9 – Legal Liability of A.G. Becker for the Debts of the Herman Schaffner Bank
As the author researched and wrote the Chronicle of A. G. Becker & Co., Inc., including the origination of the firm, the question kept arising: "Why didn't A. G. Becker have a legal liability for the debts (deposits) of Herman Schaffner & Co. ("HS"), a general partnership of which he and his brother-in-law were sole partners?"
First, the author mused that perhaps partnership law in the 1890s was different than current law, or that the legal organization of Herman Schaffner & Co. did not, in the 1890s, constitute a partnership.
Or, the author thought that, perhaps savings deposits at a private bank in the 1890s weren't "debts?"
Later, more into the topic, the author noted that press reports referred to the debts of the HS Bank as being "outlawed;" the implication of this term being that, with respect to such debts, Mr. Becker had no legal obligation to pay. One might even have interpreted from this word that Mr. Becker was, in fact, forbidden from making payments.
When, later, many bank depositors were, in fact, repaid by Mr. Becker, and they thanked him for such repayments, they quite often mentioned how commendable it was that he was making such a payment for which he had no legal obligation. Some referred to the "outlawed" status of such repayments.
Finally, the author concluded that, perhaps at some point, there was a court determination that Mr. Becker had no legal obligation with respect to such debts, and, if such an obligation existed, it was judicially waived or "relieved" on some basis. On this point, the author could find no press report of such a "final judicial" determination. In fact, relative to this line of inquiry, the author requested, obtained, and reviewed some of the original court records which had been stored for ninety years in a Chicago warehouse. The records were dirty and crumbly, and were examined at downtown Chicago court facility. Nothing could be found on the topic.
In 2018, the author was contacted by Mr. David McCarthy whose wife is a descendant of Michael Greenebaum. David came across the A. G. Becker site because of its essay on Henry Greenebaum, Michael's brother. David properly suggested some editing of the Greenebaum essay toward greater accuracy, for which the author was thankful. In rereading the Chronicle, McCarthy became interested in the same question that had intrigued the author: "Why didn't Mr. Becker have legal liability for the debts of HS?"
Truly challenged by his question, David brought to it his experience and extensive "legal forensic" research and analysis. He has come up with some quite interesting conclusions all of which have been laid out in an excellent monograph which appears below.
In a number of instances, David's analysis addresses and provides answers to the questions I posed in my "Repayment" comments.
In summary, David's conclusion is that Mr. Becker did have a legal liability for the debts of HS, but that there were various conditions to such liability, including that, after a period of time, such liability expired. David analyzed the actions and inactions taken by Mr. Becker and various depositors after the HS insolvency, and lays out evidence that Mr. Becker likely was cognizant of his liability, and (perhaps on the advice of knowledgeable counsel) took a course of action -- and inaction -- which limited his payments during the period of legal liability. There is also some evidence that the public perception "that his payments were outlawed" actually deterred some depositors from taking legal action against Mr. Becker. There is even further evidence that Mr. Becker, directly or through agents, consciously promoted the idea that his obligations had been "outlawed."
The McCarthy analysis is not inconsistent with the view that Mr. Becker, all through the process of winding up the HS business, recognized a moral obligation and developed a deep conviction to repay the HS depositors. But, he didn't have the resources to do so -- he would be declared a bankrupt and would carry a reputation that would hinder his ability to carry on a future business. Further, to carry out a repayment program, he would need to do it over time, and, desirably, "on his own terms." He would need to be selective and pursue a pace that was sustainable. The only way he would have the chance to repay the HS depositors was to create and carry on a profitable business which would generate sufficient funds to give him the capacity to repay a substantial portion of the HS debts.
Thus, as in the case of so many historical questions, we will not ever know exactly what took place, and who thought this or that, and what and when? However, there is little question that A. G. Becker fulfilled his strongly held moral obligation and conviction to make good most of the HS depositors, to the best of his ability.
A.G. Becker’s Liability for the Debts of Herman Schaffner & Co.:
Questions and Answers
When the press first reported A.G. Becker’s campaign to repay depositors in Herman Schaffner & Co., the papers delivered a very consistent message that Becker’s activities were purely voluntary, and he was not subject to legal liability for the Schaffner bank debts. This position, promoted by Becker himself, is that the debts were “outlawed.”1 The newspaper pieces take the absence of personal liability as a given, and the explanations are vague or nonexistent. One writer refers to the operation of statutes of limitation.2 Others imply that only Schaffner could be responsible for the debts, or that the debts were settled as the result the insolvency proceeding.3
Q: Was there a reasonable basis for Becker’s claim of no liability?
