Story Case

Clarence Jessup and Otis McGowen were partners, dealing in stocks and bonds as "Jessup & McGowen". After the firm had been in existence for several years, another partner, John Burnham, was admitted to the firm with a one-tenth interest therein. Because his share was small, it was agreed that his name should not be made a part of the firm name, and that the public should not be informed of his membership. Burn-ham desired also that the business should be conducted in the name of the old firm, in order that credit should not be given to the firm in reliance on his own large personal property. After the new firm had been doing business in this manner for two years, it became heavily involved financially, and could not meet its obligations. A trustee took over the firm assets for the benefit of the creditors, and it was then learned that Burnham owned a one-tenth interest in the business. After the firm property was all paid out, there was still owing firm creditors the sum of $25,000. For this amount they now looked solely to Burnham. The latter had already lost $10,000, the amount of his interest in the concern. Can he be made to pay this additional sum?

Ruling Court Case. Reab Vs. Pool And Vaughn, Volume 30 South Carolina Reports, Page 140; Same Case, Volume 8 Southeastern Reports, Page 703

R. R. Pool, one of the defendants, was the owner of a bar room and restaurant in which he had been conducting a business under the name of R. R. Pool Co.

He entered into an agreement in writing with Vaughn, whereby the former conveyed one-half interest in the business for $500. By the agreement they also assumed the relation of partners. It was provided, however, that Pool should continue the business as before, under the name of "R. R. Pool Co". While the foregoing agreement was still in force, the plaintiff sold goods to Pool on credit, not knowing then that Vaughn had any connection with the business. The goods were not paid for and this action was brought to recover the price therefor. In the meantime, the plaintiff had learned of the foregoing agreement between Pool and Vaughn, and had joined Vaughn as a defendant, seeking to charge him as a partner in business.

Vaughn contended that he was not liable, because he had never received any profits from the business and furthermore had never paid his $500 into the business. He also claimed that, since he was unknown to the plaintiff when the sale was made, his credit could not have been relied upon. Mr. Justice McGowan said in part: "Whether Vaughn was known in the business or not could not affect the case. He agreed to become a partner under the old style of R. R. Pool Co. He was a partner, but a dormant or secret partner, and, as such, could not, of course be known in business. Nor was it pertinent as against creditors for Vaughn to show that he had not paid the $500 agreed upon. He could not take advantage of his own wrong. And surely there could be nothing in the alleged fact that Vaughn 'received no profits.' The agreement is the test, and that entitled him to receive them if they were made." Judgment was given for the plaintiff.

Ruling Law. Story Case Answer

A secret partner is one who is, in fact, a member of a given firm, but his membership therein is not known to the public, who deals with the firm. He may either be an active partner, in that he does some work for the firm, or he may be a dormant partner, in that he is a member, with only a small interest in the capital of the firm. For all partnership obligations, a secret partner is liable to the same extent as any ordinary member of the firm. Quite frequently, a partner of this kind will attempt to escape liability on the plea that, since he was not known to the public, no reliance was put in him or in his credit, and that therefore, he should not be held. However, his liability does not rest upon the public's knowledge of his relation, but upon the actual facts of his partnership.

In the Story Case, the creditors can compel Burn-ham to pay the balance owing, amounting to $25,000. This seems unjust, but is a risk he assumed when he became a member of the firm.