Parker v. Canfield , 37 Conn. 250 ( 1870 )

Seymour, J.

During the year 1865 the defendants Can-field and Hutchinson became interested in the business which the defendant Andrews was engaged in at New Haven. From time to time during that year they furnished him with money as capital under an arrangement that they, Canfield and Hutchinson, should each furnish $5,000, and that they each should have one-sixth of the net ¿profits, and that the arrangement should continue till September 1st, 1868. The affairs of the company were to be under the management of Andrews, and carried on in his name. The details of the contract were however not fully arranged, and it was always understood that the agreement, when its terms were fully settled, should be reduced to writing.

In January, 1866, counsel was applied to'to draw the papeí’s and the joarties then learned that their agreement would make them partners. Thereupon it was agreed by the defendants that the money invested by Canfield and Hutchinson should be regarded as a loan, and the attorney was requested 'to- prepare a writing which should secure to them one-third of the profits without subjecting them to liability as partners.

The writings, which are set forth at length in the committee’s report, were accordingly prepared and executed.

The defendants while acting under their verbal agreement were clearly partners, both inter se and as to third persons. But the plaintiff’s debt arose from moneys furnished to Andrews while he was carrying on the business under the writings, and by the written agreement the relation of the defendants to each other was materially changed. They were no longer partners inter se, and if chargeable at all, the defendants Canfield and Hutchinson are chargeable only as dormant partners.

The plaintiff claims that parties participating in the profits of a business are in general subject to the debts contracted in the prosecution of that business, and that Canfield and Hutchinson were under the written agreement, as well as under the verbal arrangement, to participate in profits in such manner as to fall within the operation of the general rule. The defendants earnestly deny these claims of the plaintiff.

The sharing in the profits of a business was formerly regarded as decisive to charge the party so sharing with liability as partner as to third persons ; but the modern cases admit of exceptions to the general rule, and the defendants contend -that the exceptions have in truth subverted and supplanted the rule, so that now the mere participation of profits is no ground whatever for charging the participant as a dormant partner. On this point we cannot adopt the views of the defendants. The rule itself is firmly established as part of the common law of England and has been generally recognized as law in this state. We concede that the rule is subject to important' exceptions, the principal of which is that of servants and agents, who are permitted to receive a certain percentage of the profits of a business as compensation for their services in that business. This exception was adopted in Connecticut in a; nicely balanced case, that of Loomis v. Marshall, 12 Conn. R., 69. The court deemed it { a matter of public policy that enterprising citizens who possess industry and skill, but are without capital, might be employed for a compensation proportioned to the avails of their labor and skill, without involving themselves and tlieir employers in the responsibilities of partnership.”

In this class of cases the agent receives what is termed a commission on the profits, as a mode of payment adapted to secure and increase exertion.

This distinction between profits received as such by a principal, and profits received by an agent as compensation for services, is nice and sometimes difficult of application, but is fully established.

There are other cases where compensation from a share of profits has been allowed for other benefits than services of an agent, in which, under the idea that public policy required the exception and that creditors are not injured but rather benefited by it, such sharing of profits has been held not to-incur the liability of a partner; as in the case of Perrine v. Hankinson, 6 Halsted R., 181, where one received by way of rent a portion of the profits of a tavern.

But, notwithstanding- these exceptions, we think the general rule remains beyond dispute, that participation in the profits of a business is primd facie strong evidence of a partnership in it.

But the defendants say that even if the general rule be as we have stated it, Canfield and Hutchinson do not come within its operation, for they say that they were not to participate in “ the profits,” but by the. express terms of the written agreement were merely to receive “ a sum equal to the profits,” not as profits, but simply as compensation for their services in procuring the loan for Andrews. This point, and points immediately connected with it, were strongly urged in argument and have been carefully examined.

In Waugh v. Carver, 2 H. Bla., 285, and in the cases following the authority of that case, the rule and the reason of it are briefly expressed in the language of Justice DeGrey: “ By taking part of the profits he takes from the creditors a part of that fund which is the proper security to them for the payment of their debts.” Now it can make no difference with creditors whether a sum equal to a certain share of the., profits is taken, or the same share of the profits is taken eo nomine. The fund on which the creditors rely is affected to the same extent and in the same manner, under the one form of expression as under the other.

