The partnership principle, upon which the right of the partnership creditor to look to the estate of the individual partner rests, is that each partner is liable for the whole of the partnership debts.1 This liability is secondary. Where the common law view of the nature of a partnership prevails, the liability of each partner in solido is secondary to the joint liability of all. Under the theory of the bankruptcy act, each partner occupies the position of surety for the firm. On the default of a principal obligor, the liability of his surety becomes absolute. A creditor is allowed to prove against the estate of the surety on this absolute liability, regardless of the financial condition of the principal. The decisions under the common law view of the nature of a partnership, which make an arbitrary exception to the arbitrary rule of distribution, in permitting the partnership creditors to prove pari passu with the individual creditors in the absence of solvent partner or partnership assets, though explained on a mistaken notion of the equity rule of marshaling, can be supported on no other ground than that of the absolute liability of the partner on the default of the partnership. Proof against the estate of the partnership, the principal obligor, should in no way prejudice the right of the creditor to prove against the estate of the partner, the surety.5 To prejudice this right is, in effect, to admit that the law, which gives to the partnership creditor the security of the individual liability of the partner, deprives him of that security in whole or in part, as soon as its possession becomes of value. Of course, the creditor should not be permitted to recover more than one hundred per cent of his claim, but such defense as the partner might have against such recovery, would go to the amount of the recovery, and not to the time or amount of the proof.

The Bankruptcy Act, in acknowledging the entity of a partnership, must perforce acknowledge that the relation of a partner to his firm's liabilities is that of a surety. A method of distribution

1 Lindley on Partnership *200; Parsons on Partnership, 4th ed., 328, 329. 25 HARV. L. REV. 406.

9 N. B. Rep. 373.

3 In re West, 39 Fed. Rep. 203; In re Downing, 3 N. B. Rep. 748; In re Rice, Under the act of 1898 this exception appears to have been retained. Fed. Rep. 118; In re Conrader, 118 Fed. Rep. 676. Contra, In re Wilcox, 94 Fed. Rep. 84, 107; In re Mills, 95 Fed. Rep. 269.

In re Green, 116

In re Wilcox, supra.

5 Ex parte Marshal, 1 Atk. 129; Lord Eldon in Ex parte Rushforth, 10 Ves. 409; In re Pulsifer, 14 Fed. Rep. 247; In re Myers, 78 Wis. 615; Williams v. Importers' Bank, 44 Ill. App. 295, 297; In re Bates, 118 Ill. 524; Citizen's Bank v. Patterson, 78 Ky. 291, 295; In re Souther, Ex parte Talcott, 2 Low. (U. S. Dist. Ct.) 320.

which denies a firm creditor the same right against a partner surety which it allows against a surety for a partnership, who is not such by reason of being a member of the firm, is, to say the least, anomalous. The provisions which postpone the partnership creditor to the individual creditor in participating in the individual assets are unsound in principle and not in harmony with the balance of the act.

There is, however, one principle of equity which might reduce the amount upon which dividends would be paid from the estate of the individual partner, namely, the principle of marshaling. The partnership estate and the individual estate of the partner constitute two funds in the hands of the bankruptcy court, both of which may, in the first instance, be resorted to by the partnership creditors, and one only by the individual creditors. Equity would compel the partnership creditors to exhaust the partnership estate before resorting to that of the partner. Whether or not this would reduce the amount upon which dividends should be allowed from the individual estate would depend upon whether the court adopted the theory that the amount upon which dividends should be allowed is that due at the time of distribution, or that due at the time of proof. If the former view be adopted the partnership creditor's claim against the individual estate should be reduced by the amount received from the partnership estate, but he should in no event be postponed to the individual creditors.

