In re the City Contracting & Building Co.
In re the City Contracting & Building Co.
Opinion of the Court
On the petition of Wong Hong Yuen, a member of the City Contracting & Building Company, a copartnership, praying “that the said firm may be adjudged . . . to be bankrupts” (as concludes Form 2 adopted by the Supreme Court: 172 U. S. 681, 89 Fed. xxvii.), this co-partnership, composed of the petitioning partner and the respondents Chung Ping, Wong Gock, Au Hang Hing, Au Tin Kwai, Lau Chung, and Au Ne Chong, was adjudged a bankrupt. The respondents had all appeared and admitted service, and thereafter upon the day set for hearing, they all, excepting Au Hang Hing, expressly consented to the adjudication of the firm as prayed. Au Hang Hing entered no demurrer, plea, answer, motion, or objection, but “stood mute,” except to state in open court that eight days before the petition was filed he had withdrawn from the firm by sale of his interest to the copartner Wong Gock. See Black, Law Dic., 2d ed., 818, tit. “nihil dicit;” Buena Vista Freestone. Co. v. Parrish, 34 W. Va. 652, 654, 12 S. E. 817, 818; Wilbur v. Maynard, 6 Colo. 483, 485; Falken v. Housatonic R. Co., 63 Conn. 258, 27 Atl. 1117, 1118-1119. See, also, In re Solomon & Carvel, 163 Fed. 140, 20 Am. B. R. 488, 489; Brandenburg, Bankruptcy, 3d ed., sec. 133. The adjudica
Subsequently, upon motion of certain creditors and after due notice, the firm members were all ordered to file their individual schedules of assets and liabilities, — in the court’s reliance upon the authorities of Collier, Bankruptcy, 9th ed., 1059, par. viii., and 3 Remington, Bankruptcy, sec. 47714-The petitioning partner complied with this order. And the respondent Chung Ping has since filed schedules, but they do not conform with the full requirements of Form 1 established by the Supreme Court, 172 U. S. 668-679, 89 Fed. xvi-xxvii., — being merely a bare list of certain chattels, on the one hand, and on the other of certain debts whose nature is not specified. And the respondents Au Tin Kwai and Au Ne Chong have filed affidavits of “no [individual] assets excepting property exempt” by law, but no statement as to their individual liabilities. The respondents Wong Gock and Au Hang Hing have yet filed no schedules.
This is one phase of the constantly recurring and unsettled question of the status of the firm members in a partnership bankruptcy, and of the intent of Congress in changing the status of the firm itself from an association not distinct from its component members to an entity entirely separate and distinct. •
Although, by nearly unanimous opinion, the firm is held to be an entity under the act of 1898, yet the administration of the act in pursuance of the entity doctrine is by no means established, and by no means clear. Indeed the confusion of authorities is so persistent and in various phases the breach so widening, even between judges of the same court (see, e. g., In re Bertenshaw, 157 Fed. 363, 19 Am. B. R. 577, 17 L. R. A., N. S., 886), as to call for legislative remedy.
And it is, specially, because of this variance of authorities on the question whether in cases of partnership bankruptcy the estates of the firm members are. necessarily drawn into the administration, and, so, whether the solvent, or non-bankrupt, member can be compelled to file schedules of individual assets and liabilities, that it becomes worth while to state the reasons leading to my own matured conclusion:
There is no direct provision of the statute, and as I am now satisfied, no warrant even for., an inference, that the bankruptcy court has any such power, desirable though it may be. And my conclusion has not been reached without recognition of the fact that there are provisions of section 5 of the act,- relating to the title “partners,” e. g., clauses “d,” “e,” “f,” and “g,” 30 Stat. 547-548, which are well adapted to the administration of the estates of all the individual firm members, but which for want of clear authorization cannot be used to that particular end without some regard to the condition of the estates of those members as to solvency; nor have I failed to note that , there are some grounds of criticism of the leading judicial authority to sup-support my conclusion, the majority opinion by Circuit Judge Sanborn in the matter of Bertenshaw, supra.
