holding that, in limited circumstances, courts can intervene and order an accounting before the partnership has dissolvedSummary of this case from Rosewood Apartments Corp. v. Perpignano
Argued February 12, 1904
Decided March 4, 1904
John Henry Hull for appellant.
J. Albert Lane for plaintiffs, respondents.
Henry B. Culver for defendant, respondent.
This action was brought by two copartners against the third for an accounting without a dissolution, and it is not surprising that a challenge is interposed to the jurisdiction of the court. The contract of copartnership has existed as long as the common law, and a vast amount of business has been transacted by persons working together under this relation. The law upon the subject is founded on the custom of merchants, who have thus in effect made their own law, yet we find no well-considered case which approves of such an action as the one now before us. While the novelty of an action is by no means conclusive against it, still it is suggestive when the history of the law relating to the subject shows many occasions and few efforts.
The general rule is that a court of equity, in a suit by one partner against another, will not interfere in matters of internal regulation, or except with a view to dissolve the partnership and by a final decree to adjust all its affairs. (Story on Partnership, § 229; Lindley, 567; Gow, 114; Parsons, § 206; Bates, § 910; Collier, § 236.) It is not its office "to enter into a consideration of mere partnership squabbles" ( Wray v. Hutchinson, 2 Mylne Keen, 235, 238); or "on every occasion to take the management of every play-house and brew-house." ( Carlen v. Drury, 1 Vesey B. 153, 158.) If the members of a firm cannot agree as to the method of conducting their business, the courts will not attempt to conduct it for them. Aside from the inconvenience of constant interference, as litigation is apt to breed hard feelings, easy appeals to the courts to settle the differences of a going concern would tend to do away with mutual forbearance, foment discord and lead to dissolution. It is to the interest of the law of partnership that frequent resort to the courts by copartners should not be encouraged and they should realize that, as a rule, they must settle their own differences or go out of business. As a learned writer has said: "A partner, who is driven to a court of equity as the only means by which he can get an accounting from his copartners, may be supposed to be in a position which will be benefited by a dissolution; in other words, such a partnership as that ought to be dissolved." (Parsons on Partnership, [4th ed.], § 206.)
"If a continuance of the partnership is contemplated," as another commentator has said, "or if an accounting of only part of the partnership concerns is allowed, no complete justice can be done between the partners, and the fluctuations of a continuing business will render the accounting which is correct to-day, incorrect to-morrow, and to entertain such bills on behalf of a partner would involve the court in incessant litigation, foment disputes, and needlessly drag partners not in fault before the public tribunals." (2 Bates on Partnership, § 910.) Judge Story declared that "a mere fugitive, temporary breach, involving no serious evils or mischief, and not endangering the future success and operations of the partnership, will, therefore, not constitute any case for equitable relief. * * * It is very certain that, pending the partnership, courts of equity will not interfere to settle accounts and set right the balance between the partners, but await the regular winding up of the concern." (Story on Partnership, §§ 225, 229.)
While a forced accounting without a dissolution is not impossible, it is by no means a matter of course, for facts must be alleged and proved showing that it is essential to the continuance of the business, or that some special and unusual reason exists to make it necessary. Thus, Mr. Lindley, upon whom reliance was placed by the courts below, mentions three classes of cases as exceptions to the general rule:
"1. Where one partner has sought to withhold from his copartner the profits arising from some secret transaction;
"2. Where the partnership is for a term of years still unexpired, and one partner has sought to exclude or expel his copartner or drive him to a dissolution;
"3. Where the partnership has proved a failure, and the partners are too numerous to be made parties to the action and a limited account will result in justice to them all."
The plaintiffs claim that this case belongs to the second class, and the courts below have so held, but, as we think, it does not come under any head of Mr. Lindley's classification, which is correct as far as it goes, and it goes as far in the direction of the plaintiffs' theory as any just classification that can be made.
