Arnold v. Wainwright , 6 Minn. 358 ( 1861 )

By the Court

Flandrau J.

— This Court has on several occasions been called upon to decide questions involving the rights and interests of partners in the partnership effects, and we have always held that such interest is a share (limited by the articles of partnership) in the surplus remaining of the partnership property, after paying 'off all the debts of the partnership. Pease, Chalfant & Co. vs. Rush, Pratt et al., 2 Minn. R., 107; Moss vs. Pettingill, 3 Minn. R., 216; Harmon, Aiken & Gale vs. Schalck & Fenske, crate, page 265. Each partner has a lien upon the partnership property, to the end that he may insist upon its being first applied to the payment of the firm debts; or as it is sometimes expressed, the partnership property is held by the partners subject to a trust for the payment of the firm debts, and neither of the members can divert it into any other channel. This interest of the individual partner in the assets of the firm is assignable, and may be taken in execution.

There is very little difficulty in adjusting the rights of partners, and the creditors of partners, in the partnership property, when once the fund and the liabilities are ascertained, as the law governing these relations is pretty well understood and settled. A much more troublesome question frequently arises as to what is, and what is not, properly partnership property, especially in regard to real estate not designated in the conveyances to the partners, as belonging to the stock of the partnership.

In regard to all lands wbicb are ascertained to be partnership property, the rule in equity is, that they shall be treated as mere personalty, and be governed by the rules and general doctrines applicable to that species of property. Story on Partn., sec. 93. “ The ground of this doctrine appears to be a special interference of equity in favor of commerce, whereby the trust is separated from the legal estate, and the latter being left to pass according to the nature of real property, the trust estate is made subject to the rules of partnership personal property, so far as concerns the interest of the partners in relation to one another, and those who are in privity with them. 1 Am. Lead. Ca., 336, note to Coles vs. Coles and Dyer vs. Clark.

Whether land is to be deemed part of the partnership stock depends upon the agreement of the partners, which agreement -may be either express or implied. After a very careful examination of the authorities, and the statutes of this State concerning trusts and fraudulent conveyances, we are of the opinion that lands may be converted into partnership stock by parol agreement of the partners, or by such facts and circumstances attending its acquisition, or use, as will raise an implication that the. partners so intended. The legal estate will be controlled by the terms of the conveyance, but equity will subject the lands to the same liabilities imposed upon the other partnership estate, and restrict the partners to the same extent in their disposition of them as obtains in regard to the personalty.

The elementary writers do not furnish a very satisfactory solution of the question as to what character of agreement between the partners will work a conversion of lands into partnership stock. They agree that it may be accomplished by agreement express or implied,” and we think it is the necessary result of their views as expressed in their text and the numerous cases cited by them, that the intention of the partners, to be ascertained from their acts or agreements is to govern, and that no express agreement in writing is necessary. See Collyer on Part., ¶. 68 to 78; Story on Part., secs. 92-3; 3 Pent. Com., 37, Title, “of stools in land;” 1 Maddocks Ch., 93 — 4; Lomax's Dig. of the Law of Real Property, Vol. 1, p. 212-13, marginal; Adams' Doctrine of Eq., marginal. This latter author in treating the subject of trusts, adopts the decision in the case of Dale vs. Hamilton, 5 Hare, 369, 382; 26 Eng Ch. R., 368, and says :

“ In accordance with the same principle, it is held that if land is acquired as the substratum of a partnership, or is brought into and used by the partnership for partnership pur-' poses, there will be a trust by operation of law for the partnership as tenants in common, although a trust may not have been declared in writing, and the ownership may not be apparently in all the members of the firm, or if in all, may apparently be in them not as partners but as joint tenants.”

In a very recent case in Maine, the whole subject was ably discussed, and it was held that the trust attached to lands owned by the partnership without regard to the character of the deed by which the partners held. Crooker vs. Crooker, published m the Am. Law Reg. for July, 1861, and which will be reported in 46 Maine R., 250. We make the following extract from the opinion of the Court from page 544 of the Am. Law Register.

