Herrick v. Ames — 21 N.Y. Super. Ct. 115

Majority

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Herrick et al., Plaintiffs and Respondents, v. Ames et al., Defendants and Appellants.

Headnote

1. Where some of the members of a firm, without the knowledge of the others, and contrary to covenants in the articles of copartnership, engage in other business and use the firm’s credit and means therein and appropriate the profits to their own use, they thereby commit a fraud upon the firm.

2. The other members of the firm, on discovering the facts, may elect to have such business and its profits treated as the business and the profits of the firm.

3. If claimed and adjudged to be treated as the business of the firm, in stating an account, in respect thereto, those who prosecuted it, must be credited with moneys paid for the property used in it.

4. The practice and concealment of such a fraud, and a discovery of it subsequent to a settlement of accounts between the partners, give a right to the defrauded partners to have the account opened, and an accounting in respect to such business.

(Before”Hoffman and Woodktjff, J. J.)

Heard, January 16th;

decided, March 9th, 1861.

Appear by the defendants (who are Isaac Ames, John 0. Barnes, Thomas Rhoads and John Gr. Rhoads,) from a judgment in favor of the plaintiffs, (who are Jonathan K. Herrick and William Herrick,) entered' on the report of Hon. William Mitchell, as referee. The complaint states: 1. That in 1856 the plaintiffs and defendants entered into copartnership for the transaction of the stationery business, under the firm name of “ Ames, Herrick, Barnes & Rhoads,” and that copartnership articles were executed, providing for the amount of capital to be contributed by

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the members, respectively, and their respective interests in the concern.

2. That the articles further provided, that “the partners Ames, William Herrick, and Barnes were not, either by themselves, or with any other person or persons, directly or indirectly, to engage in any business, except the business of the said partnership,” nor “ without the consent in writing of the other partners, and of the said special partner, to employ any of the money or effects of the said partnership, or engage the credit thereof in any manner whatever, except upon the account of and for the benefit of said partnership.”

3. That the said firm went into operation under the said articles, and on January 1st, 1859, expired by its own limitation.

4. That in October, 1856, the defendants Ames and Barnes, without the knowledge or consent of any of the other members of the firm, purchased the copyright of “ Brooks’ Interest Tables,” with the plates for printing the tables, for $2,000, and took the transfer to themselves in ■their own names.

5. That Thomas Rhoads is made defendant, because he refuses to unite as party plaintiff, and John G. Rhoads is .made defendant, because he resides in London.

6. That in payment of this $2,000, Ames and Barnes gave the firm check for $1,000, and two notes for $500 each, signed by the firm name, at four and six months, and that the check and notes were paid out of the funds of the firm.

7. That Ames and Barnes subsequently made a contract for the manufacture of the tables, for 15' and 18 cents each, •of which they sold to the firm, without the knowledge oí the other members, 5,740 for 35 cents each, and 5,943 for 45 cents each, and that by this .transaction the firm was defrauded of nearly $3,000.

8. That the defendants Ames -and Barnes had the exclusive control of the general business .of the firm, and of .the accounts, and that neither of the plaintiffs had any

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connection with the same; and that the facts connected with the purchases, manufacture, and sales of the plates only came to the knowledge of the plaintiffs since the dissolution of the partnership,

9. That Ames and Barnes conspired to defraud the firm, and make a profit by the manufacture and sale of the plates.

The referee found:

That the facts stated in the complaint are true, except as follows: The number of tables charged by said Ames and Barnes, at 35 cents each, was 6,236, the number charged at 45 cents each was 6,131, but a discount of 15 per cent, was allowed to the firm on these two prices. The firm was charged by them with $3,721.68, as paid to Morrill & Go., when in fact there was paid to Morrill & Co. only $2,091.18, and the difference, $1,631.50 was received by said Ames and Barnes, and used by them, and not accounted for to the firm.

That the last mentioned sum was part of the profits of the firm, to be divided as such among the members thereof respectively, according to their agreement for the distribution of profits. That agreement was that William Herrick should have ten per cent, of the profits, Isaac Ames 20 per cent, John 0. Barnes 20 per cent, Thomas Bhoads, 12 J per cent, John G-. Bhoads 12£ per cent, and Jonathan E. Herrick, 25 per .cent.

That the last dealing in this matter was 31st July, 1858; the interest on $1,631.60 to date of report is $156.08.”

