1. Under § 5a of the Bankruptcy Act, a partnership may be
adjudicated a bankrupt as a separate entity, irrespective of any
adjudication of bankruptcy against the partners as individuals. P.
276 U. S.
220.
2. An involuntary petition filed against a partnership, which
does not in terms seek an adjudication that the partners are
bankrupts, as individuals, nor allege that, as individuals, they
are insolvent or have committed any act of bankruptcy, is not in
legal effect a petition against them individually, and an
adjudication thereunder of the partnership's bankruptcy is not, in
legal effect, an adjudication that the partners are bankrupt
individually. P.
276 U. S. 226.
3. Hence, in this case, there was no ground, under § 67c or §
67f of the Act, for annulling judgment liens obtained against the
individual real estate of the partners within four months prior to
tho filing of the involuntary petition against the partnership, but
more than eight months prior to filing of their individual
voluntary petitions. P.
276 U. S. 226.
18 F.2d 281 reversed.
Certiorari, 274 U.S. 731, to a decree of the circuit court of
appeals which affirmed an order of the district court disallowing
the claims of the bank as a secured creditor based on a judgment
lien against the individual estates of partners who filed voluntary
petitions in bankruptcy after the partnership had been adjudicated
a bankrupt.
See also 285 F. 703; 4 F.2d 240, and
265 U. S. 365.
Page 276 U. S. 216
MR. JUSTICE SANFORD delivered the opinion of the Court.
This is the bankruptcy proceeding which was before us at an
earlier stage in
Liberty Nat. Bank v. Bear, 265 U.
S. 365.
In July, 1920, the Liberty National Bank brought suit in a
Virginia court against the Roanoke Provision Company, a partnership
composed of W. L. Becker, Sr., and W. L. Becker, Jr., and against
the Beckers individually, and in the same month recovered a
judgment against the Provision Company and the two Beckers
individually, which, being duly docketed, became, under the laws of
Virginia,
Page 276 U. S. 217
a lien upon the real estate of the judgment debtors. [
Footnote 1] In August, an involuntary
petition in bankruptcy was filed in the federal district court
against the Provision Company, as a partnership composed of the two
Beckers; alleging that it had committed an act of bankruptcy by
executing a general assignment for the benefit of creditors, and
was insolvent. There was no allegation that the Beckers were
individually insolvent, or had executed general assignments of
their individual properties or committed any acts of bankruptcy,
and there was no prayer that they be adjudged bankrupt
individually. They filed a joint answer admitting the allegations
of the petition, and the Company, as a partnership composed of the
two Beckers, was adjudged a bankrupt by the district judge, but
without adjudging the bankruptcy of the Beckers as individuals.
In April, 1921, more than eight months after the partnership had
been adjudged a bankrupt, the Beckers filed separate voluntary
petitions in bankruptcy, and each was adjudged a bankrupt. The
respondent Bear was then elected trustee for the partnership estate
by the partnership creditors, and trustee for the individual
estates by the individual creditors.
Thereafter, the bank filed proofs of claim on the judgment
against the separate estates of the Beckers, alleging that it
constituted a lien upon their individual real estate, and was
entitled to priority as such. The trustee filed objections on the
ground that he had been vested with title to the property of the
individual partners, as well as that of the partnership, as of the
date of the filing of the petition in bankruptcy against the
Company in August, 1920, and contended that, as the judgment had
been recovered within four months prior to the filing of that
petition, the lien upon the individual properties was annulled
by
Page 276 U. S. 218
§ 67f of the Bankruptcy Act. [
Footnote 2] The referee disallowed the claims of the bank
as secured claims, and allowed them as unsecured claims merely.
[
Footnote 3] This order was
reversed by the district judge on the ground that, as the order
adjudging the bankruptcy of the company had not adjudged the
bankruptcy of the Beckers individually, the lien of the judgment
upon their individual properties had not been nullified. The
circuit court of appeals reversed this decree upon the ground that
the
"adjudication of the partnership was necessarily an adjudication
of the bankruptcy of the individuals composing it, and that . . .
the lien of a judgment obtained within four months of the filing of
the petition against the partnership was lost by the
adjudication."
285 F. 703. This Court, without determining whether the
adjudication of the bankruptcy of the Company operated as an
adjudication of the bankruptcy of the Beckers individually, held
that, as there was no pleading or proof as to the insolvency of the
Beckers when the bank recovered its judgment, there was no ground
under § 67f of the Bankruptcy Act for annulling the lien thereby
acquired upon their individual properties, and reversed the decree
of the circuit court of appeals and remanded the cause of the
district court for further proceedings not inconsistent with the
opinion.
