281 F. 928 | 7th Cir. | 1922
Lead Opinion
(after stating the facts as above). The primary issue is whether, under above-stated facts, petitioners are liable as general partners with Marcuse and Morris. Then there is the question whether, in case Hecht and Finn are so liable, the liability can be extended also to the other petitioners, who do not by the finally executed contract purport to have entered into any partnership arrangement of any sort, and the further question whether the Studebakers can in any event be held general partners, in view of the
It does not appear that by such device to avoid the Stock Exchange ruling, the creditors of the partnership were in any degree defrauded or periled. If the New York Stock Exchange is a creditor, and has been to its detriment misled through the alleged fraudulent device, its rights and remedies against those who participated therein remain unaffected by the bankruptcy. But in the entire absence of any showing of detriment occasioned thereby to the creditors generally, or in fact to any of them, the utmost that could be visited upon the participants of this deception would be to hold that they occupy toward this partnership and its creditors the same relation as do Hecht and Finn, viz. that of such wTho from July 1, 1917, erroneously believed and assumed that they then entered upon a limited partnership. Assuming, therefore, that the transactions of June 30 and July 2 were colorable, in that, while a limited partnership was intended as to all the petitioners, it was carried out in form to deceive the New York Stock Exchange as to the number of its special partners, this deception would not of itself serve to fasten on the deceivers the liability of general partners. Respondents urged that in this statement of the contributors as set forth in the filed certificate there was such falsity as under the old Illinois act would result in all becoming general partners, notwithstanding the stated total was in fact contributed. Under the rigors of the old law this might have been so, but the contention of unlimited liability rests mainly on the nonapplicability of the old statute, through failure to complete the organization and begin business thereunder, and file the limited partnership certificate until
It is apparent that none of the parties to the contract or the certificate holders under the Hecht-Finn Trust contemplated or supposed that general partnership liability was assumed by any of them except Marcuse and Morris, and it was the evident understanding and belief of all that the others, whether called special partners or certificate holders, would have no liability beyond their investment, and no participation in the conduct and control of the business, which was by the agreement committed wholly to Marcuse and Morris. Had the limited partnership been fully perfected while the act of 1874 (Rev. St. 1874, c. 84) was yet in force, these investors would probably have incurred no liability beyond their investment. At any rate, this was their intention, regardless of whether under the circumstances ■ under that law this would have been the result.
' ■ If under the old law the certificate or affidavit filed was materially false, the statutory result was to make all liable as general partners. • Many other states had or have similar statutory provisions, and the courts have quite generally construed such provisions strictly against the limited partners. To such extent was this tendency recognized in the mercantile world that it was considered hazardous for one to invest money in a partnership enterprise upon the faith of compliance with limited partnership statutes, which were quite commonly regarded as a trap to catch the unwary rather than a proper means to a desirable end. To relieve from such undue hazard, and make more safe to investors not participating in the business, the employment of their capital in partnership enterprises, as well as to bring about uniformity in such matters, the “Uniform Limited Partnership Act” was drafted and submitted to the Legislatures of the different states. Several of the states have adopted it. It passed the Illinois Legislature as drafted, in June, 1917, and became a law without the Governor’s signature June 28, effective three days afterwards, July 1, repealing the act of 1874.
It indicates a policy with respect to this subject quite the reverse of that of -its predecessor. While section 8 of the old act provided that the limited partnership shall not be deemed formed until the certificate as specified has been filed, and that any false statement in the certificate required to be signed by all the parties, or in the affidavit required to be signed by one of them, shall result in,all the persons being general partners, the provisions of the Uniform Limited Partnership Act as to such matters are significantly otherwise. Section 2 (chapter 106a, § 46) provides that the limited partnership is formed when there has been substantial compliance in good faith with the requirements of the law, and as to false statements section 6 (chapter 106a, § 50) provides, not that thereby general partnership results as to all, but only as to those who executed the certificate knowing it to be false, and in favor of those only who suffer loss through reliance thereon. Provision is made for admitting other limited partners, and for the assignment of limited partnership interests, and for the limited partner to loan money to and transact business with the partner
BA person who has contributed to the capital of a business conducted by a person or partnership erroneously believing that he has become a limited partner in a limited partnership, is not, by reason of his exercise of the rights of a limited partner, a general partner with a person or in a partnership carrying on the business, or bound by the obligations of such person or partnership: Provided that on ascertaining the mistake he promptly renounces his interest in the profits of the business, or other compensation by way of income.”
