Baker v. Safe Deposit Trust Co.

This is a bill filed in the Circuit Court for Baltimore City by the appellee as executor of Charles J. Baker, deceased, against the appellants, two of his sons, as surviving partners of the firm of Baker Brothers Co., for an accounting, and for contribution by them to the losses of the firm in proportion to their respective interests therein. The answer to the bill, while admitting the partnership charged, set up two defenses to the relief prayed; first, that the appellants never were liable, as between themselves and their deceased partner, for any of the losses or debts of the firm, and second, that if they ever were so liable, such liability was fully discharged by certain proceedings had for that purpose, under the authority of the Orphans' Court for Baltimore County, having jurisdiction of the settlement of the estate of their deceased partner, and constituting a full accord and satisfaction of the claim of the appellee for an accounting and contribution.

It was established by the testimony that the whole of the capital of the firm was supplied by the deceased partner, and that the appellants were never required to supply any capital, but that the profits were divided between them, whenever profits were earned, in proportions varying from time to time; that all the debts of the firm had been fully paid by the appellee as executor of the deceased partner, and that upon payment of all said debts there was a loss of capital of $136,400, of which $113,400 was caused by depreciation of real estate below the figures at which it was carried on the books. It is seen, therefore, that only the rights of the partners inter sese are concerned in this inquiry, and we shall consider first the second defense presented.

We must agree with the Judge of the Circuit Court that the proceedings in the Orphans' Court of Baltimore County by which the appellants bought certain assets and conveyed other partnership property for the uses of the will of Charles J. Baker, did not operate as an accord and satisfaction of the partnership liabilities, though it is by no means clear what was the full consideration to the appellants for the conveyances by them of their interest in the real and leasehold property theretofore belonging to the firm, and the assignment of their interest in all assets of the firm, other than those purchased by them. On the 9th of December, 1895, all the parties entered into a written agreement to submit to Mr. Chas. C. Homer and to Mr. John T. Mason, R, as arbitrators, certain questions relating to the settlement of the affairs of the firm, among which was the question of the liability of the appellants to contribute to any loss of capital. But thisarbitration, for some unexplained reason was abandoned.

On January 4th, 1896, the appellants submitted their written proposition for the purchase and conveyances mentioned above, but they did not make a condition of its acceptance, that they should be released from liability for losses. They merely declared they did not admit such liability. On receipt of that proposition, the appellee on January 5th, 1896, filed a petition in the Orphans' Court, reciting the proposition; stating its belief that it was for the interest of the estate it should be accepted as the only alternative to a disastrous receivership, but expressly denying the suggestion of the appellants that the appellee was solelyliable for the debts of the firm, while admitting it was liableto the creditors, on demand. On January 8th, 1896, the Orphans' Court authorized the acceptance of the proposition, and the payment by the appellee of all claims for which the estate was liable, when properly authenticated; and on January 21st, 1896, the appellants executed a conveyance and an assignment consummating the transaction, and an agreement of even date setting forth all the details of the transaction, concluding with this clause; "It is also understood by said executor, and by said William, Jr., and Charles E. Baker, that the question as to whether or not the said William, Jr., and Charles E. are personally liable for the liabilities of the firm is not concluded hereby." Whatever conclusive effect might otherwise be attributed to this, not altogether clear, transaction, we cannot say that it concluded a question which the parties themselves, in their solemn agreement carrying out the accepted proposition, have said was not concluded.

We come then to the defense first presented — that the appellants never were liable, as between themselves and their deceased partner, for any of the losses of the firm. This partnership was formed Sept. 1st, 1865, when Charles J. Baker purchased the interest of Henry J. Baker and Joseph Rogers, Jr., in the firm of Baker Bros. Co. and gave notice by publication that he had associated with him his two sons, William Baker, Jr., and Charles E. Baker under the old firm name. Charles J. Baker died Sept. 22, 1894, but the firm was continued under the provisions of his will until January 21st, 1896, when it was dissolved by mutual consent. There can be no question that the effect of Chas. J. Baker's publication, made with the knowledge of the appellants, had the effect to bind them equally with him, as to third parties, in all firm transactions; but it does not follow, merely because they were so bound to third parties, that they were also bound to share all losses of the firm. Mr. Lindley in speaking of the right of contribution — vol. 2, star page 754, 1st Am. from 4th Eng. Ed. — says: "It cannot exist if excluded by agreement, and it is so excluded whenever those who wouldotherwise be contributories, have entered into any contract,express or tacit, amongst themselves, which is inconsistent witha right on the part of one to demand contribution from theothers. This is too obvious to require comment, but it must be borne in mind as qualifying the common saying that the right to contribution is independent of agreement." Idem, star page 781, vol. 2.

