Lead Opinion
delivered the opinion of the Court :
Two questions are presented for decision in this case: First, the question of fact, whether the collaterals deposited at the making of the note of April 20, 1876, were pledged as collaterals in Wallace’s hands to secure not only that note, but also to secure the payment of the .preexisting debt upon the note of December 28, 1875; and second, whether Eappleye had lawful authority to make such pledge, if it were in fact made.
After a most careful consideration of. the evidence on the subject, we are brought to the conclusion that the pledge was in fact made to secure both of these notes. Wallace and Eappleye both swear positively that this is the truth, and no witness contradicts them in this respect. Not only so, but there is such inherent evidence of the truth of this testimony arising out of the circumstances of the ease, as to give great strength to-it. Eappleye and his partner were not in -harmony. The affairs of the firm had just been turned over to Eappleye for management. The money of the insurance company had been wrongfully applied to the payment of a debt of the firm, in the expectation that the demand of the insurance company could be met by money expected from another source. Eappleye, in his solicitude to get rid of a partner not in harmony with him, had (as Frisbie claims) represented to him that if he alone had the management, Wallace (his father-in-law) would furnish the ready money necessary to carry the debts of the firm until their resources could be made available. He may have hoped that this would be.so. When applied to for a further loan, however, Wallace was found to be very cautious, and probably somewhat suspicious as to the discretion and capacity for success of his son-in-law. He was not disposed to lend any more money in that direction, but was at length induced to do so by the consideration that the collaterals offered were more than sufficient for the present loan, and he would thereby strengthen his security upon his first note. The conversations and discussions on this subject, sworn to in detail by both Wallace and by Eappleye, are so natural and probable, and so fully in harmony with the ordinary course of affairs with men of like relative conditions under similar circumstanees, as to render it very improbable that they could have been invented in all their details.
It seems to be supposed by counsel for the receiver that certain circumstantial evidence in the case rebuts the conclusion that Bappleye had agreed with Wallace that he might retain these notes as collateral to the old debt as well as to the new, and for this purpose the fact is supposed to be established that in the chancery suit of Frisbie, both Wallace and Bappleye made oath that these collaterals were held by Wallace for the new debt only, and for no other debt, and that in a prosecution against Frisbie, instituted afterwards, Bappleye so testified. It may be conceded that Bappleye did so swear, but he now swears that his former statements were not correct on this question. This identical question now presented was not a material question in issue in either of those cases. The substantial allegations on which the chancery suit was based were, that the assignment of these collaterals was made without consideration, and that the first debt was fictitious and fraudulent, and not real, and if real, was already well secured, and hence the pledge for the old debt was unwarranted. The material allegation of the answer in that case was, that the pledge was made to secure the new debt, of which Frisbie had made no mention. The material question was not whether the pledge extended over the old debt, but was whether it rested upon a real, valid, subsisting debt. It was material to show the new debt, and the pledge therefor. This being shown, it was not material in that case whether the pledge covered the old debt or not. Bappleye’s affidavit and his testimony, therefore, were not as to matter material to the issues in the proceedings in question. These circumstances, therefore, are not sufficient to authorize the rejection entirely of the testimony of Bappleye in this case. Contradictory statements by a witness as to immaterial matters do tend to cast suspicion upon the testimony of a witness, but do not authorize its entire rejection, where he is corroborated by another witness, and not contradicted by any evidence in the case.
As to the claim that Wallace made any statement in his affidavit at variance with his present testimony, it is not sustained. The only evidence on this" question is that of Mr. Cooper, who drew the affidavit of Wallace, referred to. He says as to Wallace’s affidavit, that it was about the same as that of Rappleye. This was the recollection of Mr. Cooper as to the contents of an affidavit drawn by him in another suit, near three years before he gave his testimony. An examination of Rappleye’s affidavit, referred to by the witness, shows that it contains nothing directly on the question as to whether Wallace had an agreement from Rappleye to hold these securities as collateral to the first note. There is one expression which contains that idea by implication. There is nothing in this record indicating that Mr. Wallace was not a man of unquestioned standing in the community as a man of wealth, caution and integrity. He was not interrogated at all as to this affidavit. We are satisfied his testimony in this case is true.
