Flack v. Charron

29 Md. 311, 1868 Md. LEXIS 84

• Court: Court of Appeals of Maryland
• Decided: June 26, 1868
• Status: Published

Opinion

Alvey, J.,

delivered the opinion of the court:

Upon careful examination we discover nothing in this case to distinguish it from that of Sanderson v. Stockdale, 11 Md. 563; arid, of course, the same relief that was given in that case should be afforded in this. It is true, the case of Sanderson v. Stockdale was heard on bill and exhibits only, and, in the case before us, the defendants have all filed their answers, denying most of the material allegations of the bill; but such denials have been overcome or neutralized by the *facts and circumstances proved in the cause. There is no question made here of the right of partners, where the firm is solvent, to convert, by their own acts, the joint property of the partnership into the separate property of individuals, or into the joint property of two or more partners. This, it is conceded, may be done. And if done bona ñde, and for valuable consideration, it will bind and preclude the antecedent partnership creditors.

But it is contended, that when such transfers are fraudulent, and calculated to hinder and delay the partnership creditors, they are void as against such creditors, and will not be allowed to operate to their prejudice. And this proposition we think sound, and amply supported by authority. For while it is true that the joint creditors, as such, have no immediate or direct lien upon the partnership property, yet, they have a derivative or secondary lien, that can be worked out and made effectual through the lien of the partners; and which quasi or secondary lien of the creditors, constitutes an equity, that courts will recognize and protect, against the meditated fraud of the partners themselves. And hence, while the joint creditors have no right to impeach or call into question the bona fide sales or transfers of the partnership property, it has been uniformly held that it was necessary to the validity of such sales or transfers, as against the creditors, that they should be fair and bona fide; and where they have been found otherwise, as in the case of Anderson v. Maltby, 4 Bro. Ch. 429, and note; Coll, on Part, sec. 575, they have been declared inoperative as against creditors. Ferson v. Munroe, 1 Foster, (N. H.) 462; Pars, on Part. 395. And in this case, we think no candid mind-can otherwise conclude than that the transfers of the stock in trade, and the transformations of the firm were intended to defraud the creditors of the firm of J. B. Charron & Co., by defeating their right to the appropriation of the partnership assets to the payment of their debts. The devices and disguises that seem to have been so constantly resorted to, are susceptible of *no other construction. They commence in May, 1865, in the ostensible withdrawal of J. B. Charron, the leading member of the concern, when in fact he continued his connection with the firm, holding his real interest disguised and concealed in the name of a member of his family. In February, 1867, when this member, thus cloaking the interest of his father-in-law, desired to escape from the concern, it was deemed advisable that the firm should undergo an ostensible reconstruction, and then it was that Claude C. Charron, the irresponsible minor son of J. B. Charron, was put forward to take the place of his father; his father’s interest, that had been held in the name of Richard, being transferred to him; and, so far as we can see, without any consideration whatever, but as a mere sham. Townsend, the traveling agent of the house, was taken in as a partner upon his paying three thousand dollars; and Richard’s interest having been purchased out by the firm, the three thousand dollars, paid by Townsend, were paid over to Richard, and the notes of the new styled firm given him for the balance of the price of his interest. The respective interests of Posey and of John B. Charron, now represented by C. C. Charron, in the firm of J. B. Charron & Co., were transferred ; and thus the firm of J. B. Charron & Co., composed of J. B. Charron, J. P. Posey and Stephen Richard, was transformed into Charron, Posey & Co.; the only real change taking place being the admission of Townsend in the place of Richard, and the shifting the interest of J. B. Charron from the name of one party to that of another. There was no assignable reason for any real change of the firm; but, on the contrary, the most manifest reasons against it. The creditors, who were materially interested in the change, seem never to have been consulted as to its propriety, or even informed of the intended transformation. They were left in ignorance not only as to the reasons for the change, but as to the persons composing the new firm. “The only motive that can be perceived, for this transaction, is that the parties desired to place all the tangible property of the firm of J. B. * Charron & Co., beyond the reach of its creditors, and that this was the contrivance resorted to as a means to effect that object. The surrounding circumstances of the transaction itself, the false and deceptive entries detected in the books, and the subsequent occurrences, all strongly indicate this to have been their purpose.

But it is said that the firm of J. B. Charron & Co., had, at the time of this change, assets amply sufficient to pay all of its debts; and that provision was made for'their liquidation by the appointment of Posey, the agent of the firm, to collect the outstanding debts and to pay off the creditors. To answer this .suggestion, let us recall to mind the indisputable facts. According to the answers of J. B. Charron, and J. P. Posey, with but slight discrepancy, the indebtedness of the firm amounted to about $59,000. The stock in trade was valued at $15,000; and the debts due the firm were supposed to amount to about $102,-000. These debts, however, were mostly due the firm from persons of the Southern States; and by reason of the distressed and embarrassed condition of the people, and the operation of stay laws, in those States, a large portion of the debts were not collectible. The entire stock in trade, being the only tangible property of the firm that could be made available to the creditors for the payment of their debts, was transferred, and, of course, not intended to be reached by any legal process to which the creditors could resort. The outstanding debts due the firm were kept in the control of its members, to be collected and applied as they might think proper; so that the creditors were not only made to depend for payment of their debts, upon the chances of future collections that might be made from customers embarrassed by poverty, and hedged in by stay laws, but were also made to depend upon the sheer good will and pleasure of their debtors. They were therefore without an efficient remedy for the realization of their dues. There was nothing left within their reach, and so far as they were concerned, practical insolvency of the firm existed in February, 1867, *and still exists. For it matters but little what may have been the stated amount of outstanding debts due the firm, if they wrere either worthless, or non-available to the creditors. And, as to the individual liability of the members of the partnership, it is not pretended that they have separate means of payment. So that, by the transaction of the nth of February, 1867, the creditors have been deprived of the benefit of their remedies by due course of law, to do which was of itself inequitable and fraudulent.

