LECTURE AMERICAN CORRESPONDENCE SC iOOL OF LAW PARTNERSHIP BY MAJ. CHARLES R EVANS >ii Dean of the Law Department of the University of Chattanooga. AMERICAN COKRESroNDKNVi: SCHOOL OF LAW CHICAGO, U. S. A. T Ev 153 COPYRIGHT 1908 BV AMERICAN CORRESPONDENCE SCHOOL OK LAW CHICAGO - SKKTCH OF .MA.IUK CHARLES R. EVANS. Charles H. i-;\an.s \\as born in Lancaster, Grant County, Wis- consin, on April 4-th, 1863. After a thorough preparatory train- ing he entered the University of Wisconsin, from which he was graduated \sith tin- degree of A. B. in 1881. He then engaged in the study of luw and was admitted to the bar of his native >tate in 1884 and in the following year located at Chattanooga, Tennessee. He \s a> elected City Attorney in 1887 and 1888 and again in 1891, and in 1892 was the Republican candidate* for .Judge of the .Judicial Circuit in which Chattanooga is located. He was (oimni.vsioiier of registration in 1894 and 1895, and County Attorney of Hamilton County, Tennessee, from 1894 to 1898. At the outbreak of the Spanish Am. man war he re- signed tin- latter office to accept a commission as Captain in the (jth United States Volunteer Infantry tendered him by President M< Kinley. He served with his command first at Camp Thomas. Georgia, and afterwards in Porto Rico. On January 7, 1899, he was promoted to the rank of Major. While in the sen-ice Major Kvans became familiar with military law and served in various positions on numerous courts-martial. While the island of Porto Kico was under martial law he was one of the military judges of the province of Arecibo. He was honorably mustered out with his command at Savannah, March 15, 1899. Return- ing to Chattanooga* Major Evans resumed the practice of law and wa> aUo elected to a chair in the Law Department of Grant University, now the University of Chattanooga. In 1900 he wa> a candidate for presidential elector-at-large on tin- McKin- ley and Roosevelt ticket, 'and made an extensive can\a>s of his state. In 1901 he Ix-came Dean of the Law Department of the Uni\er>ity of Chattanooga and under his .supervision this school of law has become one cf the largest and Ix-st in the Southern States, drawing many students from all the states of the nation and numbers from abroad. Major Evans l:-:th as a lawyer and as a lectuivr on law, ranks among the first in tie South and has U-en engaged in many im- portant legal battles in the state and federal courts. In 1907 liis filmn muter conferred UJXMI him the degree of A. M. He is a member of the American Bar Association ami of the Naval and Military Order of the Spanish-American War. PARTNERSHIP. I. Origin of the Law of Partnership. The body of rules which constitutes the modern law of partnership is a growth having its sources in the Common Law of England, the Civil Law of Rome and the Law Merchant. Its beginnings are older than re- corded history and traces of it are found among the most savage of tribes. Far beyond the confines of civiliza- tion, among those who lead the rudest lives, such as hunters and trappers, its elemental principals are vaguely recognized and respected. A faint conception is found in forms of life lower than that of man, as when beasts of prey combine their courage, cunning, strength and instinct to share the dangers and rewards of the chase in order that these fierce partners of the wild may live and thrive. With the advance of civiliza- tion and the higher specialization of modern life, the law of partnership has been amplified and perfected into that system of rules which govern the unincorporated busi- ness associations of today. In England and in several of the American States the law of partnership has been -Codified. II. Partnership Defined. Partnership is a legal relatinu. based njion the express or implied contract of t:co or more competent person* to unite their projierttf. labor or xkill in some lawful busi- ncsft carried on on all or anif of them on behalf of all of 8 American Correspondence School of Law. them for their joint profit. There are many definitions of "partnership," but so unsatisfactory are they, that one able writer on this subject gives no definition in his work, and contents himself with pointing out the lead- ing ideas involved in the term. A partnership is often called a contract, but this is inaccurate. Its inception is in a contract, but when once established it becomes a relationship or a status, just as marriage is a status growing out of a contract. This contract out of which the status of partnership arises is a common law contract and is subject to all the general rules affecting such con- tracts, such as the necessity of competent parties, con- sideration, legality of object, the effect of infancy, coverture, insanity, drunkenness, fraud, duress, the statute of frauds and the like. With all these principles the student of this subject is presumed to be familiar and the limits of this review lecture preclude any exhaustive treatise of them. The firmer the stu- dent's grasp of the law common to all forms of contracts the more he knows of partnership law and the more easily he comprehends those principles especially appli- cable to this subject. III. How Partnership Is Created. To create a partnership two things must concur: 1. There must be a valid agreement to enter into it. 2. The agreement must be executed, or