Adler v. Leopold Adler Company

1. Where the contract of dissolution of a partnership recites that the books of the partnership do not correctly reflect the interest of two of the partners, but provides that the partners do not desire to recast the partnership accounts, a court of equity cannot grant relief to one of such partners from the conditions of the contract, upon the ground that he was induced to enter into the contract by reason of a mistake of fact as to the partnership accounts.

2. A court of equity will not relieve a party from the injurious consequences of his own act, upon the theory that he acted on a mistake of fact, when such party by reasonable diligence could have ascertained the truth as to all matters alleged to be a "mistake of fact."

No. 16651. SEPTEMBER 16, 1949. Melvin L. Adler (hereinafter referred to as the plaintiff) filed an equitable petition against Leopold Adler and Leopold Adler Company (hereinafter referred to as the defendant and the defendant company), and in substance alleged: The defendant company was incorporated on or about November 30, 1939, with capital of $250,000. The defendant is the record holder of all shares of the capital stock of the defendant company. Prior to incorporation the business was conducted as a partnership under the trade name of Leopold Adler, the members being Leopold Adler, Sam G. Adler (brother of the plaintiff and son of the defendant), and Melvin L. Adler. The partnership was formed about January 1, 1919. As of such date the plaintiff and his brother each received a twenty percent interest therein, and the defendant sixty percent interest. The partnership continued with modifications until November 30, 1939. After January 1, 1930, each partner held a one-third interest in the business.

For approximately twenty-six years the plaintiff devoted his full time to the business, and he and his brother were substantially in charge of the operations of the business. The defendant, Leopold Adler, made it a practice to take vacations varying in duration from five to six months, and during the balance of each year he devoted substantially all but two hours of each day to the management of other businesses with which he was connected. Throughout the duration of the partnership the defendant exercised a dominant influence in all financial affairs, including contacts with banks. Administrative details of financial affairs were placed by the defendant in the hands of a named person, now deceased, who was office manager and bookkeeper for the firm, and confidential assistant to the defendant. The defendant and the bookkeeper kept the plaintiff in ignorance as to the finances of the partnership, and the defendant discouraged the plaintiff from obtaining information. When information was requested from the bookkeeper, the plaintiff was told that he would have to see his father. The defendant studiously refrained from taking the plaintiff or his brother into his confidence.

For about a year prior to the liquidation of the partnership, the matter of incorporating the business had been discussed with the defendant, his attorney, and an accountant, and the plaintiff was informed and believed that it was desirable to incorporate the business. He was further informed and believed that a dissolution of the partnership would result in a forced sale of the assets at prices far below their true value. The plaintiff's participation in the capital stock of the new corporation was dependent upon the status of the partnership accounts. The plaintiff was informed that his indebtedness to the partnership as of December 31, 1938 was $94,000, of which amount approximately $29,240.66 represented interest charges at the rate of six percent per annum, compounded annually. The plaintiff, relying upon the information furnished, and having no reason to doubt its correctness, accepted the figure of $94,000 as the amount owed by him to the partnership, and likewise accepted statements made as to the effect of crediting him with an interest in the assets, including good will of the partnership. Due to the serious illness of the defendant, no opportunity was afforded the the plaintiff to independently audit the books of the company. The representations made and the information given to the plaintiff were under a mistaken apprehension of the actual facts. Under the circumstances described, the plaintiff entered into two contracts, copies being attached, marked Exhibits A and B. The plaintiff was induced to enter into the contract, Exhibit A, upon representations that he was indebted to the partnership. The defendant accepted from the plaintiff the latter's promissory note in the sum of $47,000, with interest at the rate of three percent per annum, and in addition, an assignment of the plaintiff's interest in all of the assets of the partnership.

