Burtus v. Tisdall

By the Court, Strong, P. J.

Although the plaintiff does not, in his bill of complaint, directly impeach the sale from the defendants Tisdall & Hickman to the defendant Bailey, yet he calls for a full disclosure of all the particulars of that transaction. As a creditor’s bill is for discovery as well as relief, the plaintiff is at liberty to avail himself of any objections to a proceeding on the part of the defendants affecting his rights, although they may not have been specified by, or even generally charged, in the bill. The rule results from the necessity of the case; as a creditor cannot be supposed to be thoroughly acquainted with the conduct of his debtor towards third persons ; especially when, as is generally the case in fraudulent transactions, efforts are made to conceal the circumstances from the public. The call for an account of the disposition of the promissory notes given on the sale, and the objections raised to the manner in which it was alleged by Hickman and Bailey they had been satisfied, cannot be construed into an admission by the plaintiff of the fairness of the sale, or its conclusiveness as to his rights. A transfer of goods for the use of the persons making the same, although void as to their creditors, is yet valid as between the parties. The notes given for the purchase money, to the vendors, are choses in action belonging to them, and until they are passed to an innocent holder, for a new consideration advanced by him, may be reached by a creditor’s bill. True, the goods, while in the hands of a fraudulent vendee, may be seized and sold under an execution of one who was a creditor of the vendor at the time of the fraudulent sale. But when, as in this case, the goods are subsequently exposed for sale for a considerable period of time, and many of them doubtless sold, and the residue, if any, so far mingled with other goods that they cannot be identified, and especially when an ■execution actually issued has-proved unavailing, the creditor’s only remedy is for the value of the goods, in some shape or other. A voluntary assignee for the benefit of the creditors cannot object to a previous sale, although fraudulent; because his title proceeds from the assignor, whose interest is bound by the sale. But the right of the creditor is secured by the statute, and that cannot be affected by the mere fact that the goods have been removed beyond his reach before he could assail the transaction, for the protection of his rights. There cannot be a doubt that the value of such goods can be obtained through a creditor’s bill when the vendee is a party. (Edmeston and Riddle, ex'rs, v. Lyde & Walton, 1 Paige, 637.) And that is all for which the plaintiff calls in this case. It is therefore manifestly proper to consider all the circumstances, in order to determine whether Tisdall & Hickman, or the plaintiff as then-unsatisfied judgment creditor, have not a claim against Bailey for the value of the goods sold to him, which the plaintiff has an equitable right to have enforced towards the satisfaction of his judgment. It is evident that the firm of Tisdall & Hickman became insolvent a considerable period before the time of the sale. That took place on the 13th of April, 1843. Hickman informed the witnesses Byrne and Major that the firm had intended and prepared to fail in the middle of the previous February, and that they would have done so had it not been for the assistance of Rogers & Co. of Philadelphia. Bailey stated to the witness Roberts that he had been aware of their embarrassments for some time previous to the sale, and that latterly he had not borrowed any money for their accommodation. There can be no doubt that the firm was hopelessly insolvent at the time of the sale. Under these circumstances they executed a bill of sale of all their stock in trade, and the articles of personal property in their two coal yards, to Bailey, who was Hickman’s brother-in-law, and, as he himself said, was not worth any thing, for the sum of $1100. No reason is assigned for this extraordinary transaction, by any of the parties. It w-as concocted and arranged in so private a manner that the sale was not known to Mr. Pim, the principal clerk of the firm, until he was called to subscribe his name as a witness, although he was so much in their confidence that they constituted him one of their general assignees some five days afterwards. Bailey paid no money at the time, but gave his four promissory notes without security, each for one fourth part of the purchase money, payable to Tisdall & Hickman or order, two payable in sixty days, and two in ninety days after date. The notes were divided between the partners within an hour after they were given, and on the following day Tisdall endorsed the two allotted to him to his father, and Hickman delivered the other two to his brother-in-law, the defendant Bailey. It is said, although by no means satisfactorily proved, that the firm was indebted to Tisdall’s father to the amount of one of the notes: if so, that was all that was paid to the creditors of the firm; if otherwise, the creditors received no part of the purchase money. Now I am not disposed to judge harshly of the motives of parties, merely from the evidence adduced in a court of justice. I am aware that it often happens, sometimes from the inattention of the parties or their counsel, and sometimes from the strictness of the rules of evidence, that we have not a full history of the case. But here we have the statements of the parties themselves, that is, of Hickman and Bailey, both of whom have answered under oath, and one of them has been examined as a witness for the other; and it is but fair to presume that they have stated all that could be urged in their defence. But after giving all due credit to their statements, I am satisfied that there was a palpable attempt to defraud the creditors of Tisdall & Hickman. The goods were placed beyond the reach of the creditors, and there was an evident design that the avails should be effectually secured for the use of the debtors.

