Hall & Ruckel v. Johnston, Hill & Co. , 6 Tex. Civ. App. 110 ( 1894 )

I agree to the disposition made of this appeal, but dissent from the views expressed by the majority of the court in so much of the opinion that announces the doctrine that a retiring partner, upon the promise of those remaining in the firm to pay the debts of the firm for which he and they were liable, occupies, to creditors of the old firm with notice of this fact, the relation of surety only, although the creditor was not a party to such arrangement. In other words, the proposition, briefly stated, is that the retiring partner under such circumstances changes his status from that of a principal debtor to that of surety for the debts of the old firm, notwithstanding the creditors of the old firm have not assented to such change. I can not agree to this doctrine.

The two principal cases relied upon by the majority of the court as authority for its views (Colgrove v. Tallman, 67 New York, 95, and Smith v. Shelden, 35 Michigan, 42), in the main seem to base their holding upon the authority of the case of Oakeley v. Pasheller, 4 Clark Finnelly, 207 (same case, 10 Bligh, N.S., 548). This was a decision by the House of Lords in 1836. This case was subsequently, in 1876, reviewed in Swire v. Redman, 1 Queen's Bench Division, 536. Cockburn, Chief Justice, speaking for the court, disapproves the doctrine announced in Oakeley v. Pasheller, and holds that partners can not change their relation to their creditor without his assent. This case establishes what we understand now to be the law in England.

As said in the opinion of the majority of the court, the cases in America are divided on this question; but it seems from a review of these cases, as far as examined, that those that support the opinion of the court rest in the main upon the case of Oakeley v. Pasheller, which we found is no longer authority in England.

In Whittier v. Gould, 8 Watts, 485, the court held, that upon the dissolution of a firm, an arrangement between the partners by which the debts were to be paid by one of them does not affect the liability of the others as to the creditors who knew of the arrangement.

In Finsler v. Prather, 43 Indiana, 120, in construing a statute of Indiana that authorizes the surety to notify the creditor in writing to bring suit upon his obligation, and for failure so to do will operate as a discharge of the surety, it was held, that the provisions of the statute did not apply to a retiring partner when the remaining members of the firm assumed the debts of it. It was held that such retiring partner was not a surety that could invoke protection of the statute. The statute construed in that case is similar to the one existing in this State upon the same subject.

In Rawson v. Taylor, 30 Ohio State, 399, it is held, that a partner remains liable for all the existing debts of the firm to the same extent as if he had not retired. An agreement between him and the remaining partners, or with the new firm that succeeds, that they will assume and pay all such debts, while valid as between the partners, has no effect upon the creditors of the old firm, unless they become parties thereto.

In a recent and well considered opinion, the Supreme Court of Appeals of West Virginia lays down the doctrine, that it is not in the power of joint debtors to change by agreement among themselves their relation to their common creditors; and "as between the partners and the creditors, they were all equally bound, and no understanding and agreement between themselves could change that relation so as to impair his rights." Barnes v. Boyers, 34 W. Va. 304.

In Skinner v. Hitt, 32 Missouri Appeal Reports, 402, in effect, it is held, an agreement between partners at the time of dissolution that the continuing partners would pay all the firm debts only binds the parties making it, and does not change the relation of the retiring partner to the creditors of the firm.

The Supreme Court of the State of Washington, in the case of Wadhams v. Page Green, 1 Washington State Reports, 421, holds that a simple agreement between partners that one of them should be discharged, although the creditor has notice to that effect, will not affect the rights of the creditor unless he is a party to such arrangement. And for thus holding, the opinion cites as authority: 30 Me. 412; 26 Barb., 461; 26 Minn. 123; 43 Iowa 506; 5 Cor. Payne, 397; 4 Wn. C.C., 98; 10 Pa. St., 124; 39 Barb., 634; 47 Ala. 104.

The Supreme Court of the United States, in the case of Shepard v. May, 115 United States, 510, holds, that an express promise, made to the vendor by the vendee of real estate conveyed to him subject to a deed of trust executed to secure a debt, that he will discharge it, does not, without the assent of the creditor, make the vendee the principal debtor and the vendor the surety.

In the brief of the appellant in this case it appears that Colgrove v. Tallman, 67 New York, and Oakeley v. Pasheller, 10 Bligh, and Metz v. Todd, 36 Michigan, and similar cases, were relied upon as authority, and the doctrine there announced, and followed by this court in the majority opinion, was sought to be forced upon the Supreme Court of the United States, which, we have seen, announced the contrary doctrine.

So far as I have been enabled to examine the several works of the most prominent writers on the subject of partnership, they with striking unanimity agree that the retiring partner does not, by virtue of any arrangement between him and the remaining partners, change his status as a principal obligor to the creditors of the firm, although they have knowledge of such arrangement.

Story lays it down, "That the dissolution of a partnership, whether by voluntary act or will of the parties, or by the retirement of a partner, or by mere afflux of time, will not in any manner change the rights of third persons as to any past contracts and transactions with or on account of the firm; but their obligations and efficacy and validity will remain the same and be binding upon the partnership in the same manner as if no dissolution had taken place." Story on Part., 7 ed., sec. 334.