acted upon. By a valid agreement is meant that the partnership contract, or articles of agreement between the parties, must have the ordinary essentials of a binding legal contract, and that the partnership should have a legal object. A partnership can be created only by an agreement between I'tirtnt-rxhiji. <) the parties, either express or implied, and is never cre- ated by operation of law. This principle known as delectus jnrtti the firm, irrespective of the actual intent of the parties, and that it was immaterial whether they were partners inter se or not. The reason assigned for this harsh rule, was that "if any one takes part of the profit, he takes a part of that fund upon which the creditor of the trader relies for repayment." The modern doctrine which now prevails in England and which has l>cen followed l>y nearly all of the American states, holds, that persons are not liable to third parties as partners, although t hex- share profits, unless, (a) They are really parties inter se, or, (b) Have held themselves out as partners under sueli circumstances as to estop them from denying it. This 16 American Correspondence School of Law. rule dates from the decision in 1860 by the English House of Lords, of the leading case of Cox v. Hickman (8 H. L. Cas. 268). This decision shattered the old rule. "It put an end to two notions which had there- tofore been regarded as fundamental: First, that third persons may hold to the liability of partners those who, in fact, are not partners, merely because some other relation exists between them ; and, second, that participa- tion in the profits of a business is conclusive of a part- nership." The rule still prevails that participation in the profits of a business raises a presumption of the existence of a partnership, and prima facie establishes the fact, but this presumption is no longer conclusive and may now be rebutted. If the parties expressly intended to become partners, their intention usually governs, but unless their contract and the relation assumed constitutes a partnership, the mere fact that they intended a partnership or called it so, will not answer. Where the parties allege that they did not intend to become partners the question is more complicated. While the general rule is stated to be that there can be no part- nership between the parties if they did not intend one, yet if the legal effect of the agreement between them is to constitute a partnership, it will be so held, and further, if a person though not a partner, conducts himself to- ward third persons as to reasonably induce them to rely upon him as a partner, he will be estopped from denying his liability as a partner. This is said to be a partner- ship as to third persons, or a quasi-partnership, to dis- tinguish it from a true partnership. This holding oneself out to be a partner making himself liable as such may result from (a) His own direct act or declara- tion, (b) He may be represented as an actual member 17 by the partners with his consent, (c) Or he may be held out by the other partners with his knowledge and with- out his prohibition. In all these cues his liability is the same, toward all persons who deal with the firm on the credit of Ins name. It would therefore seem that the true test of partner- ship inter -sr, is not profit sharing, nor mutual agency, (both attributes of true partnerships), but the inten- tion of the parties, as gathered from a construction of the contract they have made. If the thing they have done constitutes a partnership by construction of law, they are ipso facto partners, and an express stipulation that they did not intend to form a partnership, simply shows that they have mistaken the legal effect of the agreement entered into. It sometimes happens that a supposed corporation has been defectively organized. The question then arises, are the members of such a corporation to receive the pro- tection of the corporation laws against individual lia- bility for the debts of such a concern or are they to be held liable as partners in a linn!' The authorities are not in harmony. Some hold them liable as partners in every case in which the corporation fails and others deny- ing that they are partners if a corporation was intended. Professor Mecham states the true test of determining their status to be whether or not a corporation was ] ble to the parties. If it was not, as in the absence of legislative authority, then the parties are liable as part- ners; but if incorporation was possible and was honest 1\ attempted in good faith, then the parties are not part- ners, as they may be regarded as having formed a cor- poration dc facto. 