Karrick v. Hannaman

by Horace Gray

United States Supreme Court

168 U.S. 328

Karrick  v.  Hannaman

This was a suit brought April 17, 1890, in the Third judicial district court of the territory of Utah, by Hannaman against Karrick, for the dissolution of a partnership formed February 3, 1886, by an agreement in writing, by which they agreed to become partners in a mercantile and laundry business for the term of five years from that date, with a capital stock of $25,000, of which the plaintiff was to furnish $5,000, and the defendant $20,000. The defendant lent the plaintiff the sum of $5,000 for five years, for which the plaintiff gave a promissory note, payable at the end of that time, and secured by mortgage upon his interest in the partnership property. The plaintiff was to give his entire time and attention to the partnership business, and the defendant was to devote to it only such time as he should see fit; the plaintiff to have the control and management of the business generally and entirely, except as the defendant might designate, and such matters to be subject to mutual agreement; one half of the net profits of the business to go to the defendant in repayment of $15,000 of the capital stock furnished by him, and the other half to be allowed to remain in the business, except that each partner might draw out not exceeding $125 a month for personal expenses; the profits and losses to be shared equally, and neither party to have any other salary or compensation for services; and the title and interest of the partners in the partnership property to be proportionate to their respective contributions to the capital.

The complaint alleged the following facts: The parties carried on business in conformity with the agreement until February 1, 1888, when the defendant took exclusive possession of all the partnership business, stock, books, and accounts, and of the premises where the business was carried on, and ever afterwards prevented the plaintiff from participating in any manner in the business or deriving any benefits therefrom. The plaintiff, until that date, performed his part of the agreement, and was ever after ready and willing to perform it, and so informed the defendant. From that date, the defendant wrongfully, and in fraud of the plaintiff's rights, carried on and controlled the partnership business for his own exclusive benefit, and applied to his own use, from the proceeds and profits of the same, large sums of money, exceeding the proportion to which he was entitled. On January 1, 1890, the defendant, without the plaintiff's knowledge or assent, sold and delivered to the Bast-Marshall Mercantile Company all the assets and property of the partnership. The complaint prayed for a dissolution of the partnership, the appointment of a receiver, an injunction against interfering with the property, its application to the payment of the partnership debts, and a division of the remainder between the partners, the setting aside and cancellation of any transfer or assignment to the Bast-Marshall Mercantile Company, and an account.

The defendant, Karrick, in his answer, admitted the partnership, and his own taking possession on February 1, 1888, but denied the other allegations of the complaint, and alleged that the plaintiff mismanaged the business in various particulars specified, and that, when the defendant took possession, the partnership was ins lvent, and heavily in debt, and the plaintiff was owing to it a large sum of money, and was insolvent, and the partnership was then dissolved by mutual consent.

The Bast-Marshall Mercantile Company was originally made a defendant, and filed a separate answer; but the plaintiff afterwards dismissed his suit as against that company. The case was referred, by sonsent of the remaining parties, to a referee, to report his findings of fact and conclusions of law to the court; and, at the hearing before the referee, much evidence was introduced by either party in support of his allegations and denials.

On October 5, 1891, the referee made his report, in which he set forth all the evidence, and by which he found that the facts were as alleged in the complaint, and were not as alleged in the answer of Karrick, and stated an account, resulting as follows:

Unadjusted and undivided profits

January 1, 1890, including

$2,616.25, then uncollected by

defendant...................... $22,858 18

Profits realized after January 1, 1890. 99 90

Wrongfully disbursed by defendant

after that date.................... 379 50

$23,337 58

Unavoidable losses after January 1,

1890............................. 2,005 12

Of which plaintiff is entitled to

one half....................... $10,666 23

Capital put by plaintiff into the

business......................... 5,208 89

Principal sum due to plaintiff.. $10,875 12

Interest at eight per cent. yearly

from January 1, 1890, to October

5, 1891, on $8,258.87, the

difference between $10,875.12 and

$2,616.25, uncollected January 1, 1890. 1,165 41

Net profits..................... $21,332 46

$15,875 12

Due from plaintiff to defendant on

note mentioned in partnership

agreement, without interest...... 5,000 00

Total amount due to plaintiff.. $12,040 53 From the findings of fact, the referee concluded, as matter of law, that the partnership was not dissolved, but that it expired February 3, 1891, according to the terms of the agreement; that the profits and losses of the partnership business should be divided equally between the parties, after crediting each with his advances to and investments in the partnership; and that the sum of $12,040.53 was therefore owing to the plaintiff. The court adopted the referee's findings of fact and conclusions of law, and entered a decree accordingly.

The defendant appealed to the supreme court of the territory, which held that, for the reasons stated in its opinion (the material part of which upon this point is copied in the margin), ^[1] the defendant could not dissolve the partnership, without reasonable cause, and without the plaintiff's consent, before the expiration of the term stipulated in the partnership articles; and, therefore, that the partnership had not been dissolved by the acts of the defendant; but that, as each partner was permitted by those articles to draw out of the partnership $125 a month for personal expenses, the defendant should have been allowed the sum of $3,000 as personal expenses for the two years during which he conducted the business of the firm; and that the judgment should be modified by deducting one-half of this sum, and, so modified, be affirmed for the sum of $10,540.53. 9 Utah, 236, 33 Pac. 1039. The defendant appealed to this court.

