Appeal of Powell

2 Pa. Super. 618, 1896 Pa. Super. LEXIS 96

• Court: Superior Court of Pennsylvania
• Decided: November 16, 1896
• Docket: Appeal, No. 23
• Status: Published

Opinion

Opinion by

Rice, P. J.,

In the year 1867, a number of persons organized a partnership association, under the name of the Meadville Savings Bank, for the purpose of dealing in exchange, bills, notes and other securities, and carrying on a general banking business. Somewhat later, articles of association were prepared and signed, wherein it was provided that the capital stock of $50,000 (after-wards reduced to $30,000) should be divided into shares of $100 each; that such shares should be always deemed hypothecated for any indebtedness or liability of the holder to the partnership;- that the stock should not be assigned, save on the books of the association, and then not without the consent of the directors, of whom there should be nine, to be elected annually ; that upon such transfer the assignee should “ succeed and become subject to all the rights and obligations of an original party thereto; ” that the death of a stockholder should not dissolve the association, which should continue to exist until dissolved by a vote of the majority of the holders of the shares of stock entitled to representation, to be cast at a meeting called to specially consider the matter of dissolution; that the holders of stock by original subscription, transfer or otherwise, should, by virtue of such subscription or acceptance of such transfer, be subject to, and thereby take upon themselves, the several and respective duties and obligations devolved and incumbent upon them as stockholders or directors; that the legal title to all the property of the association should be held by the president of the board of directors, as trustee; that the executive functions pertaining to the business and property of the association should vest in the president; and that the board should appoint a cashier and such other officers and agents as they might deem necessary. There were also careful provisions as to the election of directors and president, the duties of officers, the declaring of dividends and other matters.

The Meadville Savings Bank continued in business until January 13, 1894, when it closed its doors. Ten days afterwards, owing to insolvency, it made an assignment of all the partnership assets for the benefit of its creditors. During its continuance, transfers of its shares were made from time to time to persons not original subscribers: the last new member admitted to the firm being one Otto A. Stoltz, who purchased and had transferred to himself five shares, on January 8,1892. On August 2, 1893, H. C. Beman transferred ten shares to Gyrus Kitchen, an original partner. The learned auditors have found: “ That upon a transfer of stock or change in partnership interests no new books were opened nor were the accounts between the partners settled; that the business was conducted as before and there was no separation or distinction made between past and future liabilities or assets on the occasion of any transfer, and that the assets or moneys of the bank were used in discharging old obligations or in making new loans, without any reference to the transfer of stock and without regard to the time when liabilities so made were incurred; and that it was the custom of the bank to issue time certificates payable, generally, in one year from date, and when the same became due, to pay them either in cash or by new certificates, on the surrender of the old one, making no distinction between past and future assets or liabilities on the occasion of anj transfer of stock.”

In this respect the facts of the case in hand resemble those of Christy v. Sill, 131 Pa. 492.

The language of the resolution authorizing the assignment is as follows:

“Whereas, The association or copartnership known as the Meadville Savings Bank, on account of losses and misfortunes. being unable to continue its business, and on the 18th day of January, A. D. 1894, having been compelled to close its doors, therefore Resolved, That the said copartnership or firm go into liquidation, and the better to effect that purpose that the president of said association, Cyrus Kitchen, Esq., be authorized and instructed to make a general assignment of all and every of the assets of said association or copartnership for the benefit of its creditors; and that Jas. W. Smith, Esq., be the assignee.”

The assignee having filed a partial account, auditors were appointed to make distribution of the fund, and the case came before the court below on exceptions to their report.

It appears that there were three classes of depositors who claimed the right to participate in the distribution of the fund; (1) those who made deposits after August 2,1893, when H. C. Beman transferred his ten shares of stock to Cyrus Kitchen; (2) those who made deposits prior to that date and after January 8, 1892, when Otto Stoltz purchased and had transferred to him five shares of stock; (3) those who made deposits prior to the last mentioned date.

The question we are called upon to decide, is, who were the creditors of the Meadville Savings Bank at the time the resolution was passed and the deed of assignment made. We have the partnership agreement, the manner of conducting the business, and the resolution itself to guide us. The learned auditors adopted the view that the assigned estate “ belonged to the last partnership, or the one which conducted the business from the time Cyrus Kitchen purchased the stock of H. C. Be-man” and recommended distribution accordingly. We think this is the right conclusion, notwithstanding the able opinion of the learned judge of the court below to the contrary.

