Day v. Wetherby , 29 Wis. 363 ( 1872 )

Cole, J.

We think the circuit court erred in refusing to make the First National Bank of Hudson a party to the action on the application of the trustee, Judge Wetherby. The bank was the real party interested in the controversv. Both the debts of Dore & Co. and of Dore & Dwyer, belonged to it, and it is conceded on botli sides that tbe conveyance made to Judge Wetherby, wbieb it is songbt to bave set aside and cancelled, was given to secure tbe payment of one of those debts. Although Judge Wetherby was a stockholder in the bank at the time the conveyance of December 4th, 1866, was executed, yet it is perfectly manifest that he acted in the matter merely as the agent or trustee of the bank, taking the title for its benefit, and not for himself. The bank then is the real party in interest, and its rights, and not those of the trustee, are directly involved in the litigation. The sole issue raised by the pleadings is, whether the store and lot in controversy were conveyed for the purpose of securing the indebtedness of Dore & Dwyer, or of Dore & Co., and if either, whether the conveyance was valid as against the creditors of the latter firm. That is the issue; and it is very plain that the bank, which is the mortgagee, should be before the court. The answer of the defendants admits that the debt of Dore & Co. to the bank is paid in full, but insists or alleges that the property was conveyed to Judge Wetherby (who was acting solely as agent for the bank) to secure a valid indebtedness of Dore & Dwyer to the bank, which remains unpaid. In the determination of that question, it is evident that the bank is a necessary party. The general rule in equity is, that in suits respecting the trust property brought against the trustee, the cestui gue trust is a necessary party, because the beneficiary owns the equitable and ultimate interest affected by the decree. Story’s Eq. Pleadings, § 207, and authority cited in the notes; The Board of Supervisors v. The Mineral Point R. R. Co., 24 Wis., 94-128. It is true, this general rule has its exceptions; but those exceptions have no application to the case before us. There is no practical difficulty in ¡bringing before the court the bank, the owner of the debt and .of the mortgage given to secure its payment. Indeed, we do not well perceive how any adjudication can be had affecting the validity of the conveyance to Judge Wetherby, or the one made by bim to tbe defendant, Whaley, unless tbe bank is made a party to tbe action. For tbe bank is interested in having tbe mortgaged property applied to tbe payment of tbe debt of Dore & Dwyer, to tbe exclusion of tbe creditors in tbis suit, wbo are seeking to subject it to tbe payment of tbeir debts. Tbis view therefore, of tbe error of tbe circuit court in refusing to make tbe bank a party on tbe application of tbe agent or trustee Wetherby, necessarily involves a reversal of tbe judgment. But, notwithstanding tbis is so, still it becomes necessary and proper to indicate our views upon some other questions arising upon tbe record and discussed by tbe counsel, in order that tbe court below may have tbe benefit of them on tbe final disposition of tbe cause.

And in the first place we remark, that, to our minds, tbe evidence is perfectly clear and satisfactory that tbe object and intention of giving tbe conveyance in question to Judge Wetherby, were to secure tbe payment of tbe debt of Dore & Dwyer. At all events, we are entirely satisfied that tbis was the' intention so far at least as Dore & Dwyer were concerned. It is true, there is some conflict of testimony upon that point, even. But tbe decided weight of testimony supports tbis conclusion; and especially is this so in respect to tbe written evidence bearing upon tbe question. It appears that tbe next day after tbe conveyance was made to Judge Wetherby, be executed and delivered tbe written declaration, which clearly states that tbe property was conveyed to bim u in trust, to secure an indebtedness owing by Dore & Dwyer to tbe First National Bank of Hudson.” Now, it is incredible that Dore should have received tbis paper unless it bad been bis understanding that tbe object of tbe con veyance was to secure tbe payment of that debt. It is true that Bore testified that be bad no knowledge of tbis paper, and never saw it until it was produced on tbe trial; but the' evidence was overwhelming that be is mistaken, and that tbe paper was read over and delivered to bim at tbe time it was executed. And, moreover, there is tbe written notice served upon Judge Wetherby and tlie bank a few days thereafter, winch recited that the property was conveyed to secure the payment of the debt of Dore & Dwyer, and which paper Dore admits he signed. These written declarations, which were made deliberately about the time the deed to Judge Wetherby was executed, are decisive upon the question as to what debt that conveyance was intended by Dore & Dwyer to secure. It was most indubitably given by them to secure the payment of the debt of Dore & Dwyer to the bank, and not the debt of the firm of Dore & Co. It is possible that there was a further understanding on the part of Joyce, that whatever interest he, as partner of the firm of Dore & Co., had in the property, should be applied to the payment of the debt which the bank held against that firm. We do not say that evidence shows to our satisfaction that Joyce understood that his interest was to be so applied; but there is much more doubt upon this point than as to what must have been the intention and understanding of the other grantors, Dore & Dwyer. It appears that the interest of Joyce, as partner of the firm of Dore & Co., in this property was small; still, whatever it was, if he appropriated it to the payment of the debts of the new instead of the liabilities of the old firm, it is probable that a court of equity would make that application of his interest. And this the court might do, upon the principle which is sometimes applied in partnership cases, that where a partner has reserved a lien upon the partnership assets for the payment of the debts of the firm of which he is a member, or where he has applied a portion of the joint property to the payment of such debts, there the creditors of that firm may avail themselves of this lien, and work out their equities through him. Counsel on both sides have referred to cases, where that principle is sanctioned and enforced. So that, if the understanding of Joyce was that his interest in the store and lot should be applied to the discharge of the debts of the firm of Dore & Co. to the bank, then, since that debt has been paid, he may insist that this application shall be made of it, and the creditors of that firm may work out tbeir equity through him by the aid of this equitable doctriue. It seems to us that this is as far as a court of equity will go in the distribution of this property, upon the facts appearing in evidence.

