Whether or not the copartnership is an entity distinct from the
members, partnership debts are debts of the members of the
The individual liability of partners for debts of the firm is
primary and direct; it is not collateral like that of a surety.
The business of a bankruptcy act is, so far as may, be to
preserve, not to upset, existing relations based on fundamental
rules of law.
The Bankruptcy Act recognizes the firm as an entity for certain
purposes, but does not alter the preexisting rule that the
partnership can be in bankruptcy and the partners not.
In this case, an order directing that the separate estate of a
member of a firm which had been adjudicated bankrupt be turned over
to the trustee for administration is affirmed.
186 F. 481 affirmed.
The facts, which involve the construction of the Bankruptcy Act
of 1898 in regard to the administration by the trustee of a
bankrupt copartnership of the individual estates of the partners,
are stated in the opinion.
Page 228 U. S. 698
MR. JUSTICE HOLMES delivered the opinion of the Court.
This is a proceeding to review an order of the bankruptcy court
to the effect that the separate estate of Stanley Francis should be
turned over for administration to the respondent, McNeal, trustee
in bankruptcy of a firm of which Francis was a member. The order
was made on the petition of the trustee, and was affirmed upon a
petition for revision by the circuit court of appeals. 186 F.
The facts are short. Creditors filed a petition against Latimer,
Francis, and Marrin, alleging that they were
Page 228 U. S. 699
partners trading as the Provident Investment Bureau, and that
they were bankrupt individually and as a firm. McNeal was appointed
receiver of the partnership and individual estates, but Francis
denied that he was a partner, and sought to have the receiver
discharged. Thereupon, on March 13, 1906, it was agreed between the
counsel for the receiver and for Francis that McNeal should be
discharged as receiver of the individual estate of Francis; that
the question whether Francis was a partner should be referred to
one of the regular referees; that, until the determination of that
question, his counsel, Scott, should collect the rents and retain
possession of his estate, and that thereafter Scott should account
and turn over the funds to such person as the court might direct.
On April 17, an order was made embodying the agreement and naming a
referee. The referee found that Francis was a partner, and that now
stands admitted for the purposes of the present decision. The firm
was adjudicated bankrupt in June, 1909. McNeal was appointed
trustee in July, and forthwith filed the petition upon which the
order in question was made. The order declared that the separate
estate of Francis was subject to administration in bankruptcy, and
ordered the real estate turned over to McNeal, with leave to sell.
The firm, even with the separate estates of the partners, will not
be able to pay its debts in full.
Since Cory on Accounts was made more famous by Lindley on
Partnership, the notion that the firm is an entity distinct from
its members had grown in popularity, and the notion has been
confirmed by recent speculations as to the nature of corporations
and the oneness of any somewhat permanently combined group without
the aid of law. But the fact remains as true as ever that
partnership debts are debts of the members of the firm, and that
the individual liability of the members is not collateral like that
of a surety, but primary and direct, whatever
Page 228 U. S. 700
priorities there may be in the marshaling of assets. The nature
of the liability is determined by the common law, not by the
possible intervention of the Bankruptcy Act. Therefore, ordinarily
it would be impossible that a firm should be insolvent while the
members of it remained able to pay its debts with money available
for that end. A judgment could be got and the partnership debt
satisfied on execution out of the individual estates.
The question is whether the Bankruptcy Act has established
principles inconsistent with these fundamental rules, although the
business of such an act is, so far as may be, to preserve, not to
upset, existing relations. It is true that, by § 1, the word
"person," as used in the act, includes partnerships; that, by the
same section, a person shall be deemed insolvent when his property,
exclusive, etc., shall not be sufficient to pay his debts; that, by
§ 5a, a partnership may be adjudged a bankrupt, and that, by § 14a,
any persons may file an application for discharge. No doubt these
clauses, taken together, recognize the firm as an entity for
certain purposes, the most important of which, after all, is the
old rule as to the prior claim of partnership debts on partnership
assets, and that of individual debts upon the individual estate. §
5g. But we see no reason for supposing that it was intended to
erect a commercial device for expressing special relations into an
absolute and universal formula -- a guillotine for cutting off all
the consequences admitted to attach to partnerships elsewhere than
in the bankruptcy courts. On the contrary, we should infer from §
5, clauses c through g, that the assumption of the Bankruptcy Act
was that the partnership and individual estates both were to be
administered, and that the only exception was that in h, "in the
event of one or more, but not all, of the members of a partnership
being adjudged bankrupt."
In that case, naturally, the partnership property may be
administered by the partners not adjudged bankrupt, and
Page 228 U. S. 701
does not come into bankruptcy at all except by consent. But we
do not perceive that the clause imports that the partnership could
be in bankruptcy and the partners not. The hypothesis is that some
of the partners are in, but that the firm has remained out, and
provision is made for its continuing out. The necessary and natural
meaning goes no further than that.
On the other hand, it would be an anomaly to allow proceedings
in bankruptcy against joint debtors from some of whom at any time
before, pending, or after the proceeding, the debt could be
collected in full. If such proceedings were allowed, it would be a
further anomaly not to distribute all the partnership assets. Yet
the individual estate, after paying private debts, is part of those
assets, so far as needed. § 5f. Finally, it would be a third
incongruity to grant a discharge in such a case from the debt
considered as joint, but to leave the same persons liable for it
considered as several. We say the same persons, for however much
the difference between firm and member under the statute be dwelt
upon, the firm remains at common law a group of men, and will be
dealt with as such in the ordinary courts for use in which the
discharge is granted. If, as in the present case, the partnership
and individual estates together are not enough to pay the
partnership debts, the rational thing to do, and one certainly not
forbidden by the act, is to administer both in bankruptcy. If such
a case is within § 5h, it is enough that Francis never has objected
to the firm property being administered by the trustee.
If it be said that the logical result of our opinion is that the
partners ought to be put into bankruptcy whenever the firm is, as
held by the late Judge Lowell, in an able opinion, In re
128 F. 137, it is a sufficient answer that no such
objection has been taken, but, on the contrary, Francis has
consented and agreed to hand over his property according to the
order of the court. So far
Page 228 U. S. 702
as Vaccaro v. Security Bank,
103 F. 436, 442, is
inconsistent with the opinion of the majority in In re
157 F. 363, we regard it as sustained by the
stronger reasons and as correct.