Opinion
Argued October 20, 1884
Decided November 25, 1884
B.F. Blair for appellants. Samuel Hand for respondent Grant. Frederick P. Forster for respondents Palmer and James Foster, Jr. George H. Forster, respondent, in person.
We deem it unnecessary to determine the question which has been elaborately argued by counsel, whether by the true construction of the twenty-first section of the Limited Partnership Act, an assignment, transfer or mortgage by a special partner of his individual property, to secure his individual debts, made at a time when either the special partner or the special partnership firm is insolvent, is prohibited by that section, and made void as against the creditors of the partnership. The twentieth section avoids as against the creditors of the partnership all preferential transfers or assignments by a limited partnership of the firm effects, when the partnership, or any member thereof, is insolvent, or when made in contemplation of such insolvency.
The twenty-first section is as follows: "Every such sale, assignment or transfer of any of the property or effects of a general or special partner, made by such general or special partner when insolvent, or in contemplation of insolvency of the partnership, with the intent of giving to any creditor of his own, or of the partnership, a preference over creditors of the partnership, and every judgment confessed, lien created, or security given by any such partner, under the like circumstances and with the like intent, shall be void as against the creditors of the partnership."
It is claimed by the plaintiffs that this section by its true meaning deprives a special partner of the right to administer his individual property for the benefit of his individual creditors, in case of his own insolvency, or the insolvency of the limited partnership of which he is a member, and that every transfer, or security, made or created by him, of his individual property in favor of his individual creditors, under these circumstances is, as to the firm creditors, by force of the statute, void. It must be admitted that the language of the section is very broad. If the plaintiffs' construction is the true one, the statute upon the insolvency either of the firm, or of the special partner, sequesters all the individual property of the latter, and prevents him from appropriating it by way of preferential transfer to the payment of, or as security for, his individual debts. It is difficult to perceive upon what reason such a legislative interference proceeds, since the statute does not undertake to prescribe the rule of final distribution, or prevent the court from marshaling the assets in accordance with the equitable principle that upon insolvency firm creditors are entitled to be first paid out of firm assets, and individual creditors out of individual assets. It is also difficult to understand how the appropriation of the individual property of the special partner to the payment of his individual debts can affect the rights of the firm creditors, or constitute as to them a preference, since neither the special partner nor his individual property is liable for the partnership debts.
Without determining the true construction of the statute in this respect, but assuming that the construction insisted upon by the plaintiffs is the true one, we are, nevertheless, of the opinion that the plaintiffs cannot maintain this action, for the reason that the mortgages in question were not, upon the facts proved, preferential securities within the twenty-first section. The section avoids securities created by the special partner with "intent of giving to any creditor of his own, or of the partnership, a preference over creditors of the partnership."
The transaction between the mortgagor and mortgagee was, to the extent of $66,500, a borrowing and loan of money upon the security of the mortgages. So far as the mortgages were given to secure the individual debt of $2,500 owing by the mortgagor to Grant, they were upon the assumption made invalid and void, and were so treated in the foreclosure action. Laying that feature of the transaction out of view, and regarding the evidence in the view most favorable to the plaintiffs, it is the case of an insolvent member of an insolvent limited partnership borrowing of a third person a sum of money for the purpose of paying his individual debts, and among others, a debt to a firm of which the lender was a member, and giving to the lender a mortgage on his individual property to secure the loan, the lender when he advanced the money having no knowledge or notice of the insolvency either of the firm or of the mortgagor, but being informed of the purpose to which the money was to be applied. This transaction was not, we think, within the statute. The preference of the debts paid out of the proceeds of the mortgages was not effected through the instruments themselves. They did not create or secure any preference. The preference, if any existed, resulted from the application of the money after it had been advanced by the mortgagee, and received by the mortgagor. It could never have been intended to invalidate securities given by a member of a limited partnership on his individual property to secure a loan made in good faith, and without any fraud or collusion on the part of the lender to defeat the statute, simply because the lender knew that the money loaned was to be used to pay debts of the mortgagor, and among others a debt to a firm in which the mortgagee was interested. Such a doctrine would be very dangerous in practice, and create great uncertainty in the transactions of banks and individuals, since it would impose upon a lender the necessity of inquiring and ascertaining at his peril, whether the borrower was a member of a limited partnership, and if so, as to his solvency and the solvency of the limited partnership firm.
The fact that part of the money borrowed was to be applied in paying the debt of Grant Co., of $20,000, is we think, immaterial. The position of the mortgagee was essentially changed by the loan. He had a third interest in the debt of Grant Co. He became by virtue of the loan the creditor individually of the mortgagor to the extent of $66,500. If the plaintiffs have any remedy to pursue the money paid to the creditors of Palmer, that relief cannot be granted in this action. It was not framed with that view, nor are the proper parties to such an action before the court.
The effect of including in the mortgages the debt of $2,500 owing by Palmer to Grant, did not, we think, invalidate the entire security. It is not the case of an illegal transaction in which both parties are in pari delicto, where the court will refuse to aid either. The defendant Grant, upon the undisputed proof, was innocent of any intention to evade the statute, or to defraud the creditors of Palmer. The duty of the court in this case was discharged when it eliminated the vicious element in the transaction, leaving the mortgages to stand as a valid security to the extent of the fresh consideration.
Upon the view we have taken of the main question, the exceptions to the admission or rejection of evidence become wholly immaterial. We have assumed that Palmer, when he executed the mortgages, knew that he was individually insolvent, and had knowledge also of the insolvency of Vose, Dinsmore Co. Having reached the conclusion that upon this assumption the action cannot be maintained, the exclusion of evidence tending to prove one or both these facts was immaterial. The admission of the record in the foreclosure action, if inadmissible, was harmless, and so also was the proof of the conversation between Palmer and Grant, tending to show that the mortgages were executed in pursuance of a prior promise, upon the faith of which the debt to Grant Co. was contracted.
We think the case was correctly decided, and the judgment should therefore be affirmed.
All concur, except RAPALLO, J., absent.
Judgment affirmed.