(289 F.)

Under these conditions, the executors were fully justified in assenting to the legacies. The financial troubles which overtook and bankrupted Brewer resulted from conditions which could not be and were not anticipated by business men of the soundest judgment and largest experience. The unexpected and unprecedented fall in prices of the agricultural products of the state, cotton and tobacco, and other conditions causing the "slump" in values of property, were as unexpected as they were disastrous to the people.

The executors are known by the court and conceded by all persons in interest to be men of large and long business experience, in banking, manufacturing, agriculture, etc., and familiar with conditions in Eastern North Carolina-men of sound judgment and large success. The conditions disclosed by the record are similar to, and illustrative of, the difficulties and perplexities with which the courts are called upon to deal. This conclusion eliminates a number of the questions argued by counsel upon the theory that H. E. Brewer was, between the death of R. H. Ricks and his adjudication in bankruptcy, in possession of and dealing with the property, which was owned by the partnership at the time and date of Ricks' death, as surviving partner.

[5, 6] The question next in order is: What effect did the bequest of R. H. Ricks of his interest in the partnership have upon the rights of the partnership creditors? A statement of some of the well-settled principles in respect to the rights of partnership creditors will aid in the solution of this question.

In Case v. Beauregard, 99 U. S. 119, 25 L. Ed. 370, Mr. Justice Strong says:

"The effects of a partnership belong to it so long as it continues in existence, and not to the individuals who compose it. The right of each partner extends only to a share of what may remain after payment of the debts of the firm and the settlement of its accounts. Growing out of this right, or rather included in it, is the right to have the partnership property applied to the payment of the partnership debts in preference to those of any individual partner. There is an equity the partners have as between themselves, and in certain circumstances it inures to the benefit of the creditors of the firm. The latter are said to have a privilege or preference, sometimes loosely denominated a lien, to have the debts due to them paid out of the assets of the firm in course of liquidation, to the exclusion of the creditors of its several members. Their equity, however, is a derivative one. It is not held or enforceable in their own right. It is practically a subrogation to the equity of the individual partner, to be made effective only through him. Hence, if he is not in a condition to enforce it, the creditors of the firm cannot be. * It is indispensable, however, to such relief, when the creditors are, as in the present case, simple contract creditors, that the partnership property should be within the control of the court and in the course of administration brought there by the bankruptcy of the firm, or by an assignment, or by the creation of a trust in some mode. This is because neither the partners nor the joint creditors have any specific lien, nor is there any trust that can be enforced until the property has passed in custodia legis."

[7] So if, before the interposition of the court is asked, the property has ceased to belong to the partnership, if by a bona fide transfer it has become the several property either of one partner or of a third person, the equities of the partners are extinguished, and consequently the derivative equities of the creditors are at an end. It is therefore

always essential to any preferential rights of the creditors that there shall be property owned by the partnership when the claim for preference is sought to be enforced. In Fitzpatrick v. Flannagan, 106 U. S. 648, 1 Sup. Ct. 369, 27 L. Ed. c. 211, Mr. Justice Matthews, approving the decision in the Beauregard Case, quoting from the opinion, proceeds to say:

"Unless a partnership creditor, or the personal representatives of the deceased partner, commence such a proceeding to liquidate the affairs of the partnership, there is nothing to prevent the surviving partner from dealing with the partnership property as his own, and, acting in good faith, to make valid disposition of it. And if, in like good faith, with the acquiescence of the personal representatives of the deceased partner, he uses the firm property to continue the business on his own account and in his own name, he does it without other liability than to be held accountable to the estate of his deceased partner for a share of the profits. Any intermediate disposition of the property, made in good faith, even although it may have been specifically a part of the partnership assets, and even if it has been applied to the payment of his individual obligations, will be valid and effectual" in the absence of fraud.

*

In Ex parte Ruffin, 6 Ves. Jr. 119, 31 Eng. Rep. 970 (Reprint), 11 Chancery Book, Thomas Cooper and James Cooper were partners. The partnership was dissolved, Thomas assigning his interest to James, at a valuation fixed upon the property. James covenanted to pay the partnership debts then due, and to indemnify Thomas against them executed a bond to secure the performance of the covenant, with surety. The partnership creditors knew of the dissolution and assignment of the property to James by Thomas Cooper; advertisement of the dissolution was made. About two years after the dissolution a commission in bankruptcy issued against James Cooper. Thomas Cooper was solvent. The joint or partnership creditors attempted to prove their debts. Lord Chancellor Eldon remarked that, unless the case was controlled by Ex parte Burnaby, it was "new in its circumstances." He said:

"It is the case of two partners who owed several joint debts and had joint effects. Under these circumstances their creditors, who had a demand upon them in respect to those debts, had clearly no lien whatever upon the partnership effects. They had power of suing, and by process creating a demand that would directly attach upon the partnership effects. But they had no lien upon or interest in them in point of law or equity. If any creditor had brought an action, the action would be joint; the execution might be either joint or several."

