National Union Bank v. National Mechanics' Bank

Boyd, J., delivered the opinion of the Court. In October, 1893, George W. S. Hoffman, W. E. Hoffman and John W. Hoffman, partners, trading under the firm name of W. H. Hoffman & Sons, executed a deed of trust, in which their wives joined, to John B. Ramsay and Simon P. Schott, by which they conveyed all their property, “ including all of the joint stock of the copartnership and all of the separate estate of each of the partners in trust, for the payment of partnership and individual creditors, according to their respective rights and interest therein.” The Circuit Court of Baltimore City assumed jurisdiction of the trust, and after the sale of the property, which will be more particularly hereafter referred to, an audit was made distributing the proceeds of sales, etc. The appellant held, at the time of the assignment, two notes of the firm, each being for the sum of five thousand dollars, and endorsed by George W. S. Hoffman and J. W. Hoffman, individually. With each note there were deposited bonds of the Gunpowder Valley R. R. Co., of the par value of $7,500.00, as collateral security, with the usual authority to the bank to sell at public or private sale, in case of default. The appellant filed its claim for the amount of the notes, together with costs of protests, against the estates of the firm and of the individual endorsers.

The National Mechanics’ Bank of Baltimore excepted to the allowance by the Auditor of the claim of appellant, because it had not credited the value of the collateral security held by it, and the appellant excepted to the audit for the reason, as it alleges, that the real estate held and owned by the three members of the firm was their individual property, and not partnership assets. ³⁸² An agreement was filed in which certain facts are admitted, and the Court below was authorized to pass a pro forma order sustaining the exceptions to the claim of the appellant and overruling those filed by it. A pro forma order was accordingly passed, and an appeal taken to this Court. The principal questions presented for our consideration, are: ist. Is the appellant entitled to a distribution on its whole claim, without crediting the value of the securities held by it as collateral ? 2nd.

Is the real estate held by the members of this firm to be treated as partnership or individual property, so far as the appellant is concerned ? If the appellant had sold the securities held by it between ' the dates of the assignment and the distribution, there could be no question about the right of the trustees or the creditors to require it to credit its claim with the net proceeds of such sale. The case of Third National Bank v. Lanahan, trustee, 66 Md. 461, has established that as the law of this State, whatever may be the effect of the decisions elsewhere, cited by the appellant, and it is a just and equitable rule. Such being the case, would there be any equity in permitting the appellant to receive a dividend on its whole claim, simply because it saw proper to delay realizing on its securities until after distribution was made ?

We think not. The creditor who holds collateral securities ..for his claim, has the advantage over other creditors to the extent of their value, or what he may realize upon them, but he should not be permitted to have in addition thereto, what in many cases might be equivalent to double dividends or even more. If, for example, the collaterals realized fifty per centum of the creditor’s claim, and the .debtor’s estate would only pay fifty cents on the dollar, the creditor with the security would be paid in full, whilst the others would receive only one-half of their claims. Great inconvenience and cost would oftentimes follow the practice ³⁸³ contended for in the distribution of insolvent estates, in addition to the undue advantage given the creditor holding the collateral.

For if the whole claim be distribhted to, and the dividend exceeded the difference between the value of the collaterals and the amount of the claim, the creditor would have to refund or deduct from his dividend the balance, which would require another audit, thus involving the estate in unnecessary cost and delay. The value of the collaterals would have to be ascertained before the dividend was paid to the creditor, so as to properly protect the insolvent estate, for if this be not done and the dividend was more than the difference between the value of the col-laterals and the amount of the claim, the trustee would have to look to the creditor holding the collaterals for the excess paid him, and possibly the estate would sustain loss by not being able to recover the amount. The long established practice in proceedings of this kind in this State requires the creditor, in presenting to the Auditor prima facie proof of his claim, to swear “that no part of the money intended to be secured by such note hath been received, or any security or satisfaction given for the same, except what (if any) is credited following the language .required for authenticating claims in the Orphans’ Court. The claim in controversy in this case was supported by the affidavit of the cashier of the bank to the above effect.

Such language is not meaningless, but was evidently inserted for the purpose of requiring the creditor either to surrender the securities or credit his claim with their value before it is distributed to. The value of the securities thus held should be ascertained and credited on the claim before distribution is made. That can be easily done by relevant testimony, taken under authority of the Court, when no sale has taken place. This •was the practice in bankruptcy proceedings, and is not without precedent in other Courts.

