Sweet v. Morrison — 2 N.Y. St. Rep. 781

Majority

p. 781

Elnathan Sweet, Jr., Resp’t and App’lt, v. Dorilus Morrison and others, App’lts and Resp’ts.^[1]

(Court of Appeals,

Filed October 5, 1886.)

Headnote

1. Partnership agreements—Construction of—Power to delegate to ANOTHER.

Where by the terms of a partnership agreement there was assigned to one

p. 782

partner the duty of conducting the financial settlements. Held, that unless the intention to make one absolute dictator over the others as to the finances of the firm was shown, this agreement gave to that partner a controlling influence in financial questions only while he did his duty in exercising it, and did not strip his associates of their general partnership rights. If he went away to attend to other business of his own, he had no power to appoint a substitute. When he surrendered his own control it went hack to the firm and remained there.

2. Same—Fraud—Liability of partners for—Damases—Measure of— Action against partners.

If certain members of the firm and its debtor make by collusion a settlement valid as between them, but fraudulent as to one partner who took no part in it, that partner may recover damages against his co-partners. The only damage, however, would he the diminution of his partnership share produced by the collusive waste of the partnership assets.

8. Same—When debtor liable after settlement.

This loss cannot he known until the partnership accounts are settled; hut whatever loss on ihe final adjustment of the firm’s accounts can be traced to the waste of his partners, in collusion with the debtor, must be made good to said partner by the other partners, and if they are insolvent, by • the colluding debtor.

Cross-appeals from judgment of supreme court, general term, second department, affirming a modified judgment of the Kings county special term.

The plaintiff herein was one of the firm of Fleming, Kennedy & Go. The defendants are the other members of said firm, and the persons composing the firm of Payson, Canda & Go. The Northern Pacific Railroad Company was also a party defendant, but the complaint was dismissed as to it. The allegations of the complaint are that in 1872 the Northern Pacific Railroad Company made a contract with Payson, Canda & Co. to build a portion of its road at a certain specified price. That afterwards Payson, Canda & Co. sub-let the part of the contract for grading to the said firm of Fleming, Kennedy & Co., who did the work in a proper manner. That the" estimates of the work made by the chief engineer of the railroad company, in accordance with which plaintiff’s firm was paid, were incorrect and unjust to plaintiff’s firm. That Payson, . Canda & Co,, with knowledge of these facts, and acting collusively with plaintiff’s co-partners, obtained from said co-partners after notice from the plaintiff showing his unwillingness to consent thereto, a settlement with said co-partners upon the basis of said wrong estimates, and relinquished the claim of plaintiff’s firm for the amount really due.

The plaintiff herein, by the terms of a duly executed agreement between the co-partners, was empowered to make any and all settlements, and to give the necessary releases for any money or claims due, or to become due, on said contract. The plaintiff left to take charge of another work of his own, but before leaving gave to John Fleming, one of the co-partners, a writing, as follows:^[1]

p. 783

Minneapolis, Minn., December 2, 1872.

“ Messrs. Payson, Canda & Co.:

“John Fleming of our firm, is authorized in absence of Mr. Sweet to settled our estimates with you.

“Fleming, Kennedy & Co.”

This letter was delivered to the defendant, Morrison, and by him attached to the settlement. The settlement was signed in-January, 1872, closing up this contract. There was nothing apparently left to do but to settle the accomits between the co-partners. Plaintiff, however, claimed that this settlement was fraudulent, and brought this suit to set it aside and for damages.

The case was heard before Justice Pratt, at special term, March 12,1882, who rendered a judgment in favor of the plaintiff against defendants. From that judgment defendants appealed to the general term, which modified the judgment by reducing the recovery, and affirmed it as modified. From the judgment of affirmance the defendants and the Northern Pacific Railroad Company appeal, and the plaintiff also appeals.

E. W. Paige with Henry Broadhead for plt’ff; William W. Niles and John Van Voorhis for def’t.

There are possibly some facts in the mass of' testimony taken in this case which admit of an inference-' that the settlement assailed was fraudulent and collusive as. against the plaintiff. The proofs have not impressed us with the soundness of that conclusion; but the question is. essentially one of fact, and, in the face of the finding of the referee and its approval by the general term, we can only-reverse upon the ground that there was absolutely no evidence of fraud. We hesitate to do that, for the reason that certain incidents were proved, which, standing alone,, would tend to show collusion between all the other parties, to injure and impair the rights of Sweet; and, while they seem to us fairly explained, the adequacy of the explanation has not struck all minds alike.

