Case Name: Mahlon Mattison and another, in behalf of themselves and all others, &c. plaintiffs and appellants, vs. William P. Demarest et al. defendants and respondents
Court: New York Superior Court
Jurisdiction: New York
Decision Date: 1866
Citations: 4 Rob. 161
Docket Number: 
Parties: Mahlon Mattison and another, in behalf of themselves and all others, &c. plaintiffs and appellants, vs. William P. Demarest et al. defendants and respondents.
Judges: 
Reporter: Reports of cases argued and determined in the Superior Court of the city of New York
Volume: 27
Pages: 161–179

Head Matter:
Mahlon Mattison and another, in behalf of themselves and all others, &c. plaintiffs and appellants, vs. William P. Demarest et al. defendants and respondents.
1. The apparent withdrawal of a member of a solvent firm therefrom, and his nominal sale of his interest in its assets to a new firm of the same name, composed of the remaining partners, will not relieve such retiring member from liability for the debts of the new firm, where he secretly retains his interest in the partnership, and shares in its profits, and is only to claim such transaction as a sale, in case of the insolvency of the new firm. An assignment by the latter, for the benefit of their creditors, preferring such retiring partner for the amount of the supposed price of such sale, would be void for preferring the claim of a partner and a fictitious debt. Per .Tones, J.
2. The acceptances of a new firm, given in payment of the interest of a retiring partner in a previous firm of the same name, in the assets of the latter, sold bona fide to the former, constitute a valid legal claim against such new firm, and may be legally preferred by them afterwards in an asssignmept for the benefit of their creditors, notwithstanding such new firm is composed of the remaining members of the old firm only.
3. So held in the case of a dissolution of a limited partnership which had been formed in 1858, and the formation of a new general partnership under the same name by the general partners of the former, in 1861, when such new firm bought of the special partner his interest in the assets of the firm for the same amount as the capital contributed by him to such first partnership, and gave him the acceptances of the .new firm therefor, and in sixteen months afterwards, executed an assignment for the benefit of their creditors, preferring such acceptances,
4. Held also that such assignment was not void as against creditors of the new firm, because such purchase was made of, and notes given to, the special partner in 1861, in the expectation that such new firm would ultimately fail, and with the understanding that in such case, such acceptances should be preferred in an assignment, by such new firm, of their assets.
6. Held also that although the ultimate failure of such new firm might be expected by both parties at the time of giving such acceptances, as inevitable, an agreement to postpone such failure by the use of the money and assistance of the credit of the retiring partner in the business of the new firm, until the debts of the first firm were paid, was not in itself fraudulent as to any one. Nor would the mere payment or security of the debt due to the retiring partner be fraudulent as to the creditors of such new. firm, notwithstanding such expectation.
6. Held, further, that even assuming such arrangement to have been a fraud upon those who trusted the new firm, it was not the kind of fraud which made an assignment void under the statute against fraudulent transfers of property.
7. The mere omission of a debt from a schedule of creditors annexed to an assignment for the benefit of creditors will not vitiate the assignment per se, especially where the debt is included in a general description,
(Before Bobektson, Ch. X, and McCunn and Jones, JJ.)
Heard March 13, 1866;
decided- 1866.
This action was brought to set aside an assessment executed by the -defendants, Demarest and Middleton, composing the firm of “ Demarest & Middleton,” to the defendant, Powers, for the benefit of the creditors of such firm, wherein the defendant, Smith, is preferred. The plaintiffs were judgment creditors of such firm, and brought this action in behalf of themselves and all others similarly situated who might elect to come in and contribute to its expenses.
In August, 1858, the defendants, Demarest, Middleton and Smith, formed a limited partnership, as dealers in leather and findings, under the name of “ Demarest & Middleton.” The first two were general partners, and the third a special partner, contributing tiiQ sum of ten thousand dollars, as capital. The necessary documents to legalize such partnership were filed. It continued until July, 1861, when it was agreed to be dissolved. The defendants, Demarest and Middleton, then formed a new general partnership, to carry on a similar business under the same name.. The new firm purchased of the defendant,' Smith, his interest in the assets of the old' firm, and gave him therefor their drafts, signed by the defendant, Demarest, with - the firm name, for twelve hundred and fifty dollars each, payable, with interest, at various periods, from fifteen to one hundred and twenty days after sight. Such partnership continued until October, 1862, when its members executed an assignment of all their property to the defendant, Powers, in trust, to pay their creditors, who were divided into three classes, in a certain order. The first included the defendant, Smith, (whose debt was described to be for “ cash loaned/’) and others, (whose debts amounted to four thousand dollars,) and the last, all partnership debts.