There are certain legal propositions concerning which there is and can be no dispute. We state them for the purpose only of narrowing the discussion to the vital and controlling question in the case. The general rule of law, in the absence of an agreement otherwise, is, that the retirement of one member or the admission of a new member works a dissolution of the partnership. If the retiring member sell his interest to the other members, or to a third person who is admitted as a member, and they continue the business, the creditors of the former firm have no equity attaching to the partnership effects of that firm which have passed to the succeeding partnership. The new firm in such a case has absolute dominion over the property unhampered by any lien or trust in favor of the creditors of the former firm. They may sell it, or assign it for the benefit of creditors, and in that case the only persons entitled to participate in the distribution are the creditors of the firm to which the property belonged at the time of the assignment. The fact that the interests of the partners are represented by shares of stock which are transferable like shares in a corporation, and after such transfer the business is conducted as before, without separation or distinction made between past and future liabilities, does not change these rules. The stockholders in such a bank have the rights and responsibilities of, and in their relation to the public and each other are, general partners: Shamburg v. Abbott, 112 Pa. 6; Christy v. Sill, 131 Pa. 492. So also it is to be remembered that although the manner of doing business as described in the auditors’ supplemental report is entitled to due weight in interpreting the articles of copartnership, yet, as they well say, the fact that the partnership succeeding in the business upon a transfer continued the business as it was formerly conducted and paid obligations contracted by the old firm, would not, of itself, bind them, for all such claims.

But while these rules govern ordinary partnerships, no rule of law forbids the partners to so frame their articles of copartnership as to change their rights and liabilities, and to deprive the retirement of an old partner and the introduction of a new one of many of the usual consequences of such action. Nor is any rule of public policy contravened by an agreement between the partners that a retiring partner shall not have the right to require a winding up of the business and an immediate payment of the debts out of the partnership assets, and that, in consideration of his surrendering that right, the firm as constituted after Iris retirement shall take all of the assets, continue the business as if no change of membership had taken place, and pay the debts. If tins were the clear meaning of the articles of copartnership there would be much force in the reasoning of the learned judge whereby he reached the conclusion that the firm as constituted after the withdrawal of a member would be liable to the creditors for the debts, upon the principle recognized in Adams v. Kuehn, 119 Pa. 76, and Delp v. Brewing Co., 123 Pa. 42, and kindred cases.

Assuming the correctness of his premises, his conclusion, at least so far as it applies to the last change of the partnership when H. C. Beman dropped out, seems to have some support in the decision of the Supreme Court in Frow, Jacobs & Co.’s Estate, 73 Pa. 459. Forsman sold out Iris interest in a firm to the remaining members, who covenanted jointly and severally to pay the debts, and indemnify him against them; the remaining members continued in the same business as a partnership, took all the firm’s assets, and took upon themselves the debts without any division of Forsnran’s interest. Forsman paid debts of the first firm, and the second firm afterwards assigned for the benefit of creditors. On the distribution the auditor held that the covenant created only a joint and several obligation of the makers and not of the new firm as such; therefore Forsman was not entitled to participate in the distribution as a firm creditor. On appeal the Supreme Court intimated that if the case depended solely on the covenant the conclusion of the auditor would have been correct. “ But,” said Agnew, J., “ Frow, Jacobs and Parker were already liable for these debts as partners in the firm of Forsman & Co. which they took upon themselves when Forsman retired from the firm, and they continued the business. The evidence is clear, that, when Forsman sold out his interest to his partners and retired, they proposed to continue the business, and did so. When he went out they took all the assets of the firm into the business and took upon themselves all the debts. There was no separation of Forsman’s interest or share in either assets or debts. These assets became the capital of the new firm, and the debts, already partnership, as it regards them, became its debts. In short, it was but a dropping out of Forsman, leaving the other partners in all respects. . . . That these debts were assumed by the new firm is manifest from the nature of the business, the attending circumstances, the declared intention of the parties, their subsequent acts, and their interests.” All this would be true of this case if the articles of copartnership are to be construed as contended for by the appellees. It would seem, therefore, that, upon a change of partnership by the dropping out of one member, the new firm may become liable for existing debts although .the evidence may fall short of establishing a complete novation. And if, in the present case, by virtue of the articles of copartnership or otherwise, the new firm as such became liable to the creditors for the debts existing at the time of the change of membership, then, manifestly none of the partners at the time of the assignment had any equity which would entitle him to demand that the debts incurred afterwards should be first paid. The equities of the creditors must be worked out through the equities of the partners, and if none of the partners has an equity to have a preference made in the distribution then of course none of the creditors has any, and the distribution decreed by the court to all of the creditors of the Meadville Savings Bank without regard to changes in the membership of the partnership was right.