Simultaneously with the execution of the contract, Exhibit A, the plaintiff and his brother entered into an agreement whereby it was agreed that the defendant would own all of the stock of Leopold Adler Company. The agreement was entered into because of the mistaken belief that the plaintiff had no interest in the partnership. The agreement, Exhibit B, provided that one-third of the net profits of the corporation should be paid to the plaintiff, it being the desire of all parties that the earnings of the corporation be distributed as they had been in the partnership. There was inserted in the agreement a cancellation provision permitting it to be canceled upon three months' notice. The plaintiff continued his association with the defendant company from November 30, 1939, until July 31, 1945, when his contract was terminated with the defendant company by the defendant.

Several months after the plaintiff's contract was terminated, he learned for the first time, from an accountant formerly employed by the defendant company and its predecessor, that it was probable that, by recasting accounts so as to give effect to his twenty percent share in 1919, the plaintiff would have had no indebtedness to the partnership, but as a matter of fact might have had a credit on the books thereof. The plaintiff commenced an investigation, and from information obtained was able to verify the accountant's statement. By recasting the accounts of the partnership and giving effect to his share as of January 1, 1919, the plaintiff's account as of November 30, 1939, was that of a creditor and not a debtor of the partnership. By one method of computation the plaintiff was possessed of a credit balance of $50,778.26; or by another method of calculation, he would have had a credit balance of $20,587.02.

The plaintiff would not have entered into the contract of dissolution if he had been correctly informed as to the actual status of his account. In entering into the contract and surrendering his interest, the plaintiff, as well as the defendant, Leopold Adler, acted upon a material mistake of fact, which was induced by the erroneous and mistaken information furnished to the plaintiff by the defendant. The mistake of fact vitiates and renders null and void the contract of dissolution. The plaintiff is the equitable owner of one-third of the capital stock of the defendant company, and such stock should be impressed with a trust in the plaintiff's favor to that extent. The plaintiff acted with due diligence in the discovery of the mistake. In bringing this action for rescission and cancellation, and the restoration of his rights, he has acted within a reasonable time after the discovery of the mistake. The plaintiff had confidence in the representations made to him by the defendant, who occupied a position of trust to him and who exclusively managed the fiscal affairs of the partnership. The plaintiff does not tender or offer to restore what was received by virtue of the contract, as he has received nothing of value therefrom. The net worth of the partnership in 1939 was at least $250,000. The plaintiff surrendered his interest, and in addition paid to the defendant $47,000, with interest at three percent per annum. By reason of the mistake he has lost $47,000 and one-third of $250,000, his true credit balance of $20,000, or $55,000, or a total of between $217,000 and $255,000, which amount does not include increased value of the good will of the business of the defendant company. It is impossible to restore the status quo of the parties in connection with the agreement. (Allegations of the petition with reference to certain real estate are specifically abandoned by counsel for the plaintiff in their brief.)

The prayers of the petition were: that the court declare null and void, and rescind, the contract of dissolution; that the plaintiff's right in the partnership be restored to him; that his share of the assets in the partnership be traced into the corporation; that the capital stock of the defendant company be impressed with the plaintiff's one-third interest, and that the court decree that he is presently the owner of one-third of the capital stock of the defendant company; that he have an accounting between himself and the defendants and his brother in order to determine the true and full balances due between the parties as of November 30, 1939; that the defendants be required to produce all books and accounts necessary; that the plaintiff be given a judgment for such sum or sums as may be due him on an accounting, together with interest; and for other relief.

Honorable Eschol Graham, Judge of the Superior Courts of the Oconee Circuit, presiding for Honorable David S. Atkinson, who held himself to be disqualified, sustained the defendants' general demurrers to the petition, and the exception is to that judgment. 1. In the present case the plaintiff relies upon the Code, § 37-206, as follows: "In all cases of a mistake of fact material to the contract or other matter affected by it, if the party complaining applies within a reasonable time, equity will relieve."

