Misconduct of a Co-Partner as a Ground for Refusal of Discharge in BankruptcySource: Columbia Law Review, Vol. 9, No. 4 (Apr., 1909), pp. 346-348Published by: Columbia Law Review Association, Inc.Stable URL: http://www.jstor.org/stable/1109365 .

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346 COLUMBIA LAW REVIEW.

MISCONDUCT OF A CO-PARTNER AS A GROUND FOR REFUSAL OF DISCHARGE IN BANKRUPTCY.-The authorities agree that, irrespective of personal inno- cence, every partner must answer in damages for the tort of a co-partner, committed in the course of the firm business.2 That third parties should thus be indemnified for injury caused by one's chosen associate in the con- duct of a common enterprise, is regarded as necessary and just.2 But when it is sought not to recover compensation, but to enforce some penalty or extraordinary remedy, only partners actually in fault are ordinarily held amenable. Such, of course, is the rule in criminal prosecutions,3 except by clear statutory provision to the contrary.4 So, too, a Fraudulent Debtors' Act has been construed to reach only the partner personally delinquent;6 likewise, a summary code remedy (including disbarment) for failure to pay over moneys collected as attorney.6 Similarly, where civil arrest is author- ized in an action against a defendant "guilty of fraud," process will not issue against a partner chargeable, as such, with constructive fraud only.7 In the same spirit, judges incline to treat the specified grounds for the harsh remedy of attachment as purely personal, and limit the writ to the separate property of the offending partner.' True, for breaches of the revenue laws in the course of the firm business, every member is held answerable, under statutes awarding multiple damages;9 but such statutes have been declared by the Supreme Court to be remedial, rather than penal, aiming to indemnify the government.10 Certainly if a civil statute author- izing enhanced damages is deemed primarily penal, it will be enforced only against an actual wrongdoer." In general, therefore, unless policy or legis- lative mandate plainly controls, the courts shrink from imputing liability by virtue of the partnership relation alone.

Whether a co-partner's conduct should serve to prevent a personally

1Burdick, Partn. (2nd Ed.) 210, et seq.; Eng. Partn. Act (1890) ? xo; Strang v. Bradner (x885) 114 U. S. 555; see 6 COLUMBIA LAW REVIEWV 264.

2Cf. William Draper Lewis, 9 COLUMBIA LAW REVIEW 128. This, it is conceived, is the substance of the various explanations offered; cf. Story, Partn. ? xo8; Shaw, C. J., in Locke v. Stearns (Mlass. 1840) r Met. 56o, 562; Stockwell v. U. S. (871) 13 Wall. 53I, 548; Trust etc. Co. v. Investment Co. (I901) 107 La. 251, 256. But see Warner v. Griswold (N. Y. 1832) 8 Wend. 665, 666; Nat'l. Bk. v. Temple (N. Y. 1870) 39 How. Pr. 432, 435.

'Barnett v. State (x875) 54 Ala. 579, 587; Acree v. Comm. (Ky. 1877) 13 Bush. 353; U. S. v. Cohn (1904) 128 Fed. 615, 623.

4Whittin v. State (i859) 37 MIiss. 379. 8Watson v. Hinchman (I879) 42 Mich. 27; see also In re Edward Benson (i88x)

I N. Y. Wk. Dig. 394. 'Porter v. Vance (Tenn. I885) I4 Lea 629. ?Nat'l Bk. v. Temple, (N. Y. 1870) 39 How. Pr. 432; (semible) Hathaway v. John-

son (1873) 55 N. Y. 93 (principal and agent); Stewart v. Levy (I868) 36 Cal. S59; McNeely v. Haynes (1877) 76 N. C. 122; contra, Townsend v. Bogart (N. Y. x860) Ix Abb. Pr. 355, followed in Coman v. Allen (I86x) 21 How. Pr. 114. The reasoning is that arrest in such cases is a survival of the inhumane practice of imprisonment for debt and is intended as punishment.. Distinguish cases where the order of arrest issues because of "the nature of the action" alone. N. Y. Code Civ. Pr. ? 549, subd. 2. Sherman v. Smith (N. Y. 1871) 42 How. Pr. i98 (action of deceit); cf. Ossmann v. Crowley (N. Y. x9o5) o10 App. Div. 597; Davids v. Bklyn. Hts. R. R. Co. (N. Y. 1905) I04 App. Div. 23, affd. (9go6) X82 N. Y. 526.

