James Pott & Co. v. Schmucker

McSherry, C. J., delivered the opinion of the Court. This is another of the many cases which have resulted from the failure of the banking house of J. J. Nicholson and Son in January, eighteen hundred and ninety-two ; but it differs widely from those that have preceded it, and involves quite distinct and dissimilar principles and doctrines. In eighteen hundred and eighty-four Johns H. R. Nicholson, one of the members of the firm of J. J. Nicholson and Son, purchased the assets, the good will and the business of John B. Piet and Company who had recently theretofore failed whilst largely indebted to Johns H. R. Nicholson individually. Mr. Nicholson thereafter continued the business of Piet and Company on his own account, but under the name of the Baltimore Publishing Company, until March, eighteen hundred and eighty-five, when he procured a certificate of incorporation in which the capital stock was fixed at twenty-five thousand dollars.

The whole of this stock ⁵⁴⁶ was taken by Johns H. R. Nicholson, but to effect an organization of the corporation, whose charter name was the Baltimore Publishing Company, he allotted four shares of the stock to four of his employees to be held by them only so long as they remained in his service. He was the treasurer of the company, signed all notes and checks given by it, and furnished all the money needed to conduct its business. He owned the whole of the assets of the concern and the business carried on in its name was his business, confessedly no one else having any interest therein whatever. He was in reality himself -the Baltimore Publishing Company, and this fact was so stated and represented to the various persons who became, on the faith of this assurance, its creditors.

When the banking house of J. J. Nicholson and Son failed on January the fourteenth,,eighteen hundred and. ninety-two, it was discovered that there appeared upon its ledgers an overdraft indebtedness of seventy-six thousand. dollars apparently due to it by the Baltimore Publishing Company. The members .of the firm were aware, as this overdraft indebtedness grew, that Johns H. R. Nicholson was overdrawing in the name of the Baltimore Publishing Company. When the. Nicholsons suspended they appointed trustees- under a deed of trust for the benefit of creditors, but being proceeded against under the insolvent law and being adjudged insolvents, a permanent trustee in insolvency was elected who displaced the conventional trustees. • Before, however, the conventional trustees were superseded they filed a bill in equity against, the Baltimore Publishing Company, alleging that the company was insolvent and praying that it be so declared, and asking that receivers-be-appointed .to take charge of its assets and to reduce, them to money for the settlement,of its indebtedness.

To this bill an answer was filed, and-subsequently receivers were appointed who converted the assets into money which they now have in the Equity Court for distribution. Later on Nicholson and Son and Johns H. R. Nicholson were adjudged insolvent, as already stated, and Mr. Samuel D. ⁵⁴⁷ Schmucker was elected their trustee in insolvency. Mr. Schmucker then filed a supplemental bill wherein he made two alternative claims with respect to the funds in the hands of the Publishing Company’s receivers. These claims were, first, that the charter of the Publishing Company was invalid and that therefore the funds belonged, not to the corporation, but to Johns H. R. Nicholson individually, and consequently the title to them passed, upon his being adjudged an insolvent, to his trustee, Mr. Schmucker; and, secondly, if the charter was valid, then Mr. Schmucker as trustee in insolvency of the firm of J. J. Nicholson and Son, claimed to be a creditor of the Publishing Company to the amount of the above-mentioned overdraft, and so claiming, asserted his right to participate pari passu with all other creditors of the Publishing Company in the distribution of the funds in the possession of the receivers.

This supplemental bill was answered. At the hearing the evidence taken under the original bill as well as that taken under the supplemental bill was considered and is in the record now before us. This evidence shows that Johns H. R. Nicholson treated this overdraft hot as a debt due by the Publishing Company, but as capital of his own advanced to the company ; and there is nothing in the record to contradict this, apart from the form of the entries on the books of the firm. The Circuit Court of Baltimore City decreed, first, that the Baltimore Publishing Company’s charter was valid; and, secondly, that the insolvent firm of Nicholson and Son, through the trustee, Mr. Schmucker, was entitled as a creditor of the Publishing Company to the extent of the overdraft, to share pari passu in the receivership funds with the creditors of the Publishing Company.

From the latter or second clause of this decree the creditors of the Publishing Company have appealed. The question then is: Are the funds derived from the sale of the Publishing Company’s assets applicable under the facts above stated, to the payment in the first place of the debts due by the Baltimore Publishing Company ex- ⁵⁴⁸ elusive of the alleged overdraft indebtedness; or does the overdraft stand on the same footing with the undisputed debts of the Publishing Company, entitled to be paid pari passu with them ? If there had been no corporation, and if the business of the Publishing Company had been conducted openly and ostensibly as the individual business of Johns H. R. Nicholson in his own name, there can be no doubt, according to firmly settled principles, that the creditors of the firm of J. J. Nicholson and Son, of which firm Johns H. R. Nicholson was a member, would not have been entitled to be paid out of the funds arising from the sales of Johns H. R. Nicholson’s individual property until his individual creditors were first paid therefrom in full. And this is so because the individual property of a member of a firm is applicable in the first instance to the payment of his individual creditors, just as the social assets are liable for the firm debts in preference to the debts due by the copartners personally.

