D. J. MUELLER, Appellant, v. ELBA OIL COMPANY (a Partnership) et al., Respondents.
S. F. No. 16772
In Bank
Nov. 2, 1942
21 Cal.2d 188
In the light of all the evidence it is not improbable that a different judgment would have been reached had the erroneously admitted evidence been excluded. Since the error is therefore prejudicial the judgment should be reversed.
Edmonds, J., concurred.
Rosendale, Thomas & Muller for Respondents.
SCHAUER, J. pro tem. This is an appeal by plaintiff from a judgment for defendants Frank Raiter and Louis Oleari in an action to recover the price of goods sold and delivered by plaintiff‘s assignor to the Elba Oil Company, a partnership, in which the two defendants above named were among the general partners. Except as otherwise specifically noted the term plaintiff will hereinafter be used in referring either to plaintiff or to his assignor and the term defendants will be understood as designating the respondents Raiter and Oleari. All italics within quotations are added.
As previously mentioned the merchandise was sold to the partnership. The debt was unsecured. Subsequent to the sale but prior to trial of this action the partnership, upon involuntary petition, was adjudicated a bankrupt and in due course was discharged from its scheduled debts, including that sued on here. In course of administration of the bankrupt partnership estate the trustee instituted a proceeding to marshal the individual assets of the general partners. Such proceeding, or more technically, the controversy arising out of it, was compromised upon terms approved by order of the bankruptcy court. The compromise was predicated on, among other things, a disclosure of the assets and personal liabilities of the defendants. Its terms, as established by the order, included payment of $7,500 in cash, advanced by a bank for the defendants, to the trustee and the reciprocal consideration “that upon receipt
This action is predicated on the personal liability of defendants as general partners. Their defense is based on two propositions: (1) Release and discharge effected by the order of the bankruptcy court above mentioned; (2) discharge in bankruptcy of the individual partners as legally incident to formal discharge of the bankrupt partnership. The case was tried upon an agreed statement of facts which the trial court impliedly found to sustain the defenses above mentioned. Plaintiff challenges both of the defenses, contending that the order of the bankruptcy court in the compromise proceeding was void as to plaintiff and that the discharge of the partnership did not operate to discharge the defendants individually.
We find that the determination of but one major question is essential to our decision: Is the order of the bankruptcy court, approving the compromise and releasing the defendants, binding on plaintiff? In reaching an affirmative conclusion we survey the pertinent provisions of the bankruptcy law as it stood both before and after the 1938 amendments, together with appropriate decisions of both federal and state courts throwing light on the jurisdictional questions involved. In our discussion of the Bankruptcy Act and of federal court decisions construing its provisions we are not to be understood as assuming in any instance to declare what constitutes the true rule or better practice on a federal question in a federal tribunal. We are interested not at all in determining what constitutes in a federal court a proper as distinguished from an erroneous ruling. We are concerned only with noting rulings authoritatively made showing the jurisdictional compass of the court.
For clarity and brevity of presentation the following chronology of facts is convenient:
| Dec. 31, 1937 | Involuntary Petition in Bankruptcy filed (against Elba Oil Company naming defendants among general partners). |
| Jan. 4, 1938 | Partnership adjudicated bankrupt. (Schedule filed in due course correctly and adequately listing debt due plaintiff‘s assignor.) |
| March 11, 1938 | Notice given all creditors. (In due course trustee was regularly elected, appointed, and qualified.) |
| April 4, 1938 | Trustee filed petition for marshaling assets of partners. |
| April 7, 1938 | Order to show cause on petition to marshal assets issued and served on defendants. |
| April 14, 1938 | Second order to show cause on petition to marshal assets issued and served on defendants. |
| June 28, 1938 | Offer on behalf of defendants to compromise marshal assets controversy (by paying $7,500 to trustee) submitted to trustee. |
| Sept. 22, 1938 | The 1938 amendments to the bankruptcy act became generally effective. |
| Dec. 19, 1938 | Third order to show cause on petition to marshal assets issued and served (controversy still continuing). |
| Jan. 30, 1939 | Trustee filed in bankruptcy court his petition to compromise the controversy, based on the offer of June 28, 1938. (Petition regularly set for hearing on February 14, 1939, and due notice given all creditors including plaintiff‘s assignor.) |
| Feb. 14, 1939 | Meeting of creditors; order of court for compromise of controversy and release of defendants made and entered. (This terminated the marshal assets proceeding; the $7,500 was then accepted by trustee and expended pursuant to court order; the order was not appealed from and became final.) |
| March 6, 1939 | The partnership was discharged and its bankruptcy administration closed. (This order implies approval of and reliance upon the compromise-termination of the marshal assets proceeding and the receipt and expenditure of the $7,500 thereby obtained.) |
The offer of compromise in the marshal assets proceeding, insofar as it was reduced to writing, was submitted by a bank
“Enclosed herewith is our cashier‘s check in the sum of $7500.00, dated June 28, 1938, numbered 7794 and payable to you as trustee of the Estate of Elba Oil Company, bankrupt. This check is delivered to you for the sole and exclusive purpose of using the same and the proceeds thereof for effecting, completing, and paying a composition of creditors of said Elba Oil Company, No. 31187-Y, of the District Court of the United States, Southern District, Central Division, according to the terms and conditions of offer heretofore made or hereafter to be made by our clients, Frank E. Raiter and Louis G. Oleari, as copartners of said Elba Oil Company.
