Gilliam v. Loeb

GOODE, J.

(аfter stating the facts) — The amended statement was stricken out as a departure; as setting up a different cause of action from that alleged in the original statement filed Avith the justice of the peace. The motion to dismiss the cause is not in the record, but we are told in one of the briefs, it was dismissed because the complaint filed Avith the justice counted on a cause of action in which the two plaintiffs were jointly interested as partners with the other parties alleged to have been defrauded by defendant; and because it solicited a judgment at law, Avhereas the only remedy lay in equity, the fraud having been perpetrated on the members of a partnership in the course of the partnership business. We will first consider whether or not the cause of action as originally stated could be maintained; for if it could not, the case was rightly dismissed; and even though the court erred in striking out the amended statement, no harm resulted from this ruling. The first statement says a partnership Avas formed, cоnsisting of plaintiff, defendant and other persons, to buy a jack, but the facts alleged shoAV a common OAvnership of the animal rather than a partnership. The jack Avas bought for $800 pursuant to an agreement that plaintiffs should have a three-sixteenths interest, defendant a five-sixteenths interest and the other owners an eight-sixteenths interest. Nevertheless as it is positively charged a partnership was formed, this averment ought to be taken against the pleader. It is further averred the several members contributed in proportion to their respective interests to the purchase price of the jack as represented by defendant ($800) and that of said price plaintiffs paid $50 in cash to defendant and gave a note for $100, to be paid to the person from whom the animal was purchased. Allegations are made that defendant promoted the formation of the company and the purchase of the jack, and acted for the company in buying it. The latter allegation is еquivalent to an averment of agency on the part of the defendant. According to the facts alleged defendant told the several buyers the price of the jack was |800, whereas it was $400, and by this false representation he obtained from his associates $400 in cash above the true price, of which excess of cash $50 was paid by plaintiffs, for which they prayed judgment. The statement avers Yost, the owner and seller of the jack, was paid in notes due one year after date, given by thе different members of the firm. The cash collected by defendant as part of the purchase price was alleged to have been obtained by said fraudulent conduct and the action is for money had and received. It is apparent that if the facts stated in the complaint are true, defendant obtained $400 from plaintiffs and others by a gross fraud and is liable to them in some form of action. A point of difficulty might arise regarding whether there is a common right of action in the two plaintiffs. No question has been made about this matter, and perhaps it is fairly inferable that plaintiffs were understood to act as a unit in contributing one portion of the purchase price, and to have acquired jointly the three-sixteenths interest in the jack alleged to be owned by them. The attack on the cause of action stated in the original complaint is made solely on the ground that the facts stated show the right to sue is joint in all the members of the firm; that all of them were essential parties, either аs plaintiffs or defendants and there could be no recovery by one or more of an aliquot part of the money obtained by defendant. In other words, it is contended the partnership as an entirety was defrauded and not the individual members. This contention is unsound ; for defendant himself was a member of the firm and he wias not defrauded, but only his comembers. Therefore the' firm as a whole was not defrauded. We think those decisions holding two or more promisees of a joint contract must sue on the promise, or two or more joint owners of property for its conversion, are not in point. Such cases are: Little v. Harrington, 71 Mo. 390; Rainey v. Smizer, 28 Mo. 310; Miller v. Crigler, 83 Mo. App. 395; State ex rel. v. True, 25 Mo. App. 451; Morin v. Martin, 25 Mo. 361. This action is neither on a contract by joint obligees, nor for property jointly owned by others along with the parties suing. The possible obstacle to plaintiffs’ case arises on the averment of a partnership and the rule that partners cannot sue each other at law for demands growing out of firm transactions. The common law rule, which has been