Lineweaver v. Slagle

2 A. 693, 64 Md. 465, 1886 Md. LEXIS 113

• Court: Court of Appeals of Maryland
• Decided: January 29, 1886
• Status: Published

Opinion

Miller, J.,

delivered the opinion of the Court.

Several questions arise on this appeal, and present, for the first time in this Court, the construction of certain sections of Article 72 of the Code, relating to “ Limited Partnerships.”

The suit was brought by the appellant against Luther W. Hopkins, Charles T. Matthews and David W. Slagle, as partners doing business under the firm name of “Hopkins, Matthews & Co.” This firm failed and made an assignment for the benefit of its creditors on the 29th of April, 1884. The cause of action sued on was a promissory note for $404, signed in the firm name, dated the 1st of April, 1884, and payable at thirty days to the order of “Lineweaver & Co.,” of which latter firm the plaintiff was the surviving partner. There was no controversy as to the liability of Hopkins and Matthews, but Slagle set up the defence that he was a special partner, and the effort of the plaintiff was to hold him responsible as a general partner. At the trial several exceptions were taken by the plaintiff to the rulings of the Court which present the real subjects of dispute, and these have been argued by counsel with much zeal and ability.

The testimony shows that on the 15th of March, 1880, these three parties, Hopkins, Matthews and Slagle, formed a partnership under the firm name of “ Hopkins, Matthews & Go.” to carry on a general commission business in the City of Baltimore, in which Slagle became a special partner and contributed $5000 capital. This partnership, by its terms, commenced on the 15th of March, 1880, and ended on the 14th of March, 1882, and in regard to its due formation no question arises. It is conceded that all the requisites and formalities required and prescribed by Article 12 of the Code, were duly followed and complied with. In this firm, Slagle was unquestionably a special partner merely, and not therefore liable for its debts beyond the $5000 which he had contributed to its capital; On the 15th of March, 1882, the day succeeding that limited for the duration of this partnership, the same parties executed and acknowledged the following certificate:

“ Be it remembered, and it is hereby certified that we, Luther W. Hopkins and Charles T. Matthews, as general partners, and David W. Slagle, as special partner, and all residing in the City of Baltimore, in the State of Maryland, have formed and entered into a limited partnership under the name or firm of ‘ Hopkins, Matthews & Go.’ and intend to transact a general commission business in the City of Baltimore. The said David W. Slagle has contributed $10,000 to the capital of the firm, and the partnership is to commence on the 15th day of March, 1882, and is to terminate on the 28th day of February, 1885."

This certificate was duly recorded, and the “ terms of the partnership ” duly published in the newspapers; and it has been contended by counsel for the appellee that this partnership is to be regarded as a “ renewal or continuance ” of the one which it succeeded. But we think it clear that this position cannot be sustained. The law has made special provisions for such “ renewal or continuance,” and whore that is the object to be accomplished, these provisions must bo followed. By section nine it is declared that “every renewal or continuance of such partnership beyond the time originally fixed for its duration, shall be certified, acknowledged and recorded; and an affidavit of a general partner be made and filed, and notice be given in the manner herein required for its original formation; and every such partnership which shall be otherwise renewed or continued, shall be deemed a general partnership.” And by section ten it is provided that “every alteration which shall be made in the names of the partners, in the nature of the business, or in the capital or shares thereof, or in any other matter specified in the original certificate, shall be deemed a dissolution of the partnership; and every such partnership which shall in any manner bo carried on after any such alteration shall have been made, shall be deemed a general partnership, unless renewed as a special partnership under the provisions of the last preceding section.” The necessities of this case do not require us to decide what must be the form of the certificate for “renewal or continuance” under these sections. It is sufficient to say, that the change in the amount, of the capital to be contributed by the special partner from $5000 to $10,000, makes this in legal contemplation, a new partnership, and not a renewal or continuance of an old one ; and such would naturally be the conclusion reached by any one who might read this certificate on the records, or see in the newspapers the publication of the “terms of the partnership” in comformity therewith. From the information thus derived, no one could for a moment suppose that it was the intention of the parties to renew or continue an old firm. We are therefore clearly of opinion, that Slagle’s right to hold the position of a special partner in this partnership, is in no wise aided, or affected by the fact, that he was such in the old one. So far as his rights in this respect are concerned, they must be treated and dealt with as if this certificate was in fact, as it is in law, the formation of a new and original partnership.