In December, 1862, the plaintiff's recovered judgment in this court against the defendants, Demarest and Middleton, for nearly three hundred dollars, ($295.50,) on which execution was duly issued, and returned unsatisfied. Such judgment, as well as some others recovered by other creditors against the same defendants, (amounting to nearly' fourteen thousand dollars,) were obtained upon debts contracted before the making of such assignment.
The complaint, in this action, set forth the recovery of such judgment by the plaintiffs, and the return of the execution unsatisfied, but did not state absolutely the time when the debt was contracted, upon which it was recovered, but only its priority to such assignment. It also stated the execution of the assignment to the defendant, Powers, of which a copy was annexed, and the filing of an inventory by him in > November, 1862, by which the value of the assigned property appeared to be about twenty thousand dollars, and the amount of debts to be over seventy-two thousand dollars.
The' complaint then proceeded to charge that such assign ment was made by the assignors and accepted by the assignees, with intent to hinder and defraud the creditors of the former. That such assignors and the defendant, Smith, claimed to have formed the limited partnership before mentioned, and dissolved it, when it was insolvent, as a device to save such contribution to the capital by Smith, as special partner, and protect him against any liability in such business. That such acceptances were given to further such scheme, and not “ for cash loaned,” as stated in such assignment. That the defendants, Demarest and Middleton, fraudulently omitted from the list of debts in the inventory filed, a certain one due to a firm in England, (John and Samuel Thorp,) for the sum of eight hundred dollars, and that the defendants, Demarest and Middleton, did not deliver over all their property to the assignee.
The complaint also, after setting out the formation of the general partnership of Demarest & Middleton, charged that such partnership assumed, without any consideration, the liabilities of the prior limited partnership, amounting to forty thousand dollars, which they paid out of the avails of property acquired by such new firm, for which a large portion of the debts due from the latter, at the time of such assignment, were contracted, That it was fraudulently arranged between the members of such limited partnership, when they pretended to dissolve it, to form a new firm, whose liability should be substituted for that of such limited partnership for the debts of the latter.; and that such new firm should continue long enough in business to pay the debt thus assumed, and give an appearance of good faith to.the transaction; that the defendant, Smith, i( should assist it with his money and credit” for that purpose, and that after fully paying or securing him, “ it should ultimately fail, as it was known it must,” and that from such arrangement arose the assignment and the preference in it of the debts due to Smith.
The complaint further averred, that the principal part of the property transferred by such assignment was acquired by the defendants, Demarest and Middleton, after the alleged dissolution of such limited partnership. That the defendant, Powers, had been mainly controlled in the discharge of his duties by the defendant Smith; was selected as assignee by him, and that the terms .of such assignment were dictated by him in pursuance of such fraudulent agreement. That the defendant Powers had collected ten thousand dollars in money out of such assigned assets, eight thousand whereof he had paid to the defendant Smith. That he had in his possession two thousand dollars in money belonging to such trust fund, and nine thousand dollars worth of personal property assigned.
The complaint further averred, that the defendant, Smith, recovered a judgment upon the acceptances, before mentioned, against the defendants, Middleton and Demarest, prior to any others; that judgments exceeding twenty-two thousand five hundred dollars had been recovered against the same parties, who owed other creditors about fourteen thousand dollars. All of which creditors Intended to come into this action and be made parties.
The relief demanded by the complaint was as follows : To vacate such assignment, and declare it to have been fraudulently made as against the plaintiffs, and all judgment creditors of Demarest and Middleton, who came in as such in this action. Also to have an account by the defendant Powers of all the property of such firm in his hands; and make him personally responsible to the extent of all moneys received by him under such assignment.' Also to compel the restoration by the defendant Smith, of the eight thousand dollars paid him, and make him personally responsible for the full value of all the assigned property. Also to set aside the judgment in his favor, or postpone it as a lien to the claims of the plaintiffs ; and to compel a transfer by the defendants Powers and Smith of any assigned property remaining in their hands to a receiver. Also to enjoin the defendant Powers from acting, and appoint a receiver. The answer of the defendants Powers and Smith, controverted the charges of fraud contained in the complaint, and the facts alleged specifically therein, to sustain the same. The answer of the defendant Smith alleged, further, that printed notices of the dissolution of the limited partnership, and the formation of the new general partnership mentioned in the complaint, were served on the plaintiffs in July, 1861, and that the debt for which the plaintiffs recovered judgment was contracted in May, 1862, payable in six months thereafter. It also averred that such defendant received the drafts mentioned in the complaint, for the sum originally contributed by him to the capital of such limited partnership. It does not appear by the case, whether the defendants Demarest and Middleton were ever served with a summons, or appeared in the action.