modified somewhat by statute, is that all partnership contracts are joint only and not joint and several; and hence, in actions by or against partners, all must be made parties as plaintiffs or defendants. [Willis v. Barron, 143 Mo. 350, 45 S. W. 289.] At common law' a partnership was so far regarded as an entirety, that an action would not lie in favor of one or more partners against the others, on a case springing out of partnership business, until the affairs of the firm had been settled and a balance struck. [15 Ency. Law, Pl. and Pr., 1005; Stothert v. Knox, 5 Mo. 112; Knight v. McCutchen, 27 Mo. 436; Smith v. Smith, 33 Mo. 557; Bond v. Bemis, 55 Mo. 524; Bambrick v. Sims, 102 Mo. 158, 14 S. W. 935.] In legal thеory the several partners would have to be both plaintiffs and defendants in the action, which is not allowable; and this is the technical reason for refusing to allow an action until a settlement of the business shows an indebtedness of one or more of the partners to the others. [15 Cyc. Pl. and Pr., 1011; 1 Collier, Partnership (6 Ed.), 322, note 3.] There is said to be a deeper reason for the rule: i. e., that until ‍‌​‌​‌‌​‌​​‌‌​‌‌‌​‌‌​‌​​​‌​‌​​‌​​‌‌​‌​‌​​​‌‌‌​‌​‌‍an accounting is had and a balance struck, the relation of debtor and creditor does not exist between thе partners, nor can it be known that any member of the firm owes the others; because perchance, he may have advanced more than his proportion toward the capital, or in payment of firm debts, or have borne an undue share of the losses, or may possess other offsets against any demand on him by his comembers. [2 Bates, Partnership, sec. 849; 15 Cyc. Pl. and Pr. 1015, and cases cited in note 2.] Controversies and claims between members of a firm come under one of the heads of equity jurisdiction and usually partners must seek relief against each other in chancery. But there are exceptions both real and apparent to this rule. If only one matter or item is in dispute between partners, an action at law may be maintained on the item, though there has been no settlement of the firms affairs or balance struck. [2 Bates, secs. 865, 866; Buckner v. Ries, 34 Mo. 357; Whetstone v. Shaw, 70 Mo. 575; Bambrick v. Sims, 132 Mo. 48, 33 S. W. 445.] And sometimes a controversy between persons who are members of a partnership, will appear on first view to have arisеn out of a transaction connected with the .firm’s business, when really it stands on an independent footing, and may be the subject of a legal action between the partners, not as such but in their individual capacities. [2 Bates, sec. 868; Seaman v. Johnson, 46 Mo. 117; Russell v. Grimes, 46 Mo. 410; Stone v. Wendover, 2 Mo. App. 247; Howe v. Howe, 99 Mass. 71; Soule v. Frost, 76 Maine 119.] In the first of those cases it is said an action at law will lie by one partner against another, without a settlement of partnership accounts, for money had and received by the party sued as the plaintiff’s agent, in an account unconnectеd with the firm’s affairs. . In Whitehill v. Schickle, 43 Mo. 537, it was said an action at law will lie between partners “upon matters outside the partnership or where the dispute is so disconnected with the general partnership accounts as not to involve their investigation and settlement.” And in Russell v. Grimes, 46 Mo. loc. cit. 412, this proposition is found: “Partners are not forbidden to sue each other at law merely because they are or have been partners, but only when the adjustment of the matter in controversy involves the investigatiоn and settlement of the partnership accounts.” The 15 Am, and Eng. Ency. Law, 1035, in discussing the several classes of exceptions to the general rule prohibiting actions at law between partners, says the reason on which all the exceptions are allowed is that they do not involve partnership accounts, “because the rights and obligations assumed to be enforced are the individual rights and liabilities of the partners and not firm demands or liabilities.” In Howard v. France, 43 N. Y. 593, it was said “if no matter of account is involved and the money when received will not belong to the firm- there is no objection to the action upon the ground of partnership between the parties.” These authorities appear to lose sight of the other common law objection ‍‌​‌​‌‌​‌​​‌‌​‌‌‌​‌‌​‌​​​‌​‌​​‌​​‌‌​‌​‌​​​‌‌‌​‌​‌‍to actions between partners regarding firm matters, i. e., that all firm obligations and demands are regarded as joint; which theory, when applied to pleadings, would require partners to be both plaintiffs and defendants if actions between thеmselves were allowed.