18 American Correspondence School of Laic. IX. The Capital of the Firm. So far we have treated of the formation of a partner- ship. We will now consider the incidents and principles which regulate the partnership during its existence. The capital of a firm is the aggregate of the amounts to be contributed by the partners as the basis of begin- ning or continuing the partnership business. The con- tributions may be money or any other kind of property in which a joint ownership may be had and which can be reached by creditors, and in whatever shape contrib- uted it becomes at once the property of the firm, each partner having a joint interest in the whole, but no separate interest in any particular part, and where profits are to be divided in proportion to capital, neither party can increase or diminish his share with- out the consent of the other. Partnership capital is partnership property, but the two terms "partnership capital" and "partnership property" must not be con- fused. Partnership property includes everything be- longing to the firm, and its amount may vary from day to day, while the partnership capital is a sum fixed by the agreement of the partners, and does not vary although it may be impaired by losses. Upon dissolu- tion of the firm, the capital is to be returned to the part- ners contributing it, in the proportion in which it was contributed. Where there is nothing to show the amount, the various contributions will be presumed to have been equal. It is a well settled principle of law that only a person natural or artificial (corporation), that is a legal entity, can be vested with the title to real estate. As a firm is not a legal person it can not take title to real property in | <) the firm name. Where a deed is made to a partnership in its firm mum-, and such firm name contains the indi- vidual names of one or more of tin- partners, the legal title will vest in such of the partners as are named in the firm name, and therefore in the deed, and in them only. The effect is that of a resulting trust for the partner- ship and the property is deemed partnership property, and is subject to all the incidents thereof. Where real property is so held, a purchaser from the holder of the legal title, without notice of the partnership, acquires a good title. The firm real estate in the name of a deceased partner goes to the heir in trust for the settlement of partnership debts, and equity will com- pel the conveyance of the legal title to the surviving partner for the settlement of the firm business. The general rule in the United States is that where real estate forms any part of the partnership property it is to be treated as such, though the firm consider it as personalty. lint in equity it will be treated as personal pro|x?rty to meet the debts of the partnership and wind up the busi- ness, and after that as realty. X. Title to Firm Pro pert if. A partnership, as such, may acquire, hold, and trans- fer personal property and contract in reference thereto in its firm name. The partners are co-owners and co- proprietors of the firm property. The partners are neither tenants in common nor joint-tenants, although an estate in partnership has many of the characteristics of estates in common and in joint tenancy. A partner's interest in the firm property simply cntitVs him to a given proportion of what remains after UK firm d- 20 American Correspondence School of Law. are paid. This estate in partnership is a modified form of joint-tenancy and is marked by the following charac- teristics: 1. If a separate execution issues it covers only the debtor's interest in the firm, and an accounting must be had to determine his interest. 2. Upon the death of a partner, the surviving partner alone can wind up the business, and the personal representative's rights are simply to compel him to do so. 3. If a partner sells his interest to his co-partner, accounts standing against him on the books are extinguished, as they are not debts but items of the general account. The partner cannot as- sign, sell or mortgage any portion of the firm property as his own share, but may transfer his interest in the whole business, and such sale works a dissolution of the partnership, and upon settling the business the interest of the assignee is determined. 4. In the absence of agreement the profits are divided equally, no matter how the property was contributed. Losses are to be borne in the same proportion. But this rule does not apply to the division of capital as has been shown before. As a general rule the members of a firm are not enti- tled to statutory exemptions out of their share of firm property, as an exemption is an individual and not a firm privilege, although some states provide that this may be done. XI. Firm Name. It is not absolutely essential to a partnership that it should have a firm name, but its convenience is so great that most partnerships adopt a name under which the business is transacted. This firm name may include the names of all the partners or any one or more of them or it may be a purely fanciful one, changeable at 21 pleasure. Any name may be adopted, except one pur- porting to be a corporate name, or which has been used by another person, firm or company, and has become associated with and appropriated to their business. Some states prohibit the use of the name of any one not a partner, or the suffix "& Co.," unless such suffix stands for an actual partner or partners, who are not otherwise named. The name of the firm if of value may be treated as an asset and disposed of as such. XII. Good icill. The good-will is the favor and patronage which the firm has won by fair dealing from the public and the probability that it will continue. It has sueh a value that it is entitled to be classified as firm property. As a rule it belongs to the business and not to the place, except in cases of hotels, theaters and the like. It does not pass with a sale of the stoek but does pass with the sale of the business and upon dissolution is an