94
REPORTER.
b(len, or Ex'rs, .lrby \:'.,{tl'abiatn , 4J>ilfiss., 42!'S, :480,. '!32).; in Nebraska (Bowen v. Billings, 13"Neb,dl39, M3 l 14 RW.·152); in IQw;:L, (Hubbard :y. Curtis,S Iowa, 1,;.: 37 Iowa, 325t;, iu:¥innesota,(Ivesv.. Mahoney, N. in 'J,'enness#ei(FQwlkesv. Bowers' Heirs r H, ILea, 144). InMne ·of:these statel!!·hl\sethere been:tquqd a case :whilll;!. deals with the exceptiolili in· the' absence of joint, estate. Bot):! tlw.rule and the exception have been recognized in Alabama (Smith v. Mallory's Ex'r, 24 Ala. 628; Van ,Wagner'v. Ohaptnan's A.dm'r, 29 Ala. 172; Evans v. Winston! 74 Ala. 349);.inNew Jersey (pavis v. Howell, 33 N. J. Eq;72); in Illinois (Rainey ,v. Nance; 54 Ill. 29; Young v. Olapp, 147 HI. 176,32 R E. 187, v.Griswold, 4 Gilman, 25, 39);,jn.Missouri (Le:rel,voI!Farl'iSj,24.Mo. App. 4405; Hundley v. ])larl'is,' 103 Mo. 78, 15,S., W. :312};in Rhode Islalld (OolweUv. Bank, ,v. Cooke, 13 16 R. 1;288, 290, 15 Ath 80, and 17: Atl. 913 IL.I. 184); in Wisconsin: (Thayerv.:Humphrey, 91 Wis. 276, 64 N. W. 1007) lin Maine (HlUlris:v. Peabody, 73 Me. 262).: 'The exception has been somewhat doubtfully recognized in Georgia (Toombs v. Hill, 28 Ga. 371; Keese v. OOileman, 72 Ga. 658). The rule has been recognized,' and the exception.. disapproved, _ Indiana (Weyer Y. Thornin burgh, 15 Ind. 124; Warren;v. Able,.91 Ind. 107; Warren v. Farmer, lOu Ind. 593),'and in Massachusetts (Potters Works V.MiJ:lOt, 10 Oush. 592). In iNew Hampshire the rule re<'ognized, and the exception decbued to, be unreasonable,though it is established in bankruptcy. If there be no preference where there is no joint estate, it is said by the c(mrt that there sli6uJ'd be no prefereMe where there is no separate estate. Weaverv. Weaver, 46 N. H. 188, 192. In Ohio the rule was disapproved. in I principle, th(jugh admitted to be established in:bankruptcy;tn Grosvener 6 Ohio; 104. In Roogersv. Meranda,7:0hioSh 179, both' the rule and: the exception were approved. In Brock 25 Ohio St. 609, where the joint estate was not sufficient to pay was allowed to operate, and, in the. confusion, of mind caused by an attempt to reconcile the theory of the theory .of the .rule, the court declined to say wlwt would b,appe:Q. where the partnership assets would yield to the joint creditors less than the assets would yield to the separate creditors.· PlainlY, the court was. inclined to reduce the rule to a mere of AAs.ets. In Kentucky it appears to be established that thejpint creditor ruay waive his right to proceed against the joint estate,and, if ·lle· does so, may slJare equally with theflleparate creditor in .poth joint and separate estate; otherwise, the separate creditor receives from the seP:u:ate estate as large a di¥idend as the joint credHor has, received from the joint estate, and thereafter joint and separatecred,Hors are paid pro rata from the separate estate. , Bank Vi- Keizel',,2Duv. 169. The general rule has been disapproved in Verntont. The<numerous e;xceptions ingrafted thereon, it is said, show:thatthe nnle rests on no satisfactory basis. Bardwell v. Perry, 19 Vt. 292. It has been disapproved in O<>nnecticut (Camp v. Grant; 21,Conn. 41);,l;l;ndin, Virginia (Pettyjohn v. Woodroof, 10 S.· E. 715). In Kan.sas the matter seem'S to be left ins-ome
-witb
IN RE WIJ.COX.
