Robinson Bank v. Miller

The Robinson Bank, one of the appellants herein, claims that the mill property including the four acres of land upon which the mill was located, was partnership property belonging to the firm of Newton, Emmons Miller; that, as such, it was first liable to be subjected to the payment of the partnership creditors, including the Bank; that the mortgagees, Lamport, Walter, and Willis and Wiley S. Emmons, were individual creditors of Miller and John S. Emmons, and only entitled to such surplus as might arise out of the mill property after the payment therefrom of the firm debts.

Whether real estate, upon which a partnership transacts its business, is firm property or the property of the individual members of the firm, is oftentimes a difficult question to determine, and one upon which the authorities are not altogether uniform.

The mere fact of the use of land by a firm does not make it partnership property. (Goepper v. Ginsinger, 39 Ohio St. 429;Hatchett v. Blanton, 72 Ala. 423). Nor is real estate necessarily the individual property of the members of a firm because the title is held by one member, or by the several members in undivided interests. (1 Bates on Law of Partnership, sec. 280). Whether real estate is partnership or individual property depends largely upon the intention of the partners. That intention may be expressed in the deed conveying the land, or in the articles of partnership; but when it is not so expressed, the circumstances, usually relied upon to determine the question, are the ownership of the funds paid for the land, the uses to which it is put, and the manner in which it is entered in the accounts upon the books of the firm. (1 Bates on Law of Part. sec. 280; 2 Lindley on Part. marg. page 649; 17 Am. Eng. Enc. of Law, page 945, and cases in note).

Where real estate is bought with partnership funds for partnership purposes, and is applied to partnership uses, or entered and carried in the accounts of the firm as a partnership asset, it is deemed to be firm property; and, in such case, it makes no difference, in a court of equity, whether the title is vested in all the partners as tenants in common, or in one of them, or in a stranger. (Parsons on Part. — 4 ed. — sec. 265; 1 Bates on Law of Part. sec. 281; Johnson v. Clark,18 Kan. 157; 17 Am. Eng. Enc. of Law, page 948, and cases cited). If the real estate is purchased with partnership funds, the party holding the legal title will be regarded as holding it subject to a resulting trust in favor of the firm furnishing the money. In such case no agreement is necessary; and the statute of frauds has no application. (Parker v. Bowles,57 N. H. 491; 1 Bates on Law of Part. sec. 281).

In the case at bar, the land was not purchased with partnership funds. The undivided one third interest bought by John S. Emmons was paid for by him with his own individual money. Miller also paid for the one undivided one third interest, purchased by him, with his individual funds. None of the money of the firm of Newton, Emmons Miller was contributed towards the purchase of the one third interest held by Newton. Indeed, the proof shows, that the firm of Newton, Emmons Miller was formed by an oral agreement after Emmons and Miller had bought their interests. Each partner here held the title to an undivided one third part of the property. No entries were made upon the books of the firm, showing that the real estate was treated as firm assets. The evidence, however, does show that the property was bought for the purpose of being used in the milling business, and that, after its purchase, it was used for firm purposes, and that the firm gave its notes to pay for repairs and for placing new machinery in the mill upon the premises. Under these circumstances, was the land partnership property, or the individual property of the partners holding as tenants in common?