Was this fraudulent design known to Bailey, and did he aid in its accomplishment ? He had every opportunity of becoming fully acquainted with the circumstances of Tisdall & Hickman previous to, and at the time of, the sale. He had been on intimate terms with Hickman from the year 1833. They boarded in the same house, in 1840. Hickman married Bailey’s sister in 1841. Bailey resided in Hickman’s family from August, 1842, until the time of the sale. During that period Bailey w'as almost daily in the store of Tisdall & Hickman, often transacted business for them, and had free access to, and occasionally examined, their books; and immediately after the sale Bailey employed Hickman as clerk. He was of course an actor in an unusual and unexplained sale and purchase, and consummated the purchase in a manner which, if it was not unprecedented, was at least very singular. The inference from all this is irresistible, that, let him shut his eyes as much as he pleased, he must have known that the object of Tisdall &. Hickman, in making the sale, and receiving, dividing and appropriating the proceeds, was to defraud their creditors, and that he intentionally aided them in effecting their design.

The question is, whether Bailey can be permitted to turn these circumstances to his own advantage so as to obtain a preference over the fair and honest creditor of the fraudulent debtors 1 It would be most unconscientious—it would be a disgrace to the administration of our laws—if he could be permitted to do so. It is a clear principle of equity and justice that no man shall be allowed to profit by his own fraudulent acts, or the fraudulent acts of another in which he knowingly participates. This would be a sufficient reason why Bailey should not be allowed to interpose his demands against Hickman individually, if they had been clearly proved, nor the payment of money to him to carry out the fraud, so as to prevent the plaintiff from enforcing his claim for so much of the proceeds of the goods of the firm as has not been paid to the firm or its creditors. For this reason alone the plaintiff would be entitled to the relief called for by his bill.

But it may be well in a case circumstanced like the present, to consider the facts and the principle on which Bailey seeks to protect himself from the payment of any part of the plaintiff’s judgment. Bailey claims that he had, at the time when the bill was filed, several demands against the firm, which should at all events be credited to him. And he also alleges that he had at the time of the sale several claims against Hickman individually, and that the two notes which were allotted to Hickman were satisfied partly by those claims, and the residue by money paid to him at the time.

There is no satisfactory evidence that the firm was indebted at all to Bailey, at the time of the sale. The fact that negotiable notes for the full amount of the purchase money were given to the vendors, who were known to be insolvent, is strong, if not conclusive, to show that nothing was then due to the vendee. It is satisfactorily proved, however, that subsequent to the sale Bailey paid a note for $119,60, which he had previously given for the benefit of the firm, and also rents and taxes accruing before the sale, amounting to $157,06. He is, I think, equitably entitled to have those sums credited to him, and is only accountable to the plaintiff for the balance, amounting to $273,30, with the interest.

