Court Opinion

ID: 8818811
Source: CourtListenerOpinion
Date Created: 2022-11-26 15:26:02.280848+00
Date Added: 2024-06-11T17:04:34.120871
License: Public Domain

Mr. Justice Gridley delivered the opinion of the court. Section 14c of the Bankruptcy Act of 1898 provides that “the confirmation of a composition shall discharge the bankrupt from his debts, other than those agreed to be paid by the terms of the composition and those not affected by a discharge.” It appears from the evidence in this case that in an involuntary proceeding-in bankruptcy on the ground of insolvency the complainant and nine other persons, “copartners trading as Ravenswood Exchange Bank” were, on March 31, 1908, adjudged bankrupt by said United States District Court, that the copartnership subsequently offered terms of composition to its creditors, to wit, seventy-five cents on the dollar of their respective claims, which offer was accepted by a majority of those creditors in number and amount, and that on June 10, 1908, the composition was confirmed by said court. Counsel for defendant, relying on the so-called “entity theory” of a partnership and particularly on the case of In re Bertenshaw, 85 C. C. A. 61, 157 Fed. 363, contend that a partnership can be adjudged a bankrupt and discharged in bankruptcy without the adjudication individually of the members composing that partnership, and that in such case said members will not be individually discharged from the partnership debts. Arid counsel argue that, in the present case, where it appears from the evidence that complainant and a few of his partners were men of some pecuniary means individually and none of them were individually adjudged bankrupt and none of them either filed or offered to file schedules of their individual property or a list of their individual creditors, and where it further appears that an offer of composition was made by the partnership, Bavenswood Exchange Bank, and confirmed by the bankruptcy court, the effect of that judgment of confirmation is not to discharge complainant and his partners from the debts of the partnership, but that they are still liable to each creditor of the partnership for the amount of his claim less the sum received by virtue of said composition proceedings, and that the Circuit Court erred in entering the decree in this case. Counsel for complainant contend on the contrary that a discharge in bankruptcy of a partnership, whether by way of composition or otherwise, operates not only to release the partnership but also the individual partners from the debts of the partnership, and that in this case complainant and his co-partners are now under no liability to the defendants, and that the decree should be affirmed. Shortly before the bankruptcy proceedings in question were commenced, the case of In re Bertenshaw, 85 C. C. A. 61, 157 Fed. 363, was, on November 19, 1907, decided by the United States Court of Appeals for the Eighth Circuit. The exhaustive opinion of the court was written by Judge Sanborn; and it was therein decided, as we read that opinion, that under the Bankruptcy Act of 1898 a partnership is a distinct entity, i. e. a “person,” separate from the partners who compose it; that the partners and their individual property are to a limited extent sureties for the debts of the partnership; that the partnership may be adjudged bankrupt although the partners who compose it are not individually so adjudicated; that in such event the individual estate of a solvent partner is not drawn into the proceedings, and the bankruptcy court is without jurisdiction to summarily take and administer in the proceedings against the partnership such individual estate without that partner’s consent; that in such event, also, the partnership creditors may pursue unadjudicated partners by actions at law and suits in equity before, during and after the proceedings in bankruptcy against the partnership; and that the discharge of the partnership, where the partners are not individually adjudged bankrupt, does not discharge the partners from their liability for the debts of the partnership. In the dissenting opinion of Judge Hook it was stated that portions of the majority opinion were at variance with principles enunciated in the prior cases of Dickas v. Barnes, 72 C. C. A. 261, 140 Fed. 849; In re Meyer, 39 C. C. A. 368, 98 Fed. 976, and In re Stokes, 106 Fed. 312. And we think that portions of said majority opinion were also at variance with principles enunciated in the other prior cases of In re Forbes, 128 Fed. 137, 139, and Vaccaro v. Security Bank of Memphis, 43 C. C. A. 279, 103 Fed. 436, 442. About two weeks before the decree in the present case was entered by the Circuit Court of Cook county, the opinion of the United States Court of Appeals, for the Third Circuit, in the case of Francis v. McNeal, 108 C. C. A. 459, 186 Fed. 481, was on March 7, 1911, filed. In that case, in the District Court, a partnership had been adjudicated a bankrupt. Francis there contended that he was not a partner but the court after a hearing found otherwise. On petition of the trustee in bankruptcy, the District Court entered an order, adjudging that Francis’ separate estate was subject to administration by the trustee of a bankrupt partnership and directing him to deliver his property to the trustee for the purpose of such administration. This order was affirmed by the Court of Appeals, and in the course of its opinion the Court said (p. 484): “If the act charged be one involving insolvency, since every partner is liable in solido for all the partnership debts, the adjudication against the partnership must be based on allegations and proof that the assets of its members, in excess of their individual debts, plus the assets of the partnership, are insufficient to pay the partnership debts. Otherwise there is no partnership insolvency, notwithstanding the entity