Summary
holding that "the relationship of partners is fiduciary and imposes on them the obligation of the utmost good faith in their dealings with one another in respect to partnership affairs."
Summary of this case from Baum v. Baum (In re Baum)Opinion
Filed 15 January, 1954.
1. Pleadings 15 — Upon demurrer, the factual allegations of the complaint are to be taken as true and the pleader given the benefit of every reasonable intendment therefrom, and the pleading liberally construed with a view to substantial justice between the parties.
2. Partnership 2 — Partners have a fiduciary relationship to each other which imposes upon them the obligation to use the utmost good faith in dealing with one another in respect to partnership affairs, each being the confidential agent of the other with the right to know all that the other knows in regard to the partnership affairs.
3. Partnership 12 — Allegations of a partner that the other partner had usurped complete control and exclusive possession of the books, records and entire assets of the partnership and was squandering its earnings and assets, and had refused, after demand, to account to plaintiff for any share of the profits or earnings of the business, is held to state a cause of action for an accounting between the partners.
4. Partnership 15 — Under the equitable principle of marshaling of assets, a partner is entitled to have the partnership property first applied to the payment or security of partnership debts before resort is had to his individual assets. G.S. 59-68 (1).
5. Same — Where partners and their wives execute a deed of trust on the entire partnership property and also the individual realty of a partner to secure a partnership debt, allegations of one of the partners that the partnership property is sufficient to discharge the debt in full without resort to his individual property states a cause of action in his favor to enjoin the foreclosure of the deed of trust en masse pending an accounting of the partnership assets.
6. Injunctions 8 — Ordinarily a temporary restraining order should not be dissolved when the injury, if any, which defendant would suffer from its operation would be slight compared to the irreparable damage which would result to plaintiffs from its dissolution.
7. Partnership 15: Pleadings 2 — In partner's action against co-partner for accounting he may enjoin lien-holder from foreclosing deed of trust on partnership and individual property. The complaint alleged of cause of action in favor of one partner against his co-partner for an accounting and settlement of the partnership property. The complaint also alleged that the partners and their wives had executed a deed of trust covering not only the partnership property but also realty belonging to plaintiff individually, to secure a partnership debt, that the partnership property was sufficient to pay the partnership debt, and sought to restrain the foreclosure of the deed of trust en masse pending an accounting of the partnership property, the trustee and the cestui que, trust being parties. Held: Demurrer on the ground of misjoinder of parties and causes of action should have been overruled, the trustee and the cestui being necessary parties for a complete determination and settlement of the questions involved.
8. Parties 4 — Plaintiff is entitled to join as defendants all who claim an interest in the subject matter of the controversy adverse to plaintiff or who are necessary parties to a complete determination of the cause of action. G.S. 1-69.
APPEAL by plaintiffs from Frizzelle, J., at March Term, 1953, of WAYNE. Reversed.
J. Faison Thomson Son and S. B. Berkeley for plaintiffs, appellants.
Paul B. Edmundson for defendant, appellee.
JOHNSON, J., dissenting.
WINBORNE, J., concurs in dissent.
Civil action by plaintiff W.D. Casey, Jr., against defendant Harold J. Grantham for an accounting of a partnership owned solely by them, and in which W.D. Casey, Jr., and wife Eunice Winborn Casey seek to enjoin the foreclosure of a deed of trust on the partnership property and on the home and farm of W.D. Casey, Jr., held by the defendant Clarence Grantham, father of the defendant Harold J. Grantham, until the partnership accounting is had.
The defendant Clarence Grantham demurred to the complaint on these grounds: (1) Misjoinder of parties defendant; (2) misjoinder of causes of action; (3) misjoinder of both parties and causes of action; and (4) for failure of the complaint to state facts sufficient to constitute a cause of action.
The complaint alleges these substantive and constituent facts upon which the plaintiffs' claim to relief is founded.
1. On 17 September 1948, W.D. Casey, Jr., and Harold J. Grantham organized a partnership to engage in a sawmill and cotton gin business. They are equal partners. Casey was general manager. Grantham was to arrange the financing and credit, and said his father, Clarence Grantham, was a man of means, and he could arrange the financing of the business with him. Each partner was to receive one-half of the net profits.
