Court Opinion

ID: 8765574
Source: CourtListenerOpinion
Date Created: 2022-11-26 12:23:55.414149+00
Date Added: 2024-06-11T17:01:51.087331
License: Public Domain

HOOK, Circuit Judge
(dissenting). A partnership composed of three members, having made a general assignment for the benefit of creditors, was adjudged bankrupt in an involuntary proceeding. In such a case it was not necessary that the partnership should have been insolvent (Act 1898, § 3a [4] ; West Company v. Lea, 174 U. S. 590, 19 Sup. Ct. 836, 43 L. Ed. 1098), and for the same reason the financial condition of the partners individually was immaterial and was not inquired into. It may be said, however, in view of subsequent proceedings, that the firm assets were barely sufficient to pay 5 per cent, of its debts. None of the individual partners were adjudged bankrupt. The validity of the adjudication is not attacked. It is expressly conceded in the brief of counsel that the court had jurisdiction of the parties and of the subject-matter. At the end of the order of adjudication is this clause:
“if Is further ordered this adjudication binds only the partnership entity, and not the partners as individuals.”
This is an unusual provision, but I take it that the court meant nothing more than that there was no adjudication that the partners individually were bankrupt. Given jurisdiction an adjudication that a partnership is bankrupt binds every one within the range of the law, including, of course, the partners themselves; and it is not to be supposed that the court rendered judgment in one sentence and in the next deprived it of much of its vitality and efficacy. So it is proper to view the case as though there were a valid adjudication against a partnership with all its necessary legal incidents but none against the members individually. The foregoing opinion proceeds upon that assumption.
When the insufficiency of partnership assets to pay partnership debts was discovered, the trustee applied for an order that one of the part*376ners be directed to turn over a piece of property belonging to him individually. It was incumbered with a mortgage, but the trustee asserted that the mortgage debt was the only individual debt of the partner, and that there was an equity in the property which should be applied to the partnership debts. The application was resisted by the partner, who averred that he was not insolvent, and had not been adjudged bankrupt. The court below denied the trustee’s application.
I agree with the conclusion that, under the bankruptcy act of 1898, a partnership is to some extent to be regarded as a distinct entity, but I would not go so far as my associates have gone. The intent of Congress was to avoid defects in the prior acts, and not to create others equally if not more serious. The well-known interrelations between a partnership, its property, and its debts, and the individual partners, their property, and their debts, should not be overlooked or sacrificed to a fiction or form of words. That a firm’s debts are its own debts is true in a sense,, but they are also the debts of each partner. As Chief Justice Marshall observed in Barry v. Foyles, 1 Pet. 311, 317, 7 L. Ed. 157, “the assumpsit is made by all and by each.” It has ever been the rule that the individual estate of a partner may with due regard to the rights of his individual creditors be subjected to the payment of partnership debts, and I am unable to discover in the bankruptcy act a purpose to wholly deny the trustee as the representative of the firm’s creditors every remedy to that end. If, as is held, the partnership alone may be adjudged bankrupt, it is manifest that the trustee in case of deficiency of assets must in some way and at some time have the right to resort to the individual property of the partners. Otherwise the proceedings against the partnership would be incomplete and out of harmony with the comprehensive plan of the act of Congress as universally construed. If the partners individually are not adjudged bankrupt, and the logic of the entity theory is that they need not be, the remedy of the trustee must either be by plenary action to enforce their liability for firm debts, or they must be considered so far parties to the proceedings against their firm that they are subject to the orders of the court, and may be compelled to bring in their individual property for administration, as was sought in the court below. A bankruptcy proceeding against a partnership alone must naturally result in the discharge from further liability for debts. That is one of the ends contemplated by the act. In whose favor does the discharge operate, and from what class of debts? A discharge of the fiction termed “distinct entity” without a discharge of the partners individually signifies nothing of substance; and, if it releases the partners individually from firm debts, that result presupposes a subjection of their individual property to the payment of such debts. These considerations argue against the suggestion that the trustee’s remedy may be by plenary action, for discharges in bankruptcy are granted those who are in the bankruptcy proceedings, and not third party debtors who have simply parted with what the sheriff or other officer could find on execution.
The individual members of a partnership which has been duly adjudged bankrupt are, by force of their relation to the firm and the duties and responsibilities prescribed by law, parties to the adjudica*377tion, and subject to all proper orders of the court. Notwithstanding a partnership may be regarded as a legal entity for some purposes, there is, when it is declared bankrupt, little difference between the personal duty of its several members and the duty of an individual bankrupt to aid the court and facilitate the winding up process. The act of 1898 contemplates jurisdiction over all the partners in a proceeding against a partnership. That is the true meaning of section 5c which says:
“Tlie court of bankruptcy which has jurisdiction of one of the partners may have jurisdiction of all the partners and of the administration of the partnership and individual property.”