“ Each partner is entitled to regard the whole estate as held for his indemnity as against the joint debts, and as security for the ultimate balance which may be due to him for his own share of the partnership effects. Story on Eg., Vol. 2, sec. 1243, Hoxie vs. Carr, 1 Sumner, 173; Buchan vs. Sumner, 2 Barb. Ch. R., 198-9.

“ In relation to real estate when it is part of the partnership effects, it'is tó be treated in equity to all intents and purposes as a part of the partnership funds ; and whatsoever may be the form of the conveyance, it will be held subject to all the equitable rights and liens of the partners which would apply to it, if it were personal estate; and this rule prevails notwithstanding the legal title may, by the death of the particular party holding it, have been cast by descent upon his heirs at law. 1 Story’s Eg., sec. 647, and cases there cited; Dyer vs. Clark, 5 Metcalf, 562. Such is the rule, also, notwithstanding the estate may have been conveyed to the partners by such deed as under our R. S. of 1841, ch. 91, sec. 13 and the revision of 1857, ch. 13, sec. 7, would at law make them tenants in common. Burnside, vs. Merrick, 4 Met., 537; Howard vs. Priest, 5 Met., 582; Fall Fiver Whaling Co. et als. vs. Borden, 10 Cush., 458, before cited. Nor does it make any difference that the deed makes no reference upon its face to the grantees as partners. Tillinghast vs. Champlin et al, 4 Ames (P. I.,) 173.”

"Where the land is purchased with partnership funds, to be used and applied to partnership purposes, and is treated by the partners as part of the partnership stock, it will be treated in equity as held in trust tor the. partnership until the partnership account is settled and the partnership debts are paid. Howard vs. Priest, 5 Met., 582; 1 Am. L. C., 336, note.

It is contended that no trust in favor of a partnership can arise under our statute of uses and trusts, when the lands are conveyed to the individual members of the firm as tenants in common, or otherwise than as partners. A careful examination of this statute {Comp. Stats., 382-3-4,) satisfies us that, although the act was designed to, and does do away with some trusts that would otherwise result, it was not the intention of the framers to cut off trusts of this nature. If the statute contains any prohibition of such a trust as we are considering, it must be found in section 5, which declares “ That every disposition of lands * * * shall be directly to the person in whom the right of possession and profits shall be intended to be vested,” &c. But this section is qualified by the succeeding one, which declares that it shall not extend to trusts arising or resulting by implication of law,” &c. And 'section 10 distinctly recognizes “implied or resulting trusts,” by providing that such trusts shall not “ be alleged or established to defeat or prejudice the title of a purchaser for a valuable consideration, and without notice of such trust.” Nor do we think that the recognition and enforcement of such a trust conflicts in any manner with the statute of frauds. Sec. 6, p. 457, of the Comp. Stats. provides as follows :

" No estate or interest in lands, other than leases for a term not exceeding one year, nor any trust or power over or concerning lands or in any manner relating thereto, shall hereafter be created, granted, assigned, surrendered or declared, unless by act or operation of law, or by deed or conveyance in writing subscribed,” &c. This section expressly excepts such trusts as the one under consideration, resulting by operation of law from the peculiar situation of the lands, and the relation of the grantees or owners. That the powers of the court of equity were not to be limited by this act except where specially provided, appears more clearly from section 10, which provides that “ nothing in this chapter contained shall be construed to abridge the power of courts of equity to compel the specific performance of agreements in cases of part performance of such agreements,” meaning necessarily such agreements as would otherwise fall within its prohibitory clauses.

The remaining question is, whether the Plaintiff shows that the lands in controversy were partnership property. It appears that the Plaintiff and the Defendants, Alfred F. and John L. Howes, on the 22d of June, 1857, formed a partnership under the name of “ Howes & Wainwright,” the object of which was the establishment of a forwarding, commission, warehousing and storage business. Prior to this date John L. Howes owned one half, or the southerly forty-four feet of the land in dispute. At the formation of the co-partnership, the Plaintiff, at the request of John L. and Alfred E. Howes, purchased the other half or the northerly forty-four feet of said land. It was then agreed between the partners verbally that the eighty-eight feet should be put in, and become part and parcel of the capital stock of the firm, to be used and employed for the sole benefit of the firm, and for carrying out the objects of the co-partnership. The partners then by a series of deeds, vested in each member of the firm one equal undivided third part of the whole eighty-eight feet. Thus, the Plaintiff conveyed to John L. Howes two-thirds of the northerly forty-four feet, and John L. Howes conveyed to the Plaintiff one-third of the southerly forty-four feet, and to Alfred E. Howes two-thirds of the whole eighty-eight feet. The two first deeds were executed on the 22d day of June, 1857, the day on which the co-partnership was formed, and the deed to Alfred F. Howes was executed on the 26th day of the following August. The title therefore so far as was apparent from the ocnveyances was held by the members of the firm as tenants in common.

