Bowditch v. Jackson Co.

The plaintiffs now object to the proposed sale upon the grounds (1) that the dissolution amounts to a taking of their property against their consent, (2) that in closing out a partnership any partner. can compel an auction sale of property, and (3) that the defendants have agreed for a sale to themselves.

1. The claim of a right to a sale by auction, or a price fixed by a jury, is based first upon the assumption that there is here a taking of the plaintiffs' property in invitum, and that this cannot lawfully be done except upon such an ascertainment of value. If it were true that this amounted to such a taking, then the proceeding could not be upheld upon any theory. Private property cannot be so taken except for public use. But there is here no taking of property whatever. It is a mere question of contract and of carrying the contract into effect. If it is true (as the plaintiffs now admit) that a dissolution of the corporation and a distribution of its assets is a part of the original undertaking of the incorporators, then a sale for the purpose of such distribution is no more a taking of the stockholder's property than a sale of the corporation's manufactured product in the ordinary course of trade would be. In each instance there is a sale of property in which he has an interest. It may be that in each case he protests against the particular transaction. But his present protest cannot revoke his prior consent to a method of doing business which is now being followed, nor can his attempted withdrawal of consent make a proceeding to which he has agreed a taking of his property.

2. The contention that the plaintiffs are entitled as a matter of right to their proportion of the proceeds of all the assets as fixed by an auction sale is also urged upon the assumption that the best selling price reasonably obtainable cannot otherwise be found. Each owner's right is to his proportion of the net proceeds of all the assets. He is entitled to his share of what the property can be sold for, as distinguished from what it is worth. If this implies that the assets must be sold, it does not necessarily involve an auction sale. It not infrequently happens that such a sale would be ruinous, when one by private agreement could be negotiated for a fair price and to the advantage of all concerned. Sales at public auction have been ordered because it was thought that in this way a fair sale and the highest price would be assured. This is not because the parties have a vested right to have the value so fixed, but because courts have thought that the business transaction of liquidation (when imposed upon courts) would be better carried out in this way. It was merely a means for giving the parties their rights in the proceeds. It was not a right in and of itself.

Even in the early English reports, cases are found where sales other than at auction were approved by the chancellor, some going so far as transferring the interest of a minor heir to a surviving partner. In a later case in the house of lords these authorities are reviewed and the true rule is laid down.

"It is very true, as was said at the bar, that on dissolving a partnership of this kind the ordinary course would be for the court to direct a sale of the assets, and if necessary, a sale of the concern as a going concern, and to give liberty for proposals to be made by either party to purchase it before the judge in chambers. My lords, those provisions are moulded in every case by the court to meet the circumstances of the particular case; and it appears to me that, looking at the nature of this business, and looking at the very small interest which was taken in it by the respondent [one eighth], it would certainly not be desirable in this case to have a sale, or to bring these premises to the hammer for the purpose of ascertaining what sum ought to be given for them. It is a case therefore in which, if a decree for a dissolution had been made in the first instance, I apprehend that the court would have thought it right to authorize the owner of seven eighths of the concern to lay proposals for a purchase before the judge in chambers. I am about to submit to your lordships a provision which will, I think, in another way arrive in substance at the same end."

The following decree was entered: (1) An account for mesne profits. (2) "That an inquiry be made what sum would, on the 21st of February, 1873, have represented the respondent Daniel Backhouse Syers' one-eighth share in the value of the said music hall and tavern if it had then been sold as a going concern, after deducting all charges thereon and all liabilities of the business." (3) That upon payment of these sums within a time to be fixed by the judge in chambers, no farther accounts be taken. (5) If payments are not made as ordered, there must be a sale in the usual way. Syers v. Syers, 1 A. C. 174.

In commenting on this case, it is said in Lindley on Partnership: "Moreover, in Syers v. Syers it was held by the house of lords, that in the case then before it the court could, in its discretion, either order the sale of the undertaking as a going concern, or approve of the purchase by one partner of the share of his copartners. The rule as to selling partnership property is merely adopted in order that justice may be done to all parties, when no other course has been or can be agreed upon. It is not an arbitrary rule inflexibly applied in all cases whether it is necessary or not; and although, if one partner or his representative insist on a sale, the court may not be able to refuse to enforce that right, still the court is always inclined to accede to any other mode of settlement which may be fair and just between the parties." And in a foot-note: "And, qu., whether the discretion alluded to exists in all cases? But why should it not? Its exercise would often be most beneficial." Lind. Part. (7th ed., 1905) 587.