A petition by one partner to have the partnership declared bankrupt is involuntary as to a member who refuses to join. The Supreme Court has prescribed (General Order 8 [32 C. C. A. xi, 89 Fed. vi]) that in such a case notice shall be given the nonconsenting member, and that he shall have the right “to make proof, if he can, that the partnership is not insolvent or has not committed an act of bankruptcy, and to make all defenses which any debtor proceeded against is entitled to take by the provisions of the act,” but that, if an adjudication of bankruptcy is made, he shall be required to file a schedule of his debts and an inventory of his personal property the same as a debtor who is adjudged bankrupt. Naturally a like course must be pursued when, as in the case before us, creditors file the petition and the proceeding is involuntary as to all the partners. Reference is made to the foregoing to illustrate the purpose of the act that the individual partners are brought into a partnership proceeding and made subject to the jurisdiction of the court.
In the present case all the partners were in court when the partnership was declared bankrupt. They were parties to the proceedings both individually and as members, and became subject to all lawful orders of the court. They were individually bound for the debts of their firm, and under long-established principles their property was subject to be taken for the payment thereof. Possibly the trustee should, in the case before us, have asked an order that the partners file individual schedules and inventories rather than one for the surrender of a single piece of property. But this is not the point that was made in the court below or that is presented to us for decision. It was asserted by the trustee that there was an equity in the property above the mortgage which constituted the only debt of the individual partner. This was not denied by the partner who maintained that he was wholly solvent and had not been adjudged a bankrupt. If these claims are true, the rights of the individual creditors of the partner were not involved, and could not have been prejudiced by the order sought by the trustee.
I do not think either the solvency of the objecting partner or the fact that he had not been adjudged a bankrupt, or both combined, afforded sufficient reason for denying the application. That the partner was solvent was, as already observed, wholly immaterial to the adjudication against the firm. The act of bankruptcy committed was sufficient for the adjudication irrespective of the financial status of the *378parties. Again, if jurisdiction over the partners was obtained, there is no substantial reason why they should not have been required to surrender their property, to the end that the court might completely settle the administration, even though they were not adjudged bankrupts individually. The individual liability for firm debts nowise depends upon their being bankrupts. In fact, there may be insuperable obstacles 'to adjudging an individual partner bankrupt, though he may be in court and possess property that should be charged with the debts of his bankrupt firm. Dickas v. Barnes, 73 C. C. A. 361, 140 Fed. 849, 5 L. R. A. (N. S.) 654, presents a signal instance of this. A banking firm committed an act of bankruptcy by making a general assignment for the benefit of creditors and was adjudged bankrupt in involuntary proceedings. The appellants, though held to be partners* were not adjudged bankrupts, two of them because they had not individually committed an act of bankruptcy, a third because he was a wage earner, and a fourth because he was a .tiller of the soil. Other partners who had individually committed acts-of bankruptcy were adjudged bankrupts. An order was made by-the court below that all parties found to be partners, whether adjudged bankrupts or not, should file with the referee their several schedules of debts and inventories of properties in the same manner as if adjudged bankrupts, and should likewise surrender their property to that officer. This was the order appealed from. I will presently refer to the opinion delivered by Judge Severens for the Circuit Court of Appeals of the Sixth Circuit, but desire first to speak of the claim that the part of it which applies to the case now before us is obiter,,and therefore not to be regarded. It is said the question before that court was whether the remedy of the non-bankrupt partners was by appeal or by petition to revise, and because the court held for the latter and dismissed the appeals the question decided was merely one of practice, and did not involve the problem before us. I think my associates do not look at Dickas v. Barnes in the way it was regarded by the court that decided it. It was said by that court:
“The motion to dismiss the appeals is founded on the character of the order and that involves in one aspect the jurisdiction of the court in bankruptcy.”
And then the court proceeded to consider whether the court in bankruptcy by virtue of the adjudication against the partnership had jurisdiction to compel the partners not adjudged bankrupts to file schedules and inventories and surrender their property. It would seem that the views expressed upon that question were strictly in line with the requirements of the case. The court then said:
“The argument is that, not being bankrupts, they are not subject to the jurisdiction of the bankruptcy court; that the refusal to declare them bankrupts put an end to the authority of the court to retain control of their property for the purpose of the bankruptcy proceeding; and it is complained that the court by its order in effect denied to them the immunity to which they were entitled by reason of the provisions of the bankruptcy act. By act of July 1, 1898, * * * wage earners and tillers of the soil are excepted from those who may be adjudged involuntary bankrupts. And for our present purpose we think the other appellants, who committed no act of bankruptcy, might be regarded as standing on the same footing as those who by reason of their occupation were exempt from an adjudication of bankruptcy. It may be *379■conceded that but for the relation of these parties to the partnership the contention they make would be supported by perfectly adequate reasons. But, on account of that relation, other conditions exist. One who combines with others in a partnership enterprise becomes bound for the payment of the partnership debts. As partner, he shares the fortunes of the partnership. In certain circumstances, it may become subject to the exercise of the powers of a court of bankruptcy, where its resources will be gathered in to satisfy the claims of creditors. One of those resources is the liability of the partner, for which his individual property stands charged. It is true that by virtue of the rule in equity, as well as in bankruptcy, for the marshaling and distribution of assets, his individual property is first applicable to the payment of his private debts, if there be any. The surplus then becomes assets for the payment of the partnership creditors. These consequences of partnership are not derived from the bankrupt aet, but from the general law; and a partner is not relieved from them by his exemption from an adjudication of bankruptcy.”
