author: Emery, ~V. C.

text:
    J. Montgomery Hare v. Albert O. Headley et al.
    1. The claims of a fire insurance company, which paid insurance to a mortgagee, to a part of the proceeds of the mortgage sale, through subrogation to the rights of the mortgagee, are assignable.
    2. Insured is the sole and unconditional owner of the insured property, notwithstanding he had previously mortgaged it.
    3. Insured cannot be held to have forfeited his rights under the policy because not commencing suit on it within a year after loss, the insurer having: within the time paid the whole loss to the mortgagee of insured; and this: whether the payment be considered as made to him simply as the appointee of the owner, or by reason of an independent contract between the insurer and the mortgagee, that the rights of the latter, as mortgagee, to any insurance, should not be lost on account of any act or default of the insured.
    4. Forfeiture of insured’s rights by reason of his failure to give notice or proofs of loss as required by the policy, cannot be considered waived by the payment of loss to insurer’s mortgagee. The insurer having, at the time of payment, claimed that no liability to the insured existed under the policy, and that, under the independent agreement of the insurer with the mortgagee, the insurer was entitled to subrogation to the mortgagee’s rights under the' mortgage.
    5. An independent contract between the mortgagee of property, for whose benefit the owner insures it, and the insurer, that the insurance shall continue good as to the mortgagee, notwithstanding any forfeiture by the owner, and that if any loss is paid the mortgagee under such circumstances, the insurer shall be subrogated to the rights of the mortgagee under the mortgage, is valid, though the owner does not know of it.
    On bill &c.
    The principal question involved in this ease is whether fire insurance companies, who have paid to a first mortgagee the loss to the mortgaged property occasioned by fire, are entitled to be subrogated therefor to the rights of the first mortgagee, or whether the second mortgagee is entitled to have the payment credited or applied as a payment on the first mortgage.

      The complainant is the assignee of the fire insurance companies; the defendant Headley is the assignee of the second mortgage. The ease is heard upon bill, answer of defendant Headley, replication and written state of facts agreed on, and, so lar as relates to the question of subrogation now involved, the case in detail is as follows: The first mortgage, to secure
    $40,000, was given to the Mutual Life Insurance Company of New York, on March 21st, 1888, by Riley & Osborn, then the owners of the property mortgaged, and the mortgage contained the usual insurance clause, providing that the mortgagors should insure the buildings on the premises and assign the policies to the mortgagee as a further and collateral security for the payment of the debt, and on their failure so to insure, the mortgagees had the option to insure and any premiums paid by them, with interest thereon, were made a lien on the mortgaged premises, and to be secured by the mortgage.
    On the same day (March 21st, 1888), Riley & Osborn executed a second and subsequent mortgage on the premises to one John H. Ease, for $8,000, being the mortgage afterwards assigned to the defendant Headley.
    On January 25th, 1890, Riley & Osborn conveyed the mortgaged premises to Gabriel Schwab and others, partners trading as G. Schwab & Brothers, and on or abdut March 1st, 1891, these owners insured the property for the total amount of $30,000 in seven different fire insurance companies, the insurances to run from March 1st, 1891, to March 1st, 1892 (except the California Insurance Company policy for $3,010, which ran from March 28th, 1891, to March 28th, 1892), and in each policy was written, “ Loss, if any, payable to Mutual Life Insurance Company of New York, mortgagee.” On the policy issued by the Phoenix Assurance Company, this endorsement was made April 11th, 1891. On all the other policies the endorsement, for all that appears, was made on issuing the policies. Each of the policies was in the form known as the standard fire insurance policy of the State of New York, and contained (among others) the following conditions and provisions avoiding the policies by reason of acts, omissions or defaults of the insured:

      “This entire policy, unless otherwise provided by agreement indorsed hereon or added hereto, shall be void, if, with the knowledge of the insured, foreclosure proceedings be commenced or notice given of sale of any property covered by this policy by virtue of any mortgage or trust deed, or if any change, other than by the death of an insured, take place in the interest, title or possession of the subject of insurance (except change of occupants without increase of hazard), whether by legal process or judgment, or by voluntary act of the insured or otherwise.”
    In relation to acts of the insured after the fire, there were conditions that “ if fire occur, the insured shall give immediate notice of loss- in writing to the company,” and should within sixty days after the fire render proofs of loss, with the further provisions that the company should not be held to have waived any provision or condition of the policy or any forfeiture of it, by any act or proceeding on its part relating to the appraisal or examination as to loss provided for by the policy; and that
    “no suit or action on this policy, for the recovery of any claim, shall be sustainable in any court of law or equity until after full compliance by the insured with all the foregoing requirements, nor unless commenced within twelve months after the fire.”
    These policies did not contain the clause known in insurance as the mortgage clause, but at the time of the delivery of these .policies to the Mutual Life Insurance Company as collateral, this company had in force, with each of the insurance companies, an existing independent contract, giving it the benefit of the mortgage clause, the form of the agreement being as follows:
    “ In consideration of One Dollar, by each of the parties hereto to the other in hand paid, the receipt of which is hereby acknowledged, and for other valuable considerations, the Mutual Life Insurance Company of New York, party hereto of the first part, and..................................... party hereto of the second part, hereby mutually covenant and agree as follows:
    - “ That all Policies of Eire Insurance issued by the said party hereto of the second part, which are or may be assigned to or held by the party hereto of the first part aforesaid as Mortgagees, shall have written upon or attached or appended thereto the following clause, which it is hereby agreed is necessary to clearly express all the facts and conditions of Insurance on each particular risk covered by said Policies of Insurance respectively, the said clause heiñg as follows:

      “Mortgage Oíame. — Loss or Damage, if any, under this Policy shall be payable to the Mutual Life Insurance Company of New York, as Mortgagee, as-interest may appear, and the interest of the said Mortgagee shall be considered absolutely insured and subject to no plea in bar of its right to recover from this Company, under this Policy, such sum or sums of money as shall save the said Mortgagee from loss in consequence of any fire which may happen, except such loss as may take place by means of any invasion, insurrection, riot or civil commotion, or of any military or usurped power, and shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property, nor by any foreclosure or other proceedings or notice of sale relating to the property, nor by any change in the title, occupation or ownership of the property, nor by the occupation of the premises for purposes more hazardous than are permitted by this Policy; provided, that in case the Mortgagor or owner shall neglect to pay any premium due under this Policy, the Mortgagee shall, on demand, pay the same.
    “ It is agreed that the Mortgagee shall notify this Company of any change of ownership (other than transfer of the Title to itself), or occupancy or increase of hazard which shall come to the knowledge of said Mortgagee, and unless permitted by this policy, it shall be noted thereon, and the Mortgagee shall, on demand, pay the additional premium for such increased hazard for the term of the use thereof.
    “Whenever this Company shall pay the Mortgagee any sum for loss or damage under this Policy, and shall claim that, as to the Mortgagor or owner,, no liability therefor existed, this Company shall, to the extent of such payment, be thereupon legally subrogated to all the rights of the party to whom such payment shall be made, under all securities held as collateral to the Mortgage debt, or may at its option, pay to the Mortgagee the whole principal due or to grow due on the Mortgage with interest, and shall thereupon receive-a full assignment and transfer of the Mortgage, and of all such other securities but no subrogation shall impair the right of the Mortgagee to recover the full amount of its claim.
    “Dated .............................................
    “Attached to and forming part of Policy No..........
    “ (Signature of Company.)
    “And it is further agreed that in the event that the said clause should by oversight or neglect, be not written upon, attached or appended to any one of said Policies of Insurance, that the rights of the parties hereto under said Policy of Insurance shall be determined, established and settled with like-force and effect as if their intention to write upon, attach or append the clause aforesaid to said Policy of Insurance had been fully carried out and effectuated.
    “ In witness whereof, the parties hereto, by their duly authorized officers,
    ................................................................ have executed this agreement
    upon this......day of............... in the year one thousand eight hundred and-
    ninety-four.”

