Hardt v. Levy

The plaintiffs, as general creditors of a firm of which the defendants are members, instead of proceeding in actions at law to secure their respective claims, instituted this action in behalf of themselves and all other creditors of the firm, having for its object the appointment of a receiver, and ultimately a ratable distribution of the assets of the partnership. Such a suit cannot be maintained against the members of a general partnership, but it was long ago held in Innes v. Lansing, 7 Paige, 583, that it might be against the persons forming a limited partnership after insolvency. That case has been so far followed that the rule it declares must be deemed established. The opinion also asserts that a creditor may, if he so elects, proceed at law to enforce collection of his debt. Subsequently it was so decided in Van Alstyne v. Cook, 25 N. Y., 489 . These plaintiffs chose to proceed in equity, as they may if the partnership be limited, and may not if it be general. Which of the two it was presents the principal legal question involved. The facts are undisputed and are briefly as follows : A limited partnership, under the firm name of Levy Bros. & Co., was duly formed in 1884, with Julius and Augustus H. Levy as general partners and Adolph Levy as special partner. In a little over a year the special partner died, but the business was continued on for the full term, when an- instrument was executed, purporting to be a certificate of renewal, bearing the date of the last day of the term, but verified and recorded several days later. When su'ch term had expired by limitation, a new instrument, purporting to be a certificate of renewal, stating the names of the original partners, and also naming Moses S. Levy as a new general partner, was filed and recorded It was in form following:

This writing was executed, acknowledged, verified, filed and recorded as provided by the statute. The learned trial court reached the conclusion that the certificate did not operate to renew and continue the,prior special partnership, because it declared that a new general partner had been admitted to the firm, which brought it within that provision of the statute which declares: “ Every alteration which shall be made in the names of the general partners * * * and the death of any partner, whether general or special, shall be deemed a dissolution of the partnership.

It was further determined, however, that, while the certificate purported to renew and continue an existing limited partnership, it contained facts sufficient to constitute a new limited partnership, and such was its legal effect, and for that reason judgment was rendered in favor of the plaintiffs for the relief prayed for in the complaint.

The primary object of the act authorizing limited partnerships, which first found a place among the statutes of this state in 1822, was to encourage those having capital to enter into partnership with those having skill and practical business experience by restricting the responsibility of the former to the sum actually contributed to the firm. The secondary object was the protection of those dealing with the partnership, and that was attempted, to be reasonably secured by requiring the special partner to pay in cash the sum contributed by him; authorizing the general partners only to transact the business of the partnership; prohibiting the special partner from binding the partnership, or his employment as agent, attorney or otherwise to transact any business on account of it; proclaiming that only the names of the general partners shall be inserted in the firm name; providing for the bringing of suits either by or against the general partners, as if there were no special partners; preventing the special partner withdrawing any portion of the sum contributed by him during the continuance of the partnership, or any of its effects except actual profits made upon the original capital; declaring void as against creditors of the partnership every sale, assignment or transfer of any of the property or effects of the firm, or of the property or effects of the general or special partner, after the firm or himself has become insolvent, or in contemplation of such insolvency, with an intention of giving a preference either to a creditor of the firm or to a creditor of the general or special partner; debarring the special partner from claiming as a creditor until the claims of all other creditors shall be satisfied, except for claims contracted pursuant to § 17; requiring the making of a public record containing the name of the firm, general nature of the business done, names of all the general and special partners, distinguishing which are general and which are special, amount of capital contributed by the special partner, and the term of the partnership. Thus enabling all who might desire to ascertain the principal features of the partnership. To guard against deceit it was provided that, if any false statement be made in the certificate or affidavit, all the persons interested in the partnership shall be liable for all the engagements thereof as general partners. It was further provided that if any partnership be renewed or continued otherwise than the act provides, or if there be an alteration in the names of the general partners, in the nature of the business, in the capital contributed by any special partner, or the death of any partner, and the business be thereafter carried on, as to such busi

