Court Opinion

ID: 9448062
Source: CourtListenerOpinion
Date Created: 2023-08-03 23:22:16.955057+00
Date Added: 2024-06-11T17:31:16.728349
License: Public Domain

WASHINGTON, Circuit Judge
(dissenting).
I would hold the appellant liable on his obligation, and affirm the judgment of the District Court.
I.
The principal issue here is — who shall bear the risk of the insolvency of the continuing partners ? Upon entering a partnership, each partner impliedly assumes the risk of the insolvency of all of the others. The mere act of withdrawing from the partnership in no way alters this responsibility, as regards obligations incurred during the period of active partnership of the retired partner. A creditor who relied upon the credit of the firm during that time may recover in full from the retired partner, leaving the latter without effective recourse by way of contribution if the continuing partners have become insolvent.
An indemnity agreement does not change this situation.1 It merely enhances the potential recovery of the retired partner; instead of contributor-ship, under which he has a right to make the remaining partners pay their shares, it provides a right to require the continuing partners to pay his (the retiring partner’s) share as well. It affects merely the amount potentially recoverable ; it does not protect him in the event that, because of their insolvency, nothing is actually recoverable from the continuing partners.
The creditor’s right to recover in full against any of the partners is a valuable right. Presumably businessmen select the partnership form, with the automatic incident of unlimited personal liability, at least partly in order to confer upon creditors this right as an inducement to dealing with them. It is clear that it is beyond the power of any partner, active or retired, unilaterally to extinguish this right. When a partner retires, and secures indemnity rights against the firm,. *730the mere giving of notice to a creditor can in no way diminish the latter’s rights.
Of course the creditor may himself agree to release the retired partner from his partnership obligation. Where there is no express release, however, ambiguous acts should not give rise to a presumed relinquishment of valuable rights. Where a creditor has notice that a partner has retired, and that the remaining partners have agi'eed to assume his partnership obligations, the reasonable course for the creditor is to look to the partnership for payment in the first instance. And where the partnership is not then able to meet its obligations, it seems no less businesslike for the creditor to negotiate an extension in the time for payment with the firm.
It is from this that the possibility of prejudice to the retired partner arises. For, since he no longer has any voice in the business decisions which may be taken by the firm, he has a strong interest in preventing material alterations in obligations under which he may become liable. Where a gratuitous surety’s liability is involved, prejudice is, in effect, conclusively presumed from an agreement between creditor and principal extending the time of the obligation. Appellant urges that a retired partner be given the same favorable treatment. The equities of the two are, however, not really comparable. A gratuitous surety is one who, having no liability, agrees, without compensation, to accept a circumscribed liability. But a retired partner initially has a primary and unlimited liability. In a sense, a surety undertakes another’s debt, upon given conditions; but the liability of a retired partner is for his own obligation, and is undertaken unconditionally. While a novation between creditor and principal may presumably work injury on the surety, it need not necessarily do so; yet out of a scrupulous regard for the interests of non-compensated sureties the courts have fashioned a rule excusing proof of prejudice where the effect of the novation is material. I see no reason for extending the benefits of this view to a retired partner seeking to avoid liability on his own obligation.
In a proper case, no doubt, estoppel may bar an action against a retired partner, upon a sufficient showing of prejudice. But here, defendant-appellant, neither alleged nor attempted to prove prejudice, relying solely upon the theory that prejudice conclusively follows from the acceptance of notes. I think the court should decline to accept that theory, and that the decision below should be affirmed.
II.
Turning to the views expressed by the majority, I have these comments:
(a) Under the “release” theory, the majority opinion would allow the jury to deprive appellee of his claim upon a showing that he looked to the remaining partners for payment, billed them, and took notes from them. Normally a creditor who looks initially for payment to one of a number of joint obligors does not, because of that, forfeit his rights against the others. The rule advanced in the opinion seems to operate as an exception to this general proposition. In my view, there are no valid reasons, grounded upon the needs of business and the peculiar nature of the partnership form of organization, for such an anomaly. A valuable right — such as the one here at issue — does not normally become extinguished unless its holder chooses to bargain it away, for consideration, or unless his dilatoriness in enforcing it raises such dangers of prejudice to the obligor as to call into play the doctrines of laches or estoppel. The mere intent to look, in the first instance, to another, does not normally have such consequences. (The conduct of a retired partner, as I read the majority opinion, is given evidentiary importance in that it may permit such an intent to be inferred ; it does not supply an independent ground for the release.) If such an intent is to be rendered fatal to a creditor’s claim, a premium is put on testimony asserting or denying intent' — a treacherous subject at best. .And since the normal business practice appears to be that *731a creditor looks for payment first to the continuing business, saving the retired partner’s liability as an object of last resort, the creditor will usually be put at a disadvantage when he finally turns for payment to that partner.
The case of Regester v. Dodge, C.C.E.D.N.Y.1881, 6 F. 6, is relied upon as a ■source of the rule which the majority ■adopts. While that case does contain language which would seem to make the intention of the creditor determinative of bis rights, I deem it significant that the court there also found sufficient evidence ■of actual prejudice to the retired partner to support the defense of laches as an alternative- holding. The opinion in Regester recites that when the new partnership subsequently went into bankruptcy, “and the plaintiff [creditor] was called on to act in respect to the debt ■sued on, it was open to him at once to assert the liability of Edward Dodge {the retired partner] for the debt in ■question. Had he then done so, and had the liability of Edward Dodge been then established, a right on the part of Edward Dodge to become a creditor of the new firm in the bankruptcy proceedings would have arisen. This was a substantial right lost to Edward Dodge by un-exeused delay [of some five years] on the part of the plaintiff.” 6 F. at pages 14-15. The case is further distinguishable in that by the tiftie the action was brought, eight years after the obligation had been incurred and six years after Dodge — the retired partner — had left the firm, Dodge was dead.
I think that a far different case is presented where the creditor assents to the substitution of the liability of some new person or persons not previously liable to him. In that situation, the introduction of the new obligation constitutes consideration for the discharge of the retired partner. This was the classic English rule, see Wadhams v. Page, 1890, 1 Wash. 420, 25 P. 462, and it is, I submit, the governing principle in Dunbar v. Steiert, 1927, 31 Ariz. 403, 253 P. 1113, cited by the majority.2 In the case at bar the creditor initially secured the liability of three persons, the members of the old partnership. Appellant argues, in effect, that since the remaining two-man partnership is a new entity, the substitution of its liability for the liability of the old partnership is sufficient consideration to support his release. But this can hardly be so since the new entity, if it is such, was created by the subtraction of an obligor, and not by the addition of one.
*732It seems to me that the release theory advanced in the opinion operates in derogation of the general principles governing the enforceability of obligations, because it cuts off an otherwise valid claim without proof of consideration or prejudice; that it is not a well settled principle of partnership law; and that, absent strong policy reasons arising from the needs of the business community, it ought not be adopted.
(b) The opinion also advances a “suretyship” theory under which the defendant may be discharged if he can prove that he has been prejudiced by the change in the terms of the obligation negotiated by the continuing partners. This differs from the release theory in two particulars : (1) it adds the requirement of prejudice, although it confines it to prejudice arising from the change in the terms of the obligation; and (2) it assumes that the continuing partners have agreed to indemnify defendant, and that this is known to plaintiff. I believe that prejudice ought to release defendant, not because he is deemed to be in the position of a compensated surety, but because prejudice attributable to the conduct of plaintiff is always material to the enforceability of a claim. That prejudice should be of any kind, and should not be limited by concepts borrowed from suretyship law.
The majority would remand to permit defendant-appellant to make proof of prejudice or detriment. Appellant made no claim of detriment below. Appellant’s counsel there stated that under his theory of waiver and suretyship no detriment need be claimed. This is certainly true, but I am not persuaded that justice requires that the ease be remanded to give appellant another chance simply because the erroneous theory under which he proceeded led him to omit necessary proof. In this connection, it is worth noting that appellant conceded at the trial that estoppel would require proof of detriment, but disclaimed any intention of proceeding upon an estoppel theory.
III.
The majority has, by this decision, offered the jury a choice of two theories upon which to permit the defendant-appellant to escape his partnership obligations. In my view, nothing in the law, as applied to the facts here before us, warrants such a result.

