Jarvis et al., Adm'Rs, v. Brooks et al., Adm'Rs, 23 N.H. 136 (1851) - Opinion

At law, until equity interfered and introduced another rule, the creditor of one partner might take his share in the partnership goods on a fi. fa., and sell that share as if the partner had been tenant in common. The vendee under the sheriff’s sale, became tenant in common with the other partners, and was not subject to the partnership account. He took, not his debtor’s share of the surplus, after the partnership liabilities were satisfied, but an absolute undivided share in the chattel sold. Heydon v. Heydon, Salkeld, 292; Dutton v. Morrison, 17 Ves., 205. In the administration of the English bankrupt laws, the rule was early established that the creditor of one partner could take nothing out of the joint estate for the satisfaction of his debt, till all the partnership debts were |>aid; and this doctrine was adopted in equity as a general rule, by which a preference was secured to the partnership creditor, over the partnership funds, for the satisfaction of their debts. In England, courts of law now recognize the principle to some extent and for some purposes, but the rule is said to be there generally disregarded at law. Waters v. Taylor; 2 Vesey & Beames, 301; 1 Story on Equity, 625.

As the creditors of the partnership are preferred, in the application of the partnership estate, so the creditor of the individual partner is preferred as it respects the separate property. “ In case of joint traders becoming bankrupt, the joint creditors shall first be paid out of the partnership effects, and the separate creditors, out of the separate effects, and if any surplus of the partnership effects, after all the partnership debts are paid, the separate creditors to come in, and so, vice versa, the partnership creditors to come in on a surplus of the separate estate.” Ex parte Cook, 2 P. Wms., 500; Ex parte Crowder, 2 Vernon, 706; Ex parte Rowlandson, 3 P. Wms., 408; Ex parte Baudier, 1 Atkins, 98; Gray v. Chiswell, 9 Vesey, 118.

The preference allowed to the separate creditor, over the separate estate of his debtor, appears to have been introduced, at the same time with the corresponding preference given to the partnership creditors, over the partnership estate. They are reciprocal rules, and dependent on the same equitable principle. The rule, and the equitable grounds of it, are thus stated by counsel in Grey v. Chiswell, 9 Vesey, 120. “ The court makes a just arrangement between both estates, and both parties are before the court, but there the joint creditors cannot have recourse to the separate fund, till the separate creditors are paid; and the course of proceeding is founded on, not merely convenience, but substantial justice. The joint creditors hence increase the joint fund, and those who make advances on the separate credit, having created the separate fund, the natural justice is, that the funds so constituted shall be applied to the respective demands.”

It would seem to have been sometimes supposed, that the claim of the separate creditor to a preference over the separate estate, was denied and disallowed in the time of Lord Thurlow. Allen v. Wells, 22 Pick. Rep., 453. This opinion, We think, has gone on a misapprehension of the design and effect of the orders made on this subject, by that chancellor. In order to apply the equitable rule for marshalling the assets of the partnership and of the individual partners, and assigning them to the respective classes of debts, it was necessary, of course, that an account should be taken of the joint, and of the separate estates. If a joint commission issued against the partners, such accounts were taken without special application to the court, and the respective estates were applied to the claims against each, according to the rule above stated. Ex parte Baudier, 1 Atkins, 98; 1 Cook’s Bankrupt L., 9.

But where the commission was against one of the partners, no account could be taken of the joint estate, under that commission, without a bill in equity, brought for that purpose. It is said, that, in early times, a joint commission was sometimes sued out, after a separate commission, and both were allowed to go on together; but of late two commissions are not permitted at the same time. Murray v. Murray, 5 Johns. Ch. Rep., 76.

During and before. the time of Lord Hardwielce, the joint creditor was allowed to prove his debt under the separate commission, for the purpose of objecting to the allowance of a certificate, but not to' take a dividend; and under this rule, if the joint creditor desired an account to be taken of the joint and several estates to be distributed according to the rule in equity, the burden was thrown upon him, the joint creditor, to file his bill, and bring before the court the solvent partner, and the assignees of the bankrupt, and hence the account of the joint estate taken in their presence. Murray v. Murray, 5 Johns. Ch. Rep., 72.

