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Docket Number

No. 5732.

Attorney(S)

J.E. Vandersloot, of York, for petitioning creditors. Frederick B. Gerber, of York, for alleged bankrupt.

Judges

Albert Williams Johnson

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Smart Summary

Summary of Opinion — In re Kuntz et al. (M.D. Pa. May 31, 1929)

Factual and Procedural Background

An involuntary petition in bankruptcy was filed on November 2, 1927, against William J. Kuntz, Charles Z. Stough, and Kathryne E. Kuntz, trading as the Consumers' Coal Company. Each alleged partner filed a separate answer: William J. Kuntz denied that he was a member of the partnership and alleged he had withdrawn on April 2, 1923; Charles Z. Stough denied membership and alleged he had withdrawn on August 29, 1921; Kathryne E. Kuntz admitted membership but denied that the partnership was insolvent.

The matters raised by the petition and the answers were referred to Wm. Kurtz, referee in bankruptcy, to take testimony and report, together with findings of fact and conclusions of law. The referee, acting as special master, found the partnership insolvent and concluded that the three named individuals were partners within the meaning of the Bankruptcy Act, recommending adjudication of all three as bankrupts.

Charles Z. Stough filed exceptions to the master's report challenging the master's finding that he remained a member of the partnership at the date of the petition. The court considered those exceptions.

Legal Issues Presented

Whether Charles Z. Stough was a member of the partnership (the Consumers' Coal Company) at the date of the bankruptcy petition.
Whether Stough could be adjudged a bankrupt as a member of the partnership given the evidence of his claimed assignment/withdrawal.

Arguments of the Parties

William J. Kuntz

Denied that he was a member of the partnership.
Alleged that he had withdrawn from the partnership on April 2, 1923.

Charles Z. Stough

Denied that he was a member of the partnership.
Alleged that he had assigned all his interest in the partnership and withdrawn on August 29, 1921.
Filed exceptions to the master's report contesting the finding that he remained a partner as of the petition date.

Kathryne E. Kuntz

Admitted she was a member of the partnership.
Denied that the partnership was insolvent.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Section 5a of the Bankruptcy Act, 11 USCA § 23(a)	States that "A partnership, during the continuation of the partnership business, or after its dissolution and before the final settlement thereof, may be adjudged a bankrupt."	The court used this statutory provision to frame the permissible scope of partnership adjudications and to require that the entity be an actual partnership to be adjudged bankrupt as such.
1 Remington on Bankruptcy, § 71, p. 115	Principle that only an actual partnership may be adjudicated bankrupt as a partnership, not one "by holding out"; only actual partners may be included.	The court relied on this authority to support the proposition that mere "holding out" does not make one a partner for adjudication purposes and that Stough must have been an actual partner at the petition date.
In re Beckwith Co. (D.C.) 130 F. 475, 12 A.B.R. 453	Holds that a partnership in fact must be shown to maintain involuntary proceedings against one as a partner and not a mere holding out.	The court cited the decision and accompanying discussion (including collated authorities) to reinforce that proceedings must be based on partnership-in-fact, not estoppel alone, when adjudicating a partnership bankrupt.
Collier on Bankruptcy (4th Ed.) 61	Secondary authority referenced in support of the rule that partnership in fact must be shown.	Used within the Beckwith citation to support the same proposition that a partnership in fact is required for involuntary proceedings against an alleged partner.
In re Clark (D.C.) 7 A.B.R. 96, 111 F. 893	Case cited as authority for the necessity of showing partnership in fact.	Referenced in the opinion's discussion (via Beckwith) as part of the body of cases requiring factual partnership to sustain proceedings.
Lott v. Young [C.C.A.] 6 A.B.R. 436, 109 F. 798	Another case cited to show the requirement of partnership in fact for certain proceedings.	Included among authorities demonstrating the same principle applied by the court.
In re Kenney [D.C.] 3 A.B.R. 353, 97 F. 554	Case cited regarding consequences when no joint estate exists because partnership in fact is lacking.	Used to illustrate that absent a true partnership there would be no joint estate to administer, which is inconsistent with the Bankruptcy Act's requirements.
Jones v. Burnham, Williams Co. (C.C.A.) 138 F. 986, 15 A.B.R. 85	Holds that where one alleged partner interposes an answer denying partnership, the burden is on petitioners to prove partnership in fact.	The court applied this allocation of the burden of proof to the present case, where Stough denied partnership and thus the petitioners needed to establish partnership in fact as to him.
Buffalo Milling Co. v. Lewisburg Dairy Co. (D.C.) 159 F. 319, 20 A.B.R. 279	States that a partnership in fact must be shown to maintain proceedings in bankruptcy against one as a partner.	Reinforced the court's reliance on the requirement that partnership-in-fact be proven before adjudicating an alleged partner.
In re Kaplan et al., 234 F. 866, 37 A.B.R. 104	Explains that to justify adjudication there must be evidence to find a person was a partner in fact; estoppel from holding out is insufficient to provide rights to all creditors.	The court cited Kaplan to emphasize that estoppel-based personal liability does not equate to being a partner in fact for the purpose of adjudicating a partnership bankruptcy.
Uniform Partnership Act of Pennsylvania of March 26, 1915, P.L. 18 (Pa. St. 1920, § 16611)	Section 16, part 3, regarding personal liability by estoppel under the Uniform Partnership Act.	The court noted this statutory provision to acknowledge that estoppel-based liability exists under Pennsylvania law, while distinguishing such liability from being a partner in fact for purposes of partnership adjudication in bankruptcy.