      The existence of this independent contract between the mortgagee and the insurance companies was not known to Schwab & Company, or to the defendant Headley, or to the owners. On November 28th, 1891, a portion of the buildings was destroyed by fire. The insured did not give any notice of loss thereby to the fire companies or either of them, nor within sixty days, or ever, render proofs of loss or statements to the fire companies, as required by the policies. Previous to the fire, and in March, 1891, while all the policies were running, four writs of attachment were issued against G. Schwab & Brothers, under and by virtue of each of which the sheriff of the county of Essex attached the insured property, and all of these attachments were, at the time of the fire, outstanding and pending. On May 9t'h, 1891, a bill to foreclose its mortgage was filed by the Mutual Life Insurance Company, in this court, to which suit Schwab & Brothers were made parties defendant and were brought in by publication and the usual notice to absent defendants, which was mailed to them at their correct address in New York city. On Eebruary 9th, 1892, and more than sixty days after the fire, the Mutual Life Insurance Company, as mortgagee, entered into an adjustment with the several fire companies, submitting the amount of the loss to appraisers, who, on March 9th, 1892, appraised the loss at $6,114.64, and on July 15th, 1892, the several companies paid this award to the mortgagee. In the appraisement and the settlement which was entered into and made by the fire companies with the Mutual Life Insurance Company, as mortgagee, the fire companies claimed to the mortgagee that as to the mortgagors or owners of the property, no liability under the policies existed, and that under their independent agreements with the Mutual Life Insurance Company, they were entitled to subrogation to its rights as mortgagee under the mortgage. No assignment, however, was made by the Mutual Life Insurance Company to the fire companies, at the time of the payment, or at any time, of any of its rights.
    The above statement gives substantially, I believe, the facts which are material to the decision of the main question 'involved — the right of the fire insurance companies to subrogation.

      But a question is also raised, whether in this present contest (which in form arises over the disposition of surplus money in the foreelosuz’e suit), the money which has been paid to the life insurance company rnust not be considered as actually credited by it on the mortgage debt, and whether the fire companies are not thereby remitted altogether to their remedy on the contract with the life insuz’ance company.
    Eor a decision of this question, a reference to the proceedings in the foreclosure suit is essential. The final decz’ee in the foreclosure suit was made January 27th, 1892, more than sixty days after the fire, and before any adjustment of loss. This decree, and the execution thereon, which was issued February 9th, 1892, directed that the mortgaged premises be sold to pay, in the first place, complainant’s decree, $44,762.74, with interest from October 30th, 1891, besides costs; and, in the second place, decree for defendant Ease for $8,520, with interest from the same date, and execution was delivered to the sheriff on February 10th, 1892. After receiving payment of the sum of $6,114 from the fire companies in July, 1892, as above stated, the life insurance company, without making any credit on its execution, proceeded to a sale of the premises as if the whole amount thereof was due, and on August 23d, 1892, the property was sold for $45,100 to the complainant in this case, who, on the 22d day of August, 1892, the day previous to the sale, had received from the fire insurance companies assignments of their interests in the bond, mortgage, decree and execution, and moneys due or to grow due thereon. On August 27th, 1892, this sale was reported to the chancellor for confirmation, and on September 6th, 1892, the sale was confirmed, and the sheriff directed to execute a conveyance. On September 8th, 1892, and before the deed had been delivered by the sheriff, the defendant Headley filed a petition claiming that the payment by the fire companies to the life insurance company, after the decree, operated as a payment on the decree for its benefit, and reduced the decree to less than $42,000; and stating, also, that the fire insurance companies insisted that the life insurance company should take from the sheriff the whole proceeds of salé and pay back to the fire insuranee companies the surplus over and above the amount due the life insurance company after crediting the payment, and that the fire insurance companies had notified the sheriff'to pay the whole proceeds of sale to the complainants, or else to pay over the surplus to them. Headley claimed the surplus, and so notified the sheriff. On this petition, and without any notice, so far as appears, to either the life insurance company or the fire companies, or the purchaser, an order was made on the same day (September 8th, 1892) directing that, pending proceedings to ascertain what disposition should be made of the surplus moneys, the sheriff should pay into court any surplus in his hands over and above the amount of complainant’s decree, with interest, costs and sheriffs fees, after deducting the sum of $6,114, appearing to have been paid to complainant since issuing execution, and $14.57 interest thereon. Pursuant to this order the sheriff paid into court $3,484.02, and on January 31st, 1893, the complainant in this case, as assignee of the fire insurance companies, filed a petition, praying to be admitted as a party, either complainant or defendant, in the foreclosure suit for the purpose of obtaining the surplus money, but after hearing before Vice-Chancellor Green this application was denied, as raising questions which should be determined upon formal bill. The bill in this cause was thereupon filed by the present complainant, for the purpose of obtaining by decree in this suit payment to it of the money directed to be paid into court, by the order in the foreclosure suit, to which it was not, and by order of the court could not, become a party, either as complainant or defendant. Upon the argument, two preliminary questions raised by defendant are— first, that the claim of the fire companies is not assignable, and that the complainant, therefore, has no standing in court; and, second, that the Mutual Life Insurance Company in fact credited the money received from the fire insurance companies on the decree as a payment, and the defendant Headley is entitled to the benefit of that credit, and, if the credit was made in violation of the contract between the life insurance company and the fire companies, the latter must look to the life insurance company for reimbursement.

      Mr. Edward A. Day and Mr. James 8. Stearns (of the New York bar), for the complainant.

      Mr. Edward Q. Keasbey and' Mr. J. Eranh Fort, for the defendant Headley.
   Emery, ~V. C.

(after stating the facts).

On the above facts I reach the following conclusions:

First. As to the assignment of the claim of the fire insurance companies to complainant, I can see no objection to its validity, nor have counsel referred me to any authority calling in question the assignability of a chose in action of this character.

Second. The claim of defendant that the money received by the life insurance company for the insurance was credited on the decree, does not seem to be well founded in point of fact. Since the point was raised at the argument, I have examined the record and proceedings in the foreclosure suit which were offered in evidence, and this record plainly shows that no credit of the insurance money was made upon the decree by the life insurance company, but that on Headley’s application, and without notice to the fire insurance companies or complainant, the credit was made by order of the court, in order that the dispute between Headley and the complainant might be settled on the application for surplus money. The complainant is certainly entitled, under these circumstances, to raise the question as to his right to subrogation, and has not been deprived of it by any act of the life insurance company.

Third. As to the main question in the cause — the complainant’s right to subrogation — this must clearly rest, as it seems to me, upon the establishment of two propositions — -first, that as between the fire insurance companies and the owner insured, the policies were in fact void, by reason of acts or neglects of the mortgagor or owner which avoided the policy; and second, that an agreement between the fire insurance companies and the mortgagee, providing for the payment of loss to the mortgagee in case of such invalidation of the policy by act of the owner, is valid, although not incorporated within the policy itself but is an independent existing agreement, becoming applicable to all policies as they are assigned to the mortgagee.

