Gallagher's Appeal

| Pa. | Nov 15, 1886

Mr. Justice Paxson

delivered the opinion of the court,

This was an appeal from the decree of the court below distributing the assigned estate of George Gallagher. The deed of assignment appears to have conveyed not only the individual estate of George Gallagher but also “ all the goods, chattels, effects, book accounts, notes and property of every kind, real, personal and mixed, of the partnership heretofore existing between the said George Gallagher and Thomas F. Gallagher, deceased, of which said partnership the said George Gallagher is the surviving partner.”

The assignor had a valuable real estate which it was conceded was his individual property, and the title to which was in his own name. 1 The assignment was executed on the morning of March 17th, 1885. On the 16th of March, the day prior to the assignment, and. probably in anticipation thereof, the assignor confessed judgment to various firms and individuals, aggregating about $48,000; about three fourths in amount of said judgments were for the debts of the firms of T. & G. Gallagher, and George Gallagher & Son, of each of which he had been a member shortly before the assignment. The bona fieles of these judgments was not disputed. It was conceded that he owed the different firms in whose favor the judgments were confessed ; the contention was that he had no right to pay the debts of his firm out of his individual estate in preference to his individual creditors.

Since Blakey’s Appeal, 7 Penn. St., 449, it has been the settled law of this state that a debtor may prefer a creditor provided he does not do so in a deed of assignment. The Act of 1843 strikes down such preferences in assignments. But whilst a man retains dominion of his property he may pay whom he pleases or secure whom he pleases; he may encumber or convey his propert]-; he may prefer creditors as he chooses by payment or transfer. So long as he violates no law and commits no fraud the law will not interfere with him. It is only when a man loses dominion over his property, and transfers that dominion to another, that the right of a creditor to a pro rata dividend attaches. When it is in gremio legis his control over it ceases.

It is conceded law that one partner may not pay his private debt out of the assets of his firm, and it was contended by the appellants that the converse of this proposition is true, that is to say, that one member of a firm may not pay the debt of his firm out of his individual assets until his private debts are first paid. If the appellants’ contention amounts to anything it amounts to just. this. This position is so palpably unsound that it does not require extended discussion. The difference between the two propositions is obvious to the dullest understanding. To pay a private debt out of firm assets is a fraud —an actual fraud. It is taking the money of one person to pay the debt of another, and being an unlawful act may be restrained by an injunction. But who ever heard of restraining by injunction a man from paying his own debts with his own money? which is precisely what aman does when he pays a debt of his firm out of his private means. Not only will the law not interfere in such case, but it will lend its aid to compel him to do this very thing. For a debt of the firm the creditor may levy upon and sell the private property of one partner.

It is true the rule in equity is settled in this state that when there are partnership and separate creditors, and partnership and separate property, and the firm is insolvent, each class has priority upon its respective estate, and must first resort to it for payment. After satisfaction of the claim of either class, the other may come upon the residue, according to its several legal and equitable rights: Black’s Appeal, 44 Penn. St., 503. But it is equally well settled that this is the equity of the partners, not of the creditors, and if the latter cannot work it out through the partners they cannot do so at all. It is a rule also that can only be invoked when the law steps in to distribute the estate of the insolvent firm. It has no application to an act done by a partner whilst in the full control of his property.

The appellees claim by virtue of a lien lawfully acquired upon the real estate of the assignor. It is now proposed to postpone those judgments by an equitable mode of marshaling assets. This cannot be done in this state : Cumming’s Appeal, 25 Penn. St., 268. It was held in that case that a judgment against a firm is a lien on the separate real estate of the partners, and is entitled to priority in the distribution of the proceeds of sale of such separate real estate, over a subsequent judgment of a separate creditor of the partner whose real estate was sold.

Jackson v. Cornell, Sandford’s 1st Chan. Rep., 348, was cited by appellants as sustaining the position that the assignor could not, by confession of judgment, prefer partnership creditors as against his individual estate. We do not regard it as authority upon the point referred to. The question there arose upon the validity of such a preference in the deed of assignment itself, a thing which would be wholly invalid by our law. And that case recognized the principle contended for by the appellees here, for the court said: “ Let the partner actually apply his own property as he thinks proper while he administers it himself.” That is precisely what the assignor did in the case at bar. Whilst having full dominion over his property he confessed these judgments. To the extent of giving liens on his real estate he applied it to the payment of certain debts. The assignee took the real estate bound by the judgments and subject to their lien. It is too plain for argument that the proceeds must be applied to their payment. This disposes of the only point in the case.

The decree is affirmed and the appeal dismissed at the costs of the appellants-.