Thus, that opinion errs in resting its conclusion to. any degree on plausible, and in any event not controlling, considerations of policy: see 157 Fed. 367-368, 19 Am. B. R. 582-583; for it makes much too good a case for the “shrewd and able” solvent partner, — in spite of whose shrewdness and ability, however, his firm has fallen into insolvency. When a partnership has reached this point, — when its creditors are compelled to go begging for their money, — it is useless to urge any such argument as, “Why should not the solvent partner administer the partnership property and his own and pay the partnership debts free from the delay and expense of a trustee?” 157 Fed. 368, 19 Am. B. R. 583. For the solvent partner has, with his fellow partners, already had the opportunity to pay the firm debts, as it may be said to have been in a sense his legal duty to do, the firm obligation being by the law of partnership his as well as that .of the firm and of the other partners. But in spite of
Also the majority opinion takes a view of the application of clause “h” of section 5, 30 Stat. 548, 157 Fed. 366-368, 19 Am. B. R. 582-583, with which not one of the decisions construing this clause has been found to concur. Though agreeing with the court’s final ruling in that case, I deem Judge Hook’s dissenting opinion to express the true view of clause “h”.” 157 Fed. 379-380, 19 Am. B. R. 599-600, See, also, In re Junck & Balthazard, 169 Fed. 481, 482-483, 22 Am. B. R. 298, 299-300; Francis v. McNeal, 186 Fed. 483, 485, 26 Am. B. R. 557, 560. The object of this clause, — in which there is no intimation of its application) to a firm bankruptcy, — would seem to be to make it clear, by way of final proviso after clauses “a” to “g” applying to partnership administration, that the property of a firm itself is not to be administered merely because of the bankruptcy of one of its members. It may be noted, that the illuminating article of Professor J. D. Brannen of the Harvard Law School, on “The Separate Estates of Non-Bankrupt Partners in the Bankruptcy of the Partnership,” 20 Harv. Law Rev., 589, published a few months earlier, while characterizing this clause as “somewhat ambiguous,” Id. 591, mentions only the use which Judge Hook’s dissent found for 'it. Id. 595. The majority opinion argued that “if the property of a bankrupt parnership cannot be administered . . . without the consent of the solvent partner who has not been adjudged bankrupt, a fortiori the latter’s individual property cannot be.” 157 Fed. 367, 368, 374-375, 19 Am. B. R.
Again, the majority opinion’s discussion of clause “c” of this section, 30 Stat. 547, is not altogether convincing. 157 Fed. 366, 367, 374-375, 19 Am. B. R. 581-582, 593. And the asserted “unavoidable inference” from this clause, 157 Fed. 366, 19 Am. B. R. 581, is not an inference upon which it would be safe to found a general rule, — not an inference helpful to a clear understanding of the clause’s meaning in the more common case where one at least of the partners is insolvent. It is worthy of note, though of course not conclusive against Judge Sanborn’s position, that the text-book authorities put clause “c” to quite different uses: see Collier, Bankruptcy, 9th ed., 161-162; Brandenburg, Bankruptcy, 3d ed., secs. 152 (and note 13), 153., And 2 Remington, Bankruptcy, sec. 2233, cites clause “c” for the proposition that “the trustee elected by the partnership creditors
In the criticism of the majority opinion’s discussion of special clauses of section 5, I have refrained from quotation of the opinion, merely referring thereto, in order to save space and because, as will presently be seen, this criticism plays but a minor part in my decision; it would not be ventured at all, except that I do not endorse the entire course of reasoning even of an opinion which has probably done more than any other to place the entity doctrine upon a firm, and it is to be hoped, final basis. The majority opinion, in spite of its above .noted misconceptions, as I respectfully deem them, and in spite of the very able and useful dissent of Judge Hook, has given a severe blow to a theory contra, which had the distinguished support of Judge Lowell. In re Forbes, 128 Fed. 137, 11 Am. B. R. 787.
