Continental National Bank of Boston v. Strauss

The questions involved in both appeals are substantially alike, and in disposing of them we will take the facts of one case, for the law applicable to that applies equally to both.

The action was brought upon a promissory note- made by the defendant Klein for $2,749.81, dated October 23, 1884, payable six months after date, and endorsed by the firm of A. Hoexter & Co. The firm of A. Hoexter & Co. was a “ limited partnership ” formed under the laws of this state, and consisted of the defendants, Augustus Hoexter and Leo W. Hoexter, as general partners, and the respondent, Henry W. Strauss, as special partner. The plaintiff seeks to hold the respondent liable as a general partner. The complaint was dismissed as against the respondent on the ground that the evidence did not establish that he Avas hable as a general partner. The partnership of A. Hoexter & Co. was formed on EBy 1, 1884, for the purpose of carrying on the business of manufacturing and selling men’s collars and cuffs. The certificate of partnership provided that the respondent should contribute the sum of $50,000 in cash; that the principal place of business of the partnership should be in the city of New York, and that the partnership should commence on the first day of May, 1884, and terminate on December 31, 1886.

The complaint did not allege an attempt to form a limited partnership, nor the defects which rendered the special partner liable; but this was not necessary, as it is sufficient to charge him as a general partner, and upon the trial to show that as to creditors he is such. Sharp v. Hutchinson, 100 N. Y., 533; See Loomis v. Hoyt, 52 N. Y. Super. Ct., 287.

At the close of the testimony the appellant contended that the respondent was liable as a general *154partner for the following reasons : 1st. Because Leo W. Hoexter was a minor. 2d. Because the affidavit on the formation of the special partnership falsely stated that the respondent contributed $50,000 in cash. 3d. That the respondent had by commencing an action in the Court of Common Pleas, and having himself appointed receiver, interfered with the business in violation of the provisions of the law affecting limited partnerships. 4th. That by such proceedings he had dissolved the firm prior to the expiration of the term set forth in the certificate of its formation. 5th. That the respondent did not allege in his answer or show by proof that the partnership was dissolved by the act of the parties prior to the time limited in the certificate, and that the $50,000 capital alleged to have been contributed by him had been used or exhausted in the business.

We will consider these points in the order in which they are made. The first is untenable. The policy of the law is to encourage and protect infants, hence they are not incapable of entering into a uartnership, since it cannot be universally affirmed thauit may not be for their benefit. Story on Part., § 7.

The partnership contract of an infant is not void but voidable only, and the defence of infancy is a personal privilege. Avery v. Fisher, 28 Hun., 508; Slocum v. Hooker, 13 Barb., 536; Baldwin v. Van Deusen, 37 N. Y. 487; Hangen v. Hachmeister, 49 Super. Ct., 34; Lindley on Part., vol. 1, p. 74.

In Avery v. Fisher, supra, the court said : “ The fact that the copartner who made the assignment in this case was at the time an infant does not invalidate the assignment, for the reason that infancy is a personal privilege, and no one but the infant can take advantage thereof; and for the further reason that infancy does not incapacitate a person from becoming the agent of another. Where a partnership is created between an adult and an infant, the relation of mutual agency *155growing out of the partnership relations exists to the same extent as if both the parties were adults. The contract of partnership being legal and. binding joer se upon the adult, and equally so upon the infant until disaffirmed, by him, it follows that the partnership must be bound by the act of the infant partner at any time before an actual disaffirmance by him of the partnership agreement.” In Slocum v. Hooker, 13 Barb., 536, it was held that an infant contract of partnership was binding upon him until disaffirmed by him, and that consequently he was a necessary party to an action against the partnership.

The statute provides that limited partnerships may be formed “ by two or more persons, upon the terms, with the rights and powers, and subject to the conditions and liabilities herein prescribed.” 2 Birdseye’s R. S., 2169, § 1. There is nothing in the act preventing infants from becoming general partners, nor making the special partner liable for their contracts.

There is nothing in the record which shows that the infant repudiated the contract of partnership or attempted to avoid any of its obligations ; so that, the questions that might have arisen, had he elected to disaffirm the same, do not arise nor call for decision.

The second point raised is without proof to support it and, therefore, requires no further comment.

The third point as to the effect of the Common Pleas action in which the respondent had himself appointed receiver, is also without merit. It is only necessary to say that that action was brought in the interest of the creditors and for the preservation of the trust funds of the partnership, and was not any such interference by the special partner as makes him liable, under the provisions of the statutes, as a general partner.

