CHAPTER 68

THE PARTNERSHIP AGREEMENT

§ 572. Agreement essential.

§ 573. Form required.

§ 574. Articles of Partnership.

§ 575. Competency of parties to be partners.

§ 576. Consideration.

§ 577. Legality of object.

§ § 572, 573, 574. (Partnerships, Secs. 13, 14, 15.) Agreement and form.

(Note: The partnership agreement may be oral or written. If the oral agreement is for a partnership for more than one year it is unenforceable under the statute of frauds. The written agreement is usually referred to as "Articles of Partnership.". Obviously such articles are highly desirable to set forth the rights, liabilities, limitations, etc. Probably in many partnerships the partner knows clearly to what extent he is to share in profits, but is unaware of the proportion to which he must contribute to capital loss if loss occurs, and would probably be greatly astonished if advised of his liability position in that regard.)

Case 574. Harrill v. Davis, 168 Fed. 187, 22 L. R. A. (N. S.) 1152.

Facts: Suit by Harrill, as trustee of Western Investment Company, against Davis and three others, as partners under the name of "Coweta Cotton & Milling Company." Defendants deny personal liability, and assert that the company was a corporation. "The patent and indisputable facts in this case are that the four defendants associated themselves together, and from June, 1902, to December 22, 1902, actively engaged in purchasing lumber, material and labor of the plaintiff, and in constructing a cotton gin under the name "The Coweta Cot

ton & Milling Company,' and that during this time they incurred more than $4,700 of the indebtedness of $5,145.48, for which this action was brought. On December 22, 1902, they made their first real attempt to incorporate, and for the first time took on the color or appearance of a corporation. On that day they filed articles of incorporation with the clerk of the Court of Appeals, but they never filed any duplicate of them with the clerk of the judicial district in which their place of business was located, as required by the statutes in order to constitute them a legal corporation and to authorize them to do business as such [under the Arkansas laws]." (From the opinion of Judge Sanborn.)

Point Involved: That personal liability, as of partners, will attach where parties associate themselves under a fictitious name but do not at least constitute themselves a de facto corporation. Of the procedure necessary in order to establish a de facto corporation.

SANBORN, C. J.: The general rule is that parties who associate themselves together and actively engage in business for profit under any name are liable as partners for the debts they incur under that name. It is an exception to this rule that such associates may escape individual liability for such debts by a compliance with incorporation laws or by a real attempt to comply with them, which gives the color of a legal corporation, and by the user of the franchise of such a corporation in the honest belief that it is duly incorporated. When the fact appears, as it does in the case at bar, by indisputable evidence that parties associated and knowingly incurred liabilities under a given name, the legal presumption is that they are governed by the general rule, and the burden is upon them to prove that they fall under some exception to it. Owen v. Shepard, 8 C. C. A. 244, 19 U. S. App. 336, 59 Fed. 746; Wechselberg v. Flour City Nat. Bank, 26 L. R. A. 470, 12 C. C. A. 56, 60, 61, 24 U. S. App. 308, 64 Fed. 90, 94; Clark v. Jones, 87 Ala. 474, 6 So. 362. "Counsel for the defendants argue with much force

and persuasiveness that they escape liability because they became a corporation de facto, although they concede that they never became a corporation de jure; and in support of this position they cite, among other cases: (Citing Cases.) But in every one of these authorities articles of incorporation had been filed under a general enabling act, or a charter had been issued, and there had been a user of the franchise of the supposed corporation which had been colorably created by the filing of the articles or the issue of the charter before the indebtedness in question was created, while nothing of this nature had been done before the debt for the $4,700, which we are now considering, was incurred. The authorities which have been recited rest upon the proposition that where parties procure a charter or file articles of association under a general law, thereby secure the color of a legal incorporation, believe that they are a corporation, and use the supposed franchise of the corporation in good faith, and third parties deal with them as a corporation, they become a corporation de facto and exempt from individual liability to such third parties, although there are unknown defects in the proceedings for their incorporation. The statement of Morawetz on Private Corporations, Vol. 2, at Sec. 748, upon which counsel seem to rely, that 'if an association assumes to enter into a contract in a corporate capacity, and the party dealing with the association contracts with it as if it were a corporation, the individual members of such association cannot be charged as parties to the contract, either severally or jointly or as partners. This is equally true whether the association was in fact a corporation or not, and whether the contract with the association in its corporate capacity was authorized by the legislature or prohibited by law, and illegal'-is too broad to be sound. Parties who actively engage in business for profit under the name and pretense of a corporation which they know neither exists nor has any color of existence may not escape individual liability because strangers are led by their pretense to contract with their pretended entity as a cor