And, also, despite the foregoing minor criticisms, Judge Sanborn firmly establishes his court’s ruling by pointing out the principle that the trustee has title to nothing but the estate of the bankrupt, i. e., the partnership entity. 157 Fed. 368-369, 371-372, 19 Am. B. R. 584-585, 588-589, and by showing the significant omission, from the new act, of the provision of the corresponding section, 36, of the act of 1867, 14 Stat. 534, Rev. Stat. sec. 5121, that “all the joint stock and property of the copartnership and also all the separate estate of each of the partners shall be taken and administered,” 157 Fed. 374, 19 Am. B. R. 592; and also, by reciting as a reductio ad absurdum the parallel case of a surety, — for, as the surety of an insolvent principal cannot be brought into the bankruptcy of that principal, neither can the non-bankrupt partners here, who are “to
The- language of the concluding portion of clause “c” is difficult to dispose of before reaching the result of the majority opinion in the Bertenshaw case, but it must be disposed of; and this opinion, notwithstanding its admirable dialectic qualities, is weakened by its failure to discuss a provision of the statute affording probably the most cogent basis for an argument in support of the drawing of the estate of every individual partner in all cases into the administration in a firm bankruptcy. The language referred to is: “The court of bankruptcy which has jurisdiction of one of the partners may have jurisdiction . . . of the administration of the partnership and individual property.” My conviction is that this provision applies solely when the partner is drawn into the administration, either because he is personally subject to adjudication, or, perhaps, because he consents, — for mere consent would not give jurisdiction without some underlying authority to fake jurisdiction, wherefore, for one reason, the enactment of this provision of clause “c”. And attention is- directed to the significance of the use, in this clause, of the potential mood and the auxiliary verb “may,” instead of the indica
A comparison of the former act with the present act, is helpful to á view of things in their true light. There has already been noted, as having been emphasized by Judge Sanborn, the signal omission from the act of 1898 of the provision of the act of 1867 for administration of both firm and individual estates in a partnership bankruptcy.
It may now be noted, too, that the provisions of the act of 1867 applied only to individual partners who were insolvent, and were so found in the firm proceeding, inasmuch as the firm could be adjudged bankrupt only upon the insolvency of all its members. Parsons, Partnership, 4th ed., 479, sec. 385. See In re Penn, 19 Fed. Cas. 151, 154, No. 10, 927, 5 Ben. 89, in which Judge Blatchford holds, or implies, that all the partners should be adjudged bankrupt. See also, as suggestive, In re Burton, 4 Fed. Cas. 863, 865, No. 2,214, 9 Ben. 324, In re Bennett, 3 Fed. Cas. 209, 210, No. 1,314, 2 Lowell, 400, and Lowell, Bankruptcy, sec. 119. This is the strongest kind of an argument to support the majority opinion in the Bertenshaw case, that the trustee
If it be said, as one court declares, Francis v. McNeal, 186 Fed. 484, 26 Am. B. R. 559, and as Judge Hook, dissenting in the Bertenshaw case, 157 Fed. 376, 19 Am. B. R. 595-595, suggests, that it is not to be supposed that bankruptcy, a remedy of creditors as well as of debtors, was to lose its remedial efficiency7, upon our discarding the old theory for the new entity doctrine, it may be replied, that under the old law all the members could be reached, as the almost unexceptionable rule at least, only when all the members were insolvent, but that now under the new law the very same thing can be done under the very same condition of universal insolvency and, in addition, the courts can reach the firm as an entity if it has jurisdiction of only one member, —which is one phase of the application of the above discussed clause “c.” See In re Dunnigan, 95 Fed. 428, 2 Am. B. R. 628, reflecting the practice under the former statute: see In re Bertenshaw, 157 Fed. 372, 19 Am. B. R. 589. The certainty may be observed here, in passing, that Congress adopted the entity principle in order to remove some weakness of the former law, to supply something which should give the creditor a more direct, speedy, and effective remedy against the firm and its members. 2 Sutherland, Stat. Constr., 2 ed., sec. 471. The defect in view would seem to
In Judge Hook’s dissent, 157 Fed. 376, 19 Am. B. R. 595, so much is made of the matter of discharge as determinative of the question, as to call for a caution against surprise at any discovery of the new statute’s incapability of wholly harmonious or absolutely consistent application. Too much should not be expected of the entity doctrine, nor should there be any felt necessity of working the doctrine to extremes or holding-it up to impracticable tests. Thus, for a very extreme instance, the entity doctrine is not to fail because of the fact that-the court cannot send the entity to jail for contempt. It must -be remembered, too, that the entity status was created for benefit of creditors as well as of debtors, — and creditors are not necessarily concerned with the debtor’s discharge, while, in any event, all natural insolvent parties ultimately liable or liable as sureties, guarantors, or cautioners, i. e., the firm members, may have their discharge for the trouble of submitting -to bankruptcy administration. This matter of discharge has proved somewhat of a stumbling block in another case. In re Forbes, 128 Fed. 137, 139-140, 11 Am. B. R. 787, 790.