Liberty Nat. Bank v. Bear, supra. 265 U. S.
368.
The trustee, by leave of the district court, then amended his
objections to the claims of the bank by alleging that the Beckers
were insolvent when the judgment was recovered, and that, if
enforced as a secured claim against the individual estates, the
judgment would result
Page 276 U. S. 219
in preferences, [
Footnote 4]
and contended that the lien upon the individual properties was also
annulled by § 67c of the Bankruptcy Act. It was then stipulated
that the Beckers were insolvent when the judgment was obtained, and
that the enforcement of the judgment as a secured claim against the
individual properties would enable the bank to obtain a greater
percentage of its debt from such assets than other individual
creditors, there being no surplus from individual assets to be
applied to partnership debts, and none from partnership assets to
be applied to individual debts. The referee again disallowed the
claims of the bank as secured claims against the individual estates
of the Beckers. This was affirmed by the district court, without
opinion, and by the circuit court of appeals, which adhered to its
original ruling as to the effect of the order adjudicating the
bankruptcy of the partnership. 18 F.2d 281.
The controversy here is solely between the bank and the trustee
as the representative of the other individual creditors of the
Beckers; the partnership creditors having no interest therein, as
there is no surplus of the individual estates to be applied to
partnership debts.
The trustee relies upon both §§ 67c and 67f of the Bankruptcy
Act. Section 67c provides that:
"A lien created by or obtained in or pursuant to any suit . . .
which was begun against a person within four months before the
filing of a petition in bankruptcy by or against such person
shall be dissolved by the adjudication of such person to be a
bankrupt if . . . it appears that said lien was obtained and
permitted while the defendant was insolvent and that its existence
and enforcement will work a preference. . . ."
Section 67f provides:
"That all levies, judgments,
Page 276 U. S. 220
attachments, or other liens obtained through legal proceedings
against a person who is insolvent
at any time within four
months prior to the filing of a petition in bankruptcy against
him, [
Footnote 5] shall be
deemed null and void in case he is adjudged a bankrupt, and the
property affected by the . . . lien shall be deemed wholly
discharged and released from the same, and shall pass to the
trustee as a part of the estate of the bankrupt. . . ."
It is indisputable that, under these provisions, the judgment
liens upon the real estate of the Beckers cannot be annulled unless
they were adjudged bankrupts under petitions in bankruptcy filed
within four months after the suit against them was commenced, §
67c, or the judgment liens obtained, § 67f. This being
unquestioned, the trustee does not claim that the liens were
annulled under the voluntary petitions of the Beckers which were
filed after the expiration of the prescribed periods. His sole
contention is that they were annulled by the proceedings under the
involuntary petition filed against the Provision Company within
such periods. As to this, he insists that, although the petition
was filed against the partnership alone and the partnership alone
was adjudged a bankrupt, the petition was, in effect, a petition
against the individual partners, as well as the partnership, and
the adjudication was, in effect, an adjudication that the
individual partners as well as the partnership were bankrupts --
that is, that the adjudication that the partnership was a bankrupt
necessarily imported an adjudication that the individual partners
were also bankrupts.
This contention disregards entirely the principle established by
the Bankruptcy Act that a partnership may be adjudged a bankrupt as
a separate entity without reference
Page 276 U. S. 221
to the bankruptcy of the partners as individuals. In this
respect, the Act makes a complete change from the earlier Bankrupt
Law of 1867, which did not permit the partnership entity to be
adjudged a bankrupt, but merely provided that, when two or more
persons who were partners in trade were adjudged bankrupt, the
property of the partnership, as well as that of the partners,
should be taken over by the bankruptcy court for administration.
[
Footnote 6] The present Act
not only omits this provision of the law of 1867, but, after
providing generally that the word "persons" when used in the Act
shall include "partnerships," § 1(19), and that a petition in
bankruptcy may be filed against a "person" who is insolvent and has
committed an act of bankruptcy, § 3b, specifically declares in § 5a
that: "[a] partnership, during the continuation of the partnership
business, or after its dissolution and before the final settlement
thereof, may be adjudged a bankrupt." [
Footnote 7]
Under this provision, as was
Page 276 U. S. 222
said in
Meek v. Centre County Banking Co., 268 U.
S. 426,
268 U. S. 431,
there "can be no doubt that a partnership may be adjudged a
bankrupt as a distinct legal entity." And if proceeded against as a
distinct legal entity, without reference to the individual
partners, it may, as such, under § 12a, offer terms of composition
to the partnership creditors alone.
Myers v. Internat. Trust
Co., 273 U. S. 380,
273 U. S.
383.
