MITCHELL, J. I concur, except in the result arrived at as to the claim of the Irish-American Bank. I think the consideration of the debt should, in this case, determine the class to which the claim belongs, and that, notwithstanding the authorities cited to the contrary, the claim of the bank should be treated as exclusively a partnership debt. A partnership is but an aggregation of individuals, and not an entity distinct from the members composing it. It is wholly inconsistent with the spirit and purposes of our insolvent law to permit one dealing with a partnership to obtain a preference by securing on the evidence of the debt the signatures of the members of the firm, individually, in addition to their signatures by their firm name. There is nothing in the general equity rule for the distribution of partnership and individual assets which requires any such result. CANTY, J. I concur with Mr. Justice MITCHELL.

DARBY v. GILLIGAN et al.

(Supreme Court of Appeals of West Virginia, 1889. 33 W. Va. 246, 10 S. E. 400, 6 L. R. A. 740.)

SNYDER, P. Appeal from a decree of the circuit court of Taylor county, pronounced March 28, 1887, in the suit of Darby & Co. and others against John J. Gilligan and others. The suit was brought to set aside a trust-deed made by said Gilligan to John T. McGraw, trustee; to enjoin said trustee from disposing of the property thus conveyed to him; and to have the same applied to the payment of the plaintiffs' debts. On September 17, 1883, the said Gilligan and James Burns entered into an agreement in writing, whereby they agreed to form a partnership for conducting a general merchandising business in the town of Grafton, Taylor county, Gilligan having prior to that time been merchandising at the same place, and having then on hand a stock of goods, which he put into the firm at the value of $2,000, and Burns paid into the firm $1,000. Upon this capital stock, they agreed that Gilligan should have a two-thirds and Burns a one-third interest in the assets, business, and profits of the partnership. At the time this partnership was formed, Gilligan was indebted to the First National Bank of Grafton and others in the sum of $1,100, for money borrowed and put into the mercantile business while he was conducting it alone. During the carrying on of the business by the firm, the firm contracted debts to the plaintiffs and others, and the partners so managed the business that they and the firm became indebted, to insolvency. Afterwards, on February 27, 1885, by a contract in writing, the partnership was dissolved, upon the terms that in consideration of $1,000, for which Gilligan executed to Burns his note, payable one year from that date, Burns withdrew from the firm, and Gilligan assumed, and agreed to pay, all the then existing indebtedness of the firm. About two months after, on April 24, 1885, Gilligan conveyed to John T. McGraw the whole of the assets of the late firm, in trust, to secure all his debts, including the debts due the plaintiffs and others by said firm; but in said conveyance he preferred the aforesaid $1,100 due to the Grafton Bank and others, the note for $1,000 given to Burns as aforesaid, which had been assigned by him to Anna Burns, and other individual debts, amounting in the aggregate to more than the value of the assets conveyed.

Upon these facts the plaintiffs, the appellants here, contend that this attempt of Gilligan to prefer and pay his individual debts out of the said assets is a fraud upon the firm creditors, which, according to well-settled principles, a court of equity will not permit. Ordinarily the partnership estate is liable for the payment of the firm debts, in preference to the individual debts of the partners. This is the right of the partners inter se. The creditors of the partnership have no such right of priority over the creditors of the partners individually, otherwise than by substitution to the rights of the partners inter se. The partners may release this right, and, if they do so bona fide, the creditors of the partnership cannot complain; for it is not their right, except subject to the proper disposition and control of the partners themselves, to whom it belongs. This right is generally called the "partner's lien." It differs from a common-law lien in that it is not dependent on possession, and any single partner can convey a good title to specific chattels by a bona fide sale in the course of trade; and a lien does not involve the right to deal with the property, whereas the partner's equity is a right to have it applied for certain purposes, and the one partner cannot assert the lien as a sole plaintiff. The existence of this equity may be explained in a variety of ways, as on an implied contract that the assets shall not be used for private purposes; on the doctrine of suretyship, since each partner is liable in solido for the debts, and therefore, inter se, virtually a surety for the copartners for their proportions, and entitled to have the assets applied so as to relieve him. The partners have jointly the same right of absolute disposition of their joint property that any individual has. They may sell it, pledge it, convert it into other forms, divide it up among themselves, devote it to the payment of all or part of the debts, or exercise other ownership over it, subject only to each other's rights, and to the operation of statutes forbidding voluntary or fraudulent conveyances, to hinder, delay, and defraud creditors.

It is clear from what has preceded that while the partnership is solvent and going on the partners may, by unanimous assent or joint act, do what they please with the assets, if the act is bona fide. Where in such case, one partner sells or assigns his interest to the other, bona fide, for a valuable consideration, or an agreement to pay the debts of the firm, and indemnify against them, this will change thejoint into a separate property. The only question is upon the bona fides of the transaction. If such an arrangement could not be made,. a partner never could retire. Bates, Partn. §§ 559, 820, 824; Story, Partn. §§ 97, 360. On the other hand, according to the better reason and the weight of authority, if the firm is insolvent, or on the eve of insolvency, and both of the partners are insolvent, a purchase by one partner of the interest of the other, in consideration of the former's assumption of all the debts of the firm, will be regarded as a purchase upon à consideration which is of no value whatever; and, no equivalent having been given, the transfer is in effect voluntary, and its only effect, if sustained, would be to hinder partnership creditors, and hence is deemed ineffectual to convert the joint property into separate property, as against the firm creditors.