Finally, the essential purpose of bankruptcy should have great weight in the determination of the question. That purpose is, not to get satisfaction of the creditor’s claims, but to take out of the hands of the dishonest or inefficient insolvent debtor a business or an estate going bad and likely to go from bad to worse, — a business or an estate equitably charged with these claims, — and to conserve it and the debtor’s assets with the view of an ultimate division among the claimants pro rata. A solvent partner, on the other hand, is in quite different case; his financial condition is
The views of Professor Brannen are added by reference and adopted as my own. 20 Harv. Law Rev. 594-597, 598-603.
If, as is the law, the trustee has no control over the property of the non-bankrupt partner and, as would seem
And it is suggested, though by no means a conclusive point, that while the court requires the bankrupt firm or a bankrupt member to file schedules as of the date of the filing of petition (see In re Harris, 2 Am. B. R. 359, 363; act, sec. 1, clause “10;” see, also, act, sec. 70, clause “a”), yet thereafter the court has no concern with the bankrupt’s assets or liabilities, the bankrupt being freed from all liabilities of subsequent incurrence, subject always, of course, to the consummation of his discharge, act, sec. 14, clause “a.” But with the non-bankrupt partner, the case is quite different: the liability which would bring him into the bankruptcy proceeding at all, his so-called in-solido liability, continues even after the basic date, so that from him schedules would ever be called for with every change of his financial condition. Such difficulty or inconsistency may not be crucial, however.
Although not directly involved, there must be disposed of in advance any argument that, as the in-solido liability of the partners is one of the “resources” — I do not recall
This may all be true, — as no denial is here called for,— and yet it is hard to see how any such consideration would give the court the right to require from a non-bankrupt or solvent partner who at best under this theory of entity is merely debtor to the firm, a disclosure such as the schedules would afford of intimate details of his personal business affairs. The unreasonableness and injustice of such require
The most that could be predicated of this in-solido liability as a “resource” of the firm upon which the trustee could realize, would seem to be a right in a court of equity to an accounting from the individual partners; and, in this connection, Professor Bi'annen has a suggestion which it may be pardonable to note in anticipation as worthy of consideration, though he is obviously indicating what “the court should have jurisdiction to order,” rather than what the court has jurisdiction' to order. See 20 Harv. Law. Rev. 603-604, citing Jordan v. Miller, 75 Va. 442, 454, a suit for dissolution of partnership and for an accounting, wherein each partner was ordered to contribute pro rata towards the deficiency resultant upon application of firm assets to firm debts. Whether this court as a court of bankruptcy has itself any such equity powers, the narrow limits of the point under discussion do not require me, nor am Í quite prepared, to determine here, — though confessing doubt of the possession of those powers by a court of bankruptcy as such, whatever be the soundness of any possible suggestion that the trustee may have a remedy in State or Territorial, as distinguished from Federal, equity courts.
Wherefore, let the order herein made requiring schedules from the non-bankrupt partners, be set aside. In view of the fact that these partners, of the Oriental laboring class, ignorant of our laws and even of our language,- have been better advised than the'court in this matter of schedules, no order will be made citing them for contempt for their delinquencies or even for their disregard of what until now stood as the court’s order, and until now appeared to require from them obedience and respect, — and probably no such citation could be made consistently with my ruling herein. See In re Sawyer, 124 U. S. 200, 221-222, and note
Since the firm adjudication, the partner Lau Chung has presented to the clerk of court for filing, his separate petition for adjudication as an individual, with schedules in due form.
