Court Opinion

ID: 5186352
Source: CourtListenerOpinion
Date Created: 2022-01-06 04:49:00.092282+00
Date Added: 2024-06-11T08:26:44.878483
License: Public Domain

Spring, J. (dissenting):
Upon the death of Everett Dexter the copartnership was' dissolved. The survivor was vested with the title of the copartnership assets, charged, however, with the duty of converting them into cash, paying firm obligations and accounting to the personal representative of the deceased copartner for one-half, of the remaining assets. These principles are elementary and no?one seeks to dispute them.
The business carried on by the copartners for many years was that of manufacturing chairs. The manufactory was running at the time of the death of Everett. There was uncompleted work on hand, and prior to his death the business had been profitable. The *278plaintiff was confronted with a situation calling for the exercise of her judgment. The' survivor insisted that an. immediate sale signified the stoppage of the business to take.an inventory and she assented to its continuance until January 1, 1894. When that time arrived, she again urged the survivor to wind up the business, but he- insisted on its prosecution, as the times were hard and a disposal of the property would be at a ruinous sacrifice, and as á litigation was then. pending affecting their water rights which were a valuable incident to their manufacturing business.
She again consented, and this acquiescence in the continuation of the business by the survivor justified his action in trying to stem the tide of depression which fell upon that industry in common with every other during that blighting period.
The referee has found that the surviving partner acted in good faith and was honestly engaged in carrying on the business because h’e deemed it wise so to do.
The surviving partner had a reasonable time in any event in which to wind up the business.- Like any trustee, he was invested with a fair discretion. He was not to dispose of the property immediately if such a course obviously would result in despoiling the estate committed to him. While it was his duty to close out the property, he was not permitted to carry on the business, to purchase materials, or to bind the plaintiff or the property of the deceased copartner already embarked in the business in prosecuting the industry. (Willis v. Sharp, 113 N. Y. 586.)
But if the plaintiff consented to the perpetuation of the business, then under that authority the survivor could act.
As was said in Bell v. Hepworth et al. (134 N. Y. 442, at p. 449): ‘ While the strict duty of the. survivor is to wind tip the firm business and not to continue it any further than is necessary for that purpose, it is obvious that its continuance is not unlawful as to those who consent to it. It may be beneficial to all parties in interest that it should be continued.”
The parties affected by the prolonging of the business were, the plaintiff as the representative of her deceased husband, the surviving partner, and the creditors with, subsisting claims at the time of the- dissolution. These creditors have been paid, so their interest has been extinguished. In pursuance of this authority the sur*279vivor has carried on the business. Instead of terminating gainfully, the long period of pinching times not only prevented a profit, but resulted in running the business at a loss, and the survivor absconded.
The effect of the plaintiff’s action in consenting to the continuance of the business was not to commit her husband’s general estate to this copartnership. She did, however, by that action engage that the interest possessed by her husband and embarked in tlie firm enterprise should be subject to any debts contracted by the survivor in carrying on the,business.
In Adams & Co. v. Albert (155 N. Y. 356) the doctrine is thus stated at page 365: “ When a retiring partner allows his unliquidated interest to be continued in the business of a new firm, the interest thus left becomes liable, for the partnership debts subsequently incurred, as well as the prior debts. It may be that newly-acquired assets which, in the course of business take the place of the old, are subject to the lien of the hew debts in preference to the old, and that the old assets remaining in specie are subject to the old in preference to the new debts, but with this qualification the rule seems to be well settled in equity, and that is but another way of saying that the interest of the retiring partner still remains at the risk of the business.”
Her right, as executor, to a division of the assets after the payment of the then outstanding liabilities was relinquished, and she consented that such right should be subordinate to that of creditors whose claims arose out of the prosecution of the business. The parties evidently so understood the arrangement; the business was conducted under the same firm- name; the outstanding debts were paid and new ones, essential to the conduct of the business, were created-; no new books were used; the same employees were retained, and openly and above board the manufacturing was pursued as in the lifetime of Everett Dexter.
When the crash came by the sudden departure of David Dexter, July 7,1896, the indebtedness incurred-y the survivor solely in the conduct of the business had run up to nearly $10,000. In addition to that he had contracted a heavy load of debts and liabilities for his personal benefit, entirely independent of the manufacturing industry.