The defendant disputes both of these propositions and also claims that as to the alleged forfeiture by the acts and neglect of the owner, these were waived by the adjustment and payment of the loss to the mortgagee as the appointee of the owner under the policy. The question of forfeiture is one of fact, and several acts of forfeiture are relied on by complainant at the argument, one of the grounds alleged in the bill not being pressed. This was the claim that the insured were not the unconditional owners of the insured property, by reason of conveyances previously made to one Domenick and F. Butterfield. & Company. These deeds, on their face, were clearly mortgages, and, under the doctrine settled in Carson v. Jersey City Insurance Co., 14 Vr. 300 (New Jersey Supreme Court, 1881), and other cases cited, were no violations of the condition in question. The forfeitures relied on as against the owner are — (1) the seizures and levies on the property under the attachments; (2) the commencement of foreclosure proceedings with knowledge of the insured; (3) the failure of the owners to give immediate notice of the loss, or to give any notice thereof; (4) their failure to render statements or proofs of loss within sixty days, and (5) the failure to commence suit on the policy within twelve months. There is no basis for this last claim, as it appears to me, because the whole loss secured by the policy having been in fact paid within the twelve months to the mortgagee, there could be no other recovery by the owner on the policy if suit were brought. This results from the mere fact of payment, and is the ease whether the payment made to the mortgagee be considered as made to him simply as appointee of the owner, under a policy in force in favor of the owner, or as a payment in favor of the mortgagee only, made under the independent contracts.

As to the other alleged forfeitures, my view is that the seizures and levies under the attachments were a change in the interest of the insured in the insured property, by legal process, within the terms of the policy.

In relation to the second ground of forfeiture relied on, the owner’s knowledge of the commencement of foreclosure proceedings, the facts relied on to prove such knowledge are that prior to the commencement of the suit the solicitor of the mortgagee mailed a notice to the owners that the suit would be commenced unless interest was paid, and that the notices to absent defendants were mailed to them to the correct address in New York city. No direct proof is made of receipt of the letters by the owners, nor, on the other hand, has any proof been made by the defendant that the letters were not received. The question on this point, therefore, is, whether the general rule of evidence that a letter properly mailed is presumed to have reached its destination at the proper time and to have been received by the person to whom it was addressed, is applicable to a case where, if presumed to have been received, the effect will or may be to result in a forfeiture. That courts construe strictly statutes, contracts and other sources of obligations, where the forfeiture of rights under them depends upon construction, is and always has been the undoubted rule, but the question here relates to the rule of evidence and not of construction, and is whether a rule of evidence, generally applicable in relation to the prima facie proof of a fact, is made inapplicable by reason of the effect on property rights of the operation of the rule. The weight of authority is that the rule of evidence must operate without regard to the contents of the letter or its effect. Rosenthal v. Walker, 111 U. S. 185, 193, 194 and cases cited.

I am inclined to adopt this view, supported as it is by another consideration, viz., that the method of mailing notices of foreclosure to absent defendants at their post-office addresses, having been adopted and enforced by the legislature and the courts as a method of fulfilling the obligation to give the notice necessary in every judicial proceeding, such method, in view of its continued public recognition for such purposes, must be considered as sufficient prima facie proof that the notice required by law accomplished the object of the law and was received. But the determination of this question is not necessary for the decision of this cause, for, in my opinion, there are two remaining causes of forfeiture which are made out as against the owner, and these are his failure to give notice of the loss and the failure to render proofs, as required by the policy. Such failure, if not waived by the company, avoids the policy. Dwelling-House Insurance Co. v. Snyder, 34 Atl. Rep. 931 (New Jersey Supreme Court, June, 1896).

The. defendants, not controverting these failures of the owner to comply with the conditions of the policy, rely upon the subsequent adjustment and payment of loss to the mortgagee as a waiver of these failures. -This contention is not well founded, because this payment, under the circumstances of this case and in view of the contract existing between the companies and the mortgagee, must be taken as made by the companies under the claim that they were satisfying an obligation to pay the mortgagee which existed after the obligation to pay the owner ceased. Such payment so made to the mortgagee, who held this additional contract for payment, cannot be held .as intended by the companies to be a payment in waiver of the owner’s violation. Waiver as between persons entitled to insist on the performance of conditions ultimately depends on the intention of the parlies, and if the act relied on as indicating the intention is referable to other causes or reasons than a waiver of a right, it should not be construed to be such waiver.

The contention of defendant on this point, if valid, would of necessity make the mortgage clause nugatory, for the main object of this clause is to provide for a continuance of the policy as to the mortgagee, when it has been avoided by the neglect of the owner, and for a payment to the mortgagee after such avoidance as to the owner. To treat the payments made or claimed to be made under this mortgage clause, and while the.company deny the obligation to the owner, as having the effect of reinstating the policy in favor of the owner, under the theory of waiver, is to hold that the mortgage clause cannot practically be carried out as against the owner. I conclude, therefore, that the policies were void as between the owner and the fire companies, and the next question is whether a payment of the loss to the mortgagee, who has been appointed by the owner to recover the loss, if made after the policy is void as against the owner, operates to the benefit of the owner and his subsequent mortgagees. This depends upon the question whether the contract between the mortgagee and the companies is valid as against the owner, or whether the payment, although voluntarily made, so far as the owner is concerned, must, when received by the mortgagee, be credited upon the debt which the policy was assigned to secure.. If there were no mortgage clause, either in the policy or independent, and the fire insurance companies were under no other obligation to the 'mortgagee than to the owner, then such payment made to the mortgagee would, as it seems to me, clearly operate for the benefit of the owner, and the mortgagee would hold the money received for insurance in trust to apply it to the debt.

The question, therefore, as I view this part of the case, is narrowed down to the simple one, whether the contracts in this case, independent of the policies and unknown . to the owner, are, as against him, valid contracts, payments under which are to be considered as payments made to the mortgagee, not under his appointment by the owner, but as made to it in an independent right with which the owner was not concerned.'

Mortgage clauses, so called, continuing the insurance covered by a policy, in favor of a mortgagee, where they are void as to the owner or mortgagor by reason of his acts or defaults, have for many years been used' and acted on in connection with policies, and where the clause is either incorporated in the policy itself, or otherwise attached by the consent of all parties (owner, mortgagee and insurance companies), no plausible gro.und can be urged against their validity, and the uniform opinion of the courts has sustained them. The reason is that the interest and relations of the mortgagee and of the owner, to the insured property, are, in some respects and to a certain extent, so distinct that the parties being competent to make the contract may provide that the _ policy may be good to the mortgagee, although not to the owner. Hastings v. Insurance Co., 73 N. Y. 141 (1878), an earliest and leading case. Allen v. Watertown Fire Insurance Co., 132 Mass. 480 (1882); Syndicate Insurance Co. v. Bolm, 65 Fed. Rep. 165, 172 &c. (U. S. Circuit Court of Ap peals, 8th case, 1894)- The validity of such clause, if included in the policy, was assumed in a late case in the supreme court. Kase v. Hartford Fire Insurance Co., 29 Vr. 34

Davis v. Insurance Co., 135 Mass. 251, the only case cited by counsel as questioning the validity of such clauses, does not have this effect and could not have been so intended, for it does not overrule or even call in question the previous direct decision in Allen v. Watertown Insurance Co., supra, expressly sustaining them. The objection pressed here against the validity of such an agreement between the mortgagee and the insurance company, is that it was not contained in the policy, but was a secret agreement of which the owner is ignorant, providing for the continuance of the policy in the mortgagee’s favor, after it has become invalid in favor of the mortgagor or owner by reason of his defaults. The validity of such independent contract between the mortgagee and insurance companies, existing at the time of the issuing of the policy, was expressly sustained in Ulster County Savings Institution v. Leake, 73 N. Y. 161 (1878), upon grounds which, as it seems to me, are solid and unquestionable. “The contract,” says Chief-Justice Church (atp. 165), “ does not affect or purport to interfere with rights of any mortgagor who may procure or for whose benefit an insurance may be procured. It merely provides for protecting the interest of the mortgagee after the interest of the mortgagor has ceased, and I am unable to perceive any valid reason why such a contract may not be made and enforced;” and again (atp. 166):

