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|Family||Harold Edwin Kerry Jr. b. 10 December 1928, d. 15 April 2005|
|Marriage*||Principal=Harold Edwin Kerry Jr.|
|Legal Document*||26 October 1956||Bancruptcy, Seattle, King Co., WA, http://bulk.resource.org/courts.gov/c/F2/239/239.F2d.896.14533_1.html|
239 F.2d 896
Ruth B. KERRY, Appellant,
Joseph R. SCHNEIDER, Trustee in Bankruptcy of Harold Edwin
Kerry and the Community of Harold Edwin Kerry and
Ruth B. Kerry, his wife, Bankrupts, Appellee.
United States Court of Appeals Ninth Circuit.
Oct. 26, 1956.
Bogle, Bogle & Gates, Arthur G. Grunke, Seattle, Wash., for appellant.
Stanley J. Krause, Aberdeen, Wash., for appellee.
Before STEPHENS, POPE and FEE, Circuit Judges.
JAMES ALGER FEE, Circuit Judge.
On October 5, 1953, Harold E. Kerry and the community consisting of himself and his wife were adjudicated bankrupt on voluntary petitions. Ruth Kerry, the wife, who was not adjudicated in her individual capacity, filed a petition to require Schneider, who was trustee of the bankrupt, to abandon the right, title and interest of Kerry in a partnership and to allow her to foreclose a purported 'pledge' thereon. The petition was denied by the referee, and the District Court affirmed. Appeal by Ruth Kerry followed.
The history of the transaction follows. Bankrupt was the owner of about 51% of the issued shares of stock in West Tenino Lumber Company, a corporation. Ruth Kerry, considerably before the time here involved, had loaned him $29,250.00 from her separate funds and received in pledge the shares of stock held by him. There is no question as to the validity of this transaction. Subsequently, when Kerry was becoming financially involved, by agreement Ruth Kerry permitted the pledged shares to be voted for dissolution. In lieu, she was to receive, as security for the loan, a so-called assignment of the interest in the partnership to be formed. The corporation was duly dissolved. A partnership was then formed by bankrupt and three other persons, in which he had a 45/88 interest in net income, net losses and capital gains and losses. Withdrawals of profits were to be made as would be agreed. Bankrupt was managing partner.
A document was given by bankrupt to Ruth Kerry, which is set out below:
'H. E. Kerry does hereby assign and set over to Ruth B. Kerry, all of his right, title and interest in and to the partnership known as West Tenino Lumber Company which is a partnership consisting of H. E. Kerry, C. L. Stickney, H. A. Preszler and Israel Torrico. Said assignment is substituted security for that certain pledge agreement entered into between H. E. Kerry and Ruth B. Kerry, dated July 28, 1952, and which security is to act as continuing security for that certain note dated July 28, 1952, until said note is paid in full.
'Dated this 30th day of December, 1952.
(s) H. E. Kerry'
This document was delivered more than four months before petition in bankruptcy was filed.
The partners testified they knew of the arrangement, but no one else had notice of it. The name of Ruth Kerry did not appear at any place on the books and records of the company. No record was made on the books of the partnership or any other place or office of the document above set out. It was not filed with the Secretary of State. It was not filed as a chattel mortgage. Her name does not appear as one having an insurable interest in any of the partnership insurance policies. And no notice of her continuing interest was given to creditors of Kerry either prior or subsequently.
A certificate as to those having an interest in the partnership, stating the names of all of the partners, was filed according to Washington law. Ruth Kerry does not appear upon it. No certificate was filed showing she had an interest in the partnership. Although there was a profit in the partnership for 1953, of which the share of bankrupt was $3,027.67, and there was a surplus on hand, Ruth Kerry did not demand and her husband, as manager of the partnership, did not pay her these proceeds nor any part thereof. In fact, she received no proceeds from the partnership at any time.
Bankruptcy occurred on October 5, 1953, upon voluntary petition.
