U.S. Supreme Court Emerson v. Senter, 118 U.S. 3 (1886)
Emerson v. Senter
Submitted March 9, 1886
Decided April 12, 1886
118 U.S. 3
ERROR TO THE CIRCUIT COURT OF THE UNITED
STATES FOR THE EASTERN DISTRICT OF ARKANSAS
A sole surviving partner of an insolvent firm, who is himself insolvent, may make a general assignment of all the firm's assets for the benefit of all joint creditors, with preferences to some of them, and such assignment is not invalidated by the fact that the assignor fraudulently withheld from the schedules certain partnership property for his own benefit without the knowledge of the assignee or of the beneficiaries of the trust.
This suit was commenced by the defendants in error as plaintiffs, creditors of the firm of A. Butler & Co. One Moores, sole surviving partner, was defendant, and property which had belonged to the firm was attached. The plaintiff in error interpleaded, setting up title to the attached property under an assignment from Moores for the benefit of the creditors of the firm. Judgment for plaintiffs, to review which the interpleading creditor sued out this writ of error. The facts are stated by the Court as follows:
Butler and Moores constituted a mercantile firm doing business
in the State of Arkansas under the name of A. Butler & Co. The former died on the 17th day of December, 1881, and thereafter, February 23, 1882, Moores, as surviving partner, executed a deed of assignment to Emerson, the plaintiff in error. The deed recited the death of Butler, the insufficiency of assets to discharge the partnership debts, and the desire of Moores, as surviving partner, to provide for their payment, so far as in his power, "by an assignment of all the property belonging to him as such surviving partner." The grantor, for the purposes named, and in consideration of one dollar paid by the grantee, transferred and assigned to Emerson, his successors and assigns,
"all the stock in trade, goods, wares, and merchandise, debts, choses in action, property, and effects of every description, belonging to the said firm of A. Butler & Co.,"
or to the grantor, "as such surviving partner, mentioned, contained, or referred to in the schedule hereunto annexed." The conveyance was in trust that the assignee take possession of the property described, "sell the same as provided by law, and, with all reasonable dispatch," collect the debts and demands assigned, and apply the proceeds 1. to pay all the just and reasonable expenses, costs, and charges of executing the assignment, and carrying into effect the trust thereby created; 2. to pay in full, if the residue of the proceeds is sufficient for that purpose, all the debts and liabilities then due, or to become due, from Moores, as surviving partner, with interest thereon, to certain preferred creditors, among whom were the defendants in error, Senter & Co.; 3. to apply to balance to all other debts and liabilities of A. Butler & Co., or of Moores, as surviving partner; 4. to repay the latter, as surviving partner, whatever may remain after meeting the costs and expenses of the trust, and the amounts due respectively to other creditors.
The deed invested the assignee with all the power and authority necessary to the full execution of the trust created by it. It was accepted by Emerson and by some of the preferred creditors therein mentioned.
The debts of the firm largely exceeded its assets, and Moores, individually as well as surviving partner, was insolvent when he made the assignment. In addition to the recitals in the deed of a desire to make an assignment of all the property in his hands as surviving partner, Moores represented to his creditors that he had done so. Nevertheless, for the purpose of hindering and cheating his creditors, he omitted from his schedule five hundred dollars worth of goods which belonged to him as surviving partner, and with like intent, left out of the schedule and withheld from his assignee one thousand dollars in cash and other property which he held as surviving partner, appropriating to his own use the property so omitted from the schedule.
Neither the assignee nor the preferred creditors who accepted the deed had any knowledge of the alleged fraud of the grantor until after their acceptance of its provisions. Upon an issue formed between Emerson, asserting the validity of the deed, and Senter & Co., who as creditors of the firm attached the assigned effects as the property of the surviving partner, the deed of assignment was held to be void and the claim of the assignee denied.
MR. JUSTICE HARLAN, after stating the facts in the foregoing language, delivered the opinion of the Court.
The court below proceeded upon the ground, in part, that a sole surviving partner of an insolvent firm who is himself insolvent cannot make a valid assignment of partnership assets for the benefit of the joint creditors with preference to some of them. We are unable to concur in this view. Some of the cases hold that one partner cannot, either during the continuance of the partnership or after its dissolution by agreement, make such an assignment. It cannot, however, be doubted that in the absence of a statute prohibiting it, such an assignment, whether during the continuance of the partnership or after its dissolution by agreement, would be valid where the partners all unite in executing it or where one of them executes it by the direction or with the consent of the others. Partnership creditors have no specific lien upon the joint funds for their debts. 3 Kent Com. 65; Story Partnership § 358. They have no such relations with the partnership as entitles them to interfere with the complete control of the joint property
by the partners during the existence of the partnership or with their right, after a dissolution by agreement of the partnership, to dispose of it for the payment of their joint debts, giving such preference as they deem proper.