The mortgagor was not injured by this contract. If it had not been made she could not have received any benefit from the policy. It was an independent contract for the benefit of the mortgagee and the circumstance that the mortgagor also had a policy does not affect it when the contingency rendering it operative occurs.” These reasons, in my judgment, control this case. Defendants’ counsel insist that the owner is harmed, inasmuch as the expense of the insurance is borne by him. But his insurance premium is paid for his own insurance, under his own contract as to terms, conditions &c., and his bargain with the mortgagee for payment of insurance only binds him to continue the insurance of his own interest and under his own contract. So long as the owner has all the interest in the insurance policy which he has contracted and paid for, it is difficult to see how he can be said to suffer any legal harm because the premium which he has paid does not give him the benefit of an additional .insurance obtained by the mortgagee, to take effect after his interest has terminated. For this additional insurance, the mortgage has, in this case, given additional consideration, viz., its own personal obligation to the insurance company to pay ■the premiums on demand if the mortgagor did not. I conclude, therefore, that the contract is valid, so far as relates to the independent insurance of the mortgagee after the policy had become forfeited as against the owner by reason of their failure to give notice of loss, or to make proofs of loss, as required by the policy, and that the payments of loss having been made by the fire insurance company in satisfaction of the mortgagee’s separate insurance of his interest under the independent contracts, the insurance companies are entitled, by reason of such payments, to be subrogated to the mortgagee’s interests in the security, and that the subsequent mortgagee claiming under the owner is not entitled to have the payments credited on the decree. It was claimed by complainant’s counsel that the right to subrogation arose under the contract by mere claim of non-liability as to the owner. The contract does, indeed, so provide in terms, and, although it might, therefore, be good against the owner, if included in the policy or entered into by him, it clearly can have no effect on his rights, or of those claiming under him, when made between other parties. As to the owner, in such cáse subrogation can arise only as a right, given by law, upon facts proved, and the forfeiture in fact of the- policy as against him is the legal prerequisite to any independent insurance of the mortgage under this contract, and must be proved as one of the issues in the cause, which the owner and those claiming under him may require to be proved. If the policy was not in fact forfeited as to the owner at the time of the payment, then the payment to the mortgagee must be considered as a payment to the mortgagee as appointee of the owner, and not under the independent contract, and the owner would be entitled to have the payment credited on the mortgage debt.

Complainant is entitled to decree for payment of the surplus money to him, with costs against the defendant Headley.


source: Caselaw Access Project

author: Reed, V. C.

license: Public Domain

text:
    Edward L. Molineaux v. Charles T. Raynolds and Thomas B. Hidden.
    1. Partnership real estate is regarded as personalty so far as it is required to pay firm debts.
    2. As a general rule there can be no partition of firm realty so long as there are firm debts outstanding. This rule is to secure the right of each partner to have firm property applied to the payment of firm debts, in order that he may be discharged from personal liability for them; therefore, if it appears that the realty will not be called upon to pay firm debts, a partition of the same may be decreed.
    3. Upon the dissolution of a partnership,'the assets are applicable to the payment — -first, of firm debts due to non-partners; second; of advances made to the firm by partners; third, of capital contributed by each partner. The residue is divisible as profits equally between the partners, unless a different method of division is stipulated for.
    4. When, by agreement, each partner had the privilege of leaving in the business of the firm, as contributions of capital, all or a part of his share of the profits set apart to him at the end of each year, then, upon dissolution, such portions of profits undrawn will be payable as capital.
    . 5. When, upon dissolution, the partners agree upon a valuation of the firm assets at a sum not in excess of the entire amount of the capital which has been contributed, and the personal property is turned over to a new firm upon the basis of such valuation, and the real estate is retained by the members of the old firm, their respective interests in the real estate will be in proportion to their contributions of capital.
    On final hearing on pleadings and proofs.

      Messrs. A. Q. Keasbey & Sons and Mr. Hugo Hirsoh (of the New York bar), for the complainant.

      Messrs. Copeland & Luee and Mr. George S. Hamlin (of the New York bar), for the defendants.
   Reed, V. C.

This bill is filed for a partition of a tract of land upon which is a factory, at Bergen Point, New Jersey.

It is admitted that the present owners of the property are Charles T. Raynolds, Thomas B. Hidden, the two defendants, and General Molineaux, the complainant. It is also admitted that they own it as partners.

It is admitted by counsel that if the property is subject to a partition suit it should be sold and not divided. Two questions are presented for solution. The first is whether the suit for partition is well brought. If it is properly brought, then the second question is, What are the proportionate interests of the owners in the property ?

It is essential to a clear understanding of the second of these questions and in a degree of the first, that the manner in which the property in question was created and how it is now owned, should be set out in detail. It appears that previous to the year 1867 there existed a firm, under the name of Raynolds, Pratt & Company, of which firm the parties to this bill were members. In 1867 a new partnership was formed, consisting of four persons, namely, Raynolds, Hidden, Richardson and Molineaux. By the terms of the partnership agreement, each was to put into the new firm, as capital, the amount of interest which each had had in the old firm of Raynolds, Pratt & Company, and Molineaux was to put in $20,000 in addition. This agreement continued until 1875. Between 1867 and 1870, one Aquilla Rich became a member of the firm, and, in 1870, a deed for the property now in question was made to the five partners. In 1-875 a new agreement was made between these partners. In this agreement the capital stock contributed by each was set forth. It was stated that Charles T. Raynolds’ share of contributed capital was $450,000; Hidden’s share, $250,000; Richardson’s share, $138,000; Molineaux’s share, $100,000; Rich’s share, $33,000. By the terms of the agreement the net profits were to be divided, as follows: To Raynolds, thirty-three per cent.; to Hidden, twenty-two and one-half per cent.; to Richardson, fifteen per cent.; to Molineaux, fifteen per cent., and to Rich, twelve and one-half per cent. The several partners were to receive interest on their capital up to certain amounts, and were to share net profits according to the agreement above stated. This agreement continued until 1882, when another agreement was entered into. In this agreement also the amount of capital contributed by each was stated, namely, Raynolds, $450,000; Hidden, $250,000; Richardson, $138,000; Molineaux, $138,000; Rich, $33,000. The net profits were to be divided as in the last-mentioned agreement, and interest was to be paid on capital in the same way. In 1884 still another agreement was made. In this agreement the amount of capital •stock contributed by each was stated as follows: Raynolds,, $500,000; Hidden, $350,000; Richardson, $37,000; Molineaux,, $160,000; Rich, $27,000. The net profits were to be divided as follows: To' Raynolds, thirty-three per cent.; to Hidden, twenty-four per cent.; to Richardson, twelve and one-half per cent.; to Molineaux, eighteen per cent., and to Rich, twelve and one-half per cent. Interest on capital was to be paid as before. This agreement was to last for five years. Shortly before the termination of this agreement, three of the partners (the parties to this suit) purchased the interest of two of the parties, namely, Richardson and Rich, paying therefor the sum of $40,000. Each of the three purchasing partners contributed to pay the consideration, the same proportions that they had contributed capital. Shortly after the purchase of these interests, Charles T. Raynolds- having become insane, a new agreement was executed, by which the interest of Charles T. Raynolds in the personal property, machinery and fixtures of the firm was purchased by the other two partners, together with one Edward H. Raynolds. By this arrangement all the property of the firm, except the real estate, was transferred to a new firm, consisting of Thomas B. Hidden, Edward L. Molineaux and Edward H. Raynolds. By this agreement all the liabilities of the old firm were assumed by the new firm, with the exception of one liability, in the shape of a suit then pending against the firm, brought by one De Floras. This transaction wound up the business existence of the old firm, leaving as undivided assets the property in question and one other piece of real estate situate in Brooklyn, New York. .These properties, therefore, belong to the members of the old firm, the three parties to this suit.

The first question mooted springs out of the existence of the De Eloras suit. The counsel for the defendauts insist that so long as any claim against the old firm remains unsatisfied, so long each partner has a right to have the firm assets held as such to be applied in liquidation of the claim; that until all such claims are satisfied, no partner has a right to demand a division of the firm property.

