Opinion
Jas. G. Pfanstiel, of San Diego, Cal., and Harry Archbald, of Los Angeles, Cal., for petitioning creditors.
F.L. Richardson, of San Diego, Cal., for respondent.
BLEDSOE, District Judge (after stating the facts as above).
The case is before the court on exceptions to the findings and conclusions of the special master to the effect that Fackelman, as surviving partner of Pomeroy & Fackelman, a copartnership, and individually, is and should be adjudged a bankrupt, and also on motion to dismiss the proceedings on the ground that the court is without jurisdiction to entertain the same, because Fackelman has not had his principal place of business, resided, or had his domicile within the territorial jurisdiction of the court for the greater portion of six months next preceding the filing of the petition, as required by Bankruptcy Act, § 2.
Under the law, there seems to be no doubt but that a member of a partnership may, in good faith, and for a valuable consideration, sell and transfer his interest in the partnership to a copartner. The insolvency of the partnership does not work a denial of this right. 30 Cyc. 540; Sargent v. Blake, 160 F. 57, 87 C.C.A. 213, 17 L.R.A.(N.S.) (N.S.) 1040, 15 Ann.Cas. 58; Mechem. Elements of Partnership, § 298; Remington on Bankruptcy, § 2269. If such sale be to a sole copartner, the partnership is thereby dissolved, and, though the partnership creditors may not thereby be deprived of their right to proceed against either member of the previous copartnership, yet they proceed against them individually, and not in any sense as co-partners.
The rule of administration (Sargent v. Blake, supra) requiring the partnership property to be applied in satisfaction of the partnership debts in preference to the individual debts of the respective partners depends, however, upon the partnership being maintained intact; but "if, before the interposition of the court is asked, the property has ceased to belong to the partnership, if by a bona fide transfer it has become the several property either of one partner or of a third person, the equities of the partners are extinguished, and consequently the derivative equities of the creditors are at an end. It is therefore always essential to any preferential right of the creditors that there shall be property owned by the partnership when the claim for preference is sought to be enforced. * * * The joint estate is converted into the separate estate of the assignee by force of the contract of assignment." Case v. Beauregard, 99 U.S. 119, 125, 25 L.Ed. 370. In Fitzpatrick v. Flannagan, 106 U.S. 648, 655, 1 Sup.Ct. 369, page 375 (27 L.Ed. 211), in speaking of the case just cited, the court said:
"In that case it was held, in respect to a firm admitted to be insolvent, that transfers made by the individual partners of their interest in the partnership property converted that property into individual property, terminated the equity of any partner to require the application thereof to the payment of the joint debts, and constituted a bar to a bill in equity filed by a partnership creditor to subject it to the payment of his debt; the relief prayed for being grounded on the claim that these transfers were in fraud of his rights as a creditor of the firm."
That these rules have not been modified by the provisions of the Bankruptcy Act, in view of the decisions, seems clear. The Circuit Court of Appeals of the Fourth Circuit, in Dalton v. Humphreys, 242 F. 777, 781, 155 C.C.A. 365, said:
"The doctrine of a separate partnership entity has been declared, more or less positively, in a number of cases, though with a refinement of reasoning, as it seems to us, that the ordinary mind does not follow with satisfaction. The Supreme Court, however, in Francis v. McNeal, 228 U.S. 695 [33 Sup.Ct. 701, 57 L.Ed. 1029, L.R.A. 1915E, 706], has pointed out the unsubstantial nature of this doctrine, and held, moreover, that the Bankruptcy Act * * * establishes no principles at variance with the common-law rules respecting partnership relations."
It follows, therefore, in my judgment, that after the sale of Fackelman's interest and the consequent dissolution of the partnership, the only remedy of the creditors was to proceed in some form of action against Fackelman and Pomeroy as individuals, or, perhaps, within the four months period provided by the Bankruptcy Act (section 3a, 3b [Comp.St.1916, § 9587]), to have proceeded against the partnership, setting up the transfer of Fackelman's interest as being in fraud of their rights, etc. This they failed to do. Pomeroy, who retained
Page 568.
ownership and control of the business, died some weeks thereafter. After his decease, as to his estate, no proceedings in bankruptcy could be had, and the creditors labored under the necessity of submitting to the jurisdiction and judgments of the probate court. Collier on Bankruptcy (11th Ed.) pp. 146, 147, 175.
Fackelman, having departed the state and established his residence in another jurisdiction more than three months prior to initiation of bankruptcy proceedings (Bankruptcy Act, § 2[1]), even if he be a bankrupt individually, is not subject to the jurisdiction of this court, and, in consequence, neither as to him can an adjudication be had.
I have not overlooked the decision of the Circuit Court of Appeals of this circuit in Holmes v. Baker & Hamilton, 160 F. 922, 88 C.C.A. 104, which may seem opposed to the conclusion announced herein. That decision does not cite or refer to Case v. Beauregard or Fitzpatrick v. Flannagan, supra, and it was written before the decision of the United States Supreme Court in Francis v. McNeal, supra, in which, as shown in Dalton v. Humphreys, supra, the entity doctrine was given substantial and compelling limitation. In addition, two facts of controlling force are present in the instant case, which seem to distinguish it from the one cited, viz., the death of the partner to whom the entire business was conveyed, and the departure of the other partner from the jurisdiction of the court, both long before the inception of the bankruptcy proceedings.
It follows that the report of the special master should be disapproved, and the motion to dismiss the proceeding in its entirety for want of jurisdiction should be granted.
Costs will be taxed against the petitioning creditors.