Potts v. Blackwell, 56 N.C. 449, 3 Jones Eq. 449 (1857)

Dec. 1857 · Supreme Court of North Carolina

56 N.C. 449, 3 Jones Eq. 449

JOSEPH POTTS and others against JOHN BLACKWELL and others.

Where one of two partners, by a mortgage deed, conveys to the other, partnership effects, to secure debts alleged to be due from the one to the other, which deed and effects are assigned to bona fide creditors of the mortgagee, to secure debts due from him to such creditors, such conveyance was Held to be valid against creditors of the firm, who had acquired no lion.

A trustee or mortgagee is a purchaser for a valuable consideration, within the provisions of 13 th and 27th Eliz., but it seems he takes subject to any equity that attached to the property in the hands of the debtor, from which he cannot be discharged by the want of notice.

Plaintiffs in a court of equity arc only bound to show that they have reduced their debts to judgments, when they sue as creditors, to obtain an equitable fi. fa. where property cannot bo reached by a fi. fa. at law, or where they sue to have the rights of their debtor declared and incumbrances removed, so as to make the property bring a fair price.

Cause removed from llie Court of Equity of Beaufort county.

Benjamin F. Ilanlts, being largely indebted to several persons, on the 17th of September, 1856, executed a deed of trust to the plaintiffs, Potts, Myers and Donnell, to secure the payment of these liabilities, conveying to them several parcels and lots of land in, and near, the town of Washington, in this State, on which were erected valuable steam saw-mills, distilleries and planing machines ; also the machinery and implements pertaining to these mills, &c.; also a steam-boat, called the Astoria or Post-Boy. Which deed of trust was' registered on 18th of September, 1856.

B. F. Hanks' had carried on the business of sawing and planing lumber at these several mills, and shipping and selling the same, and of distilling, in his own name, from the. year 1844, up to the 23rd of August, 1856, but was, in fact, in secret copartnership in that business with the defendant John Blackwell, who resided in the town of Newbern. The business had been unprofitable for several of the latter years of the copartnership, and when the partnership was dissolved on 23rd of August, 1856, it was largely insolvent, as was each of the partners, Ilanks and John Blackwell.

On the said 23rd of August, 1856, a written contract of dissolution was entered into, and as a part thereof, Ilanks executed to John Blackwell, five notes of four thousand dollars, each payable in one, two, three, four and five years, bearing interest from that date, and at the same time executed a mortgage deed, conveying the same property that was after-wards conveyed in trust to the plaintiffs (which is above described,) to the said John Blackwell, to secure the payment of the same. The consideration of these notes, as stated by both the partners, was, that Ilanks had used, on his private account, funds of the firm, to the amount of twenty thousand dollars, and these notes wore given as an equivalent to the other partner. The mortgage deed to Blackwell was registered on the same day with the deed of trust made to the plaintiffs, but a short time before it.

At the time of this transaction, John Blackwell was indebted to his brothers, Robert M. Blackwell, Josiah Blackwell and James M. Blackwell, who all lived in New York, in several sums to each, amounting in the aggregate, including interest, to twenty thousand dollars ; and on the same day on which the mortgage was executed, to wit, on 23rd August, 1856, it was formally assigned to them.

The plaintiffs allege, in their bill, that, in fact, John Blackwell had no such debt against Ilanks, as that stated by them as the consideration of the notes and mortgage; that a true state of the dealings showed him to be indebted to the firm ; that both partners well knew of the insolvency of the firm, and that in contemplation of an early disruption of the business, these notes and the mortgage were fabricated fraudulently to transfer these effects beyond the reach of their creditors.

The prayer of the bill is, that the mortgage may be declared fraudulent, and that the assignees, Robert M., Josiah and James M. Blackwell, may be compelled to release their estates to the plaintiffs, Potts, Myers and Donnell, for the benefit of the creditors provided for in the deed of trust made to tliem.

All the defendants answered. Robert M., Josiah and James M. Blackwell, state fully the origin and nature of the several-debts to them, and aver that they were bona, fide and justly due them ; they deny that they had any reason to believe, or did believe, that the firm of Hanks and Blackwell was verging on insolvency, when the notes and mortgage deed were made and assigned to them ; that so far from that, they were informed, and believed, that Hanks, after the dissolution, was abundantly good for all his debts. Hanks and John Blackwell deny the material allegations in the bill, and aver that the transaction of the notes and mortgage was fair and honest.