doctrine.” (Citing cases.) And the Court further said (p. 485, italics ours): “In an involuntary proceeding, where the act of bankruptcy charged is one that does involve insolvency of the partnership, there can be no adjudication against the partnership, unless it and all its members are insolvent; and that in such a case, though the adjudication be against the partnership only, or against the partnership and some, but not all, of its members, the estates of all the members are drawn into the proceeding for administrationOne of the cases cited in the above opinion was that of In re Forbes, supra. In this case Judge Lowell, of the United States District Court for Massachusetts, said (128 Fed. 137, 139, italics ours): “The equal and equitable distribution of the estates of insolvents and their discharge from the obligation of their debts are the ends sought by proceedings in bankruptcy. Bankruptcy, without insolvency, actual or presumed, is almost inconceivable. Bankruptcy without discharge for the honest debtor is a contradiction in terms. It is impossible to declare a partnership insolvent so long as the partners are able to pay its debts and theirs, whether out of joint or separate estate. * * * Not the insolvency of any imaginary entity, as in the case of a corporation, but the insolvency of its human component parts, lies at the foundation of the bankruptcy of a partnership. * * * As the bankruptcy of a partnership begins with an inquiry into the condition of its individual partners, the end of the proceedings is normally their discharge. So far as I know, the discharge of a partnership as an entity has never been suggested, and what would be the effect of such a discharge can hardly be imagined. Herein appears the difference between a partnership and a corporation. Under an adjudication merely joint, it is impossible to discharge the partners as individuals, even from their joint debts, for every joint debt of the partnership is also a separate debt of each partner, and separate debts can be discharged only after an individual adjudication operating upon the separate estate.” The case of Francis v. McNeal was taken to the Supreme Court of the United States and that court affirmed the decisions of the District Court and the Court of Appeals. In the opinion, filed May 26, 1913 (228 U. S. 695), Mr. Justice Holmes referred to the opinion of Judge Lowell in the Forbes case, supra, as an “able opinion” and stated that, so far as the Vaccaro v. Security Bank case, supra, was inconsistent with the opinion of the majority in the Bertenshcm case, supra, he regarded the former “as sustained by the stronger reasons and as correct.” The learned Justice further said (p. 699, italics burs): “The notion that the firm is an entity distinct from its members has grown in popularity. * * * But the fact remains as true as ever that partnership debts are debts of the members of the firm, and that the, individual liability of the members is not collateral like that of a surety, but primary and direct, whatever priorities there may be in the marshalling of assets. The nature of the liability is determined by the common law, not by the possible intervention of the Bankruptcy Act.” He further said (p. 701): “It would be an anomaly to allow proceedings in bankruptcy against joint debtors from some of whom, at any time before, pending, or after the proceeding, the debt could be collected in full. If such proceedings were allowed it would be a further anomaly not to distribute all the partnership assets. Yet the individual estate after paying private debts is part of those assets so far as needed. Section 5f. Finally, it would be a third incongruity to grant a discharge in such a case from the debt considered as joint but to leave the same persons liable for it considered as several. We say the same persons, for however much the difference between firm and member under the statute be dwelt upon, the firm remains at common law a group of men and will be dealt with as such in the ordinary courts for use in which the discharge is granted.” It thus appears that some of the principles enunciated in the Bertenshaw case, supra, upon which case counsel for defendants rely to support their contention, are not sustained by the current of authority or by the recent decision of the Supreme Court of the United States in the case of Francis v. McNeal, supra. Counsel for defendants further contended during the oral argument before us that, if the entity theory of a partnership to the extent as urg’ed by them must be given up, there can be no valid discharge of a partnership firm without an individual adjudication in bankruptcy of the members thereof. Counsel direct our attention to the statement contained in the opinion in the Forbes case, supra, that “under an adjudication merely joint it is impossible to discharge the partners as individuals.” In our opinion this position amounts to a collateral attack on the judgment of the bankruptcy court confirming’ the composition and is untenable. The bankruptcy court had jurisdiction to enter the order, even admitting for the sake of the argument .only, that it may have erred in so doing without previously having adjudged the members of the partnership individually bankrupt. No appeal was taken from that order and, until reversed in a direct proceeding, it is res adjudícala. Young v. Lorain, 11 Ill. 624; People v. Seelye, 146 Ill. 189, 221; Sumner v. Village of Milford, 214 Ill. 388, 393; Waller v. Village of River Forest, 259 Ill. 223, 230. A certified copy of the order was introduced in evidence in the present case. And by section 21f of the Bankruptcy Act it is provided that.