Case Name: Philip W. Sherwood vs. His Creditors
Court: Louisiana Supreme Court
Jurisdiction: Louisiana
Decision Date: 1890-02
Citations: 42 La. 103
Docket Number: No. 10,407
Parties: Philip W. Sherwood vs. His Creditors.
Judges: 
Reporter: Louisiana Annual Reports
Volume: 42
Pages: 103–107

Head Matter:
No. 10,407.
Philip W. Sherwood vs. His Creditors.
In insolvency proceedings to wind up tlie business of an insolvent commercial partnership, a partner in commendnm wlio claims to be a creditor of his partner, does not occupy a different and better position than a full or active partner; and hence he can not be allowed to enforce a pledge granted to liim by his co-partner on the latter’s former share of the partnership property.' His rights as a creditor of liis partner individually must be subordinated to those of creditors of the partnership.
In liquidating an insolvent commercial partnership, the only difference between a partiier in commendtun and an activo partner, consists in tlie former’s immunity from liability for tlie debts of tlie concern beyond tlie sum wliicli lie lias agreed to furnish by his contract.
PPEAL from the Civil District Court for the Parish of Orleans. Ellis, J.
Frank N. Butler for Opponent and Appellant :
1. A partner in commendtun may legally loan money to tlie person with whom he is so associated, and receive in pledge as security for such loan tlie property acquired with tlie money thus loaned, just as any third person could lawfully do. There is nothing to distinguish a partner in commendtun in sucli a transaction from any third person, since lie lias no control whatever in the management of the business, can not bind the concern by any act of his, and is not even considered a partner, except in that he has furnished a certain amount of money or property to bo omployod in the business on condition of receiving a share of the iirofits in the proportion determined by tlie contract, and of being liable to losses and expenses to the amount furnished, and no more. C. C., Arts. 2839 to 2811; B2 An. 639; ¡S3 An. 1815.
;2. The partner in commenclam guarantees the creditors o£ the concern that the money or property fee puts into it shall be for their benefit; and when that is exhausted he is exonerated from any other payment. In no case is he liable to pay any sum beyond that which he has agreed to furnish by his contract. O. C., Art. 2842 ; 32 An. 660.
3. One may pawn every corporeal and incorporeal thing susceptible of alienation. C. 0., Arts. 3154 and 3155.
4. It is essential to the contract of pledge that the creditor be put in possession of the thing given in pledge, and that actual delivery be made to him, and that the thing pledged remains in the possession of thecreditor, or of a thirdperson, for his benefit. C. C., Arts. 3152 and 3162; 32 An. 1250; 33 An. 976; 38 An. 866; 21 Wallace 360; 2 Pickering 607.
,5. The pledge invests the creditor with the right of causing his debt to be satisfied, by privilege and in preference over the other creditors of his debtor, out of the product of the movable, corporeal or incorporeal, which has been thus pledged. C. C., Art. 3157.
6. When by the terms of the act of pledge it is stipulated that in default of payment of the pledged debt at maturity, the pledgee should have a right, at his option, to sell, without appraisement, at public or private sale, the pledged property, without recourse to a court of justice, and apply the proceeds of the sale to the payment of said debts, it is lawful for the pledgee to pursue the course thus indicated in the act of pledge to realize his debt. C. C., Art. 3157; Act No. 9, approved February 28, 1872, amending and reenacting Art. 3165, Civil Code; 27 An. 472 ; 29 An. 259.
"7. An injunction against a pledgee’s ex parte effort to sell the property pledged to him, in the manner authorized by the act of pledge, is unwarranted, and subjects the plaintiff in injunction and the surety upon his bond to such damages as may result to the pledgee by reason of such unlawful injunction.
Rice & Armstrong for the Syndic, Appellee:
l. A stranger can not hold a pledge on the undivided interest of a member in a commercial partnership to secure a debt due him by such individual member to the prejudice of the then or future creditors of the partnership. Still less can a partner, or a partner in commendam, who is hound to observe exact good faith toward the partnership creditors. C. C., Art. 2823; Sue. of Beer, 12 An. 698, 699; ' Montross vs. Byrd, 6 An. 522; Ulman & Co. vs. Briggs, Payne & Co., 32 An. 660.
•2. A contract between partners, though one of them be a partner in commenclam, by which one of them is permitted to place the assets of the firm out of the reach of the creditors of the firm, is Void as to such creditors as in fraud of their rights. Bigelow on Frauds, p. 148.
.3. Partnership assets are pledged first of all for the payment of partnership debts. C. C., Art. 2823; Sue. of Pilcher, 89 An. 362, 364; Carter Bros. & Co. vs. Galloway & Burns, 36 An. 473 and 730; Gueringer vs. His Creditors, 33 An. 1279, • 1282.
4. The possession of the pledger is that of the pledgee himself, or of a third person appointed by the joint consent of pledger and pledgee. C. C., Arts. 3158 and 3162; Weems vs. licita Moss Company, 33 An. 976.
.§. It is a palpable inconsistency that the active partner shall be in possession and control of all the assets of the partnership, and that the partner in commendam shall bo, at the s ime tipjje, in possession of part 02' all of those assets.