. The issues made in this action were tried before a justice of this court, without a jury. The facts found by the decision of the court were: (1.) That the plaintiffs recovered the judgment mentioned in the complaint, upon a debt contracted before the 20th of October, 1862, and issued an execution which was returned unsatisfied, as therein stated. (2.) That the defendants Demarest and Middleton executed the assignment, a copy whereof was annexed to the complaint, and the defendant Powers took into his possession property so assigned. (3.) That the defendants Demarest, Middleton and Smith formed the limited partnership stated in the pleadings ; (to the capital whereof the defendant Smith contributed and paid the sum of ten thousand dollars ;) and dissolved the same in July, 1861, by the withdrawal of Smith and the sale of his interest in the partnership to the other partners for f>10,000; for which he took the draft mentioned in the pleadings, and preferred in the assignment, on .which dissolution the defendants Demarest and Middleton formed the new general partnership mentioned in the pleadings, which continued until October, 1862. (4.) That the defendants Demarest and Middleton fully and fairly made over their property, under such assignment to the defendant Powers, who took possession of the same. (5.) That the defendant Powers was not selected as assignee by the .defendant Smith, nor did the latter dictate the terms of such assignment, nor was there either any fraudulent combination on the part of the defendant Powers with any of the other defendants, or any control over him in the discharge of his duties as assignee, by the defendant Smith. (6.) That the sum secured by such before mentioned acceptances was a valid and subsisting debt due and owing from the defendants Demarest and Middleton to the defendant Smith at the time of the execution, by them, of the before mentioned assignment, and that such assignment was not made with intent to hinder, delay or defraud either the plaintiffs or any other creditors of the assignors.
Judgment was given of dismissal of the complaint, in favor of the defendants Powers and Smith, and against the plaintiffs, from which this appeal was taken. No disposition was made of thQ defendants Demarest and Middleton, as parties to the action, by any judgment.
J. Graham, for the plaintiffs, appellants.
O. B. Smith, for the defendants, respondents.

Opinion:
Robertson, Ch. J.
It is not claimed, in this case, that the making or conducting of the limited partnership entered into by the defendants, Demarest, Middleton and Smith, formed originally a part of any fraudulent scheme to defraud the plaintiff, of which the assignment assailed in this action was the completion. Nor does the complaint deny that the proper legal steps were taken to dissolve such partnership, or that, upon its dissolution, the general partners assumed a liability to the defendant Smith, for the sum of $10,000, either as a restoration of the capital contributed by him, or the consideration for the purchase of his interest in the assets of such firm. Nor is it pretended either that such" sum was not originally paid in by Smith, or that the transaction between him and the general partners, in which their drafts for such sum were given, would not have been perfectly fair, provided no general partnership had been formed. Nor that the defendant Smith was a party to any transaction to prejudice those who were creditors of the limited partnership at the time of its supposed dissolution. Although, even if he had been, no one but such creditors could complain of it. (Lachaise v. Marks, 4 E. D. Smith, 610.) Nor do I understand that the plaintiffs go so far as Seriously to contend that, so far as they were concerned, the limited partnership, in consequence of a failure to dissolve it, or from any other cause, so continued in law to the time of incurring the liability to them for which they obtained judgment, as to make it a debt of the limited and not the general partnership, and even down to the time of executing the assignment in controversy, so as to make it void as to any assets assigned as being the property of such continued limited partnership. On the contrary, the creation of the new partnership, the substitution of the liability of the new firm for that of the limited partnership, for the debts of the latter, and the continuance of such firm in business long enough to pay the debt 'so assuihed, and give the transaction an appearance of good faith, and its ultimate failure, after, paying or securing the defendant Smith, are made, in the complaint, part of a scheme to defraud somebody, although it is not stated who that was. The principal part of the property, however, transferred by such assignment, is also alleged, in such complaint, to have been acquired by the defendants Demarest and Middleton after the time of the supposed dissolution, and it is made a matter of complaint therein that a very large proportion of the debts, owing- (query, by whom ?) at the time of the assignment, 'was contracted for property acquired " in the firm name," the avails of which were applied to pay the debts of what the defendants claim- to have been a distinct and different business. These allegations would have been all immaterial if the plaintiff's were, (as they do not claim in their complaint themselves to have been,) creditors of a limited partnership, who had executed an assignment, void by reason of its preference of creditors, and securing a special partner.
