Malley v. Atlantic Fire & Marine Insurance

51 Conn. 222 | Conn. | 1883

Lead Opinion

Pardee, J.

This is an action upon a policy of insurance against loss by fire. On the 12th day of May, 1881, the defendant executed and delivered to the plaintiff a policy of insurance against loss by fire, upon his stock of merchandise, for the sum of $2,500, to continue in force one year from that date. It provided that “if the interest of the assured in the property be any other than the entire, unconditional, sole ownership of the property, for the use and benefit of the assured, * * it must be so represented to the company and so expressed in the written part of this policy; otherwise the policy shall be void.” Also, “if the property be sold or transferred * * or any change take place in title or possession, * * whether by legal process or judicial decree, or voluntary transfer or conveyance, * * then, and in every such ease, this policy shall be void.”

On January 12th, 1882, the plaintiff completed an inventory. Annexed to it were three statements, under the following heads: — “ Edward Malley, general,” “ Edward Malley, personal,” and “ Edward Malley & Co.” On that day he and William Neely signed the following contract:

“ We, the undersigned, Edward Malley, of New Haven, and William Neely, of New York, do hereby enter into the following partnership agreement, which shall remain in force three years from the date hereof, January 12th, 1882 :

“We hereby agree to become partners in the business now established and being conducted by said Edward Mallejr in New Haven.

“ The said Malley hereby agrees to furnish the capital necessary to run the business in its present shape, except as hereinafter elected. Also to furnish the store or stores now occupied by him in the business. The said Neely shall devote his whole time and attention to the business, and not engage in any other business during the continuance of these articles, and will not, during the same length of time, give or indorse any notes, or otherwise become surety for any person or persons whatever, without the consent of said Malley, either in his own private matters or in behalf of the firm. He also agrees to furnish, within the first year, $10,000 capital for the use of the firm.

• “ The said Neely shall be entitled, out of the net profits of the business, to receive twelve and a half per cent, thereof; and if the net profits exceed $50,000, shall receive fifteen per cent, thereof; in any event said Neely shall receive $3,000 per year. In estimating the net profits there shall be deducted, as a portion of the expenses, six per cent, on the actual value of the stock and fixtures; also the rent of the old store at $8,000, and the shoe store, if used, at $2,000; said store and fixtures to be kept in repair bjr said Malley himself.

“ Said Neely shall not, however, draw out of said concern more than the sum of $2,000 in any one year, until the fund in the concern shall accumulate to the sum of $10,000 over and above that sum put into the concern by said Neely as capital. All the remainder of the profits of the said concern shall belong to said Malley.”

On the same day the plaintiff made the following memorandum upon his journal: “ Accounts closed on Sales Ledger K and re-opened on Ledger A of E. Malley & Co.” Since the date of the contract the business has been advertised and conducted in the name of Edward Malley & Co., except that the bank account kept at the Merchants’ National Bank of New Haven, remained in the name of Edward Malley, and he signed the notes and checks.

Between January 12th and February 28th, 1882, the firm added by purchase to its stock, merchandise of the value of nearly $77,000, and sold therefrom merchandise of the value of nearly $59,000. On February 28th, 1882, the stock was nearly destroyed by fire.

William Neely has not contributed to the capital the $10,000 specified in the contract, nor is there any evidence that he had received therefrom any larger sum than at the rate of $2,000 per year.

The defendant refusing to pay any portion of the loss, this suit was instituted, and the case is reserved for the advice of this court as to the judgment to be rendered therein.