J. M. Wilson, for appellant.

J. L. Rawlins, for appellee.

Mr. Justice GRAY, after stating the facts in the foregoing language, delivered the opinion of the court.

Notes

1. Where the partnership is merely at will, the right of one partner to terminate it must be conceded; but where, by agreement, it is to continue for a time stipulated, the party seeking a dissolution before the expiration of the time ought, in justice, at least be required to act in good faith, and at a reasonable time, and in a reasonable manner. In the case of a partnership for a stipulated time of duration, where the business has been established, is becoming profitable, and has good future prospects, to allow one of the partners sua sponte to expel the other, and dissolve the partnership, with a view to appropriate the business to himself, would be to adopt a doctrine at once inequitable and unsupported by either reason or justice. There seems to be no good reason why a person should be allowed to commit a breach of his contract in such case, while in all other cases of flagrant violation, not within the partnership, he would be compelled to specifically perform, if it was within his power to do so. Why should a partner be thus allowed to ruin the business of the firm from mere caprice, or of his own volition, without cause, and in violation of his agreement, and sacrifice the entire object of the partnership? That such a violation may entitle the injured partner to damages is no answer, for damages, in many cases, must necessarily prove to be utterly inadequate to compensate for the destruction of a profitable and growing business; and, besides, this mode of redress is usually slow and unsatisfactory, and is not a remedy that will or can do complete justice between the parties. Where there is such a breach between the partners as to render continuance impossible, or when dissension has dispelled the hopes, prospects, and advantages which induced its formation, or if, for any just cause, the partnership ought to be dissolved before the expiration of the term, then a court of equity is competent to grant relief. But it would scarcely seem to come within the principles of justice to permit one partner to expel another from a profitable business

for some real or fancied wrong or mismanagement, and then continue the business himself, and profit by his own wrong, responsible only in damages.

Mr. Justice Story, in his Commentaries on the Law of Partnership (section 275), speaking of the power of one partner to dissolve the partnership where the time of duration is stipulated, says: 'In cases where the partnership is, by the agreement, to endure for a limited period of time, the question whether it may within the period be dissolved by the mere act or will of one of the partners, without the consent of all the others, does not seem to be absolutely and definitely settled in our jurisprudence, although it would not seem, upon principle, to admit of any real doubt or difficulty. Whenever a stipulation is positively made that the partnership shall endure for a fixed period, or for a particular adventure or voyage, it would seem to be at once inequitable and injurious to permit any partner at his mere pleasure to violate his engagement, and thereby to jeopard, if not sacrifice, the whole objects of the partnership; for the success of the whole undertaking may depend upon the due accomplishment of the adventure or voyage, or the entire time be required to put the partnership into beneficial operation.' In Gerard v. Gateau, 84 Ill. 121, Mr. Justice Scott, delivering the opinion of he court, said: 'A party who is the author of the ill feeling between himself and partners ought not to be permitted to make the relation he has induced the ground of a dissolution of the partnership. His conduct may have been taken with a view to that very result, and it would be inequitable to allow him advantage from his own wrongful acts. It would allow one partner, at his election, to put an end to his own deliberate contract, when the other has been guilty of no wrongful act or omission of duty. The results flowing from a premature dissolution of a partnership might be most disastrous to a partner who had embarked his capital in the enterprise.' So, in Henn v. Walsh, 2 Edw. Ch. 129, the vice chancellor said: 'A partnership agreement, like any other, is binding upon the parties; and they must adhere to its terms. Neither partner is at liberty to recede from it against the will of the other, without a sufficient cause. Mere dissatisfaction by one partner will not justify him in filing a bill for a dissolution where, by the express agreement, it is to continue for a definite term; and this court will not interfere to dissolve the contract upon such ground.'

The views thus expressed have the apparent support of most elementary writers, and seem to be in conformity with the doctrine prevailing in England. The contrary doctrine, if not indefensible, is founded on reasons exceedingly artificial. It is based on the ground that one partner has the right to found his claim, real or otherwise, to immediate safety and indemnity, on an obvious injury to the interests and rights of another, which is alike inequitable and unjust; and we think it is not supported by the weight of authority. Story, Partn. §§ 275, 276; Story, Eq. Jur. § 673; Lindl. Partn. (5th Ed.) bk. 4, c. 1, p. 575, § 2; Ferrero v. Buhlmeyer, 34 How. Prac. 33; Pearpoint v. Graham, 4 Wash. C. C. 232, Fed. Cas. No. 10,877; Peacock v. Peacock, 16 Ves. 49; Cash v. Earnshaw, 66 Ill. 402; Van Kuren v. Trenton Co., 13 N. J. Eq. 302.