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White v. Eiseman

28 Abb. N. Cas. 363 Court N. Y. Court of Appeals, Second Division; English

Delivered by Vann, J.

Contents

Majority

p. 363
WHITE v. EISEMAN.
N. Y. Court of Appeals, Second Division;
May, 1892.

Headnote

[Reversing 58 Hun, 484 .]
1. Partnership ; limited..] Where it is sought to charge a special partner as a general partner on the ground that the affidavit of the general partner, stating that the contribution of the special partner has actually been paid in'cash, is false, the affidavit may be sustained if true at the time it was filed with the county clerk, although not true at the time when it was sworn to, unless the inaccurate statement qf payment on verifying the affidavit was made with the purpose of evading the statute or in some way it has actually misled the firm’s creditors.[1]
2. The same.] At the time the general partner of a limited partnership swore to the affidavit stating that the contribution of the special partner had actually been paid in cash, he had only the special partner’s check for its amount, but before filing the affidavit with the county clerk he caused the check to be certified. Held, that the certified check must be regarded as cash, since the general partner had thereby gained absolute control of the money; and that the affidavit, therefore, being substantially true at the time of filing, the special partner was not liable as a general partner.
Appeal from a judgment of the General Term of the Supreme Court, First Department, overruling exceptions and sustaining a judgment for plaintiffs upon a verdict directed by the trial court.
The action was brought by Ralph H. White and Henry A. Belcher against Samuel Eiseman, Moses L. Eiseman, Sydney S. Spencer and George E. Perkins, as general partners, composing the firm of Spencer & Perkins, for goods sold and delivered. The defendants Eiseman set up the defense that the firm was a limited partnership and that they were the special partners thereof.
p. 364
On the trial it appeared that on August 5, 1886, defendants filed a certificate of limited partnership and the affidavit of Sidney S. Spencer, one of the general partners, stating that the special partners, Samuel Eiseman and Moses L. Eiseman, had paid their contributions in cash. When the affidavit was made, August 3, Spencer had received a check of the special partners to the order of the firm for the amount of their contribution. The check was certified by the bank on which it was drawn August 4th, and was deposited in the firm’s bank on the fifth, before the hour when the certificate and affidavit were filed. The check was paid on the 6th to the bank in which it was deposited.
At the trial the court directed a verdict for plaintiffs and ordered defendants’ exceptions to be heard in the first instance at the General Term.
The General Term held that the truth of the statements in the affidavit was to be determined in reference to the time when it was actually verified, and as it appeared that it was then false the special partners were liable as general partners. [Reported in 58 Hun, 484 .]
A. Blumenstiel, for appellants.
Frederick Mabbett, for respondents.

The primary object of the act authorizing limited partnerships was to encourage those having capital to become partners with those having skill, by limiting the liability of the former to the amount actually contributed to the firm. The next and incidental object was to furnish reasonable protection to those dealing with the concern by requiring certain acts to be done and public notice thereof given, so that all who desired might know the essential features of the arrangement. In order to pre

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vent evasion and fraud, it was provided that any false statement in the certificate or affidavit should render all the partners equally liable. That provision, however, was not designed as a trap to catch the innocent and unwary, but as a bar to shut out the dishonest and fraudulent. While the courts were at first inclined to a strict construction against those seeking exemption from the common law liability of partners, the tendency in this State is now toward a liberal construction, so as to accomplish the wise purpose of the act by uniting capital and labor in business enterprises without excessive hazard to the former (President, etc. Manhattan Co. v. Laimbeer, 108 N. Y. 578 , 582 ; Fifth Avenue Bank v. Colgate, 120 Id. 381, 396; Met. Nat. Bank v. Palmer, 30 N. Y. State Rep. 509; Levy v. Lock, 47 How. Pr. 394 ; Lawrence v. Merrifield, 42 Super. Ct. 36; s. c., 73 N. Y. 590 ; Ropes v. Colgate, 17 Abb. N. C. 136 ; 13 Am. & Eng. Cyc. of Law, 807).

The more recent cases regard the statute as remedial in nature, and looking to substance rather than form, protect those who in good faith substantially comply with the essential requirements. We now have a case before us where nothing of substance was omitted. The defect complained of neither misled nor injured the creditors who seek to take advantage of it. Payment having been made in the usual way practiced by business men, who regard a check with adequate funds behind it as cash, an affidavit was made accordingly, and the good faith of the affiant is questioned by no one. There was no intentional violation of the statute, and the failure in literal compliance consisted of the fact that the affidavit was not technically true when made, although both affidavit and certificate were true when filed. The exact question, therefore, presented for decision, is whether there is substantial compliance if the affidavit and certificate are true when, for the first time, use is made of them for a purpose contemplated by the statute ?

In support of the plaintiff’s theory we are referred to

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the’ case of Durant v. Abendroth ( 69 N. Y. 148 ), where it was said in behalf of the four judges whose votes were effective that the certificate and affidavit speak.as of the day of their date (page 152). This, however, was not essential to the decision, nor was it regarded as controlling, for in the third sentence following it is said that good faith would be of no avail “if the payment had not been actually made in cash when the certificate and affidavit were made and filed!’ As that affidavit was filed on the day it was made, it spoke from the common date of making and filing, and the remark of the court relied upon by the plaintiffs is without special significance. In that case 'the only payment made was by an uncertified check, dated eight days after the certificate and affidavit were filed, and it was not paid until the tenth day thereafter, yet this court has pronounced it “ a very stem and technical application of the statute ” to hold the special partner liable even under those circumstances, and has declared that the principle should not be extended (President, &c. Manhattan Co. v. Laimbeer, supra, p. 589 ).