Any liability of the defendant Smith to the plaintiffs; as a general partner or otherwise, for the debt on which they have obtained judgment, ¡(if he has made himself so,) is immaterial, -both because the plaintiffs -have waived such liability, by taking a judgment against Demarest and Middleton alone, and such fact has no possible bearing upon the question of fraudulent intent or illegality of the assignment. That instrument would not be fraudulent, as against creditors merely, because the defendants Smith, Demarest and Middleton, combined to procure from the plaintiffs, or any other person, property wherewith to obtain the means of discharging liabilities of the limited partnership, and securing to the defendant Smith the payment of the amount for which he relinquished his interest in the assets of such partnership. Such a combination might, under some circumstances, afford good grounds for making Smith personally liable for the value of such property, or have enabled the plaintiffs to maintain an action for its restoration. But the title to such property is vested in the assignee by the action for the price, while any claim against the defendant Smith is merged in the judgment against the other two. Besides, the plaintiffs have waived all objections to such assignment, upon any grounds peculiar to themselves, by commencing this action on behalf of themselves and. all other judgment creditors ; not even setting out what the nature of the debt was for which they obtained judgment.
It is insisted, however, that the assignment in question is void, by reason of the preference of the claim of the defendant Smith. Not because it was simulated, or was not justly due, since that was not asserted in the complaint, or sustained by any evidence, but because Demarest and Middleton, being general partners, and already liable for the debts of the limited partnership, agreed with Smith to substitute for such debts the liability of the' new general partnership then formed by them, keeping up the business of such new firm only long enough to pay such debts, and acquire an appearance of good faith, but with the understanding or expectation that it must and should ultimately fail, after having fully paid or secured Smith, and executed the assignment in question, in pursuance of such plan.
It is very plain that Demarest and Middleton would not, even if they succeeded in such plan of substituting the respon sibility of a new general partnership for that of the limited one, change or shift any personal liability of their own thereby. They could only relieve, by such substitution, the assets of the former firm from the liability to be applied specifically to the payment of its debts, and distributed equally among its creditors, (Innes v. Lansing, 7 Paige, 583,) and, of course, not until those very creditors acceded to such substitution. For any fraud in accomplishing that, only such creditors would have a right to complain. The defendant Smith could derive no advantage from such substitution, after he had relinquished all his interest in the assets of the old firm, as there is no allegation in the pleadings, or pretense, of any conduct or omission of his which would render him liable, as a general partner, for any debts of the limited partnership, even if the plaintiffs were its creditors. The expected ultimate, failure of such new firm is alleged, in the complaint, to have been known to the parties to be an inevitable necessity. Any arrangement, therefore, to produce it would be useless. An agreement to postpone such failure until the debts of the old firm were paid, by the assistance of the money and credit of the defendant Smith, was certainly not fraudulent by itsélf, nor would the mere payment or security of the debt due to him be, as he was equally entitled thereto with any other creditor. There is no allegation in the complaint, or evidence; of any understanding, that the defendants Demarest and Middleton should employ any fraudulent means to bring about the change of liability. The whole arrangement, therefore, to which the term "fraudulent" is applied in the complaint," consisted' of an agreement to procure previous creditors to relinquish their specific claims to the assets of the prior firm, to pay off such creditors by means legally obtained from their new business, and to secure the defendant before a failure happened, which was considered inevitable.
But, even assuming that the whole of such arrangement was fraudulent, as regarded some one, to wit, such as trusted the new firm, that was not the kind of fraud which would make such assignment void under the statute of frauds. That statute (2 R. S. 137, § 1,) only makes vicious assignments void against the parties hindered, delayed, or defrauded. There is no allegation or pretense that the plaintiffs were so, by any fraud, except a change of liabilities. Besides, the only vice which it declares avoids them, is an intent to hinder and defraud persons of suits, damages, forfeitures, debts or demands. The mere preference of a lawful debt is held not to do so. If the preference had been given in consequence even of an additional illegal act agreed to be done by a lawful bona fide creditor, provided it was not one tending to hinder or defraud other creditors, it would not, I apprehend, render such instrument void under the statute of frauds, although, possibly, it might defeat the right of such creditor to claim the benefit of such assignment. The only illegality which avoids such an assignment, under that statute, is that which makes, or endeavors to make, it the instrument of defeating or delaying the collection of debts by due course of law.
