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(289 F.)

plies and fertilizers. To have immediately upon the death of Ricks required the business to be suspended, the property sold, and debts collected would have been disastrous to all concerned. There was nothing, so far as the referee's findings go, to cause the executors to apprehend loss by permitting Brewer and W. W. Ricks, and after May 28, 1920, Brewer as the purchaser of the interest of Ricks, to pursue the course found by the referee, at least for the current year. The findings exclude the suggestion that his financial condition prior to "the late fall of 1920" was such as to impose upon the executors the duty to assert the right and equity vested in them in regard to the partnership property and debts. Brewer had not sold, or, except by securing the purchase price of his purchase from W. W. Ricks, incumbered, any portion of the partnership property.

The trustee and petitioning creditors cite, and strongly urge as a controlling authority, to sustain their view, the case of Dalton v. Humphrey (C. C. A. 4th Cir.) 242 Fed. 777. I have carefully examined the facts and the opinion of Judge Knapp. In so far as the decision is applicable, I would regard it as controlling authority. For an understanding of the scope of the decision, a statement of the essential facts is necessary:

Robert Harris and his brother, H. C. Harris, were partners in business. As such partners they owned shares of stock in the Citizens' Bank. They became indebted to the bank, represented by firm notes. A provision in the charter secured to the bank a lien upon the stock for any indebtedness due the bank by a stockholder, in preference to other creditors. The loans were made upon the faith of this provision. H. C. Harris died in April, 1911, leaving a will in which he gave his entire interest in the partnership to his son, W. C. Harris. The will was duly probated. No executor or administrator was appointed. Acting upon the bequest, the son at once assumed the place of his deceased father in the partnership and the business went on as before, under the same firm name and without any public announcement of the change in the personnel, except that the name of W. C. Harris was printed on the letter heads. The bank notes were renewed at intervals of three or four months, after the death of H. C. Harris.

In

When W. C. Harris came into the firm, the bank was assured, both by him and R. C. Harris, that the business would continue as before, and that the bank would have its lien on the stock, worth more than the loan; and so the loan was continued by successive renewals of the notes for two years, during which a large part of the debts of the old firm were paid and fresh indebtedness incurred by the new firm. June, 1913, the firm and the individual members were adjudged bankrupt. The bank proved its debt and claimed its lien on the stock. The trustee conceded that the bank was entitled to the lien. In a suit instituted in the state court by certain creditors of the old firm, a receiver was appointed of the partnership, composed of H. C. and R. C. Harris, who intervened in the bankruptcy proceeding, alleging that the partnership had been dissolved by the death of H. C. Harris and that its affairs had not been closed; that its assets were insufficient to pay its creditors; that as receiver he was entitled to its property,

including the shares of stock in the bank; that the assets should be applied to the payment of the debts of the old firm. To a report by the special master sustaining the bank's lien, and that the title to the stock was vested in the trustee, exceptions were filed by the receiver, who appealed from the judgment conferring the master's report. Judge Knapp says:

"So far as the record discloses, the litigation under review is confined to the bank stock, and involves (1) the right of the bank to a lien thereon; and (2) the title to the stock as between the trustee and the receiver. The situation is this: When H. C. Harris died, the old firm was dissolved, and the title to its assets vested in Robert Harris, the surviving partner, with the right, acting in good faith, to make any valid disposition of the same. Fitzpatrick v. Flannagan, 106 U. S. 648, 657, 1 Sup. Ct. 369, 27 L. Ed. 211. But W. C. Harris, as legatee of his father, owned an undivided half of the partnership property, and manifestly Robert Harris could recognize that ownership and admit his nephew to joint possession without the aid of an administrator. Nor does it seem to us doubtful, under the authority just cited, that the surviving partner of the old firm, in the absence of protest or adverse action by creditors, could exercise his right to dispose of its assets by transferring the same, for the consideration of agreeing to pay its debts, to a new firm composed of W. C. Harris and himself, who were already in possession of the property. Assuming that all parties acted with honest intent, as appears to be conceded, and that the creditors assented to a continuance of the business by the new firm, the evident effect of the arrangement was to make that firm the owner of the stock in question. It thereby became the actual stockholder, in place of the old firm, and its indebtedness to the bank was, therefore, secured by the lien imposed upon its stock by the terms of the bank's charter."

