of the partners from participation until the partnership creditors are paid. The Federal Bankruptcy Act adopts this rule, in explicit terms,31 and so also does the Uniform Partnership Act.32

So where firm property has been levied upon for the individual debt of one partner, inasmuch as the only interest which can ordinarily be so sold is the partner's share in the final surplus,33 such levy must yield priority to subsequent levies for debts due to the partnership creditors.34 And the same result will ensue where one partner has mortgaged or otherwise incumbered his interest in the partnership property to secure his separate creditors.35

But where all of the partners themselves, while the assets remained under their control, have created valid liens upon the property, the court in administering the estate will give such liens effect.36

§ 450. Same subject-Joint but not partnership creditors not preferred. The reasons which operate to give firm creditors

31 Sec. 5, subd. f, "The net proceeds of the partnership property shall be appropriated to the payment of the partnership debts, and the net proceeds of the individual estate of each partner to the payment of his individual debts. Should any surplus remain of the property of any partner after paying his individual debts, such surplus shall be added to the partnership assets and be applied to the payment of the partnership debts. Should any surplus of the partnership property remain after paying the partnership debts, such surplus shall be added to the assets of the individual parties in the proportion of their respective interests in the partnership."

32 Sec. 40, subd. h.. "When partnership property and the individual properties of the partners are in the

possession of a court for distribution, partnership creditors shall have priority on partnership property, and separate creditors on individual property, saving the rights of lien or secured creditors as heretofore." 33 See ante, § 148.

34 Jarvis v. Brooks (1853), 27 N. H. 37, 59 Am. Dec. 359; Conroy v. Woods (1859), 13 Cal. 626, 73 Am. Dec. 605; Bullock 7. Hubbard (1863), 23 Cal. 495, 83 Am. Dec. 130; Pierce v. Jackson (1810), 6 Mass. 242, Ames' Cas. 293; Meech v. Allen (1858), 17 N. Y. 300, 72 Am. Dec. 465, Mechem's Cas. 677, Ames' Cas. 326, Gilm. Cas. 499.

35 Ewart v. Mercantile Co. (1895), 130 Mo. 112, 31 S. W. 1041.

36 Smith v. Smith (1893), 87 Iowa 93, 54 N. W. 73, 43 Am. St. R. 359.

as such a preference in payment out of firm assets operate to exclude from such priority any who do not stand in that relation. It is consequently generally held in this country that the joint creditors of the partners as individuals, not being partnership creditors, will, in a judicial distribution, be excluded from participation in the partnership assets until the firm creditors are paid.87 The English courts have held the contrary.38

A number of American courts have held the contrary where the question arose in controversies as to the right of partnership creditors to priority over an earlier levy by a creditor of all the partners jointly, though not a partnership creditor.39

The rule in bankruptcy excludes the joint non-partnership creditor in favor of the partnership creditor.40

As has been already seen, an obligation may be shown to be a partnership obligation in fact-and hence entitled to be paid out of partnership assets-although it was made in the individual names of the partners instead of the firm name.41

§ 451. Same subject-Partner cannot compete with firm creditors. So, if the partnership be indebted to one partner, inasmuch as he is himself, as a member of the partnership, one of the persons from whom his claim is due, and is therefore at once both debtor and creditor, while as to the claims of strangers against the partnership he is a debtor simply, it is clear that he is not strictly a partnership creditor within the rule which

37 See Forsyth v. Woods (1870), 11 Wall. (U. S.) 484; Second Nat. Bank v. Burt (1883), 93 N. Y. 233; Turner v. Jaycox (1869), 40 N. Y. 470; Whelan v. Shain (1896), 115 Cal. 326, 47 Pac. 57; Dunnica v. Clinkscales (1881), 73 Mo. 500.

Where there is but one partnership, though it has several branches, all of the assets are to be administered as a unit: In re Vetterlein (1890), 44 Fed. 57. Otherwise, where there were really distinct partnerships; Gay v. Ray (1907), 195 Mass. 8, 80 N. E. 693; post, § 461.