The fourth point is without force, because the partnership if dissolved prior to the time set forth in the certificate of its formation, was dissolved by reason of *156the insolvency of the firm and by operation of law, and not by the voluntary acts of the parties.

The fifth point as to whether the $50,000 in capital, alleged to have been contributed, was exhausted or not, it is only necessary to say that the records offered in evidence by the plaintiff show that the firm was insolvent, and that the obligations against it were more than sufficient to exhaust the entire capital, general as well as special.

Upon the trial it was made clear that the respondent Strauss was a special and not a general partner. The plaintiff undertook to prove partnership by showing that Strauss’s name appeared upon a sign in front of the defendants’ place of business, but the witness testified that it so appeared as special and not as general partner. The plaintiff thereafter offered in evidence a deposition, made by Strauss, and by it it appeared affirmatively that Strauss was a special and not a general partner. So that there was really nothing to go to the jury upon any of the questions involved in the case. On this proof, it was not necessary for the respondent Strauss to show that he had literally complied with the provisions of the law in regard to limited partnerships. There being a limited copartnership presumptively all its provisions were complied with ; for the law will not assume in the absence of proof, that a man does an unlawful act, but will assume that he has performed his duty. The onus was, therefore, upon the plaintiff to point out the irregularities in the partnership which made Strauss liable as a general partner; not having pointed out or proved any such irregularities, the trial judge properly dismissed the complaint as to him, and there is no force whatever in the exception taken to this decision. The plaintiff argues, that the existence of the special partnership could be proven against the plaintiff in one way only, i. e., by showing compliance with the statute. Ropes v. Colgate, 17 Abb. N. C. *157136; Van Ingen v. Whitman, 62 N. Y., 513. This is true as an abstract proposition, but the mode of proof and the onus in this instance were changed by the plaintiff’s own evidence. The complaint charged that Strauss was a member of the firm of A. Hoexter & Co. Strauss denied that he was a member therein except as special partner. Strauss’s interest as special partner, and his contribution of $50,000 capital as such, were set forth as the title upon which he based his right in the Common Pleas action, to call upon the general partners to account for their mal-administration of the trust. The proofs offered by the plaintiff, made out as against it, a prima facie case of limited partnership, sufficient to call upon it to point out the errors or irregularities in the formation of the firm, that made the special partner liable, if any such existed. In other words, the law would not presume, in the face of this evidence, that Strauss had illegally formed the limited partnership or had done any wrong.

The law infers that every man does his duty, has not incurred a penalty, and has complied with the law. This presumption aided by the proofs offered by the plaintiff that Strauss was a special partner, and had contributed $50,000 as such to the capital of the firm, and that a limited partnership Avas formed “ pursuant to the provisions of the revised statutes of this state” (fol. 106) means that it was legally formed under said statutes—not illegally or irregularly. See Leland v. Cameron, 31 N. Y., 121. This dispensed with the production of the certificate of formation required by Section 8 of the Statute, because the special partnership was sufficiently proved by the plaintiff Avithout requiring the corroborating evidence of the papers themselves. If the onus of proving the special partnership had fallen on the defendant, as it generally does, the defendant could have been required to produce the best evidence of it, i. e., the original papers themselves, but *158where a plaintiff without objection proves a special partnership “ under the statute ” without the formality of producing the original papers, the evidence, when once in the case, with all the presumptions following it, must be acted upon as though the best evidence of which the thing is capable had been produced. The plaintiff did not call for better evidence of the special partnership, indeed at no time denied it, and the entire theory of the plaintiff’s case as presented at the trial was that Strauss, although only a “ special,” had for some reason, not made clear, rendered himself liable as a “ general ” partner as to creditors of the firm. The plaintiff also contended that the defendant was bound to show that his contribution of $50,000 as a special partner, was used, or had been exhausted in the business. But this was not necessary. A special partner who contributes to a firm an agreed amount of capital, is not responsible for the manner of its use by the general partners, nor is he bound to show what they did with it. They become trustees with regard to it, and the person paying them the money is not responsible for their misapplication of it.

If the special partner is not to “ interfere with the business ” it would be next to impossible for him to regulate the use of the money contributed by him. This is one- of the things the special partner, or a creditor in a proper case may by bill require the general partners to account for, where fraud and mal-administration are charged against them. The property of a limited partnership, after insolvency, is deemed a trust fund for the benefit of all the creditors ; if the partners neglect to place it in the hands of a proper trustee for distribution, any creditor may proceed at once, in equity, for the appointment of a receiver and distribution. Innes v. Lansing, 7 Paige, 583; Whitewright v. Stimpson, 2 Barb., 379. The special partner may in a proper case invoke the same remedy.