The equitable rule thus invoked is entirely settled. The property of a firm, whether personal or real, is a fund to be primarily applied to the payment of its debts, and each partner has a right to have it so appropriated, to the end that he himself may be relieved from any personal liability to answer for the firm debts. In England, land as well as personalty belonging to a firm is regarded as personal assets. Lind. Part. 343.

In this country the land is held to be personal assets so far only as it may be needed to pay firm creditors. Bank of the Metropolis v. Sprague, 5 C. E. Gr. 13; Freem. Part. 118. .

Out of this equity of each partner to have the firm property applied to the payment of firm debts in order that he may be discharged from personal liability, has emerged the rule that the partition of the real property of a firm will not be decreed so long as debts of the partnership remain unliquidated. Pennybacker v. Leary, 65 Iowa 220; Kruschke v. Stefen, 83 Wis. 373; Mendenhall v. Benbow, 84 N. C. 646 Freem. Part. 443.

By the rule laid down in these cases, the only method by which a partner, under such conditions, can compel a division of the firm property, is by a bill to administer and settle the partnership affairs.

It is apparent, however, that inasmuch as the ground for refusing partition is that partners may be protected from future calls to pay firm debts, therefore, if it should be made to appear that the property involved in the application for partition will not be needed to meet such obligations, the objection to the distribution of the property disappears.

Now, it appears in this case that there is other real estate in Brooklyn belonging to this firm of the value of $150,000. It also appears that the De Floras suit is pending' in the courts of New York. The property and the pending suit are therefore both in the state of the firm’s domicile. It is beyond the realm of probability that the final judgment in the De Floras suit, which suit has been dragging along for twenty years, can reach an amount which will begin to exhaust the Brooklyn property. Although it appears that a proceeding for partition of that property also had been commenced in the courts of New York, that proceeding has not gone to a decree, and it is in that suit that the defence set up here can be more appropriately interposed. Under these conditions, I do not see any substantial ground for thinking that the interest of any member of the firm will be menaced by the severance of the title to this property as is proposed by this suit.

The second question is therefore presented — what are the proportionate interests of these parties in this real estate ?

The contention of the complainant is that this real estate represents accumulated profits, and therefore should be divided in the proportions to which the several partners were entitled to share in profits.

The contention of the defendants is that this real estate represents capital, and it should be divided in proportion to each partner’s contribution of capital. Inasmuch as the partners, under the different partnership agreements, were entitled to share in profits in proportions differing from his proportionate contribution of capital, it follows that by the adoption of the one or the other of these theories the interest of the complainant in the firm property is differently affected.

As has been already displayed, these partners had transacted partnership business, under successive agreements, from 1867. Each agreement set out the amount of capital which each partner had contributed and prescribed the proportion of profits to which each partner was to be entitled during the term of the partnership. He was also to have the right to draw interest upon his capital. Now, some partners drew out all of their interest and all of their profits; others let a portion of their profits or a portion of their interest remain in the business. By the apparent acquiescence of all the partners, the balance of these profits or interest remaining at the end of each year undrawn was added to the amount of the capital of those of the partners who saw fit to permit it to remain in the business. By reason-of the unequal additions to the capital from year to year, the proportions of capital respectively contributed constantly shifted and the total amount of capital contributed by all increased.

Now, the theory of the complainant is that the original amount of firm property was increased by the employment of the profits which were permitted to remain in the business, in improving and purchasing property.

It is insisted that by the sale of the personal property by the-old firm to the new firm in 1889, the members of the old firm were paid for all the property which represented the product of the original capital, and that what remained is to be regarded as the product of the profits, and should therefore be divided as such.

Now, it seems to be entirely clear that at the end of each year the net profits of the business were divided between the respective-partners, in the proportions in which profits were to be divided by the terms of the agreement. It is cigar that when these profits were calculated and divided according to the terms of the-agreement, and the share of each partner was put to his credit, then, as between the partners, these profits ceased to be assets of the firm and became debts due from the firm to each member of the firm. The sum set apart to each partner at the end of each year was at the disposal of the partner as so much cash put to his credit. He could draw it out and use it as he chose. If he chose to invest it in the business, it was to be regarded as any other money which he saw fit to so invest. It became a part of the capital or'it became a loan, just as he and the partners agreed. That they agreed to regard these sums as additions to the capital appears beyond all question. Up to 1884 there was not merely a division of calculated profits, but such calculation included all-profits, so that apparently nothing existed in the. shape of undivided earnings.

This appears from a fact I think proven, i. e., that in the calculation of profits all moneys spent in betterments were eliminated from the debit side of the account. Mr. Mather, the bookkeeper, swears positively that no expense for permanent improvements, but only expenses for repairs to the real estate and machinery, were deducted from the gross earnings of the busi-' ness in arriving at the net profits.

Each partner, therefore, received as a credit for his share of the profits the same amount that he would have received had no permanent improvements upon the firm property been made. The expense of the permanent improvements was a debt against the firm assets, and when paid was necessarily paid out of the new capital which the partners contributed by leaving a portion of their credit for profits and interest in the business of the firm. This portion, as already observed, after being calculated and credited, was equivalent to cash, and if left in the firm business is to be regarded as capital. Again, each of the parties has acquiesced in the view that his interest in the property was in proportion to his contributions of capital.

In March, 1889, as already stated, the interest of two of the partners, Richardson and Rich, were purchased by the three remaining partners. The interest of these two partners, whether something or nothing, was paid for by the three partners in proportion to their capital. The purchase eliminated any claims which the selling partners might have had to share in the assets of the firm, and transferred such claim to the three remaining partners. The manner by which this purchase was made and paid for, indicates that the view of the parties was that the right of each in all the assets was in proportion to his capital.

Again, in May, a new firm was formed, comprised of the two old members, Hidden and Molineaux, and a new member. By reason of Raynolds’ insanity, it became essential to ascertain the •amount of Raynolds’ interest in the firm. The ascertainment of this necessarily involved the ascertainment of the proportionate interests of Hidden and Molineaux. In accordance with the result of this adjustment of values, the personal assets of the old firm were to be turned over to the new firm. An expert was put upon the books to discover any error in bookkeeping which might have crept in during the number of years covered by the partnership transactions, so that a final accurate account might be stated. "With the consent of ail the parties connected with the old and the new firm, such an account was stated, and upon the basis of such statement the personal property of Raynolds was purchased, and the personal property of Hidden and Molineaux in the old firm was transferred to the new firm. In making up the valuation of the property of the old firm, the real estate was valued at $289,200. The real estate did not pass to the new firm, but was retained by the three old members. In fixing the value of all the property, the value of the real estate was deducted. In fixing the value of the interest of each partner in all the property, his proportionate interest in the real estate was deducted from his proportionate interest in all the property.. Now, the deduction, on account of Raynolds’ interest in the real estate, was calculated in accordance with the relative amount of capital which he had contributed to the firm. In other words, his share in the personalty was sold upon the theory that his proportionate interest in the real estate, as well as in the personalty, was fifty of the one hundred and one parts, and the real estate was retained upon that theory. It will be perceived that the adoption of this theory in respect to Raynolds’ interest involved as a sequence the adoption of the same theory with respect to the interest of Hidden and Molineaux. It is also perceived that if Molineaux’s proportionate interest in the real estate, as is now claimed, is not in proportion to his capital contributed, which is sixteen of the one hundred and one parts, but is two per cent, more, then it follows that the deduction from the "amount received by Raynolds on account of his interest in the real estate retained was excessive, and therefore what he received for the personalty was inadequate. This follows from the fact that if Molineaux’s share was larger, Raynolds’ must be smaller, else the proportions could not be preserved. In fact, to accord to Molineaux what he now claims, the entire settlement must be overturned and a new one adopted.