See In re Bridgman, 1 B. R. 312 ; Amory v. Francis, 16 Mass. 308 ; Farnum v. Boutelle, 13 Metc. 159 ; First National Bank v. Eastern ³⁸⁴ Railroad, 124 Mass. 524 , and Bell v. Fleming, 1 Beas. 13. There was therefore no error in the pro forma decree in regard to that ruling. In considering the question as to' the right of the appellant to have the real estate treated as the individual property of the members of the firm, and not as partnership assets, we must bear in mind the fact that W. H. Hoffman was the original owner of all this property, and that whilst it .was thus owned by him he was in partnership with his three sons, trading under the name of William H. Hoffman & Sons, being the style of the firm subsequently adopted by. them. If a deed of trust, similar to the one made by the sons, had been made in the lifetime of the father, by the members of the original firm, it would hardly be contended that the real estate should be treated as partnership property — certainly not as against the individual creditors of William H. Hoffman.

By his last will and testament the senior Hoffman charged an annuity upon the “ Gunpowder Mill ” property, for the purpose of keeping a burying ground, etc., in proper condition, and made certain provisions for his wife. He directed his executors to ascertain the value of the rest of his property and gave it, with the exception of one-twentieth thereof left to Peter Vondersmith, his son-in-law, to his three sons and his daughter, Lydia A. Smyser, to be divided between them equally, share and share alike. He directed that in the division his son, John W. Hoffman, should have the property known as the “ Gunpowder Mill,” chargeable with the annuity aforesaid, together with certain water rights and' four hundred acres of land-connected therewith, known as “ Paper Mill Hills;” also a part of the tract of the land known as “ Laurel Hills,” one hundred yards wide, on each side of a stream. He also 'directed that in the distribution his son, George W. S. Hoffman, was to have the “ Marble Vale Mill” property, containing 21.8 acres, and his son, William E. Hoffman, was to have his “ Clipper Mill,” together with a tract of land called “ Grist Mill Hills,” containing 257 acres; also a tract ³⁸⁵ called “ Addition to Grant Mill Hills,” containing seven and one-quarter acres, and some houses named by him.

He provided that the property thus given to his three' sons should be taken by them in the distribution at the prices or values fixed by the appraisers, as provided for in his will, and then directed “ that all the rest of my property and estate not hereinbefore devised or specially distributed * * * * shall be sold or disposed of by my said executors * * * * and the proceeds of such sale or sales be so distributed among my said four children as to make the share of each, under these provisions of my will, equal the one to the other.” Subsequently, his son-in-law and his daughter conveyed their respective interests to the three sons “ as individuals.” It is admitted in the agreed statement of facts, that after the father died the three sons continued to trade under the firm name of William H. Hoffman & Sons, and opened on their firm books an account headed “ Real Estate,” in which they entered all the property so derived by them and continued the same on their books in that way; “ that between the said three sons all the said real estate was always considered in their business as copartnership property, and was treated between themselves as such, but that the title to the same appeared in the Land Records of Baltimore County, and in the office of the Register of Wills of Baltimore County, as having been derived by them under the will of their said father, and the conveyances of said Vondersmith and Smyser, as has been hereinbefore stated, and no conveyance was made by them to the said partnership.” It múst be conceded that there is nothing on the face of the will that would indicate any intention of the testator to vest the property in his three sons as partners; but, on the contrary, it is apparent that he intended them to own individually certain properties which he directed to be given them, as above stated. The property was, at the time the partnership was formed, the individual property of the three members. So far as the record discloses, nothing has since ³⁸⁶ been done to transfer the property to the firm or vest any interest in it, excepting the entries in the books and the fact that the real estate was considered in the business as co-partnership property, and so treated between the members, as above stated. We are therefore met with the inquiry, whether that is sufficient to authorize a Court of Equity to treat the proceeds of sale as partnership assets when called upon to decide between the creditors of the firm and those of the individual members.

If this property had been purchased with partnership funds for the use and on account of the firm, it would be immaterial that the title stood in the name of the individual members, as a Court of Equity would treat it for all the purposes of the partnership as firm property, and hence it would be liable to the partnership creditors to the exclusion of the individual creditors until the former are satisfied. In that case there would be an implied or constructive trust in favor of the partners as such, which would inure to the benefit of the creditors of’ the firm. But when it has been acquired in the manner above stated, the question arises whether those dealing with the members of the firm have not the