
    Penney v. McCulloch, et al. and McCulloch et al. v. Penney.
    
      Bill in Equity to set aside Fraudulent Conveyance.
    
    1. Fraudulent conveyance; sufficiency of answer to bill; burden of proof. — Where1 a bill is filed by existing creditors of an alleged insolvent partnership against the partners and their grantee, seeking to set aside a mortgage of substantially all the partnership property' as constructively fraudulent as against complainants’ rights, an answer filed by such grantee, containing .only a mere general denial of the allegations of fact cnarged in the bill, is insufficient to relieve respondent of the prima facie case made against him; the burden resting upon him of overcoming the presumption of unfairness and mala fldes both by a clear and distinct response to' each averment of the hill and by clear proof.
    2. Same; burden of proof as to consideration of alleged fraudulent conveyance. — Where a hill is filed by existing creditors of an insolvent partnership against the partners and their mortgagee, seeking to set aside the mortgage as in fraud of complainants’ rights, proof by complainants of the existence of their debts devolves upon the respondent mortgagee the burden of proving a bona fide debt and that the mortgage was given to secure same, untainted by any fraud.
    8. Same; when bona fide debt not shown. — On a bill filed by existing creditors of a partnership to set aside a mortgage as fraudulent, respondent — the alleged fraudulent grantee— proved as tne consideration or his mortgage the payment by him of certain sums to certain persons at the instance and request of the partners, but failed to prove that the amounts so paid were correct and justly owing by the partnership. Held: That he had nor discharged the burden resting upon ■him of showing a bona fide vamable consideration for said mortgage.
    4. Mortgage of partnership property, when constructively fraudulent; liability of mortgagee to partnership creditors. — A partnership in failing circumstances executed a mortgage or substantially all the partnership property (personalty), due one day after date, to secure a recited indebtedness to the mortgagee, the consideration of which consisted in part of sums paid by such mortgagee to .third persons at the instance and request of the partnership, and in part of debts owing to the mortgagee by the members of the firm individúan, and which the partners by the partnership agreement assumed to pay, and in part oí a certain sum to be paid the mortgagee for services in looking after the mortgaged property. The property mortgaged greatly exceeded in value the recited mortgage indebtedness. Prior to the giving of the mortgage the mortgagors had given to the mortgagee two bills of sale on the same property to secure the same indebtedness. The mortgage was filed for record on the day it was executed and provided for foreclosure at public, or private sale. After the execution of the mortgage and for several months after the law-day the property was in mortgagee’s store, to which he had a key, but the mortgagors also had acr cess to it, and by verbal agreement with the mortgagee they were to ship and sell the property in his name. Some of -t they did sell in his name and some they sold clandestine y in their own name, and the mortgagee also sold some. The mortgage was not foreclosed by public sale. Held: 'that the mortgage was constructively fraudulent as to existí, g creditors of the partnership, and that the mortgagee was liable to them’ as trustee for the value of that part of said property appropriated or converted by the mortgagee to' his own use, but not for the other property.
    Appeal from Morgan Chancery Court.
    Heard before Hon. Wm. H. Simpson.
    The bill was filed by W. B. McCulloch and others as existing creditors of the Co-operative Furniture Company (or Factory), a partnership' composed of Miller &. Palmatier, and sought to set aside as fraudulent a mortgage executed by said partnership to J. E. Penney, who was made a party defendant.
    The opinion showsi the material averments of the bill. The bill prayed that the several debts of complainants. be ascertained; that the mortgage be declared fraudulent; anil void and be set aside as to .complainants; that said Penney be required to account and to pay into court for complainants the value of the property mentioned in said mortgage. which had been appropriated or converted by him to lids own use, and that the remaining property mentioned in the mortgage, which he had not used, converted or appropriated,, be condemned for sale for the satisfaction of complainants’ debts. There was also a prayer for general relief.