Por aught shown in the original complaint filed by these plaintiffs, their concern had no other affairs or business — no transactions of any kind — except the purchase of the jack. Hence there are no accounts whose settlement might show an indebtedness from defendant to his co-partners or from them to him, and no dealings have occurred on which a balance could be struck. The alleged fraud of defendant, even if it was intertwined with the partnership relatiоn, stands out as a solitary item. In such a case, as we have seen, the courts allow an exception to the usual rule and an action at law will lie,

That a partner who procures from his copartners a sum of money ostensibly to make a purchase for the firm, and appropriates the money to his own use, cannot be reached except by a suit in equity wherein an account can be taken of the entire business of the firm, is a theory repugnant to our minds and which Ave are disposed to reject if it is not enforced by decisive precedents. But the most apposite precedents, both those dealing with partnerships and. those dealing with joint ownerships, reject it. We have found no case in which the principle the courts acted on in holding the culpable partner liable in an action at law, Avas expounded, but some of the decisions cannot be distinguished in their material facts from the one at bar. The courts appear to isolate a transаction in which a gross fraud or other wrong is perpetrated by one partner on his associates, and to regard it as so far detached from the general partnership affairs that it may be treated jurisdiction-ally as if all said affairs, except a single item, had been adjusted. This is nowhere said, but it seems to be the result of the adjudications. Bates says in his treatise that if a partner, by an act outside his authority, creates against his co-partners a liability he could not have called on them to share; they may recover from him the amount they have to pay in consequence of the liability; and that in this class of cases, if the payment is out of a joint fund, or the money is borroAved on a joint note, the action will be a joint one, but if the payment is from their private means, each must recover separately; citing Osborne v. Harper, 5 East. 225; Graham v. Robertson, 2 T. R. 282; Cross v. Cheshire, 7 Exch. 43; Fuller v. Percival, 126 Mass. 381; Calkins v. Smith, 48 N. Y. 604; 2 Bates, sec. 895, 896. We are not satisfied those cases fully support the text; for the actions were either against third parties Avho Avere supposed to have participated in the fraud, or Avere brought after the dissolution of the firm. That is to say, the copartners were not suing each other. But other cases are authority for the text. In Grant v. Hardy, 33 Wis. 668, the two parties had jointly purchased certain mining lands from one Stonebraker for $8,000. Hardy Avas Stonebraker’s agent to sell the land and had induced Grant to take a three-fourths interest and furnish $6,000 of the supposed purchase price; Hardy agreeing to take and pay for the o'her one-fo-’-1-! interest. By.collusion between Stonebivk^r and ^a.... the former stated the price at ¡fj8,000, but had agreed with Hardy to' take $6,000. Hence the latter obtained a fourth interest for nothing, which Grant afterwards purchased from him for $2,100, and having detected the fraud, sought to recover the money. Grant and Hardy bought ‍‌​‌​‌‌​‌​​‌‌​‌‌‌​‌‌​‌​​​‌​‌​​‌​​‌‌​‌​‌​​​‌‌‌​‌​‌‍for the purpose of mining the land as partners and commenced operations, and it was after the formation of the contract of partnership аnd while the relation subsisted, the land was purchased and the fraud perpetrated. The court said Hardy could not retan a benefit accruing from a betrayal of confidence repo in him, and a recovery was allowed. An identical case i Gates v. Paul, 117 Wis. 170, wherein it appeared tlu ' ties had entered into a partnership to purchase t lands in the south; Paul agreeing to contribute the , ey to buy the lands and Gates who was a timber exp i to select the lands for a one-sixth interest. The - 1 was instituted by Gates for a dissolution of the par Pier ship and to have an undivided one-sixth interest in tlu lands, the title to which had been taken in Paul’s name, vested in him. Presumably this was a suit in equity. On the hearing it developed that Gates had represented to Paul the price of one of the tracts was $10,000, when in truth it had cost but $5,000, and in consequence Paul was defrauded by overpaying the purchase price. The court said that at the time the suit was commenced, Paul had a cause of action at law against Gates fоr the excess paid and interest, and further: “The principle ruling the matter is the same as in any other case where one person takes another into a transaction, ostensibly on the ground floor, while he in fact, by false pretenses, is obtaining an unfair advantage over his trusting associate. The defrauded person may keep his interest in the property purchased and sue at law to recover his damages, or he may rescind the transaction and sue at law to recover the consideration which he paid for the property, or he may sne in equity for a rescission and an accounting.” [Loc. cit. 190.] In these decisions a prior decision (Bergeron v. Miles, 88 Wis. 397, 43 Am. St. Rep. 911) was approved. The Bergeron case was one of joint purchase, not partnership, wherein it appeared the defendant had induced the plaintiff to