In re Downing, 1 Dill. 33

In re Downing

1 Dill. 33 | U.S. Circuit Court for the District of Missouri | 1870

DILLON, Circuit Judge.

The court finds this to be a very difficult case. The difficulty arises rather from the state of the authorities, all of which have been brought to our attention by the industry of counsel, than from any doubt in the mind of the court as to how it ought, on principle, to be decided. As an early determination is desired, we shall refrain from an extended examination of the cases cited or elaborate exposition .of our views, and content ourselves with indicating briefly the grounds of our judgment. On either of two grounds the order appealed from is, in our opinion, erroneous.

1. This is a contest between the individual creditors of Downing, and those who became the creditors of the firm of Downing & Emerson, before its dissolution. It is admitted that Downing purchased of Emerson all “the goods .and assets of the firm.” There is no joint property. Emerson is a non-resident of this state, and is also insolvent and in bankruptcy. The ground on which the individual creditors claim priority is that, by the sale from Emerson to Downing, the property became the individual property of the latter, and that upon the well known equity rule, recognized, as it is claimed by the bankrupt act (section 36), they, as the individual creditors of the bankrupt, are entitled to be paid out of his separate estate in preference to the firm creditors. This rule, upon the agreed statement, has no application to the case. Downing, when he purchased the assets from Emerson, agreed with the latter “to pay off and discharge all the liabilities” of the firm. This contract was binding on Downing, and so far as he is concerned, made these debts his own. As between Downing and Emerson, the former thereby became the sole and individual debtor. As between Downing and the creditors, the latter had the legal right, if they deemed it to be for their interest, to treat Downing as individually liable to them on his promise to Emerson, for their benefit. *1007In. equity, the promise which Downing made, to Emerson to pay these debts, could be enforced against him; and this controversy is to be decided upon equitable principles. In-•cleed, a promise by one to another for the benefit of a third person may, according to the prevailing American doctrine, be enforced at law in the name of the latter, especially where, as in the case at bar, the promissor receives a fund or property with which to make such payment “In this country.” says Hr. Parsons, “the right of a third party to bring an action on a promise made to another for his benefit, seems to be somewhat more positively asserted, and we think it would be safe to consider this the prevailing mle with us; indeed, it has been held that such a promise is to be deemed made with a third party, if adopted by him, though he was not cognizant of it when made.” 1 Pars. Cont. (5th Ed.) 467, 468, and cases cit-ed. “After some conflict of opinion, it seems now to be settled in cases of simple contract, that if one person makes a promise to an-other for the benefit of a third, the latter may maintain an action upon it, though the ■consideration did not move from him.” 2 Oreenl. Ev. § 109, and cases there cited. That Downing received, in the surrender to him of the assets, a sufficient consideration ■for his promise, cannot be disputed. By this promise he is bound, and the creditors of the firm are in equity entitled to enforce it against him. It is, on their election to avail themselves of it, cumulative to their other rights. They need not release the firm in ■order to be able to get the benefit of this promise, made by one of its members, for their benefit. If Downing had secured this promise by mortgage, can it be doubted that •equity (aside from the bankruptcy) would give the creditors the benefit of this security If they desired it? • The right of the credit- ■ ors given by the arrangement between Downing and Emerson is not defeated by the sub- ■ sequent bankruptcy of Downing. They may ■ assent to and claim the benefit of it at any time, either before or after bankruptcy of their debtor. I look upon their rights in ■ equity as being the same as if Downing had individually indorsed the pre-existing firm paper, in which case they could have proved ' their debt against either, if not indeed against both the firm and Downing. It would be strange if the parties could, by the • same transaction, make the assets individual property, but could not, with the assent of the creditors, make one of the firm debtors, ■ also, individually liable. It carries out the contract precisely to hold that the parties made the property the individual property of Downing, and that the latter superad ded to the existing liability to the creditors, his in- • dividual liability.

NOTE. Bankrupt Act—Rights of Individual and Firm Creditors under the 36th Section. Followed. In re Isaacs & Cohn [Case No. 7,093]; In re Rice [Id. 11,750]; In re Long & Co. [Id. 8.476]: In re Tesson [Id. 13.844]; In re Long & Corey [Id. 8,476]; In re Knight [Id. 7.8SU]; In re McEweu [Id. S.7S3]: In re Hamilton, 1 Fed. S12; In re Litchfield, 5 Fed. 4s, 50. Cited. Amsinek v. Bean, 22 Wall. [89 TJ. S.] 404; Emery v. Canal Nat. Bank [Case No. 4,446]; In re Webb [Id. 17,317].

*10072. But if the foregoing views should be ■ erroneous, I am of the opinion that the same ■ result is reached by the true construction of “the bankrupt act of 1SG7. In.the case at ■bar, it will be remembered, the partnership had ceased to exist There were no firm assets. Both of the members of the firm were separately in bankruptcy, and insolvent. Under these circumstances, the creditors of the former firm of Downing & Emerson had, under section 19 of the bankrupt act a right to prove their debts against the estate of Downing—especially as he had, for a valuable consideration, assumed to pay them. If no proceedings are taken against the partnership, under section 36 of the bankrupt act (which contemplates cases where there are both firm and individual assets and debts) firm debts may, as stated, be proved under section 19, are entitled to share pro rata under section 27, as it extends to “all creditors whose debts are duly proved,” and are embraced in the discharge provided for in sections 32. 33, and 34. These sections provide for a discharge from “all debts and claims,” and • the use of the word “partner” in section 33, shows that it was contemplated that one partner might, under the antecedent provisions of the act, be entitled to be discharged for, or in respect of, partnership debts. In other words, section 36 of the bankrupt act only comes into operation when there are firm assets, and the proceedings are instituted against the firm and each of its members, in which case the assets are to be mar-shalled according to the equity rule, firm creditors to have priority as respects the joint assets, and individual creditors as respects the separate estate of their debtor. This construction of the bankrupt act has the merit of producing that equality, which it is the leading and manifest purpose of the act to secure, and in effect reaches the result which the English chancellors have felt bound by equitable principles to adopt, viz.: That where there is no joint estate and no solvent partner, all the creditors, joint and separate, shall share, pari passu in the estate of the bankrupt partner.

Upon the facts submitted, this court is of the opinion that all of the creditors of the said bankrupt who had proved their claims before the register, were, and are. entitled to share pro rata in the distribution of the estate of the bankrupt, whether their debts were originally against the firm of Downing & Emerson, or against Downing, individually. This court is therefore of the opinion that the court below erred in holding that the individual creditors of Downing were entitled to priority, and its judgment is reversed, and the assignee ordered to make an equal distribution of the estate among all the creditors whose claims have been duly established and registered. Reversed.