Vette v. Giles

ADSCPIULER, Circuit Judge (after stating the facts as above). The primary issue is whether, under above-stated facts, petitioners are liable as general partners with Marcuse and Morris. Then there is the question whether, in case Hecht and Finn are so liable, the liability can be extended also to the other petitioners, who do not by the finally executed contract purport to have entered into any partnership arrangement of any sort, and the further question whether the Studebakers can in any event be held general partners, in view of the — 933 — fact that the Studebaker contribution was made by and for “Studebaker Bros. Trust.” The various contentions will be stated as they are below considered. [1] For respondents it is strongly urged that the reduction of the first agreed number of special partners from 5 to 2, and the “HechtFinn Trust,” with certificates to manifest the interest of each contributor, was a fraud and a device conceived for the purpose of avoiding the objection of the New York Stock Exchange to limited partnerships having more than 2 special partners, and to any special partners being engaged in other business. There was evidence from which the District Court could have reached this conclusion, and doubtless it did so conclude, and such conclusion of fact, reached upon contradictory evidence, we may not disturb in this proceeding to review and revise as to the law. But would such finding warrant the conclusion that the ostensible limited partners and the certificate holders all became general partners with Marcuse and Morris? Applying to the transaction the epithet of fraud does not change its true nature or its incidents. If it had been intended that all should be general partners, and the device was for the purpose of concealment, and protection of some from general liability, the court would look through the form to the actual intent and purpose of the parties. But the record affords not even suggestion of such intent. If the contribution of $190,-000 was in good faith made to the capital of the partnership, it is not readily understandable what material difference it would make whether it was in fact contributed by 2 or by 20. It does not appear that by such device to avoid the Stock Exchange ruling, the creditors of the partnership were in any degree defrauded or periled. If the New York Stock Exchange is a creditor, and has been to its detriment misled through the alleged fraudulent device, its rights and remedies against those who participated therein remain unaffected by the bankruptcy. But in the entire absence of any showing of detriment occasioned thereby to the creditors generally, or in fact to any of them, the utmost that could be visited upon the participants of this deception would be to hold that they occupy toward this partnership and its creditors the same relation as do Hecht and Finn, viz. that of such wTho from July 1, 1917, erroneously believed and assumed that they then entered upon a limited partnership. Assuming, therefore, that the transactions of June 30 and July 2 were colorable, in that, while a limited partnership was intended as to all the petitioners, it was carried out in form to deceive the New York Stock Exchange as to the number of its special partners, this deception would not of itself serve to fasten on the deceivers the liability of general partners. Respondents urged that in this statement of the contributors as set forth in the filed certificate there was such falsity as under the old Illinois act would result in all becoming general partners, notwithstanding the stated total was in fact contributed. Under the rigors of the old law this might have been so, but the contention of unlimited liability rests mainly on the nonapplicability of the old statute, through failure to complete the organization and begin business thereunder, and file the limited partnership certificate until — 934 — after the repeal of the act requiring it, and the resultant nonapplicability of the old statute. It is apparent that none of the parties to the contract or the certificate holders under the Hecht-Finn Trust contemplated or supposed that general partnership liability was assumed by any of them except Marcuse and Morris, and it was the evident understanding and belief of all that the others, whether called special partners or certificate holders, would have no liability beyond their investment, and no participation in the conduct and control of the business, which was by the agreement committed wholly to Marcuse and Morris. Had the limited partnership been fully perfected while the act of 1874 (Rev. St. 1874, c. 84) was yet in force, these investors would probably have incurred no liability beyond their investment. At any rate, this was their intention, regardless of whether under the circumstances ■ under that law this would have been the result. ' ■ If under the old law the certificate or affidavit filed was materially false, the statutory result was to make all liable as general partners. • Many other states had or have similar statutory provisions, and the courts have quite generally construed such provisions strictly against the limited partners. To such extent was this tendency recognized in the mercantile world that it was considered hazardous for one to invest money in a partnership