Story Case

Aaron McCoy and Thomas Bailey had been partners in the furniture business. At the time of the dissolution the firm owed several creditors, among them, Henry Miner. Bailey took over the firm business and agreed to pay all the firm debts. He, however, soon became insolvent, leaving most of the old firm creditors unpaid. Miner knew that Bailey had agreed to pay all the firm obligations, and that he had taken over the firm property with that intention. Nevertheless, he brought suit for the amount, owing to him, against both McCoy and Bailey. McCoy maintained in defense that Bailey took over all the property of the firm when it was dissolved and that Bailey agreed for that consideration to pay all the old debts. McCoy claimed also that this property taken was of sufficient value at this time to cover all the outstanding obligations. Is this a good defense?

Ruling Court Case. Mcjlreavy Vs. Magirl, Volume 123 Iowa Reports, Page 605; Same Case, Volume 99 Northivestem Reports, Page 193

Magirl and McAreavy were partners engaged in business. In the year 1889, the firm borrowed $200 from Julia McEnany and gave to her a promissory note for that amount, signed in the name of the firm. Later, before this note was paid, the partnership was dissolved by agreement, and Magirl agreed to take over the partnership property and assume all outstanding obligations. Of this arrangement, the defendant McAreavy was duly notified. Soon after, Magirl married Julia McEnany. In 1898, she brought suit on this note against McAreavy and recovered judgment for the principal sum and interest. This judgment was never paid and McAreavy brought this bill to have this judgment cancelled and set aside. He claimed that by their agreement in dissolving the partnership by which Magirl assumed all the debts of the partnership, Magirl became the principal debtor, and that he, McAreavy, became only surety for the debt. Since Julia McEnany, now Julia Magirl, had allowed the claim to be barred by the Statute of Limitations as against the principal debtor, he, as surety, was relieved of his liability.

Decision

As between the two partners, the dissolution agreement was binding upon them and made Magirl principal debtor and McAreavy only surety. But as between the partners and the creditors of the firm, this agreement was not binding. The liability of the firm and each partner was fixed by their original contract of partnership. By this contract, each partner was liable individually for the debts of the firm and this liability to third persons and creditors could not be changed by the agreement of the parties, subsequently, without the consent of the creditors.

The decision "Is in accord with the views expressed by many courts and law writers and is bottomed upon the proposition that the liability of the partners as principal debtors being fixed by the terms of the original contract, it is not competent for them by any agreement between themselves to change the nature of that liability, or impose upon the creditor, without his consent, any new or additional obligation or duty, a neglect of which may work a discharge of one of such debtors from his obligation to pay." Accordingly, it was held that the plaintiff, McAreavy, was not entitled to have this debt cancelled or annulled.

Ruling Law. Story Case Answer

We have just seen that the liability on partnership contracts is a joint liability of all the partners and not the several liability of any one. However, when judgment has been recovered against them jointly, the third person may proceed against any one of them and get satisfaction from the separate property of any. The partners may make agreements as between themselves which limit their liability for the debts of the partnership, but these agreements are not binding upon third persons who know nothing about them, or who do not consent to them. One partner may not sell, or relieve himself of liability to debts incurred while he was a partner. Thus, in the Story Case, even though Miner knew that Bailey took over the firm property, which was valuable enough to satisfy the debts, and though Miner knew that Bailey had also agreed to pay these debts, Miner could, nevertheless, bring suit against McCoy. Miner was right in bringing suit against both of them, for, upon securing judgment, he could collect the entire amount from McCoy.