser agreed to assume all the liabilities of the firm, and also to pay a certain sum of money. A person who held a promissory note executed, not by the firm, but by one of the partners as principal and the other as surety, brought suit on the note against the purchaser of the partnership assets, alleging that the note was for merchandise sold to the firm while in business. It was held, that there was no privity between the holder of such a note and the purchaser of the firm property; that there was no agreement to pay the holder of such note, which was not a partnership debt, but an individual debt of one partner on which the other was surety; and that the petition was demurrable. An offer was made to amend the petition by setting out the written contract, whereby it was alleged that the purchaser undertook and obligated himself to pay all indebtedness of the business conducted by the former partners, and that the promissory note held by the plaintiff was one of the liabilities of the business, which the defendant agreed to pay. It was held that this amendment was properly refused. It was said in the opinion that in its original form the suit was “against a party that it was sought to substitute for the principal debtor and his security. The amendment offered to charge the defendant as having undertaken to pay the debt, which the plaintiff alleged was due to him from the firm of Truitt & Hunt.” It was added, that there was nothing in the original pleadings to amend by; and that, had there been enough upon which to engraft an amendment, the one offered sought to introduce a new and distinct cause of action. It will be seen that this did not hold that the creditor would have had no rights as against the purchaser, upon an action properly brought.

In Austell v. Humphries, 99 Ga. 408 (27 S. E. 736), S., being indebted to II., agreed with him in parol that H. should, to the extent of the indebtedness, have “ an interest ” in certain promissory notes which S. held on a third person. Subsequently S. delivered these notes to A. for use by the latter in raising money, with an understanding that EL was to be paid out of their proceeds; but there was no contract or agreement of any kind between A. and EL A. raised money on the notes, but did not pay any portion of the same to EE., though he afterwards promised H. in parol to pay H. the debt due him by S. It was held that EL had no such title to the notes in question as would have authorized him to bring an action against S. for any of the notes or their proceeds. It was said that the suit was upon an express contract, and no contract between H. and A. was shown. It was further held that the promise made by A. to El., after receiving and realizing on the notes, that he would pay El., was without legal consideration, and did not furnish a ground for recovery. Here again the question arose upon a suit which was considered to be one at law based on an express contract. There was also no question of partnership, and no transfer of firm assets with an assumption of firm debts. Spears v. Scott, 111 Ga. 745 (36 S. E. 950), depends on special facts; but, in so far as it throws light on the question, it seems to recognize the equity of a mortgage creditor whose debt a purchaser of land agreed to pay.

In Hawkins v. Central Ry. Co., 119 Ga. 159 (46 S. E. 82), one railroad company sold to another its property and vendible franchises, in consideration of a sum of money and an agreement by the purchaser to pay the vendor’s “current liabilities.” It was held that one who had been injured by reason of the negligence of the vendor company could not maintain a suit therefor against the vendee. After referring to the two lines of decisions, the opinion said that the court was relieved from deciding between these divergent authorities, in view of the common-law principles codified in two sections. One was the section already quoted, which declares that if there be a valid consideration for the promise, it matters not from whom it moved; and that the promisee may sustain his action, though a stranger- to the consideration. Civil Code (1910), § 4249. The other was the section which declares: “As a general rule, the action on a contract, whether express or implied, must be brought in the name of the party in whom the legal interest in such contract is vested, and against the party who made it in person or by agent.” Civil Code (1910), § 5516. It may be doubted whether these sections have the full effect seemingly attributed to them. Declaring that a promisee may enforce the prom- . ise, although he did not furnish the consideration; does not seem to exclude persons who may have interests from protecting them by appropriate action. And the statement that “as a general rule” the'action must be brought in a certain way would seem to imply the existence of exceptions to such general rule, rather than its universality. But however that may be, this decision and others establish the rule, that where a vendee agrees to pay the debts of the vendor, the creditors of the latter can not in this State sue the vendee at law, upon the contract. It has since been followed in Guthrie v. Atlantic Coast Line R. Co., 119 Ga. 663 (46 S. E. 824). It does not, however, settle the question of when there may be equitable rights in creditors, which may be protected by equitable proceedings and with proper parties. Nor does it deal with the status of retiring or incoming partners and the assumption of the debts of the former firm by the latter. In an illustrative way, it was said in the opinion: ‘“Thus, if property is put in the hands of an assignee or trustee to be sold and the proceeds applied to the payment of creditors, the latter may sue in equity to enforce the agreement for their benefit (Bell v. McGrady, 32 Ga. 257; Dallas v. Heard, 32 Ga. 604 (2)).” But in fact such was not the exact agreement made in those cases, especially not in the case of Bell v. McGrady, as will appear from what is said in a former part of this opinion. In Spears v. Scott, supra, a somewhat similar reference was made to those eases, when it was said: “In Bell v. McGrady, 32 Ga. 257, and Dallas v. Heard, Ib. 604, wherein the contracts sued upon were construed to constitute the promisor trustee for the benefit of the third person, it was held that the latter might sue thereon in equity.” Neither in the case of Hawleins nor in that of Spears was mention made of what was held, in the two earlier cases cited, to be sufficient to create “a trust,” or an enforceable equitable right, in favor of creditors of a vendor, especially where the original debtor was insolvent.