A: The short answer: no. From day one of the insolvency proceeding until well into the repayment program, Becker was fully liable for the debts of the Herman Schaffner & Co.
Q: Was A.G. Becker personally liable on the debts of Herman Schaffner & Co.?
It is clear from Becker’s statements to the press, and the notice to creditors issued in the insolvency proceeding, that A.G. Becker was a partner in Herman Schaffner & Co.; the only partners were Schaffner and Becker.4 One of the basic principles of partnership law is that each partner has unlimited individual liability for the debts of a partnership.5 Under Illinois law as it then stood, legal action on a partnership debt generally had to be brought jointly against all living partners.6 If suit was brought against all the partners, and a judgment was obtained, the judgment could then be enforced in full against the property of any partner.7 In addition, in the event of the death of a partner, a creditor had “the right to elect whether he will proceed against the assets in the hands of the surviving partner, or against the estate of the deceased partner…."8 Accordingly, there would have been no requirement to sue the estate of Schaffner; nor does it appear that it would have necessary to wait for the completion of the insolvency proceeding and the payment of distributions.9
Q: How long did a depositor have to bring legal action against Becker?
A: 10 years.
Under the Illinois statute of limitations in effect at the time, an action on written evidence of indebtedness had to be brought within ten years after the cause of action accrued.10 Contemporaneous case law was abundantly clear that both a certificate of deposit11 and a passbook12 constitute written evidence of indebtedness.
The cause of action on a certificate of deposit would have accrued at the maturity date of the certificate of deposit. Accordingly, a certificate holder would have had ten years from maturity of a certificate to sue.13 It is unclear when the cause of action on a passbook would have accrued under the relevant case law of the time; unlike a certificate of deposit, a passbook represents a demand obligation and has no maturity. A conservative approach would have started the ten-year limitation period when the insolvency proceeding was filed on June 3, 1893. Accordingly, litigation against Becker with respect to a passbook could have been commenced any time until June 3, 1903.14
Q: Is there any argument that a shorter limitation period could have applied?
A: Yes, but it would have been highly unlikely to have been successful in court.
The argument would be that a passbook is incomplete as a written evidence of indebtedness, since it does not contain all the terms (e.g., interest rate, interest rate convention, including compounding, and rules on notice required for a withdrawal.)15 If key terms in a contract were conveyed orally or could only be proved by oral testimony, such a contract should be construed as an oral contract, subject to a five-year limitation period.16 At the time Becker was denying liability to the press in 1901, a five-year limitation period would likely have already expired.
Given the case law directly on point with respect to passbooks, this argument would almost certainly have failed.
Q: Could Becker have gotten a discharge under federal or state law?
Becker could not have been the beneficiary of a discharge from his obligations under federal or state law. Bankruptcy was not an option for Becker – literally. There was no federal bankruptcy statute in 1893.17 In addition, Illinois did not have a state insolvency procedure that granted a discharge from debt.18 The insolvency procedure that Herman Schaffner & Co. used was an assignment for the benefit of creditors provided for in the Illinois statutes.19 In an assignment, the distressed company (assignor) transfers title of all assets to an independent third-party trustee (assignee). Assignee acts as a fiduciary for the creditors by liquidating all assets and then distributing the proceeds to the creditors pro rata. Under the Illinois statute, no discharge was effected under the procedure.20
Q: Did any depositors act on Becker’s liability for the debts of Herman Schaffner &Co.?
A. Yes. Some got court judgments. It appears that others successfully negotiated settlements by filing or threatening legal action.
Becker was sued in an individual capacity on at least two occasions, once as “surviving partner of Herman Schaffner & Co.” He did not defend, allowing default judgments to be entered against him personally.21
Attorney Samuel B. King, acting as executor of the estate of S. M. Bayor, sued Becker after Robert Schaffner declined to enter into an agreement to toll (that is, suspend) the statute of limitations on the Bayor claim. King sued on or just before June 3, 1903, citing that the statute of limitations forced his hand.22 Per the Becker repayment ledger, the Bayor estate was paid in full on September 25, 1905.
A depositor named Jake Floersheim (J. Florsheim & Co. in the Becker ledger), importuning Becker for money by letter years later, indicated that another depositor, Sig. Bachman, purchased Floersheim’s claim and “use[d] it” against Becker. The implication is that Bachman threatened or commenced litigation against Becker.23 On January 28, 1901, the Bachman claim was settled in full, and Bachman accepted a small, partial settlement on the claim purchased from Floersheim.
A correspondent named Louis Sachsel sent a letter containing what seems like a veiled threat.24 This was followed by one of the few partial settlements noted in the Becker ledger. Sachsel, Tuska & Co. received an additional 10%.