The evidence in the case, however, of any fact tending to make out fraud of any kind, was very conflicting. And, although there is no express finding upon any question of fraud or fraudulent intent, except against a fraudulent combination or agreement, at any time, on the part of the defendant Powers with any of the other defendants in regard to such assignment, it must be presumed, if necessary in order to sustain the judgment, that the opinion of the court was adverse to the plaintiffs upon the proof of fraud, and such finding is not to be disturbed on appeal. (Ball v. Loomis, 29 N. Y. Rep. 412.)
An attempt was made on the trial to establish that the debt to the defendant Smith, secured in the assignment, was due from the defendant Middleton alone. But the acceptances given for it were signed by Demarest with the firm's name • they were given for Smith's interest in the assets of the old firm, which were brought into the new, as its capital. Besides, the testimony as to its being the separate debt of Middleton was contradicted. There is no ground for interfering with the judgment on that ground. It was assumed in the argument on behalf of the plaintiff, that all the steps for the legal dissolution of the limited partnership were not completed until September, 1861, apparently on the ground that the defendant Smith admitted in his answer that the proofs of publication of the notice of dissolution were not filed until- that time, but that was not rendered necessary by the statute, provided such notice had been duly filed, recorded and published. (1 R. S. 767, § 24, 5th ed.) The date at the foot of the published notice (September, 1865,) was evidently a clerical error, and there is no direct evidence what the last day was on which such notice of dissolution was published; most probably it was at the end of July, 1861. It does not appear that any business was transacted by, or on behalf ofj such limited partnership, after the filing of such notice, and therefore Smith could not become a general partner as to any one. Eo force of legal fiction can convert creditors of the general partnership of Demarest and Middleton, consisting of them alone, into creditors of the prior limited partnership, so as to prevent the former from making a preferential assignment.
The omission from the inventory of the debt due to Messrs. Thorp, must be presumed to have been done innocently; indeed, there is no evidence of fraud, except the omission itself, and the statute does not avoid an assignment for such omission. It was not omitted from the assignment, since that does not profess to give the names of all creditors, while it provides in general terms for the payment of all the debts of the firm. The covenant in the assignment, by the assignee, to execute the trusts " to the best of his skill, knowledge and ability," if below the legal standard of his duty, is merely supererogatory and harmless. He is bound, notwithstanding, by such standard, and there is no exemption of- him therefrom in the assignment.
The question put to the defendant Middleton, as to the object of the defendant Smith in becoming a special partner, was not only immaterial to any issue in the action, hut was in an improper form. He could only testify as to some act or expression of Smith, showing his object, and not give his own general inference. Besides, no foundation was laid by showing that he had the necessary knowledge of such object. The general partnership agreement was properly admitted in evidence on the certificate of the notary public. The statute of 1833, (ch. 271, § 9,) gives to every instrument (except certain ones) proved or acknowledged in the manner provided for taking proof or acknowledgment of conveyances of real estate,'the same effect as if it were such a conveyance. And a conveyance certified to have been proved by a subscribing witness, before a proper officer, may be read in evidence. (1 R. S. 759, § 16, 17, 1st ed.)
I do not find any errors in the admission or exclusion of testimony, or the principles of law applied. The judgment must, therefore, be affirmed, with costs.
McCunn, J, concurred.
Jones, J.
From the frame of the complaint, and the allegations therein contained, I am of opinion that the validity of the assignment is attacked on fpur grounds only.
1st. A fraudulent and intentional omission from the list of creditors, and from the inventory filed under the act of April 13, 1860, of a debt due an English creditor.
2d. That the property of the judgment debtors has not been fully and fairly made over under the assignment, and has not been fully and fairly specified in the inventory filed as aforesaid, and has not been all. surrendered to, or taken possession of, by the assignee.
3d. That the assignee was selected by the defendant Smith ; that the terms and provisions of the assignment were dictated by said Smith; and that the assignee ha,s been mainly controlled in the discharge of his duties by said Smith.