There is neither allegation nor evidence that Hull tried to exclude or expel the plaintiffs, or to drive them to a dissolution, or that he did anything in bad faith or with an ulterior purpose. The controversy was confined to one point of difference, the Murchison contract, which was a matter of internal regulation. There was no dispute about anything else. The plaintiffs claimed that the contract bound the firm, and that it included all work done or to be done for Mr. Clark, while Hull claimed that it did not bind the firm, and that if it did, it embraced only a part of that work. There was no difference in the computation of balances, or claim that the articles had been violated by either side, except with reference to that contract. The plaintiffs insisted that Hull had drawn out more than his share of the profits, because he drew one-third of the income without leaving one-third of the part going to Murchison, and that thus there was a balance against him. Hull claimed that the plaintiffs in paying anything to Murchison wasted the assets of the firm, and thus there was a balance against them. When the interlocutory judgment was made, the parties at once stipulated the respective balances on the basis of that decree, and thus obviated a reference so that final judgment was entered without delay. Neither party desired an accounting, except as an excuse to sustain or defeat the Murchison contract. Exclusion from a small portion of the profits, paid or withheld in good faith on account of that contract, was not exclusion from the affairs of the firm, yet an accounting was sought only as a means of settling the dispute over that particular subject, which related simply to a detail in the management of the business. No discovery was asked for. There was no claim that Hull was insolvent, or that he had suppressed any fact, or had made secret profits, or had been guilty of bad conduct, or that the books had not been properly kept, or that the plaintiffs had been denied access to the books. There was no evidence that any partner had refused to give an account of all moneys received by him, or that there was error or omission of any kind in the accounts of the firm, except as limited to the Murchison agreement. It was easy to test the validity of that contract by simply withholding payment, forcing Murchison to sue and raising the question by answer. That was not an equitable, but a legal question. Murchison's claim did not differ from that of any firm creditor, except that the partners were at odds over its validity. "No action can be maintained by one partner against the other in respect to particular items of account pertaining to the partnership business." ( Thompson v. Lowe, 111 Ind. 274.) An accounting without a dissolution has never been allowed under the circumstances of this case by any court in this country or in England, so far as we can learn from the authorities cited by counsel or discovered by ourselves. A brief review of the leading cases will show that the principle upon which they rest has no application to the facts of the case before us.
In Fairthorne v. Weston (3 Hare's Ch. R. 387) the plaintiff bought into the business of an attorney, paying seven hundred pounds down and agreeing to pay seven hundred more at the end of five years, when the defendant was to retire and the business was to belong to the plaintiff. During the five years the parties were to be copartners, sharing the profits and expenses equally. After a while the defendant, for the fraudulent purpose of getting rid of his contract, received money and refused to account for it, excluded the plaintiff from all knowledge and control over the business, used insulting language toward him and violated the copartnership agreement in other ways and all in order to bring about a dissolution. A bill filed for an accounting, without a dissolution, was sustained upon the ground that the defendant was violating the contract in order to compel the plaintiff to submit to a dissolution upon very injurious terms and that the court had power to support as well as dissolve a partnership.
In Richards v. Davies (2 Russell M. 347) a copartnership for a long term had not expired and the acting partner excluded the others "from the means of ascertaining the state of the partnership affiairs." A bill for an accounting and to permit the plaintiffs "to have access to all the books of the partnership" was sustained, but the court refused to make an order "for carrying on the partnership concerns unless with a view to dissolution." It is claimed that this case was overruled by Knebell v. White (2 Younge C. Exch. 15), where it was held that a bill for an account of partnership transactions must pray for a dissolution or the court could not take jurisdiction.
From the fragmentary report of Harrison v. Armitage (4 Mad. 143) it appears that the defendant denied that there was any partnership and the court so held, but remarked orally that one partner might file a bill against another for an account without asking for a dissolution, although not in a case of interim management. The remark was obiter, and so limited as not to include the case we are considering, yet it is one of the few authorities relied upon by those who claim that courts of equity should open their doors to admit quarreling copartners.
In Knowles v. Haughton (11 Vesey, Jr., Ch. R. 168) the existence of the partnership was denied by the defendant, who claimed that the plaintiff "was merely employed as a clerk." An accounting was granted without a dissolution, the object being to establish the partnership.
