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X-9697
Reg. 0-26
INTERPRETATION OF LAW OR REGULATION
(Copies to be sent to all Federal reserve banks)
August 2.4, 1936.
Honorable

Dear Mr. _ _

,

s

This refers to Mr.

letter of July 7, 1956, regard-

ing the applicability of section 22(g) of the Federal Reserve Act
and the Board's Regulation 0 to the liability to a bank of an executive officer of a member bank arising as the result of his indorsement of the note of a partnership in which he has less than a majority interest.
You have not furnished detailed facts as to the circumstances involved in the particular case and as to why indorsement
by the individual partner on the partnership obligation is desirable.

Therefore, the Board is not in a position to undertake to

rule upon a particular case, but it will advise as to its views
with respect to the general question whether the liability to a bank
resulting from such an indorsement comes within the provisions of
section 22(g) of the Federal Reserve Act and the Board's Regulation
0.
If an executive officer is a member of a partnership under
an agreement whereby his liability for partnership debts is limited,
and is, therefore, liable under the law for the debts of the firm
only to the extent of his contribution to its assets or to a limited




X-9697
Reg. 0-26

-2-

extent on some other basis, his individual indorsement of a note of
the partnership would clearly increase the extent of his liability.
Even in the case of an unlimited partnership, the act of a
partner in adding his individual indorsement to a note of the partnership would appear to create a liability distinct from, and in
addition to, his liability as a partner arising by operation of law.
In the marshaling of assets of an insolvent partnership, it appears
to be a general rule in equity that firm creditors shall be paid
first from partnership property and that they may not resort to the
individual property of a partner until the partner1s individual
creditors have been paid in full.

However, a creditor holding the

note of a partnership bearing the individual indorsement of one of
the partners would be an individual as well as a firm creditor and
would, therefore, be entitled to payment from the individual property
of the partner in preference to other firm creditors.

In this rospect,

the liability of the indorsing partner would appear to be greater, as
to the holder of the partnership note indorsed by him, than it would
have been had he not indorsed such note.
As indicated in the Board's letter to you under date of April
4, 1936, it seems clear that the prohibitions of section 22(g) of the
Federal Reserve Act are not applicable to a loan by a member bank to
a partnership in which one or more executive officers of such bank
have either individually or together less than a majority interest.
As stated in the Board's letter, it is believed that the evident




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X-9697
Reg. 0—SB-

—3™

policy of the law to exempt such partnership loans would be defeated
if the law were construed as including the liability of an executive
officer who is a member of such a partnership arising solely by virtue of the operation of law which makes him individually liable as
a partner for the debts of the firm.

However, the Board does not

feel that it would be justified in extending the exemption permitted
by the statute beyond the point clearly contemplated by its provisions and beyond the point necessary to give full effect to the purposes of the statute.
In the circumstances, it is the view of the Board that the
liability to a bank of an executive officer of a member bank arising
from his indorsement of a note of a partnership in which he has less
than a majority interest would constitute a liability falling within

the provisions of section 22(g) of the Federal Reserve Act and

the Board's Regulation 0.




Very truly yours,
(Signed)

Chester Morrill
Chester Morrill,
Secretary.