Per Burnett, J.—In a case where one partner has filed his bill for a dissolution of the partnership and the appointment of a receiver, it seems that until a dissolution has been judicially declared, and a receiver ordered to make a pro rata distribution of the assets among the creditors, they are not prevented from resorting to adverse proceedings, and thereby gaining a preference.
The fact that the referee in the proceedings supplementary to execution was the clerk of the attaching creditor, is not any considerable evidence of fraud, when the limited duties of the referee are considered.
When the plaintiff proceeded under section two hundred and thirty-nine of the Practice Act, to examine his judgment debtor as to a judgment held by him against A, and after examination obtained an order to apply the same to the judgment of plaintiff, it seems that it is not necessary to make A a party to the proceeding.
Debts or credits are considered property in the statute. A judgment is a debt of record, and the parties to it are called judgment creditor and debtor.
Upon the application of the receiver in the suit for dissolution, he can obtain the necessary proceedings for procuring a correct application of the balance of a judgment held by the partnership against a third party, after paying the judgment creditor of the partnership.
Per Terry, J.—A fund in the possession of a receiver can only be distributed by the order of the Court in whose custody it is, and no party can, by adverse proceedings, acquire a lien over it.
Where, however, it appears that the partners, parties to the suit for a dissolution, held a' - judgment against a third party, which was never reduced to the possession nor under the control of the receiver, the appointment of the receiver would not operate as an assignment or transfer of any property not so reduced to possession within a reasonable time.
Per Murray, C. J., dissenting.—The act concerning proceedings supplementary to execution, provides for two cases: First, when the debtor has property which he refuses to apply, etc., in which case he is required to be summoned, etc; and, second, where any person or corporation has the property of, or is indebted to, the judgment debtor, in which case such person, or debtor of the judgment debtor, must be summoned.
A judgment is not properly within the meaning of the act, which, being in derogation of the common law, must be strictly construed; and the case is not altered because the debtor of the judgment debtor does not complain that he was not summoned.
Opinion — Burnett
Burnett, J. The first question presented by the record, and upon which the decision of the Superior Court of San Francisco was predicated, is whether the property, in the judgment of Adams & Co. against Hastings, vested in the receiver appointed by the Court in the case of Alvin Adams against his copartners, so as to prevent a creditor of the firm from gaining any advantage over other creditors by adverse legal proceedings. The Court below held that it did, and that defendants gained no priority or lien by virtue of their proceedings against Adams & Co., and that, therefore, the judgment against Hastings was rightfully under the control of the receiver, who represented the copartners as well as their creditors.
It appears that the complaint of Alvin Adams was filed for a dissolution, and prayed for the appointment of a receiver, and the application of the assets of the firm to the payment of the partnership debts. It was only a case for a dissolution—not one stating a previous dissolution. It is true, that in the case of Williamson v. Wilson, Bland R., 418, the Chancellor held that insolvency operated as a dissolution of itself, and that in such a case, a Court of Equity, when called upon to administer the funds, would do it upon the principle of a pro rata distribution. But in the case of Alvin Adams there is no sufficient allegation of the insolvency of the firm of Adams & Co., and had there been such an allegation, still the creditor would not have been deprived of his remedy, as was held in the case cited of Williamson v. Wilson.
The case of Warring v. Robinson and others, 1 Hoff. Oh. Rep., 524, is mainly relied on by the plaintiffs in support of the opinion of the Court below, upon the point now under consideration.
The Chancellor says: “ In the case of Pratt v. Robinson, July, 1839, 1 decided that a judgment obtained adversely against the partners was entitled to such priority.” And referring to the case of McCrudix v. Senior, 4 Paige, 378, the Chancellor says: “ A bill was filed by one partner, alleging a violation of the partnership articles, by applying the effects of the firm to their private transactions, and seeking a dissolution of the partnership, an injunction, and receiver. After service of the injunction, one [199]of the partners confessed judgment to a partnership creditor. The injunction prohibited him from intermeddling with the property and effects. The Chancellor held, that the injunction did not prohibit the partner from giving a preference to a bona fide creditor of the firm, and that the facts stated in the bill did not entitle the complainant to an injunction to restrain the creditors of the firm from proceeding at law to recover their just debts, or to restrain any member of the firm from confessing a judgment to such creditors, so as to give them a preference in payment.” “It is true, the appointment of a receiver, in a cause where a bill is filed for a dissolution, is not a dissolution.”