It will be observed, however, that in order to reach this conclusion, it is necessary to hold, in the first place, that the articles of copartnership contain such an agreement as we have referred to, and, in the second place, that it enured to the benefit of those who became creditors prior to the changes in the membership of the firm. Do the articles of copartnership contain an agreement which bound the new firm, created whenever a change of membership occurred, to pay past debts and to indemnify the retiring member against them ? This is the pinch of the case. The solution of this question depends finally on the construction of that clause of the provision relative to the transfer of stock which reads: “and upon such transfer the assignee or assignees of such share or shares shall thereby, as to such share or shares, succeed and become subject to all the rights and obligations of an original party thereto.” The ordinary rule is, that the purchaser of a partner’s interest acquires no right to be admitted to- the firm without the consent of the remaining partners, or to interfere in the partnership affairs. Wliat he acquires is simply the seller’s share of the assets after the partnership debts are paid. One purpose of the provision under consideration was to secure his admission into the new firm and to prevent a winding up of the business. It is questionable whether more was intended. An incoming partner may become liable for the debt of the old firm by agreement, but the presumption of law is against such liability and requires proof to remove it: Kountz v. Holthouse, 85 Pa. 235. Even if this were a new question, we should hesitate to say that this provision, standing by itself, could be construed as an agreement whereby a purchaser of a share of stock would become liable to creditors for all of the past debts of the concern. And yet this is what we must hold to sustain the decree. The more reasonable and natural construction of the language is, that upon a transfer of stock the assignee acquired the rights and became subject to the obligations of a partner as fully as an original member of the firm or holder of stock — which is the same thing — acquired such rights and became subject to such obligations. But this is not a new question. After a careful comparison of these articles with those of tire Pittsburg Savings Bank, which were construed in Christy v. Sill, 131 Pa. 477, we are of opinion that that decision rules this case. The manner of conducting the business of that bank was similar to that of the Meadville Savings Bank. The articles of copartnership with reference to the dissolution of the partnership and the transfer of stock were substantially the same as these; but in place of the provision under consideration was this: “ All stockholders are hereby individually bound to make good to all depositors the amount of their deposits.” If anything, that is a less ambiguous provision than this, and, as we have suggested, the related provisions and the manner of doing business, so far as they might be resorted to in aid of its construction, were very much the same as appear in the present case. But the court said — McCollum, J., “ We are unable to discover in the restrictions on the sale of stock any engagement by the incoming partner to become liable for the antecedent debts of the firm, and we cannot construe article 27 as imposing on him such a liability. If it had been the purpose of the partnership to attach such a result to a change of membership, it should have been clearly expressed. We think article 27 refers to deposits made with the firm of which the stockholder is a member, and that it has no application to deposits made with a preceding or subsequent firm. Thus read and understood, it is intelligible and in accord with well established principles.”

For the same reasons we are compelled to the conclusion that the articles under consideration cannot be construed as binding the new firm, created when a change in membership took place, to pay the antecedent debts. They remained the debts of those who were members of the firm when the} were incurred, and so far as we can see the persons composing the Meadville Savings Bank on August 2, 1893, are still liable to every depositor whose money they had received, unless the last partnership has heretofore paid the debt. The hardship which it is suggested is likely to result from not allowing them to participate in this distribution is more seeming than real. Every one who lends money to a partnership composed of a number of persons, whether the firm be organized for banking, manufacturing or other business is presumed to know that changes are likely to occur from time to time in the membership. He is bound to know the law, and there can be no presumption of law or fact that he will suffer if he is left to his remedy against those whom he trusted.

As the whole right of property existed in those who constituted the firm after the last assignment of stock, their right to appropriate it to the partnership debts of that firm is clear and unquestionable: Baker’s Appeal, 21 Pa. 76.

