Dexter v. Dexter

Nash, J.:

The referee finds that David Dexter died intestate on the 9th of August, 1880, leaving him surviving two children, Everett A. Dexter and David E. Dexter ; that at the time of his death he and his son Everett were engaged as copartners in the business of manufacturing chairs at Black River, N. Y.; that upon the death of David, senior, the two sons entered into a copartnership under the firm name of “ D. Dexter’s Sons.” They were equal partners and continued the same business at'the same place until the death of Everett. At the time of the death of David, senior, he was the owner in severalty of certain parcels of real estate, and tenant in. common with his son Everett in others. After the death of David, senior, Everett conveyed to David E. fractional parts of the. lands in which he and.his father were tenants in common, thereby making David E., with the inheritance from his father, equal owner with Everett of all the lands of which the father died seized, or in which Everett had an interest'as .tenant in common with his father, except as stated in the next paragraph, among which lands were the “Shop Lot,” the “Saw Mill.Lot,” and the “Tannery Lot,” on ^which the business had been carried on by Everett and his father,, and which was continued thereon by Everett and David E. during their copartnership.

The referee finds that David E. transferred to Everett his undivided one-half interest in some other real, estate which he and Everett had inherited from their father, and these transfers it is found were intended to equalize the interest of the two in the partnership.

The copartnership formed by Everett and David E. continued until the death of Everett, which occurred March 12, 1893. He left him surviving the plaintiff, his widow, and the defendant Carolyn M. Dexter, his only child and heir at law. ' He left a will by which he devised and bequeathed two-thirds of all his property, real and personal, to his widow, and one-third of his property to his daughter, and appointed the widow executrix, to whom letters testamentary were issued upon probate of the will. Soon after the issuing of letters testamentary the plaintiff asked David E. to wind up the affairs of the firm. He objected', giving as a reason the expense of stopping the business at that time of the year to make an inventory, and the plaintiff consented that the business might be continued until January 1, 1894. '

David E. continued the business after as before Everett’s death, in the firm name the firm stock was Used; new stock was purchased in the name of “D. Dexter’s Sons,” the old firm obligations were paid and new debts were contracted in the name, of the firm ; the same help was employed and the same books were used.

At the expiration of the year the plaintiff renewed her request that the firm matters be closed up, and continued to press such requests. David E., however, stated that the times were so bad that-a sale then would be a sacrifice, and especially as a suit had been begun involving the water rights bf the late firm, and the owners were parties to it, which suit was then pending.

The plaintiff never consented to become a partner, nor to share the profits of the continuance of the business, nor to become responsible for any losses. But she did know that the business was being continued in the name of D. Dexter’s Sons, and assented to it until such time as a satisfactory sale could be made.

The business was continued precisely as before Everett’s death, until July 7, 1896, a period of three years and -four- months, w-lien David E., having become financially embarrassed, absconded, and has not returned. He paid and discharged all the debts of the firm contracted before Everett’s death.

In the course of the business .David E. contracted debts in the name of D. Dexter’s Sons.

At the time David E. absconded he was indebted- to the defendants Lewis, Woodward, Wilcox, Augsbury and the National Union Bank, on account of transactions other than in the business he had conducted in the name of' D. Dexter’s Sons.' These defendants, after David E. absconded, commenced actions' against him and obtained attachments, which were levied upon the real estate found by the referee to have been “put into the firm,” and'“upon the personal property belonging to the late firm of D. Dexter’s Sons, and upon the personal property purchased after the death of Everett A. Dexter in the continuance of the said business in the firm name of ‘ D. Dexter’s Sons,’ ” and the sheriff is still in control of the property under the attachments.

Before David E. absconded, and on the 9th of January, 1895, David borrowed $3,500 on his individual account, not connected with the manufacture of chairs, from the defendant Abel" Davis, and gave as security a mortgage dated on that day and executed by himself and wife, covering the “ Shop Lot,” the “ Saw Hill Lot ” and the “ Tannery Lot.”

As conclusions of law the referee finds that the real estate, the title of which, at the death of Everett, was in Everett and David'E., and which was used and occupied by the latter after the death of Everett, is to be deemed personal property of the firm, of which David E. is survivor, so far -as the debts incurred by David E. in the name of the said firm, in carrying on the business after. the death of Everett, are concerned. “ Fourth. That the assets of the firm having been used by the survivor in the purchase of other assets and property in the name of the late firm and for its benefit, and he having mingled the new-property with the old, the new property will be deemed the property of the firm, and the' court will impress upon it the lien of the representative of the estate," and of the creditors whose claims were incurred in the prosecution of the business by the survivor in the name of the firm.

“ That the representative of the estate, having consented to the continuance of the business of the late firm, and to the use of the firm property therefor, has subordinated the lien of the estate in the firm property to the claims of the creditors whose debts were incurred in carrying on the business, and the debts, of the firm, if any, and the debts mentioned in the eighteenth finding of fact herein, should be first paid out of the assets.