The next question is, did Slagle contribute and pay the $10,000 as the law requires, so as to entitle him to the status, and immunity of a special partner? In various sections of this Article, it is provided that the special partner “shall contribute in actual cash payments a specific sum as capital to the common stock;” that a certificate shall be executed, acknowledged and recorded, which shall state among other things, “ the amount of capital which each special partner shall have contributed to the common stock;” that at the time of filing this certificate, there shall also be filed an affidavit of one or more of the general partners, “stating that the sums specified in the certificate to have been contributed by each of the special partners to the common stock, have been actually and in good faith paid in cash;” that “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; ” and that “ the partners shall publish the-terms of the partnership when registered, for at least six weeks immediately after such registry, in .two newspapers to be designated by the clerk of the Court in which such registry shall be made.”

These aré some of the conditions which the Legislature has seen fit to attach to the privilege of participating in the profits of a partnership, without absolute liability for its debts. One of the objects they are intended to attain, is notice to the public of the exact terms of the partnership, so that those who deal with it may do so advisedly. Another, and the most important, is that the contribution by the special partner shall be made in actual cash. This also has in view the protection of the public. “ Its object is to provide a fund on the day the company is formed, to be thereafter subject to no contingencies or losses, except those which come from the proper business of the partnership,” (103 Mass., 19,) and wherever the question has arisen, the Courts have uniformly exacted a strict compliance with this condition. The contribution cannot be made partly in cash, and partly in goods, credits, or assets of another firm taken at a valuation, nor w.ill government bonds, or any other class of commercial securities, no matter how valuable they may be, or how easily convertible into money, be accepted as a substitute for the “actual cash payments,” which the statute requires. Haviland vs. Chace, 39 Barb., 283; Pierce vs. Bryant, et al., 5 Allen, 91; Haggerty, et al. vs. Foster, 103 Mass., 17; Richardson vs. Hogg, 38 Penn. State Rep., 153; In re Merrill, et al., 12 Blatchford, 221; Van Ingen vs. Whitman, Bankrupts, 62 N. Y., 513. Nor is it material that the parties may have acted in good faith, and have honestly intended to comply with the law, and have honestly supposed the transaction did gratify the statute, for, as was said by Eolger, J., in the case last cited: “The statement of the amount of the cash payment is required so that the public may gauge thereby the extent of its dealings with the firm. The affidavit is called for, that the public may have reliance upon the existence of the fact of payment. The statute is thwarted, the public is misled and deceived, as much when there is an unintentional untruth, as when there is an intentional one. This statute does not set out to deal with motives, but with acts and their results; and it guards the public, not by requiring good intentions, but a certain act done in a certain mode, and a true statement that it has been thus done.” To the same effect is the decision in the Massachusetts’ case, (103 Mass., 17,) where it was held that government bonds could not be regarded as equivalent to cash within the meaning of the statute. “It is wholly immaterial,” say' the Court, “ that the transaction at the time was honestly intended and understood by the parties to be sufficient; that the securities actually transferred afforded the means by which their cash value was in fact, subsequently realized; or that creditors were not actually defrauded. The statute is plain and explicit. The use of the phrase, c actual cash payment,’ is emphatic and significant. It is wisely intended to exclude a construction by which commercial securities of any description may be regarded, by the aid of mercantile usage, as substantially equivalent to cash; and to remove from all parties the temptation to evade its requirements in this respect.”

This brings us to an examination of the facts attending the alleged contribution and payment of the $10,000. The proof shows that -on the 15th of March, 1882, the day on which the certificate was signed, and at about 10 o’clock, a. m., Slagle gave to the firm of “Hopkins? Matthews & Co.” a certified check on the Citizens’ National Bank, for $10,000, which was soon afterwards deposited by the firm and passed to its credit; that in a few hours, and on the same day, between two and three' o’clock, p. m., the firm gave Slagle its check on the same bank for $6500, and that three days afterwards the firm, by another check, paid him the sum of $1119.16. There is further proof to show that the old firm kept their account in the same bank, and that on the 15th of March, 1882, and prior to the deposit of Slagle’s check, that account was overdrawn to a small amount, and that on that day and the next, neither the old firm nor the new one, nor Hopkins and Matthews, the general partners in both, had any money in bank out of which the $6500 check could be paid, save that which was derived from Slagle’s check for $10,000. Assuming then that these were the facts, or that a jury would so find from the evidence, the transaction amounted simply to this, that Slagle on the morning of the 15th of March, 1882, paid in his $10,000, and a few hours afterwards on the same day $6500 of the same money was paid back to him. Now we take it to be too plain for argument that this was not such a “ contribution” of $10,000, “to the common stock” of the firm that day formed, as the law requires. In no legitimate sense of the word can the paying of money one hour and receiving it back the next, be said to be a “ contribution ” of it for any purpose whatever. We hold it to be clear that to gratify the statute the special partner must pay his money into the common stock and leave it there to the risks of the business. The payment and devotion of the money to the business of the firm must be actual and absolute, not apparent and illusory. If the terms referred to, leave any doubt that this is what the statute means, that doubt must be removed by the thirteenth and fourteenth sections, in which it is expressly declared that “no part of the sum which any special partner shall have contributed to the capital stock, shall be withdrawn by him, or paid or transferred to him in the shape of dividends, profits, or otherwise, during the continuance of the partnership,” and if by payment of interest or profits, his capital shall be reduced, he “ shall be bound to restore the amount necessary to make good his share of capital, with interest.”