asset to be accounted for like other property. XIII. Implied P triers of Part tiers. As between themselves parties becoming partners may limit by agreement the powers to l>e exercised by indi- vidual partners, but in the absence of such agreement, or in dealing with third persons who have no notice of the limitations imposed, each partner implicdly pxs certain usual and ordinary powers in dealing with the firm business and property. Every partner is implicdly the general agent of the firm in all matters connected with the firm's business. The authority of a partner to 2 American Correspondence School of Law. bind the firm in dealing with third parties, is derived in two ways: 1. It may be a real authority derived from the articles of co-partnership, or from the nature of the business in the absence of articles. 2. It may be the apparent authority derived from the nature of the busi- ness, though actually restricted by the partnership articles. These implied powers of a partner are limited to those acts within the usual and ordinary scope of the firm's business. He has no implied power to bind his firm out- side the scope of the business as usually carried on. A partner has implied power to bind his firm by appoint- ing agents, engaging servants, rendering accounts, re- ceiving notice, making purchases, accepting payments, selling chattels, receiving bills in payment of firm debts, making and accepting tenders, and in case of trading partnerships, by borrowing money necessary to carry on partnership business, making and giving firm paper, mortgaging and pledging personal property, and ac- cepting and indorsing paper in firm name. A partner may sue and defend suits in the firm name, but must in- demnify the other partners if he acts without their con- sent. He has no implied power to submit a controversy to arbitration, confess a judgment, make an assignment for the benefit of creditors, make a guaranty, or execute a deed, mortgage or lease of realty, or to bind the firm by a sealed instrument, except a release. In the management of the internal affairs of a part- nership and conducting its business, a majority of the partners have the right to control as against the minorit) r but this does not authorize them to take up a new kind of business, or change the nature of the business. XIV. Rights and Duties of Partners. Partnership being a confidential relation, partners are bound to observe the highest degree of good faith to- ward each other. Hence a partner can never lawfully prefer his own interest to that of the firm. A partner will not be permitted to obtain 'for himself profits or benefits arising from a transaction concerning firm in- terest. "Good faith requires that a partner shall not obtain a private advantage at the expense of the firm. He is bound in all transactions affecting the partnership, to do his best for the common body, and to share with his co-partners any benefit which he may have obtained from other people, and in which the firm is, in honor and conscience, entitled to participate." In Latta v. Kil- bourn, 150 U. S. 524, 541, Mr. Justice Jackson, speak- ing for the court, said that "it is well settled that one partner cannot, directly or indirectly, use partnership assets for his own benefit; that he cannot, in conducting the business of a partnership, take any profit clandes- tinely for himself; that he cannot carry on the business of the partnership for his private advantage; that he cannot carry on another business in competition or rivalry with that of his firm, thereby depriving it of the benefit of his time, skill and fidelity, without being ac- countable to his co-partners for any profit that may ac- crue to him therefrom; that he cannot l>e permitted to secure for himself that which it is his duty to obtain, if at all, for the firm of which he is a member; nor can he avail himself of knov ledge or information which may be properly regarded as the property of the partnership, in the sense that it is available or useful to the firm for any purpose within the scope of the partnership busi- ness." 24 American Correspondence School of Law. It is the right of each partner to share in the manage- ment of the business, unless otherwise agreed upon. The books and accounts are to be accessible to the partners alike. The partners are not entitled to compensation for services rendered the firm, other than their share of the profits, unless an agreement to that effect is ex- pressly or impliedly agreed upon. XV. Liability of Partners. Partnership contracts at law, as distinguished from equity, are considered joint, and are neither several, nor joint and several. Hence in suits against the firm all the partners should be joined unless out of the juris- diction or bankrupt. A judgment against one partner on a firm obligation releases the other partners, as it merges the joint liability in the judgment, but in a number of the states the statutes tend to make the joint action both joint and several. Apparently opposed to the principle of the common law that partnership obliga- tions are joint is the further principle that each partner is responsible in solido for all the debts of the firm. The action to establish the liability is joint, but the liability itself is several. Hence each partner in a general part- nership is personally and individually