The next question relates to the power of Rappleye to pledge these collaterals to secure the first debt. Counsel for the receiver seems to construe the contract of April 18, 1876, between Frisbie and Rappleye, as an assignment of the assets of the firm for the benefit of creditors, and hence insists that Rappleye became “a trustee for all the creditors, without priority, ” and that he therefore had no power or authority to secure one creditor to the prejudice of others. In the absence of this agreement between these partners, it will not be denied that Frisbie and Rappleye, in winding up their affairs,’ could have made a valid contract with Wallace that if he would . make the second loan he might hold the securities as collateral to both debts, or to his entire claim. This contract differs from an ordinary assignment for the benefit of, creditors in its whole character.and structure. It was made for the benefit of the parties to it, and Rappleye was given the largest powers and discretion. The end to be accomplished for the benefit of the parties was, that the debts and liabilities should be extinguished out of the assets, without sacrifice of the assets, and. a surplus divided. To “secure that end” Rappleye was authorized “to trade any part of the assets, and to do all and every the matters and things that may he * * * expedient in settling the affairs of the ■firm.” It was plainly the design and effect of this contract to clothe Rappleye with powers to this end equal to the combined power of both Frisbie and Rappleye,—that he was to be in that regard in full the representative of the late firm. Frisbié plainly undérstood that Rappleye had power in some way to borrow money, for in his bill he said he was expected to get advances from Wallace, and his complaint was that this was not done; and he also understood that Rappleye had power to pledge assets to secure old debts, even without any new consideration. He was told by Wallace that he held this second parcel of securities. At that time he did not know of the new loan by Wallace, and yet he made no objection and did not then find any fault with the arrangement.
In an ordinary assignment to a trustee for the benefit of creditors, the title to the assets is passed from the debtors, so that the same can not be reached by creditors except by virtue of their rights under the assignment. Here the title was placed in Rappleye, and in his hands these assets were as open to appropriation by creditors as if the assignment had not been made. Their rights were in no way affected by the transfer. The object and legal effect of this contract was that the prosecution of the business should cease, and that Rappleye should have vested in him all the powers which both the partners would otherwise have had in the management of the property, to the end that they should both be relieved from liability as debtors. This case does not involve the question of the personal liability of Frisbie upon the last note. The validity of the debt for which that note was given, and of the note as the note of Bappleye, may be, and no doubt is, involved. Bappleye had authority to apply the assets to pay the debt of the insurance company, or to pledge assets in its security to procure extension of time for the payment thereof; or, under the powers given in the agreement, he had power to borrow money to pay that debt, upon his own note, and pledge the assets in security, if the pledgee was given no power to sell the assets in violation of the limitations in the agreement. Treating, then, this new note merely as the note of Bappleye alone, it is a' debt of such character that the pledge of collaterals was in that regard valid.
The remaining question relates to Wallace’s right to a lien on the collaterals for the payment of the first note. Obviously Frisbie understood that he had by this contract clothed Bappleye with power to pledge assets to secure the payment of old debts. He was told by Wallace that he held this second parcel of securities. At that time he did not know of the new loan, and yet he made no objection thereto. Afterwards, when he got the notion that this first indebtedness was not real, he filed his bill charging that there was no foundation for this old indebtedness, that it was merely colorable, and that Bappleye had no lawful authority to pledge the col-laterals to secure a fictitious claim of indebtedness.
We are fully convinced that the pledge was made as claimed by Wallace, and that in equity Wallace’s estate should be fully paid from the proceeds of the collaterals in question, before the application thereof to any other debts of the late firm.
The judgment of the Appellate Court is therefore reversed, and the decree of the Superior Court of Cook County is also reversed, and the cause remanded to the Appellate Court, to be remanded thence to the Superior Court, with directions to enter there a decree in conformity to the views herein expressed.
T 7 7 Judgment reversed.
