Sheldon v. Stevens

Houghton, J.

In 1890, the plaintiff’s assignor and the defendant entered into a copartnership, and the defendant gave to the plaintiff a note of which the one in suit is a renewal. The proceeds of the note were to be used as capital for the copartnership. The plaintiff’s assignor, Adams, was conducting a banking institution under the name of John Hall & Co., of which he was the sole proprietor. At the time the original note .was given, it was understood that it was to be discounted by the plaintiff and the proceeds applied to the purchase of partnership property. This was done. The note was renewed from time to time until 1895 when the present note was given, due in one year. There has never been.any adjustment of the accounts between the plaintiff’s assignor, Adams, and the defendant. Two years after the note in suit became due, Adams executed a general assignment for the benefit of his creditors, to plaintiff, who now claims that the note came to his hands as an asset from Adams, and that the defendant should pay without any adjustment of the partnership accounts between himself and Adams.

I think this position cannot be maintained. An assignee, under a voluntary assignment for the benefit of creditors, stands in no better position than did his assignor. He receives the property transferred subject to all equities which attached to it in the hands of his assignor. Addison v. Burckmyer, 4 Sandf. Ch. 498; Matter of Howe, 1 Paige, 125. He has not the character of a tona fide purchaser. Cornwell v. Baldwin’s Bank, 12 App. Div. 233. If Adams could not h'ave sued the defendant on the note in question in an action at law before an adjustment of the partnership accounts, and without any express agreement to pay, and when it was understood that the note was to be part of the capital contributed by both to the copartnership enterprise, then the plaintiff, as his assignor, cannot do so. Reed v. Sands, 37 Barb. 185. No person deriving title under one partner can be in better position than was the partner himself. Menagh v. Whitwell, 52 N. Y. 159. It is true the note in form was a promise by the defendant to pay the plaintiff’s assignor a certain amount on a certain day; but it was delivered on the condition that it was to be discounted by the plaintiff’s assignor, and the proceeds used as capital in the partnership venture. The action is in effect between the original parties and upon a past due paper, and evidence showing this state of affairs was competent. Higgins v. Ridgway, 153 N. Y. 130. It was as between the plaintiff’s assignor and the defendant, therefore,. a copartnership note. It did not change its character, I think, because it was cashed by one of the partners. There was no agreement that it was to be wholly paid by the defendant. The amount may be owing by defendant to plaintiff’s assignor, but the plaintiff cannot bring an action at law to collect it before that has been determined on an accounting, because his assignor could not do so. Hughes v. Smither, 23 App. Div. 590. Such a claim can only be considered in equity to obtain a settlement of the partnership accounts. Matter of Sheldon, 25 App. Div. 182. The above principles are not in conflict with Crater v. Bininger, 45 N. Y. 545, and First National Bank v. Wood, 128 id. 39, and kindred eases relied upon by plaintiff. In those eases, there will be found some special agreement with respect to the note, which, as matter of fact, I find did not exist in this ease, or that there had been an accounting and adjustment of the amount for which the obligation was given. In the present case, the note was given on the express understanding that it shordd be used to obtain capital for the firm. If it had been discounted by some third person, both plaintiff’s assignor and defendant would have been bound to pay. That it was discounted by plaintiff’s assignor, did not give him the right to collect in an action at law the whole of it from the defendant.

The principles of offset against an insolvent debtor do not apply. It is not a question of the defendant offsetting against the plaintiff’s assignor. The defendant did not owe plaintiff’s assignor at the time of the assignment .any sum which the plaintiff can recover in an action at law. There is no inequity in this. On the contrary, the equities are all the other way. The partnership funds should pay the partnership debts. The defendant should not be compelled to pay the individual creditors of plaintiff’s assignor. It is enough that he may be obliged to pay whatever deficiency there may be on the partnership accounts when that is determined.

The plaintiff insists that an accounting cannot be ordered in this action. The answer sets up an equitable defense and asks that an accounting be had. Upon the trial, the court refused to take up the partnership accounts, announcing that it would order a reference for that purpose in case the decision was not absolute in favor of plaintiff. Inasmuch as the defendant asks for an accounting in his answer, I think it is proper to order such accounting, in view of the equitable relief demanded by the defendant. This can as well be done in this action as in a separate one for that purpose.

A decree may be prepared embracing the foregoing conclusions, and a referee agreed upon to take and state the accounts of the partnership; and if the parties fail to agree, the court will appoint some suitable referee for that purpose.

Judgment accordingly.