    The answer of Penney merely denied the averments of the bill and required proof thereof, except that it admitted the residence of the parties and that said partnership became indebted to respondent in the sum of $525.94, to secure which it executed the mortgage described in the hill. The demurrers to- the bill, incorporated in the; answer, were not insisted on in argument, and lienee it is not deemed essential to set tliem out.
    In addition to tlio evidence noted in the opinion, the record shows the following evidence a.s to the various items ('(instituting the consideration for Penney’® mortgage: Penney and Bibb testify that Penney paid Miller’s house rent during the months of November and December, 1895, amounting to $40. And Palmatier testified: “It was agreed between Miller and myself that we would both, pay our house rent, and grocery bill in that way. We. agreed that this-might, be paid by Penney to Bibb and charged to the (Jo-operative Furniture; 'Company.. When we first went into business we agreed that we would not any of us draw out of the company any more than was necessary to pay our house rent and grocery bill. At the time we gave Penney the mortgage we owed him $75 paid Lovin, $75 paid J. L. Brock, $40 paid Bibb & Hoff, $50 for glass, $50 for rent of one building and Kervm-s, $44 rent for Paimatier, $25 for cow, $10 paid Huidnall. The Co-operative Fimiitm-e Company was indebted to Lovin in that amount and more, too, for supplies and groceries- for the hands. I suppose I-saw as much as $40 worth of goods- supplied to- the men. Lovin let the men have what we told him to. Miller wrote the orders and gave Lovin'ei edit, for it and charged the hands with it. I do not know whether Penney paid tin m or not,, lmt they gave us credit! for the amounts. I saw the entry on Lovin’s book wher-e he gave us credit, for the amount paid hy Penney. Penney paid J. L. Brock $75 for the Furniture Far tory. That was- for orders given on Brock. Miller and myself both asked Penney to assume the payment o-f the $75 to- Brock. It was¡ for a debt contracted or about, to be contracted with Brock for tire benefit of the Co-operative Furniture1 Company. I did not see Penney pay Brock. Penney paid -one Hudnail $10 for the Company. Hudnail Avas one -of the employes of the Furniture 'Company.”
    Penney’s testimony as to the three items- of Brock, Lovin and Huidnall is as follows: “I gave an order to Brock for $75 and charged Miller & Paimatier up- AA’ith the $75 at the time I paid it. I paid $75 less 47 crnt-i AAdiich Avas credited hack to Miller & Paimatier. They Avere. owing Lovin fon- groceries. I paid Loatu $75 for the Co-operative Furniture. Company at Miller & Palmatier’s request. They said Lovin Avas pushing them for pay for groceries lie had furnished their hands.' Miller & Paimatier requested me to settle this amount AAdth Lovin, AAdiich I did. The paper shown me is the receipt I got from LoA’in at the time I paid the account for the Coopei-atiA'e Furniture Company. I paid Miller $10 in Bibb- & Hoff’s bank, and he-Avont right outside and paid it to Hudnail, who Avas Availing to get it. That was for labor. I did not see Hudnail perform the labor.” Hudnail, Brock and Lovin were not examined.
    The mortgage Avas dated Newennber 29th, 1895, and Avas due one day after date, and provided for a foreclosure, , in cas-e of default, at public or private sale. It was filed for record on the day it was given. It covered p-racticall}' all the firm’s property, and the firm was insolvent when the mortgage was given. Penney liad access to their books. The evidence showed that the firm rented one of Penney’» stores, the rent of which constituted part of the consideration of the mortgage. The, property mortgaged remained in the store after the execution of the mortgage and after the lawday, Penney having the key to tlie store. The mortgagors had an agreement with Penney that the furniture was to he shipped in Penney’» name to different markets to he found by the mortgagors, and Penney was, then to consent to the sales negotiated by them. There was evidence that some of the property was sold by Penney and some by the mortgagors with his knowledge anil in his name, and some they sold clandestinely without his knowledge, and some was still on hand when tire bill was filed in April, 1896, and at the time of the final decree.
    On submission on, the pleallingsand proof, a decree wa,s rendered declaring complainant’s, entitled to relief, holding the mortgage constructively fraudulent as against complainants a,nld setting it aside for such fraud, and holding Penney liable for the value of the property which lie had up to the time of final decree appropriated or converted to his own use. This value was less than the total amount of complainants’ debts, but this property, together with that which has, been disposed of or converted by Miller & Palmatier and that which remained on hand unsold, wasi more than said entire debts.