. In Dunbar, defendant, having agreed to purchase a garage from plaintiff, entered into a partnership with Miller. The partnership was then dissolved, and Miller agreed to undertake defendant’s liability, plaintiff assenting. In affirming a judgment for defendant, the court said, 253 P. at page 1114: “The essence of the new contract was the substitution of Miller for [defendant] as the debtor. Miller agreed to such substitution, [defendant] agreed to it, and [plaintiff] also consented, and, in consideration thereof, released [defendant].” Gillett v. Ivory, 1912, 173 Mich. 444, 139 N.W. 53, is to the same effect.
International Harvester Co. of America v. Layton, 1921, 148 Ark. 156, 229 S.W. 22, also cited by the majority, ■does support the release of a retired partner without consideration. However, there the 'creditor’s agent, knowing that defendant ivas about to retire from the firm, “without any solicitation, told [defendant] that he could consider himself out. [Defendant] relied on that and did not have anything further to do with the company.” 229 S.W. at page 24. There is no evidence in the case at bar of an express waiver of this kind.
Le Gault v. Lewis-Zimmerman, 1922, 28 Wyo. 474, 206 P. 157, was not a suit to enforce the liability of a retired partner; it was an action for the dissolution of a partnership in which the sole question was whether the plaintiff was, as he asserted, a partner of the defendant. The defendant offered to prove that if plaintiff had ever been a partner, be bad retired. To this end ho introduced evidence that a creditor of the partnership had continued to deal solely with defendant, and that plaintiff, being thereby released from the partnership obligations, had received consideration for surrendering his partnership interest. While the court held the evidence admissible, it does not appear from the opinion that plaintiff in any way challenged the legal theory supporting Ms discharge from the obligation in question.