Q: Why wasn’t Becker sued more frequently?
A: For various reasons.
One educated guess is that he was, and remained, judgment-proof, in that he had few assets, and that the substantial value he created over time in A.G. Becker & Co. accrued not to him personally, but to his stockholders (his wife and in-laws.)25 Perhaps the cost of individually litigating small claims deterred many depositors from bringing claims.26 The press may have been an important factor. Readers may have taken claims by the press – and Becker, via press accounts – at face value.27
Q: Why did Becker pay off certain depositors in full, rather than attempt to pro rate amounts among all depositors?
A: It is possible this was done in order to avoid extending or restarting the limitation period.
Under the statute of limitations, if a payment was made on a written evidence of indebtedness, either before or after the limitation period, the limitation period would start anew.28 Accordingly, a partial payment on a claim would have extended (or restarted, in the case of a time-barred claim) the time period in which Becker could be sued on that claim to ten years from the date of such payment. Becker certainly had a legitimate interest in not extending or reviving limitation periods.
Q: Did Becker have a legitimate reason to publicly disown liability for debts of Herman Schaffner & Co.?
Under the statute of limitations, a written acknowledgment of debt could extend or revive a limitation period.29 In addition, under then applicable case law, even an oral acknowledgment of debt could extend or revive the limitation period for the full ten years.30 Accordingly, Becker needed to be careful in correspondence and in dealing with the press not to inadvertently trigger a longer or new limitation period. Becker had a legitimate reason to deny his liability, both for this reason, and in order to avoid undercutting the argument that a five-year limitation period applied.
— March 21, 2019
1 "Becker Paying Outlawed Debts." The Chicago Journal, February 20, 1901; "Paying Debts Long Outlawed." Chicago Times Herald, February 21, 1901; "Paying a Half Million in Outlawed Debt." San Francisco Chronicle, February 21, 1901.
2 "Debt of Honor Reduced $250,000." The Inter Ocean (Chicago), April 20, 1902.
3 "Pays Dead Man's Debts." The Chicago Record, February 20, 1901.
4 "Becker Paying Outlawed Debts." The Chicago Journal, February 20, 1901; Notice, dated June 10, 1893, by The American Trust & Savings Bank, Assignee in re Herman Schaffner & Co., Insolvent (County Court of Cook County), available in the A.G. Becker Collection, Newberry Library (Chicago).
5 Glenn M. Gottlieb, "Res Judicata and Collateral Estoppel in the Law of Partnership," California Law Review 65, no. 4 (1977): 863. While there was an Illinois limited partnership statute effective at the time, under which a special partner (now called a limited partner) had his or her liability limited to capital, a special partner could not transact any business for the partnership. Harvey B. Hurd, comp., The Revised Statutes of the State of Illinois 1893 (Chicago, Illinois: Chicago Legal News, 1893), Chapter 84. Becker’s conduct of the commercial paper business would not have been consistent with special partner status in a limited partnership. In addition, there is no indication that the partners complied with any of the formalities required for a limited partnership (i.e., a written certificate of limited partnership, filing with the county clerk, and publication).
6 Sandusky v. Sidwell, 173 Ill. 493, 50 N.E. 1003 (Ill., 1898)
7 Floyd R. Mechem, "Insolvency of Firm and Partners, Marshalling of Assets, Joint and Several Claims," Illinois Law Review 19 (1924): 284.
8 Silverman v. Chase, 90 Ill. 37, 1878 WL 10102 (Ill., 1878)
9 Mason v. Tiffany, 45 Ill. 392, 1867 WL 5298 (Ill., 1867); see also Doggett v. Charles H. Dill, 108 Ill. 560, 1884 WL 9750, 48 Am.Rep. 565 (Ill., 1884). Note that the judgments referred to in note 21 below were entered prior to the completion of distributions in the insolvency case.
10 Hurd, The Revised Statutes of the State of Illinois 1893, Chapter 83, Section 16. “Actions on bonds, promissory notes, bills of exchange, written leases, written contracts, or other evidences of indebtedness in writing, shall be brought within ten years next after the cause of action accrued.”
11 Fleischer v. Rentchler, 17 Ill.App. 402, 17 Bradw. 402 (Ill. App., 1885); see also Palmer v. Wood, 149
Ill. 146, 35 N.E. 1122 (Ill., 1894)
12 Schalucky v. Field, 124 Ill. 617, 16 N. E. 904 (Ill., 1888); J. Jassoy & Co. v. Horn, 64 Ill. 379, 1872 WL 8334 (Ill., 1872); see also Palmer v. Wood, 149 Ill. 146, 35 N.E. 1122 (Ill., 1894). Schalucky involved the liability of a stockholder (Marshall Field) under a savings bank charter for an amount up to the stated value of his stock. Coincidently, the savings bank in question was Henry Greenebaum’s German Savings Bank, where Becker was employed. Jassoy involved an earlier version of the statute with substantially similar language and a longer limitation period.