In view of these facts, namely, that from 1867 to 1889 the profits have been divided; that they had been (if the partners pleased) added to the capital; that the purchase of the two partners’ shares was made upon the basis of the proportion of capital contributed; that the calculation and settlement of the Raynolds interest in all the property was made upon the same basis; that the books of the firm were open to each member of the firm, and that at the end of each year (as Mr. Mather says) the balance-sheet of the firm’s business and division of profits was given to each partner, and invoked no complaint — I say that, in view of all this, no court would be justified in unsettling this deliberate adjustment of the partnership affairs, unless in case of fraud or gross mistake. No such fraud or mistake is apparent.

But the complainant insists that by the sale made by the old firm to the new firm in 1889, all the capital contributed by the parties to this suit to the firm’s business was paid, therefore the real estate left remaining must be divided as profits.

The legal ground upon which it is sought to rest this insistance is well established. Upon the dissolution of a partnership, after the payment of firm liabilities, the amounts contributed as capital by each partner are to be paid.

If there is a surplus, it must bé divided as profits, and if there is a deficit the loss must be borne in the same ratio. Mr. Justice Lindley, in his work on Partnership, marg. p. J¡D2, lays down the following rules for the adjustment of partnership accounts upon dissolution. The assets are to be applied:

“ 1. In paying the debts and liabilities of the firm to non-partners.
“2. In paying to each party ratably what is due from the firm to him for advances as distinguished from capital.
“ 3. In paying to each partner ratably what is due from the firm in respect of capital.
“ 4. The ultimate residue, if any, will then be divisible as profits betwefen the partners in equal shares unless the contrary can be shown.”

It follows, of course, that if the contrary is shown the residue must be divided in accordance with such showing. There can therefore be no doubt that, upon the assumption that there was a surplus, the parties to this suit, as partners, were entitled to be paid before the division of such surplus only the amount of capital which each had contributed. Nor can there be a doubt that, whether by the enhancement of the value of the real estate or from any other cause, such surplus existed after the payment of the capital, such surplus would be divisible as profits. Robinson v. Ashton, L. R. 20 Eq. Cas. 25.

As already shown, all the earnings, so far as they could be calculated, had either been drawn out by each partner or had by him been transmuted into capital. Whether there would remain any additional surplus in excess of the amount of contributed capital could only be.ascertained by a sale of all the firm property, or by a sale of a part, and an estimate of the value of the remainder, or by an appraisement of the value of all and a division of the same according to the estimated value of the •several portions.

In 1889, the old firm, as already observed, was dissolved by the insanity of C. T. Raynolds, and a new firm was formed by Hidden, Molineaux and another Raynolds. The committee of the C. T. Raynolds sold his interest to the new firm, and Hidden and Molineaux transferred their interest in the old to an interest in the new. The property of the old firm was not exhibited for sale, but by an agreement between the committee of Raynolds and Hidden, Molineaux and Edward Raynolds, a price was fixed for all the property of the firm in excess of its liabilities, excepting the De Floras suit. The price or value of all this property was fixed at $1,316,725. At the close of the firm’s business the amounts due the partners were, to Raynolds, $583,994.97; to Hidden, $587,368.28; and to Molineaux, $145,163.37. The total was the same as the amount of the estimated value of the firm assets. The amount of such assets was, in fact, diminished by a deduction made for depreciation in value of the machinery and on account of the irrecoverable overdrafts of Richardson and Rich.

What was actually paid to the committee of Raynolds was his share in the amount of the assets remaining after such deduction, namely, $539,346.76. Hidden’s share was estimated and turned •over upon the valuation of $356,314.52, and Molineaux at the valuation of $130,874.94. From these amounts was deducted the estimated value of each partner’s share in the retained real estate, and the balance was paid for in cash or credits of different kinds upon the books of the new firm. How, in the agreement of 1884, it was stated that the amount of capital contributed by each was, Raynolds, $500,000; Hidden, $350,000; and Molineaux, $150,000. If the subsequent profits, which had been divided and credited to Raynolds and Hidden and left undrawn, together with the undrawn interest, are to be regarded as additional capital, then it is perceived that all the property of the firm was needed to pay capital.

If it should be conceded that the amounts to the credit of Raynolds and Hidden, in excess of the $500,000 and $350,000, respectively, represented profits and interest, then such shares of undrawn profits so divided and credited, together with the interest, were debts of the firm to the partners as for advances.

Therefore, in pursuance of the rule already announced, they were payable before the capital. After such payment, the remainder of the firm property, as valued, was insufficient to pay the amounts of capital stated to have been contributed in 1884. In this balance Molineaux would have the right to share in the ratio of sixteen of the one hundred and one parts, assuming that his capital has not been depleted.

If, as in fact, it has been depleted, then his share would be less. The real estate representing a portion of such balance of the firm assets is divisible in the same ratio.

I am unable to perceive how the complainant’s interest in the real estate can exceed sixteen of the one hundred and one parts upon any hypothesis which has been or can be propounded.

I will advise a decree in conformity with these views.


author: Eeed, V. C.

text:
    James Talcott v. Satterlee Arnold and Anna M. Arnold.
    1. A debtor cannot be compelled to work for his creditors, but if he puts his latent property-earning ability into action, equity will apply any property created to the payment of his debts.
    2. If the debtor is a husband, his first duty is to support his family, and he can devote enough of the proceeds of his labor to effect that purpose.
    3. Such a debtor can give to his wife in her separate business, or in respect to her separate property, those incidental services which a husband as head of a family would naturally render, without subjecting the business or property of the wife to any liability for his debts.
    4. A wife can employ her husband as a servant in the management of her separate business, but a court of equity will closely scrutinize such relation to see whether the employment is bona fide and whether the business is clearly that of the wife.
    5. After the failure of a firm in which a husband was a partner, his wife advanced to him §10,000, with which he supported his family, and paid the expenses of a shop wherein he carried on a series of experiments as an inventor. He caused to be issued, in his wife’s name, a number of patents from which large sums of money were realized, and a portion of the proceeds was put in property in the wife’s name. All the contracts in the business were made in her name, and the property in which the business was conducted and the bank accounts were also in her name. No contract of employment was proved and the entire course of conduct showed that the husbaiid was master of the business, over whom the wife exercised no control and from whom she expected no account. — Held, that the business was the husband’s and its proceeds would be applied to the payment of one of the firm debts, subject, however, to a prior lien of the wife for the repayment of the money which she had advanced to him.
    On final hearing.

      Mr. John B. Vreeland and Mr. Theodore Little, for the complainant.

      Mr. Elwood C. Harris, for the defendants.
   Eeed, V. C.

This bill is filed by a judgment creditor of Satterlee Arnold, for the purpose of reaching certain equitable assets of the said Satterlee Arnold, and to have them applied to the payment of his judgment.

Previous- to 1879, Satterlee Arnold was in business in the State of New York, together with one Sarah T. Harden. Their business was the manufacture of knit goods. The complainant was a commission merchant, -who received and sold the goods of Arnold & Harden. He was accustomed to advance money upon the goods in his hands for sale.

In 1878 the firm of Arnold & Harden failed in business and made a general assignment for the benefit of its creditors. At that time the complainant had a large amount of the goods of the late firm in his hands, upon which goods he had made large advances of money. He subsequently sold these goods as the opportunity for sale offered, and found that the receipts from the sale of all the goods in his possession were insufficient to repay the advances of money which he had made, together with interest. He brought an action to recover the balance in his-favor, in the courts of the State of New York, and on November 21st, 1885, recovered a judgment. .Upon that judgment an action was brought in this state, and a new judgment recovered in the supreme court, for the sum of $6,200.53, on September 28th, 1891. Execution was issued and returned unsatisfied.

