Case Name: Reddington, Respondent, vs. Franey, imp., Appellant
Court: Wisconsin Supreme Court
Jurisdiction: Wisconsin
Decision Date: 1907-04-09
Citations: 131 Wis. 518
Docket Number: 
Parties: Reddington, Respondent, vs. Franey, imp., Appellant.
Judges: 
Reporter: Wisconsin Reports
Volume: 131
Pages: 518–524

Head Matter:
Reddington, Respondent, vs. Franey, imp., Appellant.
March 22 —
April 9, 1907.
Subrogation: Payment of debts of another: Partnership: Pleading: Parties. (
1. Relief by way of subrogation in favor of one wbo bas paid tbe debt of another should not be granted unless tbe necessity for it be clearly shown.
2. Plaintiff bought the interest of one partner and with the other formed a new firm. He advanced money for the purpose of discounting bills of the new firm, but his partner secretly used it to pay the debts of the old firm. Held, that the, new firm was the owner of the money so used, and plaintiff’s right, if any, must be worked out by subrogation of the new firm to the rights of the creditors whose claims were so paid, rather than by sub-rogation of the plaintiff personally.
3. A complaint in such case which did not show the relations and rights of the partners in either firm as between themselves, or that, even if the new firm was largely indebted to plaintiff, he could not secure repayment of his advances by dissolution and settlement of its affairs, did not state a cause of action for sub-rogation.
4. The partner who was a member of both firms, and who was made a defendant in the action, was not a necessary party plaintiff; nor was it essential that the creditors of the old firm, whose claims had been paid, should be joined as defendants.
Appeal from an order of tbe circuit court for Sheboygan, county: Michael EjbwaN, Circuit Judge.
Reversed.
Tbe complaint in this case alleged in brief tbe following facts: That on and prior to June 30, 1902, tbe defendants J ohn Franey and Tbomas E. Eraney were partners under tbe name of T. E. Eraney & Co., owning a stock of goods and conducting a furniture business at Plymouth, Wisconsin, owbicb business Tbomas E. Eraney was tbe managing partner; that on tbe day named tbe plaintiff purchased tbe interest of J ohn Franey in tbe business on tbe representation that said business was profitable and owed no debts, and upon tbe further express agreement in writing on tbe part of J ohn Franey that be would pay all debts of the former firm if any there were; that plaintiff was thereupon received into tbe firm, and that in truth tbe former firm was then owing debts amounting to $3,721.95; that thereafter tbe plaintiff advanced to tbe new firm the sum of $4,000 on tbe representation of Tbomas E. Eraney, tbe managing partner, that it would be used to discount tbe bills of tbe new firm; that without tbe plaintiff’s knowledge or consent said Tbomas F. Eraney used $3,721.95 out of said sum in discharging tbe debts of tbe old firm, a list of said debts so paid being given; that Tbomas E. Eraney was, at tbe time plaintiff discovered said misapplication of funds, and now is, wholly insolvent, possessing no money or property out of wbicb plaintiff could' then or can now realize any part of said moneys; that tbe plaintiff by reason of tbe premises became the equitable owner of said claims so paid and is entitled to be subrogated in place of tbe creditors so paid. Judgment of subrogation and that tbe plaintiff re cover the sums so paid against Tbomas E. Eraney and John Franey was demanded.
Tbe defendant John Franey demurred to the complaint on three grounds: (1) That there is a defect of parties plaintiff in that Tbomas E. Eraney should have been joined as a plaintiff; (2) that there is a defect of parties defendant in that tbe creditors whose claims were paid should have been joined as defendants; (3) that the complaint does not státe facts sufficient to constitute a cause of action. Tbe demurrer was overruled, and tbe defendant J ohn Franey appeals.
For the appellant there was a brief by Doyle & Hardgrove, and oral argument by J. G. Hardgrove.
Simon Gillen, for tbe respondent.

Opinion:
Winslow, J.
Tbe essential facts alleged in tbe complaint are that tbe plaintiff advanced to bis firm, for tbe purpose of making cash purchases of goods, money which bis partner T. E. Eraney secretly and without plaintiff's consent used to pay debts of tbe former firm composed of T. E. and John Franey, and that T. E. Eraney has no property out of which plaintiff can collect bis claim. These are tbe facts from which tbe plaintiff's right to subrogation must be found to exist, if it exist at all. It is true that it is alleged with much particularity that John Franey contracted in writing with the plaintiff to pay and discharge the debts of the old firm at the time plaintiff purchased John Franey's interest and was received into the firm; but no liability is now claimed as a result of that agreement, and, indeed, this court has already decided in a former action between the plaintiff and John Franey that there could be no recovery on the agreement in the absence of allegations showing that the plaintiff was in some way legally compelled to pay the debts of the old firm. Reddington v. Franey, 124 Wis. 590, 102 N. W. 1065. It will be noticed that no statement is made as to the present pecuniary condition of the new firm or the amount of its property; and we are entirely uninformed as to whether it is still doing business or has been dissolved, whether the partners' have settled their mutual accounts or not, whether the plaintiff owes the firm or the defendant T. E. Eraney owes the firm, or whether both owe the firm, or what will be the condition of the mutual accounts when the business is settled and a'balance struck. The significance of these omissions will appear later in this opinion.