Whichever of these views is adopted, the same results follow from the application of a third rule of the substantive law of partnership, without regard to the equity rule of marshaling. Each partner has a so-called lien or equity to compel the application of the firm assets to the payment of the partnership debts.2 This

1 Authorities on these conflicting theories are irreconcilable. The following seem to support the view that the amount upon which dividends should be allowed is that due at the time of distribution. Security Investment Co. v. Bank, 58 Kan. 414; Delaware Co. v. Oxford Co., 38 N. J. Eq. 151; State Nat. Bank v. Esterly, 69 Oh. St. 24; Savings Bank v. Woodward, 137 Mass. 412; Bank v. Bank, 80 Md. 371, 382, 383; Whitaker v. Bank, 52 N. J. Eq. 400, 418; State v. Nebraska Savings Bank, 40 Neb. 342, 352, and cases cited 58 Cent. L. J. 111, n. It will be noted that many of these decisions are in cases in which the securities exhausted belonged to the estate of the insolvent, and the courts looked upon the amounts realized as payments by that estate. The following seem to support the contrary view. Cases cited in n, 5, p. 500; cases cited in 58 Cent. L. J. 111, n.; Merrill v. Nat. Bank, 173 U. S. 132; Furness v. Union Nat. Bank, 147 Ill. 570, 573; Kellogg v. Miller, 22 Ore. 406, and cases therein cited.

2 Lindley on Partnership* 351; Bates on Partnership § 820, p. 867.

equity is sometimes said to be based upon an implied term of the partnership articles. The doctrines of suretyship make a resort to this implication unnecessary. As has been seen, under either view of the nature of a partnership, the individual liability of a partner is secondary. He has the surety's right to exoneration by his principal, which right matures with the maturity of the obligation. This right to exoneration would compel the application of partnership assets to partnership debts before recourse is had to the individual estates, whenever the court has jurisdiction over partners and partnership.

The remaining partnership principle which enters into the distribution of the firm and individual assets, is that a partner paying a partnership debt is entitled to reimbursement from the partnership, or contribution from the partners, after the creditors of the firm have been satisfied, provided a balance is due him on a statement of the partnership account.2 This right to reimbursement and contribution also finds its explanation in the equitable doctrines of suretyship.3 The exercise of this right is postponed until the partnership creditors have been satisfied, because each partner is surety for every debt of the partnership and hence cannot equitably compete with the firm creditors. The situation is analogous to that of a surety on several notes secured by the same collateral. On paying one of the notes he is not entitled to subrogation to its holder's rights, so as to compete with the holders of the remaining notes." "Indemnification and not profit is the measure of the surety's recourse" against both the principal and the co-surety. The right to reimbursement from the partnership estate is limited to the amount actually paid by the partner or his estate. The surety cannot profit at the expense of his princi

1 See Ames, Cases on Suretyship 598, n. and cases cited.

2 Collyer on Partnership, 6th ed., § 109; Bates on Partnership § 836, p. 893; Lindley on Partnership * 383, 721 et seq., 740; Coleman v. Coleman, 78 Ind. 344, 347; Lyons v. Murray, 95 Mo. 23; Gordon v. His Creditors, 6 Rob. (Ala.) 328; Fissler v. Hickersnill, 82 Pa. St. 150.

3 Pratt v. Law, 9 Cranch (U. S.) 456; Simpson v. Gardiner, 97 Ill. 237, 241; Haverford v. Fire Ass'n, 180 Pa. St. 522; Stebbins v. Willard, 53 Vt. 665; Dobyns v. Rawley, 76 Va. 537.

♦ Amsinck v. Bean, 22 Wall. (U. S.) 395, 402; Emery v. Bank, 7 N. B. Rep. 217; Ex parte Lodge, 1 Ves. Jun. 166; Ex parte Maude, L. R. 2 Ch. App. 555; McLean v. Johnson, 3 McLean 202.