join in a land deal, each to pay one-half of the price, which the defendant represented to be larger than it was. Berger-on advanced one-half the supposed price to pay for his moiety and Miles retained the excess. The action was for money had and received and a judgment for the plaintiff was" sustained. In Rice v. Culver, 32 N. J. Eq. 601, it appeared the complainants and certain of the defendants had purchased a tract of land supposed to contain something over seventy-three acres. The purchase was arranged by two of the defendants named Culver and was supposed to be at $1,500 an аcre, when in fact it was at a slightly lower figure, and instead of the tract containing seventy-three acres, it contained only sixty-eight, a deficiency of five acres. The suit was in equity for an accounting and to recover the excess of money paid the Culvers on account of the misrepresentations regarding the price of the land and its quantity. The court eliminated the alleged fraud in overcharging, because of explanatory facts tending to show it was an innocent act, but said the deficiency in the quantity of the land had not been satisfactorily explained. The bill in equity was dismissed on a ruling that the proper remedy was at law. Said case was one of partnership, for the land was to be improved at the expense of the buyers and put on the market. The court said if the Culvers received from the subscribers to the agreement under which the land was to be purchased, money which would not have been received but for their misrepresentation as to the number of acres, “an action at law was the appropriate remedy for the injury and the money might have been recovered accordingly.” In More v. Rand, 60 N. Y. 208, the action was for the dissolution of a partnership between plaintiff and the defendant and for an accounting in respect to the business. The defense was that the defendants were induced to enter into the partnership by the fraudulent representation of the plaintiff, and a counterclaim was preferred for damages occasioned by the fraud. The facts were the plaintiff More and onе Holley, had been partners in conducting a hotel and had owned a lease on the premises and the furniture subject to a mortgage. More and Holley sold out to the defendants on a contract whereby Holley was to receive $31,000 and More $29,000; but with a reservation that defendants might elect within two months to take More in as a partner, in which case he should accept ten per cent of the future profits in lieu of the $29,000, which was his portion of the price to be paid him and Holley. By еlection of the defendants More became their partner, and the lower court found a partnership was formed. The counterclaim preferred was based on alleged misrepresentations by More when he and Holley sold to the defendants, regarding the value of the furniture and the profits of the business. The suit was in equity by More for a dissolution and accounting, and the difficulty the appellate court found was not with the question of whether the counterclaim would have been good in a legal action, but whether it could be preferred in a suit in equity. The opinion says (loc. cit. 212) that if the allegations contained in the answer were true, it was clear “an action for deceit would lie against plaintiff for inducing defendants to enter into the contract and purchase Holley’s interest, in which they would be entitled to recover substantial damages.” And further, that though a joint action might have been maintained against More and his previous partner Holley, it was error to suppose they must bе joined. Those defendants were asking to recover from their partner on a counterclaim, because of Ms fraudulently inducing them to pay an excessive price for tbe partnership property. In essence both that case and this one involve the obtention of money by one partner from his associates, by false statements in regard to the valne or price of property to be purchased for the firm’s business. In Cross v. Cheshire, 7 Exch. 43, it appeared that A and B who were in partnership, had an account in a bank where B kept a private account also. B gave the bank a promissory note signed in the firm name for a balance against him individually. The bank sued A on the note and recovered; and it was held A might then maintain an action at law against B for money paid to B’s use. The court said: “If one partner has cheated his fellow-partner through a note given in the name of the firm — unless perhaps where the party is deprived of his remedy by the act being a felоnious one— that other party is entitled to recover against him, as for money paid to his use, the sum paid in satisfaction of an apparent debt of his own, created by a fraud on the partnership.” Howard v. France, 43 N. Y. 593, and Hale v. Wilson, 118 Mass. 444, are analogous. The foregoing cases suffice as authorities for the proposition that the fact of the partnership is no obstacle to the maintenance of this action. Obtaining money by a partner from his copartners under the circumstances charged against the defendant, with no intention to ‍‌​‌​‌‌​‌​​‌‌​‌‌‌​‌‌​‌​​​‌​‌​​‌​​‌‌​‌​‌​​​‌‌‌​‌​‌‍devote it to firm purposes, but to pocket it, is a transaction which touches the partnership at a tangent and is in no way involved in its proper business. It is simply a fraud unconnected with the partnership, except that the relation presented the opportunity for its commission.'