SBogart v. Dart (N. Y. I881) 25 Hun. 395, Hill v. Bell (1892) III Mo. 35 [firm property not attachable] Worthley v. Goodbar (i8go) 53 Ark. i, Jaffray v. Jennings (I894) ioi Mich. 515 [innocent partner's individual property not attachable].

'Att'y-Gen'l v. Burges (1726) Bunbury 223; U S. , . Thomasson (1866) 4 Biss. 99; Stockwell v. U. S., supra.

I?Stockwell v. U. S., supra; cf. Huntington v. Attrill (1892) I46 U. S. 657, 667.

"Williams v. Hendricks (x896) II5 Ala. 277.

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innocent partner's discharge in bankruptcy, depends, accordingly, on the nature of bankruptcy legislation. Three theories of the true object of such legislation have been advanced: (I) punishment of the fraudulent debtor; (2) equitable distribution of the bankrupt's assets among the creditors; (3) reinstatement of the unfortunate, honest debtor." Of these views, the first, dominant in the early stages," may be disregarded, as obsolete. The second makes the discharge of the bankrupt a subordinate feature, in the nature of a privilege, not to be lightly granted.4 Under the third, denial of a dis- charge savors of a penalty, and every doubt is therefore to be resolved in favor of the bankrupt." The act of I898 seems to have been framed upon the view last stated. It provided: ? I4b "the judge * * * shall dis- charge the applicant unless he has (I) committed an offence as herein [sec. 29] provided"-[of which fraudulent concealment of assets from the trustee (b), and making a false oath or account in relation to any proceed- ing in bankruptcy (c), were alone pertinent]; or (2) "with fraudulent intent to conceal his true financial condition and in contemplation of bank- ruptcy, concealed of failed to keep books of account * * *" Thus, if not coming within one of only three possible objections, the bankrupt must be discharged, no matter how unworthy,1" and the burden of proof (which must be "clear and convincing") lay on the parties opposing the applica- tion.l7 Naturally, therefore, a defalcating agent's failure to keep true books of account of a business under his care was held not to bar the innocent owner's discharge,"-a ruling later followed, though with reluctance."

The excessive leniency of the discharge feature of the act of I898 was from the start a subject of adverse comment,2 and this defect was an especial concern of the amendments of I903. "In contemplation of bankruptcy" and "fraudulent" (before "intent") were stricken from subd. b (2) of ?I4, and four new grounds for refusal of discharge, added: among them, "* * * unless the applicant * * * has (3) obtained property on credit from any person on a materially false statement in writing made to such person * * *" That a breach of this provision by a co-partner, acting in the scope of the partnership, but without the knowledge of the bankrupt, is, however, no ground for refusing the latter a discharge, has recently been declared by the Circuit Court of Appeals, Fifth Circuit, Shelby, J., dissenting, Hardie v. Swafford & Bros. Dry Goods Co. (90o8) I65 Fed. 588, following an earlier case in the Second Circuit.= This deci-

'Richard Brown, Journal of the Society of Comparative Legislation (I9oo) Vol. II. (N. S.) 252.

