This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
A bankrupt may be discharged from his liability to the creditors of a partnership of which he is a member by a discharge given in bankruptcy proceedings affecting himself alone if due notice is given to the creditors of the partnership.1 Hence, partnership creditors may participate in individual insolvency and bankruptcy proceedings.2 Under a state statute which requires a creditor who accepts a dividend from an estate assigned for the benefit of creditors to release the debtor from further claims, partnership proceedings will relieve the partners from their partnership and individual debts. Hence, the assignment of a partnership which does not include individual property is void.3 If in individual proceedings a discharge is sought which will affect partnership debts, such debts must be scheduled,4 notice must be given to partnership creditors,5 and the petition in bankruptcy and the petition for discharge should refer to such debts and ask relief therefrom.6
"It is also quite certain, under both the decisions and the terms of the bankrupt act itself, that if the property had been attached within four months prior to the filing of the petition, and the defendant had. been adjudged a bankrupt, it would have been released and discharged; and if this be so, there can be no reason why the bond which stands in the place of the attachment and the property should not be relieved and released. Metcalf Bros. v. Barker, 187 U. S. 174, 47 L. ed. 126 • • •; Hill v. Harding, 130 U. S. 699, 32 L. ed. 1088, * * * ; Wolf v. Stix, 99 U. S. 1, 25 L. ed. 309; Handle v. Mellen, 67 Md. 181, 8 Atl 573; Hutchins v. Taylor, • • • Fed. Cas. No. 6,953;
Swan v. Littlefield, 4 Cush. 574; Curtis v. Barnum, 25 Conn. 370. The recent cases of House v. Schnadig, 235 111. 304, 85 N. E. 395, and A. Klip-stein & Co. v. Allen-Miles Co., * * * 136 Fed. 388, are in point, and are somewhat analogous cases." Crook-Homer Co. v. Gilpin, 112 Md. 1, 28 L. R. A. (N.S.) 233, 75 Atl 1049.
1 United States. Tuckers v. Oxley, 9 U. S. (5 Cranch) 34, 3 L. ed. 29; Lesser v. Gray, 236 U. S. 70, 59 L. ed. 471; Jarecki Mfg. Co. v. McElwaine, 107 Fed. 249; In re Diamond, 149 Fed. 407; Horner v. Hamner, 249 Fed. 134, L. R. A. 1918E. 465.
California. Hawley v. Campbell, 62 Cal. 442.
Kansas. Inge v. Stillwell, 88 Kan. 33, 42 L. R. A. (N.S.) 1093, 127 Pac. 527.
Massachusetts. Clarke v. Stanwood, 166 Mass. 379, 34 L. R. A. 378, 44 N. E. 537.
Minnesota. Loomis v. Wallblom, 94 Minn. 392, 69 L. R. A. 771, 102 N. W. 1114.
New Jersey. Murphy v. Nicholson, 87 N. J. L. 278. 94 Atl 62.
Wisconsin. Curtis v. Woodward, 58 Wis. 499, 46 Am. Rep. 647, 17 N. W. 328.
2 Clarke v. Stanwood, 166 Mass. 379, 34 L. R. A. 378, 44 N. E. 537.
In other jurisdictions it has been held that a discharge of an individual member of a firm does not bar his liability on partnership debts.7
It has been held that a discharge can not be granted to an individual partner in a proceeding against the partnership only; since the individual parties are not parties, their individual estates are not affected, and the debts of the partnership are therefore not provable claims against the estates of the individual partners in such proceeding.8 On the other hand, it has been held that, whether a partnership is an entity distinct from its members or not, the debts of the partnership are the direct and primary debts of the partners, even under the bankrupt act; and that it would be inconsistent to grant a discharge from a partnership debt as a joint debt, and to leave the partners severally liable thereon.9 If there is no agreement between the partners and the creditors of the partnership, that the partners shall remain personally liable, a discharge of the partnership in bankruptcy under a composition agreement operates as a discharge of the individual partners,10 even if the creditors had believed that the partners would remain liable personally, and accordingly had insisted upon the omission, from the composition agreement, of a provision discharging the partners from liability.11 The fact that the partnership does not ask a discharge in bankruptcy proceedings does not prevent an individual partner from instituting voluntary bankruptcy proceedings and from seeking a discharge from liability for partnership debts.12
3 McCord-Brady Co. v. Mills, 8 Wyom. 258, 46 L. R. A. 737, 56 Pac. 1003.
4 In re Laughlin, 96 Fed. 589; In re Hartman, 96 Fed. 593.
5 In re Laughlin, 96 Fed. 589; In re McFaun, 96 Fed. 592; In re Russell, 97 Fed. 32.
6 In re McFaun, 96 Fed. 592.
7 Glenn v. Arnold, 56 Cal. 631; Perkins v. Fisher, 80 Ky. 11.
8 In re Meyer, 98 Fed. 976, 39 C. C. A. 368; In re Barden, 101 Fed. 553; Strause v. Hooper, 105 Fed. 590; In re Hale, 107 Fed. 432 (involuntary proceedings); In re Pincus, 147 Fed. 621: In re Bertenshaw, 157 Fed. 363, 17 L. R. A. (N.S.) 886.
As to the property and effect of a bankruptcy proceeding against a partnership, to which the partners are not parties, see Francis v. McNeal, 228 U. S. 695, L. R. A. 1915E, 706, 57 L. ed. 1029.
9 Francis v. McNeal, 228 U. S. 695, L. R. A. 1915E, 706, 57 L. ed. 1029 [overruling, In re Bertenshaw, 157 Fed. 363, 17 L. R. A. (N.S.) 886, and following Vaccaro v. Security Bank, 103 Fed. 436].
10 Abbott v. Anderson, 265 111. 285, L. R. A. 1915F, 668, 106 N. E. 782.
11 Abbott v. Anderson, 265 111. 285, L. R. A. 1915F, 668, 106 N. E. 782.
"The defendants withdrew their objections to the composition upon the proviso being stricken out, and when it had been stricken out there was nothing to which the objections could apply. The objections were not withdrawn upon the faith of any agreement that the partners should remain individually liable for any deficiency, or upon any agreement that the law was as understood by the referee and the court, and the only effect of striking out the proviso was to leave the composition to have its legal effect without any agreement on the subject. We do not find any ground of estoppel against the complainant. The examination of the partners had shown that some of them were solvent and their individual assets might have been drawn into the administration, but the creditors preferred to accept the offer of composition merely from a mistaken view of the law." Abbott
A discharge given to a partner in proceedings in bankruptcy is a defense to a liability due from him to the other partner, growing out of the partnership transactions, if such claim was a provable debt when the proceedings were begun.13 If, however, such obligation was not a provable debt when the proceedings in bankruptcy were begun,14 as where it arose out of a judgment rendered after the bankruptcy proceedings were begun,15 the discharge of such partner is not a defense thereto.