SECURITIES AND EXCHANGE COM'N v. DuPont, Homsey & Co., Civ. A. No. 60-659.

• Decision Date: 01 May 1962
• Docket Number: Civ. A. No. 60-659.
• Citation: 204 F. Supp. 944
• Court: U.S. District Court — District of Massachusetts
• Parties: SECURITIES AND EXCHANGE COMMISSION v. duPONT, HOMSEY & COMPANY and Anton E. Homsey.

204 F. Supp. 944

SECURITIES AND EXCHANGE COMMISSION v. duPONT, HOMSEY & COMPANY and Anton E. Homsey.

Civ. A. No. 60-659.

United States District Court D. Massachusetts.

May 1, 1962.

James E. Dowd, Edward P. Delaney, Boston, Mass., for plaintiff.

Charles H. Morin, Mark M. Horblit, Marcien Jenckes, Boston, Mass., for defendant.

FRANCIS J. W. FORD, District Judge.

Petitioner Legate in 1959 became a limited partner in the defendant firm now in receivership, turning over to the firm $80,000 in cash and securities. In his proof of claim and petition Legate alleges that he was induced to become a limited partner by the misrepresentations of Homsey, the principal general partner of the firm. He further alleges that the New York Stock Exchange, both before and after the time he became a limited partner, had knowledge that Homsey and the firm in the conduct of their business had violated the law and the rules and regulations of the Exchange and failed to fulfill the duty allegedly incumbent upon it to investigate the conduct of the business and take appropriate disciplinary action against Homsey and the firm, which would have disclosed to Legate the falsity of the representations made to him by Homsey. On the contrary, he alleges, the Exchange engaged in an advertising campaign to persuade the public that member firms of the Exchange had a high standing and reputation for integrity, honesty and character and that petitioner was influenced by this advertising in becoming a limited partner.

Petitioner seeks to rescind his partnership contract on the ground of fraud, to establish his standing as a general creditor for the amount of his partnership contribution, to establish a claimed right to priority over the Exchange as a creditor in the distribution of the assets of the firm, and to recover directly from the Exchange the amount of his partnership contribution less any amount which he may recover from the assets of the firm. The receiver moves to dismiss the petition insofar as it seeks the establishment of a priority over other creditors or direct recovery against the Exchange.

The first issue between the parties is as to the standing of Legate as a creditor of the firm. If he can prove that, as he alleges, he was induced to become a limited partner by the fraud and misrepresentation of Homsey, then his rights are governed by Mass.G.L. Ch. 108A § 39, which provides:

"§ 39. Same Subject; Rights of Party Entitled to Rescind Partnership Contract. — Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled —

"(a) To a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him; and

"(b) To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities; and

"(c) To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership."

Thus Legate, if he can prove his allegations, is entitled to elect to rescind his partnership agreement and to stand as a creditor of the firm for the amount of his partnership contribution. He is not however entitled to priority over the claims of the customers of the firm or their assignees but only to have his claim satisfied out of any partnership assets remaining after these claims of third parties have been satisfied.

Legate appears to contend that a partnership agreement induced by fraud is void ab initio and that therefore he is entitled to recover the amount of his contribution before claims of third parties against the firm can be satisfied. This contention cannot be accepted in the light of the clear provisions of § 39, whatever support for it may be...