88 See Hoare v. Oriental Bank (1877), L. R. 2 App. Cas. 589.

39 See Saunders v. Reilly (1887), 105 N. Y. 12, 12 N. E. 170, 59 Am. Rep. 472, Burd. Cas. 277; Steiner v. Peters Store Co. (1898), 119 Ala. 371, 24 So. 576; Couchman v. Maupin (1879), 78 Ky. 33.

40 See In re Nims (1879), 16 Blatchf. 439; In re Weisenberg (1904), 131 Fed. 517.

41 See ante, § 295; Rouse v. Wallace (1897), 10 Colo. App. 93, 50 Pac. 366.

gives such creditors priority. It is settled, therefore, that he cannot compete with the latter class in securing payment out of the assets of the partnership; 42 neither can his own creditors, or others standing simply in his shoes,43 by virtue of his claim, be permitted to so compete.

"To that rule," said Lord Eldon, "there is an exception, manifestly founded in justice, and that is where a partner becomes a creditor in respect of the fraudulent conversion of his separate estate to the use of the partnership." 44 Another exception to this rule has been made in England where the firm and the partner were carrying on separate trades, and the claim was due in respect of goods furnished by one to the other as such separate traders; 45 but this exception has not been approved in the United States.4

46

Some other exceptions have also been made, as where the claimant partner has been discharged from liability for the partnership debts and therefore is no longer one of the debtors, 47 or his liability has been barred by the statute of limitations,48 and he has afterward become a creditor of the firm.

42 See Edison Illuminating Co. v. DeMott (1893), 51 N. J. Eq. 16, 25 Atl. 952; Ex parte Blythe (1881), 16 Ch. Div. 620; Bonwit v. Heyman (1895), 43 Neb. 537, 61 N. W. 716; McCruden v. Jonas (1896), 173 Pa. 507, 34 Atl. 224, 51 Am. St. R. 774, Burd. Cas. 478; In re Rice (1908), 164 Fed. 509; In re Telfer (1910), 106 C. C. A. 366, 184 Fed. 224 (under present bankruptcy act). 43 McCruden Jonas, supra. Where the claim is a negotiable instrument, the bona fide transferee for value will stand on a better footing. See Millers River Bank v. Jefferson (1884), 138 Mass.' 111, Gilm. Cas. 563; McCruden v. Jonas, supra; Parsons v. Tillman (1884), 95 Ind. 452; First Nat. Bank v. Wood (1891), 128 N. Y. 35, 27 N. E. 1020.

v.

44 See Ex parte Sillitoe (1824) 1 Glyn v. Jam. 374, Ames' Cas. 428, Gilm. Cas. 569.

45 See Ex parte Sillitoe, supra; Ex parte Cook (1831), Montagu, 228, Ames' Cas. 432. As to claims between firms having a common partner, see Haines Estate, (1896), 176 Pa. 354, 35 Atl. 237, Burd. Cas. 482; First Nat. Bank v. Wood, supra; Bonwit v. Heyman, supra.

46 See Somerset Potters Works v. Minst (1852), 10 Cush. (64 Mass.) 592; Re Lane (1874), 2 Low. (U. S. D. C.) 333.

47 See Ex parte Atkins (1820), 1 Buck 479.

48 See In re Hepburn (1884), 14 Q. B. Div. 394.

§ 452. Same subject-One partner's share cannot be reached by his creditors until partners' claims against firm are satisfied. So, though the share or interest of one partner in the final surplus may, as has been seen, be rendered available to his ereditors, it must be kept in mind that that surplus is not ascertained until not only the firm creditors as such are paid, but also not until the claims of the respective partners against the firm, as for advances made or money loaned to it, are satisfied. In equity, therefore, the individual creditors of one partner cannot reach his share until the claims of partners against the firm have been satisfied.49

§ 453. Same subject-Individual creditors usually given priority in individual assets of a partner. The right of the partnership creditors to priority of payment out of the partnership assets being conceded, it has been urged that the separate creditors of the partner were entitled in a judicial distribution of the assets to a like priority of payment out of the separate assets of the partner, and this right has been maintained by many, perhaps by a majority, of the cases in the United States, following the early English precedents.50 "The correctness of this rule, however," it was said in a leading case,51 "has been