The doctrine of subrogation, by means of which a debt once paid or a security discharged is kept alive as against the principal debtor for the benefit of a third person who, not being a mere volunteer, has paid the debt, is an equitable doctrine, favored by the law because it accomplishes the ends of justice and fair dealing. It is welLsettled that one who is legally bound to pay the debt or who has an interest to protect thereby is not a volunteer. It is also held without substantial conflict of opinion that where a fund is misappropriated by an agent or trustee without the owner's consent to the payment of the debt of another, the owner of the fund is not a volunteer, but will be entitled to subrogation if necessary for his due protection. It will be unnecessary to enlarge further on the abstract doctrine of subrogation in the present case. The right must be founded, if it exist, at all, upon one or both of these principles. It is evident that the plaintiff was under no obligation to pay the debts of the old firm, nor was such payment necessary for the protection of any property interest which he had. Neither his individual property nor the property of the new firm could have been seized to pay them. Reddington v. Franey, supra. He had, however, advanced funds to the new firm on the agreement that they should be used to discount bills for the purchase of new goods, and according to the allegations of the complaint these funds were used by his partner surreptitiously to pay the bills of the old firm. Independently of any agreement as to the use of the funds, his copartner would have no right to use them for purposes outside of the firm business; hence the allegation that it was understood that they were to be used to discount bills of the new firm adds nothing to the legal effect of the transaction. The money was advanced to the new firm for its proper purposes; thereby the firm and not his copartner became indebted to the plaintiff for the amount advanced, and the moneys became firm assets, and the plaintiff became entitled to credit for the advance upon the firm books. The plaintiff could, not sue bis copartner at law to recover tbe advances in tbe absence of an agreement by bis copartner tbat be would personally pay them. Sprout v. Crowley, 30 Wis. 187; George v. Benjamin, 100 Wis. 622, 76 N. W. 619. Tbe logical conclusion seems to be tbat T. E. Eraney took firm funds without tbe knowledge of bis partner and wrongfully used them in discharging tbe debts of tbe old firm of which be was a member. Certainly this act calls persuasively for tbe application of tbe doctrine of subrogation on behalf of tbe owner of tbe funds, if necessary for such owner's protection. As we have seen, the firm owned tbe funds, and hence tbe plaintiff's right, if any, must be worked out by subrogation of tbe new firm rather than by subrogation of tbe plaintiff personally. In legal contemplation it is tbe new firm which advanced the money to pay tbe debts of tbe old firm, not tbe plaintiff, as tbe complaint seems to assume.
Here we meet difficulties arising from the lack of any allegation as to tbe relations and rights of tbe partners in either firm as between themselves. T. E. Eraney was a partner in both firms and prima facie liable for tbe debts of both firms. There is no allegation tbat John Franey ever agreed with T. E. Etaney to assume or pay tbe debts of the old firm, nor is there any showing of tbe condition of tbe accounts of tbat firm as between tbe partners. Eor all tbat appears T. E. Eraney may have been equitably bound, as between himself and John, to discharge those debts, or be may have agreed to do so at tbe time of tbe sale of John's interest to tbe plaintiff. In either case T. E. Eraney would have no right of subrogation either individually or through tfm medium of tbe new firm. But this fact would not, of course, affect tbe right of tbe plaintiff to have bis equities worked out through tbe firm. Here, however, we meet another difficulty. Tbe plaintiff's advance of money to tbe new firm simply made him a creditor of the firm. His copartner may have advanced a greater sum, or tbe plaintiff may have drawn out moneys, or both, so that at tbe time of tbe commencement of tbis action tbe plaintiff may bave been indebted to tbe firm so that upon tbe closing out of its business be would bave no interest in its assets. But even if tbe new firm be largely indebted to tbe plaifitiff, still we bave no information as to tbe financial condition df tbe firm. Eor all that appears in tbe complaint it may bave a large amount of property. Its condition may be such that after payment of its debts and crediting tbe plaintiff with bis advances and charging them to the defendant T. E. Eraney there will be a balance remaining for division between tbe partners. Tbe allegation thát tbe defendant T. E. Franey is personally insolvent so that a judgment against him cannot be collected can hardly be considered as an allegation that tbe firm has no property with which to meet its obligations. If tbe plaintiff can secure tbe repayment of bis advances by dissolution and settlement of the' affairs of tbe firm there is no need of invoking tbe principle of subrogation.
Tbe doctrine of subrogation, by which a debt once paid or a security released is allowed to be revived and enforced in another's name, is an equitable doctrine, designed to prevent imminent injustice, and is only carried out in tbe exercise of equitable discretion. It has been called a doctrine of mere equity and benevolence. It is invoked for tbe protection of tbe person who, not being a volunteer, has, paid tbe debt. While it will not be denied simply because tbe creditor may bave another possible remedy, it must certainly appear that it is necessary for bis protection. Eor all that appears in tbe present complaint the plaintiff (who is. tbe only one claiming subrogation here) may be now the debtor of tbe new firm, or, if a creditor, be'may bave in bis own bands tbe property of tbe new firm which may be ample to satisfy bis claim. As said in Edinburg Am. L. M. Co. v. Latham, 88 Ind. 88: "We think it clear that such relief [i. e. subrogation] ought not to be granted unless tbe necessity for it be distinctly shown." The fundamental basis of tbe privilege being tbe necessity •of protecting tRe man whose money has discharged the debt, this requirement seems to he reasonable as well as self-evident.
We do not discover that there is any defect of parties, •either plaintiff or defendant; but for the reasons given the demurrer should have been sustained. '
By the Court. — Order reversed, and action remanded with "directions to sustain the demurrer to the complaint.