But, conceding the fraud, and waiving the difficulty that, the false estimates, if they were such, originated in the act and influence of the railroad company, which has been dismissed from the case, it is quite clear that such fraud was against Sweet alone, and furnishes a cause of action to him only, and not to his firm. His four partners, who made the settlement with Payson, Canda & Co., had competent authority for that purpose, which bound the firm. The terms of their partnership agreement distributed among the partners the work to be done, assigmng to Sweet, who was an engineer, the duty of “ conducting ” the financial settlements, and to his associates the work of grading.

p. 784

Such an agreement ought not to be construed as abrogating or dividing the general partnership authority, and making one absolute dictator over four as to the finances of the firm, unless such an intention is quite clearly and distinctly developed. The agreement strikes us as not so intended. It did not forbid or prohibit the exercise of authority or the right to participate on either hand. In many firms the business is necessarily divided into departments which single partners specially control, but not to the absolute exclusion of the others, or so as to abrogate utterly their partnership authority. This agreement seems to us fairly of that character, and gave to Sweet a leadership or controlling influence in financial questions, while he did his duty in exercising it, but did not strip his associates of their general partnership rights. But Sweet did not perform that duty. He went away to attend to other business of his own, and left a letter directing Fleming to settle. He had no power to make such a substitution. When he surrendered his own control, it went back to the firm, and remained there, since he could not take up and abandon his duty at his pleasure. The settlement made by the four partners, therefore, bound the firm. They lawfully represented it, and as to them there was neither fraud nor mistake. They allege neither, but deny both ; and it follows that Payson, Canda & Co. were bound to pay the firm only the amount required by the settlement actually made.

Yet, in spite of that, it was possible for Sweet’s partners, and the other defendants, to make by collusion, a settlement valid as between them, but fraudulent as to him ; and that is the fraud charged, and the fraud proved, if there be any. Sweet may recover, not the debt due to the firm, for that is discharged, but damage for the fraud practiced upon him in the process. This is his individual right, and the resultant damages can only be measured by his individual loss ; and that loss, if it exists at all, must necessarily be and can only be a diminution of his partnership share, produced by a collusive waste of partnership assets.

But he has not proved any such loss. It cannot be known, until a settlement of the partnership accounts, what loss has resulted from the fraud. Payson, Canda & Co. are not bound to pay Sweet’s firm or Sweet’s partners anything. Primarily the action is by Sweet against his copartners for a partnership settlement, in which he charges them with the willful and fraudulent waste of a valuable' claim, and holds the debtors responsible also by reason of their collusive participation. That is the sole theory upon which the action can be maintained. To Sweet’s partners, and to his firm, nothing is due from Payson, Canda & Co., and they can be compelled to pay only what is needed to perfect

p. 785

Sweet’s rights as disclosed by an honest settlement. He has a right, notwithstanding the settlement actually made, to be placed' in the position he would have been in if the full debt had been honestly paid to his copartners, and he had received his aliquot share of the assets, thus increased, after payment of the firm debts. When that is done he has obtained full justice, and all to which he is entitled. But, as the case stands, his recovery may prove to be much too large or much too small. No final settlement of the firm accounts has been had, and every effort to prove their exact condition was prevented by the rulings upon the trial. It may turn out that, even after charging the four partners with the entire amount of the disputed asset, Sweet has already had his full share, and is entitled only to judgment confirming him in its possession. In that event Payson, Canda & Co. would have nothing to pay. If it should appear that the firm debts are all paid, or, if not, that the four partners are so solvent and able to pay their proportions as to permit that subject to be disregarded, and that Sweet has already had from the firm, property in excess of a sum equal to one-quarter of the disputed claim, then the sole relief necessary to his protection is a judgment confirming him in the possession of what he has received. His partners claim that to be the truth; that he took in advance, and over and above his share, all that this asset would produce, and, having got it already, has no claim to be paid it a second time. On the other hand, that claim of the four partners may prove to be untrue, and it may further appear that large debts are outstanding for which Sweet is hable, and, at least, if his partners are insolvent and unable to pay, and all the other firm property is exhausted, he may require from Payson, Canda & Co. a sum sufficient to restore the solvency of the firm, and secure him his share of the surplus, even if it took much more than the sum he has already recovered. In other words, whatever loss of Sweet, on a final adjustment of the partnership accounts, can be traced to the waste of the disputed asset by his partners in collusion with Payson, Canda & Co., must be made good to Sweet out of it. But when that is done full justice is rendered, and he is entitled to no more. The arbitrary award of one-quarter of the claim was therefore erroneous, since no sufficient facts are found to justify it.

There were cross-appeals from the judgment of the general term. The plaintiff appealed from so much of it as reduced his original' recovery, and the defendants because it permitted a recovery at all. The conclusion we have reached determines both appeals.

p. 786

The judgment should be reversed, and a new trial granted; costs to abide event.

All concur, except Hiller, J., absent.