The plaintiff and William Neely signed a contract which in terms declared that they thereby entered into a partnership agreement which should remain in force three years from its date, and that they thereby agreed to become partners in the business established and theretofore conducted by the plaintiff in New Haven. They jointly determine that the plaintiff shall contribute the property and Neely the labor and skill constituting the capital of the partnership. They agree upon the method of management of the “business,” and upon the rule of division of the “profits of the concern” as profits. The agreement is not for a single adventure, but for the creation of the ordinary mercantile partnership. The books of account of the plaintiff as a sole trader are closed; others are opened, merchandise is bought and sold, the business is advertised and- conducted in the name of the partnership. The contract creates a partnership in the fullest legal sense of that term, with all resulting rights to and duties upon each individual entering therein. With the exception of the agreement of Neely not to give or endorse notes in the name of the firm, there is nothing either in the contract or in the acts of the parties after its execution, which restrains or even manifests an intent to restrain from its utmost reach, the opening agreement to “ become partners in the business.” Therefore upon the execution thereof the title to the property contributed to the capital of the partnership by the plaintiff instantly vested in himself and Neely jointly. They became joint owners or joint tenants thereof and of all additions thereto, and joint debtors therefor in proportion to their several interests. Each had an interest in every parcel and in the whole; in each was the right to joint possession and care, and the right of disposition for the uses of the firm ; and the name of each became necessary to' any suit for the recovery of the price.

A contract which creates a partnership in the most complete sense of that term, which invests each partner with a partnership title to the property contributed to the capital, which gives him the right to receive profits, and compels him to bear losses, in cases where each contributes an equal portion of that property, will have the same force and effect in cases where one contributes the property and the other only skill and labor; inequality in this respect does not control the interpretation of the contract; the ownership is the same in character, differing possibly in degree by agreement. In Story on Partnership, sec. 27, it is said in effect, of eases in which one partner only contributes property to the capital of a partnership, and there is no positive agreement that it shall remain his exclusive property, and no implication from the circumstances of the particular ease leading to a different conclusion, that there will be presumed to be a community of interest in the property as well as in the profit and loss. In Whitcomb v. Converse, 119 Mass., 38, four persons signed articles of partnership, two contributing property and two time and skill only to the capital, profits to be divided equally after paying interest upon the property; the partnership was dissolved by consent, and one of those contributing property closed the business, which ended in a loss. Upon his bill in equity against the others, the court held that the capital constituted a debt of the partnership, to the payment of which the partners must contribute equally; and that one being insolvent, the other three must bear the loss equally. The court says: “ When, as is usual in an ordinary mercantile partnership, a partnership is created, not merely in profits and losses, but in the property itself, the property is transferred from the original owners to the partnership, and becomes the joint property of the latter. * * * Those partners who contributed the capital did not contribute merely the use thereof, but the capital itself, and were by express agreement to receive interest at rates specified in the articles of copartnership. The partners were by agreement to receive each one fourth of the net profits, and by implication of law must share in the loss in the same proportion. The capital contributed became the property of the partnership, and the partnership, consisting of all the partners, became liáble to Whitcomb and Converse respectively for the amount of the capital paid in by them.” The proposition that this was not a case of contribution of the use of capital merely, but that the capital became the property of the- partnership, rests upon the fact that certain persons signed “ articles of copartnership * * * for the transaction of a commission business,” by which two agreed to contribute property and two skill only; the profits to be divided by a fixed rule after paying interest. There was no declaration as to losses; none as to ownership of the property; the law took care of these two important matters.

In Livingston v. Blanchard, 130 Mass., 341, two signed articles of partnership, one contributing property, the other only skill and time to the capital; profits, after paying interest, to be divided equally. The court says: “The capital became, therefore, partnership property.” This proposition rested, as in the former case, upon the agreement to be partners without mention of losses or of ownership of property.

Neely agreed to contribute $10,000 to the capital within one year after the execution of the partnership contract. It was quite within the power of the plaintiff, by special provision to that effect, to have postponed to any day the acquisition by Neely of ownership in the property; to have made it dependent either upon this contribution, or upon the accumulation of a like sum to his credit from profits, or upon both, and to have detained him in the position of agent or clerk. But the plaintiff did not do this. On the contrary, he explicitly agreed that a partnership should have an existence of three full yeqrs, computing from the date of the contract.