It cannot be said, that the land is firm property upon the theory of a resulting trust, because the money of the firm was not used to buy the property. Such a trust might exist in favor of the firm, regarding it as a person, if the partners had taken the legal title, and the firm had advanced the purchase money. The trust must arise at the time of the execution of the conveyance, and when the title vests in the grantee. Such could not have been the case here under the facts stated. (VanBuskirk v. Van-Buskirk, 148 Ill. 9). In view of the fact, that the land was bought with individual, and not partnership, funds, and was conveyed in undivided interests to the several partners, and in the absence of any agreement that it should be regarded as firm property, does the conduct of the parties in afterwards forming a partnership, and using the property for partnership purposes, and repairing and improving the mill at the expense of the firm, make the land firm property in a court of equity? A negative answer to this question is found in many of the authorities, as will be seen by reference to the following: Alexander v. Kimbro, 49 Miss. 529; Thenot v. Michel, 28 La. Ann. 107; Reynolds v. Ruckman,35 Mich. 80; Parker v. Bowles, 57 N. H. 491; Thompson v. Bowman, 6 Wall. 316; Frink v. Branch, 16 Conn. 260; Wheatley's Heirs v. Calhoun, 12 Leigh, 264; Sikes v. Work, 6 Gray, 433; Gordon v. Gordon, 49 Mich. 501;Moody v. Rathburn, 7 Minn. 89; Paige v. Paige, 71 Iowa, 318; Parsons on Part. — 4 ed. — sec. 266; Hatchett v. Blanton, supra. The general doctrine of all these cases is, that a purchase of the land with partnership funds is necessary to make it firm property. Parsons in his work on Partnership (4th ed.) says: "Although it (real estate) be held in the joint name of two or more persons, if there be no proof that it was purchased with partnership funds for partnership purposes, it will be considered as held by them as joint tenants, or tenants in common; So, if not paid for by partnership funds, then it is probably his property who does pay for it, whatever use he permits to be made of it." (Secs. 265, 266). In Hanchett v. Blanton, supra, the Supreme Court of Alabama say: "Steering clear of all cases of fraud or of the use by one partner, without the approbation of his associates, of partnership funds in the acquisition of real estate, the two facts must concur to constitute real estate partnership property — acquisition with partnership funds, or on partnership credit, and for the uses of the partnership." In Thompson v. Bowman, supra, the Supreme Court of the United States say: "In the absence of proof of its purchase with partnership funds for partnership purposes, real property standing in the names of several persons is deemed to be held by them as joint tenants, or as tenants in common." (Buchan v. Sumner, 2 Barb. Ch. 165).

The theory of some of the cases is, that real estate, bought with separate and not partnership funds, cannot be converted into firm property by a verbal agreement between the partners, because no trust can be created in lands unless by writing, in view of the statute of frauds, except such as results by implication of law. (Parker v. Bowles,supra).

There are cases which hold, that, even though the land was originally bought by the several partners with their individual funds, and deeded to them as tenants in common, yet it will be regarded in equity as firm property where it is improved out of partnership funds for firm purposes and actually used for such purposes, or where the firm puts valuable and permanent improvements upon it for firm purposes, and which are essential to the firm. In some instances the land is held to be the property of the partners, and the improvements to be the property of the firm. (1 Bates on Law of Part. secs. 281, 282). The use of the property is not conclusive of its character as real estate or personalty, but is only evidence of the intention of the parties. (Idem. sec. 285). When the intention of the partners to convert the land into firm property is inferred from circumstances, the circumstances must be such as do not admit of any other equally reasonable and satisfactory explanation. (Parsons on Part. sec. 267). And where it is sought to show a conversion of the land into personalty by agreement of the partners, such agreement must be clear and explicit. (17 Am. Eng. Enc. of Law, page 954, and cases cited.)

In Alkire v. Kahle, 123 Ill. 496, land was conveyed during the existence of the partnership to "Cato Abbott and Henry Robinson, composing the firm of Abbott Robinson," and it was held not to be partnership property, because it was not shown to have been either purchased with partnership funds, or used for partnership purposes; but we do not regard that case as holding that the mere use of the land for partnership purposes constitutes it firm property.

In Mauck v. Mauck, 54 Ill. 281, land which had been bought and held for firm purposes was said to be firm property and to partake of the character of personalty, but in that case a part of the business of the firm was to buy and sell real estate, and, although the land was said to belong to the firm, it does not appear that it was not purchased with partnership funds.

In Faulds v. Yates, 57 Ill. 416, the land was bought for the use of the partnership, but after the partnership was formed and with the money of two of the partners.