    Respondent Penney appeals,, assigning as error the said action of the court, and complainants also assign as error the failure of the'decree to charge Penney with the value of the property remaining unsold and that sold or converted by Miller and Palma,tier.
    1). W. Speaice and Paite Speaice, for appellant Penney.
    The delay of Penny in foreclosing the mortgage by public sale ivas not a badge of fraud. — Pugh v. Harwell, 108 Ala. 486.
    The burden of explaining the mortgagors’ continued possession of the property, so as to make that fact COnsistent with bona fides, was discharged by showing that they held it or had access to it, not as thedjr own, but as agents for the mortgagee, for his convenience, or for purpose of sale on his account. — Troy Fort. Co. v. Norman, 107 Ala. 667; Oilman v. MyHck, 93 Ala. 537; Mayer v. Clarke, 40 Ala. 269; Bearing v. Watkins, 16 Ala. 25; Bluthenthal v. Magnus, 97 Ala. 530.
    The mortgage was not rendered void because there was no change of possession — the recording being regarded as a substitute for the change of possession. Howell v. Carden, 99 Ala. 100; Cooper v. Bank, 99 Ala. 119; Jones on 'Chat. Mart., § 329.
    The sales made by Penney and Miller with his consent were a foreclosure, as he was authorized to sell at public or private, sale. — Jones on Chat. Mort., (3d ed.), SS 791, 793, 797; 8 Am. & Eng. Enc. of Law, (1st ed.), 185, § 1.
    General notoriety of the insolvency of the mortgagors was not admissible to prove the fact of such insolvency, but only to prove the mortgagee’s knowledge of - it. Hodges v. Coleman, 76 Ala. 103.
    All the assets of the partnership being liable to the satisfaction of their debts and being sufficient to satisfy all their .liabilities, they Avere not insolvent, although they did not have money in hand to meet them as they matured. — Smith v. Collins, 94 Ala. 394.
    The evidence offered Avas sufficient to sustain the Levin, Brock and Hudnall items as part of the consideration for the mortgage, and shoAved said items to he prima facie Adalid. — Bank v. Dickinson, 107 Ala. 266; Howell v. Carden, 99 Ala. 100; Page v. Francis, 97 Ala, 379.
    The individual rent, claims against Miller and Palmar tier, having been assumed by the partnership prior to the creation of complainants.’ debts, became partnership debts, the assumption of Avhich by Penney formed a valuable consideration for his mortgage. — Bank v. Dickinson, 107 Ala. 265; Teague v. lAndsay, 106 Ala, 266.
    Fraud is never presumed, but must be proved by the party asserting it, — 3 Brick. Dig., 510, § 34; Smith v. Collins, 94 Ala. 394.
    When a conveyance is held constructively fraudulent because of the inadequacy of the consideration paid, it may be. allowed to stand as security for the actual consideration paid, if the grantee did not participate in the fraudulent intent of the grantor. — Campbell v. Davis, 85 Ala. 56; Harwell v. Garden, 99 Ala. 100; Cooper v. Bank, 99 Ala,. 119; Kelly v. Bchillinger, 102 Ala. 336.
    The theox-y and allegations, of the bill would not justify a decree such as, would be justified in a case where actual (a,s distinguished from constructive) fraud were proven. — Meyer v. Masters, 319 Ala. 186.
    J. M. Chilton and ( )soeola Kylb for appellant Penney.
    Defendant, by his answer denied the existence of a valid debt in favor of complainants. It is only where defendant admits, the existence of a valid debt in the hands of complainant at the date of the transfer, that he is called on to'make in his answer specific, averments as to the amount of his Debt, its origin and the circumstances attending it. — Robinson’s case, 93 Ala. 70.
    ■Complainants’ bill was not so, framed as to justify a decree against Penney, if the. mortgage be held actually fraudulent., for more than the value of the property which lie had actually converted. Under a prayer for general relief, relief cannot he. had which is distinct from and independent, of that, which is specially prayed. Thomason v. Bmithson, 7 Port, ill; Charles v. Dubose, 29 Ala,. 367; Driver v. Fortner, 5 Porter, 30; Florence Mch. Co. v. Zeigler, 58 Ala. 221; 2 Beach Mod. Eq. 790.
    Damages for permitting or aiding the debtor by means of a fraudulent conveyance, in dissipating or converting the property, cannot, he recovered, in a court of equity. — Waite on Fraud. Con. (3d ed.), §§ 51, 176; Adler v. Fenton, 24 How. 411; Wiggins v. Armstrong, 1 Johns. Oh. 145; Cramber v. Blood, 68 Barb. 163, 48 N. Y. 684; Murphy v. Briggs, 89 N. Y. 446; Clements v. Moore, 6 Wall. 299; Greenwood, v. Marvin, 111 N. Y. 434.
    E. W. Godbby, contra.
    