And in the case of Egbert v. Wood, 3 Paige, 521, it was said by Chancellor Walworth: “ So by the law merchant, although the effects of a copartnership upon the insolvency of the firm were in equity considered a trust fund for the payment of the partnership debts, and any of the partners might apply to this Court for the purpose of having the partnership funds thus appropriated rateably among all the creditors, yet either of the partners, before the dissolution of the copartnership, or all of them, afterwards, might unquestionably exercise the right of appropriating those funds to the payment of one creditor in preference to another.”
In Hannah K. Chase’s case, 1 Bland Oh. R., 213, it was held, “ that the appointment of a receiver does not involve the determination of any right, or affect the title of either party in any manner whatever.” And in the case of Williamson v. Wilson, it is held, that “ a receiver is an officer of the Court j” “ but his appointment determines no right, nor does it affect the title of the property in any way.”
From these cases, it seems to he settled that until a dissolution has been judicially declared, and a receiver ordered to make a pro rata distribution of the partnership assets among the creditors, they are not prevented from resorting to adverse proceedings, and that when a creditor does resort to such proceedings, he may thereby gain a preference over those creditors who are less diligent.
And the reasons in support of these positions would seem to he ample. The proceeding is by one partner against the other, for his own securitjq more than for the benefit of the creditors. So long as no decree of dissolution is made, the case is under the control of the plaintiff, and he may at any time, before judgment, dismiss the proceedings. The power of the plaintiff to dismiss his case, leaves the rights of creditors, so far as proceedings in that case are concerned, entirely at the mercy of the plaintiff. Now, can the partners, or either of them, by their own act, place the creditors in this position ? It would seem not.
It is true, the decision of the Chancellor, in Warring v. Robinson et al, would seem to conflict with this view; but in that case [200]the decision seems to rest upon the ground that the confession of the judgment by Robinson, in favor of Warring, after the appointment of the receiver, was insufficient, although Robinson had been regularly served with process. And in the synopsis of the case, it is said, “ that the appointment of a receiver, in a suit for an account and dissolution, or staying a prior dissolution, prevents one partner from giving any preference among the creditors, although it appears that an injunction would not be sufficient,” and “ that such appointment does not prevent a creditor from obtaining a preference by adverse proceedings.”
In that case, the Chancellor also laid some stress upon the fact found by him, that Warring-“knew of the appointment of the receiver before he obtained his judgment.”
But it is not perceived how this knowledge can have much bearing upon a case like the present. If the creditor is not prevented from proceeding against the partners after the appointment of the receiver, and before a decree of dissolution, upon the ground that the case is under the control of the parties, and especially of the plaintiff in the suit for a dissolution, then the knowledge of such proceedings, and of the fact that they are thus under the control of the partners, should not prevent the creditor from resorting to adverse proceedings; on the contrary, such considerations should induce him to proceed promptly.
But in the present case the judgments of Hackett, and of Hackett and Oasserly against Adams & Co., were not obtained by confession, they were regularly obtained; and so far as their regularity is concerned, they are not subject to the objection made against the judgment of Warring. These considerations dispose of the first point.
The next question that arises upon the record, is, whether defendants had gained any priority by their judgments against the firm, and proceedings supplementary to execution. And this question involves the determination of two points; First, Whether the judgments of Hackett, and of Hackett and Oasserly were fraudulent; and second, Whether their proceedings supplementary to the issuing of execution were void.
As the Court below based its decision on the ground already disposed of, the present points were not decided.