This doctrine is so generally accepted and so familiar that we need not pause to demonstrate it. McCulloh v. Dashiell’s Admr., 1 H. & G. 96 ; Hull v. Deering, 80 Md. 424 . The application of this doctrine to varying conditions of facts has logically led to the development of a corollary, with which we are, on this appeal, more immediately and directly concerned. It has often happened in the diversity of business enterprises that one of the partners of a firm has also been engaged in a separate venture of his own, and that in the latter business he became a debtor to his own firm for advances or loans of money made by the firm to him.

In other words, as an individual he was a debtor to himself and his copartner, besides being a debtor to others on account of his separate business. Upon becoming insolvent in his individual venture and owing creditors as well as owing his own firm for money advanced to him, the question has arisen as to whether his own firm—the firm of which he was a member and to a portion of the assets of which, including his own debt, he was entitled—could com ⁵⁴⁹ pete or stand on the same footing with his individual creditors in the distribution of his individual assets; and the Courts, certainly since the time of Lord Thurlow, who broke through previous rulings of Lord Hardwicke, have quite uniformly held, when the debt to the firm was not surreptitiously or fraudently created, that until the individual creditors were first paid in full, the firm of which the insolvent was a member, though it was also one of his creditors, could not be permitted to claim satisfaction out of his individual assets. There are two conditions under which the creditor firm of which the insolvent is a member may prove in competition with the individual creditors; and these are: First, where money or effects have been fraudulently abstracted from one estate and applied for the benefit of the other; and secondly, where some of the members of a partnership form an entirely distinct firm carrying on a distinct trade from that of the general partnership, and where the articles of one trade have been furnished by one firm to the other. Collyer on Part., sec. 991.

There was no fraudulent abstraction of the funds of J. J. Nicholson and Son by Johns H. R. Nicholson for the benefit of the Publishing Company. The overdraft account was made up of numerous items entered on the firm’s books at various periods, and the transaction as it progressed was known to the other members of the firm and was never objected to or challenged. Much slighter evidence than this will repel an imputation of fraud. For instance: Where one partner puts the other in absolute possession of the partnership funds and leaves to him the sole management of the concern, this is prima facie an implied consent to any measure which the latter may adopt regarding the joint property; and joint creditors must abide by the consequences of such arrangement.

Ex parte Assignees of Lodge & Fendall, 1 Ves. Jr. 166. The second of the two conditions above alluded to does not exist in this case. There were no articles of trade furnished by Nicholson and Son to Johns PI.

R. Nicholson or the Publishing Company. What was ⁵⁵⁰ furnished was money, and Lord Eldon, in Ex parte Sillitoe, i Glyn. & Jam. 374, expressly laid down the doctrine that the right of the firm to prove in competition with other creditors arose where articles of one trade had been furnished to another trade; and he stated that there was no-case in which the proof had been allowed where money had been advanced to the partnership by one or more of the partners. This was followed by Lord Brougham in Ex parte Cook, 1 Mont. (Bankr. cas.) 228.

The reason for the general doctrine is obvious. If the firm of which the insolvent debtor fs a member were allowed to compete with that debtor’s individual creditors in the distribution of his. assets, he would, to the extent of his interest in the firm, be in fact competing with his own creditors and would thereby withdraw from them for his own benefit just So much of his own assets as would be necessary to reimburse him his proportion of the very debt due by him personally to himself and his copartners as a firm. In a word he would be repaying himself at the expense of his creditors. That he cannot be permitted to do this is made perfectly clear by Lord Eldon in Ex parte Harris, 2 Ves. & B. 210.

He said: “There has long been an end of the law which prevailed in the time of Lord Harwicke, whose opinion appears to have been that, if the joint estate lent money to the separate estate of one partner, or if one partner lent to the joint estate, proof might be made by the one or the other in each case. That has been put an end to-, among other principles upon this certainly, that a partner cannot come into competition with separate creditors of his own, nor, as to the joint estate, with the joint creditors. The consequence is, that if one partner lends one thousand pounds to the partnership, they become insolvent in a week, he cannot be a creditor of the partnership, though the money was supplied to the joint estate; so, if the partnership lend to an individual partner, there can be no proof for the joint estate against the separate estate; that is, in each case no proof to affect the creditor, though the individual ⁵⁵¹ partners may certainly have the right against each other.” See Collyer on Part., sec. 990, et seq. Now, if the firm of Nicholson and Son had not failed but were still solvent, and if Johns H. R. Nicholson alone had become bankrupt, and if the Baltimore Publishing Company as a corporation had never existed but the business conducted in its name were confessedly the individual business of Johns H. R. Nicholson, there can be no possible dispute that the firm of Nicholson and Son would not, under the principles alluded to, be permitted to prove this claim for an overdraft against