Story Case

Luther Stevens, Harold McKey and Martin Snow had been partners in the fruit commission business. In the year 1913, Snow became insolvent, because of his inability to meet his personal obligations. In January, 1914, he filed his petition in bankruptcy in the Federal Court and was declared a bankrupt on January 15, 1914. In December, 1913, Snow executed a firm note to John Burnett, ostensibly for the firm business, but he secretly kept the money. When the note became due in March, 1914, Burnett attempted to hold Stevens and McKey. These men defended, on the ground that Snow was hopelessly insolvent when the note was made, and, therefore, had no power to make such an instrument; that insolvency, as a matter of law, terminates the partnership. What answer should Burnett make?

Ruling Court Case. Eustis Vs. Bolles, Volume 146 Massachusetts Reports, Page 413; Same Case, Volume 4 American State Reports, Page 327

This is a suit upon a note dated January 1, 1880, signed by "D. Callender & Co." It was signed and delivered to the plaintiff by D. Callender, and, at that time, the only parties composing the firm were Callender, Bolles and Wilde. The defendant, Hall, who was formerly a partner, had withdrawn from the firm on July 2, 1877, and notice of the dissolution was given, by publication in the Boston Daily Advertiser, but no personal notice was given to the plaintiff. The defendant, Hall, in December, 1877, filed his petition in bankruptcy, was adjudicated a bankrupt, and, thereupon, in June, 1878, received his discharge. Under these facts, the question was, whether on this note, the defendant, Hall, was liable as a partner.

Mr. Chief Justice Morton, in his opinion, said: "Upon these facts, we are of the opinion that the defendant, Hall, is not liable. The only ground upon which he could be held is, that the plaintiff has had no legal notice of the dissolution of the firm. If the firm had not been previously dissolved, the bankruptcy of Hall would have dissolved it. The bankruptcy, like the death of a partner, dissolves the partnership, and as it is a public and notorious proceeding, all creditors are bound to take notice of it, and no further notice need be given. The publication of bankruptcy or insolvency proceedings is legal notice to all persons, by which they are bound." It was, therefore, decided, that the plaintiff could not recover from the defendant on this note.

Ruling Law. Story Case Answer

The relation of partnership is terminated when one or more of the partners become bankrupt. This is said to be a dissolution by operation of law, as distinguished from dissolution by act of the parties, as by an agreement, or by the withdrawal of a partner. Mere insolvency of a partner is not sufficient to terminate the relation. The partner must actually have been declared a bankrupt, in compliance with the statutory provisions regarding bankrupts. Or the same result would follow from an assignment of all his property, separate and partnership, to trustees for the benefit of creditors.

Since Snow was not declared a bankrupt when he executed the note to Burnett, he was still qualified to act in that capacity for the firm. Therefore, if Burnett took the note in good faith, he can hold the other members of the firm.