He protected Neely’s position as a partner during the first year from any possible effect from his failure .to make the contribution by confining that effect to time subsequent. Of course the parties looked for profits, and their contract provides for the division. They did not suppose that loss would result, therefore they made no provision for that contingency ; that was left to the law. The rule of division is a graduated one, depending upon the amount earned, providing in behalf of Neely that his share should not be less than a named sum. But the fact that the proportion must of necessity remain unknown until the termination of the business does not, as a matter of law, postpone the existence of the partnership from the date of the contract; and the plaintiff expressly agreed that' the rule of division should go into operation upon that day.

Presumably the stock of dry goods contributed by the plaintiff, constituting the entire property of the partnership upon the day of its inception, was sold to it at the fair market value. Of course the partnership was instantly his debtor to the whole extent of its assets. Neely was joint owner with the plaintiff of these, but the ownership was burdened by the indebtedness. He had the right to be in possession, and to dispose of them; to have the proceeds applied upon partnership debts, and to share in any surplus; a right not on the day of the contract of any value in the market. Therefore, if upon that day an individual creditor of Neely’s had undertaken to enforce payment of his debt from this property, he would have taken nothing by his act; probably there would have been no surplus for him. If upon the same day Neely had died, it would have availed his representative little to have inventoried his legal right; it existed, but probably had small value in the market. If, however, within ten days thereafter, there had been an enhancement of commercial values to the extent of fifty per cent., and Neely had died, upon the consequent winding up of the business and realization of this profit his representative would have been entitled to share therein according to the rule of the contract, although Neely had made no contribution of property to the capital.

Irrevocable legal title was placed in him by the plaintiff at the moment of signing the contract; a title not depending, in any degree, upon the question whether' Neely’s individual creditor could or could not then gain access to it; nor upon its value in the market on that day. As, however, profits had been earned between the day of the contract and the day of the fire, Neely’s legal right, acquired upon the first, had upon the last day become a valuable property. This ownership is not the less absolute because he consented to a restriction of his right to sign notes in the name of the firm; the effect of that restriction is limited to the exact expression of it. The plaintiff concedes that if Neely had contributed $10,000 to the capital, and had allowed $10,000 from his share of the profits to remain as capital, thereafter his ownership would have been as perfect in kind as that of the plaintiff; and it was possible that Neely should have paid in $10,000 within the first year, and that within the second profits to the amount of $10,000 should have accumulated to his credit; but all this would not have removed the restriction; that, by the terms of the contract, is to continue to the end of three years, regardless of all else; therefore, neither by it nor by the intent of the plaintiff is this restriction to have any bearing upon the matter of ownership.

When, therefore, the plaintiff, after the delivery of the policy, executed the recited agreement, and by it formed a partnership between himself and Neely for the prosecution of the dry goods business, and transferred the merchandise insured as his sole property to the partnership as his contribution to its capital, he invested Neely with a partner’s title to it which was as absolute in character as his own, although less in value; he did precisely that which he had agreed should make void the contract of insurance. For the defendant had made the continuance of the life of that contract dependent upon this, namely, that the entire burden of ownership, of caring for the property as owner, should be and remain upon the plaintiff; had forbidden him, upon penalty of forfeiture of his right to indemnity, to share this ownership, this duty, with a stranger to .the contract; had refused to insure this- property cared for as owner by a stranger; had refused to owe any duty to a stranger; to come under any obligation to treat with, or indemnify him in case of loss. Wood on Fire Insurance, § 334. It is true that the case of Cowan v. Iowa State Insurance Co., 40 Iowa, 551, determines that the sale of property by the insured to a firm of which he is a member is not such a change of title as works a forfeiture; but we believe this decision is contrary to the weight of reason and precedent.

The Superior Court is advised to render judgment for the defendant.

In this opinion Park, C. J., and Loomis, J., concurred.

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Dissenting Opinion

Granger, J.

(dissenting). Passing the overwhelming equities of the case in favor of the plaintiff apparent to every one who reads the record, I proceed to consider the cold naked question of law involved, and from the decision of which by the majority of the court I feel compelled to dissent.