The separate creditors of each partner, by bringing actions, might acquire a lien on and sell the partnership property. The Lord Chancellor notes the fact that the assignment by Thomas Cooper of his interest "was not made subject to the payment of the partnership debts." A bond of indemnity was given by James Cooper. The partnership creditors were not permitted to prove their debts and have them paid out of the partnership property.

The Supreme Court of this state has uniformly held that, while the interest of one of the partners in partnership property may be levied upon and sold under an execution issued upon a judgment against such partner, the purchaser under such sale can only claim a share

(289 F.)

of the surplus after the payment of the partnership debts. Tredwell v. Rascoe, 14 N. C. 50; Latham v. Simmons, 48 N. C. 28; Ross v. Henderson, 77 N. C. 170. The authorities relied upon by the petitioners for review sustain their contention that if Ricks, without any fraudulent intention, had during his life assigned his interest in the partnershp to Brewer, retaining no lien, nor imposing any trust upon the property to secure or indemnify himself against the payment of the partnership debts, he would, in the event of the subsequent insolvency of the partner to whom he had assigned his interest, not have any equity to have the partnership property applied to the partnership debts, and that therefore the partnership creditors would have no such equity. Brewer, taking Ricks' interest as legatee, was in the same position in respect to the partnership property as if Ricks had made a voluntary assignment of his interest to him. There can be no suggestion of any intention on the part of Ricks to defraud the partnership creditors, because both the partnership and himself individually were amply solvent. He had a right, under existing conditions, to make a gift of his interest, retaining as he did property abundantly sufficient to pay the partnership debts for which he remained liable. Sargeant v. Blake, 160 Fed. 57, 87 C. C. A. 213, 17 L. R. A. (N. S.) 1040, 15 Ann. Cas. 58; Rapple v. Dalton (C. C. A. 9th Cir.) 226 Fed. 430, 141 C. C. A. 260; In re Zartman (D. C.) 242 Fed. 595; Dalton v. Humphreys, 242 Fed. 777, 155 C. C. A. 365; In re Fackelman (D. C.) 248 Fed. 565.

Stringer v. Stevenson (C. C. A. 2d Cir.) 240 Fed. 892, 153 C. C. A. 578 is an illustrative case. Rogers, Circuit Judge, says:

"Partners may by agreement make any disposition of the firm assets that an individual can make of his property. This is, of course, subject to

*

the principle that the transfer is not made to defraud creditors. Whether the principle is also subject to the condition that the firm must have been solvent at the time is a question upon which the courts have differed. We do not need to consider that phrase of the subject, for it is not claimed that the firm of Jewell & Stringer was insolvent when its assets were transferred to Stringer. By the agreement between Jewell and Stringer, upon the dissolution of that firm, the firm assets became the individual property of Stringer, Sr. When the assets are transferred to one partner in consideration of his promise to pay the liabilities, the validity of the transaction turns upon the law of fraudulent conveyances. If no intent to hinder, delay or defraud creditors appears, the firm creditors can not impeach the transaction. The priority of firm creditors depends upon the existence of the partner's lien, and if a partner consents that the firm assets shall become the individual property of one of the partners, the priority of the firm creditors is gone"-citing Case v. Beauregard, supra.

The courts of this state have announced and enforced these principles in regard to the rights of partnership creditors. In Allen v. Grissom, 90 N. C. 90, Smith, C. J., reviews the decisions and approves the decisions in harmony with the English cases.

It seems, from the foregoing decided cases, that if the retiring partner assigns his interest in the partnership assets, making no reservation of title or impressing upon the property no trust for his protection, but accepting the personal covenant of the assignee partner to pay the partnership debts, or giving bond with security, he parts with his

equity to compel the assignee partner to apply the partnership property to the payment of partnership debts and, therefore, the partnership creditors have no equity or claim to do so. In Ex parte Ruffin, supra, James Cooper entered into covenant with personal surety to pay the debts of the firm and indemnify Thomas Cooper against loss on account of his failure to do so. It was held that he had no equity to call upon the court to apply the proceeds of the partnership property, James Cooper being in bankruptcy, to the payment of the partnership debts. The Lord Chancellor said:

"If it was necessary for the creditors to operate their relief through his equity, he has no equity."

In several of the cases cited the partner receiving the assignment of the interest of the retiring partner promised to pay the partnership debts. It was held that such promise gave to the retiring partner no equity, and therefore the creditors had none, to have the proceeds of the partnership property applied to the payment of their debts. By the assent of the executors, the legatees, Brewer and W. W. Ricks, took title to the legacies under, in accordance with, and subject to the terms of the will, and such title as they took vested in the trustee in bankruptcy of H. E. Brewer; he having purchased the interest of W. W. Ricks. The court of bankruptcy must therefore deal with the property which vested in H. E. Brewer as his individual property in its plight, condition, and title as it was at the date of filing the petition or the adjudication of Brewer.