Carithers v. Stuart, 87 Ind. 424, 433; Massie v. Mann, 17 Ia. 131, 135. Cf. Ex parte Marshal, 1 Atk. 129; Ex parte Watson, 42 L. T. R. 516; Farebrother v. Wodihouse, 23 Beav. 18. See also cases under n. 2, supra.

pal. The right to contribution does not arise until a surety has paid more than his share. Hence, unless the payment made before bankruptcy, or the dividend paid from the partner's separate estate, is in excess of his proportionate share of the whole debt, there is no right to contribution. The partner who has paid the whole of a partnership debt should, on the theory of subrogation,3 be permitted to prove against the other partners to the full amount of the debt, and to receive dividends until reimbursed for all except his aliquot part. But the authorities seem to regard only the right to contribution and to limit the proof to the due proportion of the partner against whom proof is made."

The rule against double proof would bar any right to reimbursement or contribution if the creditor has proved against the estates of the partnership and the partners.

The following have been found to be the rules of substantive law entering into the distribution of the assets of the estates of partners and partnership.

(1) The interest of each partner in the partnership property is his proportion after the payment of the partnership debts.

(2) Each partner is liable for the whole of the partnership debts.

(3) Each partner has an equity to compel the application of the firm assets to the payment of the partnership debts.

(4) A partner paying a partnership debt is entitled to reimbursement from the partnership, or contribution from the partners, provided a balance is due him on a statement of the partnership

account.

In the first of these rules we find the justification of the partnership creditor's priority in the partnership assets; in the second, is the basis of the right of the partnership creditor to share in the assets of the individual estates; in the third, we find the

1 Succession of Dinkgrave, 31 La. An. 703, 707; Eaton v. Lambert, 1 Neb. 339: Martin v. Ellerbe, 70 Ala. 326, 338; Coggeshall v. Ruggles, 62 Ill. 401; Delaware Co. v. Oxford Co., 38 N. J. Eq. 151; Mathews v. Hall, 21 W. Va. 510, 514.

2 Davies v. Humphreys, 6 M. & W. 153; Ex parte Snowdon, 17 Ch. D. 44; Richter v. Heming, 110 Cal. 530, 537; Hooper v. Hooper, 81 Md. 155; Bushnell v. Bushnell, 77 Wis. 435.

• Cases cited in n. 3, p. 502.

Pace v. Pace, 95 Va. 792; Hess's Estate, 69 Pa. St. 272; Professor Ames in 5 HARV. L. REV. 406.

5 Ex parte Watson, Buck 449, 455; Ex parte Smith, ibid. 492. Cf. Ex parte Moore,

2 Gl. & J. 167, 172; Ex parte Plowden, 2 Deac. 456, 463.

• In re Bingham, 94 Fed. Rep. 796; Wolmerhausen v. Gullick, 2 Ch. 514.

partnership creditor compelled to exhaust the partnership assets before receiving dividends from the individual estates, and in the last, we find an equitable adjustment of the claims of the partners and partnership against one another.

The Bankruptcy Act of 1898 in section 5 f provides for the partnership creditor's priority in the partnership property. Section 5 g, a novelty in bankruptcy legislation, provides for proof for the purpose of securing equitable distribution of the property of the several estates. This act persists in the confusion of the second and third of the above rules, with the result that it perpetuates in the modern view the error which has become law, by common concurrence, under the common law view of the nature of a partnership. The right of the partnership creditor to share in the individual estates pari passu with the individual creditors has long been recognized as a necessary consequence of regarding a partnership as an entity. The Scotch rule of distribution is that "upon the sequestration of copartners their separate estates are applicable to the payment pari passu of their respective separate debts, and of so much of the partnership debts as the partnership estate is insufficient to satisfy." This rule enforces our second and third doctrines of the law of partnership. It is to be regretted that Congress failed to carry these doctrines into effect, despite the excellent precedent in the Scotch law.

William F. Shroder.

CINCINNATI, OHIO.

1 Bankruptcy of Partners, 7 Law Quart. Rev. 53; 4 HARV. L. REV. 333.

2 Bell, Dig. of Law of Scotland (1882) 706, quoted in Pollock's Dig. of the Law of Partnership, 6th ed., 146 et seq.