In July, 1857, prior to the deed to Alfred E. Howes, the firm commenced the erection of a warehouse on the southerly forty-four feet of the land, for the purpose of carrying into effect the objects of the co-partnership, reserving the northerly forty-four feet for the convenience of the partnership bnsiness. The building was completed in the spring of 1859, the Plaintiff paying one-third of the cost, and the other two members each engaging to do the same. Partnership debts to a considerable amount were contracted in the erection of the building. The business of warehousing, forwarding, commission and storage was after the erection of the building actually entered into by the firm, and conducted in the building until the dissolution of the partnership.

It is contended by the counsel for the Defendants that as the object of the partnership was the establishment of the business of forwarding, commission, warehousing and storage, the partnership did not go into effect until the business was actually commenced after the erection of the warehouse. ■This view we cannot adopt. It is at variance with, and too narrow a construction to be placed upon the acts and agreements of the parties. The nature of the business contemplated by the partnership required that the principal part of the capital stock of the firm should consist of the warehouse, the land upon which it stood and a convenient area about it. No step could be taken towards transacting either branch of the proposed business, — commission, forwarding, warehousing or storage, without a warehouse or store, which must have been either purchased, rented or built. The partners adopted the latter. This step taken, and very little more capital stock was needed to carry on the business save the labor and skill of .the several partners. Were the acts alone of the parties, without their agreements, placed before us as our guide, we could hardly resist the conclusion that it was their intention to make a contribution of the land and building to the capital stock of the firm.

We have so far considered the question as between the partners themselves. We will now examine it in its bearings upon third parties. If the conveyances, as in the case at bar, make no reference to the land being partnership stock, but vest the title in the several members as tenants in common, then the trust which arises between the partners cannot be enforced against a Iona fide purchaser or mortgagee without notice, (Comp. Stats., 382, sec. 10,) but will be enforced against a purchaser or mortgagee from one partner, or his representative, who has notice actual or constructive that the land is partnership property. Lomax's Dig., Vol: 1, p. 254-5; 1 Am. Lead. Gas., 339, note to Coles vs. Coles and Dyer vs. Clark, Edgar vs. Donolly, 2 Munford, 387; Hoxie vs. Carr et al., 1 Sumner 174, 192; McDermott vs. Lawrence, 7 Serg. & Rawle, 438; Lord vs. Heron, 4 Munford, 316; Frink vs. Branch, 16 Conn., 261, 271; 3 Kent's Com., 39, 40.

In the case at bar, the Defendants Arnold and Samuel R. Howe's are charged distinctly with actuhl knowledge that the lands were partnership property, and the consideration moving from them for their conveyances are assailed in a manner that would take from them the character of Iona fide purchasers, even if they had not been notified. , The consideration for the assignment of the mortgage to George E. Howes is also alleged never to have been paid, nor intended to have been paid, which places him in the same position with the Defendants Arnold and Samuel R. Howes. The Defendant Swift being merely the assignee of an insolvent estate for the benefit of creditors of course takes the land cum onere.

The Defendants’ counsel pointed out some slight inconsistencies between the allegations in the complaint and the reply, but we regard them as unimportant in the view we have taken of the case except so far as they may reflect upon the credibility of the Plaintiff’s pleadings. The allegations of the complaint alone are sufficient to charge the land in the hands of the Defendants with the trust in favor of the partners, therefore the issues of fact joined must be tried.

The order denying the motion for judgment in lavor of the Defendants on the pleadings is affirmed.