But the appellee has explained why these sums of $6500, and $1119.16 were thus paid back to him immediately upon the formation of the new partnership. That explanation, as we gather it from the record, is substantially as follows: There is proof to show that at the termination of the old firm, its books were balanced, and taking the accounts at their face value there stood to the credit of Slagle as special partner in that firm $5000 capital, and $2619.16 profits, aggregating $1619.16, the precise amount paid to him by the two checks of the 15th and 18th of March, 1882; that in the partnership articles of the old firm there was one to the effect that on its expiration, the general partners should purchase all the fixtures, tools, and implements used in the prosecution of its business, then on hand; that the assets of the old were taken by the -new firm at an estimated value which was guaranteed by the old firm; that all the debts and liabilities of the old firm were paid as its assets were collected, and a balance was left of such assets sufficient to pay back to Slagle all his capital and profits except the sum of $609.52; and that this deficiency was charged against him in the accounts of the new firm. There is also proof that at the time the books of the old firm were thus balanced, the cash thereby appearing to be on hand was theoretical merely, and that the actual cash was scattered all over the country in the shape, (as. we infer,) of debts and accounts due the firm; that these were not collected until some time after, (precisely how long is not stated,) the new firm had been in operation ; and that all of them never were collected, for when the affairs of the old firm were liquidated there was a deficiency in the estimated value of these assets to the extent of $1828.56. Now assuming as. true all the facts above stated that can be regarded as favorable to the appellee, we do not think his case is placed in any better legal position. The fact still remains that the $10,000 was not contributed in cash as the law requires. The sum of $2380.84 only was so contributed, while the balance, amounting to $1619.16, was, in fact, represented by his interest in the uncollected and unrealized assets of the old firm, taken at a valuation which was guaranteed by that firm. In our judgment this cannot be accepted as an equivalent for the cash which the law requires, without ignoring all the decisions upon the subject, as well as the plain meaning of the statute itself. In our opinion the requirement that the special partner shall “contribute ” a specific sum “in actual cash,” was made by the Legislature for the very purpose of preventing such transactions. The statement, therefore, in the certificate and affidavit, that Slagle had made this contribution of $10,000, was, in legal contemplation, “a false statement” no matter in what good faith or with what honest intentions he and his associates may have acted.

It follows from what has been said that the Court was right in rejecting the defendant’s fifth prayer, but wrong in granting the third in lieu of it, and also in rejecting the plaintiff’s second and fifth prayers.

•The defendant’s fourth prayer, as we read it, simply asserts the proposition, that payment by a certified check on a bank in good standing, and which the bank actually pays, is a good mode of payment under the law of limited partnership, and that the mere fact that a special partner has paid his contribution by such a check, does not make him a general partner. Taking this to be the' sole effect of that prayer, we have no fault to find with it. When a bank certifies a check to be good, it is bound to pay it when presented by the payee, (if he be other than the drawer,) or by any subsequent holder; and if a check be given bona fide on a banker having funds to pay it, it is in this State prima facie payment, if accepted as cash. Moses vs. Franklin Bank, 34 Md., 581; Woodville vs. Reed, 26 Md., 190.

The case also presents another question which involves the construction of the 15th, 16th and 17th sections. In section fifteen, there is a provision, that “ every sale, assignment or transfer of any property or effects of such partnership made by such partnership, when insolvent or in contemplation of insolvency, or after or in contemplation of the insolvency of any partner, toith intent of giving a preference to any creditor of such partnership, shall be void as against the creditors of such partnership.” Section sixteen declares that “every such sale, assignment or transfer of any of the property of a general or special partner when insolvent, or in contemplation of insolvency, or after or in contemplation of the insolvency of the partnership, with intent of giving to any creditor of his own, or of the partnership, a preference over the creditors of the partnership, shall be void as against the creditors of the partnership.” And by section seventeen, it is provided that “every special partner, who shall violate any of the provisions of the two last preceding sections, or who shall concur in or assent to any such violation by the partnership, or by any individual partner, shall be liable as a general partner.”