enterprise upon the faith of compliance with limited partnership statutes, which were quite commonly regarded as a trap to catch the unwary rather than a proper means to a desirable end. To relieve from such undue hazard, and make more safe to investors not participating in the business, the employment of their capital in partnership enterprises, as well as to bring about uniformity in such matters, the “Uniform Limited Partnership Act” was drafted and submitted to the Legislatures of the different states. Several of the states have adopted it. It passed the Illinois Legislature as drafted, in June, 1917, and became a law without the Governor’s signature June 28, effective three days afterwards, July 1, repealing the act of 1874. It indicates a policy with respect to this subject quite the reverse of that of -its predecessor. While section 8 of the old act provided that the limited partnership shall not be deemed formed until the certificate as specified has been filed, and that any false statement in the certificate required to be signed by all the parties, or in the affidavit required to be signed by one of them, shall result in,all the persons being general partners, the provisions of the Uniform Limited Partnership Act as to such matters are significantly otherwise. Section 2 (chapter 106a, § 46) provides that the limited partnership is formed when there has been substantial compliance in good faith with the requirements of the law, and as to false statements section 6 (chapter 106a, § 50) provides, not that thereby general partnership results as to all, but only as to those who executed the certificate knowing it to be false, and in favor of those only who suffer loss through reliance thereon. Provision is made for admitting other limited partners, and for the assignment of limited partnership interests, and for the limited partner to loan money to and transact business with the partner — 935 — ship as an outsider might do, and for one to be'at the same time a limited and a general partner. Section 24 (chapter 106a, § 68) provides for amendment of the certificate when there is a false or erroneous statement therein, or when the members desire to make in it any change that shall accurately represent the agreement between them. To insure construction as of remedial legislation, section 28 (chapter 106a, § 72) provides that the rule of strict construction of statutes in derogation of the common law shall not apply to the act. Section 11 (chapter 106a, § 55) provides that— BA person who has contributed to the capital of a business conducted by a person or partnership erroneously believing that he has become a limited partner in a limited partnership, is not, by reason of his exercise of the rights of a limited partner, a general partner with a person or in a partnership carrying on the business, or bound by the obligations of such person or partnership: Provided that on ascertaining the mistake he promptly renounces his interest in the profits of the business, or other compensation by way of income.” [2] Although on July 2, 1917, when this supposed limited partnership deal was supposedly consummated through delivery of the executed agreements, filing of certificate, deposit of checks, and beginning of the business, and from that time to the time of the bankruptcy all the parties were under the belief that they were a limited partnership duly organized under the law of Illinois, it appears-that in this they were clearly mistaken, because the law under which they attempted so to qualify had been repealed before their organization was completed, certificate filed, and business begun, and they did not comply with the new act, either in the form of the certificate or in the filing of it for record in the recorder’s office as required under the new law, the filing having been in the office of the county clerk as the old law prescribed, and also because the new law provides that limited partnerships shall not be organized for the carrying on of brokerage business. [3] As set forth in the statement of facts the record shows that after the filing of the intervening petition charging that all were general partners, Hecht and Finn undertook to avail themselves of the provisions of section 11 by unconditionally paying into court for the alleged bankrupt estate $46,000 which represents the profits and income which, during the course of the business, had been paid on this $190,000 of capital, with interest from time of payment, and it is the contention that this payment operates to relieve from general partnership liability the theretofore supposed special partners, including all the certificate holders under the Hecht-Finn trust. It is earnestly contended that because the Uniform Limited. Partnership Act prohibits the formation of a limited partnership to carry on the business of brokerage, section 11 cannot in any event afford relief. But section 11 is very broad in its terms. It is not limited to instances where there has been an attempted compliance with the provisions of the new act. It includes in its terms any person who at any time contributed to a partnership, erroneously believing himself to be a limited partner. — 936 — There are other sections which amply provide for the correction of errors and irregularities in organization and for amendment of