Russell v. McCord. FRANK RUSSELL, ASSIGNEE IN BANKRUPTCY OF THOS. GRIFFIN v. THOMAS McCORD, ASSIGNEE IN BANKRUPTCY OF WM. BRUMMELLER. DISTRICT COURT-WESTERN DISTRICT OF MICHIGAN INJUNCTION BILL. 1. When a firm is insolvent and there is a sale by one partner to another for a valuable consideration, this does not of itself constitute fraud. 2. Where an execution is levied after the defendant is adjudicated a bankrupt, no lien attaches on the property so levied upon. There was a partnership in the boot and shoe business between Brummeller and Vanderwerp. Griffin was a creditor, besides others. Henderson & Co., creditors, finding that the assets of B. & V. were not sufficient to pay their debts, advised Brummeller to purchase the interest of Vanderwerp. They seemed to think that one partner could better manage the business, besides lessening the expense of moving the same. Accordingly Vanderwerp transferred his interest and surrendered the firm assets to Brummeller. Henderson & Co. promised not to press the firm for their claim, but induced the partners to give their note for the amount of the same, with a warrant of attorney. No sooner had this been done than they took judgment against B. & V. and issued execution. This was accordingly levied on the goods in Brummeller's possession. Griffin now sued Brummeller & Vanderwerp. They defended, but he succeeded in obtaining a judgment, and at once had execution levied on the goods already levied on by the prior execution in favor of H. & Co. Russell v. McCord. The general creditors of the firm subsequently, that is in about ten days after the assignment was made by V. to B., filed a petition in bankruptcy against Brummeller, and in this Vanderwerp joined. The latter was adjudicated a bankrupt on September 15 following. McCord, the defendant, was appointed assignee. McCord now filed a bill against Henderson & Co., and the officer in whose hands the execution was placed, for the purpose of setting aside the lien under execution that H. & Co. claimed they had, on the ground of fraud. The property was sold, and afterwards, as H. & Co.'s debt was arranged satisfactorily, the proceeds were turned over by consent to McCord, assignee, etc. Griffin was afterwards adjudicated bankrupt, and Russell, his assignee, brought this suit to establish a lien in his favor by virtue of the levy heretofore made and referred to above in favor of G.; and for an injunction restraining McCord from paying out the funds pending the litigation. Chas. W. McLaren appeared for complainant. N. A. Fletcher, for defendant. WITHEY, J.-The case is before me on motion for an injunction. It is claimed that Griffin's execution created a valid lien on the goods as the property of the firm of Brummeller & Vanderwerp, because the transfer by one partner to the other of the firm effects was fraudulent, being intended to hinder, delay and defraud creditors, and also was without consideration. The bill and an affidavit made by Brummeller constitute the showing. The affidavit of Brummeller negatives all charges of positive fraud, or fraud in fact, on the part of the partners, in the sale of the firm effects by Vanderwerp to his partner. The transfer was made in the Russell v. McCord. hope and expectation that Brummeller would be able, by the indulgence of their creditors and a reduction of expenses, to work through and pay the debts of the firm. Henderson & Co.'s agent had encouraged this view; they were the largest, or among the largest, creditors, and recommended the course which was pursued. The agent represented to the debtor firm Henderson & Co.'s disposition to be indulgent as creditors, and not press payment, and that they would not make use of the warrant of attorney to take judgment unless driven to do so by other creditors. It appears that both Brummeller and Vanderwerp placed implicit reliance upon those representations and assurances, and as debtors are naturally inclined, they took the most hopeful view of their affairs, and acted with the best intention, with no view to hinder, delay or defraud creditors. It may be, and probably is, true that Henderson & Co.'s agent was acting in bad faith, but they gained nothing by the course pursued. Was, then, the sale by one partner to the other of the firm assets, a fraud in law upon the firm creditors, of whom Griffin is one? This question is raised under the Statute of Frauds, and not under the bankrupt act. It is undoubtedly the rule, when the Statute of Frauds is under consideration, that positive intent to commit fraudfraud in fact, as it is called-and also constructive fraud, denominated fraud in law-that is, when the necessary effect of a transfer is to hinder or delay creditors, without positive intention-alike render a sale void as to creditors, who, through judgment and execution, or by bill in equity, attack the transfer. It appearing there was no actual fraud, was there constructive fraud? A transfer by one member of firm to his co-partner, of firm assets, under ordinary circumstances, is as permissible and valid as a transfer by one individual of his property to another individual. Such transfer passes title, and is good against all the world unless the neces Russell v. McCord. sary effect is to defraud creditors. It has often been held that where a firm is insolvent, that of itself will not avoid a bona fide sale to one of the partners of the joint assets, and it cannot be necessary to refer to the judgments which have so determined. Ex parte Peak, 1 Madd. 346; Lindley on Part. 758. What is claimed is, that the transfer, by one partner, of the firm property was necessarily fraudulent, because it hindered and delayed the joint creditors in the collection of their debts. We are unable to understand how the effect claimed by complainant necessarily resulted from the transfer. The goods and entire assets in the hands of Brummeller, after the sale to him, were liable for the debts of firm creditors who should come armed with judgment and process as much as before the sale. Both partners, and each are liable to the joint creditors, and the individual property of both partners remained liable for joint debts after, as before, the transfer. No part of the firm property had been withdrawn from the reach of firm creditors. Vanderwerp withdrew no assets of the firm from the business, and he is not shown to owe individual debts. How, then, does it appear that the firm creditors were hindered or delayed in the collection of their debts by the mere act of one partner selling to the other? It is claimed that Brummeller owed $300, private debts, besides the notes given Vanderwerp, aggregating $300 for his interest in the firm property, and that in view of the firm's insolvency, the effect in consequence of bankruptcy is to postpone firm creditors to these individual creditors. If we concede such to be the effect in the bankruptcy, which would not be the case as to the $300 indebtedness to Vanderwerp, as he should not be allowed, being one of the debtors, to share in dividends as against firm creditors, how does the effect produced by the bankruptcy proceedings commenced after the transaction we are investigating, render the previous sale, constructively fraudulent, as hindering or Russell v. McCord. delaying creditors? Bankruptcy, which followed very soon after the sale, was not the necessary result of the sale. It was the entering of judgment against both members on the note, and warrant of attorney by Henderson & Co., and their levy on the goods in Brummeller's possession, in violation of Brummeller & Vanderwerp's understanding of the treatment they were to receive from those creditors, which precipitated the bankruptcy proceedings. The sale was prior to, and should be judged independently of the subsequent bankruptcy proceedings, caused by the action of one of their creditors, and not by one partner selling to the other. The bankruptcy was not the result of the sale, and if not, there was no constructive fraud in the sale. The following judgments fully sustain the views we have expressed: Ex parte Ruffin, 6 Ves. 119; Ex parte Williams, 11 Ves. 6; Howe v. Lawrence, 9 Cush. 553; Robb v. Mudge, 14 Gray, 534. But it is said the sale was without consideration. There is no ground for this proposition, inasmuch as Brummeller's agreement to pay all the firm debts was a good consideration, and further, he gave his notes to his partner for $300. Complainant's execution was levied after the petition in bankruptcy was filed by firm creditors against Brummeller, on which he was adjudicated, and when the goods were in the latter's possession. No lien could therefore attach against the assignee in bankruptcy, unless the sale to Brummeller was fraudulent in fact, or by necessary construction of law, so that the goods still remained at the date of the levy, firm assets and firm property. Such not being our view of the facts, the injunction asked is denied. |