poration. In such cases they act as the agents of a principal that they know does not exist, and they are liable under a familiar rule, because there is no responsible principal. 2 Kent, Com. 14th ed. 630; Queen City Furniture & Carpet Co. v. Crawford, 127 Mo. 356, 364, 30 S. W. 163."

Question 574: (1) What is a de facto corporation? (2) Why was there none in this case?

(3)

State the facts in the case above, whether the parties were here individually liable and why.

§ 575. (Partnerships, Sec. 16.) Competency of parties to be partners.

(See Cases in Contracts, supra, as to general capacity of minors, married women and insane persons to contract.)

Case 575. Jennings v. Stannus, 191 Fed. 347.

Facts: For the purpose of claiming his exemptions out of the partnership property, William A. Stannus of the firm of Stannus & Son, bankrupt (there being no exemption allowed to partners out of partnership property), shows that the son is a minor, and contends that this avoids the partnership.

"This disposes of the principal question. It remains to determine whether the son being a minor avoids the partnership relations. An infant's agreement to enter into a co-partnership, like most other contractual obligations of his, is not void, but voidable only, and that at his instance or within a reasonable time after arriving of age. It is only such agreements as are not possible to be regarded as beneficial to him which are null from the beginning. Partnership obligations will not, however, bind him personally, but are valid against the firm, and are entitled to payment out of the partnership assets, regardless of the minority of one of its members. These principles are well settled by uniform trend of authority; Sparman v. Keim, 83 N. Y. 245; Dunton v. Brown, 31

Mich. 182; Moley v. Brine, 120 Mass. 324; Page v. Morse, 128 Mass. 99; Gay v. Johnson, 32 N. H. 167; Bush et al. v. Linthicum, 59 Md. 344; Ex parte Taylor, 44 Eng. Reprint, 388; Goode & Benmon v. Harrison, 105 Eng. Reprint, 1147; Bates, Law of Partnership, Vol. 1, §§ 142148.

"It follows that the partnership, where a member of the firm is a minor, continues in all respects valid until the minor has declared his privilege and has withdrawn from the firm. So that in the present case, the son having in no way, so far as the record discloses, declared his withdrawal, the partnership of William A. Stannus & Son continues valid and undissolved, except for the assignment in bankruptcy. Such being the case, the elder Stannus cannot claim his exemption out of the partnership property of William A. Stannus & Son."

Question 575: If a minor is a member of a partnership may he withdraw therefrom at any time and demand an accounting? Is his partnership agreement void or voidable? Are partnership obligations incurred while he was a member binding on him personally? Are such obligations binding on the assets of the firm?

Case 576. Adams v. Beall, 67 Md. 53.

Facts: The facts are stated in the opinion.

Point Involved: The right of an infant partner to withdraw from the partnership and recover his capital.

ROBINSON, J.: "The appellee, while a minor, paid to the appellant $2,900, as a consideration for being admitted as a partner in the appellant's business. The partnership continued for more than a year, and, finding it unprofitable, the appellee, without formally dissolving the partnership, withdrew from the business. The question in the case is whether the appellee is entitled to recover of the appellant the money thus paid. His right to disaffirm the partnership contract, and to avoid all liabilities under it, including the partnership debts, is not denied. Being an infant when the contract was made, this is a privilege to which for his protection he is en