The court below, however, held that this conveyance to Judge Wetherby was fraudulent and void as to the creditors of the firm of Dore & Co. That firm was composed of Dore, Dwyer and Joyce. It commenced business in July, 1866, succeeding the firm of Dore & Dwyer, which had previously been doing a mercantile business at Hudson, and which owed the First National Bank a debt of about $1,700. It appears that Joyce contributed little or no means to the capital of the firm, though the fact is established that he paid a small amount to purchase the lot upon which the store was erected. The store was erected sometime during the summer and fall of 1866, and the lot was principally paid for, and the building was mostly, if not entirely, paid for out of the means of the old firm of Dore & Dwyer. It is probable that the means of Dore & Co., to a small extent, were contributed to pay for work and material used in the erection of the store. The court below held that the legal title to the store and lot was in Dore, Dwyer and Joyce as tenants in common; but that, as they were purchased with partnership funds for partnership purposes, each partner held his interest in trust for the company until the accounts were settled and partnership debts were paid. And further, because the firm of Dore & Co. were in embarrassed circumstances and unable to meet their liabilities when the conveyance was made to Judge Wetherby, that the title never vested in favor of the •creditors of Dore & Dwyer, but that the property must be applied to the discharge of the debts of the new firm. We do not perceive upon what principle this superior equity of the creditors of the new firm rests. We have already remarked that the evidence shows that the store and lot were mostl-y paid for out of the assets of the old firm. Under such circumstances, equity and justice would seem to require that the pro-ceels of tbe property sbould be appropriated to tbe payment of tbe debts of Dore & Dwyer, at least, so far as tbe assets of tbat firm contributed to its acquisition. Especially sbould this be so in view of tbe fact tbat tbe partners themselves bave charged it with tbe payment of a valid debt owing by tbe old firm. We bave already alluded to tbe equitable doctrine, sanctioned in many cases, which would devote tbe interest of tbe partner Joyce, to the payment of tbe debts of tbe firm' of Dore & Co., providing be executed tbe conveyance with tbe understanding it sbould be so applied.. But' why sbould a court of equity go farther than this, and give tbe creditors of tbe new firm a preference in tbe distribution of tbe property? In this case, tbe bank surely acquired a priority at law by securing tbe mortgage. Its equity was equal, if it was' not in fact superior, to tbe equities of tbe new firm, because tbe mortgaged property was principally acquired by the assets of Dore & Dwyer. And as tbe partners, by common consent, appropriated it to tbe liquidation of tbe debt due tbe bank, it sbould not be taken from tbe bank and given to tbe creditors of tbe new firm. Such a distribution of tbe property would be contrary to tbe principles of natural justice. It is giving the creditors of Dore & Co. a preference to which they have' no equitable right. Tbe transfer by tbe partners to tbe bank seems to bave been made in tbe utmost good faith. There is no pretense tbat there was any intent on tbe part of any one to defraud other creditors by giving this conveyance. But the1 partners, in tbe management of their own affairs, saw fit to give tbe bank a mortgage upon a part of tbe partnership property, and what principle forbids them to make this disposition of it ? It must be admitted tbat only a small amount of tbe assets of tbe new firm was contributed to tbe acquisition of this property. It was almost entirely acquired by tbe assets of tbe firm of Dore & Dwyer. And to take it from a creditor of tbat firm, who by diligence has obtained a transfer of it to secure tbe payment of a valid debt, and appropriate it entirely to tbe payment of tbe debts of tbe new firm, seems to ns a violation of all principles of equity and justice.

It is said that where a partnership is changed, retaining the assets of the old one, the creditors of the new firm are to be preferred; and the case of Smith v. Howard, 20 How. Pr. R, 121, is referred to in support of this position. This case, however, merely decides that the creditors of an old firm have no equity against the partnership property of the old firm in the hands of the new firm or their assignee; and that, while the partners are administering their own affairs, they may prefer one set of creditors in an assignment. And this case very clearly states the rule, that, when partners are thus administering their own affairs, the partnership creditors have no lien upon those funds, and that the equities between the joint and separate creditors of the partnership depend solely upon the equities of the partners themselves, and must be worked out through them. An application of this principle would doubtless require the interest of Joyce in the mortgaged property to be applied in the manner he intended when he executed the conveyance to Judge Wetherby. Further than this we do not think a court of equity should go in the distribution of that property.

It follows from these views that the judgment of the circuit court must be reversed, and the cause remanded for further proceedings in accordance with this opinion.

By the Court— So ordered.