Fooshe v. Sunshine

Plaintiff Claude R. Fooshe and his wife instituted this action against T. R. Sunshine, John Curci, L. A. Turner, A. W. Foster, and Growers Acceptance Assocation, a copartnership, for rescission of a sale or for damages, in connection with the purchase by plaintiffs from defendants Sunshine, Curci and Turner, of certain farming lands located in the west side of Fresno County. At the time of the sale to plaintiffs, appellant Foster was a farming superintendent for the sellers. About that time Foster entered into a partnership agreement with plaintiff Fooshe under the partnership name of “Mountain View Farms,” for the purpose of farming these lands. That partnership entered into a lease of the lands from Fooshe and his wife.

Appellant Foster, individually and on behalf of the partnership, filed a cross-complaint against Fooshe and his wife for damages, for dissolution of the copartnership and for an accounting.

It should be here noted that subsequent to the entry of the original judgment on plaintiff’s complaint, which was entered on February 6, 1947, and after the appointment of a referee to take an accounting of the partnership affairs but prior to the entry of the final judgment following the partnership accounting, Foster was adjudicated a bankrupt. On May 21,

1948, he received his discharge in bankruptcy. On July 6, 1948, he filed his petition to stay proceedings in this action on account of said discharge in bankruptcy. The court granted this petition in part and denied it in part, staying the liability except as to the sum of $3,153.04.

The evidence, according to the findings, may be thus sum

It is appellant’s contention that his entire debt, including the claim merged in this judgment, was discharged in bankruptcy; that his motion to stay proceedings should have been granted. Exception is taken to the finding of the referee and the court that Foster’s liability for such withdrawals was a liability for obtaining money by false pretenses and false representations, for willful and malicious injury to the property of another, and was a liability created by his fraud, misappropriation and defalcation while acting in a fiduciary capacity, and that at the time of the misappropriations Foster owed a fiduciary duty to Fooshe and was therefore liable to him for 60 per cent of said sums or $3,153.04.

Respondents contend that Foster’s cash withdrawals of partnership funds to his own personal use after partnership operations ceased were the wrongful and secret taking of funds to which he had no moral or legal right, and that his liability therefore was not dischargeable in bankruptcy under Section 17 of the Bankruptcy Act (30 Stats. 550, 11 U.S.C.A. § 35 .) That section provides in part:

“Debts not affected by a discharge. A discharge in bankruptcy shall release a bankrupt from all of his provable debts, except . . . (second) . . . liabilities for obtaining property by false pretenses or false representations or for willful and malicious injuries to the person or property of another, . . . or (fourth) were created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in any fiduciary capacity; . . . .”

Many cases are cited by appellant showing that the general rule is that misappropriation by a partner of partnership funds is not a misappropriation by him while acting in a “fiduciary capacity” within the meaning of the section excepting certain debts from the effect of a discharge in bankruptcy, and that while a partnership contract implies trust and confidence, a partner, during the existence of the partner

42 Lawyers Report Annotated N.S. 1093 [note] recites the generally adopted rule and states:

“There has been considerable diversity of opinion under the various bankruptcy acts as to what relations are fiduciary under the provisions of the acts, excepting debts created while acting in a ‘fiduciary capacity’ from those discharged, but the principles applicable to a determination of that question are now well settled.

“In the first place, it is the generally accepted rule under all of the acts that the term ‘fiduciary capacity’ relates to special, technical, or express trusts, and not to those trusts which the law implies from the contract between the parties.”

Respondent’s argument is that the relationship between partners is fiduciary, citing section 2415, subdivision 1, Civil Code; Nelson v. Abraham, 29 Cal.2d 745 , 750 [ 177 P.2d 931 ] ; Perelli-Minetti v. Lawson, 205 Cal. 642 , 647 [ 272 P. 573 ] ; MacIsaac v. Pozzo, 26 Cal.2d 809 , 813 [ 161 P.2d 449 ]; Moropoulos v. C. H. & O. B. Fuller Co., 186 Cal. 679 , 684 [ 200 P. 601 ]; Laughlin v. Haberfelde, 72 Cal.App.2d 780 , 788 [ 165 P.2d 544 ]; and Universal Sales Corp. v. California etc. Mfg. Co., 20 Cal.2d 751 , 772 [ 128 P.2d 665 ]. It is then contended that in view of the statutory provision and the cited cases, the general rule above cited by appellant ought not to be followed in California since under section 2415, supra, one partner is accountable as a fiduciary, and that decisions of sister states and the results of those decisions “appear to be counter to the spirit and letter” of section 17, subdivision 4 of the Bankruptcy Act.

This question was touched upon in Marlenee v. Warkentin, 71 Cal.App.2d 177 [ 162 P.2d 321 ]. That was an action on a judgment obtained against the defendant who wrongfully

It appears to us that this case is determinative of the question before us. Here it clearly appears that at the time the first judgment was obtained the court specifically declared in that judgment dated February 6, 1947, which became final, that the Mountain View Farms, a copartnership, “is hereby dissolved. ” So at the time the appropriation herein mentioned was made the partnership had been dissolved. (Corp. Code, § 15031, subd. (6).) The assets of the partnership were then being held subject to the order of the court until an accounting was had under its directions. Any misappropriation made of those assets by the appellant Foster subsequent to the time of the dissolution was clearly “a willful and malicious injury to the property of another,” within the meaning of section 17 of the Bankruptcy Act.

