White v. Reed — 36 N.Y. St. Rep. 479

Majority

p. 479

George W. White, App’lt, v. Mary Reed, Exr’x, et al., Resp’ts.

(Court of Appeals, Second Division,

Filed March 17, 1891.)

Headnote

Partnership—Accounting—Sale of partner’s interest obtained by fraud.

Where a sale by one member of a firm to his partners is set aside for fraud or other cause, and the other members cpntinue the business, or enter upon new enterprises with the firm property, they may be required to account to the outgoing partner or his representative for the resulting profits. But the right of the outgoing partner to recover rests upon the fact that when he retired from the firm he had some remaining interest in the capital appropriated and used in the continuance of business by the other partners.

p. 480

Appeal from judgment entered on decision of general term of the superior court of the city of New York, affirming a judgment entered upon report of a referee, and from an order of the general term reversing a judgment previously entered upon a report of another referee.

George H. Adams, for app’lt; Albert Stiekney, for resp’ts.

The plaintiff, Horatio Reed and Charles White were equal partners in business from 1862 to August 4, 1876, when the plaintiff sold out his interest to his partner. The plaintiff in 1881 brought this action against Reed and White to •set aside the sale on the ground of alleged fraud, and for an accounting, with a view to the recovery of an additional sum by way of capital and profits. The court determined that the allegation of fraud was sustained; and by interlocutory decree set aside the sale and directed an accounting, which was had before a referee, upon whose report judgment was entered in favor of the plaintiff for upwards of $100,000. The judgment was reversed by the general term, and a new accounting directed before another referee. 23 J. & S., 417; 13 N. Y.St.Rep.,738. It was had andresulted in a report and judgment against the plaintiff for upwards of $8,000. The latter judgment was affirmed. This appeal is from that affirmance and from the order reversing, the judgment entered upon the first report The interlocutory judgment, and the facts' and conclusions of law found by the court directing it, remain undisturbed and effectual as the determination of the rights and liabilities of the parties, so far as they are dependent upon such decree: The business of the firm was large and consisted of buying live hogs in Chicago and shipping them to the city of New York, where they were slaughtered and the product disposed of. The plaintiff resided in Chicago, and had charge of buying and shipping the hogs to New York, where they were received by Reed and White, who had entire charge of the business there, and kept the books representing the accounts of the firm. In fact New York was its place of business.

In June, 1872, Reed entered into a secret arrangement with one Bate to sell and deliver to the latter from day to day, in the name of the firm, a large quantity of slaughtered hogs, to be disposed of by Bate for the joint profit of him and Reed to the exclusion of the firm. To accomplish this a formal agreement was made between them on the one part, and certain persons on the other part, whereby the latter agreed to make advances and take dressed hogs on terms particularly mentioned ; and the firm of Charles White & Co. made sales and deliveries to Bate up to February 8th following of over three million pounds of dressed hogs amounting to $186,761.58. In June, when such arrangement was made, Bate was indebted to the firm $24,722.71 and was then insolvent, of- which Reed was advised when he entered into the agreement with him; and when the business with Bate was closed in February, 1873, his indebtedness to the firm had increased to $44,735.74. In August, 1876, the plaintiff expressed to Reed and White dissatisfaction with the conduct of the

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business in New York and especially with the loss occasioned by the indebtedness of Bate, and he proposed to sell his interest in the firm for a sum certain. After some negotiation he sold out to Reed and White and agreed to take in cash and notes about $27,000 and one-third interest in certain real estate at a valuation of about $30,000, making together $57,000 for his interest. At that time a balance sheet was taken from the books which showed his credit balanc'e to be $70,818.40, and to induce him to make the sale for an amount less than such balance the defendants represented to the plaintiff that the Bate account was of no value and ought not to be taken into account. The court found that the representations in that respect were false to the knowledge of Reed, and were made with fraudulent intent on his part to induce the plaintiff to sell his interest for less than its value, and with the fraudulent intent of concealing from him the true state of the affairs of the firm to his disadvantage. The value of the indebtedness of Bate was in the liability of Reed to account to the firm founded upon his secret arrangement before mentioned with Bate; and in that view the interlocutory decree directed that in the accounting Reed be charged with the value of the merchandise delivered to Bate by the firm after June 15, 1872, and credited with payments made by him to the firm.

