Opinion
10-24-1895
CARR et al. v. HERTZ et al.
James E. Howell, for complainants. Chandler W. Riker, for defendants.
(Syllabus by the Court.)
Bill by Martha Carr and another, executrices, against Isaac Hertz and others, to annul a series of mortgages. Decree for complainants.
The bill is filed by two partners to annul a series of mortgages made by a third person, as partner, upon all the firm property, to certain of the firm creditors. All these partners were executors or executrices of deceased persons who had by will left that part of their estate theretofore invested in the business still in the business, with power to their personal representatives to continue the said business. To understand the questions raised, it is essential that the evolution of the partnership which existed at the date of the execution of these mortgages should be exhibited in detail, as well as the transactions which preceded and attended the making of these instruments. In 1883, there was a firm in the city of Newark carrying on the business of tanners and dealers in leather. The firm was composed of Joseph W. Carr, John W. Carr, and Louis M. Smith. Joseph W. Carr died in 1884. By his will he gave to his wife the use of all his estate during her widowhood, with remainder over to her children. The will contained the following provision: "My desire is that the interest which I now have as partner in the leather business conducted in the said city by the firm of Smith & Carr shall remain undisturbed, and that my widow shall, at the expense of my estate, employ some person who shall be acceptable to the surviving members of the said firm to represent her." Martha Carr, the widow, was appointed sole executrix. She, having drawn as much of her husband's interest as was in excess of that of the other partners, left the balance of the estate which had been invested in the business still in the business. The business was thereafter conducted by her and the surviving partners untilFebruary 19, 1886. At that time the interest of Louis M. Smith was bought out by John W. Carr and the executrix. Thereafter the business was continued in the firm name of "John W. Carr & Co.," or, as indicated on some of the bill heads, "John W. Carr & M. Carr." John W. Carr was the managing member of the partnership. One Charles Wenzel was in his employ; and upon John W. Carr's absence in California, by reason of his sickness, Wenzel was given a power of attorney to transact the business and sign the firm name. John W. Carr died, leaving a will dated December 5, 1887, in which will he gave his wife a certain portion of his property, and then gave the residue of his estate, real and personal, to his executors and the survivors of them, in trust for the following purposes: "To continue the business of the firm during the lifetime of his wife if it should be found profitable and his executors should deem it best to do so." He authorized his executors to enter into any arrangement or agreement, as they saw fit, to continue and carry on the said business, with or without the present partner, and to use the residue of the estate as they may see fit, and to manage and conduct the business for his said interest therein, in all respects according to their judgment, until the death of his wife, or until such time in her lifetime as the said executors should see fit to discontinue the same. He empowered his executors to sell, in their discretion, any part of his real estate which was not embarked in the said business, and also the proceeds of such business upon the discontinuance thereof. In this will, the testator's wife, Caroline, and Charles Wenzel, were appointed executors. No arrangement was entered into by the said executors with the partner Martha Carr in respect to the continuation of the business, nor was any agreement or understanding entered into between Caroline A. Carr and Charles Wenzel in respect to the carrying on of the firm business. The business, however, went on as usual. The two ladies were entirely unfamiliar with the practical operation of the business, and the business was continued on the same line and under the same management as it had been conducted prior to John W. Carr's death, with the exception that checks and notes and evidences of indebtedness were required to be signed by Martha W. Carr; and, although the bank seems to have recognized some signatures of the firm name made by Charles Wenzel, the agreement of the copartners was that the firm name should be signed only by Martha W. Carr. After the probate of the will, Wenzel was urged to have an inventory of the estate of his testator made, which would have necessitated an investigation into the affairs of the partnership. This he on one excuse or another, postponed from time to time, and it was in fact never made. On various occasions and to different persons, he repeatedly remarked that he was not interested in the concern individually. According to Mr. Wenzel's testimony, the firm had met with a loss previous to the death of John W. Carr; and some time in October, 1891, the attention of the two ladies was called to the fact that the estate was in an embarrassed condition. The two executrices called a meeting of the creditors of the firm on November 23, 1891. At this meeting the authority of the executrices was practically turned over to the creditors. They were empowered to inspect and protect the firm property. The creditors appointed a committee, which committee went to the factory, and were refused admittance by Mr. Wenzel. Subsequently, the committee gained access to the factory, made an inventory and appraisement of the personal property, and put a keeper in charge, and continued the work of tanning. On November 30th, another meeting of creditors was held, at which the executrices, through their counsel, offered to turn over all the assets of the firm to two trustees for the creditors, and hold the proceeds until all the creditors signed a certain paper which allowed the widows to retain their homes. On the same day, the executrices executed an assignment of all the firm property to two trustees to carry out this purpose, but said assignment did not become effective, because some of the creditors refused to accede to the condition. Charles Wenzel refused to take any part in the proposed action of the executrices, but, beginning on December 1st, he, between that date and December 13th, inclusive, made a series of mortgages, which practically exhausted the entire firm property. He made two mortgages on December 1st to Isaac Hertz,—one upon the hides in process of manufacture, to secure $775.49; the other upon all tools, fixtures, accounts receivable, two horses, carriages, wagons, and harness, to secure the sum of $850.15. On December 2d, he made a mortgage upon all the property covered by the second Hertz mortgage, as well as upon the 628 hides, to the Newark Bark Company, to secure the sum of $2,320. On December 3d, he made three concurrent mortgages upon the hides, accounts receivable, tools, fixtures, all their business assets,—one to Cornelius Fitzpatrick and John Doolan, to secure $1,118.70; another to Charles Smythe, to secure $3,337.63; and still another to secure Levi R. Barnard the sum of $1,277.15. On December 13th he made three real-estate mortgages, covering all the interest of the firm in certain designated property. One of these mortgages was made to Cornelius Fitzpatrick and John Doolan, to secure $1,118.70; another, to Charles Smythe, to secure the sum of $3,337.63; and one to Levi R. Barnard, to secure $1,277.15. These mortgages were concurrent.
