Welbourn v. Kleinle ( 1900 )

On June 1, 1888, John E. Welbourn and William Kleinle entered into a co-partnership under the firm name of Rennous, Kleinle Co., for the manufacture of brushes in the city of Baltimore, which partnership continued until the death of Welbourn, May 17, 1896. The articles of co-partnership stipulated that upon the death of either partner the business should continue on joint account till the 1st of June following, and that if death should occur between January 1st and June 1st of any year, the estate of the deceased partner should be credited with the full share of the year's profits, the same as if he had lived; and that if the survivor should decide to continue the business, he should take the deceased partner's share by giving the notes of the new firm in equal amounts, at nine, ten, eleven, twelve, thirteen and fourteen months, to be dated June 1st after such death, with interest, or such equitable modification of terms as the executor should agree to under the advice of the Orphans' Court. By his will, Welbourn appointed his wife, Lucy H. Welbourn, his executrix, and upon his death she duly qualified as such.

On June 29, 1896, Kleinle, the surviving partner, submitted to Mrs. Welbourn, as executrix, what he designated "a statement of the business of the firm of Rennous, Kleinle Co.," accompanied by his proposition for settlement of the firm's affairs.

This statement showed net assets of $108,487.98, from which he deducted twenty per cent on merchandise and fixtures to cover risk of loss, leaving each partner's share $47,099.91, and his proposition was to give the executrix eight notes for $5,000 each, with interest, maturing in one, two, three, four, five, six, seven and eight years respectively, and to pay the balance, $7,099.91, during the year between June 1, 1896, and June 1, 1897, as collected from debtors of the firm. The executrix accepted this proposition, and on July 18, 1896, conveyed to Kleinle all her testator's interest in the assets of the firm. Kleinle executed and delivered the notes provided for, all of which have been since paid, as well as the balance above mentioned.

In the statement submitted by Kleinle to Mrs. Welbourn, the item of "fixtures and machinery" was stated as amounting to $2,147.10, and the controversy in this case has exclusive reference to the correctness and fairness of this item.

On July 1, 1899, Mrs. Welbourn, as executrix of her husband, filed the bill in this case, setting forth all the above facts, and alleging that her husband, shortly before his death, declared to Mr. Kleinle in her presence that in view of their long time personal friendship and business relations he reposed absolute trust and confidence in his settlement of the partnership affairs after his approaching death, and that he expected and believed that he would make a fair, just and equal division of all the partnership funds and assets; that when she accepted the proposition made to her, she did so in the same confidence, and in the belief that the valuation of the fixtures and machinery shown in said statement was a fair and accurate valuation, having then no knowledge nor means of knowledge of any fact which could lead her to think otherwise; but that she had recently learned that said fixtures and machinery were on May 31, 1896, valued on the books of the firm at $17,848.55, and after deducting twenty per cent as agreed on, were fairly and reasonably worth $14,322.59, on which basis there was still due her as executrix in equity and good conscience $6,087.84, and she prayed that Kleinle should set forth a detailed list of all said fixtures and machinery with the true values thereof, and should account to her for all such values in excess of the $2,147.10 already settled for.

The defendant answered fully, alleging that the valuation of the fixtures and machinery was perfectly fair and accurate. He denied that the paper submitted by him with his proposition purported to show the condition of the partnership, the assets thereof, or the interest of the deceased partner therein, in the sense implied by the plaintiff's bill, and averred that it was no more than a proposition on his part to purchase the interest of his deceased partner at a price which in his judgment he could afford to give, and he denied that he had violated or neglected any obligation resting upon him as surviving partner, or that any act of his was in contravention of the partnership agreement, or inequitable towards the plaintiff. Testimony was taken and the Court (JUDGE SHARP), passed a decree dismissing the bill, from which decree this appeal is taken.