103
doubt. Fullam v. Abrahams, 29 Kan. 725. The list above given is not supposed to be exhaustive, but it represents with some fullness the rule of distribution as administered in the courts of equity of the several states. It should be added that some of the decisions above cited rest upon the language of particular statutes, as well as upon general principles of law. In Tucker v. Oxley (1809) 5 Cranch, 34, there was question concern· ing the right of the debtor of a bankrupt to set off against his debt to the bankrupt a debt due him from a firm of which the bankrupt was a member. The court permitted the set·off, and, in discussing the right of the joint creditor to prove against the separate estate of the bank· rupt, Chief Justice Marshall made' some statement of the history of tIle rule, not altogether full or accurate, but showiilgthat he dis· criminated between bankruptcy and equity, and appreciated to some extent the reasons which determined the. different practice adopted by Lords T'nurlow arid Loughborough. It is not necessary here to consider the decision in Tucker v. Oxley. The case is mentioned only for the reference made in the opinion of the court to the general rule of distribution. In Murrill v. 8 How. 414, the question came before the United States supreme court, not in bankruptcy, but in equity. The opinion of Mr. Justice Daniel states that "the rule in equity governing the administration of insolvent partnerships is one of familiar acceptation and practice." The learned justice then stated the history of the rule, partly in traditional version, but with some discrimination between equity and bankruptcy; though with little between separate and joint commissions. He noticed the two excep· tions,-thatof the petitioning creditor and that in the absence of joint estate,-which he termed "eccentric variations in the English practice"; and he further said of them, "They do not\ for aught we have ·seen, appear to have been recognized by the courts in this coun· try." . He referred with approval to McCulloh v. Dashiell's Adm'r, and to Story, Partn. 376, and he mentioned. Tucker v. Oxley. 'Po this history of the rule of distribution there should be added some short consIderation. of the principles upon whieh the rule is supposed to rest, and these can neither be found nor applied without· difficulty. Iu several cases, and in the writings of many persons learned in the law, elaborate arg'llrrients have been made to show that the rule whieh gives the separate creditor a prior claim on the separate estate is unsound in principle, and works unfairly in nota few instanees. Eden, DankI'. I.aw (2d Ed.) 169; 2 Christ. DankI'. (2d Ed.) 35; Evans' Letter to Sir So Hommy (1810) p. 81; Story, Partn. § 376. Indeed, some of the arguments usetl ill support of the rule rather make against it. Thus it aas been said that the rule is based upon the theory that the joint creditor gives credit to the joint estate, and the separate creditor to the separate estate. The facts are often quite otherwise. A man lending money to a firm lends it upon the credit of the individual estates of the separate partners m; well as upon that part of their pl'operty which is engaged in the firm business; and, on the other hand, the separate creditor of a partner-his butcher or tailor, for example--gives him credit quite as much upon the success· ful firm business in which he is supposed to be engaged as upon any
104
94 FEDERkL REPORTER.
property in his separate ownership. It has been said that, inasmuch as the law has laid down the rule of distribution as above stated, creditors know the rule, llnd give credit accordingly; but this argument, if made in support of the reasonableness of the rule, is vicious by proceeding in a circle. It makes the creditor give credit to a fund becallile such is the law, and makes the fact that he has given credit to the fund a reason for the law. The rule has been defended upon'the ground that it is, in substance, a marshaling of assets; but it goes much further than the marshaling of assets in equity, and theconfnsion into which this treatment of the rule-as merely a marshaling of assets-brings a court is . shown by the opinions in Lodge v; PriChard and other cases. The rule does not carry out the mercan· tile theory of the partnership relation. Cory, Accts. (2d Ed.) 124. The historical origin of the rule, lies not improbably in an ancient practice of distributing the joint estate under a joint commission and the sepllrate estate under a .separate commission, each commission dealing with its corresponding creditors. The best theoretic defense of the rule is probably this: The operation of the law of partnership which gives to any separate partner or his assignee only his net share of the partnership assets--a rule manifestly founded in justice and convenience-usually insures to the joint creditors a priority in the application of the joint estate; and therefore this half of the rule has seldom been questioned. The priority given to the separate creditor in the application of the separate estate is a rough, but practical, offset to the inequa.lity caused by the rule governing the application ofthe joint estate. See the dissenting opinion of Judge Gibson in Bell v. Newman, 5 Serg. & R. 78. Entirely apart from statute, however, two things are quite clear: First, that the general rule, with some variations, is established in the courts of this country and of England; and, second:, that these variations, and particularly the exception in the absence of joint estate, have tended to discredit the rule, and to confuse its operations, rather than to obviate its difficulties. Thus far the history of the development in this country of the rule of distribution has been considered apart from the bankrupt acts. The explicit provisions of·· these ·acts and their construction by the courts remain to be dealt with. The bankrupt ac1 of 1800 (2 Stat. 19), contained no reference to the distribution of the assets of a partnership and its component partners, and, except Tucker v. Oxley, no decision made under that act has been found which bears upon the question. Act 1841, §14 (5 Stat. 448), reads in part as follows: "The aSSignees shall also lreep separate ac<;ounts of the joint stock or property of the company, and of the separate estate of each member thereof; and, after deducting out of the whole amount received by such assignees the whole of the expenses and disbursements paid by them, and net proceeds of the joint stock shall be appropriated tp pay the creditors of the company, and the net proceeds of the separate estate of each partner shall be appropriated to pay his separate creditors; and if'there shall be any balance of the separate debts: of .any partner, aft'er ·the payment of his separate debts, such balance shall 00 adlled to the. joint stock,for the payment of the joint creditors; and, if there Shall be any balance of the joint stock, after payment of .the joint debts, such balance shall be divided and appropriated., to and among the separate estates of the several partners, according to their respective rights
IN RE WILCOX.
