
    Lewisburg.
    Hupp v. Hupp.
    1849. July Term.
    
    (Absent Cabell, P. and Brooke, J.)
    
      H & N are merchants and partners. H sells out to M; and the new firm undertake to pay the debts of the first. H becomes indebted to the new firm, for which he executes his bond with two sureties; and this bond is assigned for value to A. The new firm afterwards fails, and the partners are insolvent, leaving debts of the old firm unpaid to a larger amount than the bond of H, and H pays them. Held : H is entitled in equity, to set off against his bond in the hands of the assignee, the debts of the old concern of H & N, which M & N were bound to pay, and which H had paid.
    This was an injunction to a judgment of the County court of Shenandoah, recovered against George F. Hupp, by George A. Hupp, assignee of John Newman & Co. The Judge of the Circuit court, to whom the application for the injunction was made, refused it; but it was granted by one of the Judges of the Court of appeals.
    
      George F. Hupp in his bill alleged that George A. Hupp, as assignee of John Newman & Co., had recovered a judgment against himself and Strother Moore and Joseph S. Spengler, for the sum of 1214 dollars 91 cents, with interest from the 28th of September 1842 till paid, and costs. That the assignors were a mercantile firm composed of Joseph S. Machir and John Newman, who transacted business in New Market, in the county of Shenandoah. That they failed in business in June 1843, being totally insolvent, and had so continued to be insolvent. That before the formation of the partnership of John Newman Sp Co., the plaintiff and Newman had been partners, doing business in the county of Frederick. That in October 1841, the plaintiff sold out his interest in the concern to Joseph S. Machir, for about 2800 dollars, which was about the amount he had put into the concern when it commenced business. That said Machir, by the terms of sale was to take the plaintiff’s place; and the new firm, then composed of Joseph S. Machir and John Newman, under the style of John Newman & Co., were to pay all the debts of the firm of Hupp & Newman ; for which the property of the concern of Hupp & Newman was ample. That John Newman & Co. immediately removed all their goods to New Market. That whilst they were doing business in New Market, the plaintiff became indebted to them on new transactions, to the amount of 1214 dollars 91 cents, and gave them his bond therefor, with Moore and Spengler as his sureties; not doubting at the time that the debts of Hupp & Newman were provided for, and mostly paid; and he had been so informed by Machir. That after giving said bond, and after it had been assigned to George A. Hupp, the plaintiff learned that several of the debts of Hupp & Newman had not been paid; and John Newman & Co. being then unable to pay them, the plaintiff had discharged them. That on the trial of the action, he was not allowed to offset these debts against the bond, because in the opinion of the Court, separate demands were not legal offsets to joint demands. That the insolvency of Machir and Newman precluded the plaintiff from getting any thing from them by an action at law; but he was advised that in equity, George A. Hupp, their assignee, stood in their shoes, against whom the debts of Hupp & Newman, which were assumed by John Newman & Co., were good offsets.
    
      George A. Hupp, John Newman and Joseph S. Machir were made parties defendants; and the prayer of the bill was for an injunction to the judgment; that an account might be taken of the matters between the plaintiff and John Newman & Co.; and that the debts of Hupp & Newman, which had been paid by the plaintiff after said agreement, be allowed as offsets to the bond aforesaid; and for general relief.
    The defendant George A. Hupp, demurred to the bill: but the demurrer was overruled by the Court. He and Newman then filed their answers.
    The only allegation of the bill which was contested by the answers, was that in relation to the agreement by John Newman & Co. to indemnify the plaintiff against the debts of Hupp & Newman. As to that, George A. Hupp said he had no personal knowledge on the subject: He was informed and believed, however, that Joseph S. Machir alone, bought out the interest of the plaintiff in the concern of Hupp & Newman; that Joseph S. Machir alone, and in his own name, made the contract to indemnify the plaintiff against the debts of Hupp & Newman ; that Joseph S. Machir received the only consideration money from the plaintiff for that contract of indemnity; and that John Newman’s position in the concern was in nowise affected by the sale by Hupp to Machir, except that Machir became his partner instead of Hupp.
    