4th. That the defendant Smith was preferred in the assignment, for a fictitious debt, averring that he had been engaged in business with the defendants Demarest and Middleton, and had put in as his capital $10,000; that such business was disastrous, and the assets, of the business, including the $10,000, were insufficient to pay the debts. That in this position of affairs an arrangement was made whereby the firm was to pay to Smith this $10,000, although not indebted to him therefor. That the scheme was that Smith should retire from the business, and sell out his worthless interest to the other two for $10,000, and those two should continue the business as a firm, and give their notes to Smith for the $10,000. That this was done, and the notes given, and that these notes constitute the claim for which he is preferred.
As to the first ground of objection, it is clear that the debt in question is omitted from the schedule of creditors and the inventory. Such omission, unless fraudulently done, will not vitiate an assignment, especially where the debt is included in the general language of the assignment itself. In this case, there is no evidence that the omission was fraudulent.
As to the second objection, the judge who tried the action has found against it as a matter of fact, and his finding is supported by the evidence.
As to the third objection, the same remarks apply as are applicable to the second.
As to the fourth objection, the gist of it is that the debt to Smith was a fictitious one. If it was a good, valid and existing debt, the objection falls to the ground. The judge below found that the debt was a good, valid and existing one. I see no reason for disturbing this finding. One member of a solvent firm may retire from the firm, and sell out his interest to the remaining partners, and the sum agreed to be paid for his interest will constitute a fair and valid debt against the remaining partners, provided the transaction is in good faith. I think the evidence sustains the conclusion, to which' the judge, in finding the debt to be fair and honest, must have come, that the special partnership was solvent at the time of the sale of Smith's interest, and that such sale and his retirement were bona fide.
Of course, if the vendor, notwithstanding the form of a sale is still secretly to retain his interest in the firm, share the profits thereof, if any, and only to rely on the sale in case of insolvency, then the sale would be merely colorable, and such vendor would remain liable as a partner, and an assignment preferring his claim for the amount of the sale would be invalid, both as preferring a fictitious debt and as preferring the debt of a partner. The judge below, in finding that the debt was fair and honest has necessarily found that the sale in question was not of such colorable character, and I think the evidence sufficient to sustain the finding.
There are many allegations in the complaint, and much proof of a scheme to defraud creditors, subsequent to the sale by, and retirement of Smith, by obtaining goods on credit, with the design of paying the debts for which Smith was liable, and also the notes given to him with the proceeds of such goods, and after such payment, of failing, leaving no, or but little assets to pay such subsequent creditors. This scheme of fraud might perhaps enable the subsequent creditors to replevy their goods, or to arrest the parties concerned in it, or to sue Smith for the price of their goods ; but it does not affect the validity of the assignment.
There is one view, however, in which this scheme would have a bearing on this case, and that is as tending to show that the sale by Smith was not bona fide. The judge, in finding that sale to be bona fide, necessarily finds against any facts tending to show that it was not bona fide, and I cannot say that his finding is against the weight of evidence.
The plaintiff, however, contends that the assignment is void on the following grounds :
1st. That the limited partnership not having been validly formed, Smith became a general partner, and .that such general partnership was never validly dissolved, and consequently preferring him, was preferring a debt of the partnership.
2d. That the limited partnership was validly formed, but by reason of certain informalities in the proceedings for its dissolution, Smith became a general partner, with the same result as stated in the first proposition.
With respect to these two propositions, they rest on the basis that where a partnership exists between two or more, such partnership cannot inter sese prefer one of the partners' for a debt due him by the firm ; and it is contended that Smith having become a general partner remains such until a dissolution, and that the partnership has never been dissolved.
A general partnership may be dissolved by mutual consent of the co-partnership. It is not necessary that there should be any writing or formality about it, nor is notice to the world or to dealers necessary. If notice is not given, all the partners still remain liable as partners for an indebtedness subsequently contracted by one of them. This liability, however, does not constitute them partners inter sese. The existence of such liability has no bearing on the right and power of one partner of a solvent firm to retire bona fide from the firm, and on such retirement, to sell his interest to the remaining partners, and take their notes in payment, which will constitute a valid claim against the remaining partners, and can be legally preferred by them in an assignment made by them.
Considering the connection between Smith, Demarest and Middleton to be that of a general partnership, I am at a loss to perceive why under the evidence it was not properly dissolved.
The proceedings taken to dissolve it under the statute relative to limited partnerships can, if it never was a limited partnership, have no effect. They were merely supererogatory. The dissolution was consummated by the act of Smith retiring with the consent of the other partners, selling his interest to the new firm and receiving his pay.