13 Fleischer, 17 Ill.App. at 404
14 Modern Illinois case law holds that the statute of limitations does not begin to run for a demand obligation until a demand for payment is made. Schreiber v. Hackett, 527 N.E.2d 412, 173 Ill.App.3d 129, 122 Ill.Dec. 914 (Ill. App., 1988). For a recent discussion of the application of the statute of limitations to a passbook, see Arlt v. GreatAmerican Federal Sav. & Loan Ass'n, 572 N.E.2d 1115, 213 Ill.App.3d 584, 157 Ill.Dec. 651 (Ill. App., 1991). Consistent with Schreiber, Arlt holds that the 10-year limitation period does not begin to run until the depositor makes a demand for payment. Since this could lead to a completely open-ended liability -- if no demand is made, in theory the limitation period never starts -- the case imposes a second condition that the demand must be made within a reasonable period, to be determined by the trier of fact. In Arlt, the plaintiff made the demand 23 years after the last deposit to the account. The court suggests that, given the nature of a passbook and long-term savings strategies, such a long period before making a demand could be reasonable. However, Arlt involved a solvent financial institution. Presumably a court in Becker’s day considering the matter would have taken note of the wellpublicized insolvency of the Schaffner firm and would have set some date as an appropriate date to start the limitation period for a claim on a passbook. A court could even have picked a date after the filing of the insolvency proceeding -- perhaps on delivery of the notice referred to in note 4 above, the filing of a claim in the insolvency proceeding, or upon the final distributions made in the insolvency proceeding. I doubt a court in Becker’s day would have tied the commencement of the limitation period to the date of the last deposit to or withdrawal from a passbook. This could lead to arbitrary and illogical results. For instance, if a depositor opened a passbook account with a single deposit in 1882, with no subsequent transactions, the statute of limitations would have run on that depositor even before the insolvency was known. Schreiber, cited above, explicitly rejects that logic.
15 The sample Herman Schaffner & Co. passbooks, in the A.G. Becker Collection, Newberry Library (Chicago), contain no such terms.
16 Hurd, The Revised Statutes of the State of Illinois 1893, Chapter 83, Section 15. “Actions on unwritten contracts … shall be brought within five years next after the cause of action accrued.” For an example of a contemporaneous case holding that contract partly in writing and partly oral is subject to the five-year limit, see Ry. Passenger & Freight Conductors' Mut. Aid & Ben. Ass'n v. Loomis, 142 Ill. 560, 32 N.E. 424 (Ill., 1892); see also Plumb v. Campbell, 18 N.E. 790, 129 Ill. 101 (Ill., 1888). Notwithstanding its holding, Ry. Passenger cites Schalucky, a case finding a 10-year limit on an action on a passbook, approvingly. See note 12 above.
17 Congress adopted bankruptcy statutes in response to various financial crises (the Bankruptcy Act of 1800 in response to the Panic of 1797, the Bankruptcy Act of 1841 in response to the Panic of 1837, the Bankruptcy Act of 1867 in response to the Panic of 1857 and the Civil War, and the Bankruptcy Act of 1898 in response to the Panic of 1893). Charles Jordan Tabb, "The History of the Bankruptcy Laws in the United States." ABI Law Review 3, no. 5 (1995):14. Each of the statutes prior to the 1898 Act was repealed, largely due to creditor complaints as to poor payouts, high fees and delays. The 1867 Act was repealed in 1878. (Tabb 19) In contrast to Becker, Becker’s old employers Henry Greenebaum and Elias Greenebaum were able to make use of the liberal discharge provisions of the 1867 Act, particularly the composition provisions, following the failure of the Greenebaum banks. In re Greenebaum et al., Bankrupts, No. 5,769 (N.D.Ill. May 25, 1878), available in G. L. Barber, ed., The Chicago Law Journal, vol. 1 (Chicago, Ill.: E.B. Meyers and Company, 1878), 599. Of course, after the enactment of the 1898 bankruptcy law, Becker could have filed a voluntary bankruptcy. Given that few were asserting his liability for partnership obligations, and that such a filing would have marred his standing in the financial community, most likely irreparably, there was no practical reason to file for bankruptcy in the period after 1898.
18 Samuel Williston, Selected Cases and Statutes on the Law of Bankruptcy, 2d ed. (Cambridge, Mass.: Harvard Law Review Publishing Association, 1915), 6.