It was proper in any event for the trustee to deny a petition to abandon as burdensome property to which bankrupt had a right and of which he was in control and deny a petition for appellant to foreclose thereon. However, the question has been treated as if it involved the right of the trustee to the interest in the partnership free and clear of any pledge to Ruth Kerry. This question will be considered in the light of the petition.
The trustee, as of the date of filing of the petition, became possessed of all the right, title and interest of the bankrupt in the partnership. The property rights of the bankrupt were:
'(1) his rights in specific partnership property, (2) his interest in the partnership, and (3) his right to participate in the management.' R.C.W. 25.04.240.
The trustee was thus placed in position described by R.C.W. 25.04.250:
'Nature of a partner's right in specific partnership property. (1) A partner is co-owner with his partners of specific partnership property holding as a tenant in partnership.
'(2) The incidents of this tenancy are such that:
'(a) A partner, subject to the provisions of this chapter and to any agreement between the partners, has an equal right with his partners to possess specific partnership property for partnership purposes; but he has no right to possess such property for any other purpose without the consent of his partners.
'(b) A partner's right in specific partnership property is not assignable except in connection with the assignment of rights of all the partners in the same property.'
No sale or other transfer would be required for the trustee to step into the shoes of bankrupt as a member of the partnership as of the date of the filing of the petition.
Above and beyond this, the trustee was possessed of all the rights of a lien creditor of bankrupt:
'The trustee, as to all property, whether or not coming into possession or control of the court, upon which a creditor of the bankrupt could have obtained a lien by legal or equitable proceedings at the date of bankruptcy, shall be deemed vested as of such date with all the rights, remedies, and powers of a creditor then holding a lien thereon by such proceedings, whether or not such a creditor actually exists.' 11 U.S.C. § 110, sub. c.
He was thus in a position to foreclose a lien of a creditor in the bankruptcy court as described in R.C.W. 25.04.280:
'Partner's interest subject to charging order. (1) On due application to a competent court by any judgment creditor of a partner, the court which entered the judgment, order, or decree, or any other court, may charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt with interest thereon; and may then or later appoint a receiver of his share of the profits, and of any other money due or to fall due to him in respect of the partnership, and make all other orders, directions, accounts and inquiries which the debtor partner might have made, or which the circumstances of the case may require.
'(2) The interest charged may be redeemed at any time before foreclosure, or in case of a sale being directed by the court may be purchased without thereby causing a dissolution:
'(a) With separate property, by any one or more of the partners, or
'(b) With partnership property, by any one or more of the partners with the consent of all the partners whose interests are not so charged or sold.'
Thus the court was entirely correct in view of the position of the trustee under the Bankruptcy Act and the statutes of the State of Washington relating to partnerships in refusing to abandon this property or permit Ruth Kerry to foreclose her alleged assignment in another forum. But the trustee filed a petition also in which he prayed that the referee determine 'the right, title or interest of Ruth B. Kerry and the trustee in and to the alleged partnership' interest of the bankrupt.
The referee and the trial court moreover held that appellant had no enforceable pledge on the partnership property or interest of bankrupt, and thus left Ruth Kerry, individually, in the position of a general creditor, to which question we now address ourselves. First, it must be ascertained just what the document above set out was. It is headed 'Assignment.' Based upon this and the use of the words 'assign and set over,' appellant treats the document as a technical assignment. From this it is argued that an 'assignment' of intangible property need not be recorded or noticed in order to have full effect in transferring title to the property under Washington state law. This position may be conceded for the purposes of argument as to a true assignment.1 But there are no Washington statutes or decisions which directly decide that a mortgage, pledge or encumbrance, although called an assignment, will be given such effect as against creditors who have relied upon the appearance of ownership of an intangible in the original possessor.2
The stock of the bankrupt corporation had previously been pledged to Ruth Kerry. At the time of the formation of the partnership, she could have been made a partner, to whatever extent it was necessary to give her an interest in the business for protection of her separate funds. But it is objected that, unless Ruth Kerry became a member of the partnership, which she was not bound to do, under the Uniform Act she could not exercise control over the property thereof, nor had she any right to interfere with the management or administration of its business or affairs. But in any event, even under the construction of appellant, she was entitled to receive the profits. There were profits accruing to the share of the bankrupt, but none was ever paid to her. Since the referee and the trial court held that lack of indicia of possession in Ruth Kerry comprised grounds for holding the supposed pledge invalid, the question of whether any law of the state required public record must be given attention.