The learned judge proceeds to hold that, by the failure of the creditors to require the partnership to be "wound up" and its property applied to the payment of their debts, and "without protest or objection" allowing the new firm to take up the business and carry it on for more than two years, and making no dissent until after bankruptcy, by such long acquiescence, manifested at least by nonaction, a strong presumption is raised

"that the new firm succeeded the old firm taking over its assets and assuming its liabilities, with the knowledge and consent of the former's creditors. This being so, it appears plain to us that a few creditors of the old * should not now be permitted to upset an arrangement to which they presumably consented and which at the time was undoubtedly deemed best for all concerned."

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This conclusion is based upon the Fitzpatrick and Beauregard Cases, supra. The decision, so far as it affects the right of the bank to the lien on the stock, rests upon the fact that the members of the new firm expressly recognized and assented to statutory lien. The right of the trustee to the stock, after paying the bank's debt, rests upon the conclusion of the court that the creditors assented to the manner of dealing with the partnership property in view of the facts found by the special master. The learned judge places his conclusion upon the assent by the creditors of the old firm to the assumption by the new firm of the debts. In the absence of any express or affirmative assent, the principle upon which they lost the right to have the partnership property applied to the payment of their debts is that of equitable es

(289 F.)

toppel. Judge Knapp, referring to the course pursued by the creditors of the old firm, says:

"Without protest or objection they allowed the new firm to take up the business and carry it on for more than two years; there was no dissent until after the bankruptcy. In the circumstances, this long acquiescence, manifested at least by nonaction, raises a strong presumption that the new firm succeeded the old firm, taking over its assets and assuming its liabilities, with the knowledge and consent of the former's creditors."

It appears that, during the time which the new firm was operating, "a large part of the indebtedness of the old firm to other creditors was paid off and fresh indebtedness incurred by the new firm." In the Dalton Case the deceased partner bequeathed to his son his interest in the partnership property, without reserving to his representative his equity or lien by subjecting the property to the payment of the partnership debts. In this respect the case is distinguished from the in

stant case.

[12] In a very careful and exhaustive review of the variant and varying rules laid down by English chancellors and American judges regarding the application of the assets of bankrupt partnerships and individual partners, Judge Lowell (In re Wilcox [D. C.] 94 Fed. 84) gives an interesting history of the more or less discordant decisions of English and American courts and provisions of the Bankruptcy. Acts of 1800 (2 Stat. 19), 1841 (5 Stat. 440), and 1867 (14 Stat. 517). He reaches the conclusion that the act of 1898 (Comp. St. §§ 9585–9656), in respect to partnerships, differs materially from those statutes as shown by the provisions of section 5f, g, h. This opinion is referred to by Chief Justice White in Farmers' Bank v. Ridge Avenue Bank, 240 U. S. 498, 36 Sup. Ct. 461, 60 L. Ed. 767, L. R. A. 1917A, 135. While the questions involved in these cases are not the same as here, there is found in both opinions a recognition of the fact that the Bankruptcy Act of 1898 disposes of many of the questions relating to proceedings in bankruptcy in the administration of partnership property. The provisions of section 5f, g, clearly indicate a purpose on the part of Congress to direct the settlement of bankrupt partnership estates by statutory provisions rather than by an appeal to suits in equity, as was formerly done. There is a manifest purpose to provide for the application of partnership assets to partnership debts and individual property to individual debts. This is the principle by which courts of equity are guided.

It may be that the novel conditions presented in this case could have been dealt with more satisfactorily and the equities of the parties interested presented more clearly, by a suit in equity. The evidence taken before the referee and his conclusions of fact and law, with the petitions for review, bring before the court the essential questions involved with sufficient clearness. I did not deem it advisable to have the estate burdened with the cost and delay of a suit in equity. While I am not inadvertent to the doubts and difficulties presented upon the record, and the equities of the individual creditors of H. E. Brewer, as the result of anxious consideration, I reach the conclusion that, by. the terms used by R. H. Ricks in giving what he and his legatees re

garded as a valuable legacy to his friend and partner, in recognition of his services in building up a large and prosperous business, one half, and to his nephew, who had been employed by the firm, the other half, of his interest, he preserved to his estate his equity to have the partnership property carry the burden of its indebtedness and that they took it subject to this burden, while, by reason of conditions which neither he nor his representatives could have anticipated, the legacies, instead of being "assets," became "liabilities."

The several debts, in regard to which it is claimed that there are differentiating elements will be dealt with separately:

Debt of Wilson W. Ricks..