The bill is filed upon the notion that there are equitable assets of the husband, the legal title to which is now in the name of the wife.

It appears that Satterlee Arnold is an inventor, and his skill has been directed to the invention of improvements upon the sewing machine, for which inventions he has caused a number of patents to be issued. Previous to the time of the failure of his firm in 1879, he had procured patents to be issued to himself, namely, No. 104,532, issued June 21st, 1870 ; No. 119,958, issued October 17th, 1871, and No. 204,938, issued June 18th, 1878. The title to these patents seems to have been passed over to Mrs. Arnold before the failure of the firm.

Since the failure, the husband has had issued to himself, and has then assigned to his wife, the following patents: No. 241,116, issued on May 10th, 1881; Nos. 378,822 and 378,823, issued February 28th, 1888.

He has caused to be issued to his wife the following patents: No. 392,581, on November 13th, 1880; No. 242,038, on May 24th, 1881; No. 249,734, on November 22d, 1881; Nos. 278,-484, 278,485 and 278,486, on May 29th, 1883; No. 311,558, on February 3d, 1885; Nos. 331,106 and 331,108, on February 24th, 1885; No. 313,909, on March 17th, 1885; No. 324,351, on August 18th, 1885; No. 331,107, on November, 24th, 1885; Nos. 378,644 and 378,645, on February 28th, 1888.

So far as appears, nothing substantial was realized from these patents until 1882. On April 1st, 1882, an agreement was entered into between Anna M. Arnold, the wife, and the Norfolk and New Brunswick Hosiery Company, by the terms of which agreement she granted to the company the exclusive right to make; use and sell in the United States the patents granted on June 21st, 1870 (No. 104,532); on May 10th, 1881 (No. 241,-116); and November 22d, 1881 (No. 249,734), as well as any patent which might thereafter be granted to Satterlee Arnold or to Anna Arnold, for any improvement or invention appertaining to “the anchor stitch seam,” or “anchor sewing machine trimming and holding devices,” or any invention to make knit underwear with the anchor stitch seam and anchor stitch sewing machine trimming.

The company agreed to pay royalties, which, after January 1st, 1883, would together amount to not less than $1,000 a month. These royalties have been, since the date of the agreement, all paid.

On April 2d, 1886, another agreement was made, between Anna M. Arnold, of the first part, and Satterlee Arnold, of the second part, and A. G. Jennings & Sons, of the third part.

By this contract Anna M. Arnold granted to A. G. Jennings & Sons the exclusive right in the United States to manufacture and sell gloves and other hand covering made of fabric other ■than leather, and also the right to license others to do so, under patents numbered 104,532, 241,116, 249,734, 276,484, 278,485, 278,486, 311,558, 313,909, 324,351, 331,106, 331,107, 331,108, and under any patent which might be thereafter issued to Anna M. Arnold in aid of the improvements patented as aforesaid.

The parties of the third part agreed to pay the sum of $25,000 in money. They also agreed to pay one-half of all the royalties which they should receive from others whom they should license, and they guaranteed for five years that these royalties should not be less than $3,000 a year*

Out of the royalties received under the first of these agreements the wife has bought and now owns an unencumbered lot of ground in Verona worth $5,000, and also ten government bonds of $1,000 each. She also owns a $1,000 railroad bond. She is also the owner of stock in the Arnold Sewing Machine Company, which stock is of the nominal value of $75,000, but probably of little real value.

Besides the amounts received from the Norfolk and New Brunswick Hosiery Company, Mr. Satterlee Arnold states that $50,000 or $60,000 has been received under the Jennings contract. Indeed, he says that they had spent in their business $110,000. The proceeds received under the two contracts left after paying the expenses of the business and maintaining the defendants’ household seems to have been invested in the property already mentioned.

The question presented for solution is whether all these patents assigned to or issued to Mrs. Arnold, and the contracts made in her name, from which she received a consideration in cash, and from which she has received and is entitled to receive royalties, the stock held by her in the Arnold Sewing Machine Company, and the property which has been purchased by the use of the moneys received from the said contract, belong to the wife free from any liability to answer for this debt against her husband. She, of course, insists that the property is hers, and she puts her right to it upon the ground, first, that the assignments made previous to the failure of her husband’s firm, in 1879, although the assignments were voluntary, were nevertheless valid, inasmuch as they were not made when he was insolvent, or when he supposed himself upon the verge of insolvency, and that at any rate they were then, and are still, valueless.

In. respect to the patents issued to her since 1879; it is secondly insisted that they belong to her by virtue of an agreement made between herself and her husband, by which, in consideration of the sum of $10,000 advanced by her, or to be advanced by her, she purchased the future products of the inventive ability of her husband, and established a separate business of experimentation and of machine-building, and of selling and leasing the said machines.

In respect to the three patents assigned before 1879, it is impossible to conclude from the testimony that they had in themselves any value; nor is there anything in the testimony to show when the insolvency of the firm of Arnold & Harden was first known to the defendant.

The subsequent inventions seem to have been the source from which the profits derived from the contracts and from the business have been mainly received. In regard to the patents issued to Mrs. Arnold, subsequent to 1879, the point upon which the present inquiry must turn is, whether the transaction of which those assignments were a part was a separate business of the wife. The language of section 4 of the Married Woman’s act (Rev. p. 637) is:

“ That the wages and earnings of any married woman, acquired or gained by her after the passing of this act, in any employment, occupation or trade in which she is employed, and which she carries on separately from her husband, and all investments of such wages, earnings, money or property, shall be her sole and separate property, as though she were a single woman.”

If the business carried on by the husband in the name of the wife after 1879, can be regarded as her separate business, then by force of this statute all the property invested in it, and all the accretions resulting from its conduct, belong to her. And if the husband in conducting this business was a servant of the wife under a bona fide employment, then his services in' the business will not subject any portion of such property to the claims of the husband’s creditors

The account given by Mrs. Arnold of the circumstances under which these patents were assigned to her, and the future inventions issued to her, and the property where the business was carried on put in her name, is this: She says that about the time of the failure of her husband in 1879, she received the sum of $10,000 from the estate of her uncle, Dr. Vedder, of Schenectady. She and her husband were then living at Troy. She says that they entered into an agreement by which he assigned to her the patents issued and to be issued, in consideration that she should pay him $1,200 a year, and should pay all the shop expenses for the development of these patents, and for all experimenting. She says:

“I was to take all the risks from my private fortune for that purpose, and in consideration of his salary and the amount of this money which I paid out, all these inventions as they became developed through due experimenting and became patented were to be assigned to me.”

She says that she thinks that this agreement was put in writing, but she cannot find it.

The husband’s account of this arrangement with his wife is substantially the same as hers. He also thinks, but is not sure, that the agreement was put in writing.

I do not think that there was ever any such agreement written and signed by these parties. If it had been executed, that fact would indicate that they were of the opinion that such an agreement was of importance. It is improbable that in such case there would be a doubt in their minds whether it had ever been executed.

Nor do I believe that any single verbal agreement, embodying the points which are now said to have been covered by a written agreement, was entered into.

I have no doubt that the wife received the money mentioned as coming from her deceased uncle’s estate. I have no doubt that, with her consent, the money was paid to him as received by her or as needed by him from time to time, and that it went to support the family, including the husband, for two or three years after his insolvency, as well as to pay the shop expenses; but that there was a distinct agreement that he was to receive a certain sum as salary, I do not think is proven. Nor do I find any foundation in the testimony to support the theory that the business which was carried on from 1879 to the present time, ostensibly in the name of the wife, was, in fact, the business of the wife. The theory of the defendants is that he was the servant, she was the master; that all the business was transacted by him as her servant. Now, the entire history of the business from the year 1879 down, is convincing that she let him have her money whenever he wished it, without a question, and that he put all the patents in her name, for the purpose of securing his property to his family in case of business trouble, while, in fact, he retained as complete control over it as if he was its absolute owner. Every step taken in the business was the offspring of his thought and will alone. In all the transactions it is perfectly obvious that everything was left to him. His wife naturally had but the faintest knowledge of the work in which he was engaged, and exercised no oversight over the conduct of the business.