“We are advised that the terms and conditions of said offer are or will be as follows: (1) that all secured creditors of said Elba Oil Company shall take and accept all properties described in their respective securities in full satisfaction and discharge of the debts secured thereby; (2) that all unsecured creditors and all trustees’ fees, attorneys’ fees, receivers’ fees, costs, etc., shall be fully satisfied and paid out of said sum of $7500; and (3) that each creditor of said Elba Oil Company shall execute in writing a full and complete release and discharge of our clients, Frank E. Raiter and Louis G. Oleari, of and from any and all individual liability to each of said creditors. If you effect, complete, and obtain confirmation of a composition of creditors upon such terms and conditions, you are authorized to use the proceeds of said check for payment of said fees, costs, claims of unsecured creditors, etc., but for no other purpose, and in the event that you are unable to effect, complete, and obtain confirmation of such composition within three months from the date hereof, you shall return said sum of $7500.00 to us without deduction of any kind whatsoever. Until and unless said composition shall be so effected, completed, and confirmation thereof obtained, said sum of $7500.00 shall be and remain the property of the undersigned.”
While such offer of compromise uses the words “composition of creditors” in referring to the purpose of the offer, the ends to be attained and the conditions for payment of the money are specified as (1) that all secured creditors of the partnership shall accept their securities in full satisfaction of the secured debts; (2) that all unsecured creditors and fees and costs “shall be fully satisfied and paid out of said
It has been held that technically a partnership is an entity which may be adjudged bankrupt irrespective of any adjudication of the individual partners as bankrupts (Luse v. Peters, (1933) 219 Cal. 625, 629 [28 P.2d 357]; see cases cited in note 7, annotations to
An individual partner‘s property when taken over must be applied first to the payment of his individual debts and the surplus, but only the surplus, is then added to the partnership assets, and if any surplus of partnership property remains after paying its debts such surplus is added to the assets of the individual partners in the proportion of their respective interests in the partnership. (
Prior to the effective date of the 1938 amendments to the Bankruptcy Act it was held by high authority that partners who were not individually adjudicated bankrupt were, nevertheless, by the discharge of the bankrupt firm, themselves discharged from further liability for partnership debts. (Abbott v. Anderson, (1914) 265 Ill. 285 [106 N.E. 782, L.R.A. 1915F 668]; see, also, Francis v. McNeal, supra). In the note on page 669 of L.R.A. 1915F, annotating Abbott v. Anderson, supra, after referring to Francis v. McNeal, supra, it is stated that “The law can therefore be regarded as settled that a discharge of a partnership in bankruptcy discharges the members thereof from liability for firm debts, whether the bankruptcy court brought in the members of the firm and their property or erroneously discharged the firm as an entity without an adjudication of the individual members.” It will also be noted that the Supreme Court in Francis v. McNeal, supra, overruled In re Bertenshaw, (1907, 8 Cir.) 157 F. 363 [85 C.C.A. 61, 13 Ann. Cas. 986, 17 L.R.A.N.S. 886], in its earlier arguendo ruling (at page 369 of 157 F.) that “the creditors of the partnership may subject the individual property of the unadjudicated partners to the payment of their debts before during or after the bankruptcy proceedings, by actions at law, by suits in equity or by other proceedings.” Furthermore, as to the jurisdiction and power of the bankruptcy court to discharge partners from liability for firm debts although they remain technically unadjudicated as bankrupts, the Circuit Court of Appeals, Eighth Circuit, in Armstrong v. Norris, (1917, 8 Cir.) 247 F. 253, 255 [159 C.C.A. 347], said: “The bankruptcy of their firm made Brown and Norris as individuals parties to the proceeding, so far as their rights and liabilities as debtors were necessarily involved in its scope and effect. They were in court jointly and severally. The partnership debts were their debts. Their individual liability therefor was primary and direct, not collateral. The partnership property that was administered was their property, for a deficiency of which to pay the debts their individual estates, if any, were bound, and were subject to the jurisdiction of the court in that proceeding for equitable marshaling and application. Ordinarily
The 1938 amendments to the bankruptcy law (