In Loscombe v. Russell (4 Simons, 8) there was a partnership for seven years, "and so from seven years to seven years, till determined by notice." After the first period had expired and one year of the second, a bill was filed for an account of the profits upon the allegation that no settlement had been made for the last three years. In dismissing the bill the court said: "With respect to the law of this court upon this subject, there is no instance of an account being decreed of the profits of a partnership on a bill which does not pray a dissolution, but contemplates the subsistence of the partnership. * * * With respect to occasional breaches of agreement between partners, when they are not of so grievous a nature as to make it impossible that the partnership should continue, the court stands neuter; but when it finds that the acts complained of are of such a character as to show that the partners cannot continue partners and that relief cannot be given but by a dissolution, the court will decree it, although it is not specifically asked. Here a dissolution is not prayed for and if the court were to do what is asked, it would not be final."
Under similar circumstances, Lord ELDON dismissed the bill in Forman v. Homfray (2 Ves. B. 329), observing "that if a partner can come here merely for an account, pending the partnership, there seems nothing to prevent his coming annually."
In Taylor v. Davis (4 Law J. [N.S.] 18) an injunction was granted restraining the defendant from retaining in his sole possession and excluding the plaintiff from access to a book kept by the firm and indispensable to the business. The book had been abstracted by the defendant and he had threatened to burn it.
In Marshall v. Colman (2 Jacob W. 266) the court declined to restrain the defendant from violating the articles of partnership in refusing to use the name of the plaintiff as a part of the firm name in the transaction of firm business. The lord chancellor said: "It would be quite a new head of equity for the court to interfere where one party violates a particular covenant and the other party does not choose to put an end to the partnership; in that way there may be a separate suit and a perpetual injunction in respect of each covenant and that is a jurisdiction that we have never decidedly entertained."
In Knebell v. White (2 Younge C. 15) previous conflicting decisions were considered and the court said: "It may now, therefore, be considered as settled that in the case of ordinary trading partnerships, an account of partnership transactions must be consequent upon a dissolution of the partnership."
These cases illustrate, if they do not exhaust, the instances where the courts of England have interfered, or refused to interfere, when a dissolution of the firm was not asked. In this country the question does not appear to have been directly decided, at least not in this state. It was not involved in Sanger v. French ( 157 N.Y. 213), nor in Traphagen v. Burt ( 67 N.Y. 30), as will appear from an examination of the facts. The primary object of those actions was to establish a partnership with reference to a particular adventure, and they turned mainly on the existence and effect of an oral agreement between the parties. Our courts, and especially those having jurisdiction under the laws of Congress, have sometimes interfered by injunction in a flagrant case of danger and injustice, although no dissolution of the firm was contemplated. ( Marble Co. v. Ripley, 10 Wall. 339; Leavitt v. Windsor Land Inv. Co., 54 Fed. Rep. 439.) This is quite different from an action for an accounting without a dissolution, where no especial reason is alleged or proved to show that one is necessary, or to authorize a departure from the general rule.
A court of equity will not take cognizance of an action for an accounting as a mere incident to the settlement of a solitary matter in dispute between partners, when it is not vital to either party or to the business and dissolution is not sought. Actions to establish a partnership, the existence of which was denied by the partner in control; to give a partner access to the books after persistent refusal, or to permit him to take part in the business from which he had been excluded, are founded on intentional and continuous wrongdoing which, unless arrested, might subvert the partnership. When one party seizes or absorbs the entire business, or usurps rights of his copartner which are essential to his safety or the safety of the firm, or persists in misconduct so gross as to threaten destruction to the interests of all, the court may intervene to restore the rights of the innocent party or to rescue a paying business from ruin. Extreme necessity only, however, will justify interference without a dissolution. There was no sufficient reason for an appeal to a court of equity in the case under consideration. There was no equity in the bill as filed by the plaintiffs and none in the case made for them by the evidence. The defendant Murchison had an adequate remedy at law, and he can take nothing from his intrusion into the litigation, under the circumstances, for the questionable order admitting him as a defendant did not create a cause of action nor add to the jurisdiction of the court. All the parties should be put back where they were before the action was commenced, and, hence, it is our duty to reverse the judgments below and dismiss the complaint, with costs to the defendant Hull against the plaintiffs and the defendant Murchison.
GRAY, O'BRIEN, HAIGHT, MARTIN and CULLEN, JJ., concur; PARKER, Ch. J., absent.