The law governing this case, we think, is free from difficulty, though its application to a transaction between a surviving partner and the personal representative of a deceased partner does not seem to have been considered in any reported case in this State, and from the argument of counsel herein, we apprehend that it is upon the facts alone, that our view differs from that of the learned Judge of the Circuit Court, who filed no opinion with his decree.

In Parsons on Partnership, 441, 2, it is said: "Surviving partners are held strictly as trustees, and their conduct in discharging their trust is carefully looked after by Courts of equity." The law is stated in similar language in Bates onPartnership, sec. 743, and in Perry on Trusts, vol. 1, sec. 178, et sequente. Whether it is technically accurate to designate them trustees is not material, since there is a general concurrence among text writers, and in the decided cases that they are trustees in a certain sense, and that they sustain a fiduciary relation to the representatives of the deceased partner. This doctrine we understood to be tacitly conceded as correct by appellee's counsel, and we do not think it could be successfully controverted, notwithstanding LORD WESTBURY'S contrary view in Knox v. Gye, L.R., 5 Eng. and Irish Appeals, 656, which called forth from the Lord Chancellor, LORD HATHERLEY, "a protest against language" which, he says, "was to me entirely novel, that there was no fiduciary relation between the survivor of two partners and the executor of a deceased partner."

An exception to the rule that a trustee can not purchase the trust property is made in the case of a surviving partner, who may purchase the interest of a deceased partner from his executor or administrator, and in the case before us the articles of co-partnership expressly authorize such purchase; but all such purchases, whether authorized by the articles or not, "on account of the generally dangerous inequality of knowledge with respect to the subject matter of the purchase and sale, are regarded with suspicion, will be carefully scrutinized, and only be allowed to stand, if assailed, where they appear to have been reasonable, fair and just." Tennant v. Dunlop, 97 Va. 342.

In such cases, "the law by which the surviving partner must regulate his conduct is a law of jealousy." Porter v.Woodruff, 36 N.J. Eq. 174.

"The trustee must clear the transaction of every shadow of suspicion." 1 Perry on Trusts, sec. 195.

"The exception is one difficult to make out." Per LORD ELDON in Coles v. Trecothick, 9 Vesey, 246.

As expressed by LE GRAND, C.J., in Hoffman Steam Coal Co. v.Cumberland Coal and Iron Co., 16 Md. 506, "Permission is given to the trustee to show the perfect bona fides of the transaction, and circumstances relieving it from the censure of the law." In Pairo v. Vickery, 37 Md. 485, BARTOL, C.J., said of contracts between persons sustaining fiduciary relations: "Theonus of showing their perfect fairness is cast upon the party who sets them up, and not upon the cestui que trust who assails them." And in Cumberland Coal and Iron Co. v. Parish,42 Md. 606, ALVEY, C.J., said: "It is not necessary to establish that there has been actual fraud or imposition practiced by the party holding the confidential or fiduciary relation, the onus being upon him to establish the perfect fairness, adequacy and equity of the transaction."

With these general principles in view, establishing the duty to inquire into this transaction, let us ascertain how the parties are affected by the facts as disclosed by the testimony.

The only information, either given or offered by Kleinle to Mrs. Welbourn, as to the state of the partnership accounts and assets, is that contained in the following paper submitted to her by him:

Baltimore, Md., June 29, 1896.

MRS. JOHN E. WELBOURN:

The following is a statement of the business of the firm of Rennous, Kleinle Co., and my proposition for a settlement.

Assets.
Cash .....................................                $   6,491 43
Merchandise ..............................    69,293 70
Fixtures and Machinery ...................     2,147 10
_________      71,440 80
Debtors ..................................                   46,946 98
____________
$ 128,879 21
                              Liabilities.
Borrow and Loan acct. ....................    13,846 17
Creditors ................................       197 17
Reserve fund .............................     2,347 35      16,391 23
__________    ___________
Surplus due W.K.  J.E.W.                                   108,487 98
 
Less 20 per cent deducted on merchandise,
machinery, and fixtures ................                   14,288 16
____________
2)94,199 82
____________
Net value of each partner's share.                           47,099 91
My proposition is to give you my notes at
one and eight years, for $5,000 each,
with interest from June 1,'96, amounting
to .....................................                   40,000 00
And balance in equal installments during
the year from June 1, '96 to June 1, '97,
more or less as shall be collected. ...                    7,099 91
____________
$47,099 91
  Your early attention will oblige,
                              Yours, c.,
WM. KLEINLE."