As to the applicability of the 1938 amendments to the present controversy it is to be recognized that normally where any provision relating to discharge is amended, the right to discharge will be governed by the law as it stands at the time the petition for discharge is filed or the court acts on it (Farmers’ Sav. Bank of Grimes, Iowa v. Allen, (1930, 8 Cir.) 41 F.2d 208, 210; In re Farrow, (1939, D.C., Cal.) 28 F.Supp. 9, 10) but it is also to be noted that in enacting the 1938 bankruptcy legislation Congress prescribed a conditional saving clause as to pending proceedings, making applicability of the new law to such proceedings dependent on practicability. The clause is as follows (52 Stat. 940, see annotation to
From what has been said as to the law prior to the effective date of the 1938 amendments to the Bankruptcy Act (September 22, 1938) it clearly appears that at the time the initially pertinent proceeding (the petition to marshal assets of the defendants) was filed (April 4, 1938) and likewise at the time (June 28, 1938) of the making of the offer to compromise the controversy represented or precipitated by such petition, the bankruptcy court had jurisdiction and authority to discharge these defendants from liability for the partnership debts without the necessity of their being adjudicated bankrupt and if the local bankruptcy courts were following the rule stated in the note on page 669 of L.R.A. 1915F, above quoted, the discharge of the firm during that period would have impliedly and effectively discharged these defendants from liability for firm debts. Again we state that we are not holding that the L.R.A. 1915F rule was the only holding the bankruptcy court could have made. We are cognizant of such decisions as First Nat. Bank of Herkimer v. Poland Union, (1940, 2 Cir.) 109 F.2d 54, wherein it is asserted in effect (p. 57) that the weight of authority denies discharge to an unadjudicated partner even though his assets may be seized by the firm trustee. The only proposition which we are concerned in depicting is that indubitably the bankruptcy court had jurisdiction, whether properly or erroneously, to release or discharge individual partners from firm debts without the formality of adjudication of the partners.
At the time the petition to marshal assets was filed and at the time of the compromise offer, section 27 of the Bankruptcy Act (
The allegations of the petition for compromise so far as recited up to this point are consistent with the object of the offer which was made by defendants—their complete release or discharge from firm debts—but unfortunately it contains another allegation which is inconsistent with the general plan and which is dwelt upon strongly by the plaintiff. Such allegation is that “Said controversy may be compromised upon the following basis, to-wit:
“That in consideration of an order being made and entered herein, wherein and whereby Frank E. Raiter and Louis G. O‘Leari are fully and completely released and discharged of and from any and all individual liabilities to each and every one of the creditors who have filed claims in the above entitled bankruptcy proceedings, being the Elba Oil Company, a copartnership, the said Frank E. Raiter and Louis G. O‘Leari will, through the Monterey County Trust & Savings Bank, pay to the Trustee herein the sum of $7500.00.”
Following the same inconsistency the prayer of the petition, in addition to asking that notice be sent to creditors and that an order be made authorizing the compromise, requests “an order made and entered herein fully and completely releasing and discharging the said Frank E. Raiter and Louis G. O‘Leari of and from any and all individual liabilities to each and every one of the creditors who have filed claims in the above entitled bankrupt estate.” Plaintiff‘s claim, although duly scheduled by the bankrupt partnership, was not filed or proved by plaintiff or his assignor, and at the date the petition for compromise was filed (Jan. 30, 1939) the time for filing creditors’ claims had expired (
Upon the above described petition the matter came on regularly for hearing in the bankruptcy court and the referee properly took cognizance of the actual terms of the compromise offer. Apparently the inconsistencies in the petition were ignored, as no amendment thereto appears to have been made, and an order was made which includes the following
“IT IS FURTHER ORDERED that upon receipt of said sum of $7500.00 by the Trustee that the said Frank G. Raiter and Louis G. Oleari, and each of them are fully and completely released and discharged from any and all claims, demands, liability, causes of action or judgments against them or either of them, as general partners of the above-named bankrupt.”