Court's Reasoning and Analysis

The court identified the pivotal factual point: although a fictitious-name certificate showing the three were trading as Consumers' Coal Company was filed on August 20, 1921, evidence showed that Stough assigned all his interest to his partners on August 29, 1921, and that no notice or record notation of his withdrawal or assignment was made.

The special master found Stough was a partner as of the petition date because no public notice of his withdrawal had been given. The district court concluded this reasoning was erroneous because the Bankruptcy Act permits adjudication of a partnership only where a partnership in fact exists at the relevant time (Section 5a, 11 USCA § 23(a)).

The court relied on authorities establishing the principle that involuntary bankruptcy proceedings that seek to adjudicate an individual as a member of a partnership require proof of an actual partnership relationship at the relevant time; mere "holding out" or estoppel might create personal liability to misled creditors but does not suffice to adjudicate a partnership for all creditors. The court invoked Remington and several circuit and district court decisions (including In re Beckwith Co., Jones v. Burnham, Buffalo Milling Co. v. Lewisburg Dairy Co., and In re Kaplan) to support the rule that petitioners bear the burden of proving partnership in fact when an alleged partner denies the relationship.

Applying these principles to the record, the court found that Stough was not in fact a member of the partnership at the date of the petition and therefore could not be adjudged a bankrupt as part of the partnership. The court also noted that, while estoppel-based personal liability is recognized under Pennsylvania's Uniform Partnership Act, that statutory estoppel does not substitute for the presence of an actual partnership necessary for adjudication as a partnership under the Bankruptcy Act.

Holding and Implications

Holding: The court sustained the exceptions to the master's report and ordered that the Consumers' Coal Company, composed of William J. Kuntz and Kathryne E. Kuntz (excluding Charles Z. Stough), be adjudicated bankrupt.

Implications: The direct effect is that Charles Z. Stough is excluded from the partnership adjudication and will not be adjudged a bankrupt as a member of the Consumers' Coal Company. The adjudication applies to the partnership composed of William J. Kuntz and Kathryne E. Kuntz. The opinion does not announce or purport to establish any broader new precedent beyond applying established authorities requiring a partnership-in-fact for partnership adjudications in bankruptcy.

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In re KUNTZ et al.

In Bankruptcy. In the matter of William J. Kuntz and others, trading as the Consumers' Coal Company, alleged bankrupts. On exceptions to the master's report finding and deciding that Charles Z. Stough was a member of the partnership or firm trading as the Consumers' Coal Company. Exceptions sustained, and partnership composed of other parties than said Charles Z. Stough adjudicated bankrupt.

JOHNSON, District Judge.

Exceptions have been filed to the report of the master in finding and deciding that Charles Z. Stough was a member of the partnership, or firm, trading as the Consumers' Coal Company.

The facts of the case, briefly stated, are as follows:

An involuntary petition in bankruptcy was filed on November 2, 1927, against William J. Kuntz, Charles Z. Stough, and Kathryne E. Kuntz, trading as the Consumers' Coal Company. Separate answers were filed by each of the said alleged partners. William J. Kuntz denied that he was a member of the partnership, and alleged that he had withdrawn from the partnership on April 2, 1923. Charles Z. Stough denied that he was a member of the partnership, and alleged that he had withdrawn from the partnership on August 29, 1921. Kathryne E. Kuntz admitted that she was a member of the partnership, but denied that the partnership was insolvent.

The issues raised by the petition and the answers were referred to Wm. Kurtz, referee in bankruptcy, to take testimony and make report thereon, together with his findings of fact and conclusions of law. The referee filed his report as special master, in which he finds that the partnership is insolvent, and that William J. Kuntz, Charles Z. Stough, and Kathryne E. Kuntz were partners within the purview of the Bankruptcy Act, and recommended that William J. Kuntz, Charles Z. Stough, and Kathryne E. Kuntz, trading as the Consumers' Coal Company, be adjudged bankrupt.