There were proofs taken on both sides, and the cause was set down for hearing on the bill, answers, exhibits and proofs, and sent to this Court by consent.

Rodman, for plaintiffs.

Fowle and Rodman, for defendants.

The argument of Mr. Eowle was as follows:

1st. There was no fraud in the conveyance from Hanks to John Blackwell. But, if there was, the plaintiffs are not entitled to recover; for

2. They must claim either as purchasers or creditors, under 27 or 13 of Eliz.; Pev. Code, ch. 50, secs. 1, 2.

1. Are they purchasers, under 27 Eliz. % Wo think they are; Roberts on Fraud. Conveyances, 373; Ghapman v. Emery, Cowp. 279 ; 5 Ire. 91; 1 Ire. 149; 3 Dev. 105.

Being purchasers they might have taken the land as against John Blackwell, but not the steam-boat, which is pei’sonalfcy, since the 27 Eliz. applies only to realty ; Grimsley v. HooJcet\ 3 Jones’ Eq. 7; Green v. Eornegay, 4 Jones, 69.

The objection that the deed to John Blackwell was not recorded in the custom-house, according to the act of Congress, will not avail the plaintiffs, because Congress only has power to regulate commerce with foreign nations and among the several States, and with the Indian tribes;” Constitution of United States, Art. 1, sec. 8, clause 3.

In our case, the steam-boat plies between Washington and Beaufort, and never leaves the territorial limits of North Carolina. But Robert, Josiah and James Blackwell are purchasers (i. e. if a mortgagee is a purchaser) from John Blackwell for a valuable consideration, and without notice, for the deed to the plaintiff had not been executed at the time of the conveyance to them. They, therefore, take discharged of the plaintiff’s claim; Rev. Code, chapter 50, sec. 4. If a mortgagee is not a purchaser, the plaintiffs cannot claim as purchasers ; for a trnsteepmd the cestuique trust, together, are equal to a mortgagee. The interest remaining in the trustee has been declared to bo an equity of redemption, under the act of 1812; Simpson v. Fries, 2 Jones’ Eq. 156 ; Harrison t. Battle, 1 Dev. Eq. 537.¡

2. As creditors of the partnership, they are not entitled; because

1. They have not reduced their claims to judgment and taken bold of the property ; Grimsley v. Hooker, 3 Jones’ Eq. 7; Harrison v. Battle, 1 Dev. Eq. 537.

2. The creditors of a partnership have no lien in equity against partnership effects, except through the partners themselves ; Adams on Equity, [243,] note (1,) 457. The creditors’ right may, therefore, be terminated at any time by the act of the partner, through whose lien they claim; Clement v. Foster, 3 Ire. Eq. 213 ; Parrish v. Lewis, 1 Clarke. O. R. 191; Waterman v. Hunt, 2 R. I. 298. Thus a sale of eacli partner’s im terest upon separate executions to the same purchaser, passes the whole interest in the partnership property discharged of the partnership debts, for the equities of the partners have then ceased; Doner v. Stauffin, 1 Pa. R. 198; Baker’s Appeal, 21; Penn. St. R. 83. So a conveyance of partnership property to pay seperate debts of the partners, if bona fide, is binding, whether the partnership be solvent or not; Allen v. Centre Valley H. li., 21 Conn. 130.

Last]y. An assignee of a mortgage given to one partner by another member of tiiefirm, holds unaffected by the claims of the partnership creditors; Waterman v, IIuntb 2 R. Island, 298.

PeaRSON, J.

This is a contest between two sets of creditors, one the creditors of Ilanks and Blackwell, the other creditors of Blackwell. The debts of each are admitted to be true; so they are equally innocent, and the question is, upon which shall the loss fall ? The plaintiffs claim under a deed of trust executed by Ilanks to secure them ; the defendants (except Ilanks and John Blackwell) claim under a mortgage executed by Ilanks to Blackwell, and by him assigned to them prior to the execution of the deed of trust. The property is the same, and belonged to the firm of Ilanks and Blackwell.