The Uniform Partnership Act, which is adopted in the State of Washington,3 makes a clear distinction between the different types of conveyances of the right, title and interest of an individual partner. "Conveyance' includes every assignment, lease, mortgage, or encumbrance.' R.C.W. 25.04.020. Clearly, the document before the Court is not a lease. It is not necessary to debate the question of whether an assignment could be made as security for a pre-existing debt, or whether such a conveyance is limited to a transfer of the interest absolutely, within the meaning of R.C.W. 25.04.270.
The difference between an absolute conveyance and the imposition of an encumbrance or mortgage is clearly recognized in the law.4 An instrument may be on its face a deed, but, if the intent be to use the property as security, it will be a mortgage and foreclosure will be required.5
It seems clear to this Court that, since the partnership statute uses the words 'mortgage, or encumbrance,'6 an assignment, as avowed security of a preexisting debt, falls within such a classification. It must be held that, by including these words in the statute, the legislature made applicable the laws relating to recordation of mortgages of like property interests. This sweep includes the following sections:
'Chattel mortgages authorized-- Corp mortgages. Mortgages may be made upon all kinds of personal property; and upon growing crops and upon crops before the seed is sown or planted as follows: * * *' R.C.W. 61.04.010.
'Requisites to validity-- Filing. A chattel mortgage is void as against all existing and subsequent creditors of the mortgagor * * * unless it is accompanied by the affidavit of the mortgagor that it is made in good faith, and without design to hinder, delay, or defraud creditors, and unless it is acknowledged and filed, within ten days from the time of its execution, in the office of the auditor of the county in which the mortgaged property is situated.' R.C.W. 61.04.020.
The elaborate section of the Partnership Act requiring a creditor to reduce his claim to judgment and to have it registered for a lien seems to strengthen this conclusion.7 Therefore, we are of opinion that, if the matter ever comes before the courts of the State of Washington, it will be held that an assignment of an interest in a partnership for security must be recorded to give it priority over debts of the assignor. Thus the partnership will not be dissolved, but these creditors will be given notice.
It is urged upon us that the Supreme Court of the State of Washington has held that there need not be recordation of an assignment of an intangible.8 However, these cases may well be distinguished.9 There is a holding that the mortgage of a leasehold which is personal property must be recorded to give it effect as security.10 We are of opinion, however, that court will give weight to the language of the Uniform Partnership Act as adopted by that state and the amendment of the chattel mortgage statute which was in force in the State of Washington when this case arose.11
Affirmed., Principal=Harold Edwin Kerry Jr.
|Legal Document||16 March 1960||Partnership Dissolution, Seattle, King Co., WA, http://www.find-laws.com/courtcases/view/washington-55-wn2d-535-c-l-stickney-et-al-respondents-v-harold-e-kerry-et-al-appellants|
55 Wn.2d 535, C. L. STICKNEY et al., Respondents, v. HAROLD E. KERRY et al., Appellants
[No. 35035. Department Two. Supreme Court January 28, 1960.]
C. L. STICKNEY et al., Respondents, v. HAROLD E. KERRY
et al., Appellants.1
 PARTNERSHIP - DISSOLUTION AND SETTLEMENT - BETWEEN PARTNERS -SET-OFF OF NONPARTNERSHIP DEBT. The rule that where a partner who is indebted to a partnership is insolvent, a court of equity may compel a set-off of personal claims of one partner against the insolvent partner, has no application where the insolvent partner has been adjudicated bankrupt.
 BANKRUPTCY - RIGHTS OF TRUSTEE - PARTNERSHIP PROPERTY. While the filing of a petition in bankruptcy works an immediate dissolution of a partnership, the trustee in bankruptcy does not acquire jurisdiction of the partnership property for purposes of winding up the partnership affairs if one or more partners is solvent, but the partner or partners who wind up the business and account for the property have no right to distribute any part of the interest of the bankrupt partner once the partnership liabilities have been paid and that interest determined.