2. During the first and second years of the partnership, Harold J. Grantham borrowed from his father, Clarence Grantham, $15,000.00 in cash at 6% interest for the partnership business, for which loan neither the partnership, nor the individual partners, gave any evidence of this indebtedness or security therefor.
3. In 1951 Casey went to New Mexico on partnership business, leaving the management and control of the partnership business in Wayne County to his partner. When Casey returned to Wayne County, he found the partnership cotton gin was not open, though the cotton ginning season was in progress.
4. To secure Clarence Grantham for his $15,000.00 loan to the partnership prior to going to New Mexico, Casey and his wife, and Harold J. Grantham and his wife executed and delivered to Clarence Grantham 15 promissory notes in the sum of $1,000.00 each bearing interest at 6%; the first note to become due and payable one year from date, and the other 14 notes to become due and payable one each year for the next 14 years. The date of each of said notes was 23 December 1950. To secure this indebtedness the makers of the notes executed and delivered a deed of trust to W. Powell Bland, Trustee, for Clarence Grantham, conveying in said deed of trust to the trustee the assets of the partnership and the home and farm of the plaintiff W.D. Casey, Jr., which deed of trust is properly recorded in Wayne County and by reference made a part of the complaint.
5. Upon his return from New Mexico, Casey found the partnership affairs in bad shape, and a study and accounting of its debts, engagements and affairs were necessary to enable plans to be made for the more orderly operation of the partnership or the settlement of its affairs. Casey undertook to arrange such study and accounting with Harold and Clarence Grantham, but after diligent efforts and numerous conferences nothing could be done to that end.
6. The books and records of the partnership are now, and have been, in the hands of the defendants Harold J. Grantham and wife Viola Grantham. Harold J. Grantham, aided and abetted by his father, has usurped complete control and exclusive possession of the entire assets and business of the partnership, is squandering its assets, and refuses to account to Casey for any share of the profits. That Harold J. Grantham and his father have entered into a course of dealing with each other for the purpose of ousting Casey from the partnership to the end that they may take over not only the assets of the partnership conveyed in the deed of trust above mentioned, but also the home and farm of Casey conveyed in the deed of trust. That in furtherance of this purpose Harold J. Grantham and his father have caused Bland, Trustee, to advertise for public sale on 6 December 1952, the property conveyed in the deed of trust so that W.D. Casey, Jr.'s farm and home may be sold at a forced sale to plaintiffs' irreparable damage.
7. That the partnership property conveyed in the deed of trust is well worth the amount of the debt and interest owed by the partnership to Clarence Grantham.
The plaintiffs prayed first for an accounting of the partnership business and second that the sale of the property under the deed of trust be enjoined.
On 6 December 1952, Honorable Henry L. Stevens, Jr., holding the courts of the 4th Judicial District, issued a temporary restraining order.
At the March Term 1953, the Honorable J. Paul Frizzelle signed a judgment sustaining the demurrer to the complaint filed by Clarence Grantham on the ground of a misjoinder of parties and causes of action, dismissing the action and dissolving the temporary restraining order before issued by the Honorable Henry L. Stevens, Jr.
From the judgment so entered the plaintiffs appealed.
Upon the essential or ultimate facts stated in the complaint, which on a demurrer we are required to construe liberally with a view to substantial justice between the parties with every reasonable intendment to be made in favor of the pleader, these three questions are presented for decision: First, does the complaint state a cause of action for an accounting and settlement of partnership affairs between the partners W.D. Casey, Jr., and Harold J. Grantham; Second, can the plaintiffs enjoin the foreclosure sale under the deed of trust of the partnership property and the home and farm of the plaintiff W.D. Casey, Jr., until after an accounting and settlement of the partnership; and Third, if so, are Clarence Grantham and W. Powell Bland, Trustee, proper parties defendants so that it can be done in this suit ?
It is elementary that the relationship of partners is fiduciary and imposes on them the obligation of the utmost good faith in their dealings with one another in respect to partnership affairs. Each is the confidential agent of the other, and each has a right to know all that the others know, and each is required to make full disclosure of all material facts within his knowledge in any way relating to the partnership affairs. 40 Am. Jur., Partnership, p. 217.
