Morrisey v. Berman , 94 N.Y.S. 596 ( 1905 )

Scott, J.

This action was brought against two defendants, Charles Cohen, who defaulted, and the respondent, Berman, upon a promissory note made by them while copartners. Berman pleaded, and it was so proven, that after the making of the note the copartnership between himself and Cohen had been dissolved; that the assets had been taken over and the copartnership liabilities assumed by Cohen, and that notice of such dissolution, taking over and assumption had been given to plaintiff. It was also alleged, but not proven, that plaintiff, with knowledge of these facts, and without the consent of the defendant Berman, had extended the time of payment of the note, thereby discharging the respondent from liability thereon. The learned justice held, as matter of law, that the dissolution of the firm, and the taking over by one partner of all the copartnership assets, and his assumption of the firm liabilities, notice thereof having been given to the plaintiff, cast upon him the obligation, as a firm creditor, to look primarily to the partner who took over the assets and assumed the debts, and that the retiring partner might not be proceeded against until the plaintiff’ had pursued and exhausted his remedy against the continuing partner. The necessary exception having been taken,' the question presented by this appeal is the correctness of the ruling of the learned trial justice. "The well-established rule respecting the relative liabilities after dissolution of persons who have been members of a partnership is well stated in United States National Bank v. Underwood, 2 App. Div. 342, as follows: “ It is not to be disputed that, when a firm is dissolved and one of the partners takes the assets and assumes the liabilities,, the other partner occupies thereafter the position of a surety, not only as between the partners themselves, but as to all others who have had dealings with the firm, to whom notice of the new contract has been brought.” It has accordingly been frequently held that if a firm creditor, under such circumstances, gives a valid extension of credit to the continuing partner, without the consent of the retiring partner, he thereby absolves the latter from obligation upon the indebtedness. Such absolution can only result from the creation, by the dissolution and notice, of a relation analogous to that of principal and surety between the continuing and retiring partner, a relation which the film creditor, having notice, is bound to recognize and respect. It must also follow as a consequence of the creation of this relation, upon the plainest principles, that the creditor must first prosecute his remedy against the principal before he may have recourse to the surety. But it is said that the creation, in the manner described, of the relation of principal and surety as between the debtors themselves, does not in any manner alter or modify the original contract or the common liability; that that remains an unchanged fact, and may be enforced as freely and perfectly as ever against all the debtors. Palmer v. Purdy, 83 N. Y. 144. A consideration of the obligation arising out of copartnership debts will make it readily apparent that the rule applied by the learned court below does not in any degree alter or modify the original contract. The assets of the firm are the primary fund for the payment of partnership debts, and even in the case of a going partnership recourse must first be had to the partnership assets before satisfaction can be sought out of the individual property of partners. True in such a case all the partners are sued, but this is because they all have, in legal contemplation, the possession and ownership of the partnership assets. It is, therefore, both logical and just that, after a dissolution in which one partner has taken all the assets and assumed the payment of all the debts, recourse should first be had to the partnership assets, which, in the absence of allegation or proof to the contrary, must be assumed to be sufficient to pay the debt. In this way the creditor gets precisely what he contracted for, anil what he would have had if there had been no dissolution, to wit: first, recourse to the partnership assets, and then, if these prove insufficient, recourse over to.the individual property of the copartners with whom he contracted. A precisely Similar question is presented where a member of a copartnership has died. His estate still remains contingently liable upon the copartnership obligation, but his executor may not be joined, in the first instance, with the surviving partner, in an action upon the obligation. The reason is the same as that which seems to apply to the case at bar. The surviving partners having succeeded to the possession and control of the partnership assets, which constitute the primary fund for the payment of the obligations, are primarily liable for the debt, and the individual estate of the deceased partner, or, in this case, the individual estate of the retiring partner, can only be resorted to in case of the insufficiency of the copartnership assets. Voorhis v. Childs, Exr., 17 N. Y. 354. In the- case at bar, Cohen, the continuing partner, became the principal debtor, not because as between himself and his copartner he had undertaken to pay the debt, but because by the terms of the dissolution he had come into possession and sole ownership of the partnership assets which from the beginning constituted the primary fund for the payment of the debt. It may be said that every member of a copartnership assumes a dual liability for the firm’s debts. As joint owner of the partnership assets he is primarily liable up to the amount of those assets. If they prove to be insufficient he is contingently liable as an individual for so much as the assets will not satisfy, but his individual liability does not accrue until the insufficiency of the copartnership assets is made to appear. By the assignment of all the firm’s assets to Cohen, Berman’s primary liability as joint owner of the assets terminated. The assets — the primary fund — still existed but were solely owned by Cohen and a judgment against him alone was the appropriate method to reach them. Berman’s individual liability still continues as before, and precisely to the same extent and upon the same condition; that is, he remains individually liable for so much of the debt as cannot be realized out of the copartnership assets. But until recourse has been had to the firm assets (which can only be done by judgment against the continuing partner), and they have proven insufficient, the individual liability of the retiring partner has not become established. It follows that the learned justice below applied the correct rule to the facts as they appeared. As the appellant may still be liable upon his contingent obligation the words “ on the merits ” should be stricken from the judgment in order to preclude a possible plea of res adjudicata in case an action to enforce his individual liability should hereafter be properly brought.

The judgment as thus modified will be affirmed, with costs.

Leveettritt, J., concurs.