If it had been at all doubtful at the time, as to what was the real purpose and design of this change in February, 1867, we think subsequent events make it manifest beyond question. Both John B. Charron and Posey, remain in the new styled firm, the former represented by his minor son, and the latter as an ostensible partner; and although it was said to be understood in February, 1867, when Richard withdrew, that Posey alone was to assume the duty of liquidation, it seems that J. B. Charron, shared it with him;, and all the moneys that were subsequently collected, were taken into the new concern, and used by it; and only such creditors were paid, as the parties deemed it to their interest to pay. Subsequently, when the neglected creditors began' to complain, and after Posey had managed to get his entire interest out of the concern, and in fact stood in debt to it, he, in September, 1867, went through the form of retiring, though upon condition that he was to be retained in the service of the firm to be newly formed, of Charron, Townsend & Co., at a salary. It was soon after this last ostensible change, that Posey submitted to the creditors of the firm, of J. B. Charron & Co., the condition of its affairs, and made to them the extraordinary proposition of the 27th of September, 1867. For extraordinary it certainly was, for a firm that pretended to be entirely solvent in February, preceding and able and willing to pay all of its debts. According to the statement submitted to the creditors, Posey supposed that of the remaining debts due the firm, amounting in the aggregate to $65,897.33, about $27,716.77, *might be realized. Of the whole amount due, he put down the small sum of $4,711.60, as worth par, and that due on open accounts. And of the entire 'remainder of the debts due, he estimated $31,074.96, of them to be worth fifty cents in the dollar, and the balance of $30,110.77, to be worth only twenty-five cents in the dollar. The debts of the firm remaining to be paid, amounted to $21,326.30. Posey, after collecting in and appropriating in his own way, as many of the available assets as he could, then proposed to the creditors of the' firm of -J. B. Charron & Co., “ to settle up the business for the sole benefit of its creditors, (they allowing him a moderate compensation for his services,) to pay over to them all moneys as received pro rata, (provided they all agree to the arrangement,) or if preferred by them, he will transfer and assign all the books, notes and entire assets to them, provided they will give him a release in fullThus the creditors are put to the alternative of either employing Mr. Posey, at a salary, to gather in what he could, or might think proper, of the doubtful debts due the firm, or to assume the work of collection themselves, and give Mr. Posey a full release. And this would seem to be designed as the consummation of the whole plan of operations. John B. Charron and Richard had made their escape from the concern, and it now remained for Posey to make his, and to leave the creditors to take care of themselves. Certainly a very convenient and easy mode of winding up partnership affairs, so far as the partners are concerned, but not very just or equitable to the creditors.

It is said, however, that whatever fraudulent purpose may have been contemplated by John B. Charron and J. P. Posey, that Claude C. Charron and Townsend, the parties constituíing the firm of Charron, Townsend & Co., were ignorant and innocent of it. But that is not our conclusion from the facts of this case. We think they were fully aware of the condition of the firm of J. B. Charron & Co., and were privy, and contributed to the fraudulent schemes and devices to hinder and delay its creditors. The firm, of which they pretend to *be the only partners, is but the fraudulent transformation of the firm of J. B. Charron &'Co., conducting its business on the stock in trade that properly belongs to that firm, and which equity requires should be applied to the payment of its debts.

It was contended in argument, that whatever might be thought to be the true character of the transaction of the partners in transferring the partnership property, there could be no proceeding had in a Court of Equity, for the purpose of avoiding such transfers until after judgment and execution at law, creating a lien upon such property. But we think there is no force in the objection. The case is plainly embraced by the very terms of the Code of Pub. Gen. Laws, Art. 16, sec. 35, which declares that “ in no case of a proceeding in equity to vacate any conveyance, or contract, or other act, as fraudulent against creditors, shall it be necessary for any creditor or plaintiff in the cause to have obtained a judgment at law on his demand, in order to the relief sought in the case.” Besides, the same objection was raised in Sanderson v. Stockdale, 11 Md. 564, and the court overruled it, distinguishing that case from the case of Uhl v. Dillon, to Md. 500.

It follows, from what we have said, that we regard the case as a proper one for both an injunction and a receiver, in accordance with the prayer of the bill. We shall, therefore, affirm the order of the 2nd of April, 1868, from which the several appeals have been taken, so far as it continued the injunction against John B. Charron, Stephen Richard, and John P. Posey, and granted the prayer for a receiver as to the firm of J. B. Charron & Co., and shall reverse said order so far as it dissolved the injunction against Claude C. Charron and John M. Townsend, and the firms of Charron, Posey & Co., and Charron, Townsend & Co.; the question of the refusal to appoint a receiver, as to these latter firms, not being before us on this appeal, the cause will be remanded to the court below, that further proceedings may be had therein *in accordance with this opinion, and that the same may be brought to" final hearing and determination. The costs to await the final result.

Order affirmed in part, and reversed in part, and cause remanded for further proceedings.