But as far as relates to Bailey’s demands against Hickman individually, I am by no means convinced that they remained unsatisfied at the time of the sale. Those demands were, 1st. the amount of a note alleged to have been given by Hickman to Bailey for money lent, dated February 3d, 1841, for the principal sum of $183,87, and 2d. the amount of an account for goods purchased by Bailey for Hickman and his wife in England, and for which he paid $113,50. I am inclined to think that the note was actually given for money supposed to be due at the time it bears date. Bailey and Hickman both swear positively to the fact, and there is no direct evidence to contradict them in this particular. The circumstances stated by them are unusual, but they may be explained by the intimacy existing between them, and the confidence which they reposed in each other. Besides, the note was produced in evidence and its genuineness was proved. So also I think the evidence is sufficient to prove the account for purchases made in England. But the great and insurmountable objection to the allowance of these charges is, that it is no where stated, in the language of several of our statutes, and as it should have been averred, if true, in a matter surrounded by so many suspicious circumstances, that they were due “ over and above all discounts.” It seems singular that the requisite question to elicit information on this point was not asked, but notwithstanding, I think the statement would have been volunteered if it could have been truly made. For any thing that appears, there may have been set-offs. There was at least one. Bailey had boarded with Hickman from August, 1842, to April, 1843, about eight months, and for which confessedly nothing had been paid. Hickman says that “ where they both came from in England, such a thing as charging a relative board is not known, whatever his circumstances may be.” That may all be true and right enough, where the board is actually given by the relative, but it would be considered wrong, probably in England, and certainly in this country, when it is at the expense of his creditors. There a man should be just before he is generous, if that may be called generosity which is at the expense of another. But the generosity in this case seems to have been all on the side of the insolvent debtor. The creditor, while receiving his board gratuitously, thought proper to charge his relative seven per cent interest, and also to demand payment for articles of wearing' apparel which he had purchased for his own sister about the time of her marriage. There is, at any rate, strong reason to infer that the two claims in question had been fully satisfied in some way or other, (although possibly they had not been directly paid,) before the sale. As Bailey had known for some time previous to that transaction that the firm was insolvent, and had on that account refused to make loans for them, it is by no means probable that he would have postponed the settlement of his claims so long. Besides, if Hickman had been indebted to him at the time, he would have deducted the amount from the purchase money, and have given his notes only for the balance. He would not have been restrained then, any more than he was the next day, by the consideration that in justice the money should be paid to the creditors of the firm. From these circumstances, we are, I think, warranted in drawing the inference that those claims had been previously satisfied, and were resuscitated for the occasion.

If Bailey in fact paid money to Hickman, and the payment was made in good faith, and without any intention to defraud the creditors of the firm, it should be sustained. But I am not satisfied that any such payment of money was made. Bailey, it is true, swears positively to the payment, and his oath is responsive to the bill. In such case, the answer is evidence, but it is by no means conclusive. It may be controverted by other evidence, or by the circumstances of the case, which may be proved by other testimony, or admitted. Bailey’s statement as to the alleged payment, contained in his answer, is to some extent at variance with the testimony adduced by him. He says that the balance due on the two notes which came into the possession of Hickman, amounting to $224,75, was then, (April 14th, 1843,) paid in cash by him to Hickman, and the two notes were delivered to him, (Bailey,) at the time of the settlement. The allegation is material, as it would have been singular for Hickman to surrender both notes before the whole amount had been satisfied. Hickman says the same in his answer, but he says in his evidence that $170 only was paid at the time, and the balance a few days afterwards. His evidence corresponds with the endorsement on the back of the note which he gave to Bailey; and both contradict the answer. The discrepancy is not of itself very material, but taken in connexion with other circumstances, has a tendency to discredit the answers, and to destroy their effect. It seems strange that Bailey, after having given his note payable in ninety days, should have paid it immediately. If he had been in affluent circumstances, with the ready command of money, and Hickman had needed it to answer some pressing emergency, the immediate payment would have been natural enough. But Bailey had stated to the witness Roberts, within the preceding year, “ that he was not worth any thing, and that he could not get any thing to doand Hickman had asked the same witness if he knew of any one who would be likely to want Bailey’s services, or would give him employment. It is evident that he was not engaged in any business, and it is by no means probable that he had the command of money. Nor does it appear that Hickman intended to appropriate the money to answer any existing pressing necessity. On the contrary it is to be inferred from what he says that he used it for the purpose of answering future expenditures. Neither is it at all probable that Bailey would pay the whole amount of notes due at a future day, leaving unsatisfied and unsecured taxes and rents to a considerable extent, due from the payee and his partner, who were insolvent, and which would still continue a lien on the property for which the notes were given. The whole seems so improbable that we are bound to reject the allegation made in Bailey’s answer as to the payment of the two hundred and twenty-four dollars and seventy-five cents, unless it is satisfactorily supported by other evidence. I have already stated that Hickman’s account of the alleged payment differs from that given by Bailey. Hickman, however, says that the whole was eventually paid. I have given some effect to his evidence on another point, where it was supported by the circumstances, and seemed probable. In such case a discredited witness may be believed. But it is different when an allegation is supported by his evidence alone, or principally, when confessedly there can be no one to contradict what he says, if untrue, and where his statement is in effect contradicted by the attending circumstances. Hickman is expressly contradicted as to his former assertion of an important fact, which, if it existed at all, must have been known to and remembered by him, by two unimpeached witnesses. He swears that he never said to those witnesses that his firm was prepared to fail in February, 1843. Bach of the rebutting witnesses swears expressly that he did make such declaration to them. The assistant vice chancellor supposes that the declaration related to a collateral matter, and therefore could not be controverted. And he directed that the contradictory testimony should be struck out of the case. It is true that a witness’ evidence denying a supposed allegation by him in a collateral matter cannot be controverted by other evidence. The rule, however, is one of convenience, not of justice to the witness; for it is as discreditable to him to swear falsely in a collateral matter as in something having a direct bearing upon the merits of the controversy. The subject to which the declaration in this case referred was not, however, entirely collateral; it was material to determine whether Bailey in fact suffered claims against a known insolvent, having, however, the means, and no doubt the will, to pay them, to remain unsatisfied from that time until the 14th of the following April, and was entitled to considerable weight in the decision of that question. The evidence ordered to be struck out must, therefore, be restored. And with that evidence and the attending circumstances, the testimony of Hickman is insufficient to establish the allegation of payment. If, however, the alleged payment had been fully made out, it could not avail the defendant Bailey, as it would have been evident that it must have been made to carry out an intent to defraud the creditors of the firm, with which he was fully acquainted, and in which he participated.

