Case Name: Ernst Richard Fuhrmann and Justus Friederich Heinrich Heyn, Appellants, v. Carl von Pustau, Impleaded with August Heckscher, Respondent
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1908-06-05
Citations: 126 A.D. 629
Docket Number: 
Parties: Ernst Richard Fuhrmann and Justus Friederich Heinrich Heyn, Appellants, v. Carl von Pustau, Impleaded with August Heckscher, Respondent.
Judges: 
Reporter: Appellate Division Reports
Volume: 126
Pages: 629–636

Head Matter:
Ernst Richard Fuhrmann and Justus Friederich Heinrich Heyn, Appellants, v. Carl von Pustau, Impleaded with August Heckscher, Respondent.
First Department,
June 5, 1908.
Partnership — liability of special partners—withdrawal of contribution after dissolution — creditors’ bill to charge special partner.
Where a limited partnership has been duly organized in compliance with the statute, a special partner is not a proper party defendant to an action brought to enforce the firm obligations unless he has become liable as a general partner under the provisions of the statute.
Where a special partner withdraws his contribution after the limited partnership has expired by time limitation he does not become individually liable for debts incurred by the partnership. The individual liability imposed by section 39 of the Partnership Law on special partners withdrawing their contributions applies only where the withdrawal is made during the continuance of the partnership.
It seems, however, that where a special partner withdraws his contribution after the termination of the partnership the moneys may be reached by a creditor, but only by a creditors’ bill in equity after his legal remedy against the firm property and the general partners individually has been exhausted.
The inadequacy of the remedy at law against the copartnership can only be shown by recovery of a judgment against the general partners and inability to enforce the same by execution.
McLaughlin, J., dissented, with opinion.
Appeal by the plaintiffs, Ernst Eichard Fuhrmann and another, from a judgment of the Supreme Court in favor of the defendant August Heckseher, entered in the office of the clerk of the county of Hew York on the 3d day of March, 1908, upon the decision of the court, rendered after a trial at the Hew York Special Term, sustaining the said defendant’s demurrer to the amended complaint, and dismissing the said complaint as to him.
William D. Gaillard, for the appellants.
Robert B. Hamilton and Justus P. Sheffield, for the respondent.

Opinion:
Ingraham, J.:
The complaint, the sufficiency of which is the question presented on this appeal, alleged that the defendants were copartners, the defendant von Pustau being the general partner and the defendant Heckscher a special partner who had contributed the sum of $50,000 to the copartnership ; that this special partnership expired by limitation on January 6, 1906 ; that on or about said 6th day of January, 1906, Heckscher, the special partner, received from the copartnership the sum of $50,000 theretofore contributed by him and withdrew such amount from the copartnership assets, although the accounts between the plaintiffs and the copartnership had not been adjusted and a full payment made by the copartnership to the plaintiffs of the balance due them. It is then alleged that there were certain transactions between this copartnership and the plaintiffs under an agreement that became operative on the 1st of January, 1900, and under which, between January 1, 1900, and September 1, 1905, the plaintiffs consigned to the copartnership, consisting of the defendants, a large quantity of merchandise which was received by the copartnership; that the copartnership rendered account sales of this merchandise from time to time and made remittances to the plaintiffs; that these account sales were incorrect and that on several consignments the copartnership received various sums of money in excess of that for which it had accounted to the plaintiffs; that the defendants have refused to make further accountings, have altogether failed to account for upwards of ten consignments made to the copartnership by the plaintiffs prior to September 1, 1905, and that there is a large amount due and owing by defendants on account of said consignments, and the plaintiffs demand an accounting by the defendants for all the consignments of merchandise made to them by the plaintiffs under the contract as aforesaid, that plaintiffs have judgment against the defendant von Pustau as may appear on such accounting to be due them and against defendant Heckscher to the extent of the §50,000 withdrawn by him from the said copartnership and for other and further relief. The defendant Heckscher, the special partner, demurred to this complaint on the ground that as to him the complaint did not state facts sufficient to constitute a cause of action.