Although the courts are not entirely agreed, as to whether' a firm should be adjudged bankrupt without adjudication of all its individual members: Collier, Bankruptcy, 9th ed., secs. 147, 148, 152, 158, and notes; 1 Remington, Bankuptcy, secs. 60, 61; 3 Id. sec. 60; Mills v. Fisher, 159 Fed. 897, 899, 20 Am. B. 237, 239, Lurton, Circuit Judge; In re Forbes, supra, Lowell, District Judge; yet apparently no court holding a firm to be subject to adjudication without adjudication of its members, would deny that, in a firm proceeding, all the partners or any partner might also be so adjudged. 1 Remington, Bankruptcy, sec. 64; In re Springer, 199 Fed. 294, 298, 29 Am. B. R. 96, 100-101. There seems to be no reason why those members who here appeared in response to summons and then in open court asked to be adjudicated, should not be granted that privilege in the firm proceeding. An order to that end would, really, amount to nothing more than an amendment of the petition, which unquestionably could be granted, by way of allowing the prayer to include not only the firm but its members. See General Order xi, 172 U. S. 657, 89 Fed. vii.; Collier, Bankruptcy, 9th ed., 21, par. “b;” Fletcher, Eq. Pr., secs. 53, 378; Story, Eq. Pl., 10th ed., sec. 884. Such an order would facilitate the administration. To that end the member’s voluntary surrender of his asséts should be encouraged. It is, surely, within the broad equity powers of a court of bank
The partner Lau Chung may, therefore, be adjudged bankrupt in the firm bankruptcy. Let his petition be filed herein. As to the other partners who at the hearing expressed the desire to be adjudicated, an adjudication will be made herein upon their filing forthwith their separate petitions with schedules in due form. See Collier, Bankruptcy, 9th ed., 144, par. “b.” Each such petition should be entitled, as the major title at least, in the matter of the individual partner himself and not in the name of the firm; in order, partly, to insure or facilitate notice to the creditors of the partners as distinguished from the creditors of the firm, and the clerk, referee and trustee will see that all notices to the partners’ individual creditors are entitled accordingly. See In re Gorman, 2 U. S. Dist. Ct. Haw. 439, 15 Am. B. R. 587.
And the fact, as it seems, that no such double fee system was provided or in operation under the act of 1867, even when all the partners were, as a rule, adjudged in one proceeding, may be worthy of consideration in this connection. See Rev. Stat. sec. 5124; Id. sec. 5121; G. O. Supreme Court, Oct. Term, 1874; Bump, Bankruptcy, 9th ed. 868-871; Id. 785-788.
The rulings in the cases of In re Langslow, 98 Fed. 869, 3 Am. B. R. 529, note, and In re Gay, 98 Fed. 872, 3 Am. B. R. 529, though barren of discussion are, in my opinion, sound, and the fully considered ruling in the Barden case, and in the case of In re Farley, 115 Fed. 359, 8 Am. B. R. 266, which follows it, unsound. It is therefore held, that (separate costs and fees need not be paid by each involvent partner who is adjudged bankrupt in this proceeding and whose' estate is drawn herein for adjudication with the estate of. the firm; except, however, for the requirement from each such partner of a deposit of the customary amount to cover costs of advertising notices to his individual creditors, — such expense being not, of course, cov
In conclusion, if any excuse for the length of this opinion be in order, it must be assigned to the unsatisfactory state of the precedents, and if any excuse for that unsatisfactory condition be ■ desired, then, the discriminiating Professor Brannen may again be quoted: “But the possibility of finding such apparent contradictions between different clauses of the section [act, sec. 5], as well as the reenactment by section 54 of the old rule of distribution of the partnership and individual estates, indicates that the scheme of treatment of partnerships in bankruptcy was not fully thought ■ out by the draftsmen to its logical conclusion. The theory was a new thing, and the changes necessary to the application of the theory seem not to have been carefully considered.” 20 Harv. Law. Rev. 591. And another, and earlier, commentator in the same publication, 19 Harv. Law. Rev. 615-616, observes justly, “This unwarranted result of administering in a firm proceeding the estates of non-bankrupt partners indicates a failure to appreciate .fully, the legislative innovation in partnership law, and shows an unconscious adherence to the older law.”
Surely, a statute lending itself to such - differences of opL nion — differences both majór and minor and of all degrees — 1 and to such varied construction by men so learned and experienced as the differing judges, calls loudly for amendment. It is not fair, that the courts should be put to such ■ vast but preventable labor as a conscientious judge feels obliged to give to a case like the present.
Reference
- Full Case Name
- IN THE MATTER OF THE CITY CONTRACTING & BUILDING COMPANY, A COPARTNERSHIP, BANKRUPT
- Status
- Published