In Bopp v. Fox, 63 Ill. 540, land, bought by four partners with their individual funds and conveyed to them in their individual names, was held to be partnership property, because, two weeks before the purchase, the four purchasers made, not a mere executory agreement to form a partnership at a future time, but "a present verbal agreement of partnership," and then afterwards bought the land and began the erection of a mill for the purpose of carrying on the milling business as a firm "already formed under the verbal agreement." It was there held, that the essential question was, whether the purchase money "was paid as partnership money for a partnership purpose," and we said: "We consider this was essentially a purchase with partnership funds for partnership purposes."

The weight of authority seems to us to support the position, that, where persons, who afterwards become partners, buy land in their individual names, and with their individual funds, before the making of a partnership agreement, the land will be regarded as the individual property of the partners, in the absence of a clear and explicit agreement subsequently entered into by them to make it firm property, or in the absence of controlling circumstances which indicate an intention to convert it into firm assets. We do not think, that an application of this rule to the facts of the present case shows the real estate here in controversy to be firm property. The testimony proves affirmatively, that there was no agreement, written or verbal, to put the land into the firm as a firm asset, and that it was treated by the parties as individual property. John S. Emmons insured his interest separately. When he gave his note for $1500.00, signed by his brother as surety, in part payment of the purchase money for the land, he promised his brother that he would give him a mortgage on his one third interest, when the master's certificate, issued to him at the sale, should ripen into a deed; and the mortgage afterwards made was given as soon as the master's deed was obtained. Four months after the purchase, when he borrowed $1800.00 of the Bank upon his note signed by his father and father-in-law as sureties, he stated to the Bank that he intended to mortgage his interest to his sureties to secure them. About this time Newton, Emmons Miller paid $5400.00 in cash for improving the mill, but this amount was contributed by the partners, not out of partnership funds, but by the contribution of their individual monies, each paying one third. The one third so paid by John S. Emmons was the $1800.00 borrowed on his note. The Bank itself in procuring deeds from the partners in September, 1884, dealt with them as owners of separate interests.

Each member of a partnership has a superior lien on the partnership property for the payment of the firm debts. This equitable lien of the partners is worked out for the benefit of the firm creditors. (Hapgood v. Cornwell, 48 Ill. 64). Hence, partnership property must be first applied to the payment of partnership debts; and the true interest of each partner in such property is the balance found to be due to him after the payment of the firm debts and the settlement of accounts between the partners. (Bopp v. Fox,supra). In equity, real estate stands on the same footing in this respect as personal property. (Alkire v. Kahle, supra). It results, that there can be no dower interest in real estate owned by a partnership, until all the partnership debts are paid, and the partnership accounts are adjusted. (Trowbridge v. Cross, 117 Ill. 109). If the land in controversy was firm property in September, 1884, there were no dower interests at that time in the wives of Newton, Emmons and Miller, and yet their wives were required by the Bank to sign the deeds to its trustee, Woodworth, and one of them was paid $200.00 for her signature.

There is no question about the bona fide character of the mortgages to Willis Emmons, and Wiley S. Emmons and W. W. Walter. They paid the judgments upon the notes of John S. Emmons upon which they were sureties, and those notes were given for borrowed money expended in the purchase and improvement of the mill property. We think those mortgages have been properly sustained as resting upon an undivided one third interest in the land, which must be regarded, under all the circumstances of this case, as the separate property of John S. Emmons.

But even if the interest held by John S. Emmons was firm property, there is nothing to show that the holders of the mortgages thereon had notice, or reasonable ground for believing, that it was firm property. The record title was in John S. Emmons, and all the circumstances coming to their knowledge, as heretofore stated, were calculated to create the impression that his real interest was that indicated by the record. Facts showing a partnership in the milling and grain business were not necessarily notice of a partnership in the land. Now, it is well settled that a bona fide purchaser, or mortgagee, of firm property from one of the partners holding the legal title, without notice of its partnership character, will hold it free from partnership claims. (Parsons on Part. — 4 ed. — secs. 277, 278; 1 Bates on Law of Part, sec. 291; Dyer v. Clark, 5 Metc. 562; Collyer on Part. — Perkins' ed. — sec. 135).