105
and interests therein, and as it would have been If the partnership had been dissolved without an,y bankruptcy; and the sum so appropriated to the separate estate of each partner shall be applied to the payment of his separate debts."
'l'his provision, it will be seen, recognizes the general rule of distribution, and says nothing about any exception thereto. In Re Mar, wick (1845) 2 Ware, 229, Fed. Cas. No. 9,181, there was no joint fund except $40, paid by a separate creditor for a worthless asset in order to create a nominal joint estate, and so to prevent the joint creditors from coming upon the separate estate. Judge Ware said: "It has hitherto been found impracticable to establish any general rule that will meet the equities of all the val'ious eases that come up in practice; and the courts have been finally compelled. instead of subjecting the whole to a ,rigorous analysis, and extl'acting a system of rules which will carry out the ,principles of natural justice, to cut down the difficulties by establishing a general rule, which at first seems conformable to general equity, and then to limit and qualify It by a number of arbitrary exeeptions, in order to meet the partic:ular equities of particular cases. This system is admitted to be not en'tirely satisfactory. It has sometimes been departed from, and again restored, and is now adhered to, not because it is in all respects conformable to the principles either of positive law or of natural equity, but partly as a rule of convenience, as it has been sometimes called, and partly because no system has been hitherto presentell as a substitute which is not found to be encountered by equal difficulties," 2 Ware, 233, Fed. Cas. No. 9,181.
After saying that the general rule is based upon the theory of credit given to the different estates, the learned judge continued: "The general rule therefore has its foundation in natural equity, and it is established by the law. The law itself makes no exception. Now, admitting the case of there being no joint estate to be a casus omissus, not contemplated, and therefore not within the purview of the law, it certainly covers all cases where there is a joint fund, without inquiring into its origin. Anll it is a rule in the construction of statutes that, when the statute covers the whole ease in all its circumstances, and makes no exceptions, none can be made by the court." 2 'Ware, 235, Fed. Cas. No. 9,181.
It will be perceived that the learned judge approved the general rule, disapproved the exception on principle, doubtfully recognized it upon authority, and avoided its effect by permitting its flagrant evasion. Act 1867, § 36 (Rev. 81. § 5121), is, in all essentials, the same as section 14 of the act of 1841. In Re Downing (1870) Fed. Cas. Ko. 4,044, Judges Dillon and Krekel held that the provision for distr'ibution made by the act of 1867 did not apply where the commission was separate. The decision was rested largely upon section 27 of the act of 1867 (Rev. 81. § 5091), which provides that "all creditors whose debts are duly proved and allowed shall be entitled to share in the bankrupt's property and estate pro rata, without any prio'rity or preference whatever" (with certain immaterial exceptions). In Re Knight (1871) 2 Biss. 518, Fed. Cas. :Ko. 7,880, Judge Drummond seems to have followed In re Downing, though it is a little hard to say whether he meant to declare that, under a separate commission, joint creditors could come ratably with the separate creditors upon the separate estate, even where there was joint estate (as would be the case if Rev. 8t. § 5121, and the general rule had no application to a sejJ-