* *

In the case at bar the firm as well as the individual partners were indebted, to insolvency, at the time the contract of dissolution was made by the terms of which Gilligan assumed to pay, not only the debts of the firm, but $1,000 to Burns. As the firm and Gilligan were then

both insolvent, there was no valuable consideration for either this assumption of the firm debts or said $1,000. Less than two months after this transaction, Gilligan, without paying a single firm debt, so far as the record shows, assigned all the assets in such a manner as to devote the whole of them to the payment of his individual debts. It seems to me plain that to uphold this scheme, against the rights of the social creditors, would violate, not only the general principles of equity, but the express provisions of our statute against voluntary and fraudulent conveyances. It is, however, claimed for the appellees that if this transaction is held void as to the firm creditors, then, for the like reasons, the act of Gilligan in putting his own stock of goods into the firm must be held void as to his individual creditors. But there is no analogy in the two transactions. It does not appear that either Burns or Gilligan was insolvent at that time, and it does appear that Burns paid into the concern $1,000, and also that the debts due the plaintiffs and others were contracted by the firm on the faith of the social assets.

For these reasons the decree of the circuit court is reversed, and the cause remanded.

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CHAPTER VII

LIMITED PARTNERSHIPS

EXPLANATORY NOTE AS TO THE UNIFORM LIMITED PARTNERSHIP ACT BY WILLIAM DRAPER LEWIS. 1

The business reason for the adoption of acts making provisions for limited or special partners is that men in business often desire to secure capital from others. There are at least three classes of contracts which can be made with those from whom the capital is secured: One, the ordinary loan on interest; another, the loan where the lender, in lieu of interest, takes a share in the profits of the business; third, those cases in which the person advancing the capital secures, besides a share in the profits, some measure of control over the business.

At first, in the absence of statutes, the courts, both in this country and in England, assumed that one who is interested in a business is bound by its obligations, carrying the application of this principle so far, that a contract where the only evidence of interest was a share in the profits made one who supposed himself a lender, and who was probably unknown to the creditors at the times they extended their credits, unlimitedly liable as a partner for the obligations of those actually conducting the business.

Later decisions have much modified the earlier cases. The lender, who takes a share in the profits, except possibly in one or two of our jurisdictions, does not by reason of that fact run a risk of being held as a partner. If, however, his contract falls within the third class mentioned, and he has any measure of control over the business, he at once runs serious risk of being held liable for the debts of the business as a partner; the risk increasing as he increases the amount of his control.

The first Limited Partnership Act was adopted by New York in 1822; the other commercial states, during the ensuing 30 years, following her example. Most of the statutes follow the language of the New York statute, with little material alteration. These statutes were adopted, and to a considerable degree interpreted by the courts, during that period when it was generally held that any interest in a business should make the person holding the interest liable for its obligations. As a result the courts usually assume in the interpretation of these statutes two principles as fundamental:

First. That a limited (or as he is also called a special) partner is a partner in all respects like any other partner, except that, to obtain the privilege of a limitation on his liability, he has con

i Proceedings of the Twenty-Sixth Annual Meeting of National Conference of Commissioners on Uniform State Laws, p. 384 (1916).

formed to the statutory requirements in respect to filing a certificate and refraining from participation in the conduct of the busi

ness.

Second. The limited partner, on any failure to follow the requirements in regard to the certificate or any participation in the conduct of his business, loses his privilege of limited liability and becomes, as far as those dealing with the business are concerned, in all respects a partner.

The courts in thus interpreting the statutes, although they made an American partnership with limited members something very different from the French Société en Commandité, from which the idea of the original statutes was derived, unquestionably carried out the intent of those responsible for their adoption. This is shown by the very wording of the statutes themselves. For instance, all the statutes require that all partners, limited and general, shall sign the certificate, and nearly all state that: "If any false statement be made in such certificate all the persons interested in such partnership shall be liable for all the engagements thereof as general partners."

The practical result of the spirit shown in the language and in the interpretation of existing statutes, coupled with the fact that a man may now lend money to a partnership and take a share in the profits in lieu of interest, without running serious danger of becoming bound for partnership obligations, has, to a very great extent, deprived the existing statutory provisions for limited partners of any practical usefulness. Indeed, apparently their use is largely confined to associations in which those who conduct the business have not more than one limited partner.

One of the causes forcing business into the corporate form, in spite of the fact that the corporate form is ill suited to many business conditions, is the failure of the existing limited partnership acts to meet the desire of the owners of a business to secure necessary capital under the existing limited partnership form of business association.

The draft herewith submitted proceeds on the following assumptions:

First. No public policy requires a person who contributes to the capital of a business, acquires an interest in the profits, and some degree of control over the conduct of the business, to become bound for the obligations of the business, provided creditors have no reason to believe at the times their credits were extended that such person was so bound.

Second. That persons in business should be able, while remaining themselves liable without limit for the obligations contracted in its conduct, to associate with themselves others who contribute to the capital and acquire rights of ownership, provided that such contributors do not compete with creditors for the assets of the partnership.