The plaintiffs in their brief, take the ground that, “ the judgments of Hackett, and of Hackett and Oasserly, are fraudulent in fact.” In support of this ground they refer to many facts, and among others, they state that “ some hundred attachment suits were immediately commenced by creditors all over the State, and all these suits were brought by Hackett and Oasserly.” But upon referring to the record at page 50, it appears that this statement is a mistake of counsel, and that Hackett and Oasserly did not bring the suits, but were the attorneys of Adams & Co.
[201]. The other facts relied upon to sustain the allegation of fraud under the circumstances stated in the record, do not seem to be sufficient; when fairly considered, they entirely fail to sustain the charge. The most material circumstance was the fact, that the referee was the clerk of the defendants, Hackett and Casserly; but when the nature of the duties of a referee in such a case is considered, this circumstance is not any considerable evidence of fraud. His duty was very limited and plain, and his acts subject to the revision of the Court. There is no ground for charging fraud in fact, so far as his acts are concerned. As to the delay in bringing suits, and filing the report of the referee, these circumstances do not afford any good ground for the inference of a fraudulent intent. There seems to have been much delay and some negligence in the case of Adams against his co-partners, as well as in the cases of Hackett and Casserly.
The decision of the second point, which regards the validity of defendants’ proceedings supplementary to the execution, must depend upon the provisions of our Practice Act, and the Equity practice in similar cases.
In construing this act, it is proper to remember that two of the leading ends contemplated by the system, are simplicity and economy, and it would seem, therefore, to be a just conclusion, that it should receive a liberal construction; and that the main intention and spirit of the act should be fairly carried out.
In reference to the chapter prescribing the mode of proceedings supplementary to execution, it seems clear that those provisions were intended as a substitute for what was called “ a creditor’s bill.” This is so stated by the Practice Commissioners in their original note to this chapter in the New York Code. The design was, in the language of those Commissioners, “ to furnish a cheaper and easier method.” The different sections of this chapter, when taken together, form a consistent and harmonious whole; and when fairly and liberally carried out, afford a cheaper and easier method than the former one by creditor’s bill.
The two hundred and thirty-eighth section authorizes a general examination of the defendant after issue and return of execution unsatisfied. The two hundred and thirty-ninth section authorizes the examination of the defendant at anytime after the issue of execution. The two hundred and fortieth section allows debtors of the judgment debtor to pay the Sheriff. The two hundred and forty-first section provides a remedy against persons having property of the debtor in possession, or who are indebted to him.
The main difference between sections two hundred and thirty-eight and two hundred and thirty-nine, consists in this, that the latter allows the plaintiff to proceed earlier and in a more stringent manner. Under one section the creditor can only examine [202]the judgment debtor after execution returned, while under the other he can examine him before the return, and also have him arrested upon a proper showing. But under both these sections the same property may be made liable when ascertained.
The provisions of section two hundred and forty-three are general, and refer to the eases arising under sections two hundred and thirty-eight, two hundred and thirty-nine, and two hundred and forty-one; and have reference to the orders the Court may make for the application of the property discovered.
The proceedings of Hackett and Casserly were under the two hundred and thirty-ninth section. Their affidavit was regular and their judgments regular. The order of the Court made upon the affidavit was regular. It would seem clear that so soon as the proceedings supplementary to execution were instituted before the District Court, that Court obtained jurisdiction over the case, and had authority to proceed and apply the property of the judgment-debtors to the satisfaction of the judgments of the present defendants. The Court appointed a referee, who proceeded to examine the defendant Woods, and upon that examination ordered Woods for himself and the firm of Adams & Co., “ to apply the property described to the satisfaction of the judgments " of Hackett and Casserly.
When the referee had examined Woods, and made the order for the application of the Hastings judgment to the satisfaction of the judgment of Hackett and Casserly, then the property was in the custody of that Court, and Hackett and Casserly obtained a lien upon the same to the extent of their judgments, unless the proceedings before the referee were so defective as to render them void.
