third persons; and such is the usual and reasonable practice.1 Even as to them it has been held that the reservation should be open and notorious, because, as they may resort to the debtor for indemnity, the unsecured creditors have the right to calculate on this liability in determining whether to adopt the compromise.2 § 113. Understatement by a Creditor of his Debt. When the understatement of a debt may possibly be injurious to the creditors generally, or to a surety, the creditor who has knowingly made such a statement cannot afterwards recover the difference from the debtor, though the statement was made at his request; for instance, when the surety is depending on the future earnings or acquisitions of the compounding debtor for his indemnity, or when the composition is payable by instalments which have not all matured.3 So, under the insolvent laws, creditors named in the schedule were barred of their ordinary remedies to the extent of the debts so scheduled, but the assignees could apply future property of the debtor, in a certain way and under certain circumstances, to the proportionate payment of those debts. It was held that a creditor whose debt was omitted in whole or in part, with his consent, could not recover judgment against the debtor for the remainder, because he might thereby intercept the property of the debtor from coming to the assignees.* If, however, all the old debts are fully paid or satisfied, there are decisions that a debt omitted by agreement may be recovered, in the absence of any positive stipulation that all creditors were to execute the composition deed." And in this 1 Kearsley v. Cole, 16 M. & W. 128; Bateson v. Gosling, L. R. 7 C. P. 9, explaining Webb r. Hewitt, 3 Kay & J. 438; Green . Wynn, L. R. 7 Eq. 28; affirmed, L. R. 4 Ch. 204; Sohier v. Loring, 6 Cush. 537; Tobey v. Ellis, 114 Mass. 120. 2 Davidson v. McGregor, 8 M. & W. 755; Thomas v. Courtnay, 1 B. & A. 1; Alsager v. Spalding, 4 Bing. N. C. 407; Ex parte Sadler, 15 Ves. 52. 8 Holmer v. Viner, 1 Esp. 131; Britten v. Hughes, 5 Bing. 460; Russell v. Rogers, 10 Wend. 473; Teede v. Johnson, 11 Ex. 840; Blackstone v. Wilson, 26 L. J. Ex. 229. 4 See Eastabrook v. Scott, 3 Ves. 456; Russell v. Rogers, 10 Wend. 473. 5 Eastabrook v. Scott, 3 Ves. 456; Russell v. Rogers, 15 Wend. 351; Huntington v. Clark, 39 Conn. 540. country, where future property never passes to the assignees, it is not a fraud to omit the name of a creditor from the schedule, with his consent, since that act cannot prejudice any one but the creditor himself.1 § 114. Sureties and Creditors assuming a Greater Burden than others. If one creditor assumes greater burdens than the others, such as by being surety for the payment of the composition, or by postponing his debt until all others are satisfied, there is no fraud on the face of the transaction though he should agree for a larger eventual dividend than the others receive.2 It has been held that concealment would vitiate such a contract; but this appears more than doubtful. The creditors may be presumed to know that a surety will demand security. § 115. No Agreement for Equality. If there is no common action by the creditors, and no representation, express or implied, that they are to share alike, the debtor may lawfully settle with each as best he can, because in such a case one creditor owes no duty to another. For similar reasons it is not illegal for a friend of the debtor, not indemnified by him, to procure a creditor to proceed, or to abstain from proceeding, in bankruptcy against a debtor not already bankrupt, or to buy up debts at different rates in order to prevent or dismiss the proceedings. It is unlawful to buy debts with a view to influencing the choice of assignees, or for the purpose of bringing proceedings oppressively for a collateral object.7 1 Re Needham, Cas. No. 10,081. 