When the partnership is dissolved by the death of one partner, the surviving partner is entitled to the possession and control of the joint property for the purpose of closing up its business. Wickliffe v. Eve, 17 How. 469; Shanks v. Klein, 104 U. S. 18 . To that end and for the purpose of paying the joint debts, he may, according to the settled principles of the law of partnership, administer the affairs of the firm and, by sale or other reasonable disposition of its property, make provision for meeting its obligations. He could not otherwise properly discharge the duty which rests upon him to wind up the business and pay over to the representative of the deceased partner what may be due to him after a final settlement of the joint debts. It is true that in many cases -- where, for instance, the surviving partner is not exercising due diligence in settling the partnership business or is acting in bad faith -- the personal representative of the deceased partner may invoke the interference of a court of equity and compel such a disposition of the partnership effects as will be just and proper; this because, as between the partners and therefore as between the surviving partner and the personal representatives of the deceased partner, the joint assets constitute a fund to be appropriated primarily to the discharge of partnership liabilities, though not necessarily and under all circumstances upon terms of equality as to all the joint creditors. But while the surviving partner is under a legal obligation to account to the personal representative of a deceased partner, the latter has no such lien upon the joint assets as would prevent the former from disposing of them for the purpose of closing up the partnership affairs. He has a standing in court only through the equitable right which his intestate had, as between himself and the surviving partner, to have the joint property applied in good faith for the liquidation of the joint liabilities. As with the concurrence of all of the partners the joint property could have been sold or assigned for the benefit of preferred creditors of the firm, the surviving
partner, there being no statute forbidding it, could make the same disposition of it. The right to do so grows out of his duty, from his relations to the property, to administer the affairs of the firm so as to close up its business without unreasonable delay and his authority to make such a preference, the local law not forbidding it, cannot upon principle be less than that which an individual debtor has in the case of his own creditors. It necessarily results that the giving of preference to certain partnership creditors was not an unauthorized exertion of power by Moores, the surviving partner.
It is, however, contended that the assignment in question was void because of the fraudulent omission from the schedule by Moores of certain property which constituted a part of the partnership assets, and was appropriated by him to his own use. But this fraud upon the part of Moores did not affect the rights of the assignee and of the beneficiaries of the trust who were ignorant of the fraud of the grantor. Such seems to be the established doctrine of the Supreme Court of Arkansas. In Hempstead v. Johnston, 18 Ark. 140, it was said that a deed of trust or other conveyance is not necessarily void
"because its effect is to hinder and delay the creditors of the grantor in the collection of their claims; but such must be its object. It must be a fraudulent contrivance for that purpose, and the grantee or person to be benefited by the conveyance must be party privy to the fraudulent design."
Referring to the facts which existed in that case -- that the grantor was in failing circumstances when the deed of trust was made, that suits were pending against him, and that some of the beneficiaries were his near relatives -- the court said:
"But all these facts may and do exist in many cases consistently with the hypothesis that the conveyance was made in good faith to secure preferred creditors whose demands are just."
In Cornish v. Dews, 18 Ark. 172, 181, the court said:
"As held in the case of Hempstead v. Johnston, supra, if the deed was valid when executed, no subsequent conduct on the part of the grantor or the trustee, however fraudulent, could avoid the deed and deprive the creditors, accepting it in good faith and not participating in the fraud, of their rights under it. And even if Cornish
(the grantor) had the purpose when he made the deed of hindering and delaying creditors not provided for by it, yet if the preferred creditors were not parties or privies to his fraudulent purpose, but accepted the deed in good faith to secure the debts really due them, it would be valid as to them."
See also Mandel v. Peay, 20 Ark. 329; Hunt v. Weiner, 39 Ark. 75. The rule announced by the Supreme Court of Arkansas is in harmony with the settled doctrines of this Court, and accords with sound reason. Marbury v. Brooks, 7 Wheat. 556, 20 U. S. 577 ; Brooks v. Marbury, 11 Wheat. 78, 24 U. S. 89 ; Tompkins v. Wheeler, 16 Pet. 106, 41 U. S. 118 . There was nothing upon the face of the deed to Emerson to indicate that it was made for any other purpose than in good faith to make provision for the payment of certain debts held against the grantor as surviving partner -- first, debts due to the preferred creditors, and then debts held by other creditors. If the intentional omission by the grantor of certain property from his schedule, and his appropriation of it to his own use, was such a fraud as would vitiate the deed where the assignee or the preferred creditors have previous notice of such omission, that result cannot happen when they were ignorant of the fraud at the time they accepted the benefit of the conveyance.
The judgment is reversed, with directions to enter judgment on the special finding of facts in favor of the plaintiff in error.