32 Bl. Corn. 471. 141t re Leslie (1903) x19 Fed. 406, 410; In re Seeley (1879) 21 Fed. Cas. 1007,

zoIo; In re Alvord (x9go) 135 Fed. 236, 237; In re Dresser (i905) 144 Fed. 318. "In re Collins (1907) 157 Fed. 20o, 122; In re Rosenfield (I868) 20 Fed. Cas. 1203;

In re Moore (I868) I7 Fed. Cas. 663; In re Hyman (X899) 97 Fed. i95, 197. 1sn re Howden (x190) iii Fed. 723; In re Thomas (1899) 92 Fed. 912; In re

Herman Boasberg (1899) i Am. B. R. 353, 356; In re Black (1899) 97 Fed. 493. "7In re Gaylord (9goS) 112 Fed. 668; In re Keefer (9go5) 135 Fed. 885; Int re

Logan (1900) oz02 Fed. 876; In re Blaloca (19o2) zI8 Fed. 679. "1In re Hyman (1899) 97 Fed. I95. "in re Myers (900o) io5 Fed. 353; cf. In re Schultz (1901) o09 Fed. 264. 20i2 Harvard L. R. 272; In re Howden, supra, at 723. "In re Dresser (1905) 13 Am. B. R. 6I6; referee's report confirmed (1905) I44

Fed. 318, aff'd (I906) 145 Fed. 1021.

NOTES. 347

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COLUMBIA LAW REVIEW. COLUMBIA LAW REVIEW.

sion is in line with the general disposition against imputing misconduct to a co-partner and with the apparent purpose of the act of 1898 to favor the release of the honest bankrupt. On the other hand, it may be urged that the minority view conforms with the literal terms of the subdivision, since the bankrupt, as a member of the firm benefited, has in fact "obtained property"; that words specifying guilty intent are absent;2 and that the excision of "by him" after "made" from the original draft of the subdivision indicates an intention to let in the principles of agency.3 Furthermore, because of the difficulty of proving actual participation, the majority inter- pretation renders the provision almost nugatory, in view of the general transaction of business through agents.4 The minority's position involves the assumption, however, that in enacting the amendments of I903 Congress abandoned the penalty theory of the discharge. The substitution of the theory-on which the English act is based-that public policy is in the long run best served by making the interests of creditors paramount, and so treating a discharge as an exceptional privilege, seems altogether desirable." It is to be feared, however, that Congress failed sufficiently to show such a change of theory by the amendments of I903.

STATE AUTHORITY OVER INTERSTATE COMaMERCE.-The Supreme Court, two justices dissenting, in a recent case, Mo. Pac. Ry. Co. v. Larrabee Flour Mills Co. (I909) 29 Sup. Ct. Rep. 214, sustained the decision of a State court directing an interstate carrier to supply cars to a shipper upon his private siding and to transfer them to a connecting carrier. The order was issued to prevent unjust discrimination. The majority held, first, that the powers of Congress and the State upon this subject are concurrent, and second, that the Interstate Commerce Act did not oust the State of its power. The minority, disputing both grounds, also denied the power of the State court on the theory that its judgment was a regulation of a trans- action within the exclusive power of Congress. Inasmuch as the order of the court would control transportation between the starting point and the point of destination, the subject hardly appears to be one over which the concurrent power of the State might be exercised as a mere incident of commerce, or, despite the language of the majority, one indirectly affecting commerce itself.1 The case, however, is reconcilable wih the more logical demarcation between subjects requiring uniform legislation and those per- mitting of local control.2 Siding facilities like connections between inter- secting carriers,3 may be adequately regulated by local legislation without

"Accordingly, it was held in Matter of Petersen (1903) Io Am. B. R. 355 and In re Gilpin (i9o8) 60o Fed. 171 that the statement need only be false in fact and not knowingly false; contra, In re Collins (1907) 157 Fed. 120. These cases are dis- tinguishable from the principal case on the ground that in all of them the bankrupt knew a statement was being made and might be considered in personal fault for failure to insure accuracy.

2See In re Dresser (I9os) 13 Am. B. R. 6I6, 620. 2Cf. Attorney-General v. Siddon (1830) I Tyrwhatt 41, 49. "See Collier (7th Ed.) Bankruptcy, x8o; Bankruptcy A Commercial Regulation,

i5 Harvard L. R. 829. 1See 9 COLUMBIA LAw REVIEw 66.