The further direction for the accounting given by the interlocutory decree was, that the defendants account for the disposition by them of the partnership assets which were in their possession on August 4, 1876; and that an accounting be had between the par-ties in respect to their several interests in the assets or their proceeds, or in the amounts for which the defendants might be chargeable in their disposition of them; that an account be taken of the assets and liabilities of the firm existing on that day; that the defendants file an account and the referee make an inventory of such assets and liabilities; and that he ascertain and determine what were the obligations of the defendants to the plaintiff in disposing -of the partnership assets or any of them after the sale by him, and the amounts with which the defendants were chargeable by reason of such disposition ; and that on such accounting the plaintiff be charged with all sums of money withdrawn by him or paid to him by the firm in August, 1876, also the value of all property withdrawn by or transferred to him by the firm or by the defendants at that time. The referee determined that the plaintiff received ' something more than he was entitled to at the time of the sale to Reed and White. This was based upon the finding made by him of the value of the firm assets at that time, and the determination that the plaintiff then received $57,000 for his interest. Both of those propositions of fact are contested by the plaintiff, who insists that he did not receive and should’ not account for or be charged with that amount. The one-third interest in the real estate before mentioned was not conveyed to him, but an agreement was made by White, who held the legal title for the firm, to sell it to him and to make conveyance when requested to do so. In December, 1880, the plaintiff released White from the agreement

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to convey, in consideration whereof Reed and White paid the-plaintiff §19,000. The plaintiff claims that he should not be charged with the $30,000, but only with the $19,000, as of the-time he received the latter sum. And this is urged on the ground that when the sale by him to his partners Reed arid White was set. aside the agreement to sell and convey such interest in the real estate referred to fell with it, and he was chargeable in that respect with only what he received upon the release of it by him and as-of the time he received the consideration of his release.

That view does not seem tenable, as the fraud charged had no-relation to the nature of the consideration which he received in payment for the transfer of his interest in the partnership property. Before the commencement of this action he had released his claim under the agreement to sell him the land for a specific-consideration paid to him. And on this subject.the interlocutory decree directed that in the accounting the plaintiff should be charged with all sums of money withdrawn by him from the firm in August, 1876, “also with the value of all property withdrawn by or transferred to him by said firm or by the defendants at that time.” The estimated value then made seems to have been the amount for which the third interest in the land was taken by the plaintiff, and there is no other evidence and no finding or request-to find upon the subject of its value at that time. And upon this review this court cannot say that it was worth then any less-than the price allowed by the plaintiff for it.

The question whether his interest in the firm assets was entirely covered by the $57,000 was one of more difficulty. All the partners had credit balances on the books, and the custom was to-make annual rests and to add interest from year to year on such balances. They, as represented by the balance sheet of 1st of July, 1876, were Charles White, $124,657.41; Reed, $84,096.99; plaintiff, $70,818.40. The plaintiff’s interest as thus represented (a sum equal to which he at first proposed to sell for) was reduced little less than one-third the amount of the Bate indebtedness in-the arrangement pursuant to which he made the sale. These-credit balances on the accounting were changed by adding some-assets not on the books or in the ledger account at the time of the sale, also by charging Reed with the amount of the Bate indebtedness which accrued after June 15, 1872, and adding one-third that amount to the balance of each of the other partners, thus; producing actual credit balances as of August 4, 1876, as follows: Plaintiff, $78,909.18; Charles White, $132,748.19; Reed, $68,515.43, making an aggregate $278,163.60. But the value of the-interests of the partners so represented was dependent upon the actual value of the assets of the firm. And while they had the nominal value of upwards of $290,000, the referee found that at. that time the actual value-was only $201,181.77 ; and after charging one-third of the losses and depreciation and the small amount of liabilities to each of the parties, the result as found by the referee was that the $57,000 was in excess of the plaintiff’s interest in the partnership assets. While the evidence is not such as to necessarily require the finding that the value of the property of