G.S. 59-52 provides "any partner shall have the right to a formal account as to partnership affairs: (a) if he is wrongfully excluded from the partnership business or possession of its property by his co-partners . . . (d) whenever other circumstances render it just and reasonable."
Equitable jurisdiction is practically exclusive in proceedings for an account and settlement of partnership affairs, including suits for an accounting and settlement of the firm's affairs between the co-partners themselves. Pomeroy's Equitable Jurisprudence (5th Ed.), Vol. 4, p. 1078.
The complaint alleges that the partner Harold J. Grantham has usurped complete control and exclusive possession of the entire business and assets of the partnership; that the books and records of the partnership are in the hands of Harold J. Grantham and his wife; that Harold J. Grantham is squandering the assets and earnings of the partnership and refuses to account to his partner W.D. Casey, Jr., one of the plaintiffs, for any share of the profits or earnings of the business, though demand has been made therefor. The complaint clearly states a cause of action for an accounting of the partnership between the partners. Pugh v. Newbern, 193 N.C. 258, 136 S.E. 707.
G.S. 59-68 (1) reads: "When dissolution is caused in any way, except in contravention of the partnership agreement, each partner, as against his co-partners and all persons claiming through them in respect of their interest in the partnership, unless otherwise agreed, may have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners."
"Each partner may be said to have an equitable lien on the partnership property for the purpose of having it applied in discharge of the debts of the firm; and to have a similar lien on the surplus assets for the purpose of having them applied in payment of what may be due to the partners respectively, after deducting what may be due from them, as partners to the firm." Lindley on Partnership, 10th Ed., p. 426. See also Rowley Modern Law of Partnership, Vol. I, p. 413. For practical purposes this right does not exist until the affairs of the partnership have to be would up, or the share of a partner ascertained. Lindley, ibid., p. 427.
It is said in 68 C.J.S., Partnership, p. 639, "the right, in equity, to have the partnership and individual assets marshaled is for the benefit and protection of the partners themselves, and, therefore, the equity of a creditor, to the application of this doctrine, is of a dependent and subordinate character, and must be worked out through the medium of the partners or their representatives" — citing in support of the text Dilworth v. Curts, 139 Ill. 508, 29 N.E. 861, where it is said "the right in equity to have the partnership and individual assets marshaled is one resting in the hands of the partners, and must be worked out through them."
Each partner has the right to have the partnership property applied to the payment or security of partnership debts in order to relieve him from personal liability. Bankers Trust Co. v. Knee, 222 Iowa 988, 270 N.W. 438; see also Simmons v. Simmons, 215 Iowa 654, 246 N.W. 597, 601.
It appears that under the general rule as to marshaling partnership and individual assets, or under the application of a principle of equity similar to that rule, the rule that partnership debts may be paid out of individual assets is subject to the modification that the individual assets may be so applied where, and only where, there are no firm assets, or where the firm assets have become exhausted. It would seem that the rationale for this modification to the rule rests upon the fact that the partners occupy the position of sureties in respect to their individual property being liable for the payment of partnership debts. 68 C.J.S., Partnership, p. 664; 35 Am. Jur., Marshaling Assets and Securities, Sec. 21; 37 Am. Jur., Mortgages, Sec. 695; Annotations; 47 L.R.A. (N.S.) 303; 12 L.R.A. (N.S.) 695; L.R.A. 1917 B., p. 528.
The complaint alleges that the partnership property conveyed in the deed of trust to Bland, Trustee, for the benefit of the defendant Clarence Grantham is well worth the amount of the debt and interest owed by the partnership to Clarence Grantham. The demurrer admits that allegation to be true. The reasonable inference to be drawn from the complaint is that all of the partnership property is situate in Wayne County, and is in the jurisdiction of the Superior Court of that county. There is nothing in the complaint to show that the partnership has any debt, except the debt to Clarence Grantham, father of Harold J. Grantham. Harold J. Grantham owes to his partner W.D. Casey, Jr., the obligation of the utmost good faith in respect to the partnership affairs, but instead of performing that duty he has in his possession the books, records and assets of the partnership, and refuses to account to Casey as to the partnership affairs. The complaint further alleges that Harold J. Grantham and his father Clarence Grantham are seeking to oust W.D. Casey, Jr., from the partnership so that they may take over not only the assets of the partnership, but also Casey's home and farm, and have had Bland? Trustee, to advertise for sale the property conveyed in the deed of trust to plaintiffs' irreparable damage.
