CHAPTER 9.

REMEDIES OF CREDITORS.

A. The Nature of the Partners' Liability to Third Persons.

Sec. 54. PARTNERS ARE JOINTLY LIABLE FOR FIRM INDEBTEDNESS. Partners are jointly liable upon contract debts. But for torts are jointly and severally liable.

It is frequently said that partners are jointly and severally liable for debts of the partnership, but this is not accurate. They are jointly liable, that is, all must be sued upon a partnership account. A creditor cannot select one partner to sue, but must join all known partners. The idea of several liability comes from the fact that each partner is liable for the whole amount of the debt in case his co-partners do not contribute to its payment, as where they are insolvent.

For acts of a tortious nature, the partners are jointly and severally liable.

The partnership act covers this point as follows: 58 "All partners are liable

(a) Jointly and severally for everything chargeable to the partnership under sections 13 and 14.

(b) Jointly for all other debts and obligations of the partnership, but any partner may enter into a separate obligation to perform a partnership contract."

58. Sec. 15.

"Sections 13 and 14," above referred to provide "Whereby any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership, or with the authority of his co-partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act.

"The partnership is bound to make good the loss:

(a) Where one partner acting in the scope of his apparent authority receives money or property of a third person and misapplies it; and

(b) Where the partnership in the course of its business receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership.'

It will be noticed that these quotations describe acts of a tortious character or breach of trust.

Sec. 55. PARTNER LIABLE IN TOTO. The partner may eventually be made liable for the entire firm indebtedness so far as the creditor is concerned.

We have noted that all the partners must be sued upon a firm indebtedness. Yet, after all, any partner may ultimately have to pay the firm indebtedness.

Example 13. M sells goods to firm of A, B and C trading as "A and Company." The debt being unpaid, M must sue “A, B and C, co-partners trading as A and Company." But if A and B are or become insolvent, and C remains solvent, C must pay the debt. Even if A and B are still solvent, M may push his rights against C, leaving C to obtain contribution from A and B.

See balance of chapter for discussion of rights of creditors.

B. Remedies of Creditors.

(a) Where no judicial proceedings are in progress to distribute assets.

Sec. 56. RIGHT OF FIRM CREDITOR AGAINST FIRM PROPERTY. A firm creditor has no rights upon the property of the firm except where he may have obtained same by judicial writ or by special contract. Then his rights against the firm property are governed by the same rules that govern the rights of secured and lien creditors against any debtor.

If A is indebted to M, that in itself gives M no rights against the general property of A. One must first obtain a mortgage, or the lien of a judgment or of an attachment proceeding, or a lien as bailee, or otherwise, before he can have rights against the property. Thus if M, a wholesale druggist, sells goods to A, a retail druggist, and takes back no mortgage, and retains no lien of any sort, he has no right against A's goods. A may sell them and mortgage them. Partnership debts are no different from individual debts in this regard.

If a partnership creditor has a mortgage or other contract lien or secures a judgment, his rights to enforce the same are governed by the same rules which apply when one's debtor is an individual or corporation so far as the nature of such rights is concerned. He may foreclose whatever mortgage he has, or he may execute his judgment by levy on the property of the partnership.

Sec. 57. RIGHT OF FIRM CREDITOR AGAINST INDIVIDUAL PROPERTY OF PARTNER. A creditor of a firm who has a judgment against the firm members may execute it by levy upon the partners' individual property.

It will be remembered that one sues a firm by suing the individual members who compose it, and that the resulting judgment is against such members individually. Being, then, against A, B and C (trading perhaps as A and Company), it may be executed by levying upon either the joint property of A, B and C, or upon any property belonging to any of them.

Example 14. M secures a judgment against A, B and C, partners, upon a partnership debt. The firm has assets of the value of $5,000, and A has an automobile worth $1,500 which is his separate property and used entirely for his personal purposes. M may direct the sheriff to seize and sell this automobile in satisfaction of the judgment.5

59

Sec. 58. PREFERENCE OF CREDITORS. By common law and where there are no judicial proceedings under statute to distribute assets among creditors, one creditor of a firm may be voluntarily preferred over others, or may secure a valid preference through legal proceedings.

Keeping in mind that we are discussing the rights of creditors where no proceedings are in progress to distribute assets, as in bankruptcy or other insolvency proceedings, one creditor may be preferred or may secure a preference through legal proceedings over other creditors.

Example 15. A, B and C, partners, owe M, N and O, $1,000. They have partnership assets of the value of 59. Stevens v. Perry, 113 Mass. 380.

$1,000. This $1,000 may be transferred to M in payment of his debt, or M, by diligence in pushing his claim may obtain a preference over N and 0.60

In the above example A, B and C have committed an act of bankruptcy, upon which a petition in bankruptcy may be based if acted upon within four months of its occurrence; and such preference may be set aside by a bankruptcy court if occurring within four months prior to the filing of the bankruptcy petition if M knew or had reasonable cause to know that a preference was intended.

In a bankruptcy court, or in a court of equity, where proceedings are in progress to distribute assets among creditors, the court having the assets and the creditors before it, equality of distribution is the rule; but in the above example we are not assuming such a state of affairs.

Sec. 59. RIGHT OF CREDITOR OF INDIVIDUAL PARTNER AGAINST FIRM ASSETS. A creditor of a member of a firm may by proper judicial proceedings have the partner's interest in the firm subjected to the payment of his debt.

One who secures a judgment against another may have levy made on that other's assets; if such debtor has an interest in a partnership that is an asset which the creditor is entitled to realize upon.

What does such asset consist of? The debtor's share in the partnership which he would have after the payment of debts and an accounting with the other partners. That share may be large or small, or non-existent.

Example 16. M secures a judgment against A; A is a member of the firm of A, B and C, A has an automobile not belonging to or used in the firm business. M has here two possible sources from which he may secure satisfaction 60. Richard v. Leville, 44 Nebr. 38, 62 N. W. 304.