    
      Newman in his answer utterly denies that any arrangement whatever was made by him, whereby his situation or liabilities touching the concern of Hupp & Newman, were in anywise raised. He says the purchase by Machir of Hupp, was made by Machir alone, upon his own responsibility, and for his own benefit. That Newman was not interested m the purchase, nor in any way affected thereby, except that Machir became his partner instead of Hupp. He denies that he bound himself individually, or as a member of the firm of John Newman Co., to indemnify Hupp against the debts of Hupp & Newman ; or that Machir had any authority from him to make any contract of indemnity to Hupp touching the debts of Hupp & Newman; and he does not believe that Machir attempted to make such contract, except in his own name, or in his own behalf. The bill was taken for confessed as to Machir.
    
    The only witness who speaks of the contract to indemnify Hupp is Benjamin J. Lavender. He says: Some short time after the dissolution of the firm of Hupp & Newman, he was called on to go to Strasburg, to assist in a settlement to be had at that place between George F. Hupp, P. A. Machir, John Newman and Joseph S. Machir, all of whom at one time or other had been concerned in the store in New Town. The terms of sale by Hupp to Machir, and by which Machir took his place in the concern of Hupp & Newman, were that Hupp was to withdraw, taking out of the concern his private account, (the amount not recollected,) and two bonds of McLeod amounting to about 300 dollars. The now firm were to take all the goods, notes, bonds, accounts, real estate, and in fact all the property of the firm of Hupp & Newman, and were to pay all their debts. The goods amounted to near 5000 dollars, and the notes, bonds, &c., amounted to over 10,000 dollars. All the parties were present at this settlement, which lasted nearly a week. Mr. John Newman was present during the whole time ; and during which time the matters were very fully discussed, and witness never heard him once dissent from the arrangement; and always understood and believed that it was with his full concurrence. The debts which the firm of Hupp & Newman owed at that time in Baltimore and Philadelphia, were as well as witness recollects, between 8000 dollars and 10,000 dollars. The witness was not present at the time of the contract by which Machir bought out Hupp's interest in the firm of Hupp & Newman.
    
    The proofs in the record shew that George F. Hupp, had paid upwards of 3000 dollars of the debts of Hupp & Newman, after his withdrawal from the partnership, and indeed after the failure of John Newman & Co.
    
    When the cause came on to be heard, the Circuit court perpetuated the injunction, with costs; and made a decree over in favour of George A. Hupp, against Newman and Machir, for the amount paid by him to them, for the bond, with interest and costs. Whereupon George A. Hupp applied to this Court for an appeal, which was allowed.
    
      Patton, for the appellant.
    The decree is erroneous, for the following reasons :
    1st. Because, supposing the injunction was proper on the charges in the bill, and the demurrer to the bill properly overruled, the material allegation of the bill, and without which it is supposed very clear there was no equity, is directly and expressly denied by both George A. Hupp and by Newman, in their answers directly responsive to the bill; if indeed the bill can be construed as making the allegation distinctly. The bill charges that Machir purchased George F. Hupp’s interest in Hupp & Newman; and that Newman & Co. were to pay the debts of Hupp & Newman. It does not directly aver that the firm of Newman & Co., or the members of that firm, agreed to pay the debts of Hupp & Newman. But let it be, that the charge in the bill is to be so understood, the defendants, assuming it to be so, in their answer expressly deny its truth.
    
    
      The answer is directly responsive to an affirmative allegation material to the plaintiff's equity; and the answer must be taken to be true unless disproved by two witnesses, or one witness and corroborating circumstances.
    