*159True, section 17 of the act provides that “ if he (the special partner) shall interfere contrary to these provisions he shall be deemed a general partner.” But section 18, provides that “ the general partners shall be liable to account to each other, and to the special partner, for their management of the concern, both in law and equity, as other partners now are by law.” As was held, in Hogg v. Ellis, 8 How., 474, “ This liability to account must be proper and necessary, as well after the dissolution of the partnership as before, and must, therefore, have been intended to apply to both cases. It is a liability to account in the same manner as other partners are, that includes the liability to have a receiver appointed when it would be done in ordinary partnerships.” A bill may be filed by one partner for a receiver, founded on some breach of duty by the other members of the firm (Colly on Part., § 384), and the receiver, if appointed, represents the partners and their creditors and holds the assets of the firm as a trust fund for their benefit. It certainly cannot be deemed an unlawful interference with the rights of the general partners or their creditors, for the special partner, to file a bill, the object of which is to preserve the partnership assets for their benefit from waste or misuse.

Limited partnerships formed under the statute are governed, and the mutual rights, duties and liabilities of the partners are regulated by the common law, in every respect not taken out of the general rule by the statute. Ames v. Downing, 1 Bradf., 321; Jacquin v. Buisson, 11 How., 385. The interference by a special partner, which makes him liable as a general partner is something more than mere observation or that incidental supervision and advice which a person having capital invested in a concern would naturally give to an enterprise in which perhaps the greater part of his fortune was invested. It means active participation or domination.

Thus, in Lewis v. Graham, 4 Abb., 106, the court *160held, that a special partner of a firm with whom property is pledged, is not incapacitated by his relations with the firm from purchasing the pledge at a sale made by them. Speaking of the special partner, the court (at p. 113) said : " He did not direct or aid in the sale of the securities. An attempt to interfere with the sale of them would have made him liable. A refusal to do so would not involve him in any neglect of duty. . . . The special partner. . . . may advise as to the interest of the partnership, but so may any one else. Such advice is no act or control of the partnership funds or duties.”

In the Madison Co. Bk. v. Gould, 5 Hill, 312, 313, the court said : “ The special partner may examine and advise in relation to the management of the partnership concerns, but he shall not transact any business on account of the partnership, nor be employed for that purpose as agent, attorney or otherwise. If he shall interfere contrary to these provisions, he shall be deemed a general partner (§ 17).” In the case cited, the court found that the special partner went beyond giving advice, and actively participated in the business of the partnership contrary to the section of the act referred to, and “ thereby lost his character and protection as a special partner.” So in First Nat. Bk. of Canandaigua v. Whitney, et al., 4 Lans., 34, where during the existence of a limited partnership, the special partner bought out the entire firm property, and continued the business in his own name, for his own account. This was held to be an interference with the firm business contrary to the provisions of the act, that rendered the special liable as a general partner on debts contracted by the firm.

In the present case, there was no interference with the partnership, contrary to the provisions of the act, but only in the manner and to the extent expressly authorized thereby.

The interference which makes a special liable as a *161general partner is not a legal, but illegal interference, the one being authorized and the other not.

The dissolution of a limited partnership, prior to the expiration of the term set forth in the certificate of its formation, except in the manner prescribed in the act, may render a special liable as a general partner, that is provided the dissolution be a voluntary one, but where it proceeds from involuntary causes, the result stated does not follow- Thus, (1.) the death of one of the partners within the period fixed for the duration of the agreement dissolves the limited partnership, Ames v. Downing, 1 Bradf., 321; Jacquin v. Buisson, 11 How., 385; Troubat on Lim. Part., § 428). (2.) It may perhaps terminate by the extinction of its assents which constitute the capital upon which its business must be done. Story on Part., § 280. (3.) It may be dissolved by decree of the -court, or by act of the law, for wilful acts of fraud and bad faith, gross instances of carelessness and waste in the administration of the partnership by one or more of the general partners (Colly on Part., § 281), and this, at the instance of any other general partner free from fault, the special partner or any creditor of the firm interested in the application of the firm property as a trust fund for the payment of the firm’s debt. These acts of dissolution not proceeding* from the wrongful conduct of the special partner do not charge him with the liability of a general partner, and there is nothing in the act relating to limited partnership that was intended to charge him with liabilities for a dissolution caused by any of the involuntary acts or things stated.-

The case is full of technicalities, yet substantial justice was done, and the rules of law properly observed.

We find no error that requires a new trial, and the judgments appealed from must be affirmed, with costs.

Freedman, P. J., and Gildersleeve, J., concurred.