The agreed statement of facts further establishes that no appeal was taken and that the order above quoted from has become final; that the $7,500 was accepted by the trustee and expended pursuant to the order; and that the partnership was discharged in bankruptcy. The discharge recites that the “Elba Oil Company, a copartnership, composed of . . . Joseph E. Barrett, J. S. Lees, Louis O‘Leari and F. E. Raiter . . . had been duly adjudged a bankrupt, under the Acts of Congress relating to bankruptcy, and appears to have conformed to all the requirements of law in that behalf.”
Probably inspired by the use of the term “composition of creditors” in the compromise offer of June 28, 1938, there has been some argument between the opposing parties on this appeal as to whether the proceeding to marshal assets of the defendants and the compromise proceeding based thereon, were not in law what they appear to be but, combined with the offer, together constituted either a never-properly-instituted attempt at a composition of creditors under the then-existing sections 12 and 74 (
So far as due process of law is concerned, it does not appear that plaintiff has been deprived of any right by any misapprehension that the compromise proceeding was in fact a composition or arrangement proceeding. Its character as a compromise proceeding is apparent upon mere inspection of the petition; the petition is that of the trustee, not that of the defendants or of the bankrupt firm; the substance of the petition obviously seeks compromise and does not purport to set forth the allegations specifically required by the Bankruptcy Act to be contained in a petition for composition or arrangement. (See sections cited supra in reference to “composition” and “arrangement.“) Furthermore, in the agreed statement of facts plaintiff stipulates “that on or about the 28th day of June, 1938, defendants . . . made unto said Trustee, and through said Trustee to the creditors of said bankrupt, an offer of compromise and composition, the terms of which are set forth in Exhibit ‘4’ . . . ; that thereafter . . . said Trustee filed in said Court and matter his petition to compromise the controversy between said Trustee and said defendants . . . .”
At the date when the petition to compromise was filed, and likewise when it was acted upon, section 50, title 11, U.S.C.A.
The plaintiff‘s assignor was a scheduled creditor. Notice of the compromise proceeding was given as required by
Such offer clearly stated the conditions on which it was made. The trustee could not alter those conditions and, as also held in substance in the case last cited, at page 276 thereof, the offer had to be accepted in substantial compliance with those conditions or not at all. The petition to compromise was at worst only ambiguous. It contained the statement that the trustee “recommended that if the sum of $7500.00 was paid over to the Trustee herein in full and complete settlement, release, and discharge of the individual liability of said Frank E. Raiter and Louis G. O‘Leari to the creditors of the above entitled bankrupt, your petitioner would present to the court a petition based thereon to compromise the controversy.” In our own state courts it is established that an order is not void on its face although it is not in accordance with the petition on which it is based. (In re Morehouse, (1917) 176 Cal. 634, 636 [169 P. 365]; Estate of Gardiner, (1941) 45 Cal.App.2d 559, 564 [114 P.2d 643].) Even if the question here is not settled for us by the fact that the bankruptcy court determined its own jurisdiction we must hold that the petition was jurisdictionally adequate.
In connection with the attack on the compromise proceedings, it is asserted that the trustee was entitled as of course to compel the defendants to marshal their assets, and on that premise plaintiff contends that there was no controversy to compromise. Such contention is devoid of merit; substantially every fact disclosed in connection with the proceeding to marshal assets and to compromise the same belies it. The mere fact that the trustee had the right as of course to maintain the proceeding did not make the fact or amount of net recovery for the partnership estate any less controversial. The trial court in bankruptcy (the referee) had the right to consider the uncertainty and cost of litigation in determining the advisability of compromise (Petition of Stuart, (1921, 6 Cir.) 272 F. 938, 941) and it also had the right to determine the sufficiency of the petition upon which it acted (In re L.M. Axle Co., (1925, 6 Cir.) 3 F.2d 581, 582).