James E. Howell, for complainants.
Chandler W. Riker, for defendants.
REED, V. C. (after stating the facts). As already stated, this bill is filed by Caroline A. Carr, executrix of John W. Carr, and Martha Carr, executrix of Joseph W. Carr, attacking several mortgages made by Charles Wenzel.
The authority of Mr. Wenzel to execute those mortgages, if it existed at all, must rest upon an implied authority residing in him as a partner. It is clear he did not become a partner in the business by any conventional arrangement between Caroline A. Carr and himself. His right to rank as a partner resulted entirely as an inference of law, from the fact that he had carried on, with the property of his testator, the business as a firm business. But inasmuch as his coexecutor, while having no voice in the active transaction of the business, seems to have acquiesced in its continuance, the law would seem clearly to clothe Wenzel with the authority of a partner in the business. Assuming, therefore, that he possessed the power and authority of a partner, the question supervenes: Did the implied authority with which a partner is invested authorize him to execute, under the circumstances of this case, the series of mortgages now attacked? It is entirely settled that a partner has the implied authority to sell any portion of the firm property. He possesses that power although the sale may be made to pay an antecedent debt, and although the sale itself may lead to the insolvency of the firm. So may he pledge or mortgage a part or all of the firm property for the purpose of raising funds to carry on the partnership business, or to pay some one or more of the outstanding debts of the firm. All this power is conceded to a partner so long as his acts are bona fide. But, in gauging the power of the partner, it is uniformly held that it is limited to such transactions as come within the scope of the partnership business. The moment an act of his, in dealing with partnership property, is to be ranged outside of the legitimate business of the partnership, his authority to bind the other partners of the firm ceases. So it is held in numerous and weighty authorities that the disposition by one partner, without the consent of his copartner, of all the property of the firm in the way of a general assignment for the benefit of creditors, is beyond the ability of any person as partner. The reason assigned for this limitation upon his power is that such an assignment is not an act done in the transaction of the business of the firm, but it is an act directly dissolving the partnership, closing its existence, and finally distributing its property. If the evidence was more convincing that this series of mortgages made by Mr. Wenzel was part of one scheme, by which these mortgagees and Wenzel concerted to transfer in this method practically all the property of the firm to prefer the mortgagees as creditors, I should regard the question as directly involved whether a general assignment for the benefit of creditors is within the power of one partner without the assent of his copartners; for it cannot be doubted that such a scheme is, in respect to this question of power, exactly equivalent to a general assignment But I am not clear that at the time the first mortgage was made to Mr. Hertz, or at any other particular period between December 1st and December 13th, there was a general scheme in the minds of the parties to transfer all the property by way of preference to the creditors named. Therefore, I am not willing to regard these mortgages as standing upon the same footing as would a general assignment for the benefit of creditors.