 PARTNERSHIP - DISTRIBUTION AND SETTLEMENT AS BETWEEN PARTNERS - SET-OFF OF NONPARTNERSHIP DEBT - JURISDICTION OF COURT. A Superior Court is without jurisdiction to compel the payment of a nonpartnership debt owed by a bankrupt partner to another partner from the bankrupt partners interest in the partnership.
MALLERY, J., dissents.
Appeal from a judgment of the Superior Court for Thurston county, No. 27958, Charles T. Wright, J., entered November 24, 1958, upon findings in favor of the plaintiffs, in an action for a money judgment. Reversed.
O'Leary, Meyer & O'Leary, for appellant.
Brodie & Fristoe, for respondents.
ROSELLINI, J. -
While there are two plaintiffs and four defendants named in the title to this action, C. L. Stickney is the only plaintiff and Ruth B. Kerry the only defendant involved in this appeal.
The question in the case is: In a partnership accounting, can a nonpartnership debt owed by a bankrupt partner to one of the other partners be paid to him out of the bankrupt partner's interest?
1 Reported in 348 P. (2d) 655.
 See Ann. 29 A. L. R. 45; Am. Jur., Partnership, 255.
536 STICKNEY v. KERRY. [55 Wn. (2d) The partnership involved in this litigation was composed of four members, one of whom, Stickney, leased the partnership property, known as the West Tenino Lumber Company, and employed another partner, Harold E. Kerry, to manage it. The latter held a 51.13 per cent interest in the partnership, and the former, his employer, held an interest of 19.32 per cent. Under the terms of the employment contract, Kerry's salary was to be determined on the basis of the earnings of the business. During the course of this employer-employee relationship, Kerry was advanced $7,000 in excess of his earnings. On October 2, 1953, he and the community composed of himself and Ruth B. Kerry filed their petition in bankruptcy in the United States District Court for the Western District of Washington, Southern Division, and on October 5, 1953, were adjudged bankrupt. They included the $7,000 owing to Stickney as a debt in their schedule of unsecured creditors, and listed as an asset their interest in the partnership. Thereafter the referee entered findings of fact and conclusions of law to the effect that the trustee in bankruptcy was, on dissolution of the partnership, "entitled to receive all right, title and interest in assets distributed" as the result of Kerry's interest in the partnership. This ruling was later affirmed by the judge of the district court. Subsequently, Ruth B. Kerry purchased from the trustee in bankruptcy all of the right, title and interest of H. E. Kerry in the partnership and, on March 19, 1954, entered into an earnest-money agreement with the other three partners for the purchase of their interests. At that time Stickney claimed the right to have the $7,000 owed him by Kerry set off against a $9,782.85 debt which he owed the partnership for rent. Mrs. Kerry disputed his right to do so, and it was agreed that this matter would be settled in court. This action is the result. Before trial, however, Stickney's debt for rent was paid by setting off other credits against it. So the question before the court was whether he was entitled to receive $7,000 out of Kerry's Jan. 1960] STICKNEY v. KERRY. 537
interest in payment of Kerry's nonpartnership debt to him. The trial court answered this question in, the affirmative.
Whether a nonpartnership obligation can be enforced in an accounting and dissolution proceeding, is a question which has not been determined in this jurisdiction and on which courts in other jurisdictions are not in agreement. Cook v. Vennigerholz, 44 Wn. (2d) 612, 269 P. (2d) 824. But the plaintiff cites the case of Pendleton v. Beyer, 94 Wis. 31, 68 N. W. 415, wherein the Wisconsin court allowed partners holding nonpartnership claims against an insolvent partner who sued for an accounting to collect those claims out of any amount which might be found owing to the insolvent as a result of his interest in the partnership.