It is earnestly contended that because the Uniform Limited. Partnership Act prohibits the formation of a limited partnership to carry on the business of brokerage, section 11 cannot in any event afford relief. But section 11 is very broad in its terms. It is not limited to instances where there has been an attempted compliance with the provisions of the new act. It includes in its terms any person who at any time contributed to a partnership, erroneously believing himself to be a limited partner.
In the statutory condition that “he promptly renounces his interest in the profits of the business or other compensation by way of income” there may be some ambiguity; but in this case the record shows the compliance was to the fullest extent that might be claimed on behalf of creditors, and it is not contended that the unconditional payment of the $46,000 falls short of compliance with the section, if the
This act, conceived and born with the Uniform Eimited Partnership Act, indicates similar purpose of relieving from • risk of incurring partnership liability where the general partnership relation was not by the parties intended. It prescribes that the rule of strict construction of statutes in derogation of common law shall have no application to the act (section 4 [1]), and defines a partnership to be “an association of two or more persons to carry on as co-owners a business for profit” (section 6 [1]). The contractual relation of petitioners does not fall within this definition. It cannot strictly be said that they became co-owners. They contributed $190,000, which, unless lost in the venture, would eventually be returned to them. In this respect it differed from a loan of funds to the partnership, with division of profits in compensation for the loan, only to the extent that in the one case the creditors of the partnership may resort to the amount so contributed, free from participation of any claim of the contributor as a creditor, while the loaner would for his loan be upon parity with other creditors. Petitioners had no proprietary interest in, or title to, or dominion over, the property of the partnership; neither had they under the contractual relation, any right, power, or duty in the carrying on of the partnership business. As to the conduct of the business they were strangers, in quite the same sense that a loaner of funds would have been.
While receipt of profits has in some instances been held conclusively to presume partnership as to creditors, section 7 (4) makes this presumption prima facie only. Section 9 (1) provides that every partner is the agent of the partnership for the purposes of the business. But under this contract none of petitioners had or could have had any right to do a single act whereby the partnership would have been bound. The contract, either as first drawn or as afterwards entered into, gave them no right or power to act for the partnership, and the record does not disclose any holding out or assumption of agency. Section 7, under the subtitle “Tests in Determining the Existence of a Partnership,” prescribes that:
“In determining whether a partnership exists, these rules shall apply: (1) Except as provided by section 16, persons who are not partners as to eacn . other are not partners as to third persons.”
Under the law as it was prior to the adoption of the Uniform Partnership Act the existence of general partnership as between alleged partners was a question wholly of their intention, to be gathered from their agreement. Goacher v. Bates, 280 Ill. 372, 117 N. E. 427; National Surety Co. v. Townsend Brick, etc., Co., 176 Ill. 156, 52 N. E. 938. In the last cited case it was said:
“While the agreement with Adams Bros, to share one-half the profits and losses might raise a presumption of partnership, yet if the parties actually meant that there was to be no partnership created, and so contracted, the presumption would be rebutted.”
“Even where parties * * * enter into a joint enterprise and share in the profits, a partnership, as between themselves, is not necessarily the result.The intention of the parties always controls.”
So in Smith v. Knight et al., 71 Ill. 148, 22 Am. Rep. 94, where Knight agreed to put money into a commission business and was to receive 10 per cent, per annum and the share of the commissions, but was not to be liable for losses, the court, passing on the alleged partnership of Knight, said:
“In determining this question, the intention of the parties must be considered. Written articles of copartnership may be so expressive as to leave no room for doubt. So far as these articles of agreement are concerned, we discover nothing in them evidencing an intention to form a partnership.”
And in Insurance Co. v. Barringer, 73 Ill. 230, the court said:
“Whether a partnership exists or not, depends upon the intention of the parties. Parties may be partners as to third persons, when not so between themselves.”
In London Assurance Co. v. Drennen, 116 U. S. 461, 6 Sup. Ct. 442, 29 L. Ed. 688, it was said:
“The mere participation in profits would give no such [partnership!] interest contrary to the real intention of the parties. Persons cannot be made to assume the relatión of partners, as between themselves, when their purpose is that no partnership shall exist.”
If we are correct in saying that, as between Marcuse and Morris on the one hand and the petitioners on the other, it was the distinct intent and purpose that there should be no general partnership, then as between themselves they did not become general partners. Undoubtedly contracts are conceivable wherein the parties may call themselves partners, where from the things actually agreed upon the partnership relation does not exist; and, on the other hand, they may in terms declare they are not partners, when the very things they have agreed upon supply all the elements of partnership, and they would become partners despite their declaration to the contrary.