It is regrettable that the trustee in preparing the peti-
Regardless of the form of the mesne proceedings in the bankruptcy court, or of irregularities or errors therein, the controlling fact is that that court had jurisdiction over the subject matter and the parties before it. It had jurisdiction over the partnership as an entity, over its estate, over these defendants as partners and as individuals, over their individual estates, and over all of the scheduled creditors of the partnership. Its jurisdiction included the power to compromise any controversy among the parties before it and to discharge the defendants from liability to the creditors of the bankrupt firm.
The proceeding to marshal assets was instituted and the compromise offer was made prior to the effective date of the 1938 amendments. The law as it then existed was as much a part of that offer as though it had been written therein. (6 Cal.Jur. 310, § 186; Brown v. Ferdon, (1936) 5 Cal.2d 226, 231 [54 P.2d 712]; Wing v. Forest Lawn Cem. Assn., (1940) 15 Cal.2d 472, 476 [101 P.2d 1099, 130 A.L.R. 120].) The compromise offer involved substantive rights (see Brown v. Ferdon, supra), not mere matters of remedy or procedure. Not only were the defendants’ interests concerned, but so
The offer of compromise, it will be recalled, specified the conditions on which the tendered money could be used and explicitly reserved title in the bank pending fulfillment of those conditions. It concluded “Until and unless said composition shall be so effected, completed, and confirmation thereof obtained, said sum of $7500.00 shall be and remain the property of the undersigned.” If we were to hold that the subsequent amendments of 1938 deprived the court of jurisdiction to approve the compromise offer on the terms upon which it was made we would in effect convict the trustee of converting the money paid to him, the referee of authorizing and directing such conversion, and the district court judge of ratifying and approving such conversion. We think such an application of the amendments would give them an impracticable effect and that it would have been impracticable for the bankruptcy referee or judge to have so applied them to the proceedings here involved. Such proceedings therefore (upon the assumed hypothesis) constituted a proper case for actuation of the conditional saving clause of the amendatory act hereinabove quoted. It is obvious, of course, that if application of the 1938 amendments to the proceedings concerned would not deprive the bankruptcy court of its power to release or discharge the defendants then, notwithstanding applicability of the amendments, the questioned orders would still remain valid.
Our state courts give full faith and credit to the final judgments and orders of the United States District Courts (
“The argument is pressed that the District Court was sitting as a court of bankruptcy, with the limited jurisdiction conferred by statute, and that, as the statute was later declared to be invalid, the District Court was without jurisdiction to entertain the proceeding and hence its decree is open to collateral attack. We think the argument untenable. The lower federal courts are all courts of limited jurisdiction, that is, with only the jurisdiction which Congress has prescribed. But none the less they are courts with authority, when parties are brought before them in accordance with the requirements of due process, to determine whether or not they have jurisdiction to entertain the cause and for this purpose to construe and apply the statute under which they are asked to act. Their determinations of such questions, while open to direct review, may not be assailed collaterally.” (Chicot County Drainage District v. Baxter State Bank, (1939) 308 U.S. 371, 376 [60 S.Ct. 317, 84 L.Ed. 329, 333]; see, also, Bank of America v. McLaughlin etc. Co., supra, at p. 627.) By express definition in the bankruptcy act the word “court” “shall mean the judge or the referee of the court of bankruptcy in which the proceedings are pending.” (
Jurisdiction is but the power to hear and determine and does not depend upon the correctness of the decision made. (Gray v. Hall, (1928) 203 Cal. 306, 315 [265 P. 246].) If a judgment ordered without a trial cannot be attacked collaterally, as has been held (Ex parte Bennett, (1872) 44 Cal. 84, 87; Johnston v. San Francisco Sav. Union, (1888) 75 Cal. 134, 139 [16 P. 753, 7 Am. St. Rep. 129]; Holland v. Superior Court, (1932) 121 Cal.App. 523, 531 [9 P.2d 531]), then certainly the order of the bankruptcy court, made upon the proceedings hereinabove related, is not open to collateral question. There has been no suggestion of extrinsic (or other) fraud at any stage in the proceedings.
From what has been said the conclusion is reached that plaintiff here is making a collateral attack on a final order and judgment which the United States District Court had jurisdiction to make. Such attack fails.
Perhaps upon appeal, or other form of review in the federal courts, it might have been held that the referee‘s order of compromise and release was erroneous and that discharge of the bankrupt firm did not operate to discharge these defendants individually, but the state court is not a court of review for proceedings in the federal bankruptcy court. It
The judgment is affirmed.
Gibson, C. J., Shenk, J., and Curtis, J., concurred.