If any partnership relation existed between Malley and Neely at the time of the happening of the loss in controversy, it was because the law infers such relation from the instrument recited in the opinion of the court, dated January 12th, 1882. Outside the physical act of signing that instrument, there is disclosed upon the record no act done by Neely tending to indicate that he was or claimed to be a partner in the business. y

It does not appear in what capacity, if any, he had been previously employed by Malley, but it does appear that, after the contract and up to the date of the fire, “ the business conducted by said Neely was the purchase of merchandise in New York city for the wholesale and retail business in New Haven.” This is all the record discloses on that subject. It excludes therefore any actual joint possession or control bjr Neely as joint Owner of the merchandise situated and insured in New Haven; and as to the proceeds of the sale of that merchandise, it was found by the Superior Court that they were deposited in bank to the individual credit of Malley; that Neely had no control over them, but that all checks were issued and notes given by Malley individually. No check or obligation -of any kind purporting to be a partnership check or obligation was ever signed by Neely. Two questions then arise: first, was there an existing partnership as between Malley and Neely at the date of the fire; and second, if there was, did that partnership involve such a change of title in the insured merchandise owned by Malley at the date of the insurance as to work a forfeiture of his claim to indemnity under the terms of this policy of insurance.

I entertain grave doubts whether even a technical partnership was created between the parties under this contract. There is a marked distinction between actual and contemplated partnership. If an agreement merely looks to a future partnership, the contractors cannot be considered partners until the event which was to make them partners happens. Lindley on Partnership, 27; Harker v. Burr, 106 Mass., 48; Roberts v. Chalker, 27 Conn., 114. That event in this case was to be the contribution by Neely of $10,000 to the capital. Until then he had no right to share in the profits as such, nor could he draw out of the concern more than the sum of $2,000 in any one year, until he had not only put in the $10,000, but until the accumulation of that fund had amonnted to $10,000 in addition thereto. Neely never contributed any part of the $10,000. He was not therefore a partner as betweenfhimself and Malley at the date of the loss. It is quite true that, having permitted liimself to be held out as one of the firm by advertisement and otherwise, he would be estopped to deny a partnership liability as against creditors. But the law works such an estoppel out of considerations having no relevancy to the enquiry whether, as between the contracting parties, the title of Malley in the capital contributed by him was transferred to Neely.

• But assuming that there was a partnership created by this agreement, existing at the date of the fire, we reach the more important, because wider question, whether that agreement annulled this policy of insurance. It is said in the majority opinion that “ upon the execution thereof the title to the property contributed to the capital of the partnership by the plaintiff instantly vested in -himself and Neely jointly; they became joint owners thereof and joint debtors therefor.” If this be so, it is not because such was the intent of the parties to the agreement, because by its terms the instrument excluded Neely from any such joint ownership of the capital, and so far from Neely intending to become a joint debtor to Malley, for property purchased by him from Mallejq to be thereafter owned by himself or in common with Malley, he stipulated that Malley should as its exclusive owner be entitled to receive interest upon its whole value at the rate of six per cent, per annum. But it is said that, irrespective of the actual intent of the parties as to Malley’s continued ownership, the contract creates a partnership in the fullest legal sense of that term, with all the resulting rights to and duties upon each individual entering therein, and therefore upon the execution thereof there devolved upon Neely, as a conclusion of law, such a title to the capital contributed by Malley as to extinguish his right to indemnity for the loss he has sustained by the fire. I am compelled to dissent from this proposition. I understaftd the law to be that “ to avoid a policy of insurance on the ground that the property has been alienated, an alienation in fact must be shown by the insurers, and that the burden of proof is-in all such cases upon them.” Wood on Fire Insurance, § 320. This principle was applied, and the plaintiff’s right'of recovery against such a defense as is here interposed, was sustained, in Orrell v. Hampden Fire Ins. Co., 13 Gray, 431, where the insured, to avoid an attachment, had represented that the insured merchandise had been sold and did not belong to her; in Gilbert v. N. Amer. Fire Ins. Co., 23 Wend., 43, where a deed from the insured had been executed, delivered and recorded, but he was permitted to show that the delivery had been intended as an escrow, and that it had been recorded by mistake ; in numerous cases cited by Wood on Fire Insurance, § 323, of executory contracts of sale, on which partial payments had been made; in Lockwood v. Middlesex Mut. Ins. Co., 47 Conn., 553, where during the period covered by the risk, one of the insured sold his interest in the property insured to his co-tenant; in Cowan v. Iowa State Ins. Co., 40 Iowa, 55, where there was a sale of the insured merchandise to a firm of which the insured was a member. Unless, therefore, an actual substantial change of title as distinguished from a mere technical change, results as a necessary legal inference from the creation of a partnership between the then owner of the property and his incoming co-partner, it would seem that there was not under the terms of, this policy such a forfeiture as to extinguish the plaintiff’s right to indemnity.