The idea is shadowed forth, however, that the limited part-ship was validly formed, that consequently under the statute the sale of Smith's interest turned it into a general partnership, and that the result of this is that the same act which created the general partnership cannot be said to dissolve it, and that having become a general partnership it cannot be dissolved as a limited one under the statute relative to such partnership.
I think the idea is erroneous.
The 12th section provides that " Every alteration which shall be made in the capital or shares contributed, held or owned by any of the special partners and the death of any partner, whether general or special, shall be deemed a dissolution of the partnership unless ® * ® * and every such partnership which shall be carried on after such alteration shall have been made or such death shall have occurred shall be deemed a general partnership in respect to all business transacted after such alteration or death, except ® ®."
By this section such alteration or such death ipso facto dissolves the limited partnership, and, if the business is thereafter carried on, the partnership becomes a general one as to such business.
After it becomes a general partnership, the provisions of the act which are intended to prescribe the powers and duties of, and to place restraints on, a limited partnership cease to be applicable, and it becomes possessed of all the powers, rights, privileges and incidents, and subject to all the duties and liabilities of a general partnership, formed in the ordinary way. It follows that the members of a general partnership created by the statute can in the same manner as a general partnership formed in the ordinary way, at any time, dissolve the partnership by mutual consent without notice to its dealers or the world ; the only effect of not giving notice being as has been hereinbefore stated.
This then being the right and power of partners in a general partnership, I see no reason why when the matters, which •dissolve the limited and raise a general partnership under the statute, consist of an agreement between the partners whereby one withdraws entirely from business connection with the others and sells out his interest to them, and of acts done in carrying out such agreement, those very matters should not operate eo instanti the raising of the general partnership to dissolve it. '
The effect of this doctrine is to make general partners only those members of the special partnership who continue to be interested in the business, after an act which, under the statute, amounts to a dissolution of the special partnership, with a liability on the withdrawing members to be charged as if they were general partners, at the instance of such persons who, being former dealers with the firm, have had no actual notice of the withdrawal, and of such persons who, not having been former dealers, have had no constructive notice.
Under this construction of section 12, conceding that under the facts of this case a general partnership was created under the act, yet it was immediately dissolved by the withdrawal of Smith and the organization of a new firm ; and the purchase by that new firm, at the time of the dissolution, of Smith's interest was valid and the obligations given by the new firm for the purchase money constituted a valid and just debt.
If, notwithstanding the dissolution of a limited partnership under section 12, the limited partnership still continues for some purposes, yet it may be put an end to for all purposes by the filing and publication of a notice under section 24.
From the tenor of this section it seems to me that partners in a limited partnership may at any time dissolve it inter sese, but that the notice must be filed and published and the term for the publication have been completed before the dissolution takes effect as to third persons. The fact that there was a dissolution inter sese prior to the filing of the notice, does not vitiate the effect of such notice. On the contrary there must be such a dissolution before notice, if it can be given. It results from this that only those who become creditors prior to the expiration of the term of publication can claim that the firm still retains its impress of a limited-partnership and is subject to the provisions of the act, and those creditors, only, can attack the acts of the partners as being contrary to such provisions.
In the present case, if notwithstanding the acts of the partners, the limited partnership continued for any purpose, yet, by the filing and publication of the notice, it wholly ceased for all purposes at least as early as September 7,1861.
The plaintiffs not having become creditors prior to September 7, 1861, cannot attack any of the acts of the partners as being contrary to the provisions of the act relative to limited partnerships.
What rights a person who became a creditor prior to September 7, 1861, would, under the circumstances of this case have, is not a matter for discussion or decision in this case.
The plaintiff's counsel makes this further point, that the dissolution of the limited partnership and the ultimate assignment by the general partnership were intended to prefer Smith and secure him his 010,000, as special partner, at the expense of creditors, and that consequently they are inimical to the-provisions of the Revised Statutes relative to limited partnerships.
There are two answers to this: 1st. The plaintiffs never became creditors of the limited partnership, and therefore cannot invoke in their favor the provisions of the statute. 2d, As matter of fact, the dissolution of the limited partnership was not intended to prefer and secure Smith his 010,000 at the expense of creditors of that partnership.
With reference to the 1st, 2d and 8th points of the plaintiffs, I fully concur in the views expressed by Chief Justice Robertson.
I am of opinion that the judgment should be affirmed, with costs.