Item 22 of the will of R. H. Ricks is as follows:

"I give, devise and bequeath to my friend, H. E. Brewer, the one-half interest in the copartnership business carried on in the city of Rocky Mount, North Carolina, under the firm name of H. E. Brewer & Company, not hereinbefore given to Wilson W. Ricks, including alike real estate, stock of merchandise, furniture, fixtures, notes, book accounts, crop liens, mortgages and other choses in action and personal chattels; but, however, not including any indebtedness which may be owing to me by said firm at the time of my death, and subject to all other firm indebtedness, outstanding at such time." The legacy to Wilson W. Ricks of the other one-half interest is in exactly the same terms.

[8] We are thus brought to the consideration of the contention made by the executors of R. H. Ricks that, by the terms of the will, Ricks retained the equity to which he was entitled at the time of his death to require and enforce, as against Brewer, the equity to have the partnership property applied in exoneration of his personal liability, to the discharge of the partnership debts. It is not very material, for the purpose of this inquiry, whether the words "subject to the payment of the debts," etc., be construed as a condition subsequent or a trust impressed upon the property in the hands of the legatee. It is manifest that it was his intention to attach to his gift the condition that the legatee took the property in the same plight and subject to the same equities upon which he held as partner. Unless this construction is given the language, it has no meaning or import. The words do not impose a mere personal obligation upon the legatees. Lord Chancellor Eldon, in Ex parte Ruffin, supra, had in mind, and noted, this distinction. He says:

(289 F.)

"The assignment, was not made subject to the payment of the debts. But in consideration of a covenant leaving no duty upon the property, but attaching a personal obligation upon the assignees to pay the debts."

So in Dingeldein v. Third Avenue R. R. Co., 37 N. Y. 575, a'deed was executed for property, "subject to the payment by said parties hereto of the second part, of all the money which the said Third Avenue R. R. Co. is bound to pay on account of sewers," etc. Hunt, C. J., said:

"Where land is conveyed simply 'subject to a mortgage,' and there is no express agreement to pay, no agreement will be implied; and no action involving a personal liability can be maintained by the mortgagee against the buyer."

But when the language is "subject to the payment" the grantee assumes a personal liability to pay the debt. An action against the grantee by the holder of the debt was sustained. In that case the debts assumed did not constitute any lien on the property.

In Hoy v. Bramhall, 19 N. J. Eq. 74, it is held that a conveyance of mortgaged property "subject to the payment of all liens thereon" does not create a personal obligation on the vendee to pay the mortgage, or any part of it; but it makes the part so conveyed, as against the residue, subject to its proper proportion of the mortgage debt.

In Goldsmith v. Eichold, 94 Ala. 116, 10 South. 80, 33 Am. St. Rep. 97, Stone, C. J., says:

"One contention is that, by giving and devising all his estate and effects to Bernard, the survivor, Abraham clothed him with the individual right and title to all the property of every kind which had belonged to the partnership, and thereby surrendered any lien he may have had to have the partnership' effects applied to the payment of partnership debts. We will not say this could not have been done. Possibly a will containing an express waiver would have cut off the lien; and possibly, if it had directed or authorized a continuance of the business with the firm effects, and it had been so continued, this would have worked a surrender of the lien by necessary implication. But we need not decide this, as the will contains no such provision. On the contrary, it first directs the payment of all of testator's debts, and gives and devises to Bernard only the residue after the payment of the debts." Thayer v. Humphrey, 91 Wis. 276, 64 N. W. 1007, 31 L. R. A. 549, 51 Am. St. Rep. 887.

It is clear that if R. H. Ricks, during his life, had assigned to Brewer and W. W. Ricks his interest in the partnership property in the words used in his will, in the deed of assignment that, in case of insolvency, as against them, he could have maintained a bill to enforce his equity to have the property applied to the payment of the debts. Why may not his executors, for the protection of his estate, do so in this court, when the property is brought into its jurisdiction for administration and distribution? 20 R. C. L. 1032, § 274. This is in accord with the provision of Bankruptcy Act, § 5f (Comp. St. § 9588).

[9] In re Filmar (C. C. A. 7th Cir.) 177 Fed. 170, 100 C. C. A. 632, 24 Am. Bankr. Rep. 194, it appeared that Swigert and Filmar were engaged in business as partners. Swigert sold his interest to Filmar in consideration of a small sum and the agreement to pay the partnership debts. Partnership assets were then in excess of partnership debts. Filmar settled all of the debts except one due to Lippincott.