ELLINGSON v. WALSH CONNOR BARNESON

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District Court of Appeal, Second District, Division 2, California.

ELLINGSON v. WALSH, O'CONNOR & BARNESON et al.*

Civ. 12265

Decided: October 23, 1939

Ackerman, Wayland & Mathews, of San Francisco, for appellant. Rollin L. McNitt, of Los Angeles, (Edythe Jacobs, of Los Angeles, of counsel), for respondent.

Respondent Ellingson, as receiver of the First National Bank of Beverly Hills, commenced this action against the partnership of Walsh, O'Connor & Barneson and the individual members thereof for the purpose of recovering certain rental due according to the terms of a written lease covering the premises occupied by the partnership. The action was submitted upon an agreed statement of facts and a judgment for the amount of rental due, attorney's fees and costs was entered against the partnership and all of its individual members who were general partners. Lionel T. Barneson, one of the general partners, has taken this appeal from said judgment.

Walsh, O'Connor & Co., a special partnership, leased the premises in question on October 4, 1929, for a period of ten years for a total rental of $66,000 payable in monthly instalments of various amounts. Thereafter the original lessor assigned the lease to the First National Bank of Beverly Hills. In 1930 the limited partnership of Walsh, O'Connor & Barneson was formed and all of the rights of Walsh, O'Connor & Co. under the lease were assigned to the last-mentioned partnership. On April 21, 1931, one of the general partners withdrew from Walsh, O'Connor & Barneson and on April 28, 1931, appellant Lionel T. Barneson became a general partner in said firm. Appellant had no connection whatever with Walsh, O'Connor & Co. and was not associated with Walsh, O'Connor & Barneson prior to April 28, 1931. The judgment represents the amount of rental due from the firm of Walsh, O'Connor & Barneson for the period from March 1, 1932, to January 25, 1933, during all of which time appellant was a general partner in said firm. The judgment contained no restrictions concerning the manner in which it was to be satisfied. From the time that it took possession until February, 1932, the firm of Walsh, O'Connor & Barneson occupied the leased premises and paid the rental provided for in the lease to the First National Bank of Beverly Hills. The lease contained a covenant by the lessee not to sublet the premises without the written consent of lessor. In accordance with the provisions of the covenant Walsh, O'Connor & Barneson in February, 1932, obtained the written consent of the lessor to sublet the premises and did in fact sublet the premises to a third party who was in possession during all of the time for which the rental is sought to be recovered.

The sole contention presented by appellant is that the court erred in not restricting the manner in which the judgment could be satisfied as against him. It is urged that by virtue of the provisions of section 2411 of the Civil Code the judgment as to appellant should have been so restricted that it could only be satisfied out of partnership property and not out of his personal assets. Section 2411 of the Civil Code, which is a part of the Uniform Partnership Act adopted in this state, provides as follows: “A person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred, except that this liability shall be satisfied only out of partnership property.”

On behalf of respondent it is contended that section 2411 has no application for the reason that appellant was admitted into a new partnership and not into an “existing” partnership. Upon the theory that when the membership of a partnership is changed a new partnership comes into existence in legal contemplation, it is argued that when appellant became a member of Walsh, O'Connor & Barneson a new partnership was formed which was separate and distinct from the former firm of the same name, of which he was not a partner; that this new partnership either by assignment and assumption of the obligations of the lease or by attornment to respondent became liable for the rental as its own obligation and that the members of the new partnership are individually liable.

If respondent's position relative to the result of a change in the membership of a partnership is to be sustained it is obvious that the provisions of section 2411 of the Civil Code would be rendered nugatory since in no case could a person be admitted into an “existing” partnership Under settled rules of statutory construction we must, if possible, fairly and reasonably construe the code section in question in such manner as to make it effective and to prevent its being rendered nugatory. “A statute should never be construed so strictly as to render it absurd or nugatory.” Walters v. Bank of America, etc., Ass'n, 9 Cal.2d 46, 69 P.2d 839, 842, 110 A.L.R. 1259. The legislature doubtless did not intend the absurd result which would follow from respondent's argument. On the contrary, it is apparent that the intention was to meet situations such as the one presented in the instant case, disregarding for the purpose of the section the legal theory of a new partnership resulting from a change in membership. In his brief appellant presents a persuasive discussion including excerpts from the commissioners' notes to section 17 of the Uniform Partnership Act, which is in substantially the same language as the section under review, in an endeavor to show that section 2411 affords, in line with his interpretation, ample protection and fair treatment for all creditors alike, those of the earlier partners as well as those of the partnership after appellant's admission as a partner. The court is not called upon to decide, however, whether all are accorded exact protection under the section; rather, it is our sole duty to determine the legislative intent in enacting it.