In Welsh v. Canfield, 60 Md. 473, this Court said:

"Whilst in general, a partnership imports community of profitsand losses among its several members, it cannot be doubted that whatever may be their legal liability to outside parties, as among themselves, a disproportionate interest as to profits and losses may be agreed on." It is very plain upon principle that a deficiency of capital upon liquidation, must be considered as any other loss, according to the terms of the agreement, and hence Mr. Lindley in treating of this subject — vol. 2, star page 808 — says: "The only case which practically gives rise to difficulty, is when partners have advanced or agreed to advance unequal capitals, and to share profits and losses equally. If nothing more than this is agreed, a deficiency of capital must be treated like any other loss; * * * but if the meaning of the partners is that all debts shall be paid out of the assets, and that any surplus assets remaining after payment of debts shall be divided between the partners in proportion to their interests therein, or to their capitals, effect must be given to such agreement, and those partners who bring in most capital, must lose most." A necessary corrollary to this reasoning would seem to be, that where one supplied all the capital, under an agreement restricting the partnership to profits, when earned, and only after payment of all debts, that if on liquidation there was an impairment of capital, he who provided it must bear the whole loss. Here the only right growing out of the partnership relation, which is asserted in the bill, or which is involved in its consideration, is the right to require the appellants to contribute out of their own pockets to reimburse the executor of their deceased father and partner, for impairment of his capital and the payment of firm debts out of the father's estate. Our inquiry therefore must be, what were the terms of their agreement of partnership in this regard. There being no written articles of agreement, and the death of Charles J. Baker preventing recourse to the evidence of any of the parties themselves upon this point, we are confined to the course of dealing between the parties as shown by the partnership books and transactions, supplemented by the other competent testimony introduced to explain the course of dealing, from which the Judge of the Circuit Court states in his opinion he found nothing that would vary the general rule of partnership liability.

Now it is admitted that Charles J. Baker always supplied all the capital of the firm, and that the sons never did supply, and were never required to supply any. The books of the firm, confirmed by the testimony of Brauns, an expert accountant, and for over twenty years a book-keeper of the firm, and by that of Myer, also an expert accountant, after full examination, show that throughout the whole period from 1865 to 1894, the sons were never credited with any share or interest in the property or capital of the firm, and that they were never credited with anything more than a certain percentage of net profits, and that when there were no net profits, none of the partners received anything. The father received nothing for his capital and services, and the sons received nothing for their services, they having no capital. In this there was nothing unusual, it being settled that the capital of a firm may consist of the mere use of the property owned by one member of the firm. "In such case the title remains in the individual member during the continuance of the partnership, and upon its dissolution, the property is freed from such use." Citizens' Fire Ins. Co. v.Doll, 35 Md. 106; Whiting v. Leakin Gorsuch, 66 Md. 265. The percentage of net profits which they received varied, but the rule restricting them to profits never varied. The percentage ranged from one-sixth to one-fourth for each of the sons, with the residue to the father. Whenever these distributions were made, the individual account of each member was credited with his percentage, and the profit and loss account was debited with the aggregate amount. At six of the semi-annual distribution periods of June and December in each year, there were no available profits, and no distribution was made. At every distribution period, all debts, expenses, and losses were charged to profit and loss, and if there was still an unsettled balance of loss, such balance was carried over and charged against the profits at the next distribution period. No loss was ever charged to the individual account of any partner, until June 30th, 1894, when the sum of $23,000 — amount of loss at that time, was charged to the account of Charles J. Baker by direction of Charles E. Baker. Conceding, as we must do, that this entry would not bind the appellee if not known to and approved by Charles J. Baker, provided it would operate to his prejudice, we are of opinion it could not so operate because under the agreement as we construe it, all debts were payable in primarily from profits, and if these were not adequate, then by Charles J. Baker, so that ultimately these losses must have been paid by him. It was shown by Mr. Blacklock, a witness for the appellee, after examining the books, that the net profits distributed, were what remained "after all charges and bad debts were taken out." This was the unbroken course of business between the partners. In accordance with this course of business when certain real estate which was carried on the books at $70,000, was appreciated in value to the extent of $19,000, this increase was in June, 1872, carried to profit and loss and distributed as part of the net profits. This was the correct disposition, because that distribution did not impair the capital of the father, which upon dissolution would remain in specie. This distribution was therefore no departure from the uniform course, and even if it were, having been made under the direction of the father, the sons could no more be required to contribute to its return to the estate, than they could be required to return a proportion of net profits distributed ten or twenty years before, to make good losses afterwards occurring. Net profits as defined above have been shown to be the only source, under the dealings of the parties, to which the sons could look for compensation for their services, and the only source to which the father could look for reimbursement for debts of the firm paid by him. We cannot believe, in the face of the evidence afforded by the partnership books, that the father meant if losses were incurred greater than the profits would discharge that his sons were not only to lose their labor, but to go down into their pockets to share with him the loss of his capital. The question we have to decide is one of intention and must be determined by a consideration of all the circumstances available for the construction of the contract.Parsons on Contract, p. 58. Fleischmann v. Gottschalk,70 Md. 529. Our construction of the contract, as deduced from the uniform course of dealing between the partners, is, that the father put his capital against the time and skill of his sons, believing that the profits alone, under the plan adopted, would discharge all the debts and protect his capital from impairment; the sons believing that the profits, after payment of all debts, would ensure them reasonable compensation for their time and skill.