It may be that the property of the partnership conveyed in the deed of trust may not sell for enough at a forced sale to pay Clarence Grantham's debt in full — though the demurrer admits that it will — but that Harold J. Grantham may be indebted to the partnership in an amount to make up such deficiency, if such a deficiency should exist. How can that be determined, until there is an accounting between the partners of the partnership affairs?
Under the rules laid down above it would seem to be plain that the plaintiffs have alleged sufficient facts to enjoin a foreclosure sale under the deed of trust until there has been an accounting and settlement of the partnership affairs between the partners, Casey and Harold J. Grantham. Under such circumstances it is the rule with us that an injunction should be granted where the injury, if any, which the defendant Clarence Grantham, would suffer from its issuance would be slight as compared with the irreparable damage which the plaintiffs would suffer from the forced sale of their home and farm from its refusal, if the plaintiffs should finally prevail. Huskins v. Yancey Hospital, Inc., 288 N.C. 357, 78 S.E.2d 116, where the authorities are cited.
We now come to the third question: Are W. Powell Bland, Trustee, and Clarence Grantham proper parties defendants so that such an injunction can be issued in this suit ? The answer is Yes.
"As a rule, creditors of a partnership are neither necessary nor proper parties to a suit between partners for a firm settlement and accounting . . . the circumstances may be such that they are properly made parties in the first instance." 68 C.J.S., Partnership, p. 939. In support of the statement "the circumstances may be such that they are properly made parties in the first instance" the text cites Hoskins v. McGirl, 12 Mont. 563, 31 P. 544. In that case the headnote correctly states the court's decision as follows: "A. and B., as partners, became indebted to C. and D., for which B. became liable, as A. afterwards withdrew. A., claiming that such debt had been fully paid, which B. denied, brought action against B., making C. and D. parties, for an accounting and on a note which specified that B. should be allowed `set-offs for all debts of the firm of A. B., which he may now be or hereafter become liable to pay.' Held, under Code, Sec. 16, which provides that `any person may be made a defendant who has or claims an interest in the controversy adverse to the plaintiff, or who is a necessary party to a complete determination or settlement of the question involved therein,' that C. and D. were proper parties." In the opinion the Court said: "In an action of this nature, we are of opinion that the whole matter should be settled by the court, with all the parties before it at once, and that in such settlement Mund is a proper party."
G.S. 1-69 provides that "all persons may be made defendants, jointly, severally, or in the alternative, who have, or claim an interest in the controversy adverse to the plaintiff, or who are necessary parties to a complete determination or settlement of the questions involved."
One cause of action is alleged in the complaint — a suit by W.D. Casey, Jr., as a partner against his partner Harold J. Grantham for an accounting and settlement of the partnership affairs between themselves and in which suit the plaintiffs are seeking to enjoin the foreclosure of a deed of trust by Bland, Trustee, and Clarence Grantham, father of Harold J. Grantham, on the partnership property and on their home and farm until the partnership accounting is had. The demurrer of Clarence Grantham admits as true the allegation in the complaint that the partnership property conveyed in the deed of trust is well worth the amount of the debt with interest owed by the partnership to Clarence Grantham. In our opinion, W. Powell Bland, Trustee, and Clarence Grantham are necessary parties so that the court can completely determine and settle the questions involved with all the parties before it at once. How can the joinder of these parties embarrass or injuriously affect the rights of Harold J. Grantham and wife? Ezzell v. Merritt, 224 N.C. 602, 31 S.E.2d 751.
There is no misjoinder of parties and causes of action, and the judgment of the lower court sustaining the demurrer and dismissing the action at the costs of the plaintiffs was entered improvidently, and it is ordered
Reversed.