The plaintiff's right to recover cannot be measured by one equitable statute or section of the Code, since such statute must be construed with reference to other equitable principles of which it forms a part. Barron v. Terrell, 124 Ga. 1077,1078 (53 S.E. 181); Cook v. Wier, 185 Ga. 418, 421 (195 S.E. 740). But if the rule were otherwise, and if the plaintiff's action could be measured solely by his contention that in executing the contract dissolving the partnership he acted under a mistake of fact material to that contract, he could not recover in this action, for the reason that no mistake of fact is shown by the allegations of his petition, when considered in connection with the contract he seeks to rescind.

The plaintiff alleges that, several months after his connection with the defendant company had been terminated, in an interview with an accountant formerly employed by the defendant company and its predecessor (the partnership), he "learned for the first time of the failure to give petitioner credit for his interest in the assets of the partnership and the fact that it might make a vital and material difference with respect to the status of his debit balance at the time of the formation of the corporation . . . The said accountant informed petitioner that it was probable that, by recasting the accounts so as to give effect to his twenty percent share of said partnership assets in 1919, he would have had no indebtedness to the partnership in 1939, and that as a matter of fact he might have had a credit on the books thereof. Petitioner thereupon commenced an investigation into the financial affairs of the partnership with which he had never been allowed previously to acquaint himself. From information obtained and accumulated petitioner was able to verify the correctness of said accountant's statement, with respect to the existence of an actual credit balance in his favor in 1939 rather than the alleged debit of $94,000."

The contract of dissolution (effective as of November 30, 1939) appears to have been executed by each of the three partners, and provides in part: "The partnership of Leopold Adler was formed in 1919. In June, 1923, Leopold Adler gave to each of his two sons, Sam G. Adler and Melvin L. Adler, a twenty percent interest in the assets and profits and losses of said department store business, which gift was made retroactive to 1919. This gift of the interest in his business to his two sons was declared by Leopold Adler in a written declaration executed by him in June, 1923. It has happened in the course of the negotiationsleading up to the liquidation of the partnership that Sam G.Adler and Melvin L. Adler were not credited with their share ofthe partnership assets on the partnership books, although it has been otherwise recognized that they were and are partners in all the assets of the business, including its good will, and liable as partners for all the debts of the business. The department store business of Leopold Adler has been operating successfully for many years in the same location it now is when Sam G. Adler and Melvin L. Adler became partners therein, and the good will of the business was then a valuable asset and was then, and is now, conservatively worth at least $100,000 and in the liquidation of the partnership, the said Sam G. Adler and Melvin L. Adler are justly entitled to their respective shares in this capital asset.If Sam G. Adler and Melvin L. Adler should be given credit onthe partnership books for their shares in the assets of thepartnership, their respective indebtedness to the partnershipwould be considerably reduced, but the parties hereto do notdesire to go back and recast the accounts, except that Sam G. Adler and Melvin L. Adler shall be allowed in the liquidation their shares in the good will of the business." (Italics ours.)

From the above provision of the contract of dissolution it is evident that the plaintiff was fully informed that he had not been credited on the books of the partnership with his share of the partnership assets, and he was further advised that, should he be given credit for his share, his indebtedness to the partnership would be considerably reduced. Notwithstanding this direct and specific notice to the plaintiff of the very fact of which he now complains, he nevertheless agreed that "the parties hereto do not desire to go back and recast the accounts." The fact that the plaintiff may have been induced to agree that he did not desire to recast the books of the partnership by credit to his account of the full book value of the assets of the partnership, plus one-third of the value of the good will (estimated to be $100,000), and his employment by the corporation, will not sustain his allegations that he acted under a mistake of fact. Whatever may have been his reasons for agreeing that he did not desire to recast the books of the partnership, such reasons were sufficient to him at the time of the execution of the contract.

The plaintiff does not allege that any fraud or deceit has been practiced upon him. The terms of the contract of dissolution are clear, and the plaintiff by its terms was put on notice that a different result might be arrived at if a complete revision and audit of the books were made.