When money is thus obtained, an action for money had and received will lie against the guilty party. [Crigler v. Duncan, 121 Mo. App. 381, 99 S. W. 61; Moses v. McFerlane, 2 Burr. 1005; Winningham v. Fancher, 52 Mo. App. 458.] One defrauded as plaintiffs were, if the statements of the complaint are true, may reclaim from the guilty party the money or property fraudulently obtained. [Goodger v. Finn, 10 Mo. App. 226.]

It is insisted all the members defrauded were necessary parties to this action and if the others would not join as plaintiffs, they should have been made defendants. Looking to the averments of the complaint, we find Yost, who sold the jack,- received his pay in separate notes executed by different members and due one' year after date. We find also the members severally contributed to the amount of cash collected by defendant and which he intended to appropriate from the first, according to their respective interests in the jack; plaintiffs contributing $50. Under these circumstances it is clear to us that each person could maintain a separate action to recover his cash contribution. In Calkins v. Smith, supra, one partner made his promissory note and indorsed it in the firm name to pay his own debt to the defendant, who took the note with knowledge of the facts аnd afterwards indorsed it to an innocent holder. The partnership went through a receivership, in the course of which the note was paid out of the firm’s assets, and the action was to recover from the indorsee who had taken the note in fraud and indorsed it to an innocent holder. The court said the case was not a joint fraud on the partners, for which they could unite in an action, but was committed on each partner separately, entitling each to sue alone to recovеr his damages; that the amount of damages sustained by the different partners was not the same, but was rather in relation to their respective interests in the firm. This is according to the rule stated by Bates and referred to before, namely: if the payment is out of a joint fund or the money borrowed on a joint note, the action will be a joint one, but if the payment is from private means, each partner must recover separately. [Bates, Partnership, sec. 96.] And this doctrine was sustained by Lord Ellenborough in Osbornе v. Harper, 5 East. 225. Others of the cases Ave have cited are in accord. We Avould prefer to say each may sue separately at law; perhaps they might bring a joint suit in equity.

We Avill now inquire whether or not the amended petition filed in the circuit court, constituted a neAv cause of action and a departure from the one filed before the justice of the peace. The only effect of the amendment was to state the purchase of the jack in such allegations as made .the purchasers co-owners merely, instead of partners. Inasmuch as Ave have held the copartnership relation, if it existed, did not stand in the way of plaintiff’s recovery, and that each member of the firm might recover in a separate action the amount of cash paid defendant, it is obvious ‍‌​‌​‌‌​‌​​‌‌​‌‌‌​‌‌​‌​​​‌​‌​​‌​​‌‌​‌​‌​​​‌‌‌​‌​‌‍the averments of a partnership in the first petition are not of the essence of the case stated, which really consists of the allegations regarding the fraud perpetratеd on the purchasers by defendant, Avhereby he procured money from them and appropriated it to his OAvn use. Whether the transaction sounds in co-partnership or in co-ownership, the case against defendant is the same. It follOAVs that a neAv cause of action was not substituted by the amended petition, nor did a departure occur. As it happened, this point was thoroughly discussed in Gates v. Paul, 117 Wis. 170, wherein the original petition, which alleged a purchase of lands by che parties as partners, Avas amended so as to eliminate the element of partnership and ask relief on the theory that the title was taken in the name of the defendant for both himself and the plaintiff, whereby the defendant became a trustee. After an exhaustive discussion of the question, the court held the genera] scope of the controversy was not altered by taking the partnership averment out of the petition, but that the remedy sought and the facts essential to granting it, remained the same. In the prеsent case the same measure of damages and the same evidence would be essential to make out the cause of action stated in both the original and the amended complaints, except that under the latter it would be unnecessary to prove a partnership, which is an irrelevant fact. Moreover, both statements count on the same transaction. ' That the amendment was proper we have no doubt, and the following authorities justify it: Stewart v. Van Horne, 91 Mo. App. 647; Schwab Clothing Co. v. Railroad, 71 Mo. App. 241; Lottman v. Barnes, 62 Mo. 159; Ross v. Land Co., 162 Mo. 317, 62 S. W. 984.

The judgment is reversed and the cause remanded with a direction to reinstate the case, set aside the order striking out the amended statement and proceed with the case.

All concur.

Case Details

Case Name: Gilliam v. Loeb

Court Name: Missouri Court of Appeals

Date Published: Apr 14, 1908

Citation: 109 S.W. 835

Court Abbreviation: Mo. Ct. App.