It cannot be disputed that obligations were created by the execution of the lease on October 4, 1929, and that these obligations arose long before appellant became a partner in the firm. Respondent makes the contention, which is conceded by appellant, that the partnership of which appellant was a member, which for clarity we will designate appellant's partnership, became liable for the payment of the rental due during the time covered by the complaint. This contention is based in part upon the occupancy of the premises by appellant's partnership, which respondent claims resulted in a privity of estate with the lessor, and in part upon the action of appellant's partnership in obtaining the consent of the lessor to the subletting of the premises in accordance with the terms of the lease. Respondent's contention may be conceded but we are still faced with the clear language of the statute which requires that notwithstanding the liability of appellant's partnership and the liability of appellant as a member thereof, his “liability shall be satisfied only out of partnership property”. The sole question involved is whether appellant's liability may be enforced against his personal estate or whether his liability shall be satisfied only out of partnership property. In deciding this question the principles underlying the law of partnership should govern. In considering respondent's reference to the law of landlord and tenant it should be remembered that appellant personally did not assume the relationship of landlord and tenant with the lessor but that such relationship was between appellant's partnership and the lessor. It is immaterial whether liability of appellant's partnership is based upon privity of estate or privity of contract for in either case the obligation to pay rent was an obligation which arose at the time the lease was executed and continued during the occupancy of the partnership to which the lease was assigned and also continued during the occupancy of appellant's partnership. The fact that a right of action accrued during the occupancy of appellant's partnership does not change the basic fact that the obligation arose prior to the existence of appellant's partnership. It is significant that a provision in a lease for the payment of rental is expressly made a covenant running with the land. (Secs. 1462, 1463, Civ.Code.)

Support is given to appellant's contention by the decisions construing the statute formerly in force in California providing for stockholders' liability. Section 322 of the Civil Code, as it formerly was in force, St.1905, p. 396, provided: “Each stockholder of a corporation is individually and personally liable for such proportion of all its debts and liabilities contracted or incurred during the time he was a stockholder as the amount of stock or shares owned by him bears to the whole of the subscribed capital stock or shares of the corporation. *” The terms, obligation and liability, are practically synonymous. In 49 Corpus Juris, page 849, we find: “The term ‘liability’ has been defined as meaning ‘obligation’, and ‘obligation’ has been said to be equivalent to, and practicaly synonymous with, ‘liability’. ‘Obligation’ has been defined as a legal liability; liability generally, whether such liability be founded in contract or tort.” In passing upon actions to enforce the liability of stockholders the California courts have uniformly held that the liability of stockholders was created at the time of the execution of contracts which were binding upon the corporations rather than at the time when the obligations of the contracts were sought to be enforced. Hunt v. Ward, 99 Cal. 612, 34 P. 335, 37 Am.St.Rep. 87; Chambers v. Farnham, 182 Cal. 191, 187 P. 732. In Fry v. Baltimore Hotel Company, 80 Cal.App. 415, 422, 252 P. 752, 755, the court said: “Undoubtedly an action for the breach of a lease, whether it be for damages to the freehold, for failure to pay rent, or for holding over after the termination of the tenure, founded upon the original contract, creates a stockholder's liability, commencing at the date of the execution of the lease and not from the date of the breach of covenant.” In Coulter Dry Goods Co. v. Wentworth, 171 Cal. 500, 153 P. 939, 941, the plaintiff sought to enforce liability against individuals who were not stockholders of a corporation at the time of the execution of a contract for the future delivery of goods but they were stockholders of the corporation at the time the goods were delivered and accepted. In holding the defendants not liable the court said that “those who are stockholders when the ‘liability’ is created or incurred are alone liable in any actions arising from its breach”.

We conclude that section 2411 of the Civil Code sets forth the limit of appellant's liability and that the judgment should have been so restricted that it could be satisfied as against appellant only from partnership property. The trial court is directed to modify the judgment accordingly. The appellant shall recover costs on appeal.

WOOD, Justice.

We concur: MOORE, P.J.; McCOMB, J.

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