49 See Buchan v. Sumner (1847), 2 Barb. Ch. (N. Y.) 165, 47 Am. Dec. 305; Crooker v. Crooker (1863), 52 Me. 267, 83 Am. Dec. 509; Divine v. Mitchum (1844), 4 B. Mon. (Ky.) 488, 41 Am. Dec. 241, Mechem's Cas. 626; Buck v. Winn (1850), 11 B. Mon. 320; Cain v. Hubble (1919), 184 Ky. 38, 211 S. W. 413; Warren v. Taylor (1877), 60 Ala. 218, Mechem's Cas. 1081, Burd. Cas. 580, Gilm. Cas. 446.

50 See Rodgers v. Meranda (1857), 7 Ohio St. 180, Mechem's Cas. 630, Burd. Cas. 424, Gilm. Cas. 528; Hundley v. Farris (1890), 103 Mo. 78, 15 S. W. 312, 23 Am. St. R. 863, 12 L. R. A. 254; Claflin v. Behr (1889), 89 Ala. 503, 8 So. 45; Moody v. Lucier (1883), 62 N.

H. 584; Greene V. Butterworth (1889), 45 N. J. Eq. 738, 17 Atl. 949; Peters v. Bain (1889), 133 U. S. 670, 10 Sup. Ct. 354; New Market Nat. Bank v. Locke (1883), 89 Ind. 428; Hawkins v. Mahoney (1898), 71 Minn. 155, 73 N. W. 720, Gilm. Cas. 558; Davis v. Howell (1880), 32 N. J. Eq. 72, Burd. Cas. 438, Gilm. Cas. 538.

Where one partner who is solvent seeks to recover a private debt from the estate of his insolvent copartner, it is no objection to his doing so that the amount if recovered by him will ultimately go through his estate to the partnership creditors; In re Head [1894], 1 Q. B. 638.

51 Rodgers v. Meranda, supra.
In Murrill v. Neill (1850), 8 How.

much controverted, and there has not always been a perfect concurrence in the reasons assigned for it by those courts which have adhered to it. By some, it has been said to be an arbitrary rule, established from considerations of convenience; by others, that it rests on the basis that a primary liability attaches to the fund on which the credit was given-that, in contracts with a partnership, credit is given on the supposed responsibility of the firm; while in contracts with a partner as an individual, reliance is supposed to be placed on his separate responsibility. And again, others have assigned as a reason for the rule that the joint estate is supposed to be benefited to the extent of every credit which is given to the firm, and that the separate estate is, in like manner, presumed to be enlarged by the debts contracted by the individual partner; and that there is consequently a clear equity in confining the creditors, as to preferences, to each estate respectively which has been thus benefited by their transactions. But these reasons are not entirely satisfactory. So important a rule must have a better foundation to stand upon than mere considerations of convenience; and practically it is undeniable that those who give credit to a partnership look to the individual responsibility of the partners as well as that

(U. S.) 414, 12 L. ed. 1135, it is said: "The rule in equity governing the administration of insolvent partnerships is one of familiar acceptance and practice; it is one which will be found to have been in practice in this country from the beginning of our judicial history, and to have been generally if not universally received. This rule, with one or two eccentric variations in the English practice which may be noted hereafter, is believed to be identical with that prevailing in England, and is this: That partnership creditors shall, in the first instance, be satisfied from the partnership estate; and separate or priv ate creditors of the individual partners from the separate and private

estate of the partners with whom they have made private and individual contracts; and that the private and individual property of the partners shall not be applied in cxtinguishment of partnership debts until the separate and individual creditors of the respective partners shall be paid. The reason and foundation of this rule, or its equality and fairness, the court is not called upon to justify. Were these less obvious than they are, it were enough to show the early adoption and general prevalence of this rule to stay the hand of innovation at this day, at least under any motive less strong than the most urgent propriety."