Case v. Beauregard (99 U.S. 119)

APPEAL from the Circuit Court of the United States for the District of Louisiana.

This suit was brought July 10, 1869, by Frank F. Case, receiver of the First National Bank of New Orleans, against Gustave T. Beauregard, Thomas P. May, Augustus C. Graham, George Binder, Alexander Bonneval, Joseph Hernandez, the New Orleans and Carrollton Railroad Company, and the Fourth National Bank of New York, to recover a debt of $237,000.89, which he claimed was due from, and had been contracted by, Beauregard, May, and Graham, while they were partners, and carrying on business as such; and to have certain transfers of partnership property set aside and subjected to the payment of the debt. Beauregard leased, April 12, 1866, from that company its railroad tracks, its rolling-stock, and corporate privileges for twenty-five years. The lease, although made to him individually, was entered into on his part in view of a partnership to conduct the enterprise, which on the first of that month was formed between him, May, and Graham, for operating under that lease the road. By the terms of the partnership, which was to continue for twenty-five years from the date of the lease, he was charged with the management of the road, was to receive only a salary for his services, and when the capital furnished by May and Graham was reimbursed to them with eight per cent interest, the partners were to share the profits equally, and all losses were to be equally borne by them. On their part, May and Graham were to furnish the requisite capital, fixed at $300,000. Locomotives had been used on the road, but after the date of the lease the tracks were adapted to horse-cars, important changes effected, and large purchases of property made, for the uses and better equipment of the road, all of which involved a heavy expenditure of money.

May 16, 1867, May assigned his interest to the United States. Graham, on the 8th of that month, assigned his interest to the Fourth National Bank of New York. The bank failed in that month, and was a creditor of the partnership. The latter had overdrawn, between Sept. 6, 1866, and May 1, 1867, the account kept in that institution in the name of Beauregard, as such lessee. At that time, May was president of the bank. He directed the treasurer of the partnership to draw upon the bank without regard to the state of the accounts, and instructed the paying teller to honor the checks, promising to make good the deficit. It amounted to the sum for which this suit was brought. No part of it has ever been paid to the bank. At one time, May deposited with it, as cash, a demand note for $40,000, drawn by him as attorney for Beauregard. At another time, he drew a draft upon Graham for $125,000, which was also credited upon the account as cash. Neither the draft nor the note was paid. Both were held by the bank, and were overdue at the time of its failure.

May had obtained from the assistant treasurer of the United States at New Orleans public moneys, he knowing them to be such, for his individual uses. In part payment of this indebtedness he assigned, with other property, the balance to his credit on the books of the bank, amounting to $315,779.10, and his interest in the railroad company, its property and appurtenances, and bound himself to execute any further acts or instruments necessary to give a complete title to the property transferred. A few days thereafter, May 16, 1867, he, claiming to act under a power of attorney from Graham, conveyed, by an act passed before a notary public of New Orleans, to the United States 'all and singular the right, title, interest, share, property, claim, and demand of every nature and kind whatsoever, of them, the said May and Graham, and each of them, in and to the New Orleans and Carrollton Railroad, the lease and other franchises thereof, and the railroad tracks, rolling-stock, engines, cars, live-stock, and other appurtenances thereunto belonging or in any wise appertaining;' the same having been acquired under the lease and the articles of partnership aforesaid. The United States was to give him credit for all that should be received from the proceeds of the sale or other disposition of the interest conveyed.

The United States, Oct. 31, 1867, in consideration of $228,000, conveyed the property so acquired by said act to Binder, Bonneval, and Hernandez, and further stipulated to save them harmless from any claim that might be set up by the bank for $112,009.09, apparently standing to the debit of Beauregard, as lessee of the road, but which the act declares was due by May, and to defend the transferees from an assignment of Graham's interest to the Fourth National Bank of the City of New York. The transferees assumed the liabilities due and owing by Graham and May, as lessees, on account of the railroad, as set out in a schedule of direct debt, amounting to $122,852.58, and of prospective debt for additions, $40,000,-making $162,852.58.

Oct. 15, 1867, Binder, Bonneval, and Hernadez joined Beauregard in an agreement or act of fusion with the railroad company, whereby they surrendered to the latter all interest they had in the lease of the road and property of the partnership; and the company, being thus restored to the property and franchises with which it had parted, entered into the possession thereof. May, Graham, and Beauregard are insolvent.