6 Lowell, 309, Fed. affirming 5 Cranch C. C. 102, Fed. Cas. 2 Eastabrook v. Scott, 3 Ves. 456; Wells v. Hacon, 5 B. & S. 196; Bissell v. Jones, L. R. 4 Q. B. 49; Ex parte Nicholson, L. R. 5 Ch. 332; Dewhirst r. Jones, 3 H. & C. 60; Ex parte Burrell, 1 Ch. D. 537; Re Shaw, 9 Fed. Rep. 495. 8 Leake v. Young, 5 E. & B. 955; Wood v. Barker, L. R. 1 Eq. 139. 4 See cases supra, note 2. 6 Fry v. Malcolm, 5 Taunt. 117; Ecker v. Bohn, 45 Md. 278; Ecker v. McAllister, 17 N. B. R. 42. 7 Ex parte Griffin, 12 Ch. D. 480; 5 Clarke v. White, 12 Pet. 178; Re Pooley, 20 Ch. D. 685. § 116. Secrecy essential. Secrecy is of the essence of this fraud in compositions, because the creditors may agree to such division of assets as they choose. If the contract is known to them before they assent to the composition, they cannot afterwards complain.1 An actual concealment may not be necessary if the bargain is one which would not be reasonable and to be expected. But, speaking generally, the burden of proving a fraud is on him who alleges it.2 § 117. Composition void, though no Injury to Creditors. Where a statute or implied undertaking forbids the preference, it will be void, although no creditor has been misled by it; as, for example, if the composition (supposed to be equal) or consent to the bankrupt's discharge is signed by the preferred creditor after all others have signed, and though his assent should not be necessary to the discharge.3 A note § 118. Note given to promote a Void Composition. or bill given to the preferred creditor will be valid in the hands of a bona fide holder for value, unless there is some statute making the security absolutely void ab initio. That a statute may be so drawn is clear; but the courts will not readily admit such to be the meaning.5 1 Phettiplace v. Sayles, 4 Mason, 312, Fed. Cas. No. 11,083; Lee v. Lockhart, 3 Myl. & Cr. 302, citing on this point Ex parte Sadler & Jackson, 15 Ves. 52, where Lord Eldon offered an inquiry whether the additional security was known to the creditors. Ex parte Russell, 2 Ch. D. 424; Re Walshe, 2 Woods, 225, Fed. Cas. No. 17,118. 21 Bigelow, Fraud, p. 123; Bump, Fraudulent Conveyances, 4th ed., § 177; Burrill, Assignments, 6th ed., § 310. 8 Steinman v. Magnus, 11 Eas Payne v. Eden, 3 Caines, 213; Patterson v. Boehm, 4 Penn. St. 507; Re Palmer, 2 Hughes, 177, Fed. Cas. No. 10,678; Pinneo v. Higgins, 12 Abb. Pr. 334; Ex parte Milner, 15 Q. B. D. 605. 4 See Birch v. Jervis, 3 C. & P. 379. 5 See Reeves v. Hawkes, 6 L. T. N. S. 53; Goldsmid v. Hampton, 5 C. B. N. s. 94; Taylor v. Wilson, 5 Exch. 251; Dalrymple v. Hillenbrand, 17 N. B. R. 434. CHAPTER VI. BANKRUPTCY OF PARTNERS. § 119. Settlement of Estates of Partners. If partners are made bankrupt by a joint adjudication, which is the usual case, their assignees have the right, of course, to deal with all the firm assets, and with all those of the several partners.1 If the partners are made bankrupt separately, within the same jurisdiction, the court may order the several cases to be consolidated, or, under the old practice, one to be impounded.2 By rule, under our late bankrupt law, if partners were made bankrupt in different districts, the first petition was to be proceeded with and the other to be stayed.3 Much of the doctrine of this chapter might be given under the head of proof of debts, but as it is really a question of marshalling assets, though spoken of as proof against the joint or the separate assets, it has been found convenient