In 1785, Lord Thurlow changed this rule, and ordered that, on petition of a joint creditor, he should be allowed to prove his debt and take dividends under a separate commission, pari passu with the separate creditor. Ex parte Hogdson, 2 Brown, 5. The chancellor, sitting in bankruptcy, had both a legal and equitable jurisdiction. The commission was considered to be in the nature of an execution; and at law a judgment, recovered by a joint creditor, was regarded in the same light as a judgment recovered by a separate creditor, and satisfied in the same way out of tbe separate property. If the chancellor, therefore, in making these orders chose to consider himself as acting in the exercise of his legal jurisdiction, he could recognize no distinction between the joint and separate creditors in their claim to be satisfied out of the separate estate. The legal right of the joint creditor was clear; but equity interfered, when application was made to that jurisdiction, by marshalling the joint and separate assets equitably between and among the joint and separrate creditors. Murray v. Murray, 5 Johns. Ch. Rep., 72.

As a rule of practice, Lord Thwrlow, in the order allowing the joint creditor to prove his debt under the separate commission, thought it expedient, as matter of convenience, to look to the legal, rather than the equitable, rights of the parties, and in this preliminary order to place the joint creditor on his legal footing of equality with the separate creditor. But this change, in a mere matter of practice, had no effect to change the substantial and ultimate rights of joint and separate creditors to a distribution of the respective funds, according to the general rule in equity, which had there been recognized and established for a century. Upon a proper application to the equitable jurisdiction of the chancellor, the separate creditor had the benefit of of that rule on exactly the same principle as in the former practice. The change in practice merely shifted the burden of bringing a bill to take the joint account from the joint creditor to the assignees under the separate commission.

The case of Ex parte Hodgson, is meagerly reported in 2 Brown. A much more satisfactory account of it is given by Lord Eldon in Dutton v. Morrison, 17 Vesey, 207, and by that account it appears that Lord Thurlow held that “ it was upon the assignees to bring their bill to have the account settled.” And this appears clearly to have been the only consequence of the change in the rule, that it compelled the assignees, who represented the separate creditors, to bring the bill for a joint account, instead of leaving it to the joint creditors, as it stood under the former rule. In 1796, Lord Loughborough restored the former rule. Ex parte Elton, 8 Vesey, 238. The statements and discussions in ex parte Elton, leave no shadow of doubt as to the operation of Lord Thurlow’s rule. Lord Lougléorough desired the assistance of the bar, and those who were peculiarly conversant with the subject, to point out the balance of convenience and inconvenience between the two rules of practice. He said, that he understood from the attorney general, Sir John Scott, that it was not settled as matter of law, but of convenience, and subject to the limitation, that if the assignees of the separate estate think fit or will undertake to file a bill, a creditor admitted to favor is to be restrained from receiving a dividend. The difficulty was in settling on the best and most convenient way of obtaining an account of the joint estate, when the commission was against one of the partners, and Lord Loughborough says: a wherever my order will procure an account of the joint estate, there can be no harm, for then I shall give the usual directions to apply the funds respectively, the joint estate to the joint debts, the separate to the separate debts, the surplus of each to come in reciprocally to the creditors remaining upon the other.” He says further, as to the practice under Lord Thurlow’s rule, “ what I order to-day, sitting in bankruptcy, I shall forbid to-morrow, sitting in chancery, for it is quite of course to stop the dividend upon a bill filed. The plain rule of distribution is that each estate shall bear its own debts. The equity is so plain that it is, of course, in a bill filed. The object of a commission is to distribute the effects with the least expense. Every order I make to prove a joint debt upon a separate estate, must produce a bill in equity.”

Lord Eldon, after some characteristic doubts and misgivings, allowed the rule of his immediate predecessor to stand. He appears to have been embarrassed.with the difficulty that, under Lord Loughborough’s rule, the creditor was not made a regular party to the proceedings under the commission; but, on the whole, thought it better to let the rule stand, which he found established. Dutton v. Morrison, 17 Vesey, 207. These rules, respecting orders for proving joint debts under a separate commission, are thus treated by successive chancellors as more matters of practice, which they had power at their discretion to change from time to time, according to their ideas of expediency and convenience. It is entirely inconsistent with the stable character of English jurisprudence to suppose that a judge could assume to change on such grounds, a rule of law affecting the substantial rights of creditors to the satisfaction of their debts.

