Court Opinion

ID: 6413753
Source: CourtListenerOpinion
Date Created: 2022-06-25 11:54:36.262011+00
Date Added: 2024-06-11T15:51:27.905429
License: Public Domain

Chapman, J.
The plaintiffs are the directors of a trading company which bears the name of Division No. 395 of the New England Protective Union. The company has become insolvent, and the plaintiffs bring their bill against the defendants, as member's of the company, for the purpose of winding' up its affairs and compelling the defendants to contribute, each his just proportion, for the payment of its debts. It is properly admitted by all parties that the company is a mere partnership. It is organized in conformity with a constitution and by-laws, which are to be regarded as a special agreement adopted by the copartners, and binding upon them as among themselves. It does not, however, affect their obligations to creditors; and as among themselves the rules of law applicable to partnerships must prevail, except so far as they are modified by the speeia' agreement.
It is objected that the directors have no right to recover, because it is alleged that they had no authority to contract debts. But the ninth article of the constitution gives them full authority to obtain the necessary capital for the purchase of goods beyond the amount received of the several members by the payment of the fee of membership ; to give notes for the same; to procure a store, employ a store-keeper, and attend to all the mercantile affairs of the Division. Indeed it seems to have been intended that the business should be principally carried on by means of borrowed capital; for the small contribution of ten dollars, which is all that each shareholder is to pay, could not be supposed to be a sufficient capital to carry on the business of an ordinary country store, without dealing largely on credit. Nor is there any restriction upon the discretion of the directors as to the amount of money to be borrowed or of goods to be purchased on credit. The directors are to be regarded as the agents of the company, and the members are bound by their contracts made within the scope of their authority. As to creditors, each member is liable to pay all the debts of the company, *473As between them and the directors they are bound to contribute to the payment of the debts, unless they are released by some misconduct on the part of the directors.
Nothing of this kind appears in the master’s report. He finds that the money borrowed was necessary for carrying on their business, and their insolvency grew mainly out of the depreciation in the value of some of their goods, loss on notes and accounts, and interest paid on borrowed money. It is true that the semi-annual settlements required by the constitution do not appear to have been made. The settlements actually made only served to mislead, the goods being inventoried at cost, and the notes and accounts at par. The insolvency was thus the natural result of going into a hazardous business, in which they were unskilled. The court are of opinion that nothing is proved against the directors which should exempt the members from contribution.
The defendants further contend that they are not liable, because none of them have signed the constitution. The third article provides that each member shall sign the constitution and pay into the treasury ten dollars, two dollars of which shall be an admission fee; the residue shall be a deposit or trading fund, to remain as a permanent investment until the depositor voluntarily leaves the Division, at which time he may withdraw the amount of his trading fund in goods on demand, but not in cash under three months, unless by a vote of the directors. But the court are of opinion that the signing of the constitution is not a necessary prerequisite to membership. By the law of partnership, one becomes a member of a firm when he contributes to the capital stock and is admitted to a community of interest with the other partners in the property, business, profits and responsibilities of the partnership. It appears that those who paid in their ten dollars were admitted to such community, though they had not signed the constitution. They must, therefore, be regarded as partners.
It appears that after they had been in business for some time, it was believed that they had accumulated a considerable amount of profits, and that new shares were created. Several *474of the defendants agreed to take an additional share each. Some of them did nothing under the agreement. Others made a payment of four dollars each, and thus acquired new shares. These last must be regarded as holding additional shares, because they were entitled to a community of profits on account of such shares, and thus subjected themselves to a proportionate part of the responsibilities.
It appears that some persons who had been members withdrew from the firm, taking out their eight dollars; others sold and transferred their shares, and the purchasers were admitted by the directors as members, and acted as such; and others have deceased. Questions are raised as to the effect of these changes. The constitution and by-laws allowed each member to retire at his pleasure. This is in conformity with the general law of partnership. And, in the absence of any special agreement, the retirement or decease of a member would dissolve the partnership. In such case the retiring member and the estate of the deceased member would be liable for all the debts of the company. On this account the retiring member or the representative of the deceased member might, in the absence of any special agreement, maintain a suit in equity for winding up the partnership affairs, and compelling the application of the assets to the payment of debts.
A partnership, therefore, is by no means adapted to carry on a business which is designed to be permanent, or in which a large number of persons unite, or where changes of membership are expected to take place. The only safe method of prosecuting such business is by means of corporate powers. A corporation is not affected by the decease of one or more of its members, and its shares may be transferred, so that existing stockholders may go out, and new ones may be admitted without disturbing its business, and with safety to the members.
The originators of this scheme have endeavored to avail themselves of the advantages of a corporation, under an association as partners. As between the retiring members and creditors of the company, the attempt is unsuccessful. Such members remain liable for all existing debts ; and they may be *475liable for subsequent debts to creditors who had knowledge of their membership, but had not had notice of their withdrawal. But as among themselves, their rights and liabilities may be modified by special agreement. By the fair interpretation of the-agreement made by this company, the retiring member is entitled to nothing but his eight dollars. The company retain the assets and assume the debts, absolving him from all liability for the same. On the other hand, he has no longer a right to vote in the management of their business, nor can he compel them to wind up their affairs. His security is in the solvency of the members who may remain when the affairs are wound up.
One of the consequences of this provision is, that when a member learns that the company is likely to prove insolvent, he may retire, and leave his associates to bear the burden. The more watchful and shrewd associates will be likely to do this, and leave the more unskilful and ignorant to suffer. We do not decide that if a member takes this course fraudulently, he may thereby exempt himself from contribution. But in the present case no fraud is alleged against any of the retiring members ; and the court are of opinion that they are all exempt. This rule applies to those who have assigned their shares, so far as the assignees have been admitted as members in their stead, and also to those who have deceased. The plaintiffs are entitled to contribution from those who were members when the bill was filed.
It is also objected by the defendants that, inasmuch as a partnership is dissolved by the death of one of its members, so that a surviving partner cannot be held responsible on a contract thereafter made without his assent or knowledge by another partner, (as was held in Marlett v. Jackman, 3 Allen, 287,) the death of John Putnam in 1855 operated to relieve from liability all who thereafter took no part in the company and did not assent to or know of its subsequent transactions. But the doctrine there established is not applicable to this case. It is apparent, on a just construction of the articles under which this Division was organized, that it was designed to consist of many members, who might from time to time cease to be interested *476therein by death or by voluntary withdrawal, and that the same business should be continued in the same manner by those who should remain, and by such as might be added to their number under the terms of the articles. Under these circumstances, it must be considered that each member agreed to be and remain a partner in the association, notwithstanding changes in others of its members, until such time as he himself should die, or withdraw therefrom by some positive act of his own. Story on Part. § 319, a.
Questions are raised in respect to the membership of certain individuals. As to the defendant Howe, the evidence shows that he is a member, he having become interested in the assets, and having been permitted to act as a member and a director. The defendants Battles and Cheney are proved to have withdrawn, and are not liable. The evidence that the defendant Weaver has withdrawn is not sufficient to establish the fact, and he must be regarded as liable.
The plaintiffs have no claim for costs or counsel fees in the suits brought against them by creditors; for it was their duty to pay the debts of the company without suit. This is the duty of any member upon whom a creditor makes a claim.
The costs of the present suit are to be paid by contribution. The plaintiffs may tax their bill; the defendants who are represented by Mr. Brainard may tax one bill; and those who are represented by Mr. Davis may tax another bill; the taxation to be as between solicitor and client. The assessment is to be made upon the solvent members of the company. The case is to be recommitted to the master to make a further report, and is to stand for further directions.