Court Opinion

ID: 6237761
Source: CourtListenerOpinion
Date Created: 2022-02-17 20:36:41.269937+00
Date Added: 2024-06-11T08:57:47.614596
License: Public Domain

Mr. Justice Paxson
delivered the opinion of the court,
This record presents an interesting question which is not free from difficulty. The plaintiffs are creditors of the firm of Gruber, Hoopes & Co., and filed this bill in the court below against said firm and certain execution creditors thereof, under the following circumstances : The firm of Gruber, Hoopes & Co. was a limited partnership, formed under the Act of 1836, with Henry Gruber and William P. Hoopes as general partners, and A. H. Mershon as special partner. The amount of capital contributed by the special partner was $12,000 in cash, all of which he borrowed’ for the purpose of placing it in the firm ; $7,500 of it having been obtained from Mrs. Lacey, now the wife of the said Mershon, and $4,500 thereof from his sister, Mrs. Cadwallader. The general partners contributed no capital. A few months after the organization of the firm, Gruber and Hoopes, the two general partners, executed in their joint individual names two judgment notes, one of them in favor of Mrs. Lacey for $7,500, and the other in favor of Mrs. Cadwallader for $4,500. The only consideration for these notes was-the money borrowed by Mershon, and placed by him in the firm as his special capital under the articles. When these judgment notes were received by Mrs. Lacey and Mrs. Cadwallader, they returned to Mershon the notes which he had given them respectively. In less than eighteen months thereafter the firm confessed its insolvency, whereupon Mrs. Lacey, now Mrs. Mershon, and Mrs. Cadwallader entered their *285judgments, issued execution and levied upon the assets of the firm. The general creditors contested the validity of these executions upon the ground that they were illegal under the Limited Partnership Act of 1836, and filed this bill in order that this question might be properly raised and decided.
The firm does not appear to have been insolvent when the judgment notes were given; hence the case does not come witliin the letter of the provisions of sections 20 and 21 of the Act of 1836, which prohibit any sale, assignment or transfer of the property or effects of such partnerships, by either a general or special partner, when insolvent or contemplating insolvency. The real question is whether it is lawful for the general partners, without any consideration, to assume the debt created by the special partner in procuring the money which he paid into the firm as his contribution of capital under the articles.
The learned judge below hold that the real object of the Act of 1836 was to enable one to embark in business without any liability therefor, beyond the amount contributed as capital. Assuming this to be the principal object, the Act requires a rigid adherence to its terms, and a compliance in good faith with all its provisions as the price of the privileges thereby conferred. The creditor knows by an examination of the articles that the special partner has contributed a certain amount of money in cash, which goes into the assets of the firm, is responsible for their debts, and which the special partner cannot withdraw while there is a creditor unpaid, or during the continuance of the partnership. The 15th section of the Act of 1836 provides : “ No part of the sum which any special partner shall have contributed to the capital stock shall be liable for any debts previously contracted by the general partners; nor shall any part of such sum 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.” It is too clear for argument under this section that the special partner cannot withdraw his capital during the partnership, even with the consent of the general partners. It is a fund, set apart by the Act for the benefit of the creditors, and to some extent partakes of the nature of a trust. I do not of course mean a technical trust, which would require it to be invested and so held, but a trust in- the sense that neither the special nor the general partners can lay their hands upon it except for the purposes for which it was created. It may bo used in the business, for it was contributed for that purpose, but it cannot be diverted either directly or indirectly hjT any device whatever. Was there an attempt tó divert it in this case ?
*286The defendants contend that there was not; that the money having gone into the firm, the general partners had the right to assume Mershon’s liability and confess the judgments referred to. ,
It is settled that where a partner borrows money to put into his firm as his quota of capital, the firm is not liable therefor, although the money actually goes into the firm business: McNaughton’s Appeal, 5 Out., 550. It was held in Siegel v. Chidsey, 4 Casey, 279, that where money was obtained on the personal credit of a member of the firm, and the money went into the firm and was used for its exclusive benefit, though this would not make the firm liable to the creditor, yet it would be a good consideration to support the subsequent promise of the firm to pay the debt; and a judgment confessed on such assumption was not fraudulent as to creditors. In that case the fact was that the loan though made to one member of the firm, was in reality a loan to the firm, and the money was received by them and used in their business. The same doctrine was held in the subsequent case of Walker v. The Marine Bank, 2 Out., 574, upon a similar state of facts, Shauswood, C. J., saying: “ It is certainly true that if there was no debt from the firm to the plaintiff, at- the time of the giving of the note, if they had never received any consideration, they had no right to create a debt by voluntarily assuming the debt of one of the members so as to be good against their creditors. But there were facts in the case which showed that they were morally bound for the debt. They had received the money. It had entered into the business of the firm, made their purchases, paid their debts, and in equity and good conscience the plaintiff stood upon as fair a platform as other creditors who had sold them goods or advanced them money.”
No argument is needed to show that when one member of a firm borrows money in his individual name, but in reality for the use of his firm, and the money actually goes into the firm assets, that the firm may assume the liability and confess a judgment therefor. The consideration for .such assumption is the moral liability, and the general creditor has no grounds of complaint for the reason that the assets of the firm are increased to the precise extent of the money borrowed.
This principle, howevey, has no application to the case in hand. The firm of Gruber, Hoopes & Co. owed no debt to either of these ladies, nor were the general partners under any moral obligation to make good the money which Mershon, the special partner, had borrowed of them. Their affidavits show that they loaned the money to Mershon for the very purpose of making up the capital which he was to put in the firm as *287a special partner, and they knew, or were chargeable with knowledge, that when once put in it could not be withdrawn by Mershon, even with the consent of the general partners, during the continuance of the partnership. That the firm used the money in their business makes no difference. They had the right to do so ; it was placed there for that purpose. The capital put into a firm by a special partner under the Act of 1886 has no analogy to a sum of money borrowed by one member of a firm in an ordinary partnership and placed by him in the firm for their joint benefit. The practical effect of sustaining the contention of the defendants would be to allow the special partner, with the connivance of the general partners, to withdraw his capital from the grasp of creditors whenever the condition of the firm placed it in peril. It would only be necessary for the general partners to assume the debt as soon as the firm is created, when it is of course solvent, confess a judgment therefor to be laid quietly aside until insolvency occurs, and then sweep the assets into the pocket of the special partner, or those who have furnished him with the capital, by means of an execution. If such practices were allowed in eases of limited partnerships it would open the door to all manner of frauds and devices to evade the Act of 1836, by withdrawing the capital contributed by the special partners from the grasp of creditors.
We are of opinion that the judgments and executions of the appellees are void as against creditors, not only because they have no consideration to support them, but also for the further reason that they are against public policy, and contravene the Act of 1836. While no actual fraud may have been intended they are a legal fraud. Their effect is to withdraw the capital contributed by the special partner. The judgments are no doubt good against the general partners individually, but they cannot come in upon the partnership property until the partnership creditors are paid.
The court below having refused the injunction prayed for, the sheriff proceeded with his executions, but retained the fund produced thereby to await the final determination of the case. The application for a receiver, therefore, becomes of no importance. The question has been turned into one of distribution. In making such distribution the fund must go to the creditors of the firm as they shall appear to be entitled, excluding the appellees, Mrs. Mershon and Mrs. Cadwallader.
The decree is reversed at the costs of the appellees, and it is ordered that the record be remitted for further proceedings in accordance with this opinion.