Vanhorn v. Corcoran

— 265 — Opinion, Mr. Chief Justice Paxson: The first assignment of error presents a question which controls this case. It alleges that “the court erred in their answer to the plaintiffs’ first point, which point was : — ■ “ That the articles of association filed by the defendants, and under which they claim to have been organized and carried on business as a limited copartnership, are defective upon their face, in that the description of the property subscribed is too general to enable any one to form a correct estimate of the extent of the property, and gives only a lumping valuation, which renders it equally difficult to judge of the value of the property subscribed, and is therefore not a compliance with the requirements of the act of 1876, and the defendants are liable as general partners.” The answer of the court was: “ Refused under the evidence established in this case.” The defendants were sued as general partners. Their defence was that they were members of a limited partnership organized under the act of June 2, 1874, P. L. 271, and its supplement of May 1, 1876, P. L. 89. The former act requires a cash capital; the latter allows the members to make contribution to the capital “ in real or personal estate, mines, or other property, at a valuation to be approved by all the members subscribing to the capital of such association: Provided, That in the statement required to be recorded by the first section of said act, subscriptions to the capital, whether in cash or property, 'shall be certified in this respect according to the fact; and when property has been contributed as part of the capital, a schedule containing the names of the parties so contributing, with a description and valuation of the property so contributed, shall be inserted.” It will be noticed that the act gives a wide latitude as to the kind of property that may be contributed as capital. At the same time, it is very evident that it contemplates a real actual capital in cash, or in property available for the business of the company and the payment of its debts. It was never intended that the property contributed as capital should be moonshine, wild-lands, or water-lots. If the business be merchandising, a stock of goods and the store-house in which they are contained would be legitimate; if the business be mining, a mine with its — 266 — machinery and improvements would he appropriate; and if manufacturing, the factory building, with its machinery and the stock, manufactured and unmanufactured, would he in the direct line of its business, and therefore a proper and available contribution to capital. The point of these remarks will appear later. The capital stock of this association consisted of $100,000. A portion of this was contributed in cash. An examination of the certificate shows, however, that “ Isaac N. Kline et al., doing business as A. H. Heilman & Company, paid in merchandise, lumber, book accounts, and bills receivable, transferred to this association, $21,609.18, and in cash $3,390.82, making their total subscription $26,000.” This description of the property contributed is upon all fours with that contained in Maloney v. Bruce, 94 Pa. 249, of which it was said by this court: “ This is not the kind of schedule contemplated by the act of 1876. The description is too general to enable any one to form a correct estimate of the extent of the property, and a lumping valuation renders it equally difficult to judge of values. The property contributed was intended as the equivalent of a cash capital, and the plain object of the provision in the act of 1876, requiring a schedule, was to enable creditors to ascertain precisely of what the property consisted and to judge of its value. If parties seek to have all the advantages of a partnership, and yet limit their liability to creditors, they must comply strictly with the act. Where property has not been contributed, scheduled and valued, as the act of 1876 directs, there is no payment of the capital.” The description in this ease is even more vague than in Maloney v. Bruce. It consists of “ merchandise, lumber, book accounts, and bills receivable.” A creditor looking at this description could not form any estimate of its quantity, character, or value. For all practical purposes it might as well have been omitted. If the property had been properly scheduled, an estimate of its value might have been made approximating the truth. As an illustration, if the general and indefinite word “lumber” had been followed by the words “consisting of 100,000 feet of No. 1 yellow pine flooring,” almost any business man could have formed a fair idea of its value, or he could have ascertained it from any one engaged in the lumber business. — 267 — The learned counsel for the defendants below evidently felt the strain of this part of their case when they made the offer of evidence embraced in the eighteenth assignment. The evidence referred to was admitted by the court, and if properly assigned for error we would discuss and rule the point.* As it was not properly assigned, we refer to it merely to say that the evidence received in support of it only made the defendants’ case so much the worse. For it thus appeared that the defendants did not contribute any specific property at all; they merely contributed their interest in a firm, with estimated assets of $75,000 and certain debts of $53,000. The value of the difference between the two was the alleged contribution of $21,609.18. . The assets of the firm, estimated at $75,000, were turned over to the limited partnership, subject to $53,000 of debts which the latter assumed to pay. It is easy to see, therefore, why there was no schedule of the property contributed. There was no property to schedule. The whole of it in equity was liable to creditors, and could not be withdrawn from them without fraud until the last dollar of the debts of the firm was paid. So that instead of property the defendants contributed a mere equity, to wit, whatever was left of the assets of the firm after the payment of its debts. Their allegation in the certificate that they had contributed $21,609.18 in property was inaccurate, and came dangerously near being a false statement, though I do not think it was so intended. Had the certificate set forth that their contribution consisted of their interest in a firm subject to the payment of its debts, it would have conformed to the truth, but it would not have been a compliance with the act of 1876. That act contemplates such contributions as shall be available to aid the business and pay the creditors of the limited partnership. Of what use was this contribution ? It could not properly be made available until the debts were paid. To turn the property and pay $53,000 of debts -requires time. In the meanwhile the debts are drawing interest, and by the time the assets are converted, even if there is no shrinkage, there may be little surplus left. The court below was evidently misled by the idea that the assets were worth their estimated value of — 268 — $75,000. Conceding that they were, it by no means follows that the margin between the assets and the debts was worth $21,609.18. The evidence does not show that it was, or that the company has realized any such sum, or any sum whatever, after the payment of the $58,000. The defendants contend, however, that even if there was an irregularity in the formation of the association, they are not liable as general partners, but that the plaintiffs must proceed under the act of 1874, as was done in Maloney v. Bruce, supra. It is true, in that case there was no attempt to hold the defendants as general partners; the suit was against the company, and after judgment, leave was granted t'o take out execution against the defaulting member. The creditor there had his election to proceed against the association as a valid organization and pursue the remedy pointed out by the act of 1874, or, to hold all the members liable as general partners. He chose the former. In the case in hand, the creditors elected to treat the members as general partners, or as liable as such. This they had a perfect right to do. Prima facie, a firm transacting business is a general partnership. It can only shelter itself behind the act of 1874 and its supplements by showing a strict compliance with the law. It was said in Eliot v. Himrod, 108 Pa. 569, “ Each partner is liable unless saved by statute. If the partners have not complied with the statutory requisites a limited partnership has not beeft formed.” To the same effect is Maloney v. Bruce, supra. This is the key to the whole situation. A limited partnership that has not complied with the law of its creation is not a limited partnership at all; it is, however, a partnership in which all the members are liable as at common law. If the defect appears upon the face of the certificate, it is the duty of the court to rule it as a question of law. It would lead to more than confusion to permit a defective schedule like this to be supplemented by evidence to show that there really was property and that it was of the value indicated. It would open the door to all kinds of fraud and perjury, and no man could know whether such an association was a valid limited partnership, until after the verdict of a jury. As there were no disputed facts in this case, the learned — 269 — judge below should have given the jury a binding instruction to find for the plaintiffs for the full amount of their claim. Judgment reversed and a venire facias de novo awarded. Footnotes [*] See Hawes v. O’Reilly, 126 Pa. 440 ; Battles v. Sliney, 126 Pa. 460.