It has long been the established rule in the circuit courts of
appeals and district courts that, under § 5a of the Act, a
partnership may be adjudged a bankrupt as a separate entity, under
a voluntary or involuntary petition, irrespective of any
adjudication of bankruptcy against the individual partners.
In
re Meyer, 98 F. 976, 979,
aff'g Chemical National Bank v.
Meyer, 92 F. 896, 901;
In re Mercur, 122 F. 384, 387,
aff'g In re Mercur, 116
Page 276 U. S. 223
F. 655, 658;
In re Stein & Co., 127 F. 547, 549;
Dickas v. Barnes, 140 F. 849, 851;
In re
Bertenshaw, 157 F. 363, 368;
Mills v. Fisher &
Co., 159 F. 897, 899;
Francis v. McNeal, 186 F. 481,
483;
In re Samuels, 215 F. 845, 847;
Armstrong v.
Fisher, 224 F. 897, 899;
Carter v. Whisler, 275 F.
743, 746;
In re Dunnigan, 95 F. 428, 429;
In re
Duguid, 100 F. 274, 278;
In re Barden, 101 F. 553,
555;
Strause v. Hooper, 105 F. 590, 592;
In re
Stokes, 106 F. 312, 313;
In re Hale, 107 F. 432, 433;
In re Farley, 115 F. 359, 360;
In re Pincus, 147
F. 621, 625;
In re Solomon & Carvel, 163 F. 140, 141;
In re Everybody's G. & M. Market, 173 F. 492, 493;
In re Lattimer, 174 F. 824, 826;
In re
Perlhefter, 177 F. 299, 305;
In re Lenoir-Cross &
Co., 226 F. 227, 229. [
Footnote 8] This rule has been applied not only where the
petition in bankruptcy sought merely the adjudication of the
partnership as a bankrupt, but where the adjudication of the
individual partners was also sought. Thus, in some cases, the
partnership was adjudged a bankrupt, although the court refused to
adjudge the bankruptcy of the individual partners, either because
they had not committed individual acts of bankruptcy, or because,
being wage earners or tillers of the soil, they were exempt
from
Page 276 U. S. 224
involuntary bankruptcy, or because they were insane, or minors.
[
Footnote 9]
This rule, often announced, is based upon the plain words of the
Bankruptcy Act. The specific provision in § 5a that a partnership
-- a person within the meaning of the Act -- "may be adjudged a
bankrupt," distinctly implies that it may be adjudged a bankrupt as
a separate entity without reference to the bankruptcy of the
individual partners. This implication is strengthened by the fact
that there is no requirement in § 5 that the partners shall be
joined as defendants in a petition filed against the partnership,
and no provision that the partners shall be adjudged to be
bankrupts under such a petition or that such individual
adjudications shall be a prerequisite to the adjudication of the
bankruptcy of the partnership; as well as by the fact that, while §
5 of the Act incorporated most of the administrative provisions in
the corresponding section of the Bankrupt Law of 1867, it omitted
the provision for granting discharges to the individual partners.
That is, the adjudication of the bankruptcy of the individual
partners was left solely to the general provisions of the Act,
under which no person could be adjudged a bankrupt in involuntary
bankruptcy unless he was not only insolvent, but had committed an
act of bankruptcy, and not even then if he were a wage earner or
tiller of the soil. Section 3a, 3b, and 4b.
We cannot believe that Congress intended to limit and weaken the
broad provision of § 5a permitting a partnership to be adjudged a
bankrupt, by making it essential to
Page 276 U. S. 225
such an adjudication that the partners should also be adjudged
bankrupts individually. So to hold would make it impossible, in an
involuntary proceeding, to adjudge bankrupt a partnership as a
separate entity, although it was insolvent and had committed an act
of bankruptcy, if any of the partners could not be adjudged a
bankrupt because he had not committed an individual act of
bankruptcy or was a person exempt from such an adjudication, or for
any other adequate reason. [
Footnote 10]
The conclusion stated is not in conflict with the decision in
Francis v. McNeal, 228 U. S. 695,
upon which the trustee relies. That decision, as we have heretofore
pointed out in
Liberty Nat. Bank v. Bear, supra,
265 U. S. 368,
and
Meek v. Centre County Banking Co., supra, 268 U. S. 432,
did not involve the question whether an adjudication of the
bankruptcy of a partnership involved the adjudication of the
bankruptcy of the partners, but merely involved the question
whether a bankruptcy court in which an insolvent partnership had
been adjudged a bankrupt might under the administrative provisions
of § 5 require a partner who had not been adjudged a bankrupt to
surrender his individual property to the trustee of the partnership
estate for the purpose of paying the partnership debts. There was
no claim or suggestion that the adjudication of the bankruptcy of
the partnership had involved an adjudication of the bankruptcy of
the partner as an individual, or that, under that adjudication, he
could be deemed a bankrupt individually or a trustee could be
appointed of his individual estate for the purpose of administering
it as that of a bankrupt.