But it seems to me that the case presents another question, which is whether the power of Wenzel, if it would otherwise have existed, was not in this instance limited by the known dissent of the other partners to his act. It is entirely settled that, while third persons dealing with the firm will not be affected by any limitation upon the authority of partners contained in the articles of copartnership, yet, if a person dealing with one partner has notice of this limitation, he cannot hold the firm if the partner's act is violative of the limitation. 1 Lindl. Partn. p. 170. And knowledge of restrictions upon the power of a partner may be established by circumstantial evidence, as well as by direct proof of notice. 17 Am. & Eng. Enc. Law, p. 996. It is equally well settled that in respect to those implied powers with which a partner is invested, if a party dealing with such partner receives notice of the dissent of his copartners from any act of such partner, the third party cannot hold the firm by reason of such act. The apparent implied authority is revoked by dissent coupled with the notice of dissent id. p. 997; Gallway v. Mathew, 10 East, 264; Willis v. Dyson, 1 Starkie, 164; Monroe v. Conner, 15 Me. 178; Matthews v. Dare, 20 Md. 248; Knox v. Buffington, 50 Iowa, 320; Wilcox v. Jackson, 7 Colo. 521, 4 Pac. 966. In most cases where the occasion for the application of this rule has arisen, either a direct notice of the dissent was given to the person dealing with the partner, or a general notice of which he has knowledge. The question, however, is not in respect to the form of the notice, but whether there was notice, and circumstances may speak as forcibly as words. Wilcox v. Jackson, supra. Now, in view of these well-settled rules, how do these mortgagees stand? It is in evidence that the two executrices, on November 23, 1891, called a meeting of the firm creditors, at which meeting their intention was manifested to devote the property to the payment of all the firm creditors. This purpose still more clearly appeared by the transactions which occurred at and which followed the meeting of November 30th. At this meeting it was proposed to turn the property over to trustees, who were to take charge and sell the same, and pay the creditors pro rata. There was, indeed, a condition annexed that the homes of the executrices should be left intact; but that the intention, and sole intention, of these executrices, was an equal distribution of the firm property among the creditors, is unmistakable.Now, at this meeting of creditors all the mortgagees were present. They all knew that, so far as the two executrices were concerned, they intended this disposition of the property, and that they intended no other. Wenzel himself, of course, knew the intention of the executrices. He knew that they had refused to make mortgages to other firm creditors. He himself asserts that, inasmuch as they chose to adopt their method, he concluded that he would adopt his. He knew that the trustees representing the creditors were in possession of the factory, and I have no doubt that the mortgagees knew the same. Now, on the heels of the meeting of November 30th and the action of the trustees taking possession of the factory, these mortgagees hastened to Wenzel, and, on the 1st, 2d, and 3d of December, induced him to make the chattel mortgages. They knew—no reasonable person could have failed to know—that the two executrices were opposed to any action upon Wenzel's part, and certainly of his execution of any mortgages. Now, if it be true that these mortgagees, as well as Wenzel, had notice of the antagonism of the two executrices to the execution of any mortgage to any of the creditors, the rule applies that the implied power which he may have had to dispose of the property by way of mortgage was revoked by the circumstances just mentioned.
Again, it seems to me that there is another feature in this case which leads to the same result. It will be recalled that Mr. Wenzel was one of the two personal representatives of a deceased partner. These two represented a single interest in the firm, the other interest being represented by Caroline A. Carr, the other executrix. Now, while one of two executors or administrators has the power to sell, in the course of administration, any of the property belonging to the estate, yet the property that these personal representatives held at the time of these mortgages was trust property. The will of John W. Carr impressed all the property that had been invested in this business with an express trust. It seems entirely clear that, in executing the discretionary power with which they were invested by the will in dealing with this property, they could only act jointly. Thus, the power to continue the property in the partnership business, if they should deem best to do so; the power to enter into some arrangement to carry on the business either with or without Caroline, the surviving partner; the power to sell the real estate upon the discontinuance of the business,—all these powers were confided to joint trustees, and required joint execution. So far as respected the conduct of the business, Mr. Wenzel was probably, by virtue of his legal character as partner,— certainly by the authority which was conferred upon him by the permission of the other partners,—entitled to buy and sell and conduct all the current business of the partnership as any other partner; but when he attempted to dispose of all the property of the firm, and therefore all of his trust property, not as an act done in transacting the current business of the partnership, but after admitted insolvency, as a final disposition of all the property, it seems to me that the trust restriction upon his separate power comes into play. Now, that he was no partner, save by virtue of his position as executor, was well known to all the creditors of the firm. They knew that, on the winding up of the business, anything that might remain belonged to the two trust estates; that this trust estate was represented by two trustees; and yet, by the act of one against the dissent of another, they accepted these mortgages, which admittedly extinguished the trust property entirely. For the reasons stated, I think that the whole series of mortgages should be declared void.
In respect to the real-estate mortgages, they seem to be Inefficacious to bind the firm property upon another ground. As a general rule, one partner, without the assent of his copartners, cannot bind them by any act which requires a seal. Ellis v. Ellis, 47 N. J. Law, 70. And as a mortgage requires a seal, or what in this state stands for a seal, its execution by one partner is within this restriction. For this reason, and because each partner is a tenant in common, the general rule seems to be that real estate belonging to a firm, not engaged in the sale of real estate, cannot be conveyed or incumbered by a mortgage made by one partner, unless such power is expressly conferred upon him or the title is vested in him. 1 Lindl. Partn. p. 137; T. Pars. Partn. 337; Chief Justice Shaw, in Tapley v. Butterfield, 1 Metc. (Mass.) 518.
There should be a decree for the complainants.