It appears from the proof, that on the 24th of April, 1884, only five- days before the firm failed, Hopkins and Matthews conveyed a house and lot which belonged to the firm and ¡stood in their names, to the firm of “ Charles W. Slagle & .Co.,” of which the appellee was a member, for the consideration of $2485.62, of which $1985.62 consisted of loans with interest thereon, previously made by Slagle & Co. to the grantors. In reference to this transaction the appellant insists, that if at the time this deed was made, the firm, and Hopkins and Matthews, toere in fact insolvent, or unable to .pay all their debts as they fell due in the regular course of business, and if Hopkins and Matthews knew the true condition of the firm, or could by the exercise of reasonable diligence have discovered it, and if Slagle also knew the true condition of the firm, and of Hopkins and Matthews, or could have discovered it by the exercise of reasonable diligence, without interfering with the conduct of the firm’s business, then the deed was made with the intent to prefer the grantees therein, and having been made to Slagle himself and others, it must be presumed to have been made with his concurrence. And he therefore, by virtue of this seventeenth section, became liable as a general partner. This is the substance of the plaintiff’s seventh prayer. The legal proposition asserted is that upon the facts stated, the law presumes the intent to prefer, and that such intent need not be proved as an independent fact. This prayer was granted, and in our opinion, this ruling correctly construes these sections of tiie statute. If a man is actually insolvent, and knows it, or by the exercise of reasonable diligence could know it, and deliberately conveys a portion of his property to one of his creditors, and thereby pays in full that creditor’s claim, the necessary effect is to prefer that creditor, and from such an act the law conclusively presumes the intent to prefer. As was said by our predecessors, in the case of Gardner vs. Lewis, 7 Gill, 404, “ Whatever is the necessary consequence of an act deliberately done, that the law presumes every man to intend. When the effect of an act, understandingly done, is necessarily injurious to the rights of another, the quo animo is not a matter of fact, it becomes an inference of law.” So also in the case of Whedbee, et al. vs. Stewart, et al., 40 Md., 424, where the Act of 1864, ch. 306, which gives creditors the remedy by attachment against a debtor who has assigned or disposed of his property “with the intention of defrauding his creditors,” came up for construction, the Court applied the same rule, and said where a conveyance by its terms operates to hinder, delay or defraud creditors, the intent to do so is imputed to the parties.” Again, the same rule is emphatically announced in the case of Ecker vs. McAllister, 45 Md., 309, where the Court say, “When the probable consequence of an act is to give a preference, the debtor will be conclusively presumed to have intended to give such preference.” These decisions are quite sufficient to conclude this question. The defendant’s seventh prayer on the same subject ought to have been rejected. It is defective not only in submitting this question of intent to the finding of the jury, but also in omitting the requirement of the exercise of reasonable diligence on the part of the.se partners to discover the true condition of their firm. At the time and under the circumstances attending the execution of this deed, they were bound to make diligent inquiry as to the solvency or insolvency of the firm. That Slagle must be presumed to have assented to this transaction, does not seem to be a matter of doubt. The deed was made to a firm of which he was a member, and he was therefore one of the grantees. Moreover his own seventh prayer concedes that he knew of its execution and assented thereto. The same question arises, and the same rulings were made, as to the preference also given to Slagle & Co. by payment to them of $150, on account of a pre-existent debt, on the 29th of April, 1884, the very day on which the firrp failed. The plaintiff’s tenth and the defendant’s eighth prayer refer to this transaction. The former was properly granted, and the latter’ should have been rejected.

All that need be said as to the Court’s ruling upon the question of evidence is, that that part of the testimony of these partners in which they say that they had no intention to give a preference, either by the deed of the 24th, or the payment of the 29th of April, was inadmissible. Where the law imputes the intent from the acts done by a party, his testimony as to what his intention was in doing the act, cannot be received in evidence. This was expressly decided in the case of Ecker vs. McAllister already referred to.

The only remaining question in the case is that which relates to the payment to Slagle of the $1000 note which was secured by a mortgage on a market stall, executed in November, 1881, before this partnership was formed. In view of what, we have already decided, it is hardly possible that it will be necessary to raise this question on the new trial, and we therefore refrain from expressing any definite opinion upon it. All that need be said is that it is extremely doubtful whether such a transaction is in any way affected hy any of the provisions of this Article oí the Code. Our decision upon the other points requires a reversal of the judgment, and a new trial of the case.

(Decided 29th January, 1886.)

Judgment reversed, and neio trial awarded.