O'Neil v. Salmon , 25 How. Pr. 246 ( 1863 )

Allen, Justice.

When the law marshals and distributes the individual and copartnership assets of the different members of a firm, it has respect to the several equities of the creditors of the firm and its individual members respectively. In that case the copartnership assets are in the first place applied to the payment of the firm debts, and the individual funds of the several copartners to the payment of their respective individual debts. But this rule does not limit or restrict the copartners in administering their own funds, for the reason that there is no recognized lien or priority of claim in favor of the several classes of creditors upon the different funds and classes of assets belonging to their debtors. (Kirby agt. Schoonmaker, 3 Barb. Ch. R., 46 ; Van Rossum agt. Walker, 11 Barb., 237 ; Smith agt. Howard, 20 How., 121.)

It is no exception to a departure from this principle, that an assignment of the partnership property by an insolvent firm in trust for the payment of debts, giving preference to the creditors of individual members of the firm, is void as fraudulent against creditors of the firm, as was well decided in Wilson agt. Robertson, (21 N. Y. R., 587.) The reasons are obvious, and are fully elaborated by Judge Wright in the case cited. It is an appropriation of property of the firm to the payment of a debt or debts for which some of the members of the firm are not liable, and to the payment of which their property cannot be appropriated without committing an actual fraud upon those proper creditors. But neither the reason nor the rule applies to an appropriation of individual property, under the same circumstances, to the payment of a firm debt. Each partner is liable, and all his property, both partnership and individual, is pledged to the payment of the partnership as well as the individual debts, and all that his creditors can demand is that his property be appropriated to the payment of his debts ; and it is no fraud upon any to prefer one class to another. (Grover agt. Wakeman, 11 W. R., 187.) The debts preferred may be those for which he is liable jointly with others, or severally and alone. The only question is, whether he is liable, and if so, the setting apart of his property to them cannot be fraudulent. If this were the only ground of impeachment, therefore, I am of the opinion that the assignment would have been good, (and see 6 Huer, 83.) But it is conceded that the assignors were insolvent, both as individuals and copartners, owing debts in each capacity beyond their ability to pay.

Their individual debts were unequal in amount, and each assigned individual property of different amounts and values, and, after the payment of the partnership debts, directed the avails and proceeds of all the assigned property to be applied in payment of their individual debts pro rata, according to the amounts of the several debts. In other words, each assignor, being insolvent, diverted his own property from his own individual creditors, and appropriated it to the payment of the debts of his co-assignors, for which he was not liable, and to the payment of which his property could not by law be subjected. This is a palpable fraud, and the assignment deliberately providing for it, it cannot be upheld ; and the fact that there may be no surplus after the payment of the partnership debts, and therefore no actual diversion and misapplication of the individual property of either, cannot aid the assignment. The provision is incontrovertible evidence of the fraudulent intent, and cannot be explained. (Collomb agt. Caldwell, 16 N. Y. R., 484; Leitch agt. Hollister, 4 Com., 211; Kirby agt. Schoonmaker, supra; Smith agt. Howard, supra; Wilson agt. Robertson, supra.)

An assignment void in fact for fraud is void in toto. The fraud taints and vitiates the whole. (Mackie agt. Cairns, 5 Cow., 541; Hyslop agt. Clark, 14 J. R., 458; Grover agt. Wakeman, supra ; Goodrich agt. Downs, 6 Hill, 438 ; Barney agt. Griffin, 2 Com., 365.) Any creditor may avail himself of the objection, whatever his relation to the trust may be, if he has not assented to it and accepted a benefit under it. (Leitch agt. Hollister; Smith agt. Howard, supra.)

The judgment must be affirmed, with costs.

Bacon, J.

It is unquestionably true that in the case of insolvent partners the creditors of the copartnership have an equitable lien upon the partnership effects, in preference to the creditors of the separate partners ; and in like manner the creditors of the individual partners have a similar lien on the separate effects of the partners, in preference to the company creditors.

The assigment in this case was upon the trusts—first, to pay certain preferred company creditors; secondly, all the other partnership debts; and thirdly, all the individual debts of the separate partners, if enough should be left for that purpose. The assets assigned were the copartnership effects and those of the individuals, which were of different amounts, as were their debts.