The books of the firm were not tendered for her examination, and no explanation was made as to how the several items were ascertained.

The paper, however, upon its face is "a statement of the business of the firm," and a "proposition for settlement," and there is no ambiguity as to where the statement ends, and the proposition begins. The deduction of 20 per cent on merchandise, machinery and fixtures is plainly part of the proposition for settlement, though it precedes the verbal statement of the proposition. The statement of the business of the firm ends where the surplus is shown of $108,487.98 due W.K. and J.E.W.

The more natural verbal order would have been this:

Surplus due W.K.  J.E.W.                            $108,487 98
Net value of each partner's share      $54,243 99
  My proposition is to deduct 20
per cent from machinery, merchandise,
c., thus:
Amt. due J.E.W. .....................  $54,243 99
Less 1/2 deduction 20 per cent. .....    7,144 08
__________
$47,099 91

and to give you my notes, at one and eight years, c.," as before set out. This shows the same result, but separates more clearly the statement of the business of the firm from the proposition for settlement.

It was his plain duty to render her an accurate statement of the condition of the firm when negotiating with her for the purchase of the interest of his deceased partner, which she represented in her fiduciary relation as executrix of her husband, and such, from its form and designation, she must have understood it to be, and not a mere arbitrary valuation as to any item therein, made by Mr. Kleinle with exclusive reference to his contemplated purchase.

In the leading case of Ogden v. Astor, 4 Sandford's S.C. 350, 334, 335, it is said: "It is incumbent on surviving partners to give to the administrator of a deceased partner a full statement of all the property of the joint concern;" and "to make all the disclosures necessary to enable the administrator to form a correct judgment as to the condition of the partnership affairs," "or which in the mind of a prudent person would be likely to affect the question of the accounts." And in Perry onTrusts, vol. 1, sec. 178, (4th ed.), it is said: "If a partner who keeps the accounts of the firm should purchase his co-partner's interest without disclosing the state of the accounts, the agreement could not stand."