2Cooley v. Board of Wardens (851) 12 How. 299; Bowman v. Chic. etc. Ry. Co. (I888) I25 U. S. 465; N. Y., N. H. R. R. Co. v. N. Y. (1897) x65 U. S. 628; Brig James Gray v. Ship John Frazer (1858) 21 How. I84.

3Wis. etc. R. R. Co. v. Jacobson (g9oo) I79 U. S. 287; cf. Smith v. Alabama (I888) x24 U. S. 465.

sion is in line with the general disposition against imputing misconduct to a co-partner and with the apparent purpose of the act of 1898 to favor the release of the honest bankrupt. On the other hand, it may be urged that the minority view conforms with the literal terms of the subdivision, since the bankrupt, as a member of the firm benefited, has in fact "obtained property"; that words specifying guilty intent are absent;2 and that the excision of "by him" after "made" from the original draft of the subdivision indicates an intention to let in the principles of agency.3 Furthermore, because of the difficulty of proving actual participation, the majority inter- pretation renders the provision almost nugatory, in view of the general transaction of business through agents.4 The minority's position involves the assumption, however, that in enacting the amendments of I903 Congress abandoned the penalty theory of the discharge. The substitution of the theory-on which the English act is based-that public policy is in the long run best served by making the interests of creditors paramount, and so treating a discharge as an exceptional privilege, seems altogether desirable." It is to be feared, however, that Congress failed sufficiently to show such a change of theory by the amendments of I903.

STATE AUTHORITY OVER INTERSTATE COMaMERCE.-The Supreme Court, two justices dissenting, in a recent case, Mo. Pac. Ry. Co. v. Larrabee Flour Mills Co. (I909) 29 Sup. Ct. Rep. 214, sustained the decision of a State court directing an interstate carrier to supply cars to a shipper upon his private siding and to transfer them to a connecting carrier. The order was issued to prevent unjust discrimination. The majority held, first, that the powers of Congress and the State upon this subject are concurrent, and second, that the Interstate Commerce Act did not oust the State of its power. The minority, disputing both grounds, also denied the power of the State court on the theory that its judgment was a regulation of a trans- action within the exclusive power of Congress. Inasmuch as the order of the court would control transportation between the starting point and the point of destination, the subject hardly appears to be one over which the concurrent power of the State might be exercised as a mere incident of commerce, or, despite the language of the majority, one indirectly affecting commerce itself.1 The case, however, is reconcilable wih the more logical demarcation between subjects requiring uniform legislation and those per- mitting of local control.2 Siding facilities like connections between inter- secting carriers,3 may be adequately regulated by local legislation without

"Accordingly, it was held in Matter of Petersen (1903) Io Am. B. R. 355 and In re Gilpin (i9o8) 60o Fed. 171 that the statement need only be false in fact and not knowingly false; contra, In re Collins (1907) 157 Fed. 120. These cases are dis- tinguishable from the principal case on the ground that in all of them the bankrupt knew a statement was being made and might be considered in personal fault for failure to insure accuracy.

2See In re Dresser (I9os) 13 Am. B. R. 6I6, 620. 2Cf. Attorney-General v. Siddon (1830) I Tyrwhatt 41, 49. "See Collier (7th Ed.) Bankruptcy, x8o; Bankruptcy A Commercial Regulation,

i5 Harvard L. R. 829. 1See 9 COLUMBIA LAw REVIEw 66.

2Cooley v. Board of Wardens (851) 12 How. 299; Bowman v. Chic. etc. Ry. Co. (I888) I25 U. S. 465; N. Y., N. H. R. R. Co. v. N. Y. (1897) x65 U. S. 628; Brig James Gray v. Ship John Frazer (1858) 21 How. I84.

3Wis. etc. R. R. Co. v. Jacobson (g9oo) I79 U. S. 287; cf. Smith v. Alabama (I888) x24 U. S. 465.

348 348

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