Giles v. Vette, 59

• Decision Date: 07 January 1924
• Docket Number: No. 59,59
• Citation: 68 L.Ed. 441,263 U.S. 553,44 S.Ct. 157
• Parties: GILES et al. v. VETTE et al
• Court: U.S. Supreme Court

263 U.S. 553

44 S.Ct. 157

68 L.Ed. 441

GILES et al.

v VETTE et al.

No. 59.

Argued Oct. 9, 10, 1923.

Decided Jan. 7, 1924.

Messrs. William Burry and Guy M. Peters, both of Chicago, Ill., for petitioners.

Messrs. Geo. T. Buckingham, Horace Kent Tenney, Harry P. Weber, George W. Miller, Harry A. Parkin, Carl Meyer, and Henry R. Platt, all of Chicago, Ill., for respondents.

Mr. Justice BUTLER delivered the opinion of the Court.

On March 11 and 12, 1920, creditors filed petitions in bankruptcy against Marcuse & Co., and a receiver was appointed. The bankruptcy court found that the firm was composed of Marcuse, Morris, Hecht, Finn, Vette, Zuncker, Regensteiner, Clement Studebaker, Jr., and George M. Studebaker, and sent the case to the referee, directing findings of fact as to insolvency. The case was taken to the Circuit Court of Appeals on petition to review and revise that finding and order. That court eliminated from the order the names of all except Marcuse and Morris. Vette v. Giles, 281 Fed. 928. This court granted a writ of certiorari on petition of creditors. 260 U. S. 712, 43 Sup. Ct. 14, 67 L. Ed. 476. The question for decidsion is whether any of the persons named, other than Marcuse and Morris, are liable as general partners.

Marcuse had been a member, and Morris had been an employee, of the firm of Von Frantzius & Co., brokers, at Chicago, which suspended business because of the death of Von Frantzius. In April, 1917, settlement of the estate of Von Frantzius was pending in probate court. Proceedings in bankruptcy were pending against Von Frantzius & Co. There were many creditors of the firm, and it was indebted in large amounts to the respondents other than Vette and Zuncker. Marcuse desired to organize a new brokerage firm to carry on business in the place formerly occupied by his old firm. It was proposed that a limited partnership be formed under the Illinois Limited Partnership Act of 1874 (Rev. St. 1874, c. 84, §§ 1-23), and to that end a form of agreement was prepared, and nine originals were signed by Marcuse, Morris, Hecht, Finn, Vette, Zuncker, Regensteiner, and Hoffman (in his own name, but in fact representing the Studebaker interest).

In advance of the consummation of this agreement, Marcuse was to arrange with creditors of the firm that the assets of the Von Frantzius estate be turned over to him, as trustee, on his giving bond and making certain payments for the protection of the administrators. He was to obtain assignments of the claims of creditors, in consideration of trust certificates issued by him containing his agreement to pay off the creditors who did not accept such certificates, to organize a new partnership, to turn over the assets to the new firm for liquidation in the usual course of its business for account of the certificate holders, and, out of profits accruing to him as a member of the new firm, to pay any deficiency remaining after liquidation of the assets. This arrangement had not been completed at the time of the signing of the partnership agreement. The signed agreements were placed in escrow, not to be delivered until conclusion of arrangements for the delivery to Marcuse of all the assets of Von Frantzius, excepting an amount to indemnify against claims of nonassenting creditors, and to pay the expenses of administration, and until dismissal of the bankruptcy proceedings.

The proposed agreement provided for a limited copartnership under the name of Marcuse & Co., to commence business on April 2, 1917, and to continue for five years. Marcuse and Morris were to be general partners. The other signers were to be limited partners. Marcuse was to contribute a membership in the New York Stock Exchange, in addition to cash and other property. Morris was to contribute $10,000. Contributions were to be made by the limited partners as follows: Hecht $25,000, Finn $31,500, Vette $30,000, Zuncker $25,000, Regensteiner $28,500, and Hoffman (in fact the Studebaker interest) $50,000—amounting in all to $190,000. The general partners were to devote all their time to the business and were permitted to draw specified sums each year to be charged to expenses. Each partner, general and limited, was to have 6 per cent. on capital contributed by him. Morris was to have 10 per cent. of the net profits. There was to be paid to Marcuse 25 per cent. of the net profits, to be used by him to pay off his trust certificates covering the debts of Von Frantzius & Co. The rest was to be divided among the partners, except Morris, in the proportions in which they had contributed capital.