"A sale is, generally speaking, that method of disposing of the property, or facilitating its division, which is least open to the danger of fraud or mistake, and is therefore much favored. . . . It must always be possible that the peculiar circumstance of the case may make a sale injurious, and that the true interests of parties rosy be better protected and preserved without it, and then a court is under no obligation to require a sale." Pars. Part. (4th ed.), s. 420.

There is no one hard and fast rule for adjusting partnership affairs in court proceedings, and the claim that the partners' shares can be determined only by an auction sale is not well founded. Mauck v. Mauck,54 Ill. 281; Taylor v. Hutchinson, 25 Grat. 536. The suggestion that an order for a sale of the net Jackson assets at auction, limiting the lowest bid to the price fixed by the sale to the Nashua Company, may produce good results and can do no harm, rests upon the assumption that the present offer would still be open to acceptance if the auction failed to develop a higher bidder. But conceding this, it must also be evident that an attempt to sell at auction might do no good. It is at most a question of the best sale price and how to obtain it. If upon the evidence the court is satisfied that this has been obtained, there is no occasion for further proceedings to secure additional evidence on the point. If the court thought the question was not satisfactorily answered by the evidence, it might be appropriate (in a case where cause was shown for liquidation by the court) to order the sale at auction, or in some other way. That the auction sale is not an absolute right is stated in terms in the opinion in Mason v. Pewabic Co., 133 U.S. 50, the authority chiefly relied upon by the plaintiffs: "We do not say that there may not be circumstances presented to a court of chancery, which is winding up a dissolved corporation and distributing its assets, that will justify a decree ascertaining their value, or the value of certain parts of them, and making a distribution to partners or shareholders on that basis; but this is not the general rule." Even with this qualification, Mr. Justice Bradley stated his opinion to be that "the opinion of the court asserts too strongly the right of the minority stockholders to insist upon a sale. In many cases in this country, a valuation of the interest of a minority, under the direction of the court, has been deemed a proper method of ascertaining their share in the assets, where a sale would be prejudicial to the interests of the whole."

This is the law in cases where the liquidation of the assets is in the hands or under the direction of the court. But liquidation is not necessarily a judicial proceeding, nor can judicial action in reference to it be invoked, except for cause. The plaintiffs' whole contention is based upon the assumption that in every case of dissolution the liquidation is a matter for judicial administration, unless the parties are entirely agreed. The law is otherwise. It is not a matter of course that a court of equity will interfere in the liquidation of the assets of a corporation or firm by a majority in interest. It is the right of the parties to conduct this part of their business for themselves. Before this right can be interfered with, it must be made to appear that the majority are assuming to exercise powers not conferred upon them, or are proceeding in a manner not authorized by law.

The typical cases where receivers or sales have been ordered are those where there were only two partners. In case of a disagreement, there was no majority either way. But no case has been cited, where, in case of more than two partners, the honest and judicious action of the majority in closing out the property has been reviewed by a court of equity. In the case at bar cause for a receivership was alleged, but not proved. If it had been established, then the question what kind of a sale should be ordered by the court would arise, as in Syers v. Syers, before cited. No cause for a receiver being shown, and the allegations of misconduct having been disproved, it follows that the action of the majority cannot be interfered with.

After a dissolution, each partner still has implied authority to dispose of the firm property by sale or other reasonable mode, necessary for the purpose of winding up the firm. Lapenta v. Lettieri, 72 Conn. 377; Robbins v. Fuller, 24 N.Y. 570; Gray v. Green, 142 N.Y. 316; Walling v. Burgess,122 Ind. 299; Bach v. Insurance Co., 64 Ia. 595; Barton v. Lovejoy,56 Minn. 380; Shanks v. Klein, 104 U.S. 18.

"The dissolution of a partnership terminates the capacity of the individual partners to continue the firm business with the partnership property and assets, and to incur debts in the firm name. But the partnership property will remain to be disposed of and its assets to be collected, and partnership debts must be paid. . . . Notwithstanding the dissolution of the partnership, the firm continues to exist for all purposes necessary for winding up its affairs; otherwise, as was said by Lord Justice Turner, it would be necessary to apply for a receiver in every case upon the dissolution of a partnership. Butchart v. Dresser, 4 DeG. M. G. 542, 544. If partners have not provided for the manner in which the affairs of the partnership shall be wound up, the law provides therefor by continuing the partnership, with its incidents of interest, powers, and obligation, for the purpose of winding up the concerns of the partnership so far as is necessary to that end and no further. Pars. Part. 420." Davis v. Megroz, 55 N. J. Law 427, 431.