,'6. “ Legal proceedings” to enforce the payment of a debt, or the sale of property pledged for such payment, can be only through service of petition, citation or by executory process when the act of pledge imports confession of judgment. Code of Practice, Ai'ts. 732, 733, 734, 735, 146, 170, 178, 179; O. C. 3165.

Opinion:
The opinion of the court was delivered by
Poché, J.
This appeal involves the discussion of the validity of a pledge granted by the insolvent to Francis Martin, his partner in eommendam, on all of the insolvent's share in the partnership property, to secure an indebtedness of §5,000.
The contest is between the partner in eommendam, as a creditor of the insolvent individually and the creditors of the partnership.
The partner in eommendam prosecutes this appeal from a judgment which refused to recognize and enforce his rights of pledge.
The pertinent facts are as follows: A pre-existing partnership, carrying on the business of manufacturing doors, blinds, sash, etc., under the style and name of the "Enterprise Sash, Door and Blind Factory," and composed of Alexander Smith, Francis Martin and Philip W. Sherwood, was dissolved in the early part of November, 1887, and Sherwood bought out Smith's interest in the concern for §5,000 cash, which he paid with money loaned him by Martin.
Immediately thereafter, Sherwood executed an act of pledge of his two-third interest in the factory in favor of Martin to secure his indebtedness of $5,000 to the latter.
On the same day the two entered into a copartnership under an authentic act, with Martin as a partner in eommendam, to continue the same kind of business under the same style and name as heretofore. In the new business Sherwood contributed his undivided two-third interest in, and Martin his third of, the factory, with a stipulation of equal shares in profits and losses, limiting Martin's losses to his contribution.
On the 19th of April, 1888, Sherwood made a surrender of the partnership assets, and a syndic was appointed on June 5, 1888.
Martin's claim, under its terms and in accordance with the act of pledge, having matured, he obtained an ex parte order on June 12, 1888, for the sale of Sherwood's interest in the concern, Which had been pledged to him.
Before a sale could be effected his proceeding was enjoined by the .syndic on numerous grounds, one of which was that, as Martin was a partner, his pledge was of no effect toward the creditors of the partnership.
The syndic having thereafter proceeded to a sale of all the assets-of the concern, he presented an account on Avhieh he placed Martin as an ordinary creditor only.
By Avay of opposition Martin urged his rights of pledge on the proceeds of two-thirds of the partnership assets. Whereupon Shakspeare, Smith & Co., creditors of the partnership, opposed Martin's right of being considered as a creditor of the partnership at all, on the ground that he was only a creditor of Sherwood individually.
The various oppositions and the injunction proceedings were consolidated and tried together, resulting in judgment by which the syndic's injunction was perpetuated, Martin's pledge Avas denied and rejected, in so far as it could affect the rights of the creditors of the partnership, his opposition dismissed, and the opposition of Shakespeare, Smith & Co. maintained.
From the foregoing statement of facts, tested under well settled principles of law and of jurisprudence, it is apparent that the judgment thus rendered is correct in every particular.
The fallacy of appellant's contention consists in his assuming the attitude of a third party or of a stranger, in dealing with the insolvency proceedings of Philip W. Sherwood, for the purpose of winding up the business of the concern knoAvn as the "Enterprise Sash, Door and Blind Factory."
. It is elementary in commercial laAV, as A\rell asunder the provisions of the Civil Code, that "the partnership property is liable to the creditors of the partnership in" preference to those -of the individual partner." Art. 2823.
And for such purposes, the partner in commendam is inno better position than an activé partner. As, a member of an insolvent partnership his only immunity consists in the restriction of hie'liability for the debts of the concern, to the amount which he had agreed to furnish by his contract. C. C. 2842.
A partnership Avith a partner in commendam may exist in every association known as partnerships, and it can not be treated as a separate division of partnerships. C. O. 2840.
Ulman & Co. vs. Briggs et al., 32 An. 630; Marshall vs. Lambette, 7 Reb. 471.
Hence it follows that in determining the rights of Martin in. and to the partnership assets as a creditor of Sherwood, he must be treated with the same measure which would be meted out to á simple commercial partner whose share in the concern is liable for partnership debts, and whose claims as a creditor of his partner must be subordinated to the claims of creditors of the partnership. Gueringer vs. Creditors, 83 An. 1279.
As soon as the partnership between Sherwood and Martin was. formed, their respective previous and individual interests or shares in the factory were vested in the ideal being known as the partnership, and no portion thereof could again become the property of the partners, but the residuum, after the payment of the partnership, debts. 89 An. 382, Succession of Pilcher.
Hence the District Judge was correct, not only in holding that the pledge set up by Martin on the previous interest or share of Sherwood in the concern could not be enforced to the detriment of the creditors of the partnership, but that, as he was. only a creditor of Sherwood, he had as such no right to participate in the distribution of the proceeds of the partnership-assets. His only recourse is on the residuum which might accrue to his debtor after the full liquidation of the partnership.
As he had no pledge which he could enforce adversely to the creditors of the concern, it: follows that he had. no legal right to wrench the property from the possession of the syndic for the purpose of effecting a sale of the same independently of the insolvency proceedings. Hence the injunction sued out to stay his proceeding, was properly perpetuated.
Judgment affirmed.