Mr. Justice Walker : I concur in the conclusion reached, but not in all that is said in the opinion.
At the time this opinion was delivered Mr. Justice Dickey was Chief Justice.
Dissenting Opinion
dissenting:
Ordinarily, when I am unable to agree with the majority of.the court in the decision of a case, I am content to simply place myself upon the record as dissenting, and sometimes I do not even do that. But inasmuch as the conclusion reached in the present case seems to me to be not only destitute of any authority even tending to support it, but in direct conflict with well recognized principles founded upon an unbroken current of authority, I feel it due to myself, as a member of the court, to do something more than merely mark myself as dissenting.
With respect to the collaterals given with the note of the 28th of December, there is no ground for controversy. It is conceded that the note was given for money loaned by Wallace to Frisbie & Rappleye, in the usual course of business, and the makers had a perfect right to secure it in the manner they did. Indeed no question is made upon the argument with respect to Wallace’s right to the collaterals given with this note. The whole controversy is confined to the right to give the subsequent note, and the disposition sought to be made of the collaterals accompanying it. This note, it will be remembered, was executed by Rappleye in the name'of the firm, two days after the dissolution of the partnership between Frisbie and Rappleye, Wallace at the time having notice of such dissolution. It is conceded the note was given for loaned money, which was used by Rappleye in the payment of a partnership debt, yet defendant in error questions the power of Rappleye to execute it so as to bind the firm or the partnership effects. While the authorities are not altogether harmonious as to the power of partners after dissolution to bind one another by new engagements, yet the general doctrine, as shown by the decided weight of authority, unquestionably is, that notwithstanding the dissolution the partnership still exists, sub modo, for the purpose of collecting and paying the debts of the firm, and of doing such other acts in the regular course of business as are necessary to winding it up. The power of disposing of the partnership effects for these purposes exists practically to the same extent as it did before dissolution. Whatever is essential to the winding up of the business of the firm, as contradistinguished from what might be deemed politic, desirable or expedient, may be done, and nothing more. Parsons on Partnership, (2d ed.) 388, side page; Hicks v. Russell, 72 Ill. 230. As contracts of sale are essential to the disposition of the partnership property, whereby the necessary means may be raised for the payment of debts, they may be made as well after as before dissolution; and this power to sell, as a general rule, includes the power to mortgage or pledge the partnership property, yet this power may, and often is, modified or limited by agreement of the parties. Herman on Chattel Mortgages, sec. 118; 5 Wait’s Actions and Defences, 127.
In the application of the general rule that each partner, after dissolution, has the right, where the same has not been relinquished by special agreement, to enter into such contracts and engagements as are necessary to the closing up of the partnership business, it is generally held that á partner, after dissolution, has no implied power to give a note or other negotiable security in the firm name, even for a preexisting debt, and such is the doctrine of this court. .Parsons on Partnership, 391; Hicks v. Russell, 72 Ill. 230.
If such be the rule with respect to antecedent indebtedness, it must be conceded that it applies with greater force to ani indebtedness created after such dissolution. It is believed that no decision of any respectable court can be found holding that a partner, after dissolution, can, by virtue of any implied authority arising out of his relation to the dissolved. partnership or the partnership effects, go into the market, borrow money, and execute in the partnership name a note or other negotiable security therefor, so as to bind the other partners or the partnership effects, where the party advancing the money and taking the note or other security has notice of the dissolution of the partnership. Whether in such case, where the money thus procured has been applied in the discharge of a preexisting firm debt, the party lending it will in equity be subrogated to the rights of the creditor, as against the firm whose debt has been liquidated by the loan, is a question which does not arise upon this record, and about which it would be useless to express an opinion.