“Fifth. That the mortgage of the defendant Davis is a lien upon the one-half interest of David E. Dexter in the real estate covered by it, but such lien is subordinate to the payment of the debts of the firm, if any, and to the debts so incurred in the name of the firm after the- death of Everett, and in carrying on the said business as mentioned in the eighteenth finding of fact herein.”

The referee further finds that the claims of the several defendants, creditors of David E.,and their, attachments, are liens subordinate to the payment of the debts incurred in the business of the firm carried on by him as survivor, and to the claim of the representative of the estate of Everett.

We regard these conclusions of the referee erroneous. A dissolution by death puts an end to a partnership from the time of the occurrence of that event, whether known - or uriknown, or whether third persons have or have not notice thereof; so that it completely puts an end to the power or authority of the surviving partner to carry on for the, future the partnership trade or business, or to engage in new transactions, contracts or liabilities on account thereof. (Story on Partnership. [Bennett’s ed.], 343.) Upon a dissolution by death it becomes the duty of the survivor with, ail practical diligence to wind up and settle the copartnership concerns, to pay the partnership debts and obligations, and to distribute the surplus among those who are entitled to it, according to their respective shares therein. (Id. 347.) After dissolution of a partnership by death the survivor has no power to incur any new liabilities on account thereof; the survivor in the continuance of the business can bind no one but himself, and all the liabilities of the firm fall upon him individually. (Judge Earl in Betts v. June, 51 N. Y. 279.)

It is urged on behalf of the respondents, creditors of the new business, that “ where the survivor continues the business the general rule is that the estate of the deceased partner has a lien on the _ assets for the amount due the estate, which is ahead of the claims of creditors which arise from the continuance of the business, and the rights of the estate are to be determined as of the time of the partner’s decease. But where the representatives.of the deceased partner consent to the continuance of the business the lien is postponed to the claims of such creditors as are made in the business," and only attaches after the creditors are paid.” That “ by continuing the business the interest of the estate, as the referee finds, had been subordinated to the claims incurred, and, therefore, had the right to insist that those claims should be first paid out of the property. Each, therefore, had the right to insist that the debts should be first paid out of the property, and as this equity still exists in them it existed in all the creditors whose claims arose in the business.”

A very large number of cases are cited in support of the various propositions leading up to the conclusion of the learned counsel of the respondents that the new firm creditors, as the creditors of the new business are termed, have an equitable lien upon the assets of the new business and are to be preferred to the general creditors of the surviving partner, all of which were cases which arose between and determined the rights of the legal representative of the estate of the deceased partner and the surviving partner, or cases determining the status of creditors where the partnership business was continued pursuant to or by authority of an agreement in the articles of copartnership, providing for a .continuation of the business by the survivor after the death of one of the parties, or where a retiring partner allowed his interest to remain in the business of a new firm. In Stewart v. Robinson (115 N. Y. 328) by the terms of the copartnership agreement it was provided that upon the death of either party the business should “ be continued by the survivor ” for the term of five years, “ the estate of the deceased partner to have the same share and interest in the profits, and to bear the same share of the losses of the business as would have been received and borne by the deceased partner had he lived.” The survivor became insolvent. In actions brought by creditors seeking to charge the estate of the deceased partner in the hands'of his executors with debts contracted by the survivor of the business, it was held that the actions were not maintainable; that the executors, although they knew of the continuance of the business, had- taken, no part-in the management, and could not be deemed; partners. Danforth, J., in the opinion of the court, said the new creditor is confined, in pursuing his. remedy, to so much of the estate of the decedent as was embarked in trade, and to the personal responsibility of the party who continued the business. The case of Bell v. Hepworth (134 N. Y. 442) was an action in which the effect of the copartnership agreement in the Stewart case was further considered, and where it was held that the executor of the deceased partner having.consented to the continuation of the business, the claim of the estate was postponed to the lien of a mortgage given by the survivor to secure the loan of money used in the business. It was said in the opinion of the court that, while the strict duty of the survivor is to wind up the firm, and not to continue it any further than is necessary for that purpose, it is obvious that its continuance is not- unlawful as to those who consent to it. This was said in respect to the interests of the parties then before the court, not at all in regard to the .rights of general creditors, relatively or otherwise. The case of Adams & Co. v. Albert (155 N. Y. 356) was one- where á retiring partner allowed his unliquidated interest to be-continued in the business of a new firm) It was held that the interest thus left became liable for the partnership debts subsequently incurred, that is, the interest of the retiring partner remained at the risk of the business, although, perhaps, the newly-acquired assets, which in the course of the business took the place of the old, were subject to the lien of the new debts in preference to the old, and that the old assets remaining in specie were subject to the old' in preference to the new debts. It was held further that flip retired partner could not, on the insolvency of the new firm, assume the position of a firm creditor, in virtue of that interest, to the prejudice of actual creditors of the new firm. The suggestion that the new creditors might have an equitable lien upon the assets of the new firm, was made in view of the credit which they had extended to the new firm. No such suggestion is pertinent to the case at bar, for, as said by Danforth, J., in Stewart v. Robinson, there is here no partnership for there are no partners; there is a surviving partner, with whom, under all the authorities, the new creditors deal in regard to the new business as an individual, “ who can bind no one but himself.” .These are some of the principal cases cited and relied upon to take the case at bar out of the general rule that the death of a partner puts an end to a partnership, and to the power of the surviving partner to carry on for the future, trade or business on account thereof.

