Story Case

John Simpson and nine others entered into a contract for the formation of a company to transact a real estate business. It was agreed that there should be a capital of $10,000 and that each man should subscribe for ten shares at $100 each. It was also agreed that any one might sell his interest to a stranger. The company was formed in accordance with this contract, officers were elected and by-laws adopted. It was called The Northwestern Realty Syndicate. Later, the company became insolvent and the business was closed up with a number of obligations standing unpaid. Of the group, only Simpson was financially responsible, and the creditors brought suit against him personally on the ground that, as a partner, he was individually liable for the total amounts. The decision in the case depends upon whether or not this was a partnership.

Ruling Court Case. In Re Gibbs Estate, Volume 157 Pennsylvania Reports, Page 59; Same Case, Volume 22 Lawyers' Reports Annotated, Page 276

Henry Gibbs purchased certain shares in an organization known as the Home Savings Bank. The organizers of this bank acted in compliance with the state laws, although they had failed in effecting a perfect corporation. The organization had a president, a cashier, and a board of directors who had several times declared dividends. Just prior to the death of Henry Gibbs, the bank became insolvent and was unable to pay all of its depositors.

This action was brought on behalf of several depositors against the estate of Henry Gibbs to collect the balance due to them, as depositors. It was contended on their behalf that the organization was only a partnership, since the law with reference to corporations had not been fully satisfied, and that each member was individually liable for the full amount of the bank debt. It was contended for the estate of Gibbs, that the organization was more than a partnership, since the parties had attempted to create an organization under an existing law, and that each member was liable only for the stock which he held in the corporation.

Decision

The parties who organized the bank, proceeded farther than merely to perfect a company by virtue of a contract between themselves; they attempted in good faith to create an organization by virtue of authority granted by law. When this is done, although they have been in error in not complying with each specified detail necessary to the completion of a perfect corporation, the members cannot be sued as partners.

A partnership is an organization which derives its entire being and power, merely by virtue of the contract made by its partners. It does not exist because of any statute granting the members the authority to act as a company. Perhaps the best definition of a partnership is that given by Story: "A relation created by a contract between two or more persons to place their money, effects, labor and skill, or some or all of them in lawful commerce, and divide the profits between them." Its foundation is a contract. It results from the act of the parties, and not from the act of the law. Therefore, the estate of Gibbs is not liable in this action.

Ruling Law. Story Case Answer

Between a normal partnership and a duly organized corporation there are many prominent distinguishing features. On the one hand, partnership is a voluntary relation which depends upon an express or implied contract between the parties to the relation. On the other hand, a corporation is an organization, the existence of which depends entirely upon some statutory provisions, general or special, authorizing such a corporation.

In the second place, a partnership is but a collection of individuals; they act as individuals; they must sue and are sued as individuals; the death of one partner usually terminates the relation; the transfer by one partner of his interest dissolves the relation, and does not make his transferee a partner, unless the old members consent to the new partnership. On the other hand, the corporation is a legal entity, separate and distinct from the members who compose it. It is an artificial person which acts in its corporate name, sues and is sued as a corporation. The death of a member or stockholder has no effect upon the continued existence of the relation; the transfer of a stockholder's interest does not work a dissolution of the entity, but makes the transferee a member of the corporation.

In the third place, it is the general rule that each partner is liable for all the debts of the partnership, even though he may have fully contributed his share to its capital stock. Whereas, a stockholder in a corporation is usually not liable individually for any of the debts of the organization, provided he has paid his stock subscription in full.

In the Story Case, Simpson is liable for the full amounts because this was merely a partnership, the organization of which depended entirely upon contract, and was not an institution created by the state through the means of a charter.