By the terms of this contract petitioners were to have no participation in the conduct of the business, could not in any manner contract for or bind the firm, and were not to be liable for losses beyond their several contributions to its capital. .The existence of a partnership between themselves may be tested by the query whether in case of loss of the entire capital of the concern, and payment by Marcuse and Morris of its debts, they might have contribution from petitioners as in partnership. Undoubtedly under the contractual relation here shown they could not. We conclude that in any event, as between themselves, petitioners were not general partners with Marcuse and Morris.
With the wisdom of such change in policy as is manifested by the Uniform Partnership Acts we are not of necessity here concerned. There is reason for each view; but we are not at liberty to reject the test which the statute fixes. If experience shows the statutory test to be impractical and unwise, the remedy is with the Legislature alone. The record discloses no such 'situation as would suggest that the application here of that test involves hardship or inequity toward the creditors generally. It shows nothing to indicate that creditors were beguiled into extending credit to the firm on the faith that the petitioners (particularly the others than Hecht and Finn) were general partners, nor that petitioners held themselves out as such partners, or did any other of those things which, under section 16 of the act, might entail upon them general partnership liability.
We conclude that petitioners, not having assumed general partnership relation with Marcuse and Morris, did not as to others become partners with them.
While these proceedings will in no wise interfere with any creditor of the alleged bankrupt undertaking to establish elsewhere or otherwise liability to him of any or all of petitioners by virtue of section 16 of the Uniform Partnership Act, we find that, resolving in favor of respondent all disputed questions of fact, the law as applied to the record here does not warrant the inclusion of petitioners in the order of reference on the question of solvency of Marcuse & Co. This conclusion makes it unnecessary to consider, the proposition that the Studebaker interest in the concern belonged wholly to Studebaker Bros. Trust, and not to the Studebakers as individuals, and that therefore they can in no event be held liable as partners.
The order here under review is revised, by eliminating therefrom the names of all the petitioners herein, leaving the, revised order to include Marcuse and Morris only as the general partners in the alleged bankrupt firm of Marcuse & Company. Petitioners are adjudged their •costs. ' "
Dissenting Opinion
(dissenting). In view of the large sums involved, I feel justified in setting forth somewhat fully my reasons for this dissent.
The District Judge, after hearing the evidence, found that petitioners were general partners of the firm of Marcuse & Co., against whom ' a petition in bankruptcy had been filed. The order of reference thereupon made to determine the solvency of the partnership as enlarged, petitioners now seek to review and revise. Only questions of law are therefore presented. In re Hoyne, Bankrupt (C. C. A.) 277 Fed. 668. On this record we can consider but one question: Is there any evidence to support the conclusion of the District Judge?
The District Judge failed to make specific findings of fact, but we must assume that such findings as were essential or might be necessary to support his conclusions were by him found in favor of respondents. His conclusion that petitioners were general partners makes such a position unavoidable.
Respondents urge that there was oral evidence tending to ’show that the written agreement of the parties was but a cover to the real understanding ; that, in order to prevent the enforcement of the liability arising out of a general partnership, the parties executed a written agreement which on its face purported to be a limited partnership. Finding that such a partnership could not transact business on the New York Stock Exchange, a new agreement was executed, for the purpose of deceiving the New York Stock Exchange, and with the further object of preventing any detection of the real status of the parties in case an enforcement of the partnership liability was later attempted by any creditor of the firm. If there is any evidence in the record to support the position of the respondents, we must accept it as established. In re Hoyne, Bankrupt, supra. Nor are respondents limited upon this inquiry to direct evidence. Their position may find support in the inferences fairly deducible from the established facts.
Respondents, however, do not rely solely upon this contention, but assert in addition that, should we conclude, in executing the agreement under consideration, the parties intended the formation of a limited partnership only, nevertheless petitioners occupy the status of general partners in the partnership, because limited partnerships to conduct a brokerage business were not authorized in the state of Illinois. My reasons for dissenting will be confined to this contention only. Briefly it may be said that the parties to this agreement on July 2, 1917, and continuously thereafter to a date subsequent to these bankruptcy proceedings, associated themselves together for the conduct of a brokerage business, wherein each party contributed toward the common capital, and wherein the profits were divided according to the contribution. The status ot the parties to the contract, then, must necessarily have been that of (a) limited partners; (b) general partners; or (c) creditors.