The order of the referee upon its face, though not in the best form, substantially complies with the intention of the statute. The order would have been in more proper form if it had been simply, that the property described should be applied towards the satisfaction of the judgments, in such manner as the Court should direct. And this results from the language of the statute, the object contemplated by it and from analogy. The property discovered in proceedings supplementary to execution is in the custody of the law, and must he applied under the order of the Court, and not given up to the creditor except in proper cases. Had the judgment against Hastings been for the same or a less amount than the Hackett & Casserly judgments, then upon their consent the Court could have ordered that the Hastings judgment be assigned in full satisfaction.
The objection that Hastings was not made a party, does not seem to be well founded.
The creditor has the election to proceed against the debtor of the judgment-debtor, under the provisons of the two hundred and forty-first section, or he may proceed against his immediate [203]debtor, either under section two hundred and thirty-eight, or two hundred and thirty-nine. Putting all the sections together, the remedy of the creditor is more full and better adapted to the different states of case. In this ease, Hastings was not at the time in the State. To require a publication of notice in a newspaper would add greatly to the delay and expense, for no practical benefit. And it may often happen that a judgment debtor may have a negotiable promissory note in his possession which he refuses to apply to the satisfaction of the judgment. How is the debt to be made available ? Not by summoning the maker. It can only be done by proceedings under section two hundred and thirty-eight, or two hundred and thirty-nine. And in many cases the judgment debtor may have several claims against different persons, and it may defeat the ends of justice entirely to require all of them to be made parties. The debtors of the debtor might be entirely willing to pay the sheriff, if allowed to do so by the order of the Court. And when the proceedings are under section two hundred and thirty-nine, the creditor can certainly reach any property liable to execution. Is then a iudgment property?
Blackstone divides personal property into two kinds; property in possession and property in action, and he says that the “owner may have as absolute a property in, and be as well entitled to, such thing in action, as to things in possession.” 2 Com., 388, 397.
The definition of personal property in the New York Code, includes “ things in action and evidences of debt,” and the word property, as used in the act, includes property real and personal. Although this definition is not found in the Practice Act, yet as these provisions of our act are taken from that of New York, the terms must be used in the same sense in both codes.
And this is made clear by the language of the Act itself. Section two hundred and seventeen subjects “ debts and credits, and other property” to execution; section two hundred and twenty, requires the sheriff to “ collect or sell the things in action.” So the two hundred and forty-third section authorizes the “ Judge or referee to order any property of the judgment-debtor, not exempt from execution, in the hands of such debtor or any other person, or due to the judgment-debtor, to be applied toward the satisfaction of the judgment.” Debts or credits due to the debtor, are here considered property, and can be applied toward the satisfaction of" the judgment. A judgment is a debt of record, and the parties to it are called judgment, creditor, and debtor.
In proceedings under a creditor’s bill, it was unusual to make the debtor of the judgment-debtor a party. But in several cases it has been held that he was not a necessary party, and that when made a party, he was generally entitled to his costs. 2 [204]Barb. Ch. Prac., 157; 3 Paige, 100; 11 Paige, 495; 1 John! Ch. R., 305.
As to whether the debtor of the judgment-debtor be made a party, seems to rest, in most cases, in the will of the plaintiff; he is the party generally most interested. In the case of Hastings, it cannot well be seen what injury could result to him. His right to show any good defence against the judgment, is in no way affected. If Hackett and Casserly choose to rely upon the judgment against him as a means of payment, without knowing whether the judgment was paid or not, then they are the parties who incur the risk of loss. And there would seem to be good sense as well as good economy in permitting the application of such judgment, without the expense and delay of making him a party. The two creditors did not desire it, or need it, and their failure to make Hastings a party has not diminished the judgment, increased the costs, or in any way affected Hastings, or injured the other debtors or creditors of Adams & Co.
As to the effect of the assignment made by Woods to Hackett and Casserly, it is sufficient to say that it did not follow from the report of the referee that it should have been made, and that the judgment of Hastings is still under the control of the District Court.
