In re Bertenshaw

• Decision Date: 19 November 1907
• Docket Number: 83.
• Citation: 157 F. 363
• Parties: In re BERTENSHAW.
• Court: U.S. Court of Appeals — Eighth Circuit

157 F. 363

In re BERTENSHAW.

No. 83.

United States Court of Appeals, Eighth Circuit.

November 19, 1907

Syllabus by the Court

A partnership was adjudicated bankrupt, but none of the partners was adjudged a bankrupt. Application was made to the court to order an unadjudicated partner to turn over his property to the trustee of the partnership estate for administration in bankruptcy. Held, the court of bankruptcy was without jurisdiction to summarily take and administer in the proceedings against the partnership the individual estate of the solvent partner without his consent.

Under Bankr. Act July 1, 1898, c. 541, 30 Stat. 544 (U.S. Comp. St. 1901, p. 3418), a partnership is a distinct entity, a person separate from the partners who compose it. It owns its property and owes its debts apart from the individual property of its members which it does not own, and apart from the individual debts of its members which it does not owe. It may be adjudged bankrupt, although the partners who compose it are not so adjudicated.

The trustee of the estate of a bankrupt partnership is not the trustee of the individual property of the unadjudicated partners and has no more right to administer that property than he has to administer the property of indorsers of the commercial paper of the firm, or the property of sureties for its debts.

He is not the trustee or the assignee of the claims of the partnership creditors nor their agent or attorney to collect those claims out of other than the partnership property, and where no partner is adjudged bankrupt, he has no power to enforce such claims against any property, except the partnership property or against any unadjudicated partner or other person who has none of the partnership property.

Under Act March 2, 1867, c. 176, 14 Stat. 517, and the Massachusetts Insolvency Law of 1838 (Laws 1837-38, p. 449 c. 163), a partnership was an aggregation of partners and the insolvency or bankruptcy of the partners conditioned the bankruptcy of the partnership. It is not so under the act of 1898, and therefore many of the rules of law applicable under the former acts do not obtain under the latter.

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.

The discharge of the partnership where the partners are not adjudicated bankrupt does not discharge the partners from their liability for the partnership debts.

Under the Act of 1898 a partnership is insolvent if the partnership property is insufficient to pay the partnership debts, because it is a person (section 1 (19) c. 541, 30 Stat. 545 (U.S. Comp. St. 1901, p. 3419)), because any person is insolvent under that act whose property is insufficient to pay its debts (section 1 (15)), and the only property a partnership has or can convey or apply to the payment of its debts is partnership property, and the only debts it owes are the partnership debts.

On November 13, 1905, the court below found that B. F. Masterman, C. C. Surber, and Charles Joyce, doing business as the Opera House Drug Company, made an assignment for the benefit of their creditors, and upon that ground alone 'adjudged that said B. F. Masterman, C. C. Surber, and Charles Joyce, partners doing business as the Opera House Drug Company, be adjudged bankrupts,' and added: 'It is further ordered that this adjudication binds only the partnership entity and not the partners as individuals. ' None of the partners was found to be insolvent or adjudged to be bankrupt. The trustee chosen by the creditors of the partnership collected the partnership property, converted it into money, and paid the expenses of the proceedings. He then had remaining $213.35 to be distributed among the creditors and the indebtedness of the partnership to them was $4,180.66. Thereupon he filed a petition in the court below for an order upon C. C. Surber, one of the partners, that he should turn over to him certain real estate which did not belong to the partnership and which he owned individually, to be applied to the payment of these debts. Surber answered that this real estate was his individual property, that he had not been and was not insolvent, and that he had not been adjudged a bankrupt. The referee found the facts to be as Surber alleged, and denied the prayer of the petition, on the ground that the real estate of an unadjudicated solvent partner was not subject to administration in bankruptcy upon a simple adjudication of the partnership and the court upon a proper certificate affirmed this ruling. The trustee presents this decision for revision and reversal by a petition under section 24b of the bankruptcy law. Act July 1, 1898, c. 541, 30 Stat. 553 (U.S. Comp. St. 1901, p. 3432).