When a firm and its members are insolvent, and the firm has been dissolved, an equity exists in favor of the creditors of the firm in respect of the lands purchased with partnership funds, which is superior to that of the creditors of the individual partners; but there may be cases where an equal or superior equity may be created in favor of a creditor of an individual member of the firm, as where one has furnished to one of the members the capital upon which the business was commenced. (Reeves v. Ayers, 38 Ill. 418). By signing the note for $1500.00 as surety, Willis Emmons enabled John S. Emmons to purchase an interest in the mill property, and, if that interest was a partnership asset, he thereby aided in procuring a part of the firm capital.

In addition to what has been said, we think the evidence shows that the officers of the Bank, if they did not actually make an agreement to that effect, gave John S. Emmons to understand that the Bank would protect the mortgages on his interest, if he and his wife would sign the deed to the Bank. The consideration of that deed was just the amount of the two mortgages; and four witnesses swear that one of the officers of the Bank promised to take care of the mortgages. When a person, by his words or conduct, voluntarily causes another to believe in the existence of a certain state of things and induces him to act upon that belief so as to change his previous position, the former will be estopped to aver against the latter a different state of things. (Casler v. Byers,129 Ill. 657).

As to the mortgage made by the appellant, Miller, to Lamport, the lower courts have found that that mortgage was not made in good faith, and was not given to secure a bona fide indebtedness. It is claimed that the note for $5500.00, secured thereby, was given for money loaned to Miller by his wife and by his brother-in-law, Lamport. It is true, that the fact of the relationship between the parties is no proof of fraud, although it may be a circumstance to excite suspicion. (Wightman v. Hart, 37 Ill. 123). But we are not satisfied from the evidence, that the money, alleged to have belonged to Mrs. Miller, was not the money of Miller himself. If any funds were loaned to him by Lamport, it is not possible to fix their exact amount separately from those alleged to have been borrowed of Mrs. Miller. The witnesses contradict each other as to amounts, and as to the times and places of payment. There is refusal to answer questions, and failure to explain matters needing explanation. We have examined all the testimony as contained in the original record, and we cannot say that the Circuit Court erred in the conclusion reached by it in regard to this mortgage, or that the Appellate Court has erred in agreeing with the Circuit Court.

It is true that the deed from Miller and Newton to the Bank contains the words "subject to incumbrances," but we think the reference here is to incumbrances, which are made in good faith. The facts about the mortgage were not known when the deed was executed. There is some conflict in the evidence as to whether the parties intended to refer to the Lamport mortgage, or to certain liens claimed to exist in favor of creditors, who had furnished machinery for the mill. But even if the words refer to the Lamport mortgage alone, it is not certain from the testimony that the amount of that mortgage was a part of the consideration for the execution of the deed. The grantee in a deed, who purchases subject to an incumbrance to secure indebtedness, may not be under obligations to pay such indebtedness, if its amount is not included in and does not form a part of the consideration of the conveyance. (Drury v. Holden, 121 Ill. 130). The amount named as the consideration in the deed was simply the agreed value of Newton's interest, and did not include any part of this mortgage. The amount of the actual consideration agreed to be paid by the Bank for the deed of Miller's interest, towit: $5333.33, (one third of $16,000.00) was paid by a credit of that amount on the firm indebtedness of $21,585.23, due from Newton, Emmons Miller to the Bank.

The judgment of the Appellate Court and the decree of the Circuit Court are affirmed.

Judgment affirmed.

Mr. JUSTICE PHILLIPS, having heard this case in the Appellate Court, took no part in its decision in this court.