Story Case

The State of Maryland permitted the organization of partnerships, in which one member would not be liable for more than the amount he actually furnished the firm, provided the statute under which such a firm was organized was strictly followed. The law was such that, if the conditions were not absolutely followed, the partnership should be a general one. One of the requirements of this law was to the effect that the articles of partnership must be recorded with the recorder of the county in which the firm was doing business. James Pope entered a partnership with the agreement to become a limited member, but the manager of the firm failed to record the contract under which Pope assumed the relation of a member. Later, when the firm became insolvent, creditors assumed Pope to be a general partner, because the articles of partnership were not recorded. Can they recover against him?

Ruling Court Case. Lineweaver Vs. Slagle, Volume 64 Maryland Reports, Page 465; Same Case, Volume 54 American Reports, Page 775

There was enacted in Maryland, prior to the origin of the controversy in this case, a law which provided that limited partnerships might be formed. By compliance with the terms of the statute, a person might become a member of such a partnership, and his liability limited to the amount of capital which he contributed. In various sections of the law it was provided that the special partner " shall contribute in actual cash payments a specific sum as capital to the common stock"; that a certificate should be executed, acknowledged, and recorded, which should state, among other things, "the amount of capital which each special partner shall have contributed to the common stock"; that at the time of filing this certificate there should also be filed an affidavit of one or more of the general partners, "stating that the sums specified in the certificates to have been contributed by each of the special partners to the common stock have been actually and in good faith paid in cash"; that, "if any false statement shall be made in such certificate or affidavit, all the persons interested in such partnership shall be liable for all the engagements thereof as general partners."

Slagle, the defendant, purporting to act under the provisions of the law above recited, entered into a partnership as a special partner. One question, among others, which arose in this controversy was whether he had paid his share of the capital stock in accordance with the provisions of the statute. It developed that, upon the day the partnership agreement was settled, he gave to the firm a certified check for $10,000, which was his contribution by their agreement. This check was deposited to the credit of the firm; on the same day the firm gave him a check for $6,500, and three days later gave him another check for over $1,000. At the time these checks were given, it appeared that the partnership did not have any funds in the bank except the $10,000 which had been given by the defendant as his contribution to the capital of the firm. The firm later became insolvent and this action was brought by the plaintiff upon a note, executed in the name of the firm, against the defendant, seeking to charge him as general partner.

Decision

The payment by the defendant was not a payment within the meaning of the law, so as to relieve him of the liability as a general partner. Mr. Justice Miller, in delivering the opinion of the Court, said in part: "Now, we take to be too plain for argument that this was not such a 'contribution' of $10,000 to the common stock of the firm, that day formed, as the law requires. In no legitimate sense of the word can the paying of money one hour, and receiving it back the next, be said to be a contribution? of it for any purpose whatever. We hold it to be clear that, to gratify the statute, the special partner must pay his money into the common stock, and leave it there to the risks of the business. The payment and devotion of the money to the business of the firm must be actual and absolute, not apparent and illusory. * * * In our opinion, the requirement that the special partner shall 'contribute' a specific sum 'in actual cash' was made by the legislature for the very purpose of preventing such transactions. The statement, therefore, in the certificate and affidavit that Slagle had made this contribution of $10,000 was, in legal contemplation, 'a false statement', no matter in what good faith or with what honest intentions he and his associates may have acted."

It follows from the opinion of the Court that Slagle was held liable as a general partner; and that his liability was not limited by the amount of capital which he contributed or purported to contribute, but to the full extent of all the partnership debts.

Ruling Law. Story Case Answer

In the ordinary common law partnership, each partner was said to be a general partner with general liability. By this is meant, that each partner is liable for all the debts of the partnership, even though he may have fully paid his share of the capital stock. In many instances this rule of general liability worked a hardship upon persons who wished to invest money in a partnership, take no active part in the management of the business, and not be liable beyond the amount they contributed.

Accordingly, in many states, statutes have been passed which make provisions for the formation of limited partnerships. These statutes generally provide that there shall be two or more general partners with general liability; and that there may be one or more limited partners with limited liability. By limited liability is meant that such a partner shall be liable for the debts of the firm only up to the amount which he has agreed to contribute to the capital of the business.

Since this character of organization changes the common law rule of liability, the courts compel the parties to comply strictly with all statutory requirements. If they fail in this, the special partners are held to be general partners with general liability; and this, even though the statute may not expressly so provide. Hence, in the Story Case, Pope is liable to all the creditors personally because the articles of partnership were not recorded. He is responsible as a general partner.