    —The assumption by the firm of individual debts, and Penney’s assumption thereof after complainants’ debts had accrued, and the insolveney of the. firm, render Penney’s mortgage fraudulent. Pritchett v. Pollock, 82 Ala. 168; Jackson v. Durfey, 18 So. Hep. 456.
    The answer to the hill is not sufficiently full, being a mere general denial. — Cartwright v. Bamberger, 96 Ala. 405; Thompson v. Tower Mfg. Go., 104 Aha. 140; 1 Brick. Dig. 715, § 1096.
    Penney was a guilty participator in the fraud, by reason of having access to debtor’s hooks, and the general notoriety of their insolvency, and his knowledge of mortgagor’s surreptitious shipments of furniture. — MeDowcll v. Steele, 87 Ala. 493; Age Herald v. Potter, 19 So. Hep. 725; Levy v. Williams, 79 Ala. 179; Ghi'pman v. Glen non, 78 Ala. 273.
    Penney’s contradictions' regarding the bill of sale, and its ostensibly unconditional nature, while really a security, render it and the mortgage fraudulent and void. Sims v. Gaines, 64 Ala. 392; Tyron v. Flournoy, 80 Ala. 321; Owens v. Hobbie, 82 Ala. 466; Steiner v. Schohe, 21 So. Bep. 428; Muskegon v. Phillips, 21 'So. Rep. 822.
    Tire maturity of the mortgage the day after its execution, while it was agreed that the mortgagors were to still operate the factory, complete the goods, which were then in crude state-, find purchasers therefor, ship them, get Penney’s consent to the. sales, pay him $50 per m.onth for rent and services; the'provision for the payment of interest semi-annually, clearly show a'secret agreement from the beginning, dehors the- mortgage, for- the continued retention of possession and reservation of benefit by the mortgagors, and an indefinite and lengthy postponement of the law-day to Penney’s great advantage in rent and service charges. — Paige v. Francis, 97 Ala. 379; Ravisies v>. Alston, 5 Ala. 279; Somerville v. Horton, 5 Yerg. 550; Birmingham Dry Gdods Go. v. Kelso, 18 So. "Rep. 35; Reynolds v. Welch, 47 Ala. 200; Wiley v. Knight, 27 Ala. 336; Bank v. Brewer 71 Ala. 574.
    The Brock, Lovin and Hudnall claims, as items of Penney’s debt, were not sufficiently proven. — Paige v. Francis, 97 Ala. 379.
    The value of the property converted or appropriated by Penney, and that converted by the mortgagors, and of that on hand in Penney’s. possession, being greater than the whole amount of complainants’ debts, the 'decree should liavo; charged Penney with the full amount and decreed payment in full of their debts-; such -relief being authorized under the prayer of general relief. tintiihv. Cockrell:, 6(5 Ala. 64; 1 Brick. Dig. 4-07, §§ 928, 930; Hanford v. Pearce, 70 Ala. 452; 3 Enc. PI, & Pr. 350.
   TYSON, J.