It was contended on the argument, by the counsel for Hickman and Bailey, that copartners have a right to appropriate, by mutual consent, their joint property to the payment of debts owing by them individually, leaving those of the partnership unsatisfied. That may be true where the firm is solvent, and sufficient is left to satisfy the joint debts. Nothing like insolvency was disclosed in the cases of Laverty v. Burr, (1 Wend. 529,) and Vallet v. Parker, (6 Id. 615,) nor affected the point in controversy in Everingham v. Ainsworth, (7 Id. 326,) which were cited by the late assistant vice chancellor when this cause was decided by him. But the rule in England in cases of bankruptcy is uniform, that the primary distribution must be made to the joint creditors. I cannot see why the same practice should not prevail in this state, in cases of insolvency. It would be manifestly just, and in accordance with well settled principles. The funds of the partnership belong to the firm, to the extent of its liabilities. When the liabilities exceed the effects, the whole are joint property. It is clearly settled that the joint creditors have then the first equitable claim upon the whole, for the satisfaction of their debts. The creditors of the partners individually have such claim only upon their property as individuals. That is only the surplus, where there is any, and where there is none, there is nothing to which it can attach. In all cases of coercive measures, whether at law or in equity, these rules control. (3 Vesey, 238. 4 Id. 396. 17 Id. 115, 193, 407. 1 Wight. Exch. Rep. 50. 4 John. Ch. Rep. 525. 16 John. Rep. 106. 3 Denio’s Rep. 125. 3 Kent’s Com. 37.) Can rules so manifestly just be subverted by the agency of the partners and their separate creditors, to the prejudice, and without the consent, of those having claims against the firm 7 That point was discussed in Wakeman v. Grover, (4 Paige, 23,) which was the case of a voluntary assignment of partnership effects for the benefit of the creditors. It was supposed by the counsel for one of the complainants that a preference was given to the payment of an individual over several of the joint debts ; and it was contended that the assignment was so far invalid. The chancellor said that the question was one of great importance to the commercial community; but he declined deciding it, on the ground that it did not necessarily arise, and was not the main point in the cause. It was again raised by the counsel for the same party when the case came before the court for the correction of errors. (11 Wend. 187.) The counsel for the other parties did not controvert the law, but denied its applicability to the facts of the case. Judge Sutherland, who gave the leading opinion, declined discussing the point, for the reasons assigned by the chancellor. Senator Edmonds said that a direction, in an assignment of an insolvent firm, to pay an individual debt of one of the partners, “ might be held void as to partnership creditors, but this would be on the principle that the partnership property must first go to pay partnership debts.” Independently of authority, I cannot see on what principle an act which is clearly a misapplication of a fund to the prejudice of those who have an equitable claim to it, can be sustained. True the partners, even when they are insolvent, have the general power to sell the partnership effects. This is necessary for the protection of bona fide purchasers; and besides, when the sale is for a new and sufficient consideration, the funds are not in fact diminished. The purchase money received by the partners supplies the place of the article sold. But it is otherwise where the property is applied in payment of an antecedent individual debt. The alleged power to do that has not the same, nor indeed any sound reason, to support it. Insolvent partners should be considered as holding their joint property for the benefit of their joint creditors; and a misappropriation should be deemed in fraud of the implied trust. Unfortunately the protection of the rights of creditors is often the last consideration with insolvents. When they become satisfied of their inability to pay their debts, their remaining property is frequently diverted to inequitable purposes, or squandered with reckless profusion; so that the confiding creditor when driven to a lawsuit, finds at the end of it nothing but “ a beggarly account of empty boxes.” The power of insolvents over property which justly belongs to their creditors ought not to be extended.