The principle involved in this view of the contract is supported by Courts of acknowledged reputation, and by text writers of authority. In Everly v. Durborrow, 8 Phil. 93, a bill was filed for an account between partners, where one contributed money, and the other time and skill, and the whole capital was lost, but the relief was denied by Judge Sharswood, who cited the following language from Lindley on Partnership: "Whatever at the commencement of the partnership is thrown into the common stock, belongs to the firm unless the contrary can be shown;" and then said what, he adds, does not contradict this, "At the expiration of this partnership this capital shall be returned without interest before the final division of profits. But here there are no profits to be divided; there is no capital to return, Everly has lost his money, and Durborrow has lost what he set against it, his time and services enhanced in value by his knowledge of the business." This, it is true, was a nisi prius decision, but the great name of Judge Sharswood gives it just authority. The same view was held by the eminent CHIEF JUSTICE ROBERTSON, of Kentucky, in Heran v. Hall, 1 B. Monroe, 159, who said: "It is a general rule that when the capital of one party is money, and that of the other, labor or other personal service, they are not partners inter sese in the technical sense, merely because they had no mutual interest in the profits, and that nothing else appearing even considering them partners in the stock, he whose capital was labor, would not be liable to him whose capital was money for contribution for any loss of capital in the adventure; for in such a case each will have sustained acorrespondent loss of his capital; and neither of them would therefore be liable to the other for contribution."

In Cameron v. Watson, 10 Rich. Eq. (So. Ca.) 103, the same view was expressed by Chancellor Dunkin, quoting from Puffendorf: "In partnerships, where, on the one side, labor is contributed, and on the other only the use of money, that partner who contributed the money does not always admit the other to a share of the principal, but only to a share of the profit which such labor and money joined together might produce. According to this rule, if there should be nothing gained by the partnership concern, A should lose his labor and B his interest, which would be equal and just. And should the original stock be diminished, by the same rule, A loses only his labor, whereas B would lose interest and a part of his principal. At the dissolution B would be entitled to claim his money capital before any division of profits. A could claim nothing as profits until the amount put in by B was returned. On the other hand, if it was not there B, who had thus risked his property, must submit to the loss."

In Manly v. Taylor, 50 N.Y. Superior Court, 26, this opinion is said to be sustained by the weight of authority, and in Hasbrouck v. Child, 3 Bosworth, 105, the subject is discussed by JUDGE MURRAY HOFFMAN with great learning and fullness. After stating the general rule of equality, he says: "The case is very different when labor is furnished as an equivalent for the use of money only, and not as of equal value with the money itself. The contributor of capital has then a right to reclaim the amount from the fund. The contributor of labor is not liable for any part of a loss of such money. Resperit domino, is the maxim strictly applicable; and if any portion of the money is unexhausted the party who advanced it receives it back." And in support of his statement he cites the passage from Puffendorf quoted in 10th Rich., supra, and says, "after a careful examination of the English authorities, I am satisfied that we are at liberty to adopt any just principle for the valuation of labor contributed to the partnership funds, which the agreement of the parties does not preclude, and equity may dictate * * *. It is obvious that had the losses exhausted the whole capital Hasbrouck would in effect be made the guarantor of Child's capital in proportion to his interest in the profits — I apprehend that the agreement does not imply this; that the law does not warrant it, and certainly justice disclaims it."

The Pennsylvania, Kentucky and South Carolina cases to which we have referred have been reviewed and disapproved in Whitcomb v.Converse, 119 Mass. 43, but we are satisfied they state the sounder rule for the case before us.

We are confirmed in this conclusion by the language of the Supreme Court in London Assurance Co. v. Drennen,116 U.S. 461, where the Court said "persons cannot be made to assume the relation of partners as between themselves, when their purpose is no partnership shall exist. There is no reason why they may not enter into an agreement whereby one of them shall participate in the profits arising from the management of particular property without his becoming a partner with the others, or without his acquiring an interest in the property itself so as to effect a change of title." And also by what is said in Paul v. Cullum,132 U.S. 550. "While in the absence of written stipulations orother evidence showing a different intention, partners will be held to share equally both profits and losses, it is entirely competent for them to determine as between themselves, the basis upon which profits shall be divided and losses borne, without regard to their respective contributions whether of money, labor or experience to the common stock."

We think the decree of the Circuit Court was erroneous.

Decree reversed and bill dismissed with costs to appellantsabove and below.

(Decided March 21st, 1900).