TRAYNOR, J.—I dissent. The opinion of the District Court of Appeal in this case by Presiding Justice Peters, modified in part, sets forth the reasons that lead me to conclude that the judgment should be reversed:
“Where a partnership has been adjudicated a bankrupt the individual assets of the general partners may be drawn into the administration of the bankrupt estate, and any surplus remaining after paying individual creditors is applicable to the partnership debts. (
Section 5g of the Bankruptcy Act, 11 U.S.C.A., § 23g ; Francis v. McNeal, 228 U.S. 695 [33 S.Ct. 701, 57 L.Ed. 1029, L.R.A. 1915E, 706]; 6 Remington on Bankruptcy (4th Ed.), p. 499, 505.)”“The 1938 amendment added to section 5 of the Bankruptcy Act, paragraph j, reads as follows: ‘The discharge of a partnership shall not discharge the individual general partners thereof from the partnership debts.’ (
11 U.S.C.A., § 23j. ) The amendatory act contained the following provision: ‘Except as otherwise provided in this amendatory Act, the provisions of this amendatory Act shall govern proceedings so far as practicable in cases pending when it takes effect.’ (52 Stats., p. 940; see, In re Wm. Akers, Jr. Co., Inc., 31 F.Supp. 900.) In view of this provision section 5j (11 U.S.C.A., § 23j ) governs the interpretation of the discharge herein.“Prior to the enactment of section 5j there was some doubt as to whether a discharge of the partnership only had the effect of discharging the individual liability of the partners for the partnership debts. (Myers v. International Trust Co., supra [273 U.S. 380, 47 S.Ct. 372, 71 L.Ed. 692]; 7 Remington on Bankruptcy, (5th Ed.) p. 863; 8 C.J.S. 1546, § 580; 37 Harv.L.Rev. 614.) The 1938 provision removed this doubt,”
“The Act, prior to the 1938 amendment, provided only two methods whereby a bankrupt could secure a discharge—the discharge granted following full administration in bankruptcy, and a discharge upon confirmation of a composition of creditors. (Welles-Kahn Co. v. Klein, supra.) Under the 1938 amendment a discharge may be secured upon confirmation of an arrangement. The right of a partner to secure a discharge from individual liability to partnership creditors where the bankrupt is a partnership is similarly limited. The individual assets of a partner may be drawn into the bankruptcy administration. The Act makes no provision whereby one whose assets are subject to the jurisdiction of the court in a bankruptcy proceeding may secure a discharge from liability to creditors of the bankrupt in any other way. (See In re Northampton Portland Cement Co., 185 F.542.)”
In the present case, the alleged discharge of the liability of the partners for partnership debts did not follow from full administration in bankruptcy. The majority opinion concludes, however, that although there was no composition or arrangement plaintiff was bound by the referee‘s order discharging defendants from liability for partnership debts. At the date of the order the bankruptcy act provided: “The receiver or trustee may, with the approval of the court, compromise any controversy arising in the administration of the estate upon such terms as he may deem for the best interest of the estate.” (
“We are of the view that the referee‘s order of February
“In the case herein, while proceedings to bring the assets of the partners into the bankruptcy were pending, Raiter and Oleari offered $7,500 to be applied in part payment of the partnership creditors on condition that they be released and discharged in full from individual liability to such creditors. The plan was essentially one for a composition. A composition of creditors is a ‘proceeding, voluntary on both sides, by which the debtor, of his own motion, offers to pay his creditors a certain percentage of their claims in exchange for a release from his liabilities.’ (6 Am.Jur. 776, § 416.) The offer of composition may be of a lump sum, as in the case herein. (In re Bickmore Shoe Co., 263 F. 926.)