Shortly after the deposit in escrow, Marcuse learned that the New York Stock Exchange would not admit to membership a firm having more than two limited partners, but would not object to a firm having only two limited partners, who were not engaged in other business. This was reported to the others, and the matter of consummating the proposed partnership agreement was dropped.

But Marcuse did not abandon the idea of organizing a new firm, and, after conferences and lapse of some time another limited partnership agreement for a firm of the same name was prepared conformably to the act of 1874. Marcuse, Morris, Hecht, and Finn were the parties to the new agreement. It was dated—as was the former—April 2, 1917, and was signed June 30 of that year. Marcuse and Morris were general partners and agreed to contribute capital as in the proposed former agreement. Hecht and Finn were named as limited partners, and each agreed to contribute $95,000. The liability of each was expressly limited to the amount contributed by him. The term was five years from July 1, 1917. Rights, duties, and immunities of the general and limited partners were substantially as stated in the first draft.

On the same day, and as a part of the same transaction, there was signed an instrument known as the Hecht-Finn trust agreement. The limited partnership agreement was made a part of it, and a copy was attached. It recited that Hecht and Finn would be entitled to certain payments and distributions of income and assets of the copartnership, and declared that they held the same as trustees. The agreement directed payment to the Chicago Title & Trust Company of all funds at any time payable to Hecht and Finn under the partnership agreement, or by way of distribution or dissolution. It directed the trust company to distribute all funds to the holders of certain trust certificates for 380 shares of the initial value of $500 per share to be issued by Hecht and Finn, in accordance with the agreement, as follows: To Hecht 50 shares, Finn 63 Shares, Vette 60 shares, Zuncker 50 shares, Regensteiner 57 shares, and Hoffman (for the Studebaker interest) 100 shares. Certificate holders were entitled to have access to the books, to have an inventory and account once a year, and a trial balance monthly. Hecht and Finn were to appoint such auditors as the holders of certificates should designate. On the report of the auditors and the direction of the certificate holders they were authorized to take steps to dissolve the firm, if the business was not conducted conservatively or was neglected or mismanaged. It was provided that the certificate holders should 'have no right, title or interest, directory, proprietary or otherwise, in the said copartnership or in or to the property or assets of said copartnership, * * *' and that 'the interest of each * * * holder of trust certificates shall consist solely of the right to receive his proportionate share of the net part or parts of the trust fund from time to time payable to the trust company hereunder, * * *' This agreement was signed by Hecht and Finn; there was attached to it an agreement signed by Marcuse, Morris, Hecht, and Finn to do all things necessary to carry out the trust, and the trust company accepted the duties imposed upon it.

On the same day—June 30, 1917—Hecht delivered his check to Marcuse & Co. for $25,000 and Finn his check for $31,500, and checks were delivered to Hecht and Finn by Vette for $30,000, by Zuncker for $25,000, by Regensteiner for $28,500, and by Hoffman (for the Studebaker interest) for $50,000. These checks were handed over to Marcuse & Co., making up a total of $190,000.

On Monday, July 2, the certificate of limited partnership was filed in the office of the county clerk. The new firm commenced business on that day. All the letter heads and other papers of the firm indicated that Marcuse and Morris were general partners and that Hecht and Finn were limited partners. Hecht and Finn took no part in the control of the business. Marcuse and Morris exercised exclusive control and carried on the business. The Hecht-Finn trust agreement was unknown to persons dealing with the firm. It does not appear that any of the creditors understood or had any reason to believe that the arrangement was other than as shown by the partnership agreement.

From time to time, while it was a going concern, the firm paid dividends on the capital contributed. After bankruptcy proceedings had been commenced against Marcuse & Co., Hecht and Finn, in accordance with section 11 of the Uniform Limited Partnership Act (Hurd's Rev. St. Ill. 1919, c. 106a, § 55), hereafter quoted, renounced their interest in the profits of the business or other compensation by way of income. They also paid $46,000 into court for the benefit of the alleged bankrupt estate. This amount was sufficient to cover all dividends paid on the $190,000, so contributed to the capital of the business, with interest on such dividends from the times of payment.

Are Hecht and Finn liable as general partners?

No limited partnership was formed. On July 1, 1917, the Illinois Limited Partnership Act of 1874 was repealed, and there was substituted for it the Uniform Limited Partnership Act (Hurd's Revised Statutes 1919, c. 106a, §§ 45-75). The Uniform (General) Partnership Act (Id. §§ 1-45) became effective on the same day. The act of 187...