To this report and recommendation Charles Z. Stough alone filed exceptions which are now before this court for disposition. These exceptions raise the question whether Stough was a member of the partnership at the date of the petition in bankruptcy.

From the testimony taken before the master, it appears that on August 20, 1921, the three partners filed a certificate in the prothonotary's office in York county, under the provisions of the Fictitious Name Act (Pa. St. 1920, § 15968 et seq.), setting forth that they were trading and doing business as the Consumers' Coal Company. On August 29, 1921, Stough assigned all his interest in the partnership to his partners, but no notice of his withdrawal was given, nor was there any notation made on the record in the prothonotary's office in York county of his withdrawal from the partnership or of his assignment.

The master found that Stough was a member of the partnership at the date of the petition in bankruptcy, for the reason that no notice was given of his assignment or withdrawal from the partnership, and recommended that William J. Kuntz, Charles Z. Stough, and Kathryne E. Kuntz, trading as the Consumers' Coal Company, be adjudged bankrupt.

In this finding and recommendation the learned referee was in error. Section 5a of the Bankruptcy Act, 11 USCA § 23(a), provides that "A partnership, during the continuation of the partnership business, or after its dissolution and before the final settlement thereof, may be adjudged a bankrupt."

On the date of the petition, Stough was not in fact a member of the partnership and therefore he could not be adjudged a bankrupt as a part of, or a member of, the partnership. "Only an actual partnership may be adjudicated bankrupt as a partnership, not one `by holding out' and only those who are actual partners may be included, not those who are partners merely `by holding out.'" 1 Remington on Bankruptcy, § 71, p. 115.

In re Beckwith Co. (D.C.) 130 F. 475, 12 A.B.R. 453, it was held that "A partnership in fact must be shown to maintain involuntary proceedings against one as a partner and not a mere holding out, by which he may become liable to creditors as a partner." On page 454 (130 F. 476) of the opinion in the above case Archbald, District Judge, said: "To maintain the proceedings as to Jones a partnership in fact must be shown, and not a mere holding out, by which he may have become liable to creditors. Collier on Bankruptcy (4th Ed.) 61; In re Clark (D.C.) 7 A.B.R. 96, 111 F. 893; Lott v. Young [C.C.A.] 6 A.B.R. 436, 109 F. 798. Otherwise the proceedings might be good as to some creditors, with respect to whom this was true, and not as to others, as to whom it was not. And we should also have instances where there was no joint estate to administer, nor any assets other than the personal liability of the individuals who had made themselves answerable, a condition which plainly is not contemplated by the Bankrupt Act. In re Kenney [D.C.] 3 A.B.R. 353, 97 F. 554."

In Jones v. Burnham, Williams Co. (C.C.A.) 138 F. 986, 15 A.B.R. 85, it was held that, "where in involuntary proceedings against three persons as alleged partners, one of them interposes an answer denying the alleged partnership, the burden of proof is upon the petitioners to show that a partnership in fact existed between the alleged bankrupts."

In Buffalo Milling Co. v. Lewisburg Dairy Co. (D.C.) 159 F. 319, 20 A.B.R. 279, it was held that "a partnership in fact must be shown to maintain proceedings in bankruptcy against one as a partner."

In re Kaplan et al., 234 F. 866, 37 A.B.R. 104, it was stated in the opinion of the Circuit Court of Appeals for the Seventh Circuit: "To justify the adjudication there must be evidence from which the court could properly find as a fact that Samuel Kaplan was a partner. It would not be enough that to various creditors he had held himself out as a partner, because, while an estoppel might give rights to those who were misled, in order to give rights to all creditors he must have been in fact a partner."

It might be well to state that personal liability by estoppel is fixed by section 16, part 3, of the Uniform Partnership Act of Pennsylvania of March 26, 1915, P.L. 18 (Pa. St. 1920, § 16611).

From the foregoing authorities, it is necessary to sustain the exceptions to the master's report and to adjudicate the Consumers' Coal Company, composed of William J. Kuntz and Kathryne E. Kuntz, as members of the partnership, bankrupt, eliminating the name of Charles E. Stough as a partner.

And now May 31, 1929, the exceptions to the report of the master are sustained, and the Consumers' Coal Company, composed of William J. Kuntz and Kathryne E. Kuntz, will be adjudicated bankrupt.

IN RE KUNTZ, (M.D.Pa. 1929)