John J. White, Jr. v. William A. Brown

FAHY, Circuit Judge.

The question we have to decide is whether or to what extent a partner who retires from a partnership, as did appellant White, under an agreement with two continuing partners that the latter would be responsible for the partnership debts and indemnify him, was. released in the circumstances to be stated from an indebtedness of the partnership to appellee Brown. The indebtedness grew out of professional services-rendered by appellee, a consulting engineer, to the partnership, a firm of' architects. The amount due for the services, with some adjustments arising out of other accounts between appellee and' the partnership, was $20,659.27, for which appellee obtained judgment in the District Court. The case was tried before a jury.

It appeared that the partnership had' been dissolved in January 1957 and that appellee was notified of this in April of that year. There was evidence from which it could be found that appellee was-advised by appellant of his agreement with the continuing partners as above set forth, and that appellee in September 1957 accepted a series of twelve promissory notes executed by the continuing-partners, one of the series payable each month in the principal sum of $2,000> with interest at six per cent. The promisors failed to pay any of these notes and' became insolvent within less than a year after the dissolution agreement. There was also evidence that at a meeting of creditors in April 1958 appellant was notified that he would be held responsible.

The above appearing to be undisputed, the District Court, at the conclusion of1 appellant’s case, directed a verdict in appellee’s favor in the principal sum of $20,659.27, with interest.

Appellant contends that the court erred on the grounds that (1) a principal-surety relation arose between the continuing partners and himself by reason of the indemnity agreement, and the appellee by his conduct discharged appellant, the surety, from obligation to him; and (2) appellee also discharged appellant by accepting the liability of the continuing partners in lieu of that of the original partnership.

We consider first the latter contention. The conduct relied upon by appellant consisted of continued dealings by appellee with the remaining partners while knowing they had assumed the obligation of the old firm, billing them for the indebtedness, and taking their notes therefor.

Reliance is placed by appellant upon Regester v. Dodge, C.C.E.D.N.Y.1881, 6 F. 6, an old and impressive case, having to do as does the instant one with the •obligation to a creditor of a partner who, with knowledge of the creditor, had re-fired from a partnership when it was indebted to the creditor. On the facts, •which more clearly than those before us showed an intention of the creditor to look solely to the remaining partners, it was held he had discharged the retired partner. The court said that the liability • of the latter continues “unless facts be shown from which an intention on the •part of the creditor to accept the liability ■ of the new firm in lieu of the liability ■of the old firm can be fairly inferred.” 6 F. at page 9. The court said:

“In disposing of questions of this character, courts have frequently held that, when the dissolution of an ■ old firm has occurred, and a new firm has agreed to assume the liabilities of the old firm, but slight circumstances are required to justify finding an intention on the part • of a creditor of the old firm, who has notice of the dissolution and of the .agreement by the new firm, to ae- • cept the liability of the new firm in place of the liability of the old. • * * ‘Very slight evidence, in-deed, would be required to establish that the creditor had taken the .liability of the new firm instead of vthe old.’ ” 6 F. at pages 9-10.

While ' the indemnity agreement could not in itself alter the rights of creditors, yet, whether or not the creditor is a party to the agreement, if constitutes a promise made for his benefit and one of which he as at liberty to take advantage. Byvesky v. Agins, 1924, 100 N.J.L. 75, 125 A. 574. If appellee assented to the arrangement and adopted the remaining partners as his debtors, then the liability of appellant is at an end. Appellant was discharged from his liability if there was an agreement to that effect between himself, the remaining partners and appellee; and such agreement may be inferred from the course of dealing between the remaining partners and the creditor who has knowledge of the dissolution agreement. See Dunbar v. Steiert, 1927, 31 Ariz. 403, 253 P. 1113; International Harvester Co. of America v. Layton, 1921, 148 Ark. 156, 229 S.W. 22; LeGault v. Lewis-Zimmerman, 1922, 28 Wyo. 474, 206 P. 157; Lindley on Partnership 316-18, 323-26 (11th ed. 1950), and cases there cited; Uniform Partnership Act § 36(2).

We do not adopt the “slight evidence” criterion set out in Regester v. Dodge, supra, which is not generally approved, see 6 Williston, Contracts § 1875, at 5264 (Rev.ed.1938), but that aside there is enough evidence in this case to go to the jury on the issue of discharge by agreement. The evidence tends to show more than a continued dealing by the appellee with the remaining partners. That alone is not enough. Tuckerman v. Mearns, 49 App.D.C. 153, 262 F. 607. But we do not find the Tuckerman case or others cited by appellee, Wadhams v. Page, 1890, 1 Wash. 420, 25 P. 482 and Michelin Tire Co. v. Akers, 1927, 32 N.M. 234, 255 P. 388, 52 A.L.R. 494, to bear sufficient factual similarity to the case at bar to militate against the position we take. Appellee not only continued for some time to deal with the new partnership with respect to the matters now in suit but also took the notes of the remaining partners, eonstruable as extending for a definite period the time for payment of the indebtedness. And there was evidence that appellee acted with knowledge of appellant’s withdrawal and the assumption of the debt by the remaining partners. That this conduct continued over a relatively brief period of time is a factor to be considered. But the gist of the matter is that the evidence was sufficient to be submitted to the jury for its determination whether an agreement to discharge appellant’s liability should be inferred.