    Now, there is but one witness offered, and he only infers that Nexornan united in the. agreement that the new firm should pay the debt of the old firm; because he was present at a settlement of previous concerns, in which these parties were all present, and the arrangements were discussed. He admits he was not present when the contract was made between Machir and George F. Hupp; and he does not pretend that any contract or agreement between Newman and Hupp was made in his presence, by which Newman agreed to indemnify Hupp from, or to pay the debts of Hupp & Newman, either individually or as a member of the new firm. He does not even prove or seem to know whether the agreement between Machir and Hupp was prior or subsequent to the meeting of which he speaks, for the settlement of previous concerns.
    If such a vital allegation of a bill as this, directly denied to be true by the answers, can be proved by such testimony, it is a mockery to talk about the rule of evidence in equity.
    While it might have been very proper to grant the injunction, assuming the charges in the bill to be true, the whole foundation of it is destroyed by failing to prove the essential allegation, and the bill ought to have been dismissed at the hearing.
    2d. Because, supposing all the allegations to be true, it is with great deference, submitted, that the case presents no ground of equity against the appellant, a bona fide assignee for value, of the obligation of the plaintiff in the Court below and his co-obligors.
    At the time of this assignment to him, it is not pretended that the plaintiff in equity had paid any of the debts of Hupp & Newman, or that there had been any breach of the supposed obligation of Newman & Co. to pay the debts of Hupp & Newman; or that Newman & Co. were then insolvent. The only claim he had, was a contingent future claim to unliquidated damages in case they broke their agreement to pay the debts of Hupp & Newman.
    
    Now it is supposed to be clear that while an assignee takes subject to the equities of the obligor against the assignor, these equities must be equities subsisting at the time of the assignment, not such as supervene afterwards.
    It would be very mischievous, if the acting partner of a concern, could draw into equity at any distance of time, a bona fide assignee of his obligations to the new firm, by alleging that there were debts of the old firm yet unpaid, for which he was responsible, or had been compelled to pay.
    3d. Because, even if the bond had not been assigned, but judgment had been rendered on it in favour of Newman & Co., the matters in the bill, supposing them to be proved or not, constituted no valid ground of equitable offset.
    For the law on this subject, the authorities cited by Judge Green, in Gilliat v. Lynch, 2 Leigh 504; and also the following cases, are in point and decisive, viz: Dale v. Cooke, 4 John. Ch. R. 11; Sampson v. Burton, 6 Eng. C. L. R. 29.
    In this last case it was decided, “ that a guarantee against contingent damages, cannot be offset, not being a ?mutual demand of the same nature, but being a contingent claim for unliquidated damages. It is not even as a mutual credit, to be set off, by a debt due from the bankrupt who gave the guarantee.”
    
      Harrison v. Wortham & M'Gruder, 8 Leigh 296. On page 304, Parker, J. delivering the opinion of the Court, says, supposing the arbitrators Chancellors, “ the law allows all just discounts, but it does not in any Court permit unliquidated damages to be set off. Webster v. Couch, 6 Rand. 519.
    On the ground of set off then, it is deemed clearly settled that neither in law nor equity, is any case made by the bill.
    4th. It may be said that the insolvency of Newman & Co. would entitle the plaintiff in equity to relief. That may be if the debt were due to Newman & Co. But the insolvency is a distinct ground of equity, applicable only to the assignors, and not to the assignee, who became so before the cross right accrued; and when the assignors were entirely solvent. A ground of equity supervening after the assignment, clearly, cannot affect the assignees.
    
      Cooke, for the appellee.
    Every allegation in the bill is proved or admitted.
    
      Benjamin J. Lavender proves expressly that George F. Hupp sold his interest in the firm, to Joseph S. Machir, “ who was to take Hupp’s place in the concern; and the new firm was to pay all the debts of the concern of Hupp & Newman.”
    
    That fact is plainly and substantially admitted by Neuman. He says, “that Machir was to stand in precisely the same relation to the concern that Hupp had occupied.” In another place, he says that he was in no wise affected by the purchase by Machir, “ except in so far as this, that Machir became his partner instead of Hupp.”
    