After he had absconded these outside creditors pressed their claims *280against the property held by him, as survivor, and by virtue of warrants of attachment levied upon the same, and assert their liens thus acquired are superior to the demands incurred in the carrying on of the business. Following out the general doctrine that the survivor’s duty ordinarily is restricted to the conversion of the partnership assets into cash, and the payment of its habilites and the distribution of what remains to those entitled, it is contended that this property absolutely vested in the survivor and was applicable to his debts of every class, and that those created in the prosecution of the business were not of higher grade than his obligations outside, and that plaintiff is like any other creditor.
I cannot concur in that doctrine. Upon the death of Everett 'Dexter the.manufacturing industry was a live business; chairs were in progress of manufacture, and in order to realize on this linfinished property new purchases were necessary; labor had to be put upon it and new materials added. The plaintiff and David Dexter, in the stress of hard times, by deciding that a continuation of the business was advisable, did what any prudent man of experience would have done. It was-patent that a sale then would be intolerable; she did not become a copartner nor a creditor of David; she consented to postpone-the closing out of the business and to carry it on, and common fairness requires that the share of her husband’s property already in the enterprise should, be chargeable with any liabilities originating in the conduct of the business.; she. made no sale, to David; she did not consent that her property should be subjected to the payment of his individual debts. Under her arrangement with David she could call him to an accounting. (King v. Leighton, 100 N. Y. 386; White v. Reed et al., 124 id. 468.)
If she were a simple creditor she could only enforce collection by judgment. David’s title was not. unqualified; it was like that of a trustee, and he was liable for any misappropriation of the firm’s assets. (Russell v. McCall et al., 141 N. Y. 437, 447.)
Had Everett Dexter.provided by will that his copartner should continue in the business for a time after his death, his estate would not. be committed generally to the liabilities incurred therein after his death. His executor would not become a copartner. The. liability of his estate would be limited to that engaged .in the copartnership. (Stewart et al, v. Robinson et al., 115 N. Y. 328.)
*281If a copartner foresees that an immediate winding up of the concern upon his decease will etitail loss upon the parties, and, therefore, provides that the survivor, go on with' the business until a more opportune time arrives for its termination, that implies new debts will be created, that his representatives accept the hazard of the business but only to the extent of the property invested therein. A change in' the corpus of the property is inevitable. The manufactured product on hand one day is with the customer the day following. The ratable interests, however, of the survivor and the representatives of the deceased copartner remain intact. If the survivor despoils the property, or applies it in payment of his own debt, that' is a misappropriation because his title is not absolute. It is instead only for a specific purpose. If, instead of the copartners by will or by agreement providing for the carrying on of the business by the survivor for a definite period after the dissolution by death, the representative of the deceased copartner assents to the prosecution of the business, the relationship of the parties is identical with that arising from the provision made by the copartner in his lifetime. The survivor in either case is in command. No partnership exists in fact, but the property of the decedent in the enterprise is chargeable with the payment of new debts incurred in its prosecution. If after the death of a member of a firm of country merchants the survivor realizing that a conversion of the goods into cash cannot he had at once, induces the representative of the deceased copartner to defer closing out the business for a few months and to carry it on, can it be said this acquiescence makes the executor a mere creditor of the survivor %
In carrying on the business a few yards of dress goods, a few pounds of coffee, tea and sugar must be added to the stock, but the consent to this replenishing does not enlarge the survivor’s title in the property purchased or that already on hand. Nor does’it make this property amenable to the personal debts of the survivor. The injustice of the converse of these propositions is well illustrated by the result which will follow by carrying out the policy enunciated in the prevailing opinion in this case.
Upon the death of Everett Dexter there were liabilities against . the firm aggregating nearly $3,000. The present creditors, who *282maintain that their debts are primarily chargeable against the assets of the manufacturing industry, put their substance into that business and it was used in paying these firm obligations. Yet now by some legerdemain in legal psychology they are subordinated to the individual creditors of David Dexter, and the executrix having acquiesced in. the continuance of the business, when every one would say her assent was judicious,"'is a creditor of the survivor, and the property belongs unqualifiedly to David. The reasons why firm" property is primarily applicable to firm debts are that these debts are created on the strength of the firm property, and their consideration goes into that business. The reasons are as plain as a pike staff for the enforcement of the same equitable principles in this case.