to consider it separately. When proof of debts is spoken of in this chapter this point should be remembered. The most important § 120. Joint and Separate Assets. rule in the settlement of partnership affairs in bankruptcy is, that the creditors of the firm have the first claim on the joint assets, and the separate creditors of each partner upon his separate assets. This rule was early adopted in England, and 1 Ex parte Philps, L. R. 19 Eq. 256; Lindsey v. Corkery, 29 Grat. 650; Re Leland, 5 N. B. R. 222, Fed. Cas. No. 8228; Wright v. Cohn, 88 Cal. 328. 2 See Ex parte Rowlatt, 2 Rose, 416; Ex parte Rawson, 1 V. & B. 160; Ex parte Lister, Mont. & Ch. 260; Re Gowar, 1 M. D. & De G. 1; Ex parte Bateson, 1 M. D. & De G. 500; Ex parte Green, 3 De G. & J. 50; Ex parte Burdikin, 1 M. D. & De G. 156; Ex parte Mackenzie, L. R. 20 Eq. 758; Re Abbott, 10 Morrell, 306. 3 Rule 16, see infra, § 495. See as to simultaneous proceedings in England and Ireland, Re O'Reardon, L. R. 9 Ch. 74. Ex parte Crowder, 2 Vernon, 706; Ex parte Cook, 2 P. Wms. 500; Act of 1898, § 5 f. See infra, § 468. though departed from by Lord Thurlow,1 was restored by his successor, and has prevailed ever since, and is now prescribed by statute. It is said to be founded on the theory that the firm creditors give credit to the firm, and the separate creditors to the individuals. The priority of the separate creditors on the separate estates is objected to on the ground that the creditors of the firm have a just claim against each partner, and that by this rule they are deprived of a part of their security; but this objection has not prevailed. It is understood that the same rule obtains on the continent of Europe, where a partnership is treated as a distinct legal person, almost like a corporation. Although it does not obtain in Scotland, where the creditors of the firm rank first upon the joint estate, and prove against the separate estates for any deficiency, Mr. Bell, admitting that that accords with theory, considers the English rule more reasonable.4 In the United States there has been some difference of opinion on this point when it has been left to the courts without a positive provision of the statutes. But the bankrupt and insolvent laws have usually adopted this rule by positive enactment, and a large and increasing majority of the courts have established it when not so adopted.5 The assets have been divided indiscriminately between both 1 Ex parte Cobham, 1 Bro. C. C. 576; Ex parte Hodgson, 2 Bro. C. C. 5; Ex parte Page, 2 Bro. C. C. 119. Black's Appeal, 44 Penn. St. 503 ; McCormick's Appeal, 55 Penn. St. 252; Woodrop v. Ward, 3 Desaus. 203; 2 Ex parte Elton, 3 Ves. 239; Ex Tunno v. Trezevant, 2 Desaus. 264 ; parte Abell, 4 Ves. 837; Ex parte Hall v. Hall, 2 McCord Ch. 269; Ladd Clay, 6 Ves. 813; Ex parte Taitt, 16 v. Griswold, 4 Gilm. 25; Morrison v. Ves. 193. Kurtz, 15 Ill. 193; Wilder v. Keeler, 3 Bankrupt Act, 1883, § 40, sub- Paige, 167; Meech v. Allen, 17 N. Y. sec. 3. 42 Bell Com., 7th ed., 550 [*660]. Mr. Bates, § 827, finds this to be the rule in Kentucky. 5 See acc. McCulloh . Dashiell, 1 Harris & Gill, 96, and 18 Am. Dec. 271 and cases; Murrill v. Neill, 8 How. 414; Burnside v. Merrick, 4 Met. 537; Rogers v. Meranda, 7 Ohio St. 179; Davis v. Howell, 33 N. J. Eq. 72; 300; Re Gray, 111 N. Y. 404; Crooker v. Crooker, 46 Maine, 250, 52 Maine, 267; Jarvis v. Brooks, 23 N. H. 136; Crockett v. Crain, 33 N. H. 542; Holton v. Holton, 40 N. H. 77; Cadwell's Ass't, 89 Ia. 533; Hill v. Cornwall, 95 Ky. 512. See infra, § 468 Contra, Bardwell v. Perry, 19 Vt. 292; Camp v. Grant, 21 Conn. 41. See cases collected, 2 Bates on Partnership, § 825. |