In Lyon v. Prescott, 103 Vt. 442 [ 156 A. 679 ], there was a partnership, between two men, which had teen dissolved. Lyon collected and appropriated to his own use sums of money which belonged to the firm. Lyon later received a discharge in bankruptcy. On the question of whether the claim was ent off by the discharge in bankruptcy the Vermont Supreme Court held:

“We need not pause to inquire whether this claim would survive as a misappropriation of a fiduciary under section 17

of the Bankruptcy Act . . . for it is plain enough that it is saved by the provision of that section exempting debts which are ‘liabilities . . . for willful and malicious injuries to the . . . property’ of another. Within the meaning of this provision, the money which Lyon misappropriated was the property of the firm and not his own. It appears that he converted these funds deliberately. Neither Prescott nor the receiver consented to or ratified the misappropriation. It was willful and malicious, as expressly found.”

" In In re Frazzetta, 1 F.Supp. 122 , the District Court in Ñew York held a bankruptcy discharge unavailing to a partner who had converted partnership funds following dissolution. The court said:

“. . . the bankrupt failed to make any satisfactory accounting or give any reasonable explanation to the referee for' his acts in handling the partnership moneys that came to him after the dissolution . . . One cannot escape the conclusion that he deliberately set out to defraud his partners . . .

‘‘One of the purposes of the Bankruptcy Act ... is to discharge an honest debtor and not a malicious wrongdoer.

‘‘My conclusion is that the debt is not dischargeable in bankruptcy.” (See, also, Van Epps v. Aufdemkamp, 138 Cal.App. 622 [ 32 P.2d 1116 ].)

In Ruppe v. Utter, 76 Cal.App. 19 [ 243 P. 715 ], it was held that the remaining partner, after dissolution, occupies the position of a mere trustee.

The facts found by the court in this case, construed to support the judgment, as under the law they must be, show dissolution of the partnership, in fact, a long time prior to the conversion of the funds by Foster.

Section 2423 of the Civil Code, now section 15029, Corporations Code, provides that the dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on, as distinguished from the winding up of the business. In accordance with this section it has been directly held that conduct of a partner inconsistent with the continuance of a partnership results in the dissolution of the partnership in spite of the fact that liquidation is not completed or some appearances of the partnership continue. (Middleton v. Newport, 6 Cal.2d 57 , 62 [ 56 P.2d 508 ] ; Maryland Casualty Co. v. Little, 102 Cal.App. 205 [ 282 P. 968 ]; Sly v. Abbott, 89 Cal.

The evidence, as summarized, shows that there was a dissolution of the partnership, at least by June, 1945, which was at least five or six months before the conversions by Foster .commenced and the court specifically found that these unauthorized misappropriations occurred after partnership operations ceased. Consequently, if it can be claimed that there is any distinction between conversions by a partner after dissolution and conversions before dissolution, that distinction will not help appellant in this case. The findings clearly support the judgment in this respect.

The remaining argument is that the referee, in making his findings, acted beyond the scope of the order of reference and beyond his jurisdiction and that therefore his finding is a nullity. In addition thereto it is argued that even if the finding is within the scope of the referee’s power and jurisdiction that it finds no support in the evidence and therefore must be disregarded.

This appeal is on the judgment roll. The report of the referee and petition to stay proceedings are all contained within the clerk’s transcript on appeal. The court by its interlocutory judgment ordered that a specified referee be appointed to take an accounting of the affairs of the copartnership between specified dates and to report his findings to the court for such further proceedings and judgment as may be proper in the premises. Thereafter, the referee, in pursuance of that order, did take the accounting, and according to that report, notice of the time of the hearing was given. All parties appeared, evidence was introduced consisting of the exhibits, books and records of the company and the matter was submitted. Affidavits were filed in opposition to some of the testimony given by the plaintiff before the referee. Objection was made to the hearing of such affidavits and was sustained. The report recites that the referee, “being fully advised in the premises, makes and reports the following findings of fact and conclusions of law. ’ ’ Then follows, in detail, what appears to be a complete accounting of the book entries, a résumé of the evidence produced and the conclusions reached. By a signed order dated June 24, 1948, the referee’s findings were approved. The court ordered counsel for plaintiff to prepare a written judgment in accordance with his order and stated that no findings were necessary “except that referee’s report is approved. ’ ’ The final judgment of the court recites that the

It is claimed that the order of reference was made under section 639, subdivision 1 of the Code of Civil Procedure and not under section 638, subdivision 1 of the Code of Civil Procedure and that therefore the order did not give authority to the referee “to decide the whole issue,” but that the referee was limited to the taking of an accounting only. In support of this argument appellant cites 53 Corpus Juris 714, section 103; Williams v. Benton, 24 Cal. 424 ; and National Brass Works v. Weeks, 92 Cal.App. 318 [ 268 P. 412 ].

The holding under those cases is that under section 638, subdivision 1, the court is authorized to order the referee to try any and all issues whether of law or of fact, in the action or proceeding, to report findings and judgment thereon subject to the power of the court to reject or confirm his report. Under this section a reference may be ordered only upon the agreement of the parties. Under section 639, subdivision 1, supra, the court may direct a reference when the trial of an issue of fact requires the examination of a long account on either side, in which case the referee may be directed to hear and determine the whole issue (pertaining to the account) or report upon any specified question of fact involved therein. (Fredendall v. Shrader, 45 Cal.App. 719 [ 188 P. 580 ] ; Williams v. Benton, supra.)

While it might appear from a reading of some of the findings of the referee that such findings did not apply strictly to the question of the accounting, it cannot be said, as a matter of fact or law, that the findings made were not necessary to a full “accounting of the partnership affairs.” The partnership agreement could not be ignored in the reference. It was an instrument necessary to be considered by the referee

Judgment affirmed.

Barnard, P. J., and Mussell, J., concurred.