If it be suggested that garnishment is the remedy of the creditor, it may be asked, how can a creditor garnish a promise to pay his own debt ? Suppose that all, or a large part, of the consideration for the sale of a debtor’s property was the promise by the vendee to pay the vendor’s debts, what would be the status of the creditors?

From what has been said, it will be seen that, in this State, the creditor of the vendor can not bring an action at .law against the vendee assuming to pay debts; but, in a proper case, may resort to equitable proceedings in the superior court, which can give both legal and equitable relief. This meets one objection which has been raised to the rule allowing the creditor to sue directly, — that both the debtor, who is the direct promisee, and the creditor might have a right of action against the promisor. If all parties are before the court on equitable proceedings, full justice can be done, and the rights of all protected. A somewhat similar ruling was made as to a partial assignment of a chose in action. It was held that the assignee could not sue the debtor at law, but might bring an equitable proceeding, wherein the rights of all parties could be determined. Rivers v. Wright, 117 Ga. 81 (43 S. E. 499).

We now turn to the doctrine, as it exists in this State, of the effect of a dissolution of a firm, or sale by one partner to a third person, and the assumption of the debts by the continuing partner or firm, as creating the relation of principal and surety. In Preston v. Garrard, 120 Ga. 689 (48 S. E. 118, 102 Am. St. R. 124), the subject was carefully considered, the decision in Oakeley v. Pasheller, 4 Cl. & F. '207, supra, and the later explanation of it by Coekburn, C. J., were mentioned, and a review of the decisions in this State made. Upon the whole, it was declared that this court had followed what was understood to have been ruled in the Oakeley case, and that it was the fixed rule here that “a creditor of the partnership, who has notice of the dissolution and the agreement by the continuing partner to assume the debts, is bound to accord to the retiring partner all of the rights of a surety,” .and may so act as to work the discharge of the retiring partner from liability, as a surety might be discharged. This rule can not be confined to a case where one partner retires, and the remaining partner assumes the debts. In the parent case cited above, a partner died. A new firm was formed by the remaining partner and another, which purchased the interest of the decedent, and the new firm agreed with the executor to assume and pay the liabilities of the old firm. See also Arnold v. Nichols, 64 N. Y. 118.

It is submitted that it would be most extraordinary if the courts should hold that partners, by means of a sale of the interest of one to another, or to a new firm, and an agreement by the latter to assume the debts of the old firm, could affect a creditor having notice, place on the latter the duty of respecting the rights of the retiring partner as a surety, whose principal is the partner or firm assuming the debts, and yet declare that the creditor cán not elect to treat the partner of firm so assuming the debt as the principal. An arrangement of the character named,- to which the creditor is not a party and does not assent, does not of itself destroy his right to sue his original debtors. But if it compels him to recognize a status for the benefit of such debtors, or one of them, is he debarred from the privilege of recognizing it for his own benefit ?

By Civil Code (1910), § 3216, it is declared that “the rights of creditors shall be favored by the courts, and every remedy and facility afforded them to detect, defeat, and annul any effort to defraud them of their just rights.” And in section 3217, it is said: “Courts of equity should assist creditors in reaching equitable assets in every case where to refuse interference would jeopard the collection of their debts.” If not .a violation of the letter of these sections,^ it would certainly not accord with their spirit and purpose to hold that a firm of debtors could shift their assets at will, and impose on their creditors duties by mere notice, but could prevent a creditor from accepting for his benefit the status which they had thrust upon him-for their own. Such is not the law.

In the present case Bridges sought to have a court exercising equitable jurisdiction to wind up the affairs of Parr, Bridges & Co., and to “make just and final distribution of all its assets, amongst all persons entitled to share therein.” But he objected to Sheppard’s intervening and claiming the right to “share therein,” or attacking the claims of Bridges, and seeking equitable relief. The complainant opened the door of a court of equity and invited entrance, but he objected to Sheppard as an unwelcome intervenor.

Sheppard claims to stand as a retiring partner of Sheppard & Parr, with the rights of a surety against Parr & Parr, who were succeeded by Parr, Bridges & Co., which firm assumed the debts of the former firms, but have not paid them; and he alleges that he has had to pay some of the debts of Sheppard & Parr. He alleges also, that the purchase-money for his interest in the firm of Sheppard & Parr has never been paid; that he retained title to it until payment; that he thus stands as a creditor; that the fund before the court arose in part from insurance policies transferred by him; that Bridges has never paid for his interest, has destroyed evidence of indebtedness by him to the former firms, and is seeking to secure for himself the only funds of the firm available for payment of the debts. Under his allegations, he is entitled to intervene and seek relief. None of the grounds of the demurrer were meritorious, and they should have been overruled.

We do not pass on questions of priority of claims, as they are not before us; but only upon the right to file and urge an intervention.

Judgment reversed.

All the Justices concur, except Hill, J., not presiding.