It follows, from what I have already said, that Rappleye had no authority either to borrow the money advanced by Wallace on the 20th of April, or to execute the note given therefor, and if the partnership was not bound thereby, it is difficult to see on what principle Wallace could hold the collaterals. The note in question, then, was in law simply the individual note of Rappleye, and Wallace, having actual notice of the dissolution of the partnership, is ■ conclusively presumed to have known that Rappleye, after such dissolution, had no implied power, by reason of existing relations to Frisbie, to execute a note or borrow money so as to bind the latter, and that under the circumstances Rappleye alone was bound. This being so, Wallace was not warranted in relying upon the firm for payment, except so far as he might be subrogated-to the rights of the insurance company, whose debt against the firm was liquidated with the money advanced by him to Rappleye; nor was he authorized to receive in pledge, the securities or collaterals given to him by Rappleye with that note. It was a misappropriation of the partnership effects, in which Wallace personally participated, with express notice of such facts as in law showed the transaction unwarranted.
. There is another view of this ease, however, equally unfavorable to plaintiffs in error. At the time of the dissolution the partnership was insolvent, and Frisbie had an unquestioned right to provide for an equal division of the assets of the concern among the creditors, according to their respective demands. As a partner he had a lien in equity upon these assets, as well for his own indemnity against personal liability for the debts of the firm, as for his proportion of any surplus that might be coming to him after payment of the debts. Having these rights, by the articles of dissolution he “transferred” and “assigned” to Rappleye, “as trustee, ” his entire interest in the partnership effects “in trust,” to “collect the assets of the firm, and from the proceeds thereof pay the. firm debts in full, ” provided the assets were sufficient for such purpose. It will be observed that this instrument contains apt and appropriate words of conveyance and transfer, and by it Rappleye clearly acquired the exclusive legal title to all the partnership property, subject to the trusts upon which the transfer was made. Upon the execution and delivery of this instrument an express trust was thereby created, not only in favor of Frisbie himself, but also in favor of all the creditors of the firm. By virtue of it ea.ch creditor became entitled to share in the proceeds of the partnership estate in proportion to the-amount due him, and it was not in the power of the trustee to hypothecate to one having notice of the trust, a portion of the assets, to secure the claim of one creditor so as to give him a preference over the others. Wallace himself states that he knew of the dissolution at the time of the giving of the last note and. the transfer of the collaterals accompanying it, and the evidence satisfactorily shows that he was made acquainted with the terms of the dissolution. Indeed, there is no claim on the part of either Rappleye or Wallace that the latter did not fully understand the terms upon which the partnership was dissolved, and by which Rappleye was given exclusive control of its affairs for the benefit of the creditors, as already shown. Assuming, then, that these collaterals were given, as is claimed by Wallace and Rappleye, to secure the first as well as the last note, it is manifest that in so far as they were given to secure the first note, it was in effect giving Wallace a preference over other creditors, which was a violation of the trust, in which Wallace personally participated, and from which he is not permitted to derive any advantage. There is nothing in the instrument to warrant the attempted preference. By its terms all the creditors are put upon terms of perfect equality, and it was the duty of the trustee to so execute the trust as to effectuate the clearly expressed intention of the parties in that respect. The partnership effects having been conveyed in trust to Rappleye in the manner and for the purposes we have seen, it was not necessary for a creditor of the firm to first go ¡into a court of law to establish his claim, and could not by doing so thereby obtain an advantage over other creditors who did not see proper to take that course. The assignment in question brings the case directly within one of the exceptions to the general rule that a party must first exhaust' his remedy at law before going into a court of equity.-2 Perry on Trusts, sec. 594; Steere et al. v. Hoagland et al. 39 Ill. 264; Hill on Trustees, 518, side page.