Again, in section 158, the author says: "It frequently happens that upon the retirement of one partner, the remaining partners undertake to pay the debts and to secure the credits of the firm. This is a mere matter of private arrangement and agreement between the parties, and can in no respect be admitted to vary the rights of the existing creditors of the firm."

Collyer says: "Of course, any arrangement between the partners themselves can not limit or prevent their ordinary responsibilities to third persons, unless the latter assent to such arrangement." 1 Coll. on Partnership, ch. 17, sec. 407.

Again, in volume 2, chapter 24, section 596, he says: "In order that one liability may be replaced by another, by agreement, it is essential that the person in whom the correlative right resides should be a party to the agreement, or should, at all events, show by some act of his own that he accedes to the substitution."

Mr. Parsons, in his work on Partnership (third edition), 428, in no uncertain terms states his views thus: "No dissolution of any kind affects the rights of third parties who have had dealing with the partnership, without their consent. This is a universal rule, without any exception whatever. Undoubtedly the partners may agree as they please about their joint property, and all the parts of it, and so they may about their joint obligations; and all such agreements are valid, so far as they do not affect the rights of strangers; but where they do, they are wholly void. Thus three partners may agree to-day to dissolve and to divide all the property in a certain way, specifying that one shall have this, another that, and the third that thing. Or they make such an agreement about some one or more things, and not about all. And these agreements determine the property in these things effectually as to the partners themselves. But they are all responsible in solido for the debts due by the firm, and all the joint property of the firm is just as liable for the joint debts after such division or settlements among themselves as it was before. So, too, it is very common for the partners to agree not only that one of them may settle and wind up the partnership concern, but that one or more shall wind it up, and for that purpose shall have in full property all the goods or funds and business, or a certain part of them, and shall pay all the debts, and this he undertakes to do. Such an agreement is so far binding on the partners, that if either of the others is obliged to pay a debt thus assumed by a partner, the partner paying may have his action for the money against the partner who undertook to pay; but so far as the creditors are concerned, all the partners remain just as responsible to all the creditors after such an agreement as they were before."

Mr. Bates, in his recent work on Partnership, is not as decided in his views as the other authors quoted, but he evidently, from the manner in which he treats the question, inclines to the opinion entertained by these writers. 1 Bates on Part., secs. 533, 534.

As far as can be ascertained from the opinion, we believe the case of Mogelin v. Westhoff, 33 Tex. 789, announces the same doctrine.

The liability and the status of the parties are fixed by the contract, and the relation in which the parties stand to each other as determined by the engagement is as much a part of the obligation and terms of the contract as is the promise to pay, or any other essential feature of it. And it seems to me, that if the status of the party, or his liability in the form and manner in which he became bound when he entered into the engagement, can, without the consent of the creditor, be changed, it would be equally permissible to change the terms of the contract or the obligation of the parties in any other essential feature. It is a matter of contract, and as the parties have so obligated themselves they should so be bound, and should not be permitted to change their liability without the assent of the creditor. Any other rule would have the effect of impairing and changing the obligations of the parties and the terms of the contract without the consent of the parties to it. An act of the Legislature or a judicial decision that reaches to this extent would unquestionably be opposed to the spirit of the fundamental law that protects the inviolability of contracts.

It is no answer to this proposition to say, as the majority opinion undertakes to do, that the change of the status of the party from that of principal to surety does not change his liability or the terms of the contract and the obligation by which he was bound. The very facts of this case will illustrate the fallacy of such an argument. For if the retiring partner's situation was not changed, and he had remained bound as a principal, he could be held liable as a principal debtor in all events, and under no contingency would he be released; but if his condition is changed from that of principal to surety, he may be relieved from his debt, as in the case now before us. Of course the surety, when he enters into the obligation, is bound as well as the principal, and the creditor has his remedy against both, but the obligation of the surety and his unconditional liability is not to the same extent in all cases as that of the principal obligor. The principal obligor is unconditionally bound in all events, and no contingencies or circumstances may arise that will relieve him from his obligation; but such is not the case with the surety; he may or may not be bound, as subsequent circumstances and conditions may arise. His liability is not to that unqualified extent as that of the principal.

It seems to me that the parties to the contract have the right to rely upon the engagement as they originally made it. Mutual considerations and promises lead to the execution of the contract, and I do not think that the courts have authority, without the consent of the parties, to disturb their relations and conditions as fixed by the contract, and substitute in lieu of it something never agreed to. It is a valuable right and a valuable privilege, and one of importance, that the creditor has to hold his debtors to the contract and the promises made as originally fixed by the agreement. And if they can be relieved in one respect from the operation of the contract by which they became voluntarily and legally bound, they may find relief from other conditions imposed by the same agreement that are equally valid. We do not understand that a court of law or equity will either do this, but will leave the obligation unimpaired as the parties have made it, unless it be in cases in which the policy of the law will avoid the contract, or the party, on the ground of accident, fraud, or mistake, may be relieved of its operation. No question of this kind is involved in the principle under discussion.

In my opinion the views of the court upon this question are not the correct doctrine.