There is a multitude of authorities in the text books and reports 'holding that when the executor or surviving partner engages, in business he is personally liable for any debts ho makes. (Ferrin, v. Myrick, 41 N. Y. 315; Coll. Part. § 130; Schmittler v. Simon, 101 N. Y. 555; Thomas Law of Estates Created by Will, 771 et seq.)
The distinction in this case is that the surviving partner carried -on the business with the consent of the representative, and under all the authorities that takes it out of the general doctrine referred to. To me the deductions seem inevitable that the property in the hands of the survivor at the time he decamped was subject in the first instance to the debts contracted by him in the prosecution of -the business.; that the residue, if any, belonged, one-hálf to the plaintiff as tiie representative of her husband, and the other one-half'to David Dexter; that the attempted enforcement by attachment of the debts of the individual claimants anterior to the demands of the firm creditors is invalid.
But it is claimed that the real estate is not part of the copartnership assets. The learned-referee has decided otherwise, and has grouped together abundant facts to sustain his finding. He further - finds that the real estate was made copartnership property by agreement of Everett and David Dexter, and was so treated -during the existence of the firm. The land Comprised various par-eels which, in the main, were used in carrying on the manufacfuring pursuit. Portions were rented from time to time, and "the rentals were credited to the firm. One tract was a wood.lot, .and the timber was'sold or used for the benefit of the copartner*283ship. When David went into the firm he and his brother executed among -themselves conveyances of these several tracts for the purpose of equalizing their interest as copartners, and a subsequent conveyance running to the two as grantees described them as “ composing the firm of Dexter Brothers.” The improvements made and the taxes levied were paid out of the copartnership assets, and in everything pertaining to this land it was evidently regarded by the copartners as much firm property as the chairs made by them or the book accounts for the goods sold.
Whether real estate used by the firm, but in the name of the copartners individually, is copartnership property or not, depends upon the intention of the copartners. That intention is gathered from the facts, and if the property has been treated and regarded by the copartners as among their company assets it will possess that character. (Fairchild et al. v. Fairchild et al., 64 N. Y. 471; Darrow et al. v. Calkins et al., 154 id. 503, 514; MacFarlane v. MacFarlane, 82 Hun, 238.)
The principle is thus stated by Story in his work on Partnership (§ 92, 7th ed.): “ But however the title may stand at law, or in whosesoever name or names it may be, the real estate belonging to the partnership will in equity be treated as belonging to the partnership, like its personal funds, and disposable and distributable accordingly ; and the parties in whose names it stands, as owners of the legal title, will be held to be trustees of the partnership and accountable accordingly to the partners, according to their several shares and rights and interests in the partnership, as cestui que trust, or beneficiaries of the same.”
The mortgage to Davis was confessedly for an individual debt of David Dexter. This was an attempted appropriation of the firm property for the personal debt of the survivor, and is inferior to the debts created in the prosecution of the business.
The referee has' collated the facts showing Davis’ knowledge of the way in which the -business was carried on by the two brothers after the death of their father and of its continuance after the death of Everett. He recites the facts justifying his conclusion that Davis 'was called upon to inquire as to the status of the firm property before accepting a mortgage from David for his personal indebtedness. It is not necessary to prove he had actual knowledge, but if *284Ms familarity with the property and with its management.was sufficient to require him as a prudent man to ascertain its real situation, then he has not obtained a lien superior to that of the firm creditors. (Smith v. Weston, 159 N. Y. 194, 201; First Nat. Bank v. National Broadway Bank, 156 id. 459.)
As was said in the case last cited at'page 468: “Knowledge of the, trustee’s violation of the trust conditions will be chargeable to the person dealing with him, if the facts were such as, in reason, to put him upon inquiry and to require him to make some investigation, as the result of which the true title and authority of the trustee might have been disclosed.”
The learned referee has given a very exhaustive examination of this case, and the conclusions of law made by him are well sustained by the facts and in -line with the authorities, and the judgment should be affirmed.
Judgment reversed and a new trial ordered before another referee, with costs of the appeal to abide the event.