statements in accordance with the facts, thereby perfecting and confirming the special partnership, without incurrence of general liability. This section is not designed to amend or correct or perfect the limited partnership organization, so that it may thereafter continue as such, but looks rather to the termination of the relation, and relief from general liability on compliance with the terms of the section in all those cases where persons erroneously believed they had become limited partners, without regard to whether or not the belief was induced by supposed compliance with this or any other act. This view not only comports with the words of the section, but with the evident general purpose of the act to give effect, so far as may be done, to the bona fide intent of parties, and to relieve from the extreme consequences of honest mistakes, which the prior law and its strict interpretation entailed. The erroneous belief may be as to the nature of the business which may be organized into a limited partnership as well as to any other matter of law or of fact, which induced the error. In this respect we do not conceive section 11 to be different in its effect as part of the new law than if it had been adopted as an amendment to the old. [4] It is further contended that section 11 does not contemplate one may wait for two or three years, and until bankruptcy overtakes the concern, before undertaking to have the benefit of the section. Such state of facts would go only to an issue upon the good faith of the asserted erroneous belief, and the prompt renunciation of interest in the profits and income of the business, after learning of the error. One can scarcely imagine circumstances under which error might have .been more readily induced than those which this record presents. The new law had manifestly not then been published, and the three days which intervened between the time it became law and the time it became effective hardly gave opportunity for public discussion thereon. After the business started it does not appear that there was occasion for investigation as to its organization, nor that this was challenged, until about the time the concern got into difficulty. Even the New York Stock Exchange does not appear to have questioned its validity as a limited partnership. Consideration of the very exceptional circumstances shown induce quite inevitably the conclusion that, during all the time this business was carried on, it was in the honest, though erroneous, belief of all connected with it that it was a limited partnership, and that within reasonable promptness after ascertainment of the true status it was undertaken to comply with the conditions imposed by section 11, albeit this was after petition in bankruptcy was filed. In the statutory condition that “he promptly renounces his interest in the profits of the business or other compensation by way of income” there may be some ambiguity; but in this case the record shows the compliance was to the fullest extent that might be claimed on behalf of creditors, and it is not contended that the unconditional payment of the $46,000 falls short of compliance with the section, if the — 937 — section has application. The fact that elsewhere in the act amendment, correction, and perfection of the organization are adequately provided for assists to the conclusion that section 11 contemplated situations where a limited partnership could not under the law be formed at all, or where, because of intervening conditions, it would not be practicable to perfect or continue it. [5] But it is urged that in no event can Vette, Zuncker, Regensteiner, and the Studebakers have advantage of section 11, because of their denial that they ever became limited partners, and their consequent want of belief that they were such. The relief afforded by the section is to a person “erroneously believing that he has become a limited partner in a limited partnership.” The insistence is, and the court evidently so found, that Hecht and Finn, although appearing as the only special partners, were in truth and in fact representing as well the other petitioners herein, whose relation to the partnership was found to be not different from that of Hecht and Finn. Their connection with the partnership being thus traced through their representation by Hecht and Finn, it follows that, if such representation would operate to charge them, they should in good conscience also have the benefit of whatever Hecht and Finn may have done which would bring relief from the charge. If, therefore, it appears that Hecht and Finn believed themselves to be special partners (and there can be no doubt that they did so believe), their representative capacity held to exist as to a part of the contributed capital would extend and inure to those whom they are thus held to have represented. The restitution having been made on the entire $190,000 of supposed special partnership contributions, and having been of an amount sufficient for compliance with section 11 by all the petitioners, part of them should not be denied its benefit, because of their insistence that they were not members of any partnership at all, limited or general. Limited liability is the dominating feature of a limited partnership, and petitioners, other than Hecht and Finn, resting as they did under