The rule and reason of it as expressed by Justice DeGrey, have been much discussed by judges and lawyers. Judge Story questions the original justice and wisdom of the rule, but admits its binding authority subject to certain established exceptions, and suggests that the rule is one of evidence, and that “ admitting that a participation in the profits will ordinarily establish the existence of a partnership between the parties in favor of third persons in the absence of all opposing circumstances, it remains to be considered whether the rule ought to be regarded as anything more than presumptive proof thereof and liable to be repelled and overcome by other circumstances.” Story on Partnership, § 38.

Judge Story’s view of the matter when extended comes to this, that participation in the profits of a business is high evidence that the party thus participating is really and in truth interested in the business itself as principal, and that the party in whose name the business is done is really agent of the parties receiving the profits, and that a party who receives a share of the profits of a business may in general justly be considered one of the parties for whose benefit it is conducted.

Now if this be the true ground of the general rule, and we are inclined to think it is one of its foundations, the rule and the reason apply as well to a party who receives a sum equal to a certain share of the profits of a business, as to a party thus receiving such share of profits by the name of profits. If the receipt of a share of the profits of a business is evidence that the party receiving such share is interested in the business itself, the receipt of a sum equal to such.share and measured by it, is like evidence, and if in the one case the business is l’egarded as carried on for the benefit of the recipient of the money, it must be equally so regarded in the other case. The mere use of the expression “ a sum equal to the profits” in lieu of the word “ profits,” does not change the nature of the contract. There are indeed cases where money received may appropriately be regarded as a sum measured by profits rather than as profits .themselves; but whether they shall be so regarded depends upon no arbitrary use of phrases, but upon the nature of the contract and the real consideration upon which the money ps received. We' have already seen .that a share of profits paid to agents to secure exertion is not such a participation in profits as to make the agent liable as partner, and in such cases the money so paid is spoken of as a sum equal to or measured by profits, rather than as a share in the profits themselves.

But the cases do not turn upon the use of a particular phrase, but on the nature of the contract itself, and the nature of the consideration on which the promise to pay part of the profits to the agent is founded, namely, faithful service in the business.

We must then examine the contract itself, and ascertain from its nature what the real consideration was upon which the defendants Canfield and Hutchinson were to receive what it is stipulated they should receive under it, and whether it is or is not substantially a share of the profits. The defendants claim that by the express terms, under seal, of the contract itself, the consideration is simply as a compensation for the trouble, time and expense which Canfield and Hutchinson were put to in procuring the money to loan to Andrews, and that the consideration has no connection with the business to be earned on, but is independent of it, and that the profits are referred to as a mere measure of compensation for services already performed, and indicate no interest in the business, and do not arise from any interest in the business itself.

This construction of the contract seems to us forced and unnatural. The committee finds that the defendants expected large profits, and the turning point of the contract was to secure a share of these large profits to the defendants, Can-field and Hutchinson. These large profits for three years, as being’ in consideration for past services, presents a disproportion too gross to be regarded as the true meaning of the contract.

The mere procuring the money by Canfield & Hutchinson as a past and completed event was an insignificant matter. It derived all its value from its connection with the continued use of the money in Andrews’s business. The real consideration then is procuring and actually lending the money for the term of three years on the terms expressed or implied in the writing. Canfield and Hutchinson were to receive the sum stipulated because they furnished a loan of money to be used in the business of Andrews, carried on by him at No. 50 State Street, on account of the benefit that business would derive from the use of the money loaned. The sum stipulated to be paid on such'consideration is in its nature a profit. That is its appropriate name, and the parties cannot change its nature or obviate its consequences by giving it the name of a sum equal to the profits. We think it is implied in the written contract, as it was in the verbal arrangement, that the money furnished by Canfield and Hutchinson, first as capital and afterwards as a loan, should be used in the particular business of Andrews during the three years; and we attach some importance to this fact, not only by way of inference as above stated as to the true consideration of the agreement to give a share of the profits to Canfield and Hutchinson, but also as bearing upon the point to be spoken of hereafter, that the business carried on by the aid of these funds was in truth the business of all these defendants, prosecuted for their joint benefit, and as to the time of its duration, its subject matter, and the amount of money that should be used in it, moulded and controlled by the concurrence and joint contract of them all.