Such an assignment cannot be upheld. It would be a fraud upon the individual creditors of one of the partners to subject and devote his property to the payment of the debts of the copartnership, in preference to his own individual debts. It withdraws his property from those who have legally and morally the best claim upon it, and appropriates it to the payment of the company debts. There is no doubt that in such a case the assignment would be at once declared fraudulent, upon the application of an individual creditor. The plaintiff, here, is a creditor of the firm, and he files his bill setting up this fact, and praying that the assignment may be declared void, and asking for a receiver, and that payment of his judgment may be ordered, and for further relief. The simple question is, can the plaintiff, being as he is a partnership creditor, ask this relief ?

The obvious impression at the first glance would be, that if the assignment should be permitted to stand, the copartnérship creditors would be benefited by having the individual as well as the company property devoted to the payment of their debts, and thus likely to realize a larger dividend than they would otherwise obtain. How then, it may be asked, are they hindered, delayed or defrauded by this assignment, since as to them it seems to be more favorable than if it had not contained this provision ? The answer is, that the assignment contains a provision that upon its face makes it fraudulent in law, and having this vice, from which it cannot be purged, the whole instrument is defective, and is by the statute declared fraudulent and void ; for whenever the legal effect of any provision of an assignment is to defraud any of the creditors of the assignor, the whole assignment is void.

Although it may be difficult to find the precise.case in the books, where an assignment like this has been declared void upon the application of a partnership creditor, yet such is, I think, the clear result of the principle enunciated by the authorities, so far as they have spoken upon this subject. Thus, in Rogers agt. De Forest, (7 Paige, 277,) Chancellor Walworth says: “ Where a deed or instrument is declared void by statute on account of some illegal or fraudulent provision contained therein, all the provisions of such deed or instrument must fall together.”

In the case of Curtis agt. Leavitt, (15 N. Y., 9,) Judge Comstock discusses at some length, and with his usual ability, the proposition whether it be true that that which is void in part is void in toto, and arrives at the conclusion that it is the expression of no general rule of law, but that, on the contrary, the general rule is, that the good shall stand, although mixed with the bad. But he at the same time concedes, and indeed affirms, some exceptions to this rule, and they are : 1, where a statute expressly declares a whole deed or contract void; and 2, where there is some pervading vice which infests all parts of the agreement, as fraud, for example, so that no separation can be made. At page 123, he says : “ If a statute in terms declares an entire conveyance void which has in it one such vicious element, then it is all void, because the legislature has chosen to make it so.”

In Leitcli agt. Hollister, (4 Com., 211,) the court of appeals declare that an assignment may be avoided by any creditor, whether provided for or not, who has not voluntarily become a party to the trust, or by his own act ratified and confirmed it. It must, when executed, bind all or none of the creditors of the assignor. Otherwise the condition of one for whom a provision is made by a fraudulent trust, without his agency, would be worse than if he had been altogether excluded.”

I think it then clear, that the plaintiff is entitled to come into court and ask that this assignment be declared void. If it be said that the plaintiff is not hindered or defrauded, because in all probability the fund from which he is to receive his dividend will be increased by the very provision of which he complains, I reply, he is hindered, because, by the interposition of this fraudulent assignment, the property to which he might otherwise resort for the satisfaction of his judgment is sought to be placed beyond his reach, and his regular and legal remedy is unlawfully interfered with, and thus he comes precisely within the category contemplated by the statute when it put the seal of its condemnation upon such conveyances. See Smith agt. Howard, (20 How., 121,) where it is held in the superior court of Buffalo that a creditor provided for in a prior clause of an assignment may avoid it by reason of just such a provision as was incorporated in this assignment.

The idea that although the third trust in the assignment is void, the assignment is valid as to all else, although it has at times derived some countenance from what has rather loosely fallen from judges in the course of their opinions, is not sustained by any well adjudicated case, and is now understood to be wholly repudiated. It has no ground of principle or authority to stand upon.

The judgment should be affirmed.