The learned auditors have found that the legal effect of the resolution authorizing the assignment and the deed executed pursuant thereto was to vest the assets of the association in the hands of the assignee for the benefit of creditors of the partnership then existing, and which had its origin at the time of the transfer by Beman to Kitchen. This finding we think was correct- There is nothing in the circumstances attending the passage of the resolution or the making of the deed, nor in the writings themselves to justify any other conclusion. We must hold the assignment to have been intended for the benefit of those only who had, at the time it was made, a clear legal status as creditors of the firm which was the then owner of the assigned estate. It follows that the distribution recommended by the auditors is correct, except as to the claim of T. H. Apple. In the view taken of the main question by the learned judge it was not necessary to pass on his exceptions, hence they were not considered and no disposition was made of them. Not having been able to adopt his conclusion upon that question it now becomes necessary for us to consider these exceptions.

On August 2, 1893, when the last change in the partnership took place, T. H. Apple had a credit balance of $670.47. On December 1, 1893, his account was overdrawn $132.90. He made subsequent deposits so that on January 13, 1894, when the bank closed its doors, he had made good this overdraft and had a balance in his favor of $790.80. The auditors say in regard to this and similar cases : “ If by dealings on or after the last change of partnership interests, to wit: August 2, 1893, the claim of the creditors who held a credit balance in the bank at that time has been changed, they can only participate to an extent equal to the new credits created subsequently thereto, and all payments made after such change must be applied in discharge of such an indebtedness.” Applying tills rule to Sir. Apple’s case they held that he was entitled to a dividend on $119.90, -the difference between his credit balance on August 2, 1898 ($670.40), and his credit balance on January 13, 1894, ($790.30). The question is precisely the same as if, instead of having overdrawn his account on December 1, 1893, he had simply drawn out an amount which would exactly balance his account. Suppose that in that case he had subsequently deposited $790.30 and that that balance stood to his credit on the books of the bank when the bank closed, upon what theory could the payments made to him prior to December 1, 1893, be used to reduce his credit balance on January 13, 1894? Upon no theory, except that such payments were in the nature of overdrafts or loans, and that subsequent deposits were but repayments thereof. This is apparently the theory adopted by the auditors, but it is utterly inconsistent with the theory of the parties to the transaction as manifested by their unequivocal acts.

In their supplemental report the auditors say “ that upon a transfer of stock or change in the partnership interests no new books were opened nor were the accounts between the partners settled; that the business was conducted as before and there was no separation or distinction made between past and future liabilities or assets on the occasion of any transfer, and that' the assets or moneys of the bank were used in discharging old obligations or in making new loans, without any reference to the transfer of stock and without regard to the time when the liabilities so made were incurredWhen, therefore, the new partnership honored the depositor’s checks against the balance which stood to his credit on August 2, 1893, or paid him in-any other way, it was understood by the parties, not as a loan or an overdraft, but as a discharge pro tanto of his obligation against the bank. Assume that the new partnership was not legally bound to pay tbe indebtedness due to depositors on August 2, 1893, yet if from politic motives, in order to retain tbe confidence of tbe public and to obtain new credits, they saw fit to assume or to pay it, they could not afterwards turn round and say that the payment was simply a loan or an overdraft which they were entitled to deduct from future deposits. If, between August 2, 1893, and January 13, 1891, the payments to, and deposits of, the depositors were exactly equal the former would properly be applied to the new indebtedness and thus no new credit would be created. If the credit balance on August 2, 1893, was at no time thereafter reduced, the extent of the new credit would be measured by the difference between the credit balance on that date and the final balance on January 13, 1894, and in such case the distribution report by the auditors is right. But we think the appellees are clearly right in maintaining that where tbe credit balance on August 2, 1893, was reduced by subsequent payments there should be deducted from the final balance only the lowest balance to which tbe account was reduced after August 2, 1893, and the difference, representing as it does a new credit, should participate in the distribution. By this rule Mr. Apple was entitled to a dividend on his entire credit balance of $790.30. His first exception is sustained. As he only has excepted upon this ground, schedule “ A ” as reported by the auditors will require but slight modification.

So much of the decree as dismisses the exceptions to the auditors’ charge for compensation is affirmed. The rest of the decree is reversed and the cause is remitted to the court below with directions to make distribution in accordance with the auditors’ schedule A except as modified by the allowance of a dividend to T. H. Apple on his entire credit balance of $790.30. The costs of this appeal are directed to be paid out of the assigned estate.