It was finally held that the partner was not to be regarded as a stranger, but as a party to the bankruptcy proceedings, and that the court had jurisdiction to take such steps as were necessary to ascertain what assets were available and to subject them to the requirements of the case before it. In re Meyer, 39 C. C. A. 368, 98 Fed. 976. In this case the partnership and one partner were adjudged bankrupt, the latter having executed an assignment of the partnership assets for the benefit of creditors. There were originally three members of the partnership. One of them died, and the remaining surviving partner was not adjudged bankrupt. There was no attempt to reach the property of the nonbankrupt partner, but the assignee in insolvency contended that the partnership adjudication was invalid because neither partner should have been adjudged bankrupt, and the court was therefore without power in respect of the partnership. Judge Wallace, who spoke for the Court of Appeals of the Second Circuit, said:
“We are of tbo opinion that it is the scheme of these provisions to treat the partnership as an entity which may be adjudged a bankrupt by voluntary or involuntary proceeding, irrespective of any adjudication of the individual partners as bankrupt, and upon an adjudication to draw to the administration the individual estates of the partners as well as the partnership estate, and marshal and distribute them according to equity.”
This may not have been strictly necessary to a decision of the point involved, but I think the opinion, including the above excerpt, is a clear exposition of those parts of the present bankruptcy act which relate to the administration of partnership estates.
The precise point arose and was decided by Judge McPherson of the Eastern District of Pennsylvania. In re Stokes (D. C.) 106 Fed. 312. He held that upon a partnership adjudication the assignee in insolvency of an individual partner who had not been adjudged bankrupt could be compelled to surrender to the bankruptcy court the individual property of such partner.
The suggestion that section 5h of the act of 1898 furnishes a conclusive argument against the power of the court to subject the property of a partner not adjudged bankrupt to the payment of the debts of his bankrupt firm involves I think a misconception of the purpose of that paragraph. It is as follows:
“In the event of one or more but not all of the members of a partnership being adjudged bankrupt, the partnership property shall not be administered *380in bankruptcy, unless by consent of the partner or partners not adjudged bankrupt; but such partner or partners not adjudged bankrupt shall settle the partnership business as expeditiously as its nature will permit, and account for the interest of the partner or partners adjudged bankrupt.”
It is said this paragraph means that, when a partnership has been declared bankrupt and also one or more but not all of its members, the court has no power to administer the partnership estate without the consent of the nonbankrupt members. And the argument is that, as the court has no such power, much less has it the power when actually administering the partnership estate to compel a nonbankrupt partner to bring in his individual property. But it is manifest that section 5h does not bear the construction given it. It deals with the bankruptcy of -individual partners, not with the bankruptcy of the firm. If an individual partner becomes bankrupt, it becomes important to know the effect upon the firm of which he is a member. It not infrequently happens that a firm remains solvent and prosperous, though a member becomes insolvent and commits an act of bankruptcy not chargeable to or connected with the business of the partnership. The provision for such cases is found in the paragraph quoted, and it has nothing to do with the bankruptcy of the partnership. It recognizes, however, that before the bankrupt partner receives a discharge his beneficial interest in the firm property, after the payment of firm debts, should be applied to the payment of his individual obligations. But, since his associates have an interest in the partnership property to which his individual creditors cannot look, they are justly given the preference in liquidating their joint affairs. Eventually, however, the net share of the bankrupt partner is brought into the individual proceedings. That a partnership may be an entity for certain .purposes and its property its own does not prevent the bankruptcy of a single partner from resulting in a liquidation of the joint business, and the application of his net share therein to the payment of his individual debts. Rightly regarded the paragraph quoted- suggests the true rule for the converse situation — the bankruptcy of the partnership and the nonbankruptcy of a member. There is, however, this distinction. In a case covered by section 5h, the nonbankrupt partner has no contractual connection with the debts of his bankrupt copartner. He is not liable for them, and should, therefore, suffer no loss or inconvenience, save what comes from a necessary winding up of the partnership as in other cases of dissolution. Therefore he is given the preference in the settlement of the firm business of which he is part owner. But these reasons do not apply in a case like the one before us. The nonbankrupt partner is liable for all the debts of his bankrupt firm, and the firm creditors may look to his property for satisfaction subject to equitable limitations in favor of his individual creditors. A court of equity with all parties before it, partnership, and members, grants full relief, and the law has not required it to intrust the administration of estates to resisting debtors.