Willard W. Padgett, William P. Dillard, and William M. Banks, for petitioner.

Joseph B. Tomlinson, Austin M. Keene, and Edward C. Gates, for respondent.

Before SANBORN and HOOK, Circuit Judges, and PHILIPS, District Judge.

SANBORN Circuit Judge (after stating the facts as above).

The adjudication in bankruptcy in this case is a distinct judgment that the partnership is a bankrupt, and that none of the partners is a bankrupt. This decision has not been challenged by appeal, those issues are now res adjudicata, and the only question here is, may the bankruptcy court in the administration of the estate of a bankrupt draw to itself and apply to the payment of partnership creditors individual property of solvent partners, none of whom has been adjudged a bankrupt?

There are two conceptions of a partnership, one springing from the agreement on which it is founded, that it is an aggregation of persons associated together to share its profits and losses, owning its property, and liable for its debts. The other that it is an artificial being, a distinct entity separate in estate, in rights, and in obligations from the partners who compose it. In most of its relations to persons and things the latter conception is the more accurate. The Supreme Court of Vermont in 1878, in Walker v. Wait, 50 Vt. 668, 676, declared that:

'A partnership or joint-stock company is just as distinct and palpable an entity in the idea of the law, as distinguished from the individuals composing it, as is a corporation; and can contract as an individualized and unified party, with an individual person who is a member thereof, as effectually as a corporation can contract with one of its stockholders. The obligation and the liability, inter partes, are the same in the one case as the other. The only difference is a technical one, having reference to the forum and form of remedy.'

Judge Cooley in Robertson v. Corsett, 39 Mich. 784, said in the same year:

'The partnership for most legal purposes is a distinct entity, having its own property capable of contracting separate debts, having the right to sue in equity its several members, and to be protected against their conduct to the same extent that it might be against the conduct of strangers.'

Judge Brewer, now Mr. Justice Brewer of the Supreme Court, said in 1876 in Cross v. National Bank, 17 Kan. 340:

'Where one joins a partnership, as in this case, he makes himself a part of an entity already existing, which has acquired certain property and business and in acquiring it has incurred certain indebtedness. The firm owns the property, holds the business, and owes the debts.'

Thus it may be seen that the conception of the partnership as a distinct entity, separate in estate and obligations from each of the partners and from the individual estates and obligations of each partner, was an established and approved legal conception years before the act of 1898 was passed. Congress embodied this conception of a partnership in the bankruptcy law of 1898 by these clear provisions: Section 1(19):

''Persons' shall include corporations, except where otherwise specified, and officers, partnerships and women. ' Act. July 1, 1898, c. 541, 30 Stat. 545 (U.S. Comp. St. 1901, p. 3419.)

Section 5:

'Partners. (a) A partnership, during the continuance of the partnership business, or after its dissolution and before the final settlement thereof, may be adjudged a bankrupt.

'(b) The creditors of the partnership shall appoint the trustee; in other respects so far as possible the estate shall be administered as herein provided for other estates.

'(c) The 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.

'(d) The trustee shall keep separate accounts of the partnership property and of the property belonging to the individual partners.

'(e) The expenses shall be paid from the partnership property in such proportions as the court shall determine.

'(f) The net proceeds of the partnership property shall be appropriated to the payment of the partnership debts, and the net proceeds of the individual estate of each partner to the payment of his individual debts. Should any surplus remain of the property of any partner after paying his individual debts, such surplus shall be added to the partnership assets and be applied to the payment of the partnership debts. Should any surplus of the partnership property remain after paying the partnership debts, such surplus shall be added to the assets of the individual partners in the proportion of their respective interests in the partnership.

'(g) The court may permit the proof of the claim of the partnership estate against the individual estates, and vice versa, and may marshal the assets of the partnership estate and individual estates so as to prevent preferences and secure the equitable distribution of the property of...