There is no allegation in this complaint that this 'special partnership was insolvent either before or after the withdrawal of the contribution of the special partner or that at the time of the termination of the copartnership there were any debts owing by it except the debt to the plaintiffs.
By the Partnership Law (Laws of 1897, chap. 420) what are called limited partnerships are authorized. Section 36 of that act provides that the general partners shall be jointly and severally liable as general partners, and that the special partners shall not be liable for the debts of the partnership beyond the fund contributed by them respectively to the capital of the partnership. By section 37 the general partners only may proseciite the business of the partnership, but the special partner is authorized to have certain transactions with or for the partnership, and it is then provided that if a special partner interfere with the transactions of the copartnership except as therein authorized he shall be deemed to be liable as a general partner, and if such partnership become insolvent or bankrupt a special partner shall not, except for claims contracted in pursuance of this section, be allowed to claim as creditor until the claims of all other creditors of the partnership are satisfied. Section 38 provides that actions and special proceedings in relation to the business of the partnership may be brought and conducted by and against the general partners in the same manner as if there were no special partners. Section 39 provides that no part of the sum which a special partner contributes to the capital stock shall be withdrawn by him or paid or transferred to him in the shape of dividends, profits or otherwise, at any time during the continuance of the partnership, but a special partner is authorized to receive interest on the money contributed, under certain conditions, and if, after payment of such interest, any profits remain to be divided, he may also receive a share of the profits, and it is then provided: " But if by the payment of such interest or profits to any special partner the original capital is reduced, the partner receiving the same must restore the amount necessary to make good his share of capital, with interest, and he becomes liable as a general partner for debts contracted until he returns such amount, to the extent of the amount so withdrawn."
Under these provisions upon the organization of the partnership complying with" the statute, a special partner is not a proper party to an action brought to enforce a firm obligation unless he becomes liable as a general partner. The allegation of the complaint is that a limited partnership was duly formed; and, therefore, the special partner did not become liable for the firm's indebtedness unless under some provision of the statute he has lost the protection given to him as special partner and become liable as a general partner. There is no violation of section 37 of the Partnership Law alleged. ¡Nor does it seem that section 39 was violated, for it is not alleged that any sum which this special partner contributed was withdrawn by him or paid or transferred to him during the continuance of the partnership. There is no violation of section 40 alleged, and there is nothing in the Partnership Law that I can see that either makes the defendant ITeckscher liable as a general partner or justified a creditor in making him a party to an action to enforce a claim against the partnership which was incurred ' before he withdrew the money that he had contributed. The addition of the last clause of section 39 making a special partner liable for debts contracted until he returns the amount that he has withdrawn does not make the defendant individually liable for the ' debts of the copartnership, for it is not alleged that he withdrew his contribution to the copartnership during its continuance. It is undoubtedly true that by the withdrawal of the contribution to the copartnership by the special partner after the termination of the copartnership there was constituted in the hands of the special partner a fund which was liable to the debts of the copartnership and which could be reached by a creditor of the partnership if the creditor failed to obtain satisfaction for his debt from the copartnership property or from the individual liability of the general partners. But the withdrawal of the amount paid to the special partner after the termination of the copartnership did not under the statute make the special partner liable for the firm debts or authorize a creditor to reach these equitable assets of the copartnership except by a creditor's bill after his remedy against the firm property and the general partners individually has been exhausted.