Chancellor Walworth, in Innes v. Lansing, supra, founded upon §§ 20 and 21, prohibiting the giving of preferences, the conclusion that the legislature could not have intended that a creditor of an insolvent limited partnership should be compelled to proceed to judgment at law, the necessary effect of which might be to give him a preference' over other creditors, and accordingly held that equity would take jurisdiction in such case. While his determination that such a suit would lie has ever since been followed, it was expressly held in Van Alstyne v. Cook, supra, that the statute referred to preferences voluntarily given by the partners, and does not apply to j udgments recovered against the members of a limited partnership, who may be sued before or after insolvency as other natural persons, and the judgments obtained enforced out of the partnership assets, although the effect may be to deprive other creditors from securing any portion of their claims. It is apparent, therefore, that there is nothing in the statute, nor in the construction so far given to it, which aims to prevent a diligent creditor from obtaining that advantage which the law universally sanctions, or which is intended to assure those dealing with a limited partnership of a ratable proportion of the avails of its assets in the event of insolvency. A strained construction of certain of the provisions of the statute should not, therefore, be made for the purpose of affording a remedy which it nowhere contemplates. That which the parties did should be examined in the light of the exactions of the act, and if found to have been a substantial compliance with its requirements, either for the purpose of continuing the partnership first formed or creating a new limited partnership, the plaintiffs’ position is well grounded ; otherwise not, unless their further contention be well taken, which is that, whether a valid limited partnership exists or not, the defendants cannot be heard to deny its existence.

It will tend to avoid confusion if the question of estoppel be discussed independently of those relating to the validity or invalidity of the alleged limited partnership. We have, then, for further consideration three questions: (1) Was the original limited partnership legally continued ? (2) If not, did the certificate last made operate to create a new limited partnership ? (3) If the partnership be general, are defendants estopped from, asserting that such is the fact ?

Section 12, of the limited partnership act, provides that the death of a partner, “ whether general or special, shall be deemed a dissolution of the partnership,” unless otherwise provided in the articles of partnership, when it may be continued under certain conditions. As there doés not appear to have been any such stipulation in the articles of partnership, the exception is not applicable. The same section further declares that “ every such partnership which shall be carried oh * * * after such death shall have occurred shall be deemed a general partnership in respect to all business transacted thereafter.” It thus appears that by operation of the very statute under which the partnership was created it became dissolved upon the death of the special partner; the rights and privileges, the duties and liabilities, of the partner ceased as to all future transactions to be governed by the provisions of the act. As no provision was made in the articles of partnership to continue it in the event of death in the manner authorized by the statute, there was no method by which the old partnership could have been revived. It will be observed that the observations which we have quoted from Kennedy's case are applicable to this situation. Necessarily the partnership existing after the filing of the second certificate was general, and for the reasons already assigned the making of the third certificate did not operate to renew a limited partnership, for there was none in existence. The ground on which the trial court rested its determination that the last certificate did

We are thus brought to the question whether the certificate of renewal can be considered as the original formation of a limited firm. That the parties to it intended to renew an existing partnership is apparent from it. Had the partnership which was by it sought to be continued been in fact a limited partnership, the object aimed at would have been accomplished, had there been no change in the partners. And it might be urged that the courts cannot create for the parties a different contract than they made for themselves; but we shall not discuss that subject, as we prefer to dispose of the question on the ground that, assuming the courts have the power to spell out of the facts recited in the certificate an attempt to form an original limited partnership, when manifestly nothing of the kind was intended by any of the parties, still such effect cannot be given this certificate, because it is not in substantial compliance with the statute. A careful analysis of the facts recited was made by the learned trial judge, and a comparison of the result attained, with the statutory requirements, was made for the purpose of showing how nearly it conforms to the commands of the statute. With the exception of the clause respecting the contribution of special capital, this was necessarily so, because “ the evidence of the renewal or continuance must be furnished in the same manner as that of its-formation. The same formality must be observed.” Fifth Ave. Bank v. Colgate, 120 N. Y., 381 ; 31 St. Rep., 431 . But with respect to the capital contributed by the special partners, the statements must necessarily differ. When attempting to create an original limited partnership, the statute requires that the special partner pay in in cash the amount of his contribution. This requirement cannot be satisfied by the turning over of merchandise or other property of the value of the special partner’s contribution. Van Ingen v. Whitman, 62 N. Y., 513 , 519 ; Met. Nat. Bk. v. Sirret, 97 id., 320-328. Nor can it be done in any of the many ways which the ingenuity of man has suggested, other than a simple compliance with its terms by the payment of cash. Further, the affidavit annexed to the certificate must show that it has actually been done. So those dealing with the partnership may know that at the time of the creation of the partnership there was in cash available for the purpose of the partnership the amount stated in the certificate. But when a limited partnership is renewed new capital need not be contributed. It may be that the capital contributed has become seriously impaired, but that does not deprive the parties of the right of renewal, the privilege of prolonging the life of the partnership. And for the purposes of renewal the statute is satisfied by statements in the certificate and affidavit to