The members of a partnership, either before or after dissolution, may, where no statutory provisions intervene, like other persons who sustain no such relation to each other, make a partial or total assignment of the partnership effects in such manner as to give a preference to one or more of their creditors. This right of partners to prefer creditors in disposing of their property, rests upon the ground that their -ownership and power of disposition are as unlimited and absolute as that of persons sustaining no such relation to each other. (2 Leading Cases in Equity, 395, and authorities there cited; Reeves v. Ayers, 38 Ill. 418.) It has been supposed that the creditors of a partnership, particularly, after dissolution, have something in the nature of an equitable lien upon the partnership effects; but such is not the case. (2 Leading Cases in Equity, 396.) But where the partnership has been dissolved by the death of one of the partners, the survivor will in equity be regarded as a trustee of the partnership property, for the benefit of the partnership creditors as well as the legal representatives of the deceased partner, and in such case the former have an equity, arising out of the lien of the partners upon the partnership effects, as above mentioned, by which they are entitled to payment of their claims before any part of the partnership assets can be applied to the payment of the individual creditors of the partners. And in such cases the assets being insufficient to pay the full amount of the claims of the partnership creditors, they are to be paid pro rata. Reeves et al. v. Ayers, supra; 2 Leading Cases in Equity, 396; Parsons on Partnership, 441, et seq.; Hapgood v. Cornwell, 48 Ill. 64; Ladd v. Griswold et al. 4 Gilm. 25.
The Superior Court, in disposing of this case, doubtless proceeded upon the theory that Bappleye had authority to make the loan and hypothecate the collaterals for the payment of both notes, but found, as a matter of fact, they were pledged for the payment of the last note only, and admitting the law to be as is assumed upon that theory, the decree was clearly right. Upon that theory, the whole-case turned upon a pure question of fact, which the court found adversely to plaintiffs in error, and upon a careful consideration of the evidence it is difficult for me to conceive how they could have reached any other conclusion. It is true that in this suit, near three years after the alleged hypothecation, Wallace and Bappleye both swear positively that the collaterals in question were given to secure both notes; but it is equally true that they both swore just as positively, in another proceeding only a few months after the transaction occurred, when the circumstances must have been fresh in their minds, that they were given to secure the second note only. Besides, Mr. Young, who was present when it is claimed that there was a verbal understanding between them that the collaterals were to apply to both notes, swears that he heard nothing of the kind pass between them, and that it was not till months afterwards he heard Rappleye say there was some kind of an understanding to that effect, but that he, Rappleye, could not tell whether it was in writing^ or otherwise give any distinct or satisfactory account concerning it. Moreover, the instrument of hypothecation which was executed at the time, shows upon its face that these collaterals apply exclusively to the last note, and that no reference whatever is made to the first note. In view of these facts I am at a loss to see how the Superior Court could have come to any other conclusion than that which it did, upon that question.
But the consideration which, in my judgment, is absolutely conclusive of this case, is the fact, already shown, that upon the dissolution of the partnership Frisbie conveyed the entire partnership effects to Rappleye in trust, for the benefit of the partnership creditors, and under such assignment Rappleye had no power to so dispose of the assets of the firm as to give orle creditor a preference over another, especially when such preferred creditor had notice of the assignment, as is shown to have been the case here. It is true, the mere retirement of one partner upon the dissolution of the firm, with the understanding that the other partner shall collect and pay all debts, and have the exclusive control and management of the partnership effects in winding up the business of the partnership, will not have that effect, for the reason such an agreement as that does not transfer the legal title in the partnership effects from one partner to the other, and hence no express trust is thereby created. But in the present case the legal title of Frisbie to the partnership effects passed to Rappleye, and the latter became thereby converted into a trustee, like any other assignee, for the benefit of creditors. That such is the legal effect of the assignment to Rappleye, is fully sustained ■ by a number of well-considered cases, and no authority has been produced, nor is it claimed that any such exists, even tending to sustain a contrary view. Sedam et al. v. Williams et al. 4 McLean, (Mich.) 51; Wilds et al. v. Chapman et al. 4 Edw. Ch. 669.
. It follows, therefore, that Eappleye had no power to hypothecate the collaterals in question to secure the first of said notes. To do so was a fraud upon the other creditors of the firm, in which Wallace knowingly participated. If any error at all was committed by the Superior Court, it was in favor of plaintiffs in error, and they therefore have no right to complain of it.
For the reasons stated, I am clearly of opinion the judgment of the Appellate Court should he affirmed.
Craig and Bcholfield, JJ.: We dissent from the opinion of the court, and concur in the foregoing opinion, of Mr. Justice Mulkey.