By a process of elimination we can readily exclude any finding that petitioners were creditors. All of the evidence points to the denial of the relationship of debtor and creditor. It is not urged in this court, except inferentially. The parties never intended to create such a re
“Tbe said parties above named bave agreed to become co-partners in business and by these presents agree to be partners to one another under the name and style of Marcuse & Co.”
Also:
“The net profits of said business shall be divided among the partners thereto in manner as follows: * * * All the balance of said net profits of said business shall be divided among all of the parties hereto, except the said Morris, in the proportions in which they have contributed to the capital or capital stock of said firm.”
The so-called trust agreement executed by Hecht and Finn recognizes the relation of the petitioners to Marcuse and Morris as being that of partners by saying:
“Whereas, under the terms and provisions of said articles of agreement, reference to which is hereby made, the undersigned, said Frank A. Hecht and said Joseph M. Finn, by reason of their relation to said firm as special partners, are, and will from time to time become, entitled to certain payments and distributions of the copartnership assets and the income, interest, and profits of and upon said assets.”
In the partnership agreement the so-called special partners were authorized to name auditors of the business of said copartnership, who were authorized to examine the books and might certify in writing that the business was not being conducted in a “safe, conservative, and judicious manner,” or that the general partners were “not properly managing the business,” in which case a dissolution of the partnership was authorized at the option of the special partners. The control of the business by the so-called special partners is indicative of a partnership and the provision for the dissolution _of the firm confirms the conclusion that petitioners were not simply creditors.
The case is quite unlike the case of In re Hoyne, Bankrupt, recently decided by this court, where the parties designated themselves and treated themselves as debtors and creditors. The oral testimony of certain witnesses likewise recognized all of the parties as partners and nothing else. A finding that petitioners were not creditors, which the court necessarily made when it found them partners, must then not only be accepted on this petition to review and revise, but, it may be added, was the only finding that could be fairly reached from this record. Not being creditors, the parties were either members of a limited partnership or members of a general partnership.
The law of Illinois, where the contract was executed and where the business of the partnership was to be conducted, must define petitioners’ status. The Uniform Partnership Act covers both limited and general partnerships and was in force at the time this contract went into effect. It is idle to discuss the history of the passage of this act. Whether it received the Governor’s signature or became effective by operation of. law, whether it had long been in effect or not, are questions apart and disassociated from the question of construction. The Uniform Partnership Act represents the law of partnership,
The parties’ rights and their liabilities are fixed by the terms of the Uniform Partnership Act, however, and our inquiry must be directed to the effect -of the act upon the agreement, and this in turn becomes a question of statutory construction. Unquestionably it was the intention of the Legislature to enlarge the usefulness of the limited partnership as an instrument in the conduct of business. To accomplish this intention, then, courts should give the act a liberal construction.
It is equally certain that, because of the danger of great loss through its use in certain fields of industry, the Legislature denied its use to those who wished to engage in the banking, insurance, railroad, or brokerage business. This manifest intent, clearly expressed in section 3, must likewise find expression in the construction of the statute. There is no authority to conduct business under the Uniform Limited Partnership Act, except for the legitimate purposes therein described. Section 3 (chapter 106a, § 47) reads:
“A limited partnership may carry on any business which a partnership without limited partners may carry on, except banking, insurance, brokerage and the operation of railroads.”
It is not necessary to inquire into the reasons for excepting these four businesses; but, if ground for the exception in section 3 be required, neither imagination nor speculation need be awakened to suggest the motive and the purpose back of the legislation. The facts in the present case furnish a most persuasive argument in favor of the wisdom of the legislation that denied to those 'who would engage in the banking, the insurance, the railroad, or the brokerage business the right to do so through a limited partnership. Notwithstanding the express language of the exception in this section, the construction and the effect of which are not open to question, a conclusion has been reached that sanctions and gives legality to a course of dealing the authority for which is expressly denied.
But petitioners seek to avoid the effect of section 3 by referring to section 11 of the act, which reads:
“A person who has contributed to the capital of a business conducted by a person or partnership erroneously believing that he has become a limited partner in a limited partnership, is not, by reason of his exercise of the rights of a limited partner, a general partner with the person or in the partnership carrying on the business, or bound by the obligations of such person or partnership: Provided that on ascertaining the mistake he promptly renounces his interest in the profits of the business, or other compensation by way of income.”