the belief that they had effectually contracted for limited liability, it is our view that, if section 11 applies at all, the fact that their real purpose was shown to have been the formation of a limited partnership will not deprive them of the benefit of section 11, if the compliance with its terms included in fact all the petitioners, assuming, as we do, that the record fails to show credit was extended to the firm on the faith that petitioners were general partners. [6] Petitioners insist that, apart from other contentions, under the record here they are protected from a general partnership liability by the provisions of the Uniform Partnership Act adopted in Illinois passed at the same time and in the same manner as the Uniform Limited Partnership A,ct, and likewise effective July 1, 1917. Let it be assumed that section 11 of the Limited Partnership Act has no application whatever to partnerships carrying on brokerage business, and that persons erroneously believing themselves to be limited partners in such business cannot in any event be relieved from general liability by compliance with section 11: The rights and liabilities of such persons must then be tested by and under the law governing general part — 938 — rierships, which in Illinois, from and after July 1, 1917, was the Uniform Partnership statute. This act, conceived and born with the Uniform Eimited Partnership Act, indicates similar purpose of relieving from • risk of incurring partnership liability where the general partnership relation was not by the parties intended. It prescribes that the rule of strict construction of statutes in derogation of common law shall have no application to the act (section 4 [1]), and defines a partnership to be “an association of two or more persons to carry on as co-owners a business for profit” (section 6 [1]). The contractual relation of petitioners does not fall within this definition. It cannot strictly be said that they became co-owners. They contributed $190,000, which, unless lost in the venture, would eventually be returned to them. In this respect it differed from a loan of funds to the partnership, with division of profits in compensation for the loan, only to the extent that in the one case the creditors of the partnership may resort to the amount so contributed, free from participation of any claim of the contributor as a creditor, while the loaner would for his loan be upon parity with other creditors. Petitioners had no proprietary interest in, or title to, or dominion over, the property of the partnership; neither had they under the contractual relation, any right, power, or duty in the carrying on of the partnership business. As to the conduct of the business they were strangers, in quite the same sense that a loaner of funds would have been. While receipt of profits has in some instances been held conclusively to presume partnership as to creditors, section 7 (4) makes this presumption prima facie only. Section 9 (1) provides that every partner is the agent of the partnership for the purposes of the business. But under this contract none of petitioners had or could have had any right to do a single act whereby the partnership would have been bound. The contract, either as first drawn or as afterwards entered into, gave them no right or power to act for the partnership, and the record does not disclose any holding out or assumption of agency. Section 7, under the subtitle “Tests in Determining the Existence of a Partnership,” prescribes that: “In determining whether a partnership exists, these rules shall apply: (1) Except as provided by section 16, persons who are not partners as to eacn . other are not partners as to third persons.” Under the law as it was prior to the adoption of the Uniform Partnership Act the existence of general partnership as between alleged partners was a question wholly of their intention, to be gathered from their agreement. Goacher v. Bates, 280 Ill. 372, 117 N. E. 427; National Surety Co. v. Townsend Brick, etc., Co., 176 Ill. 156, 52 N. E. 938. In the last cited case it was said: “While the agreement with Adams Bros, to share one-half the profits and losses might raise a presumption of partnership, yet if the parties actually meant that there was to be no partnership created, and so contracted, the presumption would be rebutted.” — 939 — In Grinton v. Strong et al., 148 Ill. 587, 36 N. E. 559, the court said:- “Even where parties * * * enter into a joint enterprise and share in the profits, a partnership, as between themselves, is not necessarily the result.The intention of the parties always controls.” So in Smith v. Knight et al., 71 Ill. 148, 22 Am. Rep. 94, where Knight agreed to put money into a commission business and was to receive 10 per cent, per annum and the share of the commissions, but was not to be liable for losses, the court, passing on the alleged partnership of Knight, said: “In determining this question, the intention of the parties must be considered. Written articles of copartnership may be so expressive as to leave no room for doubt. So far as these articles of agreement are concerned, we discover nothing in them evidencing an intention to form a partnership.” And in Insurance Co. v. Barringer, 73 Ill. 230, the court said: “Whether a partnership exists or not, depends upon the