106
94 FEDERAL REPORTER.
aratecommis$ion), or meaI1 t to let them come upon the separate estate only where there was no joint estate. See In Goedde, 6 N. B. R. 295, Fed. Oas. No. 5,500. In Re 13 N. B. R. 168, ,Fed. Cas. No. 10,881, Judge Nelson, of Minnesota, held that, Rev. 'St. § 5121, was wholly inapplicable in the caseo( a commission, saying: "We a firm ,dissolved, no assets, and all the partners insolvent and in ban)q-l111tcy, without any voluntary or Invitum proceedings being instituted to declare thembanl(rupt as a firm. Under such circumstances, in my opinion, the individual creditors of Pease have no prior rights to the creditors of the old firm of which he was a member. Their claims have been duly proved, and they are entitled to share pro rata with the other creditors" The equity rule in regard to the rights of firm and individual creditors does not apply, for the reason that no proceedings have been Instituted against the partnership under of the Revised Statutes."
I
InRe Lloyd (1884) 22. Fed, 88, Judge Atchison apparently agreed with In re Knight, though the decision went upon another question. See, also, U. S. v. Lewis, 13N. B. R. 33, Fed. Cas. No. 15,595. These decisions are a return--,apparently quite unconscious-to the bankruptcy practice of Lord'ThurJow, and to ,his distinction between joint and separate commissionsy but apparently without that remedial intervention of equity which; under Lord Thurlow, made the exception in bankruptcy practically:iIloperative. In Re Jewett (1868) Gas. No. 7,304, JudgeDrtimmond confirmed the decision of the ,register, which, ,held' that the exception in the absence of Joint applicable Ullder the statute. In Re Slocum,.Fed. Oas. Nos. 12,951, Judge Wheeler,and,upon appeal, Judge Blatchford, held that the exception in the absence of joint estate was the statute of1867; and this even where there wer,e to pay the expe!Ise of realizing them. No reasons were luRe 5 Fed. 47, Judge Ohoate follqwed In re Slocum, and he expressly differed from In toe Knight iri,', holding thM! :section 5121 applied to separate, as well 'as to :1111 ReBlumer, 12 Fed. 489, Judge Butler held that,where there assets 'collected which might have been divided, though were afterwards spent in the vain attempt to,reaUzeother assets;' the exception did not 'l1pply. 'JudgeM:cKentum concurred in , In Re Byrne (1868) ,IN.. B. R. 464, Fed.Oas. Nct 2;270" Judge' McCandless affirmed' the decision of a register, whicnheld thar the' exception in the absence of joint estate of 1$67. In Re 'Johnson, 2 Low. 129, Fed. Cas. No. 7,369, :Judge LowelHntimated in his opinion that tbeexception was nQt app'licable,but th,at point was not involved in t4e qecision. See In reMcLean, 15 N. B.R. 333, 337; Fed. Gas. No. ,8,'879.' '" ",' ; , . ',' The act, of 1898 differs ilil:\;terially from the acts' of 1841 and 1867. Clauses a, b, c, d, and 'eof section 5'provide fQr the adjUdication and administration of a bankrdptpartnership. Clauses f, g, and h are as follows: " ;
"(f) The net j)roceeds of tile partnershIp property shall be 'appropriated to the payment of the. partnership debts,'and the net proceeds of the individual
IN RE WILUOX.
107
estate of eaell partner to the payment of his jnclivitlnal debts. Should anYsurplus remain of the property of any partnf!r after prrying his individual debts, such surplus shall be added to the partnership assets and be applied to the payment of the partnership debts. Should any surplus of the partnership property remain aftf'r the paying the partnership debts, such surplus shall be added to the assets of the individual partners in the proportion of their respective inte1'(,st8 in the partnership. "(g) The court may permit the proof of the claim of the partnership estate against the individual estates, and vice versa, and may marshal the assets of the partnership estlite and individual estates so as to prevent preferences and secure the equitable distribution of the property of the several estates. "(h) In the event of one or more but not all of the members of a partnership being adjudged bankrupt, the partnership property shall not be administered in bankruptcy, unless by consent of the partner or partners not adjudged bankrupt; but such partner or partners not adjudged bankrupt shall settle the partnership business as expeditiously as its nature will permit, and account for the interest of the partner or partners adjudged bankrupt."