    Now I ask, in the name of common sense, who were to pay the debts of Hupp & Newman ? Most assuredly John Newman and Joseph S. Machir. What “ relation to the concern had Hupp occupied,” so far as debts were concerned ? Why simply this, that he and Newman were bound for the debts. If then Machir was to stand in precisely the same “relation to the concern,” were not Machir & Newman liable for the debts ?
    
      But Mr. Patton gravely argues, that such was not the contract: That Mr. Newman never agreed to indemnify George F. Hupp, against the debts of Hupp & Newman.
    
    
      Machir and Newman were confessedly to hold the effects of Hupp & Newman as partners. Then was not Newman liable for all the debts of Hupp & Newman after Machir became a partner, just as he was before ; and was not Machir, who took Hupp’s place with Newman’s consent, liable for all the debts, just as Hupp was liable before ? Or to test it in another way, suppose that Newman had been compelled to pay all the debts of Hupp & Newman, would not Machir have been liable for one half to him; or if Machir had paid all, would not Newman have been liable to him for one half.
    But I am unnecessarily occupying the time of the Court on this point. The Circuit court originally refused the injunction on no such ground as this, but upon the opinion of Judge Green, in Gilliat v. Lynch, 2 Leigh 504-5, that if offsets are not allowable in a Court of law, they are not allowable in equity.
    As a general principle this is true.
    But to this general rule there are various exceptions. In the words of Judge Story, in 3 Mason 138, “ I take the general doctrine as to set-offs, to be the same in equity as at law. Joint debts cannot be set off in equity, any more than at law, against separate debts, unless there be some other circumstances, calling for the equitable interference of the Court.”
    One exception is this, that where the persons who owe the debt, which is offered as a set-off, are insolvent, so that it could not be recovered of them by suit at law, equity will allow the set-off. Equity will not permit an insolvent person who owes a debt to others, (nor his assignee, who stands in his shoes,) to recover a debt from his creditor, who must thus lose his debt, because by some rule of the common law, the debts could not be set off.
    
      
      Insolvency is the ingredient which makes the exception. Chitty on Bills 146-47; Ford’s adm’r v. Thornton, 3 Leigh 695. See also the various cases of injunctions to purchase money, where the vendor is insolvent, where, even, according to the New York and English cases, equity will interfere.
    But there is another exception to the rule equally well established. It is this: That where two persons are sued, and one of them is principal and the other surety, and the principal offers to set off a debt due to him from the plaintiff, he cannot do it at law, because the one is a joint and the other a several debt, the law Court not enquiring which is principal and which is surety. But in a Court of equity, which does enquire who is principal and who is surety, the set-off is allowed, because a Court of equity regards the principal as the debtor; for if the surety paid any part of the debt, he would recover it back from the principal, so that at last the principal must pay the whole debt.
    As he then is alone ultimately liable for the whole debt, and as the debt sought to be set off is due to him alone, the debts in the eye of a Court of equity are mutual, and where the party who sues at law is insolvent, equity will allow the set-off.
    It seems to me that it would be a reproach to our equity system, if it could afford no relief in such a case, and in the language of some of our best Chancellors, “if there was no precedent, I would make one.” But the Court is not driven to this alternative. See 2 Story on Eq. § 1437; Ex parte Hanson, 12 Ves. R. 346. This case is analagous to the case at bar, and was approved by Lord Eldon in the same case, 18 Ves. R. 234.
    The doctrine of unliquidated damages is not involved in this case. The contract was, that the new firm was to pay the debts of the old one, and if they failed to pay them, and Hupp had to pay them, he is entitled to recover (not unliquidated damages, as to which there is no certain measure,) but the amount of the debts so paid by him.
    In conclusion, I submit that the whole case turns upon the question, whether a Court of equity can allow a set-off, where the debts are not mutual in a Court of law, if the plaintiffs suing at law are insolvent, and the party seeking to set off in equity, the debt due from the plaintiff to him, is the principal debtor, and ultimately bound to pay the whole debt; and this question is no longer open.
   By the Court.

The decree is affirmed.  