The next inquiry is therefore, having for our premises an admitted partnership, does it follow as a necessary, inevitable conclusion of law, that there is an actual community of ownership and of title among all the partners, in all the capital employed in the conducting of its business ? There are two phases of this inquiry. One relates to the right of creditors to resort to a common fund, without regard to any private agreements between the partners as to its ownership. The trading community are not bound to know or to inquire into the terms of the contract of partnership as between the individual members of a firm. They may treat the capital as a trust fund for the payment of their debts and absorb the whole of it for that purpose, if necessary, even though its entirety be the contribution of a single partner. But upon the other phasé of the enquiry a very different question presents itself. As between the partners themselves, as individuals, we must look beyond the mere fact of partnership in searching for their title to the partnership capital. If, for instance, Neely had loaned Malley $10,000, under such an agreement as to taking profits in lieu of interest, that under the ruling of this court in Parker v. Canfield, 37 Conn., 266, he thereby became a partner as between himself and the creditors of Malley, it would hardly be claimed that any such change of title resulted as would defeat Malley’s claim to a recovery. We cannot, therefore, upon the mere abstract fact of the existence of a legal partnership assume, as a conclusion of law, that each partner is in fact, as between himself and his co-partners, a joint owner of the property invested in the business. Nor can we, if a conceded joint ownership exists, assume, in ignorance of their actual contract relations, in what proportion it exists, and cannot, therefore, if there be a loss, apportion that loss. All this depends upon the terms of the contract of partnership. As was said by Gray, C. J., in Whitcomb v. Converse, 113 Mass., 36, “ whether a loss of capital is a partnership loss to be borne by all the parties, depends upon, the nature and extent of the contract of partnership.” Another case cited in the opinion of the court, Livingston v. Blanchard, 130 Mass., 341, affords an apt illustration of this principle and of its application, because the articles of partnership between Livingston and Blanchard contained the same provisions as to the contribution of the entire cash capital by Livingston, and of his right to be paid rent and interest prior to any claim of Blanchard to share in the profits, as are contained in these articles of agreement, in which Malley represents the rights of Livingston and Neely those of Blanchard. The partnership in that case was dissolved by the death of Livingston. Upon a bill for an accounting brought by the executrix of Livingston, Blanchard claimed that upon the execution of the articles of co-partnership the title of the property contributed to the capital by Livingston became vested in Livingston and himself jointly, that they became thereupon joint owners thereof, and that upon the settlement of the partnership accounts he was entitled not only to one half the profits, bat also to one half the capital Livingston had contributed. But the court say: — “It appears from the articles of partnership that Livingston contributed the whole capital which was invested in the business, and that the profits, after providing for the expenses, including the rent of store, interest on capital and salary to the defendant, were to be divided equally between the parties. The capital became therefore partnership property, the expense of insuring which was part of the expenses of the business; and on the dissolution of the firm Livingston, or the plaintiff as executrix of his will, was entitled to repayment of the capital contributed by him. before the defendant was entitled to receive anything out of the profits. The amount of the profits was ascertainable only by deducting from the assets left after paying the expenses of the business, the amount of capital invested.” The opinion of the court quotes in its support from the language of the opinion in that case, “the capital became therefore partnership property.” Doubtless it became partnership property as to creditors, and became also partnership property to the extent that premiums paid for the insurance were “ part of the expenses of the business,” but, upon the issue we are now considering, the court held that, as between Livingston and 'Blanchard, the capital contributed by Livingston ivas not partnership property, but that Livingston was the exclusive owner and that Blanchard had no title to it. This conforms to the rule laid down in the text-books; “ one may be a partner in the business or in the profits arising from it, without being a part owner in the capital with which the business is carried on.” Story on Partnership, § 27; Lindley on Partnership, 16; Parsons on Partnership, 52. While therefore it is true, as said in effect by Story in the section referred to, that in the absence of any agreement to the contrary (and as against creditors in spite of such agreement,) a community of interest in the capital, as well as in the profits, will be presumed, yet it is no less true that, between the parties to a partnership contract, such presumption may be rebutted by the articles of agreement, and, oyer of them being had, it may appear, as it does here, ■not only that there was not to be an equal division of profits between Malley and Neely, but that Malley was to remain the owner of, and as such to receive interest upon, the capital he contributed. Again, joint ownership in the partnership property, where one contributes no capital, is a mere inference or presumption of law. The law infers such community of ownership between the partners, because, where one shares in the profits, it is just that he should bear his proportion of the loss, and the only way he can fairly be held to contribute to a loss of capital is by imputing to him a legal ownership therein. But this inference of the law may be overcome by the language of the partnership agreement; and in the present case the agreement provides that “ in any event said Neely shall receive $3,000 per year.” This amounts to an indemnity against loss, and destroys the foundation of the legal presumption of joint ownership, for a participation in the profits alone, accompanied by an indemnity against loss, is inconsistent with ownership of the capital itself. Nor do I understand* this legal inference to go to the extent of imputing such ownership generally and for all purposes to a non-contributing partner, but only in a restricted sense and for special purposes. Thus, in the Massachusetts cases cited, it is said that the capital contributed became partnership property, but nevertheless in both cases, upon dissolution of the partnership, the ownership of the non-contributors evaporated, and the title of each contributing partner to the amount originally furnished by him remained unimpaired. In one of these cases there was a loss, in the other a profit; and it was held that before the partnership loss or profit could be divided, the sum put in by each contributing partner must be repaid. Whatever may have been the fictitious title of the non-contributing partner to the capital during the continuance of the partnership, when tested by a division of the capital itself his substantial title was nothing at all. The utmost that can be said is that for certain purposes and awaiting certain contingencies which, may or may not arise, the law assumes a latent ownership of the capital in all the partners. Creditors are permitted to share in this assumption, though they be, as in one of the Massachusetts cases, partners themselves. It exists for their benefit, and is held in abeyance to await a proper occasion for its beneficial operation. But until a contingency occurs where the assumption is invoked for just cause, as in favor of creditors, the ownership which is not founded in actual contribution of capital, but-has only an embryo existence in the policy of the law, is an unsubstantial and dormant thing. One who is not in fact a partner, may, by so holding himself out, become a partner in the eye of the law. So one who is not -in fact a part owner of capital may, by the mere act of signing a partnership agreement,' become in the eye of the law a part owner. But the first is not thereby entitled to the profits of a real partner, and neither is the second a real part owner. Each has put himself in such position that the law, in pursuance of the general policy, may, if certain contingencies arise, and for the benefit of those having higher equities, declare that to be true in law which is not true in fact. But no such contingency has arisen in this case. This policy of the law which protects creditors is not here invoked to aid them in enforcing their rights; but it is invoked, to enable the defendant to so construe this contract of indemnity as to escape liability for a just and (but for such construction) legal claim.

In further support of the foregoing views I refer to the case of Lycoming Insurance Co. v. Barringer, 73 Ill., 230.

I am of the opinion that there was not such a change of title in the insured property from Malley to Neely as avoided this policy, and that the Superior Court should be advised to render judgment for the plaintiff.

In this opinion Carpenter, J., concurred.