“A composition when confirmed operates as a discharge in bankruptcy. ‘The confirmation of a composition shall discharge the bankrupt from his debts, other than those agreed to be paid by the terms of the composition and those not affected by a discharge.’ (
“Prior to the 1938 amendments to the Bankruptcy Act, compositions were provided for by sections 12 and 74. (
“These sections are not applicable to this proceeding. The 1938 amendments expressly provide that sections 12, 73 and 74, as amended, ‘shall continue in full force and effect with respect to proceedings pending under those sections upon the effective date of this amendatory Act.’ (52 Stats. p. 916;
“By virtue of the express provision of the amendatory act above referred to, section 12 was applicable to the pending proceeding herein involved. Section 12 provides that ‘the judge shall confirm a composition.’ (
“The judge‘s subsequent order of discharge does not operate as a release of the individual liability of the partners for the partnership debts. The discharge was of the partnership. It was provided therein that ‘Elba Oil Company, a copartnership composed of Joseph E. Barrett, J. S. Lees, Louis Oleari and F. E. Raiter, be discharged from all debts and claims which are made provable by said Acts against its estate, and which existed on the 31st day of December, A. D. 1937, on which day the petition for adjudication was filed against it; excepting such debts as are by law excepted from the operation of a discharge in bankruptcy.’ ”
“There appear to be other defects in the proceeding viewed as a composition, in addition to the absence of confirmation by the judge. Where the offer of composition is made by partners of a partnership adjudicated bankrupt it should not be made until after the schedule of individual assets and liabilities as well as of partnership assets is on file. (In re Palmer, 2 F.Supp. 275, 277.) This is because the creditors in determining whether it is to their advantage to assent to an offer of composition should have full information as to assets available to satisfy their claims. Any surplus of individual assets after paying individual debts may be used to pay partnership claims. In the present case the offer was made while proceedings to compel the partners to file their schedules were still pending and before individual schedules had been filed.
“The notice to creditors was of a petition praying for discharge of the liability of the partners Raiter and Oleari to creditors who had filed claims, whereas the order of the referee entered on the petition discharges them from any and all liability which might exist against either of them as partners.
“The bankruptcy papers included in the present record also show a failure to comply with the requirement that before confirmation is sought the composition must have been accepted in writing by a majority of the creditors. (
“The fact that plaintiff‘s assignor had not filed a claim in the bankruptcy proceeding does not bar it or its assignor from attacking the void order of confirmation. The offer of composition was made on June 28, 1938. The adjudication took place on January 4, 1938. Hence, the offer of composition was made within six months’ period following adjudication of bankruptcy, in which claims are required to be filed. (
“It should be noted that the terms of the offer of composition here involved did not confine it to creditors who had filed claims, nor did the referee‘s order of approval so limit it. But the trustee‘s interpretation of the offer evidently was that payment should be made only to those who had proved claims, since he prayed in his petition that Raiter and Oleari be released from invidual liability to creditors who had filed claims. In any event, no payment was made to plaintiff‘s assignor, nor did it in any way participate in the composition proceedings. In the circumstances the void order of confirmation did not operate as to it to discharge the individual liability of the general partners Raiter and Oleari.
“It appears that the failure to follow the procedure prescribed for a composition was due to the fact that the matter was handled as a ‘compromise of controversy.’ The act provides: ‘The receiver or trustee may, with the approval of
“But that which is as a matter of law a composition may not be accomplished without complying with the statutory requirements under the guise of being a compromise of controversy. ‘This section (
“A ‘compromise of controversy’ implies a dispute to be settled. In the case herein the papers in the bankruptcy proceeding which have been made part of the record in the present case show a dispute as to whether certain persons who claimed to be limited partners were in fact general partners. But there is no intimation of any dispute as to the status of the four general partners, including Raiter and Oleari. The trustee‘s petitions described them as general partners and the stipulation of facts upon which the present action was heard so describes them.
“The petition to compromise recites that it is doubtful that the estate can realize from marshaling of the individual assets of Raiter and Oleari a greater sum than they offered to pay, that is, $7,500, and that ‘there is also some doubt as to the ability of your Trustee to prevail in the said proceeding to marshal the assets of the said Frank E. Raiter and Louis G. Oleari.’ However, as to general partners the authority of the trustee to marshal assets to the end of applying any surplus remaining after paying individual debts to partnership obligations exists as a matter of right, unless, perhaps, where it appears unlikely that any surplus above individual debts will result. It would seem, therefore, that on the record the only dispute which could exist was whether liquidation of the individual assets of Raiter and Oleari would yield any surplus for partnership creditors. In our view such a dispute may not be made the subject of a com-
“To summarize—the court in bankruptcy was without jurisdiction to discharge the individual liability of Raiter and Oleari as general partners except following full administration in bankruptcy or upon composition proceedings which met the statutory requirements. The referee‘s order was void as a discharge of the individual liability of Raiter and Oleari. It was void as a composition of creditors under section 12 of the Act because it lacked confirmation by a judge. The provision for compromise of controversies does not authorize a discharge of the individual liability of a partner to partnership creditors.”
Edmonds, J., and Carter, J., concurred.