The bank accounts, it is true, were in her name. It is true also that he drew checks under a power of attorney from her; that the contracts with the Norfolk and New Brunswick Hosiery Company, and with Jennings & Sons, were made in her name; that the property purchased was put in her name; that the property in which the machines were manufactured was in her name. But it seems to me transparent that all this was merely color-able. It was the husband who suggested the agency, who settled the terms of the contracts, who received and deposited the money arising from them, and who spent it, with no expectation, on his part or on her part, that he would ever be called upon to account to her for its receipt or expenditure. He kept no books of account, except of the most meagre and partial kind, of the receipts and the expenses of the business. The wife never asked for an accounting and never expected any, and he knew that she never expected any.

The organization of the Arnold Sewing Machine Company and its operation., are illustrations of his absolute control of affairs. The company was organized in this way: The property in which the husband had conducted his experimentation was in her name. The Arnold Sewing Machine Company was organized, and $75,000 worth of its stock was given to the wife, ostensibly for this property, which she turned over to the corporation. The rest of the stock seems to have been held by friends of the Arnolds, the husband holding one share. The husband was made president and manager, and is still such. His control of the business of the corporation has been absolute. Ho meetings of directors seem to have been held. In fact, he cannot tell' who the present directors are. He has been the president, the manager, the board of directors and the whole corporation.

The facts of the ease, as I have found them, are very much im line with those in Glidden, Murphin & Co. et al. v. Taylor et al., 16 Ohio St. 509. In that case the husband manufactured in the name of his wife for years. There was ho formal agreement between the husband and wife concerning his services, or as to the disposition of the property of the business. As her agent and trustee, he received the proceeds and supported himself and his family therewith, and spent what money he desired, and with the surplus purchased, in the name of his wife, a dwelling-house and lot. In the prosecution of the business he had entire control. The property thus accumulated was held to be subject to the claims of his creditors.

But it is strongly insisted that all the property which is now alleged to be equitable assets of the husband is the outcome of his inventive ability, and that he had the right to give his talent to his wife, without impressing upon the property produced by it, any liability for his own debts. It is said that a man is not the slave of his creditors, and that he is not bound to devote his personal labor or mental ability to the payment of his debts. This statement is undoubtedly true. While there is a moral duty to pay debts, yet there is no method of physical coercion by which the debtor can be compelled by any judicial proceeding to do so. But the question here is, not whether the debtor can be compelled to work for his creditors, but whether if he does put into action his latent ability to earn money, and it produces property, the property can be reached and applied to the payment of his debts. In Abbey v. Deyo, 44 N. Y. 344, Mr. Commissioner "Ward Hunt, in his opinion, took the ground that the debtor could give his time and his talents to whomsoever he pleased. Therefore it followed that, however great his talents were, if he chose to exercise them for the benefit of his wife, the product was hers.

In Voorhees v. Bonesteel, 16 Wall. 31, the supreme court of the United States, on appeal from the circuit court of the eastern district of New York, followed the cases in the state courts in holding that a wife could employ her husband to manage her business, and that the application of a portion of the income of the wife’s separate property to the support of-the husband would not impair the title of the wife.

In Aldridge v. Muirhead, 101 U. S. 397, on appeal from the circuit court for the district of New Jersey, Chief-Justice Waite held that the fact that the husband had rendered services in employing the wife’s capital in the purchase of lands would not invalidate her title thereto, if his services were devoted to her separate property. These cases were cited with approval by Vice-Chancellor Van Fleet, in his opinion in Tresch v. Wertz, 7 Stew. Eq. 124. The right of a wife to employ her husband in her grocery business, in consideration of his clothes and board, was upheld by Vice-Chancellor Bird in Kutcher v. Williams, 13 Stew. Eq. 436.

I do not understand, however, that in any case decided in the courts of this state it has been held that the right of a husband to give away the proceeds of his labor or his talents as he pleases, free from the demands of his creditors, has been asserted in the unrestricted language used in the opinion in Abbey v. Deyo, supra.

It is to be observed that in all the cases so far mentioned the services of the husband were rendered in a separate business, or upon the separate property of the wife. ■

There is no instance, within my knowledge, where a husband has said to his wife, I am going to work and I give yon my labor and its fruits,” that a court has held that the gift of the property creating potentiality of the husband carries to the donee a title to the property created, free from all liability to pay the husband’s debts.

As has already been remarked, it is of course true that a court cannot exert any authority over a debtor to make him work with his hands or his intellect for his creditors; and even when a debtor has turned his ability into value by the exertion of his talent or the exercise of his hands, it is, in a degree, free from liability if the debtor is a husband. Such a debtor undoubtedly possesses the right to labor for the support of his family and the maintenance of his children. This is a duty, and so long as the result of his labor does not exceed an amount sufficient to properly maintain and educate his family in their walk in life, it cannot be reached. Phillips v. Hall, 160 Pa. St. 60 ; Seay v. Hesse, 123 Mo. 450 ; Bump Fraud. Conv. 25.

A husband can render those incidental services which the head of the family generally performs, and can give his wife the benefit of his experience and skill in the transaction of her separate business and in the management of her separate property. Tresch v. Wertz, supra.

But there is no case in our courts which has upheld the right of the husband to give to his wife unrestrictedly all the profits of his labor or his talent. Instead of upholding the right of the husband to this extent the courts have asserted a different rule. In National Bank of the Metropolis v. Sprague, 5 C. E. Gr. 13, Chancellor Runyon held that while a husband had the right to give to his wife her earnings when she carried on her separate business, with his assistance, with her own means and on her own account, yet when the labor and skill of the husband had united with those of the wife, the business would be considered' as the husband’s and the proceeds would not be protected from his creditors.

So, in Quidort’s Administrator v. Pergeaux, 3 C. E. Gr. 472, it was held that the husband could not give to his wife his earnings.

It is true that at the date of these decisions paragraph 3 of the present Married Woman’s act (Rev. p. 637) had not been enacted. That section became operative in 1874.

This statute shields all the earnings of the wife, derived from her separate business, from her husband’s creditors. Under this statute the relations of the husband and his wife are exactly the same as they were before its enactment, whenever the husband had abandoned, in favor of his wife, all claim to her earnings. In both of the cases^cited the husband had done this, so far as he was able. The ability of the husband to confer all the benefit resulting from his labor and skill, was not affected at all by the act, nor does the act modify or annul the force of the previous decisions touching that point. Those cases represent the true doctrine. No debtor can obtain a clearance from all the claims of his creditors except by virtue of a bankrupt law, nor ‘can he voluntarily turn over all the proceeds of his labors or his ability by a gift which precedes or follows the accretion of such property, so long as he has creditors.

My conclusions are that the business carried on in the name of Mrs. Arnold was not her separate business but was, in fact, the business of her husband.

The profits derived from it, and the property into which the profits have been put, are liable as equitable assets of the husband, to be applied to the payment of the complainant’s judgment.

I am of the opinion, however, that Mrs. Arnold has a superior equitable lien upon all this property as security for the repayment to her of all the money advanced to the husband, together with interest upon it.

One object which Mr. Arnold had in mind, when he caused the patents to be assigned to or issued in the name of the wife, was security to her. This much of the transaction she must have known, although she knew little beyond this.

The case is one where the legal titles held by her should be set aside upon equitable terms, and the wife’s equity in the property, to the degree already stated, should be protected.

I will frame the details of the decree on application of the counsel of the complainant, upon notice to the counsel of the defendants.