The bill in this case was filed by the complainants as creditors of .Miller and Palmatier against them and Penney to have declared fraudulent and void a mortgage -executed by them to Penney upon certain personal propérty conveyed by it and to require him to account for the. value of the property appropriated or converted to his own use; and prayed a personal decree for such value; a condemnation to sale for the satisfaction of the complainant’s debts and-costs, the property not used, converted or appropriated by him, and for general relief.

The allegation's of facts upon which the complainants based the relief thus prayed for, were in substance, that each of the complainants were prior to the 29th day of November, 1895, -existing creditors of Miller and Palmatier who had for some months prior to that date been engaged as partners under the name of the “Oo-operative Furniture'Company,” sometimes called the “Co-operative Furniture Factory” in the manufacture of various kinds of furniture for sale; that on the 29th day of November, 1895, they executed to Penney the mortgage assail-ell to secure a recited and alleged indebtedness of $525.94 upon certain articles of their partnership property which they then owned or was held in trust for them, a part of which property conveyed by the mortgage was. stock in trade, a part was raw material in process of manufacture into furniture and a part was machinery and bools. That the partnership was badly embarrassed financially and there was no consideration for the mortgage; and since the execution of the mortgage Penney had taken possession of the property described in it, a portion, of wliicji he converted and disposed of, a portion ho allowed others to convert, and dispose of, and the remainder he still holds in undisputed possession. Just. Avliat portion Avas disposed of by him or lie alhnved others to dispose of or Avliat portion he had in his possession at the filing of the bill, complainants did not hnoAV and were unable to state.

The respondent Penney answered the bill, iucorpo- . rating in his ansAver four grounds of demurrer, aaLícIi Avas OA’erruled by the chancellor. This demurrer is so manifestly untenable Ave aaí.11 not consider it. The an-SAver contains nothing but a mere general denial of the allegations of fa.ct charged in the bill and Avas utterly insufficient, to relieve the respondent of the prima facie case made against him and upon Avliom 'rested the burden of overcoming not only by clear proof the presumption of unfairness and mala fides, but by a clear and distinct response to each averment of the hill. — Moog v. Barrow, 101 Ala. 209; Robinson v. Moseley, 93 Ala. 70; Wood v. Pebbles & Co., 121 Ala. 100.

But-aside from this, under the aArerments of the bill Avhen the complainants established the existence of them respective debts, it then, devolved upon the respondent to prove that the notes evidencing the debt claimed by him against Millar and Palmatier Avere given for a bona fide debt, due to him, in the sums recited in them, and that the mortgage Avas to secure this bona ficle debt, untainted Avith any fraud.