Page 276 U. S. 226
We conclude that the involuntary petition filed against the
Provision Company, which did not in terms seek an adjudication that
the Beckers were bankrupts as individuals nor allege that as
individuals they were insolvent or had committed any acts of
bankruptcy, was not in legal effect a petition filed against them
individually, and the adjudication under that petition that the
partnership was a bankrupt was not in legal effect an adjudication
that they were bankrupts individually. There is hence no ground,
under either § 67c or § 67f of the Act, for annulling the judgment
liens obtained upon their individual real estate more than eight
months prior to the filing of their voluntary petitions.
Reversed.
[
Footnote 1]
Code of 1919, §§ 6470, 6471.
[
Footnote 2]
30 Stat. 544, c. 541; U.S.C. Tit. 11.
[
Footnote 3]
The referee at the same time disallowed another claim of the
Bank to a lien upon the real estate of the partnership, but no
steps were taken by the bank to review his order in this respect,
and no question as to this matter is here involved.
[
Footnote 4]
This was affirmed by the circuit court of appeals on an
interlocutory appeal. 4 F.2d 240.
[
Footnote 5]
The phrase "A person against whom a petition has been filed," as
defined by § 1(1) of the Bankruptcy Act, includes "a person who has
filed a voluntary petition."
[
Footnote 6]
14 Stat. 517, c. 176, § 36; R.S. § 5121.
[
Footnote 7]
Section 5 of the present Act, which was substituted for § 36 of
the law of 1867, reads as follows:
"Sec. 5. PARTNERS -- a A partnership, during the continuation of
the partnership business, or after its dissolution and before the
final settlement thereof, may be adjudged a bankrupt."
"b The creditors of the partnership shall appoint the trustee;
in other respects, so far as possible, the estate shall be
administered as herein provided for other estates."
"c The court of bankruptcy which has jurisdiction of one of the
partners may have jurisdiction of all the partners and of the
administration of the partnership and individual property."
"d The trustee shall keep separate accounts of the partnership
property and of the property belonging to the individual
partners."
"e The expenses shall be paid from the partnership property and
the individual property in such proportions as the court shall
determine."
"f The net proceeds of the partnership property shall be
appropriated to the payment of the partnership debts, and the net
proceeds of the individual estate of each partner to the payment of
his individual debts. Should any surplus remain of the property of
any partner after paying his individual debts, such surplus shall
be added to the partnership assets and be applied to the payment of
the partnership debts. Should any surplus of the partnership
property remain after paying the partnership debts, such surplus
shall be added to the assets of the individual partners in the
proportion of their respective interests in the partnership."
"g The court may permit the proof of the claim of the
partnership estate against the individual estates, and vice versa,
and may marshal the assets of the partnership estate and individual
estates so as to prevent preferences and secure the equitable
distribution of the property of the several estates."
"h In the event of one or more but not all of the members of a
partnership being adjudged bankrupt, the partnership property shall
not be administered in bankruptcy, unless by consent of the partner
or partners not adjudged bankrupt; but such partner or partners not
adjudged bankrupt shall settle the partnership business as
expeditiously as its nature will permit, and account for the
interest of the partner or partners adjudged bankrupt."
[
Footnote 8]
And even in
In Re Forbes, 128 F. 137, 139, in which the
District Court for Massachusetts held that there could be no
bankruptcy of a partnership without the bankruptcy of all the
partners, it was recognized that this would not apply in
"exceptional cases such as
In re Dunnigan, 95 F. 428,"
supra, in which it had been held, in the same district,
that a partnership might be adjudged a bankrupt although one
partner, being a minor, could not be so adjudged.
[
Footnote 9]
Neither of two incidental questions upon which the lower federal
courts have differed in opinion -- whether a partnership can be
deemed insolvent as an entity when the individual partners are
solvent, and whether a bankruptcy court which has adjudged a
partnership a bankrupt may take possession of the individual
property of a partner who has not been adjudged a bankrupt so far
as is necessary to pay the partnership debts -- is here
involved.
[
Footnote 10]
As was said by the late Judge Hough, § 5a,
"sympathetically interpreted, secures to the creditor a prompt
seizure of firm assets -- without regard to dead, insane, absent,
dormant or secret partners, who as experience shows, are commonly
used by the active members to harass and obstruct those holding
just demands against the firm."
8 Columb.Law Rev. 599, 604.