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the firm on August 4, 1876, was no more than the amount so found to be its value, there was evidence which permitted the conclusion that if the partnership had then been closed up, the amount of the assets would have produced no more than that sum. The question upon the evidence was one of fact, and it cannot upon this review be held that the finding was without some evidence for its support. Assuming then that the plaintiff, pursuant to his agreement to sell, received the value of his interest in the assets at that time, the question arises whether he was entitled to an accounting which would give him a right to participate in the profits of the business thereafter continued by Charles White and Eeed. They carried on the same business at the same place until in June, 1884, and realized large profits ; and the accounting was ■had after that time. Their deaths did not occur until in 1888. It is a general rule that when a partnership is dissolved by death •of a member or otherwise, and the other members continue the business, or enter upon new enterprises with the firm property, they may be required to account to the out-going partner or his representative for the resulting profits. And in some cases it may be optional on his part whether they be required to allow to him a due share of the profits or interest upon his share of the capital. Crawshay v. Collins, 15 Vesey, 218; 1 Jac. & Walk., 267; 2 Russell, 325; Featherstonhaugh v. Fenwick, 17 Vesey, 298; Wedderburn v. Wedderburn, 2 Keen, 722; 4 Myl. & Craig, 41. And the same rule is applicable where a sale by one member of a firm to his partners is set aside for fraud or other cause. Cook v. Collingridge, Jac., 607; King v. Leighton, 100 N. Y., 386 .

It is, however, contended on the part of the plaintiff that the practical effect of setting aside the sale was the restoration of the plaintiff’s relation of partner and its continuance without interruption by the sale; and that at least he had a ■ credit balance of upwards of $21,000 remaining, and was entitled to share in the profits of the business until its termination in June, 1884. This would have been so if he had continued a partner and drawn out $57,000. That sum would, in that case, have been charged to him on the books and he would have been entitled to credit for ■one-third of the profits. He was not, in fact, a partner from the time of his sale. The firm befóte then existing was dissolved. And the setting aside the sale did not have the effect to restore the previously existing partnership; but in view of the purpose of this action, the effect of the interlocutory decree was to charge ■the other partners (who had continued the business) as trustees, with liability to account to the plaintiff and allow him what he was equitably entitled to of the profits of the business so continued and to render to him his share remaining in the capital of the firm. This was a subject of inquiry on the accounting, and whether he had any interest in the capital was dependent upon its amount compared with that received by him on the sale. If the amount so received equaled one-third the amount of all the assets of the firm at that time, he had no interest remaining in the capital and he derived no right to any by setting aside the sale. Mor for that purpose was there a restoration of the excess of the plaintiff’s

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credit balance. The interlocutory decree, as understood, does not, go so far as that. It directs the referee to take and state an account of the assets and liabilities of the firm on August 4, 1876. And while it also directed a further accounting by the defendants, it was left for the court, on the coming in of the referee’s report, and on motion for judgment upon it, to determine the rights of the parties upon the accounting had. If, as found by the referee, whose report was confirmed by the court, the amount paid to the plaintiff on the sale exceeded the amount of his interest in the capital or assets of the firm, he had nothing in the property appropriated to or used in the business continued by Reed and White after the plaintiff’s sale to them; and in that view it is difficult to see any principle upon which his claim for profits resulting from their business, conducted with their-own property only, can be supported. While the fraud which induced the sale by the plaintiff gave him the opportunity to seek and obtain full indemnity for the loss he had suffered by it, with the right to treat the defendants as trustees, and require them to account and render to him the share of the profits of the subsequently conducted business in the event, they used in it the joint property of the firm, the fact that he had no remaining interest in it denied to him the right to such relief. Taylor v. Hutchison, 25 Grattan, 536; 18 Am., 699; Vyse v. Foster, L. R., 8 Ch. App., 309; 4 Moak, 904; L. R., 7 H. L., 318; 11 Moak, 1; Simpson v. Chapman, 4 DeG., M. & G, 154; 2 Bates on Part., § 797.