liable for the en- tire firm debt, however arising. A judgment against the firm may be satisfied out of one or more of the part- ners' individual property. Such burdened partner may enforce contribution against his co-partners. All the members of the firm are liable for the torts of one member: 1. When they authorize it or in any way joined in its commission; 2. When they have adopted it, either expressly or by retaining the benefits thereof; and :\, When it was committed by a partner while acting in the ordinary scope- of the partnership business, and as a part of his employment. The linn is also liable for all negligent aets of its sen ants and agents, as are all other principals. But for tortious or criminal acts of a partner, agent or servant, without the scope of the business or employment, the firm is not liable. In eases of tort, the liability of the firm is joint and several, and the action may be brought against one, or more or all. XVI. Actions l>n and Af^niimt the Finn. A partnership, not being recognized in law as a per- son, cannot sue or be sued in the firm name. Actions upon firm liabilities or demands must be brought by or against the individual partners, except in those states where the statutes authorize such suits in the firm name . In actions by the firm, all the partners must join as plaintiffs, except: 1. Dormant and nominal partners arc proper, but not necessary, parties plaintiff. 2. Where a contract is under seal, only those parties named therein can sue. 3. A partner may and sometimes must sue alone on contracts made in his name. 4. When the con- tract is a negotiable instrument, only the parties named in the instrument can sue thereon. In actions upon a firm liability, all the partners should be joined as defendants except: 1. Dormant and nomi- nal parties are proper, but not necessary parties defend- ant. 2. Under statutes making partnership obligations joint and several, all or any of the parties may he sued. 3. In an action for a firm tort, the partners may IK* sued jointly or severally. 4. When a contract is made in the name of one partner, such partner may or must IK- 26 American Correspondence School of Law. sued alone in the same cases that any agent may or must be sued alone upon a contract made by him for his prin- cipal. XVII. Actions Between Partners. No action at law lies between partners to enforce an obligation between the firm and a partner except: 1. Where the partnership was for a single completed trans- action. 2. Where there is but a single unadjusted item of accounts. 3. Where the action is to recover a final balance after termination of the partnership. Nor will an action at law lie between two firms with a common member. Partners may of course sue each other in regard to matters unconnected with the firm as freely as other in- dividuals. As a general rule, the remedy between partners, until final settlement of accounts, is exclusively in equity, and in the granting of equitable remedies in suits between partners the ordinary considerations govern. Equity courts will also grant injunctions to protect a partner against injurious acts of his co-partners, either before or pending or after dissolution of the partnership. XVIII. Dissolution of Partnership. A partnership may be dissolved in three ways: First, by operation of law. Second, by act of parties. Third, by decree of court. A partnership is dissolved by operation of law upon the happening of any of the following events: 1. Death 27 of partner. 2. Insolvency or bankruptcy of partner or linn. .*{. Marriage of feme .vo/r partner, except where her disabilities have been removed by statute. 4. Events rendering continuance of partnership illegal, such as the enactment of a law prohibiting the sale of intoxicating liquor, where previously a legally licensed trade. A partnership may be dissolved by the act of some or all of the partners, in the following cases: 1. Where the stipulated term has expired, or the object of the part- nership has been accomplished. 2.. Where the partners mutually agree to a dissolution. .'J. Where one partner gives notice of dissolution. 4. Where there is a change in membership, o. Where one partner's share has been transferred. A partnership will be dissolved by decree of a court of equity, where sufficient cause is shown. Fraud in the formation of the partnership, insanity of a partner, hopelessness of success and misconduct of a partner are typical grounds for the granting of such decree. The proper method of exercising the right to dissolve a partnership by the act of one or all the partners is, by notice to that effect, to the other partners, to creditors of the firm and to third persons. Notice is necessary in all cases except death of a partner. Actual notice should be given creditors and notice by publication to other per- sons. After dissolution, a partner's authority to bind his co-partner is limited to acts nccrssary or proper for the winding up of the partnership a flairs. Hy mutual agreement, the partners may delegate exclusive author- ity to one or more of their nnmlxr to wind up and set- tle the firm's affairs. I'pon the death of a partner, the surviving partner or partners have the exclusive right of 28 American Correspondence School of Law. possession and control of the joint property for the pur- pose of winding up