Catskill Bank v. Horace Gray & the Ulster Iron Co. , 1851 N.Y. App. Div. LEXIS 145 ( 1851 )

By the Court, Wright, J.

The judge who tried the cause decided that the defendants, under the pleadings and evidence, were jointly liable to the plaintiffs for the moneys loaned by the latter, and which were used in and about the business of manufacturing iron at the Ulster Iron Works, in 1847. This is correct, if by the terms of the agreement of September, 1843, Horace Gray and the Ulster Iron Company sustained the relation of partners, as respected third persons, and the money was loaned to the supposed partnership or to the agent of the partnership as such. If they are to be made to respond jointly for the debt due to the bank, it must be on a construction of that agreement; the money having been used at the works during its continuance in the business of manufacturing iron.

It is now well settled that the rule is not universal that a communion of profits creates partnership. A party may stipulate for a compensation proportioned to the profits of a particular trade or business, and not be a partner even as to third, persons; but if he stipulates for an interest in the profits of the business, as such, which would entitle him to an account as a partner, then he is to be holden liable to third parties as a partner. The compensation of a servant or other employee, for personal services, may be regulated by the profits- of the business. So, also, where land or other property is leased to another, for a particular business, the rent may be stipulated to be" paid proportionately to the profits. (Champion v. Bostwick, 18 Wend. 184. Vanderburgh v. Hull, 20 Id. 70. Burckle v. Eckart, 1 Denio, 341. Heimstreet v. Howland, 5 Id. 68. Chase v. Barrett, 4 Paige, 160. Boyer v. Anderson, 2 Leigh, 550. Perrine v. Hankinson, 6 Halstead, 184. 3 Kent's Com. 32. Gow on Part. 19. Col. on Part, by Perkins, sec. 25. Loomis v. Marshall, 12 Conn. Rep. 69.) The reason given for the distinction above stated is this. In a case where the stipulation is for a compensation proportioned to the profits, without having a specific lion upon such profits to the exclusion of other creditors, it is for the interest of the creditors that the party should be compensated in that way, instead of receiving a fixed compensation, whether the business produces profits or otherwise. On the other hand, if the stipulation is for an interest in the profits of the business, which would entitle the party to an account, and give him a specific lien or a preference in payment over other creditors, and the full benefit of the increased profits of the business, without any corresponding risk in case of loss, it would operate unjustly as to other creditors. Hence, it is right in principle, that the party should be holden to be liable to third persons as a partner in the latter case, but not in the first. (Cary on Part. 11, note I. Champion v. Bostwick, 18 Wend. 184.)

The agreement of September, 1843, is set forth in the complaint, and not being denied by the answer, is to be taken as true. By that agreement, the Ulster Iron Company leased to Horace Gray, for the term of five years, certain real property in Saugerties, in the county of Ulster, on which were mills, machinery and water power for the manufacture of iron. As rent of the demised premises, Gray stipulated to pay to the company “ one fourth part of the net profits arising from the premises, and the manufacture of iron thereon, after deducting all charges, excepting commissions on sales at Hew-York, the personal services of Gray, and the general superintendence at Saugerties, which were not to be charged in making up profits.” Gray was to provide all the funds necessary for the manufacture of bar iron to the best advantage on the demised premises, and all the necessary capital in cash or otherwise, as should be required for such manufacture. He was authorized to expend in putting the works in order, and in additional machinery, a sum not to exceed $5000, for which sum so expended, the company was to allow him interest, until the accruing rent should be equal to the expenditure. It was further stipulated that any loss that might occur should be charged to the profit and loss account, but the company was not to be liable to repay any moneys already previously received by them as rent, or be liable for any loss or deficiency at the end of the demised term. Of the fourth part of the profits which were to be paid as rent, one-half was to be paid annually, and the balance at the end of the term, with interest; such interest to be yearly added to the principal. Gray, in furnishing the capital to carry on the business, was authorized to charge interest on his advances, at the rate of six per cent per annum, and was to allow interest on all moneys in his hands arising from the manufacture. It was also agreed that the Stockbridge and Port Henry pig iron might be used in the manufacture of iron on the demised premises, and if so used should be charged at its fair market price; the price, and all other questions under the agreement, to be decided by Joseph Tuckerman of the city of New-York, who was to make up the yearly accounts of the profits.

Is this a stipulation for a-qoroportion of the profits as a measure of compensation for the use and occupation of the demised premises, or is it, in contradistinction thereto, an agreement for a specific interest in the profits as profits? I think that it is clearly of the latter character. The provisions of the agreement look to a direct interest, by the company, in the profits to be actually made from the manufacture of bar iron on the premises. The contract between the parties, is, in effect, this. A company, incorporated for the manufacture of iron, having mills, machinery and water power, agree with an individual for the use of the same for five years. The object of the contract is the manufacture of iron. The funds needed are to be advanced* the labor performed, and the business actually superintended by Gray. Gray is to procure and disburse the money for the purchase of materials, the payment of workmen, and to meet all the expenses incident to the manufacture, to the best advantage to the parties. An account of the net profits is to be annually made up. In making up this account, Gray is to be allowed by the company, interest on his advance of funds, and to pay interest on all moneys in his hands arising from the manufacture. All charges are to bo deducted, except commissions on sales at Mew-York, Gray’s personal services, and the general superintendence of the establishment. Should a certain description of pig iron be used, it is to be charged in the account at its fair market price, and in case of disagreement as to the price, it is to be adjusted by the person named to make up the yearly account of profits. The losses that might occur are to be charged in the profit and loss account, although the company are not to be liable to repay any moneys already previously received by them, or be liable for any loss or deficiency at the end of Gray’s term. The account of actual profits being annually made up in accordance with the stipulations, the company is to have the one-fourth part thereof.