19 Hurd, The Revised Statutes of the State of Illinois 1893, Chapter 10a.
20 Even now, an assignment for the benefit of creditors does not typically effect a discharge, as in a federal bankruptcy, and for that reason it is seldom used by individuals or partnerships. Calhoun, Austin B., and Kayla Haines. "Assignment for the Benefit of Creditors: General Overview." Jimerson Birr, P.A. Business Litigation Blog. February 04, 2016. Accessed February 23, 2019. http://www.jimersoncobb.com/blog/2016/02/assignment-for-the-benefit-of-creditors-general-overview/.
21 “Record of the Courts. Superior and Circuit Courts -- Judgments.” Chicago Tribune, October 26, 1894; “Superior and Circuit Court. JUDGMENTS.” The Inter Ocean (Chicago), June 10, 1898. The suits were filed by C. Wilkening & Co. and Fred L.Voltz, respectively. The judgments were pyrrhic victories because it appears the plaintiffs were not able enforce them, at least immediately. The Becker repayment ledger (available in the A.G. Becker Collection) indicates that both claims were eventually paid, on September 10, 1902 and June 18, 1902, respectively. Conrad Wilkening’s widow was pleading for payment years after the judgment. Letter, undated, circa 1901/1902, from Ida Iverson to A.G. Becker, A.G. Becker Collection. The Voltz judgment as reported in the Inter Ocean is about 10 times the amount of the unpaid deposit, per the Becker ledger; the author of the article likely moved a decimal point.
22 Letter, dated June 3, 1903, from Samuel B. King to A.G. Becker, A.G. Becker Collection
23 Letter, dated April 15, 1915, from Jake Floersheim to A.G. Becker, A.G. Becker Collection. "You will undoubtedly remember I was hoodwinkled [sic] and taken advantage of by Mr. Sig. Bachman or I would never have consented to sell him my account and use it as he did….”
24 Letter, dated May 6, 1902, from Louis Sachsel to A.G. Becker, A.G. Becker Collection. "I have done the right thing with you and hope you will do the right thing with me.”
25 Paul R. Judy, "Business Rooted – 1893 to 1900; Initial Capitalization," A.G. Becker & Co., Inc. - The Chronicle, accessed March 20, 2019, https://agbecker.us/business-rooted-1893-to-1900/. Note that Becker’s old employers, Michael and Elias Greenebaum, made use of the relatively recent developments in Illinois law permitting married women to own property separately from their spouses. For Michael’s operation of a business under his spouse’s name, see U.S. Congress, House, Banking and Currency Committee, German National Bank Investigation. Testimony in Relation to the German National Bank of Chicago, October 16, 1879, 46th Cong., 2d sess., H. Misc. Doc. No. 8 (1879), 11. For Elias’ conveyance of assets to his spouse before joining Henry Greenebaum & Co., see In re Greenebaum et al., Bankrupts, cited in note 17 above. It is likely Becker would have been aware of what the Greenebaums had done in terms of isolating assets via separate marital property.
26 Paul R. Judy, "Depositor Repayment – July 1894 into 1920s; No Legal Liability," A.G. Becker & Co., Inc. - The Chronicle, accessed March 20, 2019, https://agbecker.us/depositor-repayment-july-1894-into-1920s/. Even though the modern class action did not exist, the courts of the time allowed so-called representative actions in certain instances. In those cases, any parties who agreed to share a proportion of legal costs could join the litigation. Given Becker’s lack of assets, it would not necessarily have been in a plaintiff’s best interests to bring in additional plaintiffs to save on legal costs, particularly since a court may have then ordered the plaintiffs to advertise for all potential plaintiffs, diluting any potential recovery. For an example of a representative action against bank shareholders, see Palmer v. Wood, 149 Ill. 146, 35 N.E. 1122 (Ill., 1894).
27 See articles cited in notes 1, 2 and 3 above. For the only example I have found of a newspaper that seems to have understood the truth about Becker’s legal position, see “Chicago Man's Way," The Grand Rapids Herald, April 21, 1902. “He might easily have compromised or compounded or taken refuge in the bankruptcy court, but that was not his style.”
28 Hurd, The Revised Statutes of the State of Illinois 1893, Chapter 83, Section 16. “…if any payment or new promise of payment shall have been made, in writing, on any … written evidence of indebtedness, within or after said period of ten years, then an action may be commenced at any time within ten years after the time of such payment or promise to pay.”
29 See note 28.
30 Sennott v. Hypes, 30 Ill. 429, 1863 WL 3060, 20 Peck 429 (Ill., 1873)