We understand the rule in equity, which gives the separate creditor a preference over the separate estate, and the rule which gives the joint creditor a preference over the joint estate of partners, to have grown up and always existed together, and to dedepend on the same equitable principle of equality and reciprocity.

In this State the equitable rule, which secures to the partnership creditor a preference in the application of the partnership estate, was adopted at least as early as 1830, and has ever since been uniformly recognized and applied at law to claims of creditors enforced under our attachment laws. Tappan v. Blaisdell, 5 N. H. Rep., 190; Gibson v. Stevens, 7 N. H. Rep., 357; Morrison v. Blodgett, 8 N. H. Rep., 236; Page v. Carpenter, 10 N. H. Rep., 77; Lovejoy v. Bowers, 11 N. H. Rep., 104; Dow v. Sayward, 12 N. H. Rep., 271; French v. Lovejoy, 12 N. H. Rep., 548; and in this State the claim of the partnership creditor, to his preference over the partnership estate, has not been put on the ground of a lien among the partners, but is asserted as a legal right of the creditor. If this right depended on a lien of the partners, the partners could, of course, waive and discharge their lien, and thus defeat the right of the partnership creditors to their preference in the application of the partnership funds. But it was decided, in Ferson v. Monroe, 1 Foster’s Rep., 462, that a sale of partnership property made by the partners to satisfy a debt due from one of them, with the intention of preventing the creditors of the firm from taking the property to satisfy their partnership debts, was a fraud on such creditors and void as to them. The right of the partnership creditors to a preference, in the application of the partnership funds, having been admitted in this State, the question raised in this case is, whether the corresponding and correlative rule, giving a preference to the individual creditor over his debtor’s separate estate, is also to be considered as having been adopted as a branch and member of the same equitable doctrine.

If the preference is admitted in favor of the joint creditor, but denied to the separate creditor, the principle of equality and reciprocity, upon which the interference of equity with the legal rule has been vindicated in England, wholly fails. At law the separate creditor might take his debtor’s moiety in the partnership estate, and sell it for his debt. When he comes to assert this legal right, equity interposes with the rule that partnership debts must first be paid out of the partnership property; and in answer to his complaint that equity has taken from him his legal right, he may be told in England that equity, by way of compensation, has given him a corresponding preference in the application of his debtor’s separate estate. We have admitted the equitable rule, which takes away the separate creditor’s legal right to satisfy his debt upon an undivided moiety of the partnership property. Principle, consistency and equal justice to the separate creditors, would seem to require that we should also adopt the other branch of the same equitable doctrine, and there is no greater difficulty in administering one branch of the doctrine than the other; both may be directly asserted at law with equal convenience.

In this country the rule, giving the partnership creditors a preference for the satisfaction of their debts, has been generally adopted. In Vermont it is understood to have been rejected. Reed v. Shepherd, 2 Verm., 120. In Massachusetts, the creditors of the partnership are preferred, but a preference over the separate estate, for the satisfaction of his debt, has been denied to the separate creditor. Newman v. Bailey, 16 Pick. Rep., 570; Allen v. Wells, 22 Pick. Rep., 450.

But the cases cited for the plaintiff show that the preponderence of authority, in this country, is in favor of allowing the separate creditor his preference over his debtor’s separate property. And the supreme court of the United States, in the case of Merrill v. Neill, 8 Howard’s Rep., 414, published since the argument, have come to the same conclusion. We are not informed of any case in which the question here raised has been directly settled in this State; but in Morrison v. Blodgett, 8 N. H. Rep., 248, it would seem to have been understood that the whole doctrine of marshalling the respective estates of the partnership and the individual partners, according to the rule of equity in England, was adopted here. Eor the court in that case, say, “ if courts of law are unable to carry out the principles of equity fully, by distributing the joint and separate effects among the joint and separate creditors respectively, it may perhaps be well that they have been disposed to follow the principles established in chancery, so far as the nature of their proceedings will permit, leaving the equity jurisdiction to supply, as well as it may, the deficiency.

We are on the whole of opinion that the rule giving the separate creditor a preference for the satisfaction of his debt, out of the separate estate of his debtor, must be considered as having been adopted in this State, along with the other corresponding rule of equity, which gives the creditor of the partnership a preference over the joint funds.

On the case stated, the plaintifis must recover two undivided third parts, of the demanded premises, unless the defendant shall elect a trial in the common pleas.