It is unnecessary to decide whether under this agreement, as between the parties themselves, they would be partners ; but as respects third persons, it appears to me that that relation legally exists. What was to be received by the company was only payable out of profits actually made in the manufacture of iron. They had then a direct interest in such profits. As was said in Dob v. Halsey, (16 John. 40,) “ he who takes a part of the profits indefinitely, shall by operation of law bo made liable for losses; upon the principle, that by taking a part of the profits, he takes from the creditors a part of that fund which is the security for the payment of their debts. (See also Everett v. Coe, 5 Denio, 180; Hasketh v. Blanchard, 4 East, 144.) The case is not like that of Heimstreet v. Howland, (5 Denio, 68,) where one leased a ferry to another, the latter to take charge of the business, pay all the expenses, and pay over to the lessor one-half of the gross receipts for ferriage; and it is clearly distinguishable from Boyer v. Anderson, (2 Leigh, 550,) and Perrine v. Hankinson, (6 Halst. 181.

/"it is urged that the Ulster Iron Company, being a corpora-* tion, could not legally form a partnership with an individual.^ This company was incorporated in 1831, for the purpose of manufacturing iron. It might, therefore, lawfully exercise the powers expressly granted to it, and those necessarily to be implied, to enable it to answer the specific purpose of its creation. I entertain no doubt that under its charter, the company waS capable of making the contract with Gray set forth in the pleadings. iThat contract related to the business for which the company was incorporated, and was but a mode of furthering the specific purpose of its creation. Strictly, perhaps, corpora-1 tions should be, and are restricted from contracting partnerships I with individuals or corporations, and as between the parties to 1 the contract, acting upon equal knowledge, a question of validity | might be raised; but a corporation may contract with an indi- f vidual in furtherance of the object of its creation, the effect of Í which contract may be to impose upon the company as respects f the community, the liabilities of a partner, 'j I cannot think that a corporation may so shape its contracts relating to the business for which it was incorporated, as to' share jointly with an individual in the profits of such business ; subtract its interest in the profits, from the fund on which the creditors of the concern had a right to rely for the payment of the debts due to them; and when called upon by such creditors, be permitted to escape liability altogether, on the ground that the profits were realized as the partner of an individual, which relation the corporation could not legally occupy. I know of no sound reason why a corporation, more than a natural person, who participates in the profits, as such* of a particular business in which it may lawfully engage, should not be holden liable to the public for losses.:

It is further insisted by the counsel for the company, that the// money was not loaned to the supposed partnership, or to the agent of the partnership as such; that the loans were made to Burt as agent of Horace Gray, on his drafts on H. Gray & Co.; that the transaction was a discount and purchase of negotiable paper, and the plaintiffs’ remedy is confined to the paper; that the fact that the money received by Burt was applied to the business of the partnership, does not entitle the plaintiffs to <■ recover it of the copartners. The money sought to be recovered was loaned to Burt, as superintendent of the Ulster Iron Works, and applied by him to the business being conducted under the agreement of September, 1843. The plaintiffs do not seek to directly charge the defendants as parties to the bills of exchange, but bn a joint liability for money had and received. The fact that Burt was superintendent of the iron works when the loan was effected and applied, is found by the judge. He was the superintendent or agent at the works, in carrying out the agreement between Gray and the company. The money was obtained by him as such superintendent and applied for their joint and mutual benefit. The bank certainly knew that Burt was acting as the agent of third persons in procuring the loan. He professed to act for others; and it is not unreasonable to conclude that the plaintiffs, in loaning these funds, had regard to the eventual liability of the principals, whoever they might be, if it' should become necessary to resort to them. In Emly et al. v. Lye et al. (15 East, 6,) the action being upon a bill of exchange drawn by one of the partners of a concern, in his own name, which was discounted by the plaintiffs, and the money went to the use of the firm, it was held that the plaintiffs could not recover, either upon the bill or the money counts. Lord Ellenborough observed that the counts on the bill had been properly abandoned, for unquestionably on a bill of exchange drawn by one only, it cannot be allowed to supply by intendment the names of others, in order to charge them; and considering it a mere discount or sale of the bill, he also held that there was no j oint liability of the defendants for money had and received, and that it was the individual transaction of the partner who drew the bill; and all the other judges expressed similar opinions. I do not, however, deem this case in all its aspects similar to the one under consideration. The agreement of September, 1843, contemplated that there should be a general superintendent of the business of manufacturing iron, though as between the parties thereto, payment for his services was not to be charged in maMng up the account of profits. This superintendent draws the bills that were discounted by the plaintiffs, signing them in the character of superintendent. He must have acted exclusively as the agent of Gray, in drawing and negotiating the bills, to render the facts of this case similar to those of Emly v. Lye. The facts must have shown the transaction to have been a mere discount or sale of bills. But it seems to me necessarily to be implied from the decision of the judge that he found the fact that Burt acted as the agent of the defendants, and not exclusively as the agent of Gray. Whether that finding is sustained by the evidence, is not a question to be entertained on a bill of exceptions.

[Albany General Term, December 1, 1851.

Parker, Harris and Wright, Justices.]

New trial denied.