The plaintiffs put their equity on the ground that they are firm-creditors, and the property was firm effects, and it was a fraud on their rights for Blackwell, with the concurrence of Hanks, to withdraw these effects from the firm and apply them to the payment of his individual debts, as they well knew that the firm was no.t in a condition to meet its liabilities. They seek to have the mortgage put out of their way.

Before entering upon the principle which we think governs this case, it is proper to dispose of two questions much discussed at the bar: Is a deed of trust, or a mortgage, made to secure an existing debt, a conveyance for valuable consideration ?

It is a settled principle, acted upon every day, that the trustee, or mortgagee is a purchaser for a valuable consideration within the provisions of the 1.3th and 27th of Elizabeth ; but it would seem they take subject to any equity that attached to the property in the hands of the debtor, and cannot discharge themselves from it on the ground of being purchasers vdthout notice; in like manner asa purchaser at execution sale takes subject to any equity against the debtor, without reference to tbe question of notice. This distinction is a plain one, and reconciles the cases, Donaldson v. Bank of Cape Fear, 1 Dev. Eq. 103, Harriss v. Horner, 1 Dev. and Bat. Eq. 455, Holderby v. Blum, 2 Dev. and Bat. Eq. 51, with the settled principle above stated. "We are not at liberty, however, to decide the question, as both parties stand on the same footing with regard to it; so the case does not present it.

It was insisted that the bill could not be sustained, because the plaintiffs had not reduced their debts to judgments. That is only required when a creditor, as such, seeks to have an equitable fi. fa., on the ground, that the property cannot be reached by a fi. fa. at law, or because it is necessary to have the rights of the debtor declared; and incumbrances removed, so as to make it bring a fair price. The plaintiffs do not sue in the character of creditors, but of subsequent purchasers, and their debts being admitted to be true, constitute a valuable consideration, and possibly they could have reached the land under the 27th Elizabeth, if it had remained in the hands of John Blackwell; but in respect to the steam-boat, which is personal property, the case of Grimsley v. Hooker, 8 Jones’ Eq. 4, may have been in the way even as against him, for they claim under Hanks, the alleged fraudulent donor, and the property (as the 27th Eliz. has no application,) can only bo reached by a title paramount to that of the fraudulent donee.

There is a broad ground upon which the plaintiff must fail; If a partner conveys the effects of the firm to secure his individual debts without the concurrence of the other partner,, only his interest passes ; that is, his share of the surplus after the debts of the firm are paid and the business closed; Hanff v. Howard, ante 440, decided at this term. But if' the conveyance be made with the concurrence of the other partner, the property passes, and it is binding upon the firm creditors, for they had no lien on the firm effects, and can only work out an equity to subject the firm effects to the payment of the firm debts, under and through the other partner, which is precluded by his concurrence; Clement v. Foster, 3 Ire. Eq. 213; Hassell v. Griffin, 2 Jones’ Eq. 117; Rankin v. Jones, Ibid. 169.

In our ease, Hanks agreed that Blackwell should appropriate tlio firm effects to the payment of his (Blackwell’s) individual creditors, to the amount of $20,000, the sum set out in the mortgage. It is said that he did so because he had used effects of the firm to that amount for his own private purposes, and thought it fair that Blackwell should have the same amount. . Whether this be so or not, is a question between themselves. It is certain Hanks did concur and join in the conveyance that was made to secure the defendants. It is also certain, that they are bona fide creditors of Blackwell, and no imputation can be made of a want of bona fides, in respect to the manner in which they obtained the security. This being the case, it is immaterial what form the parties adopted in order to effectuate their purposes-; it might have been done by a mortgage executed both by Hanks and Blackwell ; or by a mortgage executed by Blackwell and concurred in by Hanks; or a mortgage executed by Hanks to Blackwell and by him assigned to the other defendants, which was the form adopted. 'All'that was essential, to give effect to the transfer, was the concurrence of Hanks, and bona fides on the part of the defendants, who are creditors of Blackwell. This made the conveyance valid against the creditors of the firm who had acquired no lien, and presents the ordinary case of a bona fide purchase for value from a fraudulent donee, and a subsequent bona fide purchase for value from the donor, in which case it is well settled, that the first purchaser holds against the subsequent purchaser, under the 27th Elizabeth. Bill dismissed with costs as to Hanks and John Blackwell.

Pee CueiaM, Decree accordingly.