We come to appellant’s further contention that he became a surety for the indebtedness to appellee, and that the latter’s conduct brought about appellant’s discharge from his obligation as surety.

Where a partner withdraws from a partnership under an agreement with his former partners who continue the business that they assume the partnership obligations and will indemnify him, and notice of these arrangements is given a creditor, who acquiesces in the situation, the rule derived from a majority of the decisions appears to be that the withdrawing partner becomes a surety for the payment of the obligation. This occurs by operation of law, that is, by equitable implication, rather than by express agreement between the creditor and the withdrawing partner.

In Mearns v. Chatard, this court said:

“The authorities bearing upon this question may be arranged under two categories. The first holds that the retiring partner continues liable unless expressly released by the creditor; and the second, that he becomes a surety for the payment of the debt by his former associates, and is absolved from all responsibility in connection with it by any act of the creditor which would ordinarily release a surety. The cases in the first category are illustrated by the following statement in an elaborate note to Dean v. Collins, 9 L.R.A.(N.S.) 77: ‘A retiring partner is not discharged from liability to a firm creditor, therefore, by any agreement between partners for the payment of the debts of the firm by one or more of them, unless the creditor has assented thereto, and agreed to look to the other members of the firm for payment of his debt.’ And those in the second category are exemplified by this excerpt from the same note: “The rule, apparently based upon Oakeley v. Pasheller, 4 Clark & F. 207, 7 Eng.Reprint, 80, 10 Bligh, N.R. 548, 6 Eng.Reprint, 202, and which seems to be sustained by the weight of authority in England, and which is sustained by authorities entitled to high respect in America, and which seems to be there growing in favor, is that, when a firm is dissolved, and one of the partners takes the assets and assumes the liabilities, the other partner thereafter occupies 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.”¹

We adopt the rule which appears to have the support of the weight of authority, with a qualification now to be noted. A compensated surety is not discharged by an extension by the creditor of a definite period of time for payment, except to the extent that the surety is harmed by the extension. Chapman v. Hoage, 296 U.S. 526, 56 S.Ct. 333, 80 L.Ed. 370, Restatement, Security § 129 (1941). We think appellant’s position is analogous to that of a compensated surety. Before he retired and when the indebtedness was incurred, appellant was personally liable, jointly and severally with his partners. On his retirement he could not fairly be said to have acquired the status of a gratuitous surety, that is, one who obligingly lends his credit to another; so to consider the matter would be to disregard entirely the fact that before his retirement the partnership relation had imposed upon appellant a primary obligation. If he were in the position of a gratuitous surety he would be released by a definite extension of time by the creditor for payment, granted

1. 47 App.D.C. 257, 262-263. to the principals without his consent, if supported by a consideration. Prejudice need not be shown. But appellant is not in a like position. His suretyship status, as we have said, arises by implication only and under equitable principles. Equity, therefore, should follow his status and permit his discharge as surety only to the extent he is harmed by the conduct claimed to bring about such discharge.²

On his defense of release first .above considered appellant conceded no prejudice, taking the position, we think ■correctly, that prejudice need not be shown as a condition to that defense. But this concession was not made with respect to his defense of discharge as a surety. In view of the rule we now .adopt based on the suretyship relation appellant should be given an opportunity to prove the extent, if any, of prejudice. Otherwise stated on this branch of the case the jury would be entitled to consider on the evidence whether or not the giving of the notes, in terms for value received, was intended to and did constitute a definite extension of time for the payment of the original indebtedness, and, if so, the court should also instruct the jury that this would release the retired partner from obligation to the appellee to the extent, if any, that appellant could show he was prejudiced by the extension.

Reversed and remanded for further proceedings not inconsistent with this opinion.

2 . Cf. Note, 10 Colum.L.Rev. 550 (1910).

1 . Although an indemnity agreement cannot limit the rights of creditors, it may have the effect of enhancing their rights, as Byvesky v. Agins, 1924, 100 N.J.L. 75, 125 A. 574, cited by the majority, demonstrates. That was a suit upon a joint ■obligation against a continuing partner. Defendant asserted that the joint character of the obligation made the retired partner’s presence essential to the litigation. Plaintiff interposed the indemnity agreement, under which defendant bad agreed to accept an individual liability, and the defense was overruled.