as, for example, a debt for money borrowed by one partner from another for a purely private purpose of his own.13 § 436. How lien is lost.-The partner's lien on partnership property is lost by the conversion of such property into the separate property of another partner, or into the property of a stranger with the other partner's consent. If, therefore, on dissolution the property of the firm is divided between the partners upon the understanding that the debts shall be paid in some specified way, the lien, so far as the partners themselves are concerned, is gone and the partners cannot reclaim the property, although the debts remain unpaid.14 So where one partner sells out all of his interest in the firm to his copartner, and the latter agrees to pay the debts of the partnership, the lien of the selling partner is, in many cases, held to be gone, and, as an incident, as will be seen,15 the rights of the firm creditors to priority of payment out of the assets, which is a right worked out through the right of the partner,16 is held to be gone also.17 This subject, however, will be more fully considered in the following chapter. § 437. No lien if partnership illegal.-If the partnership is illegal, its members have no lien upon their common property or upon each other's shares therein, unless it be by virtue of some agreement not affected by the illegality.18 18 See 1 Lindley 354 (Ewell's 2d ed.). Surviving partner has no lien on share of deceased partner for a private debt: Moffatt v. Thompson (1852), 5 Rich. (S. Car.) Eq. 155, 57 Am. Dec. 737. Lien secures partnership matters, but not the general balance of a mixed account. Nichol v. Stewart (1880), 36 Ark. 612. 14 See 1 Lindley, 355 (Ewell's 2d ed.); Miller v. Estill (1856), 5 Ohio St. 508, 67 Am. Dec. 305; Smith v. Edwards (1846), 7 Humph. (Tenn.) 106, 46 Am. Dec. 71, Mechem's Cas. 563; Croone v. Bivens (1859), 39 Tenn. (2 Head) 339, Mechem's Cas. CHAPTER XX. OF THE APPLICATION OF THE PARTNERSHIP AND INDIVIDUAL ASSETS TO THE CLAIMS OF CREDITORS. § 438. In general.-The question of the proper application and distribution of the partnership assets has given rise to no little difficulty and conflict of decision. The chief sources of difficulty have been disputes between the creditors of the partnership and the creditors of the individual partners. May the creditors of the individual partners obtain, in any way, the application of partnership funds to their claims? May partnership creditors, whose claims are not satisfied out of the partnership property, have recourse to the individual property of the partner, and in such case may they share equally with individual creditors or must they be postponed until individual creditors are paid? These and similar questions indicate the difficulties which arise. § 439. What principles control.-At the foundation of the matter lies the rule, already noticed,1 which must constantly be kept in mind. The capital or property of the firm has been contributed for partnership purposes, and it is part of the implied, if not the express, understanding between the partners, that the partnership property shall primarily be used only for partnership purposes, e. g., to pay partnership debts. Each partner has therefore the right to insist that the partnership property shall be so applied. This right is primarily the right of the partners as between themselves; but it has sometimes been regarded, not as the right of the partners alone, but, in some way, as the right of the partnership creditors, and many cases have been decided upon this assumption. If it is a right of the partners only, it is one which they may waive if they see fit to do so; but if it is a right of the creditors, then it is not one which the partners may waive. The question may present a different aspect if it arises I, while the partnership is still going on or is being wound up by the partners themselves, than it will if it arises II, after the partnership has been dissolved and the affairs are being wound up under judicial direction; and we will therefore separately consider each phase. Before doing so, however, it may be well to recall to mind what the partnership creditors may themselves legally do to secure the application of the partnership assets to the payment of their claims. 1 See ante, §§ 184-186. § 440. I. Application of the assets of a partnership by the partnership creditors. The partnership creditors, as has been already seen, have no direct lien upon the partnership assets, unless they acquire one expressly by a mortgage or other similar act. In this respect they stand in the same situation as the creditors of an individual. They may be able to induce the partners to give them a direct lien; if they cannot, they can only avail themselves of such legal remedies as the law may give them for the enforcement of their claims. These are of two general sorts: I. In pursuance of some statute, they may be able to force the debtors into bankruptcy or insolvency proceedings, in the course of which they may secure the application of the partnership assets to their claims. The present national bankruptcy act, for example, provides for declaring a partnership bankrupt and administering its assets for the benefit of creditors.2 In some States insolvency proceedings may be instituted. II. In other cases, the ordinary process by suit, judgment and execution, supplemented, where the statute provides for it, by proceedings in attachment,- may be resorted to by creditors. While, as has been seen, partners are usually joint debtors, an execution for a partnership debt may usually be levied, as has also been seen, upon either partnership or individual property. Individual creditors may resort to the individual property, or to the partner's residuary interest 5 in the partnership property. While a prior levy by a partnership creditor upon individual property will usually take precedence over a subsequent levy by an individual creditor, a prior levy by an individual creditor upon a partner's interest in the partnership property operates in subordination to the demands of partnership creditors upon that property. Legal liens so acquired, as will be seen," are not usually disturbed by later judicial proceedings, unless they amount to a preference forbidden by some statute authorizing them. 2 Sec. 5. Appendix. 3 See ante, § 308. 4 See ante, § 314. 5 See ante, § 145 et seq. 6 See ante, §§ 146-148. § 441. II. Application of the assets of a partnership by the partners themselves.-While the affairs of the partnership are still going on and its property and business are still in the hands of the partners themselves, it is, in general, true that they may make such disposition of the property as they see fit. It has sometimes been said that the partnership creditors have a kind of lien upon the partnership assets, but this is not true. It is the property of the partners, which they may, in general, deal with as they please, provided they make no disposition of it which will be deemed to be in fraud of creditors. Thus they may sell it, mortgage it, or turn it out in payment of their partnership debts. They may assign all the partnership property for the benefit of the partnership creditors. They may apply it upon all partnership debts pro rata, or, in the absence of a statute forbidding it, they may prefer one partnership creditor to another. They may unite in selling all the partnership property to one who buys in good faith and for value; and the purchaser will get a good title, even though the partnership was insolvent and the partners had a secret intent to defraud their creditors or afterwards did in fact misapply the proceeds. In all of these cases the partners are actually or ostensibly using the partnership property for partnership purposes. § 442. Right to pay joint but not partnership debts out of partnership assets. When, however, the partners attempt to apply the partnership assets to the payment of any other than a partnership debt, different considerations present them 8 Thus in Reyburn v. Mitchell (1891), 106 Mo. 365, 16 S. W. 592, 27 Am. St. R. 350, the court, quoting from Sexton v. Anderson, 95 Mo. 381, says: "The partners may, so long as the firm exists, do with their property as they see fit. The firm creditors have no lien on the partnership property for the payment of their debts while the firm continues to exist. Partners have a right to have the partnership property applied to partnership pur |