The referee, as matter of law, found that Isaac Ames and John 0. Barnes should jointly pay, on account of the preceding matter, to the several other members of said firm, as follows, viz.: To Thomas Bhoads, $223.46; to John G-. Bhoads, $223.46; to William Herrick, $178.77; to Jonathan E. Herrick, $446.92; and that said Isaac Ames and John O. Barnes should also pay to the plaintiffs their costs in this action to be adjusted, and an allowance, and that they should transfer the copyright and plates mentioned in said complaint, and the tables manufactured therefrom to the

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said firm, and to all the members, thereof, to be held for the use and benefit of the whole firm, or of all the members thereof in the same manner as the other property of said firm is*held.”

From the judgment entered on his report, the present appeal is taken.

S. M. Bowman, for the appellants.

Gouverneur Tillotson, for the respondents.

I concur fully with the referee in the principles which he has adopted in disposing of this case. The partners Ames and Barnes, had no right to engage in any other business than that of the co-partnership, nor to use the funds or credit of the firm in any manner except for the co-partnership benefit. This whole business was done in the name of the firm—the money and notes of the firm were advanced therefor; now, although then co-partners had a right to treat this as a violation of the co-partnership agreement, (if it was beyond the actual scope of the business provided for in that agreement), and to hold Ames and Barnes liable for any damages, yet they had the option to adopt the acts of Ames and Barnes, and claim a joint benefit in and share of the business so carried on with the means and credit of the firm, and have the property thereby acquired treated as copartnership property. The acts themselves, and the attempt to appropriate the business to the separate benefit of Ames and Barnes were a fraud upon the other partners, however it may be that they supposed they had a right to make such appropriation, and in that sense acted without intentional wrong. The acts were nevertheless a fraud upon the rights of the co-partners, and it is alleged that they were not discovered until after the settlement. This allegation is not denied. There is then fraud and concealment, and a discovery after the accounts are settled. This is sufficient ground for opening the settlement and directing a further accounting.

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But in the application of those principles to the facts found, an error has been committed which requires correction.

The number of tables furnished and charged to the firm at 35 cents was, (as the referee has correctly found from the accounts), 6,236 amounting at 35 cents to $2,182 60 And the number furnished and charged to the firm at 45 cents was, (as the referee has also correctly found,) 6,131; amounting at 45 cts.to, $2,758 94

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Which, if there were no other inaccuracy in the mode of stating the account, would be the sum in the hands of the defendants, belonging to the firm, for which they were bound.to account instead of $1,631.50, as found by the referee. But in consequence of errors in the following entries, viz.:

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But the greater error in the statement of the account by the referee, consists in his assuming that all the excess thus found is in the defendants’ hands. The proof is distinct and uncontradicted that the account of payments for those tables contains two notes of $500 each, (one dated November 1,1856, at four months, entered in the account under date December 31, and one dated November 1, 1856, at six months, entered under date February 25,) which two notes were paid to Morrill for the copyright and plates, and not for tables.

Now, as the plaintiff's by their complaint claim, and the referee has adjudged, that the whole transaction shall be deemed a joint or co-partnership affair, and as the plaintiffs claimed that the copyright and plates should be adjudged the property of the firm, and the referee did so adjudge, it follows that the firm should be charged with the cost of the copyright and plates. The firm should not take the plates and copyright without allowing the cost thereof in the accounting, as properly paid by the firm. It follows that, striking those notes out of the account, there has not been paid for tables so much by $1,000 as is above stated, and the actual amount received by the defendants Ames and Barnes, from the firm, for tables, more than they paid to Morrill, is, ($2,143.61, less $1,000,) $1,143.61. . Assuming the finding of the referee to be correct, that the cash payment of $1,000 was not only paid by the check of

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the firm, but that it was not charged to Ames and Barnes in their individual accounts, nor refunded by them, this sum of $1,143.61 is the true amount with which Ames and Barnes should he charged in the final account, and which, with interest, should he awarded to the respective partners in the proportions stated by the referee: To William Herrick ten per cent or $114.37, with interest; Jonathan K. Herrick $285.90, with interest; to Thomas Rhoads and John E. Rhoads each $142.96, with interest.

The correctness of this will appear by an analysis of the ledger account in evidence.

The amount of actual debits to Morrill for cash or notes ostensibly paid him, appears thus:

And the respective amounts thereof to which the partners are entitled, are as follows :

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If the plaintiff chooses to consent to a rectification of the judgment conformable to this statement of the account, the judgment so corrected should he affirmed without costs on the appeal—the other parts of the judgment being, in our opinion, correct. If he do not so consent, a new trial must be ordered, with costs to abide the event.

Ordered accordingly.