intention of the parties. Parties may be partners as to third persons, when not so between themselves.” In London Assurance Co. v. Drennen, 116 U. S. 461, 6 Sup. Ct. 442, 29 L. Ed. 688, it was said: “The mere participation in profits would give no such [partnership!] interest contrary to the real intention of the parties. Persons cannot be made to assume the relatión of partners, as between themselves, when their purpose is that no partnership shall exist.” If we are correct in saying that, as between Marcuse and Morris on the one hand and the petitioners on the other, it was the distinct intent and purpose that there should be no general partnership, then as between themselves they did not become general partners. Undoubtedly contracts are conceivable wherein the parties may call themselves partners, where from the things actually agreed upon the partnership relation does not exist; and, on the other hand, they may in terms declare they are not partners, when the very things they have agreed upon supply all the elements of partnership, and they would become partners despite their declaration to the contrary. By the terms of this contract petitioners were to have no participation in the conduct of the business, could not in any manner contract for or bind the firm, and were not to be liable for losses beyond their several contributions to its capital. .The existence of a partnership between themselves may be tested by the query whether in case of loss of the entire capital of the concern, and payment by Marcuse and Morris of its debts, they might have contribution from petitioners as in partnership. Undoubtedly under the contractual relation here shown they could not. We conclude that in any event, as between themselves, petitioners were not general partners with Marcuse and Morris. [7] If section 7 (1) means what it says, then this alleged general partnership does not respond to the prescribed statutory test that “persons who are not partners as to each other are not partners as to third persons/’ The section is all-inclusive and has application ta — 940 — alleged partnerships of all kinds, whether for the carrying on of brokerage or any other business, and wholly regardless of whether the parties were or were not acting under the belief that they had created a limited partnership. The act manifests a definite purpose of making paramount the contractual intent of the parties to the agreement, as a test for fixing a general partnership liability rather than, as often theretofore, by way of penalization for participation in profits, or doing other things which held parties to general partnership liability, when general partnership was not contemplated or intended, and was not in fact effected as between themselves. With the wisdom of such change in policy as is manifested by the Uniform Partnership Acts we are not of necessity here concerned. There is reason for each view; but we are not at liberty to reject the test which the statute fixes. If experience shows the statutory test to be impractical and unwise, the remedy is with the Legislature alone. The record discloses no such 'situation as would suggest that the application here of that test involves hardship or inequity toward the creditors generally. It shows nothing to indicate that creditors were beguiled into extending credit to the firm on the faith that the petitioners (particularly the others than Hecht and Finn) were general partners, nor that petitioners held themselves out as such partners, or did any other of those things which, under section 16 of the act, might entail upon them general partnership liability. We conclude that petitioners, not having assumed general partnership relation with Marcuse and Morris, did not as to others become partners with them. [8] We find no reported decisions construing the statutory provision above considered. A salutary principle of construction of statutes designed to be uniformly adopted by the states is found in Commercial Bank v. Canal Bank, 239 U. S. 520, 36 Sup. Ct. 194, 60 L. Ed. 417, Ann. Cas. 1917E, 25, where the Uniform Warehouse .Receipts Act was under consideration, and the court said it “should have recog- • nition to the exclusion of any inconsistent doctrine which may have previously obtained in any of the states enacting it.” While these proceedings will in no wise interfere with any creditor of the alleged bankrupt undertaking to establish elsewhere or otherwise liability to him of any or all of petitioners by virtue of section 16 of the Uniform Partnership Act, we find that, resolving in favor of respondent all disputed questions of fact, the law as applied to the record here does not warrant the inclusion of petitioners in the order of reference on the question of solvency of Marcuse & Co. This conclusion makes it unnecessary to consider, the proposition that the Studebaker interest in the concern belonged wholly to Studebaker Bros. Trust, and not to the Studebakers as individuals, and that therefore they can in no event be held liable as partners. The order here under review is revised, by eliminating therefrom the names of all the petitioners herein, leaving the, revised order to include Marcuse and Morris only as the general partners in the alleged bankrupt firm of Marcuse & Company. Petitioners are adjudged their •costs. ' "