“a certified copy of an order confirming or setting aside a composition, * * * not revoked, shall be evidence of the jurisdiction of the court, the regularity of the proceedings, and of the fact that the order was made. ’ ’ Our conclusion, therefore, is that the Circuit Court did not err in finding in its decree that by said order of the bankruptcy court complainant and his copartners were released from the payment of the indebtedness of the copartnership, Bavenswood Exchange Bank, and in issuing the permanent injunction mentioned. By section 14c of the Bankruptcy Act the order confirming the composition discharged “the bankrupt from his debts,” and as stated in the Supreme Court opinion in Francis v. McNeal, supra, “the firm remains at common law a group of men and will be dealt with as such in the ordinary courts for use in which the discharge is granted.” And while it is provided by section 16 of the Bankruptcy Act that the liability of a person “in any manner as surety for a bankrupt” shall not be altered by the discharge of such bankrupt, it is decided in said Francis v. McNeal case that the individual liability of the members of the firm “is not collateral like that of a surety, but primary and direct.” But counsel for defendants further contend that the question, whether complainant and his copartners after confirmation of the composition would remain individually liable to the defendants for the deficiencies on their respective claims, was decided by the bankruptcy court, that that decision was that the partners would remain so liable, and that, no matter how erroneous the same may have been, no appeal having been taken from it, the decision is now res adjudícala. Counsel’s argument, as we understand it, is to the effect that the original offer of composition contained the proviso that the acceptance of the offer would discharge the past and present partners; that objections to the offer were made by some of the present defendants; that after a full hearing the special master reported to thé bankruptcy court, recommending that the offer be denied submission unless the bankrupt, firm would withdraw the proviso; that in said report the master stated certain reasons for his recommendation, and further stated that in his opinion, upon the confirmation of the offer of composition of the firm, the creditors of the firm could collect the deficiencies on their claims from the individual partners; that on May 12, 1908, this report was approved by order of the bankruptcy court; that the court gave the bankrupt firm leave to withdraw the proviso; that the bankrupt firm did not appeal from this ruling but on the contrary withdrew the proviso, thereby acquiescing in the ruling of the court and thereby acknowledging that a confirmation of the composition offer as modified would not release the partners of the firm from their individual liability for the deficiencies on the claims of the firm’s creditors; and that, hence, the partners are now estopped by the judgment of the bankruptcy court from denying their individual liability for said deficiencies. We cannot agree with counsel’s contention. The order of May 12th of the bankruptcy court was not a final order but an interlocutory one, and it did not purport to decide the question here involved. “The character of conclusiveness, by way of estoppel, attaches only to final judgments, not to interlocutory judgments or orders, which remain under the control of the court, except where they dispose finally of some distinct branch or part of the case, or are appealable as being orders affecting the substantial rights of the parties.” (23 Cyc. 1232.) All that the master said in the report as to his opinion of the law was not so decided by the court (23 Cyc. 1227). Furthermore, we do not think the order was an appealable one (In re McVoy Hardware Co., 119 C. C. A. 337, 200 Fed. 949). And no investigation had then been made by the judge to determine whether or not he was satisfied that the composition was for the best interests of the creditors, or satisfied as to the other matters mentioned in section 12d of the Bankruptcy Act. The judge did not determine that he was satisfied as to these matters until after the filing of the master’s final report on June 10, 1908. Furthermore “the right to a discharge, and the effect of a discharge, are wholly distinct propositions. The proper time and place for the determination of the effect of a discharge is when the same is pleaded or relied upon by the debtor as a defense to the enforcement of a particular claim. The issue upon the effect of a discharge cannot properly arise or be considered in determining the right to a discharge.” (In re Marshall Paper Co., 43 C. C. A. 38, 102 Fed. 872, 874.) And we do not think that under the facts of this case the complainant and his copartners are estopped, under the doctrine of equitable estoppel, from taking the position that they were, by said order of the bankruptcy court of June 10,1908, released from the claims of the defendants against said copartnership, which claims were proved in said bankruptcy proceedings.One of the essential elements in equitable estoppel is that the party claiming the estoppel must have relied and acted to his prejudice upon an act, representation or promise of the other party. Counsel for defendants contend that, after the bankruptcy court had approved the special master’s report of May 12th, and after the proviso to the offer had been withdrawn, the defendants, relying upon the order of the court granting leave to the bankrupt to withdraw the proviso and also relying upon that withdrawal, thereupon withdrew their objections to the confirmation of the composition to their prejudice. A sufficient answer to this is, we think, that there is nothing in this record to show that the bankruptcy court would not have confirmed the composition offer as modified, the same having been accepted by a majority in number of the creditors whose claims had been allowed and of such allowed claims, even if said objections of the defendants had not been withdrawn. The decree of the Circuit Court is affirmed. Affirmed.