According to the statute, the partnership is not formed until the certificate has been recorded'and the affidavit filed (4 R. S. 8th ed. 2493, § 8). The organization of the firm is completed by the filing of these papers, for the omission of the clerk to record was held in the case last cited not to affect the liability of the special partner. The date of this culminating act, therefore, is of the highest consequence, because it is the time when the firm becomes ready 'for business, and when the safeguards should exist that are designed to protect third parties. As was well said in a recent case: “ It is the act of filing the certificate and affidavit which gives life to the partnership and confers immunity for the debts of the firm upon the special partner, and from that moment those who deal with the partnership become entitled to know the truth as to its formation, and from and after that time a wrong

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is done to those who deal with it if a false statement is published through the filing of the certificate. The truth of the statements contained in the certificate is to be determined, therefore, at the time of its being filed with the county clerk. If true at the instant of filing, there is no liability, because, being true at the instant of the creation of the limited partnership they fulfill the purpose for which the law was enacted ” (Ropes v. Colgate, supra, 145 ). We adopt this language as applicable to the case in hand, and extend it, in view of the circumstances already stated, to the affidavit filed with the certificate. In reaching this conclusion we are guided by the object of the legislature in passing the statute, which should not be defeated by exalting, the letter and subverting the spirit.

The formation of limited partnerships should not be made difficult or dangerous by technical construction. If every statement contained in the papers required to be filed is true at the time of filing, nothing further is necessary for the protection of creditors, who are thus given all the information that it was the policy of the statute to furnish. More than this should not be exacted in the absence of an actual intent to deceive. , As the special partner cannot make the affidavit himself (§ f) he should be protected if it is true when filed, as that is the- first use that is made of it, and the occasion when he is first charged with the duty of examining it. It is then that it becomes material, and then that it must be true, at the peril of general liability if it is untrue. If, upon then examining it, he found its contents were true, it would be a harsh and unreasonable rule to require him to ascertain, if he could, the precise date when the check was cashed or certified, and comparing it'with the date of the jurat, to decide, at the peril of losing all he had, which date preceded the other. The affidavit is simply evidence of the facts therein stated, and if those facts are true when such evidence is first used, the statute is satisfied, unless some

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furtive purpose existed when the verification was made. If any business had been done .between the making and filing, or if it had been a mere artifice to evade the statute, or if any creditor had been misled by the technical inaccuracy of statement, when viewed from the date of the jurat, a different question would have been presented from that now before us.

Our reasons for holding that the affidavit was true when filed, may be stated in a few words. The check was delivered to the general partners on the third, certified on the fourth, deposited to the credit of the firm on the fifth before the papers were filed, but was not paid to the bank where it was deposited until the sixth.

The general rule relating to payment of capital by the special partner, as stated by Mr. Bates, in his work on Limited Partnerships, section 45, is that, “ the fund must be in existence in money and in the sole control of the general partner on the day when the partnership is formed, free from all contingencies except those arising from the proper business of the concern.” This is in substantial accord with the authorities, which hold that payment in goods, notes, or even Government bonds, worth more than par, is insufficient (Van Ingen v. Whitman, 62 N. Y. 513 ; Haviland v. Chace, 39 Barb. 283 ; Haggerty v. Foster, 103 Mass. 17 ).

In Durant v. Abendroth (supra), the certificate and affidavit were filed December 23, on which day post-dated checks, payable December 31st, were given by the special to the general partner, but they were not paid until the second of the following month, and it was held that this was not a payment in cash. The court, however, said : (p. 153) “If the special partner had paid the money to the bank to the credit of the general partners, or deposited it with any third party for the express purpose of being paid to the firm at the commencement of the partnership, and had appropriated it to that purpose, in such a manner as to part with all control over it, there would be

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much force in the argument that this was a payment of his contribution of capital.”

In the Metropolitan Nat. Bank v. Sirret ( 97 N. Y. 320 ) the usual papers were filed with the county clerk, a check drawn, dated and delivered by the special to the general partners, and the check deposited by them in the bank on which it was drawn to the credit of the firm, all on the same day. No money was actually paid ; but, as there was a transfer of credit by the bank from the special partner to the partnership, it was held sufficient.

In the Metropolitan Bank v. Palmer (30 State Rep. 509) the delivery of a certified check was held a valid payment within the meaning of the act, because “ the capital was as completely subjected to the control and disposition of the firm as though the money were drawn upon it and it was, in form, paid over in cash ” (See, also, Lineweaver v. Slagle, 64 Md. 465 , and Seibert v. Bakewell, 87 Pa. St. 506 ).

We think that where the money is actually in the bank to the credit of the special partner, and he gives absolute and final control of it to the general partner, it should be regarded as a payment in cash. The delivery of a certified check to the payee has this effect (Clews v. Bank of New York, 89 N. Y. 418 ; Meads v. Merchants’ Bank of Albany, 25 Id. 143 ; Farmers and Mechanics’ Bank v. Drovers and Butchers’ Bank, 16 N. Y. 125 ).

While the check in question was delivered by the special partner on the third without certification, it was presented to the bank by the general partner on the fourth and certified while in his hands. In other words, when it was in his power to obtain cash on the check, he procured it to be certified instead of paid, which, as between the firm and the special partners, was a payment, and discharged the latter from liability on the check (First Nat. Bank of Jersey City v. Leach, 52 N. Y. 350 ). On the same day the bank charged the amount of the check to the special partners on their bank book, and

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deducted it from the balance to their credit. Thus the special partners lost control of the .money, the general partners obtained control of it, and there was an absolute, final and irrevocable appropriation of it to the use of the firm on the fourth, or the day before the certificate and affidavit were filed.

We think that the exception taken by the defendants requires a new trial.

The judgment should be reversed and a new trial granted, with costs to abide event.

All the judges concurred.

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