Was this then such a statement as the law requires? Mr. Kleinle in his sworn answer says this paper "did not purport to show the condition of the partnership, nor its assets, nor the interest of the decedent therein," and that it was only a proposition for the purchase of the interest of the deceased partner at a price which he (Kleinle) could afford to give"; though he testified subsequently that after Mrs. Welbourn qualified as executrix, he told her he could do nothing "till he could get up a statementof the business", and that on June 29th he "got the statement ready and sent it to her with a proposition for buying out her husband's interest." A statement of the business of a firm, necessarily implies the exhibition of its existing condition as disclosed by the books of the firm (the only authentic record of its condition from time to time), and not an arbitraryestimate of the condition representing the ideas of a prospective purchaser. Mrs. Welbourn was entitled to the benefit of comparison between the value of her husband's interest in the assets of the firm as ascertained by both the partners on the books of the firm while their interests were common, with the value thereof as estimated by Mr. Kleinle when their common interest had been severed, and when, as a prospective purchaser of its deceased partner's share, their interests had become conflicting, and we think it is plain from the testimony that both she, and Mr. Guest, whom she consulted as to the proposition, understood the statement submitted to be made out on that basis, and with that view, and that the difference between these valuations was measured by the proposed deduction of twenty per cent on merchandise, machinery and fixtures. Mrs. Welbourn testifies: "I supposed the valuations came directly and accurately from the firm's books, it being the close of the business year June 1st," She also says that Mr. Guest had no other knowledge of the condition of the firm than what was conveyed by that paper; that her only object in consulting him was as to the allowance of the twenty per cent discount, and that he told her, as her husband trusted Mr. Kleinle, he supposed he was giving her a fair settlement and he did not know that she could do any better than take it; that she told Mr. Kleinle she thought twenty per cent was a very great deduction, but he said that was the best arrangement he could make for her and there was nothing better for her to do. It is admitted that every item in the statement did truly and accurately represent the actual condition of the firm as shown by the books, except the item of machinery and fixtures which in the statement rendered, stood at $2,147.10, while on the books it stood at $17,848.55. It is not possible to believe, if this item had been entered in the statement as of its book value, and had been offset by the deduction therein of $15,701.45, as actually made in Mr. Kleinle's mind and as a part of his proposition, that Mrs. Welbourn would have acceded to such a deduction, in addition to the twenty per cent discount, or that Mr. Guest would have advised her to do so, without thorough investigation and full proof of the actual value of the machinery with a view to continuance of the business at the old stand. It is not necessary to find that Mr. Kleinle purposely refrained from giving the book value of the machinery, and substituted for it his own estimate of value, with a view to procuring an advantage in the purchase, and we are not to be understood as intimating that this was his purpose. The statement being conceded to be in all other respects fair and accurate, and he having advised Mrs. Welbourn before accepting the proposition, to consult Mr. Guest, her husband's uncle and adviser, we do not feel justified in imputing to him any wrongful purpose; but his failure to disclose the actual condition of the books, as to the item of machinery, necessarily misled Mrs. Welbourn and Mr. Guest, and would have equally misled the most skilled and expert adviser whom she could have sought. In cases of trust and confidence such as this, "even an innocent withholding of information, that is, where the party himself is not aware of the importance of it, will be ground of relief."Ogden v. Astor, supra; Maddox Ch. Prac., 2nd ed. 262.

And in Huguenin v. Baseley, 14 Vesey, 300, in a proceeding to set aside a conveyance alleged to have been improperly obtained it is said: "Though the defendant and his attorney were perhaps not aware of the duties which this Court required from them in the situation in which they stood, yet where the decision rests upon the ground of public utility, for the purpose of maintaining the principal it is necessary to impute knowledge which the party may not have actually had." We have reproduced the above language of LORD ELDON not only for the purpose of illustrating the principles upon which Courts of equity proceed in such cases, but for the purpose of emphasizing the fact that we attribute no fraudulent intent to Mr. Kleinle. But when this is said. without prolonging this opinion by reviewing all the evidence, which has been carefully read and considered, we do not see how he is to escape the consequences of his neglect to render such a statement of the condition of the firm as we have said the law requires.

The remaining inquiry relates to the value of the machinery and fixtures to be taken in granting relief.

It is said in Parsons on Partnership, 521, note f, that where a surviving partner improperly acquires the interest of a deceased partner, or neglects to account for the assets, he may be charged with the highest value which the proofs show; and this was so held in Killefer v. McLain, 78 Mich. 252. InRinggold v. Ringgold, 1 H. G. 71, in the case of a trustee under a deed, the Court said: "Where trustees dispose of the title to lands, contrary to the express injunction of the instrument under which they act, and there is no possible means by which the Court can reinstate the complainants in their interest, they will be charged with the utmost value of the property;" and in Ricketts Whittington v. Montgomery,15 Md. 46, the Court cited Ringgold v. Ringgold, and applied the above principle to a person acting in a fiduciary capacity who purchased on his own account a steamer which his duty required him to sell for the benefit and interest of another, and which was lost at sea and could not be returned. But the true rule in a case like the present is, we think, well stated in Tennant v.Dunlop, 97 Va. 254, to the effect that where a surviving partner has acquired the interest of a deceased partner, or some particular asset of the firm, for an inadequate consideration, through some mistake of fact, or mistaken claim of right, or under other circumstances not involving actual fraud on his part but which call for redress, the proper measure of relief is the real value of the interest or asset.