An act of the legislature was passed, by which the company was authorized to scale its present stock, issue additional shares of its capital stock to the extent of the value of the improvements placed on the road during the partnership, and to consolidate its interests with the other parties. Accordingly the company increased its stock so as to make it $800,000, of which one equal moiety, or $400,000, was awarded to Binder, Hernandez, Bonneval, and Beauregard, as representing in their right the value of the improvements put on the road by the late partnership, whose interests to the extent of two-thirds had passed to the purchasers from the United States, the other one-third being owned by Beauregard; and for and in consideration of the $400,000 of its capital stock, the New Orleans and Carrollton Railroad Company acquired and was put into possession of all the real estate and other property acquired by the late partnership of May, Graham, and Beauregard.

For the amount mentioned in his assignment, as standing to his individual credit, May gave a 'certified' check, of which the United States is the present holder and owner. Of the amount transferred from the bank to the sub-treasury in New Orleans, enough was applied to take up a check drawn by May on the bank, dated Feb. 15, 1867, and forming part of the assets of the assistant treasurer at New Orleans, and the remainder, $10,378.28, was credited on his check for $315,779.10.

The complainant charges that the First National Bank, being the creditor of the partnership, had a lien or privilege on its effects, and was entitled to be paid therefrom to the exclusion of the creditors of any member of the partnership; that the partnership was insolvent; that none of its members was able to pay his individual debts, or authorized to dispose of the partnership property for the payment of such debts; that the deed to the United States, its deed to Binder, Bonneval, and Hernandez, and the deed of the latter parties and Beauregard to the railroad company, are in fraud of the rights of the bank as a creditor of the partnership, and that the same should be cancelled and the partnership property sold to satisfy the prior and privileged claim of the bank. He prays that Binder, Bonneval, Hernandez, and Beauregard be enjoined from transferring or incumbering their stock in the company, and that the latter be enjoined from recognizing or permitting such transfer, and for engeral relief.

Bonneval, Binder, Hernandez, and the Carrollton Railroad Company answered, and pleaded the existence of the debt due from the bank to May as a bar to any claim upon them under the allegations of the bill.

The Fourth National Bank also answered.

The bill was dismissed on a final hearing, and the complainant appealed here.

Mr. J. D. Rouse and Mr. Charles Case for the appellant.

The object of the bill is to subject partnership assets to the payment of a partnership debt. Such assets belong to the partnership. Each partner is entitled only to a share of what remains after payment of partnership debts and a settlement of accounts. Bank v. Carrollton Railroad, 11 Wall. 628, and the authorities there cited.

The Code of Louisiana gives a statutory protection to the rights of a creditor of the partnership, recognizing those which the courts of chancery have elsewhere established, and adding thereto in his favor a privilege upon partnership assets. The latter are a trust fund, or the common pledge of the partnership creditors, who must be paid out of it before the creditors of the respective partners; and the transfer by one of the latter in payment of his separate debts is a fraudulent conversion of the assets, and his creditors take as against those of the firm no title thereto. Hagan et al. v. Scott, 10 La. 345; Gardiner et al. v. Smith, 12 id. 370; Claiborne et al. v. Creditors, 13 id. 279; Bank of Tennessee v. McKeage, 11 Rob. (La.) 130; Moore v. Hampton et al., 3 La. Ann. 192; Smith v. McMicken, id. 319; Saloy v. Albrecht, 17 id. 75; Succession of Beer, 12 id. 698; Dwight v. Simon, 4 id. 496.

At the time of the transfer by May of the property in question, in part payment of his individual indebtedness, his creditor knew that the partnership was indebted to the bank. All subsequent purchasers, when they acquired their respective interests, were cognizant of the same fact. The partnership and all of its members are insolvent, and its only creditor is the bank. The partnership property being largely in esse, and in possession of one of the defendants, is accessible only by the aid of a court of chancery. The bank has no remedy at law, and it is not necessary that the claim be established by judgment. The complainant is, therefore, entitled to relief in equity. Russell v. Clark's Executors, 7 Cranch, 69; Thurmond v. Reese, 3 Ga. 449; Croone v. Bivens, 2 Head (Tenn.), 339; Cornell v. Radway, 22 Wis. 260; Sanderson v. Stockdale, 11 Md. 563; Innes v. Lansing, 7 Paige (N. Y.), 583; O'Brien et al. v. Coulter et al., 2 Blackf. (Ind.) 421.

Mr. John A. Campbell and Mr. Henry C. Miller for the appellee.

Mr. Assistant Attorney-General Smith for the United States.

MR. JUSTICE STRONG delivered the opinion of the court.