"Courts cannot relieve from bad contracts or hard bargains, where they have been deliberately made, and where there has been no fraud or deceit, and the terms of the contract are clear and unambiguous." Central of Georgia Ry. Co. v. Gortatowsky,123 Ga. 366, 374 (51 S.E. 469).

2. It is clear from the terms of the contract of dissolution of the partnership that none of the partners knew, or could have known, the true and correct status of the partners with reference to the partnership assets, had certain credits been entered to the plaintiff's account, in the absence of a complete audit and recalculation from the period such credits were entered. The acts of the parties were not upon the basis of a mistake, but upon the basis of a lack of knowledge or total ignorance of what the result might be. "Ignorance by both parties of a fact shall not justify the interference of the court." Code, § 37-210;DuBignon v. Brunswick, 106 Ga. 317 (32 S.E. 102).

The plaintiff now undertakes to excuse his lack of knowledge by asserting that the defendant and the bookkeeper of the partnership kept him in ignorance as to the finances of the partnership, that the defendant discouraged him from obtaining information, and that when information was requested by the plaintiff from the bookkeeper, he was told he would have to see his father. The plaintiff further alleges that the defendant studiously refrained from taking the plaintiff into his confidence. Such allegations, standing alone, are insufficient to excuse the plaintiff's lack of knowledge. He does not allege that he requested any specific information from his father, or from the bookkeeper, nor does he undertake to explain why the information which he later obtained from an accountant (after the discharge of the plaintiff and the accountant) could not have been furnished by such accountant at any time during the period of the plaintiff's employment.

Regardless of any attitude on the part of the father of the plaintiff with reference to the financial affairs of the partnership, or the attitude of the bookkeeper, the rights of the plaintiff as a partner in the business were not thereby defeated. The plaintiff alleges that during substantially all of the period from 1919 to 1945 the plaintiff and his brother were in almost complete charge of the business; the defendant made it a practice to take vacations of some five to six months' duration each year, and during the balance of the year devoted only two hours of each day to the partnership business. Certainly during the period of the defendant's absence in any year the plaintiff might have exercised his right as a partner charged with the management of the business to have any examination, investigation, or audit of the books which he might have deemed proper.

Under all of the allegations of the petition the plaintiff has placed himself squarely within the rule that, "If a party, by reasonable diligence, could have had knowledge of the truth, equity shall not relieve." Code, § 37-211. In Keith v.Brewster, 114 Ga. 176 (39 S.E. 850), it was held: "While equity will, on seasonable application and under proper circumstances, relieve a party from the injurious consequences of an act done under a mistake of fact, it will not do so if such party could by reasonable diligence have ascertained the truth as to the matter concerning which the mistake was made." See alsoIverson v. Wilburn, 65 Ga. 103; Langston v. Langston,147 Ga. 318 (93 S.E. 892); Browning v. Richardson,181 Ga. 413 (182 S.E. 516); City of Jefferson v. Trustees ofMartin Institute, 199 Ga. 71, 77 (33 S.E.2d 354).

The recitals of the contract dissolving the partnership were sufficient to advise the plaintiff that, by entries of credits of his partnership assets upon the books and a subsequent redetermination of his partnership interest, a different result would be obtained. Notwithstanding this notice, the plaintiff made no demand for an entry of credits and a recasting of the books. "Notice sufficient to excite attention and put a party on inquiry shall be notice of everything to which it is afterwards found such inquiry might have led. Ignorance of a fact, due to negligence, shall be equivalent to knowledge, in fixing the rights of parties." Code, § 37-116.

The plaintiff's failure to insist upon adjustments in the records of the partnership is conclusive upon him. His ignorance was due to his own negligence, and he will not now be heard to complain that he acted upon a mistake of fact.

The trial court did not err in sustaining the general demurrers and dismissing the action.

Judgment affirmed. All the Justices concur.