Passing for the moment the two issues raised by respondents in reference to this section, denial of any renunciation by certain of the petitioners and failure of all of them to renounce during the life of the partnership, and taking up at once the construction and effect of this section 11, it is' apparent that we are confronted with a question of
The Limited Partnership Act is readily analyzed. By its first section the term “limited partnership” is defined. Section 2 provides the steps which must be taken by any two or more persons desirous of forming a limited partnership. Section 3 defines the businesses which may be carried on by limited partnerships. The other sections deal with the rights and liabilities and powers of partners who organize under this act. In other words, section 11 was written with section 3 as its background. The words “limited partnership” obviously meant a partnership organized under this act, a partnership for the purpose of conducting a business authorized under this act. “Limited partnership” referred to lawful associations, not to those organized in defiance of the statute. (The relief authorized by section 11 was limited to those cases where bona fide attempts to organize limited partnerships under the provisions of the act had been made.
The force of this conclusion is strengthened by sections 30 and 31 of the act (chapter 106a, §§ 74, 75). In the former section the Legislature used the heading “Existing Limited Partnerships,” while in section 31 a further reference is made to “existing limited partnerships.” “Limited partnerships,” as distinguished from .“existing limited partnerships,” must refer to those organized under this act. We can hardly attribute to the Legislature an attempt to give the same term different meanings in the same act.
Again, speaking of the partnership, the Legislature in section 11 referred to “the partnership carrying on the business,” etc. What business could the Legislature have referred to other than a lawful business, a business for the conduct of' which a partnership could be lawfully organized? In this same section 11 we find a reference to “the rights of a limited pártner.” Section 10 (chapter 106á, § 54), the preceding section, is entitled “Rights of a Limited Partner.” Can it be that the Legislature was at one moment referring to limited partnerships organized under and by virtue .of this act, and to the rights and liabilities of limited partnérs as defined by this act, and was in the same sentence including limited partnerships organized in defiance of the'act? Moreover, there could be no'erroneous belief that the Uniform Limited Partnership Act had been complied with, for. the parties were not only ignorant of the existence of the law, but in their agreement they expressly stated that they were endeavoring to organize under the law of 1874, which was expressly repealed by the later en-' actment.
Reference to the General Partnership Act cannot in my opinion help the petitioners. It is true that section 7 of the Partnership Act provides that “persons who are not partners as to each other are not partners as to third persons,” but section 6 of the same act, also provides: '
*945 “Tills act shall apply to limited partnerships, except in so far as the statutes relating to such partnerships are inconsistent herewith.”
Section 3 of the Limited Partnership Act necessarily destroys the test applied by section 7 of the General Partnership Act in so far as it deals with those engaged in the brokerage business. A general partnership is defined by the act as “an association of two or more persons to carry on as co-owners a business for profit.” Since two or more persons cannot conduct the brokerage business through a limited partnership, it follows that, when such persons engage in the brokerage business as co-owners for profit, they are necessarily general partners.
But, could I agree that section 11 applied to limited partnerships organized under these circumstances and for a purpose forbidden by the act, I would still find myself unable to agree that as to all petitioners there was a renunciation such as is required by section 6 to relieve them of the liability of general partners. To renounce means “to reject deliberately; to disown; to disavow; to disclaim.” Ordinarily it involves personal action knowingly done, or, to quote from Black’s Law Dictionary, “it implies an affirmative act of disclaimer or disavowal.”
In the present case Hecht and Finn, after adjudication in bankruptcy and with enormous liability as general partners facing themselves and others, attempted to repay to the partnership the profits previously drawn by the petitioners. As to the petitioners other than Hecht and Finn, such repayment could not be a renunciation, unless such parties either ratified or authorized such repayment. The record shows that the petitioners other than Hecht and Finn not only failed to ratify or authorize such repayment, but when requested to do so, and prior to such tender, refused to authorize Hecht and Finn to make any such payment for them, or to be bound by the trustees’ action in case such repayment was made. The evidence on this issue is clear and unequivocal; but, if it were doubtful or uncertain, we would, on this petition to review and revise, be required to assume that petitioners other than Hecht and Finn did not renounce their interest in the profits promptly after discovering they were not limited partners.
It is not necessary in this dissenting opinion to consider the status of Clement Studebaker, Jr., and George M. Studebaker. Their position is somewhat different from that of the other petitioners. Whether that difference would be sufficient to relieve them from the liability of general partners I need not discuss. Since this is a minority opinion, and since the majority of the court are of the opinion that none of the petitioners were general partners, it is not necessary to consider or discuss the evidence which furnishes the basis for the contention that these two petitioners were not general partners with Marcuse and Morris.