In 2 Barrett & Seago, Partners and Partnerships, 204, 4.1, it is said:
"Where a partner who is indebted to the partnership is insolvent, a court of equity may compel a set-off of personal claims of one partner against his insolvent partner. This is an exception to the ordinary rule that personal debts as between the partners may not be brought into the settlement of partnership affairs. The right of set-off in this case is an equitable one that arises because of the insolvency of one or more partners. This rule is admittedly a harsh one with respect to the individual creditors of the insolvent partner other than his partners. Some doubt must be expressed that this rule would be followed in all jurisdictions."
[1, 2] We think it plain that the rule, whatever its efficacy may be under certain circumstances, has no application where the insolvent partner has been adjudged a bankrupt. It is true that, as the plaintiff says, while the filing of a petition in bankruptcy works an immediate dissolution of the partnership, the trustee in bankruptcy does not acquire jurisdiction of the partnership property for purposes of winding up the partnership affairs if one or more of the partners is solvent. But the partner or partners who wind up the business, and account for the property, have no right to distribute any part of the interest of the bankrupt partner, once the partnership liabilities have been
538 STICKNEY v. KERRY. [55 Wn. (2d)
paid and that interest determined. The supreme court of the United States has made this clear:
"Bankruptcy, it is said, when decreed by a competent tribunal, dissolves the copartnership, but the joint property remains in the hands of the solvent partner or partnersclothed with a trust to be applied by him or them to the discharge of the partnership obligations and to account to the bankrupt partner or his assignees for his share of the surplus." Amsinck v. Bean, 89 U. S. 395, 22 L. Ed. 801. (Italics ours.)
In accord are Brandt & Brandt Printers v. Klein, 220 F. (2d) 935, and Callaghan v. Khoury, 90 N. H. 389, 10 A. (2d) 241. And, see, annotation, 29 A. L. R. 45.
". . . There can be no question but that . . . the jurisdiction of the bankruptcy court, at least so far as the distribution of the estate is concerned, is exclusive." In re Community Fuel Corp., 291 Fed. 689, citing Cruchet v. Red Rover Mining Co., 155 Fed. 486. See, also, Gibbons v. Dexter Horton Trust & Sav. Bank, 225 Fed. 424, and 1 Collier on Bankruptcy (14th ed.) 233-235.
How then could the superior court, in a collateral proceeding rightfully order the payment of a nonpartnership debt out of the bankrupt's interest in the assets?
Stickney, as an unsecured creditor, was entitled to no more than his proportionate share of his bankrupt debtor's property.
 "That `the theme of the Bankruptcy Act is equality of distribution' is a fundamental and long recognized principle." 3 Collier on Bankruptcy (14th ed.) 741. This action is nothing more than an attempt to circumvent the requirements of that act, and to obtain payment of a debt in full at the expense of the other creditors of the bankrupt. The court was without jurisdiction to grant such relief. Its lack of jurisdiction was acknowledged in an order which the court entered June 1, 1957, which provided:
"It is further ordered that any cause of action which the plaintiffs may have against Harold Edwin Kerry and the community of Harold Edwin Kerry and Ruth B. Kerry, his wife, accruing prior to October 2, 1953, is hereby dismissed."
Jan. 1960] STICKNEY v. KERRY. 539
This was itself a recognition by the court that payment of pre-existing debts of the bankrupt was a matter solely within the jurisdiction of the Federal court. Nevertheless it proceeded to enter judgment in favor of Stickney. But the only theory on which that judgment was entered, was that equitably he was entitled to payment of his debt out of Kerry's partnership interest, as that interest was determined in the accounting. If there was such a right, its origin antedated the petition in bankruptcy. Neither the pleadings nor the evidence reveals any cause of action accruing subsequent to October 2, 1953. It is not contended that there was ever a new promise to pay the debt on the part of either the debtor or his wife, who is the only defendant in this action; and there is nothing in the record which would tend to support such a contention.
The judgment is reversed and the action dismissed.
WEAVER, C. J., HILL, and HUNTER, JJ., concur.
MALLERY, J., dissents.
March 16, 1960. Petition for rehearing denied., Principal=Harold Edwin Kerry Jr.
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