The case of Bell v. Merrifield (109 N. Y. 202) was a creditor's bill filed by a creditor of a special partnership after a judgment had been recovered against the general partners upon which execution was issued and returned unsatisfied, the complaint alleging that the firm was insolvent, and while so insolvent and indebted to the plaintiff's assignor the defendant was paid and withdrew from the copartnership assets the amount contributed by him as special capital. The judgment demanded was that the defendant be adjudged liable as a general partner of said firm, and that the plaintiff have judgment for a sum stated which was the amount alleged to have been withdrawn by the defendant from the firm assets. The Court of Appeals held that the action could be treated as one in the nature of a creditor's bill in equity requiring the defendant to account for the capital and profits which he, as a special partner of the firm, had drawn out and applied to his own use to the prejudice of the creditors of the firm; that although the prayer for relief demanded that the defendant be adjudged liable as a general partner, all the necessary facts to enable the court to grant appropriate relief of an equitable nature were stated in the complaint; and that no liability was sought from the defendant grounded upon the fact of his being a general partner. The principal defense in that case was as to the effect of a judgment in a former action between the same parties in which the complaint alleged that the special partner was liable as a general partner, and in which the defendant had a judgment which had been affirmed by the Court of Appeals. But it was held that the evidence in the former action could not support this action in the nature of a creditor's bill; that in the former action the liability rested upon the defendant's liability as a general partner, while in the action then under consideration the liability rested upon the different and further facts that the defendant was a special partner instead of a general one, and the recovery of a judgment and the issuing and return of an execution against the general partners. The same question was presented to the Court of Appeals in Baily v. Hornthal (154 N. Y. 648), where an action in the nature of a creditor's bill based upon a judgment against the general partner with execution thereon returned unsatisfied to compel a return of the capital contributed by a special partner and which had been withdrawn after the termination of the partnership but when it was insolvent, was sustained, the court saying: " In this case the judgment is in the form of one rendered in an action at law, yet the plaintiffs could not have prevailed without first showing that they had exhausted all their remedies at law. Having a judgment against the Messrs. Weis only, they could not issue an execution against Mr. Hornthal without first obtaining a decree of a court of equity that the latter- had money in his hands which equitably belonged to the creditors of the former." Upon the same state of facts a creditor's bill was sustained by this court in Bliss v. Hornthal (33 App. Div. 225).
It seems to me that the rule is, that where during the continuance of the partnership, that is, before its determination according to the terms of the copartnership articles, any withdrawal is made by the special partner of his capital contributed to the firm it makes him liable as a general partner to all the creditors of the firm until the withdrawal is returned to the extent of the capital contributed that is withdrawn. It is not clear from the statute whether an actual return of the capital to the copartnership would terminate his liability as to those creditors whose debts had been incurred prior to the time of the withdrawal; but in any event his liability is restricted to the amount of the capital thus actually withdrawn. Where the copartnership - had expired by limitation and the capital contributed by the special partner had been returned to him, it is still subject in his hands to the payment of the debts of the copartnership, the liability for which can be enforced by a creditor's action brought by a creditor after he has exhausted his remedy against the copartnership assets. It seems to me that this conclusion is reasonable for, as between the general partners and the special partners, the dissolution of the copartnership and the return by the general partners to the special partners of their contribution, of capital would be binding upon the parties and the general partners cannot complain if it subsequently appears that the firm was insolvent. It is invalid as to creditors and the withdrawn capital becomes an equitable asset of the special partnership which is to be reached by the method provided by law for reaching equitable assets of a debtor. But that relief can only be obtained upon proof that the creditor of the copartnership has no remedy at law to secure the satisfaction of his claim, and that fact can be shown only by the recovery of a judgment against the person primarily liable, namely, the general partner, and the inability to enforce that judgment by execution. Before, therefore, the plaintiff can enforce any claim against the special partner he must exhaust his remedy at law against the general partner, and as there is no allegation in the complaint that would justify the maintenance of this action as a creditor's action the court below.correctly sustained the demurrer to the complaint.
It follows, therefore, that the judgment appealed from must be affirmed, with costs, with leave to the plaintiffs to amend the complaint within twenty days upon payment of costs in this court and in the court below.
Laughlin, Houghton and Scott, JJ., concurred; McLaughlin, J., dissented.