U.S. Supreme Court Francis v. McNeal, 228 U.S. 695 (1913)
Francis v. McNeal
Argued May 5, 6, 1913
Decided May 26, 1913
228 U.S. 695
ON WRIT OF CERTIORARI TO THE UNITED STATES
CIRCUIT COURT OF APPEAL FOR THE THIRD CIRCUIT
Whether or not the copartnership is an entity distinct from the members, partnership debts are debts of the members of the firm.
The individual liability of partners for debts of the firm is primary and direct; it is not collateral like that of a surety.
The business of a bankruptcy act is, so far as may, be to preserve, not to upset, existing relations based on fundamental rules of law.
The Bankruptcy Act recognizes the firm as an entity for certain purposes, but does not alter the preexisting rule that the partnership can be in bankruptcy and the partners not.
In this case, an order directing that the separate estate of a member of a firm which had been adjudicated bankrupt be turned over to the trustee for administration is affirmed.
186 F. 481 affirmed.
The facts, which involve the construction of the Bankruptcy Act of 1898 in regard to the administration by the trustee of a bankrupt copartnership of the individual estates of the partners, are stated in the opinion.
MR. JUSTICE HOLMES delivered the opinion of the Court.
This is a proceeding to review an order of the bankruptcy court to the effect that the separate estate of Stanley Francis should be turned over for administration to the respondent, McNeal, trustee in bankruptcy of a firm of which Francis was a member. The order was made on the petition of the trustee, and was affirmed upon a petition for revision by the circuit court of appeals. 186 F. 481.
The facts are short. Creditors filed a petition against Latimer, Francis, and Marrin, alleging that they were
partners trading as the Provident Investment Bureau, and that they were bankrupt individually and as a firm. McNeal was appointed receiver of the partnership and individual estates, but Francis denied that he was a partner, and sought to have the receiver discharged. Thereupon, on March 13, 1906, it was agreed between the counsel for the receiver and for Francis that McNeal should be discharged as receiver of the individual estate of Francis; that the question whether Francis was a partner should be referred to one of the regular referees; that, until the determination of that question, his counsel, Scott, should collect the rents and retain possession of his estate, and that thereafter Scott should account and turn over the funds to such person as the court might direct. On April 17, an order was made embodying the agreement and naming a referee. The referee found that Francis was a partner, and that now stands admitted for the purposes of the present decision. The firm was adjudicated bankrupt in June, 1909. McNeal was appointed trustee in July, and forthwith filed the petition upon which the order in question was made. The order declared that the separate estate of Francis was subject to administration in bankruptcy, and ordered the real estate turned over to McNeal, with leave to sell. The firm, even with the separate estates of the partners, will not be able to pay its debts in full.
Since Cory on Accounts was made more famous by Lindley on Partnership, the notion that the firm is an entity distinct from its members had grown in popularity, and the notion has been confirmed by recent speculations as to the nature of corporations and the oneness of any somewhat permanently combined group without the aid of law. But the fact remains as true as ever that partnership debts are debts of the members of the firm, and that the individual liability of the members is not collateral like that of a surety, but primary and direct, whatever
priorities there may be in the marshaling of assets. The nature of the liability is determined by the common law, not by the possible intervention of the Bankruptcy Act. Therefore, ordinarily it would be impossible that a firm should be insolvent while the members of it remained able to pay its debts with money available for that end. A judgment could be got and the partnership debt satisfied on execution out of the individual estates.
The question is whether the Bankruptcy Act has established principles inconsistent with these fundamental rules, although the business of such an act is, so far as may be, to preserve, not to upset, existing relations. It is true that, by § 1, the word "person," as used in the act, includes partnerships; that, by the same section, a person shall be deemed insolvent when his property, exclusive, etc., shall not be sufficient to pay his debts; that, by § 5a, a partnership may be adjudged a bankrupt, and that, by § 14a, any persons may file an application for discharge. No doubt these clauses, taken together, recognize the firm as an entity for certain purposes, the most important of which, after all, is the old rule as to the prior claim of partnership debts on partnership assets, and that of individual debts upon the individual estate. § 5g. But we see no reason for supposing that it was intended to erect a commercial device for expressing special relations into an absolute and universal formula -- a guillotine for cutting off all the consequences admitted to attach to partnerships elsewhere than in the bankruptcy courts. On the contrary, we should infer from § 5, clauses c through g, that the assumption of the Bankruptcy Act was that the partnership and individual estates both were to be administered, and that the only exception was that in h, "in the event of one or more, but not all, of the members of a partnership being adjudged bankrupt."
In that case, naturally, the partnership property may be administered by the partners not adjudged bankrupt, and
does not come into bankruptcy at all except by consent. But we do not perceive that the clause imports that the partnership could be in bankruptcy and the partners not. The hypothesis is that some of the partners are in, but that the firm has remained out, and provision is made for its continuing out. The necessary and natural meaning goes no further than that.
On the other hand, it would be an anomaly to allow proceedings in bankruptcy against joint debtors from some of whom at any time before, pending, or after the proceeding, the debt could be collected in full. If such proceedings were allowed, it would be a further anomaly not to distribute all the partnership assets. Yet the individual estate, after paying private debts, is part of those assets, so far as needed. § 5f. Finally, it would be a third incongruity to grant a discharge in such a case from the debt considered as joint, but to leave the same persons liable for it considered as several. We say the same persons, for however much the difference between firm and member under the statute be dwelt upon, the firm remains at common law a group of men, and will be dealt with as such in the ordinary courts for use in which the discharge is granted. If, as in the present case, the partnership and individual estates together are not enough to pay the partnership debts, the rational thing to do, and one certainly not forbidden by the act, is to administer both in bankruptcy. If such a case is within § 5h, it is enough that Francis never has objected to the firm property being administered by the trustee.
If it be said that the logical result of our opinion is that the partners ought to be put into bankruptcy whenever the firm is, as held by the late Judge Lowell, in an able opinion, In re Forbes, 128 F. 137, it is a sufficient answer that no such objection has been taken, but, on the contrary, Francis has consented and agreed to hand over his property according to the order of the court. So far
as Vaccaro v. Security Bank, 103 F. 436, 442, is inconsistent with the opinion of the majority in In re Bertenshaw, 157 F. 363, we regard it as sustained by the stronger reasons and as correct.