If, as some of the authorities indicate, the prior lien of a joint creditor can be enforced only through the medium and for the benefit of a dissenting partner, then it would seem to follow that an assent by all the partners to transfer their property to pay an individual, in preference to a partnership, debt, might give validity to the transaction. It could not be successfully attacked by the joint creditors. But although one object of establishing the rule may have been to protect the interests of the partners, yet I conceive that it was designed for other and paramount considerations. Why should a rule for the distribution of property have reference to the partners, who, when insolvent, have in reality no interest in it, rather than to the creditors, who, according to acknowledged equitable principles, should be alone interested in its proper destination? Chancellor Kent says, (3 Kents Com. 65,) “ The basis of the general rule is, that the funds are to be liable on which the credit was given. In contracts with a partnership, the credit is supposed to be given to the firm ; but those who deal with an individual member rely on his sufficiency.” Another reason is, that the partnership funds are generally benefited, sometimes created, by the partnership debts; seldom by those due from individual partners. Until I am overruled by the highest authority, I shall hold that the right to the priority in question is, as it should be, for the benefit of the partnership creditors, and cannot be impaired by any consideration having reference to the interests of the partners, or their individual creditors. The assistant vice chancellor, while admitting that the members of an insolvent partnership cannot assign their property to pay an individual, in preference to a joint debt, supposes that they may divide the funds among themselves, and that then each may apply the part allotted to him in a preferred payment of his separate debts. But what have they to divide ? Chancellor Kent says, (3 Kent’s Com. 64,) “ The partnership debts are to be settled before any division of the funds takes place.” When the funds are insufficient to pay such debts there is no surplus, nothing to divide, unless the partners are authorized to appropriate to each other property equitably belonging to their creditors. The joint interests of the firm are distinct from the separate interests of the members. By effecting a division, the firm would be making a present to the individual members. A gift to a stranger, to the prejudice of the creditors, would be ineffectual as to them: why would not a donation to each partner be equally so 1 If we should hold that partners could not so assign their property as to give a preference to individual, over joint creditors, and yet that they could divide it among each other, and then that each might apply the part allotted to him in payment of his separate debts, leaving the joint debts unsatisfied, it would be deciding that an object inequitable in itself might be accomplished by indirect, which could not be effected by direct means; contrary to a general, although possibly not a universal rule. My impression is that a division between the partners would not relieve the property while in their possession from the equitable priority of the lien of the joint, over the separate, creditors, nor authorize them to apply it to individual purposes. It certainly would not if the division should be made expressly with that design. Then a transfer to an individual creditor in payment of an antecedent debt, with a knowledge of such design, would not enable him to hold it discharged from the equitable lien of the partnership creditors. A sale of the divided property, by either partner, to a person not having notice, for a valuable new consideration, would undoubtedly pass the title free from the lien. But that is not this case. Vice Chancellor Plomer supposes, in the case cited by the late assistant vice chancellor, (Ex parte Peate, 1 Mad. Ch. Rep. 346,) that a division of the partnership effects for individual purposes might be valid, if fairly made, and no fraud takes place. But how can a transaction be fair and without fraud, which is expressly designed to avoid an equitable lien? It appears to me, with great deference, that the qualification destroys the rule.

If there is no precedent in favor of the rule restricting the action of partners and their separate creditors under such circumstances as exist in the present case, the principle is so evidently just and equitable that I am disposed (in the absence of any well settled rule to the contrary) to make one. If sustained I cannot entertain a doubt but that it will be productive of good.

So much of the decree of the late assistant vice chancellor as directed a dismissal of the bill with costs as to the defendants Hickman and Bailey, must be reversed, with costs. A receiver must be appointed in the usual manner, and with the usual powers. Bailey must pay over to the receiver the sum of two hundred and seventy-three dollars and thirty cents, with interest from the 13th of April, 1843, to be appropriated on the plaintiff’s judgment against Tisdall and Hickman. And the defendants must pay the plaintiff’s costs.