[13] On March 6, 1920, H. E. Brewer published a notice in the Rocky Mount Evening Telegram that the firm of H. E. Brewer & Co. was dissolved by the death of R. H. Ricks; also containing the statement that the business would be conducted as theretofore under the same name by H. E. Brewer and W. W. Ricks as copartners. This notice was published with the knowledge or consent of the executors of R. H. Ricks. W. W. Ricks denies that he consented to, or had knowledge of, the publication. For the reasons stated hereinafter, this is not material. The referee does not find otherwise, or more definitely, whether a partnership was in fact formed by H. E. Brewer and W. W. Ricks. The evidence shows that, prior to the death of R. H. Ricks, W. W. Ricks was employed by the firm as a salesman, at a fixed salary; that thereafter he continued in the same relation with H. E. Brewer. I do not think that the evidence sustains the contention that he entered into a contract creating a partnership with Brewer. He testified that he did not know that such a notice, or any notice, had been published by Brewer until late in the spring of 1920, after he had sold his interest to Brewer.

Brewer does not testify to any contract of partnership. After the death of R. H. Ricks, he continued to draw the same salary as before. H. E. Brewer could not, consistently, maintain the status of "surviving partner" of the old firm, and at the same time, in respect to the same business, the same property, a partner in a new firm. I am of the opinion that, in the light of conditions and the viewpoint of all of the persons concerned, H. E. Brewer, with no thought of involving W. W. Ricks or any one else, had the notice published, without any purpose of thereby creating a partnership, but recognizing the fact that the partnership property, by the terms of the will of R. H. Ricks, was owned by W. W. Ricks and himself, and that, as he intended to carry on the business, thinking that it was or would be agreeable to W. W. Ricks, he published the notice that the business would be continued by W. W. Ricks and himself under the same name as before. He says that he considered him a partner, because R. H. Ricks had given him one-fourth interest. There is no evidence that any specific debt was contracted between March 6 and May 28, 1920, or that any person dealt with H. E. Brewer & Co., or extended credit to Brewer, by reason of the notice.

(289 F.)

With this explanation of the status of W. W. Ricks, which is sustained by the evidence, he sold his interest in the property to H. E. Brewer May 28, 1920. A statement of estimated values of property and debts was made by the bookkeeper as a basis for the sale, showing property valued at $250,000, debts $130,000, net balance $120,000. Brewer agreed to pay for Mr. W. W. Ricks' one-fourth interest $30,000, for which he executed deed to Brewer, which was duly recorded. No cash was paid, but on same day Brewer and wife executed to J. P. Bunn, trustee, a deed conveying a portion of the property owned by H. E. Brewer & Co. prior to the death of R. H. Ricks, to secure three notes of $10,000 each, due January 1, 1921, 1922, and 1923, on account of which $5,000 and interest to January 21, 1921, has been paid. I am unable to see how the sale to Brewer by W. W. Ricks, and the execution of the notes and mortgage on the same property to secure the purchase price, changed the status of Ricks towards the estate of R. H. Ricks in respect to the partnership property and its liability for the partnership debts. If I am correct in holding that Brewer and W. W. Ricks took title under the will subject to the equity or lien which vested in their testator, Brewer took title to W. W. Ricks' one-fourth interest subject to the same liability or burden, and Bunn, as trustee, took the mortgage on the same property upon the same terms as W. W. Ricks held title. A court of equity has regard to the substance and not the form which a transaction. assumes. No new parties, claiming as purchasers for value without notice of equities or rights, have acquired rights in the property. While W. W. Ricks fails to receive the purchase price of his legacy, he sustains no less by reason of the sale. He sold to his colegatee what he got under the will, and has a security for the price or a lien on the same property, which both legatees took "subject to the partnership debts outstanding" at the date of the vesting of their legacies. He does, however, by the sale acquire a right to share in any surplus of the partnership assets, and in the individual assets of H. E. Brewer. To this extent he saves something out of wreck, whereas Brewer gets nothing of value, either from his own or the legacy to W. W. Ricks, for which he promised to pay $30,000 and has paid $5,000. The classification of the debt due Ŵ. W. Ricks is approved.

The Norfolk National Bank Claim.

[14] The referee finds that the bank has proven a claim for $32,996.13, with interest. Said claim consists of three promissory notes, all signed by "H. E. Brewer & Co., by H. E. Brewer," copartner, for money loaned and bearing date January 17, 1921, for $15,000 January 19, 1921, and January 17, 1921, $3,250. The debt, evidenced by these notes, was contracted during the month of June, 1920, for $55,000, of which amount $45,000 was paid by Brewer to the F. S. Royster Guano Company, and $10,000 left on deposit as per agreement when loan was made.

On June 1, 1920, H. E. Brewer & Co., by H. E. Brewer, submitted to the Norfolk National Bank a financial statement, showing a net worth of $138,904.75; said statement being as of the date given and on stationery on which (at top of right and left corners) appeared the

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