The evidence establishes beyond disputation that the complainants Avere creditors of the. Cooperative Furniture Oompanv for material sold to be used in the manufacturing of furniture and that practically all of it Avas used and constituted a, portion of the manufactured articles which AA'ent into the possession of Penney under bills of sale, made to him by Miller and Palmatier some time prior to tire 'execution of this mortgage. It is also practically undisputable from the evidence, that the debt secured by the mortgage Avas the same debt., at least the greater portion of it, which Avas secured hy bills of sale to the same property made by Millar and Palmatier to Penney. In fact Penney himself testifies to having two bills of sale upon this property and shows conclusively that they were intended as mere mortgages. He says, the first one. was for $292.92; the second for $75 a.nd the invariably speaks of them as having'been given these to secure debts due him. According to his testimony the-', consideration of the mortgage of $525.94 was made up of these two items and an item of $1.00 which was secured by a bill of sale upon a portion of the property hold by Mrs. Miller, wife of respondent Miller, and the item of fifty odd dollars for rent of store and personal services rendered by him in and about the sale of the furniture1, which should, under a fair aril legal status', have: belonged to him. He also shows in his testimony that some of the items included in the $525.94, were individual debts which he claimed Miller and Palmatier owed to him or to other persons which he paid at the request of either Miller or Palma.tier.. These individual items as found in his account against the Cooperative Furniture Company (Furniture account) attached to his deposition are as' follows: Nov. 19, 1895. Cash to W. A. Bibb for the rent, of the bouse occupied by Miller and' bis family $40. On the same date there appears a- charge of $23 amount of rent due him by one Campbell who had long before retired from the firm, also of the same; date, a chairge of $44 for rent due him by Palmatier. Of date Dec. 28 this concern is charged with the amount of a note1 ($25) given by Palmatier for a cow and transferred to him. There is also an item in Penney’s account of $50 for rent of a storehouse for one month., the rental value of which according to all the evidence, was $10 or $15 per month. He explains that .the balance of the $50 was charged for services to be rendered by him in looking-after the furniture to prevent its being purloined by ’Miller,and. Palmatier, notwithstanding tire key to this store-room was in his possession. He further explains why the charges for personal liabilities, of Miller and ’ Palmatier entered info the consideration of the bill of sales and mortgage by saying that they a.s partners agreed to assume to pay them. When this agreemnt was made, we are not informed, whether when tíre mortgage Avavs made -or aaíioii the first bill of sale Avas executed AA'e are not told. The other items included in the $525.94, Avere $75 AAdiich he said Avas paid to Lovin, $49.02 paid German Looking Glass and P. Oo., $10 paid Miller for Hudna.il, $75 paid hy order on J. L. Brock account labor. These items, make a total of $209.02. The $75 AAdiich he saj^s1 lie paid to Lovin Aims not shoAvn to have been a subsisting legal demand, in that the correctness of the account AAdiich Avas composed of items aggregating this sum Avas not shoAvn. Furthermore it appears that there Avere items of merchandise charged upon this account for AAdiich the partnership' as such aauis not liable. They were purchases made hy the individual members of the partnership for their personal use. The $10 paid hy him to Miller for Hudna,ll Avas not shoAvn to have been received by him or if received that the partnership justly OAved it. The order of $75 to Block aau.s for groceries, but AAdietlwn lie furnished them, Penney did not know.

It is useless to pursue any further the investigation into the facts as disclosed hy the evidence relied upon hy Penney to establish the bona fhles of the transaction. Nearly every item composing' the account making up the recited consideration in subject to some infirmity going to ite integrity us a just demand effecting the validity of the, mortgage as against the complainants. Indeed, upon Peainey’sf oaati testimony the conclusion cannot he escaped that the. whole transaction had its inception in fa and of the creditors of Miller and Palmatier. The first act consummated hy the. parties Avas to bring into •existence a fraudulent conveyance, confessedly fraudulent by the recei Auction of a benefit to Miller and Pa,1 matter — a bill of sale, absolute upon its face for the security of a debt; and this top to secure in the main their individual, indebtedness to him. By tifie acceptance of it and dealing Avith the property as Avas shown by the evidence in this canse, Penney became a. trustee for these complainants not. only for the proceeds of a.ll property sold by him, but for the value of all property AAdiich he suffered Mill-er or Palmatier to dispose: of. — Dickinson v. National Bank of the Republic, 98 Ala. 546; Bir mingham Shoe Co. v. Torrey, Curtis & Tirrell et al., 121 Ala. 89. After their rights attached, which they did while he held tire property under the hills of sale, he could not defeat those rights or discharge himself of the liability incurred as trustees by the taking of the mortgage to secure the larger part of this same indebtedness secured to him by the two bills of sale ánd an additional amount which lie claimed they owed him, even if there had been no infirmity as to the items making up the recited consideration of the mortgage. The decree adjudging him liable was correct, but the amount of his liability as there ascertained was too small. The evidence shows that the value of the goods sold by Miller after they went into Penney’s possession and the amounts admitted by Penney to have been collected by bin? from the proceeds of good werei more than enough to pay the entire debts, of complainants and interest thereion. It follows that the respondent Penney takes nothing by his appeal. And that the complainants by their cross-appeal aire entitled to decree .for the full amount of their debts and interest.

The decree of the court must be reversed and a decree here rendered in accordance with the views here expressed.

Reversed and rendered.

On application for rehearing.

On application for rehearing a majority of the court hold, that the: decree of this court reversing the decree of the lower court on cross-appeal was error, and that tire decree of the chancellor should be affirmed; Justice Tyson not concurring in these views, but holding to the views expressed by him in his opinion.  