the partnership business, and may do any act necessary or proper for the purpose. XIX. The Partners' Equitable Lien. The partners have the right to have the assets of the firm applied to pay firm debts, and this is called or amounts to an equitable lien on the partnership property before or after dissolution to have such property or as- sets applied to firm liabilities, and a like lien exists to have the surplus assets paid to themselves in proper pro- portion. This lien of each partner exists against all other partners or persons claiming through them as executors, creditors, assignees and the like, and extends to all sorts of firm property. XX. Winding up of a Partnership. Solvent p'artners may voluntarily close up their busi- ness, and insolvent partners, when they cannot agree, or conflicting claims arise must resort to a court of equity. In general the method of a partnership accounting is as follows : 1. Ascertain how the firm stands toward all persons not partners. 2. Ascertain what each partner is entitled to charge in account with his co-partners, including (a) what each has brought in, whether as capital or advances; (b) what c?.ch should have brought in but has not; (c) what each has taken out more than the others. 3. Apportion profits to l)e divided, or losses to be made up, and ascertain what each lias to pay to the others so as to settle cross claims. When the accounting is completed the assets are dis- trihuted in the following order: 1. In paying the debts due third persons by the firm. 2. In repaying to each partner his advances. 3. In repaying to each partner his capital. 4. The balance being distributed as profits, and in e(jiial proportion unless a contrary agreement IK? shown. Firm creditors are entitled to priority of payment out of the firm property, and individual creditors have prior- ity in individual property. After individual creditors are satisfied, firm creditors may have recourse to individ- ual property, and their claims take precedence over in- dividual claims of other partners. Individual creditors may have recourse to their debtor's share of what re- mains of the partnership property after payment of firm debts. Partners who have had hoiia fide dealings with the firm in their individual capacities are considered as linn creditors, and have equal rights with other firm creditors. Losses, in the absence of agreement, are shared in the s:ime proportion as profits. I f sonic of the partners are insolvent the entire loss falls upon the solvent partners. The statute- of limitations is not technically a bar to a suit for an accounting, but if a great length of time lias elapsed without action on the part of the complainant. the court will refuse to entertain the suit on the ground of ladies. When the partnership accounts have I settled and decree rendered. theV will not hi n 'pcned unless within a reasonable time and upon proof of fraud 30 American Correspondence School of Laic. or error as to some matter unknown to the complaining party when it was committed. XXI. Li- m ited Partn ersh ips. Limited partnerships exists in all the states by virtue of the statutory law, but are unknown to the common law. All the requirements of the statutes must be com- plied with. Their chief object is to enable capitalists to employ their wealth in trade without taking an active part in the management of the business, and without risking more than the sum originally subscribed, and at the same time to secure the co-operation of men of in- tegrity and ability, but without means. They usually require the execution and filing of a certificate stating: 1 . The name under which such partnership is to be con- ducted. 2. The general nature of the business to be transacted. 3. The names and places of residence of all the partners, both general and special, distinguishing be- tween them. 4. The amount of capital each partner has contributed to the common stock. 5. The dates at which such partnership is to commence and terminate. Such certificate must then be acknowledged before the proper officer by the person signing it, and be recorded with some officer named by the statute and a copy there- of published as required by the statute. Also, generally, an affidavit is required to be filed stating that the sums to be contributed by the special partners have actually been paid in and in cash. In some states they may carry on any kind of business, in others they cannot engage in banking or insurance. If the statutes are not complied with the partners become general partners. XXII. Limited Partnership . /.v.vor/V///o//.v. Some states provide by statute for limited partner- ships associations. They are neither partnerships nor corporations hut resemble the latter more than the for- mer. In Ohio, not less than three nor more than twenty- five persons, may unite in the conduct of any lawful business, except banking or real-estate, and by comply- ing with certain statutory regulations, no one of such persons, shall be liable for the debts of such association beyond his subscription. The requirements for forma- tion are similar to those required for limited partnn-- ships, and the name of the association is to be used in all matters and followed by the word ''limited." I 'nlc.ss tin- statute is strictly complied with such an association be- comes a general partnership.