Now, the certificate and affidavit before us state not that a contribution had been made in cash of $100,000 for the purposes of the partnership about to be created, but, in effect, that more than six years ago a limited partnership was formed, at which time-that sum was contributed by one Adolph Levy, now dead, no part of which had been withdrawn by or paid or transferred to him or his estate; a statement, in so far as the capital of the special partner is concerned, sufficient to effect a renewal of an existing limited partnership, but not to create one. It is said that, for all that appears in the certificate before the court, the contribution was in cash, for it is stated in one portion of it that the said $100,-000 is contributed by the said Augustus H. Levy, as executor of the estate of the said Adolph Levy, deceased. It is apparent from that which precedes as well as that which follows the assertion of contribution by the executor that the $100,000 thus alluded towns the sum paid in by the special partner in 1884, and not thereafter withdrawn. Indeed, the certificate, considered as an entirety, presents no basis for the assertion that the executor at that time paid in the sum mentioned, or intended to have it understood that he had. But if it was possible to isolate the expression referred to from other assertions in the certificate touching the contribution of capital, and by whom contributed, still it would fall short of the requirements of the statute. It commands something more than a statement in the certificate of the amount of the special partner’s contribution. An affidavit must be filed declaring that such contribution has been actually and in good faith paid in cash. The affidavit not only fails to show that the executor, as-special partner, paid such sum in cash, but it distinctly asserts to-the contrary.

It declares “ that the sum specified in the certificate of the formation of the said limited partnership to have been contributed by said special partner in said partnership to the common stock, to wit, the sum of $100,000, by the said Adolph Levy, (which the cerifícate shows was paid in over six years before), has been actually and in good faith paid in cash ; that no part of said sum of $100,000 has been withdrawn, but the whole thereof, to wit, $100,000, remains invested in said limited partnership, wholly unimpaired, and has been contributed by said special partner as capital to the common stock of said renewed and continued limited partnership.” It thus appears on the face of the papers that there-was no payment in cash, but instead that which was contributed was ‘invested in said limited partnership,’(as the partnership is described in the affidavit), but which was a general partnership, as we have already shown, While it is possible to change an existing general partnership into a limited one,' the property of the-

If the views so far expressed be correct, it follows that the partnership of the defendant is general, and not limited, and there remains for consideration the question of estoppel. It is urged that the defendants, having failed to create a limited partnership, as they intended to do, and supposed they' had done, they not only became general partners, and liable as such for the debts of the firm, which is the penalty imposed by statute for a failure to comply with its provisions, but, in addition, they can be lawfully proceeded against as a limited partnership by such creditors as may prefer that remedy. In other words, in so far as the general creditors are concerned, these defendants may be proceeded against by a portion of them as general partners and by another portion as if a limited partnership had been constituted. The penalty of a general partnership was imposed upon those attempting but failing to renew a statutory partnership for the benefit of the creditors of such firm. Mo other penalty was added or suggested, and it would be strange, indeed, if an effort to comply with the statute, and that alone, should visit the members of the firm with the responsibilities of a general partnership, and at the same time deny to them the right to say to a creditor, whose only knowledge, if he have any, of the attempt to form a limited partnership, was derived from the record: “The statute declares for your benefit that I am a general partner.”

The case of Durant v. Abendroth, 97 N. Y., 132 , does not apply. Judge Rapallo did say in that case, and correctly, “that if the firm had undertaken to make an assignment with preferences, such assignment could not have been sustained, on the ground of the violation of the statute. That violation could betaken advantage of only by creditors, and the consequences were simply to give them recourse against the special partner personally, as if he had been a general partner. But the action did not arise under §§ 11 or 12, which declare that the effect of certain acts shall be to render that which was a limited partnership general. It arose under § 8 which provides that “ no such partnership shall be deemed to have been formed until a certificate shall have been made, acknowledged, filed and recorded, nor until an affidavit shall have been filed as above directed; and if any false statement shall be made in such certificate or affidavit, all the persons interested in such partnership shall be liable for all the engagements thereof as general partners.” It will be observed that the section quoted does not provide that the effect of a false statement shall be to make the partnership general, but it attempts to secure the creditors by providing that in such case all the partners, whether general or special, shall be liable for all the engagements of the firm. And the construction given to that section by the case cited was, in substance, that when a certificate and affidavit regular inform aré filed, but the statements made therein are false in fact, the limited

VAn Brunt, P. J., and Follett, J., concur.