The testimony produced on the part of Mr. Kleinle, upon whom as we have said rests the burden of proof, came from himself, Mr. Lord, Mr. Dugan and Mr. Pattison, and was general and inconclusive. His own estimates, we think, took no real account of the value incident to the continuance of an established and successful business at the old stand, Mr. Lord's principal business was in the manufacture of wooden ware and he had no power-machinery for brush making. He had never seen Rennous Kleinle's machinery and did not attempt to put a value on it. His own machinery cost from $1,200 to $1,500, and sold for about $300, but it was sold under an assignment for benefit of creditors.

Mr. Dugan is a manufacturer of machinery for working in wood and iron, but knew nothing of Rennous Kleinle's machinery. He thought second-hand machinery in Baltimore would bring about ten to fifteen per cent of original value and repairs; but it would bring more if purchased by one proposing to continue the business at the same place, and that some machinery brings pretty good prices. Mr. Pattison is an experienced auctioneer and thought second-hand machinery generally brought about ten per cent of its cost value. He could not recall any sale of machinery to a going concern in bulk, but did recall one where the owner of the factory building bought in bulk for $1,325, wood-working machinery which he supposed cost from $5,000 to $8,000, with the idea of forming a stock company.

On the other hand, Mrs. Welbourn produced three witnesses, all of whom were acquainted with the machinery and were thoroughly qualified to judge of such values. Mr. Wright had been with Rennous, Kleinle Co. for twenty-two years, and testified that this machinery was worth to any one wishing to continue the business, at least fifty per cent. of its book value. He filed an inventory made by the firm in 1894 showing an aggregate of $18,464.56, and in parallel columns estimates of the value of such of the items as escaped the fire of March, 1899, made after the fire by himself and Leonard Rettman, showing $8,391.20, and states that all these items were in the factory June 1, '96.

Mr. Rettman is a practical brush-maker from Boston, of eight years' experience, two of which were with Rennous, Kleinle Co., and has much experience in buying and selling new and old machinery. He aided Wright in making his appraisement, and says those values are in his judgment just and fair as between a retiring and a continuing member of the firm.

Mr. Swormstedt is a machinist of forty-five years experience, and an insurance adjuster. In this capacity, he examined the machinery after the fire and filed a list of his valuations set opposite the valuations of the inventory of 1894, with which his values compare closely where but slight damage of the article was suffered. He says, Wright and Rettman's values were fair and reasonable as between partners, and that the machinery placed by Kleinle at $2,147.10 would have brought four times as much.

Mrs. Welbourn filed a paper being a statement of the condition of the firm June 1, 1894, made for the firm by its book-keeper, and found among Mr. Welbourn's papers in which machinery is shown, $14,518.74, and Mr. Welbourn noted on the statement that each partner's share of the machinery representing capital was $4,674.75, or both $9,349.50, which is little more than sixty per cent of book value. Wright and Rettman fix the fair value at not less than fifty per cent, and Swormstedt says four times $2,741.10, or $8,588.40, and we think fifty per cent, upon this state of the proof, is a fair value.

50 per cent of $17,848.55 is ....................    $8,924 27
Deduct value already accounted for ..............     2,147 10
_________
$6,777 17
Deduct 20 per cent as per proposition of purchase     1,355 43
__________
2)$5,421 74
One-half due Mrs. Welbourn with interest from       __________
June 1st, '96 .................................    $2,710 77

We think a decree should be made accordingly.

It is proper to note that as Mrs. Welbourn knew nothing of the value at which this machinery was carried until the books came into her son's possession on his entering the new firm after the fire, she has been guilty of no laches in prosecuting this suit.

The decree of the Circuit Court will be reversed and the cause will be remanded that a decree may be made in conformity with these views.

Decree reversed with costs to the appellant above and below,and cause remanded.

(Decided December 7, 1900.)