Follewing In re Knight, it may be urged that the provisions of section 5, d. f, apply only where a joint commission has been taken out, and that they are, therefore, inapplicable to the case at bar. But, if this be the true construction, then, under any separate commissipn, whether there be joint estate or not, the joint creditor will be allowed to take dividends from the separate estate ratably with the separate creditors. If this be the law, joint creditors will commonly take out separate commissions, as was pointed out by Lord Loughborough in Ex parte Elton. Lord Thurlow's rule, viz. that of paying an creditors ratably under a separate commi8Sion, did not prove so satisfactory even when it was tempered by the equitable remedies which he administered, that it should be readopted without those remedie.<;. I hold, therefore, that section 5, cl. f, of the bankrupt act applies the rule of distribution to separate as well as to joint commissions, either directly or by analogy. See In re Litchfield, 5 Fed. 47. Considering the plain language of the bankrupt act, which recognizes no exceptions to the general rule, the history of the exception in the absence of joint estate, the discredit and misconception which that exception has brought upon the general rule both in England and this country, the fantastic subexceptions imposed up<ln the exception, and the language used by the supreme court in Murrill v. Neill, I think that 1 am justified in holding that the exception is inapplicable under the present bankrupt act. If the language and dedsions of some wise and learned judges are thereby disregarded, yet it has been shown that most, if not all, of those judges acted under a misapprehension of the history of the law. It is further to be noticed that section 5, cI. g, has, by permitting the joint estate to prove against the separate estate and vice versa, resolved a doubt which arose under the English law, and has enabled a court in bankruptcy to secure generally the equitable distribution of the property of the several estates. Section 5, cI. h, provides expressly for the settlement of the partnership affairs where one partner has been adjudged abank!l'upt under a separate commission by directing the remaining partners to settle the partnership businef!s; that is to say, to pay the joint debts. This provision removes, at least in part, the difficulty pointed out by Lord Eldon in the application of the gen-
1013
er,al rule to a separate commission. The decision of the referee is llinrersed1 and the petitioning creditor is not to receive a dividend until the separate debts have been paid in full.
CAUTER v. HOBBS et at (District Court, D. Indiana. No. 5,945. BAN'KnUP'l'CY-l;'REFERENCES-AccOUNTING BY PREFERRED CREDITOR.
May 18, 1899.)
"-\,Iease of a manufacturing establishment, made by an insolvent debtor to Oneo! his creditors, as part of a fraudulent scheme to place his property ",!thin the exclusive of such creditor, and accepted by the latter with -knowledge of the lessor's insolvency, and with the intention of securing to himself an advantage over the other creditors, will be set asidE'. on petition of the lessor's trustee in bankruptcy, as fraudulent and preferential; .and the lessee will be required to account to- such trustee for the net profits of-the business conducted by him on the premises while _the same remained In his possession.
In Bankruptcy. On petitionof WalterOarter1 as trustee in bankl'uptCy of Beecher Goodykoontz 1 against the bankrupt and Zachal'lah T;· Hobbs1 to set aside certain mortgages and a lease of a brickmaking made by the'bankrupt to Hobbs1 as being preferential and fdtudrilent. For decision of the court overruling a demurrer to the petition, see 92 Fed. 594. Gardiner) Barrett & Brown and Gifford & Coleman1 for complain' " aIlt. _." '" '(iavin & Davis and Fippen & Purvis1 for defendants. BAKER1 District Judge. This is a suit by Carter1 trustee, against the defendants for the purpose of setting aside two mortgages and a lease of certain real estate, on the ground that the same are severall'y for the purpose of hindering, delaypl'eferentia!, and were ing, and defl'au{Jjng the creditors of the bankrupt, and of giving Hobbs a )arger than other creditors of the estate. On the 22d day of Augl,lSt, 1898, the bankrupt executed and delivered to HObbs a mortgage on certain real estate described in the complaint to secure date for thesulll. of $2,150, due in 30 days. On the a note of 14th day of November1 1898, the bankrupt executed and delivered to Hobbs a chattel.niortgage on certain personal property therein des<;ribed to se,Cjlre the payment of a note for $1,798.67, due one day after datE;. ' The lease or agreement under which Hobbs took poso;essionof the brick-manufacturing establishment and premises was made ao,<tut the 22d day of August1 1898; and, under and in pursuance of it, Hobbs entered into ,possession and used the same until the 25th day of December, defendant Hobbs answered the complaint, admitting that the two mortgages mentioned were invalid, as being'preferential in. their character, and ,that the same Wel'e void; fj.S · being ",itl;lin the inhibition. of the bankruptcy law; but be that the agreement under which he .took possession the premiSeS was preferential1 or taken by hiro for