There is no want of harmony in this view with King v. Leigh-ton. In that case there were unfinished contracts, which were the property of the firm at the time of the release of his interest in the partnership joint assets, which release the plaintiff was induced by the fraudulent representations of the defendant to give to the latter, who was held liable, upon the principle before mentioned, to account for the firm property and the profits realized from it in the subsequent conduct of the business by him, of which profits the plaintiff was held entitled to his share. And in the use by the defendant of such profits as capital, it is very likely he may have been required to, also, account therefor, and to allow to him a suitable measure of resulting profits. The-granting relief of that character does not proceed on the ground that the party seeking it is a member of a continued partnership, but rests upon the fact that when he retired from the firm he had some remaining interest in the capital appropriated and used in the continuance of business by the other partners. And when they seek such an advantage by fraud they will not be permitted to profit by it to the prejudice of the outgoing partner. It may be that upon the evidence the plaintiff has reason to think that the value of the assets was greater than that found by the referee, but upon that question this court is concluded by the finding and its confirmation by the court below. It is true that his knowledge of the fact, concealed from him at the time of the sale, of the liability of Reed to make good a portion of the indebtedness of Bate, would have increased the value as he then understood it

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of the firm assets $20,000 and his credit balance upwards of $6,-000; but inasmuch, as the ultimate purpose of this action was an accounting rather than to recover damages for the fraud, the right of the plaintiff to relief was dependent upon his having an interest in the assets as of and subsequent to the time of the sale. The entries in the books in that respect or the credit balances were only presumptive evidence of the value of the capital or assets of the firm. Jones v. Butler, 87 N. Y., 613 , 617.

The good will of the partnership business of the parties seems to have had no consideration on the trial or accounting. 'The subject of it or its value was not specifically mentioned in the interlocutory decree. Hor was it one of the considerations upon which the sale by and purchase from the plaintiff was founded. It quite clearly appears that the negotiations which resulted in the sale were had solely in reference to the credit balance of the plaintiff and its comparison in amount with the then value of the assets. The matter of the good will or its value is not the subject for consideration. Steu art v. Gladstone, L. R., 10 Ch. Div., 626; 27 Moak, 161.

In accordance with the views already expressed, the vital fact was, whether the value of the assets at the time of the sale exceeded the amount which the plaintiff then received as its cftnsideration. And as it was found that it did not, the plaintiff was not entitled to recover upon the accounting. In determining whether or not the judgment is supported by the findings of the referee, as confirmed by the court, reference can be had only to the report upon which the judgment was entered. When the prior judgment was reversed the report of the referee on the first accounting became ineffectual.

But the only theory upon which the affirmative judgment in favor of the defendants can be supported is, that the parties were in fact partners, and this action brought by the plaintiff as such, for a dissolution and accounting. In that view the plaintiff’s action would have a phase which, if given to it, might lead to a different result In such case, as suggested by the defendants’ counsel, all parties are actors and judgment will be awarded for and against any of them as their rights may appear. Here the partnership existing on August 4, 1876, was then dissolved, and did not in fact thereafter exist The plaintiff’s action was for relief founded on fraud; and after the obstacle produced by his contract of sale and release was removed, his ultimate remedy required an accounting to ascertain whether he was entitled to any and what amount, treating the original defendants, as he was permitted by the interlocutory judgment, as trustees of the capital in which he had an interest, and to charge them with the amount to which he was entitled of the profits of the business in which it had been employed by such defendants. He was the actor in the action. The defendants, so far as appears, had no cause against him upon which to found a counterclaim, and none was alleged.

The defendants were, therefore, not entitled to recover the affirmative judgment rendered in their favor.

The judgment, so far as by it the defendants recovered against

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the plaintiff $8,325.78 and interest, should be reversed, and in other respects affirmed, and be modified accordingly, without costs in this court to either party.

All concur.