Upon the application of Naglee to that Court, such proceedings can be had as will procure the correct application of the balance of the Hastings judgment to the general creditors of Adams & Co.
The judgment of the Court below is reversed, and the case of plaintiffs dismissed, with costs.
Concurrence — Terry
Terry, J. While concurring in the conclusion of my associate, I do not assent to the first proposition contained in the opinion in this cause.
In the case of the Receiver of Adams & Co. v. Roman et ah, decided at the January Term, 1856, the assignees declined to pay the funds of Adams & Co., in their hands, to the receiver, Naglee, on the ground that the funds had been attached by the creditors of that firm. This Court said : “ It is no answer to this to say that the fund has been attached by the garnishments of the creditors of Adams & Co.. It was not the subject of attachment. It was already in the hands of a receiver before any attachment issued. The receiver is the officer of the Court, and the fund in his hands is in Court in the custody of the law, and can only be disposed of by the order and direction of the Court; nor (as was contended at the bar) is its disposition subject to be affected by any action of the immediate parties to the suit.”
The bill was filed for the purpose of seizing the assets of the partnership, and having them distributed to the creditors. This purpose, a Court of Chancery will carry out, without regard to [205]any attempt on the part of the partners to evade or defeat it. It was the duty of the Court, as soon as this bill was filed and the property was under its control, to require all the creditors of Adams & Co. to appear, within a given time, before a master, to be appointed for the purpose, and have their claims audited under such rules and regulations as to notice, as would secure a fair hearing and a just account. Upon the report of the master, and its confirmation, the fund would then be distributed pro rata among the creditors whose claims were allowed.
I see now no reason to doubt the correctness of the principle then announced. A fund in the possession of the receiver can only be distributed by order of the Court in whose custody it is, and no party can by adverse procedure acquire a lien on such funds.
In this ease, however, it does not appear that the judgment of Adams & Co. v. Hastings, was ever reduced to possession by the receiver, and the receiver testifies that he exercised no control over it. Conceding then, that the order appointing a receiver operated as an assignment of the property of the insolvent firm, the assignment would not, under our statute operate to transfer any property which was not within a reasonable time, reduced to actual possession by the assignee.
Murray, C. J. It is my misfortune to be compelled to differ
from my Brothers in this case, and I shall briefly state the ground of my disagreement.
The act concerning proceedings supplementary to execution, provides for two cases:
1. Where the debtor has property which he refuses to apply to the satisfaction of the judgment, in which case he is required to be summoned, and the Court or Judge is authorized to direct the appropriation of such property; and—
2. Where any person or corporation has property of or is indebted to the judgment-debtor; in which case the person holding said property, or the debtors of the judgment-debtor is required to be summoned.
The affidavit of the parties sets forth, that Adams & Co. have property which they unjustly refuse to apply to the satisfaction of the affiant’s judgment.
I am of opinion that a judgment is not property within the meaning of the act; it certainly was not at common law; it was but the evidence of indebtedness. Again, the act concerning proceedings supplementary to execution gives a new remedy, and by all rules of construction being in derogation of the common law, must be strictly pursued. It is no answer or argument that Hastings the debtor of the judgment-debtor does not complain in this cause. The symmetry of the act should be preserved, and in some future case it will be found necessary to a [206]full adjustment of the rights of parties to adhere to the strict letter of the statute.
AI Brief
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Holding. The court held that until a judicial decree of dissolution is entered, partnership assets are not immune from adverse legal proceedings by creditors, and that proceedings supplementary to execution under the Practice Act are a valid, liberalized substitute for a creditor's bill.
Issues
Whether the appointment of a receiver in a suit for partnership dissolution prevents creditors from obtaining priority through adverse legal proceedings.
Whether a judgment is 'property' subject to proceedings supplementary to execution under the Practice Act.
Whether a debtor of a judgment debtor must be made a party to proceedings supplementary to execution.