The real consideration upon which Canfield and Hutchinson were to receive the amount stipulated to be paid to them is that they were interested in the business. Upon this basis they were fairly entitled to a share of the profits. Upon any other basis the agreement giving them a sum proportioned to profits is unnatural and unreal. If a party is to receive profits in consideration of furnishing capital, he is clearly a partner, and is a partner quoad third persons even though it should be stipulated that the capital should be regarded as a loan and be repaid as such by the acting partner with interest, and although it should be further stipulated that the party furnishing capital should be regarded as a mere creditor iii respect to the money by him furnished and should have no interest in the stock in trade. That is in substance the relation in which Canfield and Hutchinson stand to the business of Andrews. They have the” same interest in the results of the business, and of the same kind, that Andrews himself has, and the reason why this interest in profits is given them, is that they under the name of a loan have furnished means to carry on the business.

We have already seen that Justice DeGrey placed the liability of dormant partners on the ground that they take part of the fund on which creditors rely, and that Judge Story placed the liability on the ground that the receipt of a share of the profits was evidence of an interest in the business itself. In certain late English cases, much discussed, the liability is said to arise from an agency expressed or implied of the ostensible partner. The dormant partners are regarded as principals, and the liability is said to exist only when such element of principal and agent is involved in the relation of the parties to each other.

In the case under consideration the defendants are liable under each and all these views of the foundation of liability. There are no circumstances here to oppose the conclusion derived from their participation of profits, that they have a real interest in the business itself. The business is one in which the defendants are all interested. The defendants are all principals,. Andrews as their agent is using funds furnished by them all, in a manner agreed upon by them all, for their joint benefit and profit.

The rule under which we hold these defendants liable as partners has been much discussed and criticised, and has by many been regarded as harsh and unreasonable, but as before stated it is the recognized rule of the common law, and has been adopted by general consent as the law of this state, and recognized as such in the case of Loomis v. Marshall. Our statute of limited partnership is founded upon the supposed existence of the rule. By that statute funds may be furnished for-a partnership business, and a limited liability incurred by the special partner. But if one may furnish funds to be used in a particular trade, and take a note for tlie money and receive a share of the profits of the business as a compensation for the use of the money, the statute is superseded.

By the admitted exceptions to the general rule agents and servants employed in a business may participate in profits as a compensation for services without involving themselves in the responsibilities of a partnership. If we should now decide that parties lending money to be used in a business may also participate in profits as a compensation for trouble, time and expense in procuring the money lent, the two exceptions to the rule would annihilate the rule itself. By the first exception the party conducting a business as its agent, and by the second the party furnishing the capital, would be exempt from liability, and thus there would be no case left where parties could not by the force of words alone evade the rule.

A business may in general justly be regarded as carried on for the benefit of those who participate in its profits, and the burdens and responsibilities of such business are in general justly cast upon those for whose benefit it is conducted. There may be exceptions, but we are clear that the case under consideration justly falls within the general rule and must be governed by it.

Another question was made in the case, whether the plaintiff’s debt had not been paid or extinguished by renewal notes received by the plaintiff from Andrews alone since the termination of the partnership. If a party voluntarily takes the note of one of several partners in discharge of a copartnership debt the debt may be discharged, but these renewals were before the plaintiff knew of the copartnership, and were not expressly or by inference taken in payment or discharge. The original indebtedness against the defendants therefore still remains, and our advice to the Superior Court is that judgment be rendered for the plaintiff against the defendants for the full amount found due by the committee as originating between January 8th, 1866, and September 1st, 1868.

In this opinion the other judges concurred