The power of partners to so close out their affairs is not curtailed by courts in the absence of proof of illegal acts, or at least of gross incompetence. Birdsall v. Colie, 10 N. J. Eq. 63; Cox v. Peters,13 N.J. Eq. 39; Nathan v. Bacon, 75 N. J. Eq. 401.

"In case of an actual disagreement, he [Kent] adds that the weight of authority is in favor of the power of the majority of the firm, acting in good faith, to bind the minority. And such ought to be the law; for where there is a community of interest, certainly it is the will of the majority, and not the will of the minority, that ought to control. If there is a fraudulent combination on the part of the majority to injure or oppress the minority, the law is otherwise. But in the absence of fraud, certainly it is the majority, and not the minority, that ought to control." Staples v. Sprague, 75 Me. 458, 460.

The rule applies with added force in the case of a corporation, where there is no such thing as binding action by one individual, but all action is to be taken by the majority. The majority are trustees with not only the power, but also the positive duty, to liquidate the assets. The question is how this can best be done. Upon this question they act in good faith and negotiate a sale which, upon investigation, is found to be for an adequate price. A reasonable price having been obtained in a manner approved by a majority of the beneficiaries, there is no equity in the claim of a dissatisfied minority that the trust should be administered in accordance with their views and against the wishes of the majority.

It was urged at the argument that the finding in the superior court on the question of the adequacy of price did not go so far as to include the fact that the price was fair if measured in the selling price of the Nashua stock. The argument was the while one and one half shares of Nashua stock. The argument was that while one and one half shares of Nashua stock might be fair equivalent for one shore of Jackson stock, it was not found that $585,000 was a fair cash price for the net Jackson assets. It was then suggested to counsel that if the assumption in the former opinion that the finding covered both points was erroneous, application might be made to the superior court to limit the finding according to its true intent. Such application has been made, and the presiding justice has not qualified the former statement. This is taken to mean that the construction heretofore put upon it is not contrary to its intended meaning.

But even if it be conceded that there has been no finding of a fair sale at a price fixed in terms of money, still the plaintiffs have failed to make out a case. If there is no finding that the price is adequate, neither is there one that it is inadequate. The sale being one the majority had power to make, and being free from all taint of fraud or irregularity, a court of equity will not interfere unless there be such inadequacy of price as to amount to proof of gross mismanagement. It is not incumbent on the defendants in such a case to prove a sale for full value, for they are not called upon to justify their action. It is for the plaintiffs to show that the defendants have been guilty of a violation of duty.

3. The majority act in a sense as trustees for the minority in the winding up. They hold the property to carry out certain purposes, and in doing this it is well settled that they cannot contract with themselves. And the rule is the same as to contracts with a corporation in which they have a financial interest. But that was not the situation here. As to that part of the transaction whereby the Jackson Company received Nashua Company stock, it is evident that there was no adverse interest. Such interest in the Nashua Company as exists was created by the sale. It was not a preexisting interest which made it desirable to sell out the Jackson Company for a small price. The only difference in the ultimate situation of the parties was that the majority would hold their Nashua stock, while that of the minority would be sold. There is no possibility of conflicting interest in the agreement with the Nashua Company. It was of equal advantage to every Jackson stockholder to secure as much Nashua stock as possible in exchange for the Jackson assets. Nor does such conflict appear in the sale of the Nashua stock to the American Trust Company, upon the guaranty and presumably for the benefit of Baylies. This sale would not affect the Nashua Company, in which the assenting Jackson stockholders had prospective interests. They would neither gain nor lose by a sale of other Nashua stock, by and to third parties, at a certain price.

The theories of the law governing liquidation, which are advanced in support of the present motion, are not in harmony with the trend of the authorities. The broad proposition, that in the event of the dissolution either of a partnership or a corporation a dissatisfied minority can take from the majority the power to dispose of the assets in any reasonable way, cannot be sustained. Before the control of liquidation is taken from the majority, it must be shown that they have violated their trust; and before a sale negotiated by them can be interfered with, it must appear that it was not a fair sale.

Rehearing denied.

All concurred.