' The case of Durant v. Pierson (124 N. Y. 444) is also cited as a case “ similar to the one at bar,” holding the preference claimed. There a surviving partner borrowed money to pay the debts of the late firm, not debts incurred in the continuation of the business by the survivor; a case more' dissimilar than the case here, could, we think, hardly be imagined. The course of the decision of the case shows the tenacity with which the courts adhere to the rule that the surviving partner has no power to create firm indebtedness. There the surviving partner gave a note for money with which ,to pay the indebtedness of his late firm, signed with the firm name by him as survivor. It was held that the note in form did not create an obligation of the firm, and at law was unavailable as such, for the reason that there was no power in" the survivor to make it, but that the indebtedness thus incurred, in justice and equity, ought to be paid out of the firm assets; but even there Vann, J., dissented, and the General Term held otherwise.

It would have been deemed unnecessary to enter into so extended an examination of the authorities, but for the fact that the propositions in support of which- they are cited have been very strongly urged upon our attention.

The principle upon which the lien in favor of creditors of a copartnership upon the partnership assets is said to rest, would seem to dispose of the case here upon the mere statement of it. In Saunders v. Reilly (105 N. Y. 12) it is held that a mere general creditor of a firm, having no execution or attachment, has no lien whatever upon its personal assets; that while firm creditors are entitled to a preference over creditors of the individual members of the firm in payment of their debts out of the assets of the firm in course of liquidation, their equity is not held or enforcible in their own. light, but is a derivative one, practically a subrogation to the equity of each individual partner to have the firm assets applied primarily to the payment of its debts; and where no such equity exists in favor of any member of the firm, the firm creditors have. none. The' foundation of the rule as thus stated has been questioned, and it.is asserted by the respondent’s counsel — and very properly so, it may be conceded — that “as long as either partner 'retains his interest in the copartnership property as such, this equity remains, and that it cannot be cut off except by the joint act of all . the partners conveying the. property away.” (Citing Bulger v. Rosa, 119 N. Y. 459, and Menagh v. Whitwell, 52 id. 146.) The assertion is that the equity of creditors remains so long as either partner retains his interest in the copartnership property as such, but there are here no partnership creditors. The defendant creditors of the new business are not partnership creditors. As .already stated, there is here no partnership and no partners, and the survivor has no interest in the copartnership property as such; he holds as survivor.,

The. plaintiff, as the legal representative of the deceased partner, stands in no better position than any other creditor. Having consented to the continuance of the business after the debts of the copartnership were paid, she, as the executrix of her husband’s will, is a creditor of David E. to the amount of the value of whatever interest of the estate in the firm he has dissipated and lost.

. If the lands owned by Everett and David E. at the death of Everett were deemed the property of the.firm, and regarded as personal property, the result would be the same. As personal property, the title thereto would be in the survivor with the right to dispose' of it, and subject to the liabilities incurred by him in the same manner as any other property which came to his hands. But Everett and David E. were not copartners in the undivided real estate owned , by them at the time of Everett’s death. It was not purchased with partnership funds, nor was it used in their partnership' business-except to occupy it. There is no evidence of any agreement, made by Everett and David E. that their real estate should be held, and owned by them as copartners, or in any other capacity'.than that implied from their inheritance and the deeds of conveyance to' them as tenants in common. The finding that the transfers of real' estate made by Everett and David E., each to the other, were-intended to equalize their interests in the copartnership is implied from the conveyances, and the fact that they entered into and transacted business together under the firm name, there being no other evidence as to what their partnership agreement was, or that any agreement in fact was ever made as to the terms of their copartnership.

It follows that the plaintiff has not, either individually or as executrix, any lien upon or equity in the property of David E. Dexter, as the surviving partner of her husband or otherwise, but as executrix and devisee of her husband, she' and her daughter take the undivided interest of David E. Dexter, deceased, in the' real estate of which he died seized, which interest is in no manner liable to the claims of the creditors of David E. Dexter as survivor of the firm; that the lién of the mortgage of the defendant Davis, as well as the liens of the defendant attaching creditors, are superior" to, and have preference over, the rights acquired by the receiver.

Judgment reversed and a new trial ordered before another referee, with costs of the appeal to abide the event.

Hardin, P. J., and Adams, J., concurred; Spring, J., dissented; McLennan, J., not sitting.