Crehan v. . Megargel

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] This action is brought against defendants as alleged members of the firm of Megargel Company to recover upwards of $500,000 damages for breach of contract made by said copartnership in the state of Massachusetts to carry out certain stock transactions for plaintiff. The complaint sets forth four separate causes of action each one dealing in different form with the same transactions and alleged defaults, and each is demurred to by every defendant on various grounds including the one that it does not state facts sufficient to establish any liability. The latter ground of demurrer is the only one which we deem it necessary to consider and in this connection we shall not review in detail all of the allegations of the complaint, for their sufficiency as setting forth a cause of action against the defendants of the character indicated is so clear except at two points that it is unnecessary to do this. We shall confine ourselves to outlining those allegations which present the interesting points in the case which require discussion and it will be assumed that the complaint in other respects is sufficient under its allegations to set forth a cause of action.

In two of the causes of action it is alleged in effect that the present defendants, together with other persons, were general members of the copartnership of Megargel Company, which committed the breach of contract and caused plaintiff the damages as alleged in the complaint; also that before the commencement of this action plaintiff brought an action against such other persons in the state of Massachusetts and there recovered judgment against them for the same causes alleged in this action; that the present defendants were not joined in that action because they were non-residents of the state of Massachusetts and were beyond the reach of its process. The question to be discussed in connection with these causes of action is the one whether said judgment in Massachusetts operated to merge any cause of action against the present defendants and bar this action.

The other two counts, containing the same allegations concerning the Massachusetts judgment, attempt to set forth a cause of action against the defendants on the theory that through failure to comply with the statutes of this state governing the organization of limited partnerships, they have become liable as general partners in the copartnership of Megargel Company. These allegations are to the effect that the attempt was made in this state to organize said limited copartnership with the defendant Ralph Megargel as a special partner; that the other defendants really furnished the capital which he nominally contributed as such special partner; that the certificate and affidavit made and filed as required in the case of the organization of a limited partnership were not sufficient or truthful and that, therefore, said other defendants became subject to the penalty imposed by section 34 of the Partnership Law (Cons. Laws, ch. 39) which provides that "if any false statement be made in any such certificate or affidavit, made either upon the formation or renewal or continuance * * * of such partnership * * * the persons interested therein shall all be liable as general partners." The controlling question here is the one whether defendants were "persons interested" and thus became liable as members of the copartnership in the manner claimed and we shall consider first the two counts presenting this question.

The arrangement under which the other defendants furnished to Megargel the money which he contributed to the limited partnership was set forth in a written agreement, and while the complaint contains certain allegations to the effect that said arrangement was invalid and an unlawful and ineffectual device to evade the law regulating the formation of limited partnerships, and that these defendants and not Megargel contributed the capital and became interested in the copartnership, these allegations as made are the statements of mere legal conclusions and the sufficiency of plaintiff's complaint is to be tested by the agreement itself, which is not effectively contradicted, altered or condemned, if otherwise valid, by any of said allegations. We, therefore, turn to it for the purpose of determining whether under it defendants, other than Megargel, became "persons interested" in the partnership so as to become liable as general partners when there was failure to comply with the statute governing the organization of limited partnerships.

The agreement is too long to be quoted or even to be summarized except in the briefest manner possible, having in view the controlling features. It provided for the payment by the other parties, who included these defendants, of certain sums of money to Megargel under a trust by which he was to contribute said moneys as his capital in a special partnership to be organized.First, as between him and the other members of said proposed partnership said moneys when received were to be contributed "in his own name and as his sole and individual special capital" to the partnership. He and the moneys so contributed were in all respects to be subject to the provisions of the partnership agreement which was annexed to the trust agreement and to all laws governing such a partnership, and the subscribers (these defendants) were to "have no right of accounting or other rights whatsoever against the said partnership * * *" but were "in all respects (to) be strangers thereto," and "as regards the trust property and estate or any of the rights and interests guaranteed" they should "look only to the party of the second part (Megargel) or his representatives," except that in the event a dissolution of the partnership should be caused by the death of Megargel and the consequent termination of the trust created the subscribers were entitled to receive from the survivors of the partnership the amount of special capital that might remain after final liquidation of the business thereof. Second, as between Megargel and the subscribers (defendants) the relation of trustee and cestui que trust was created. Megargel on payment to him of the respective amounts subscribed was to issue receipts to the several subscribers of which receipts a registry and record were to be kept. "Upon the receipt by him of any interest or profits to which he might (may) be entitled as special partner as aforesaid" the same forthwith were to be distributed through the agency of a trust company amongst the registered holders of said receipts. Various provisions were made for protecting and safeguarding the relations between Megargel and the subscribers but all of these were based upon a relationship of the copartnership solely with Megargel as special partner and none of them in any manner qualified that exclusive relationship or brought the subscribers into the slightest relationship with the copartnership or the members thereof other than Megargel or gave them any voice in or supervision over the affairs of said copartnership.

It was primarily provided that this relation and condition between Megargel and the subscribers were to continue for five years, but the further provision was made between the subscribers that if it should be terminated by the death of Megargel within that time, on the consent of the surviving members of the partnership and the agreement of not less than 51 per centum in amount of the subscribers a new limited or special partnership might be formed with a new special partner.

For the purpose of establishing that under this agreement the subscribers became "interested" in the partnership plaintiff seeks to bring to his aid two different theories of this agreement — one that it is a valid instrument as between the parties to be construed as it is written, the other that it is invalid as providing for an undue suspension of the ownership of the property thereby covered.

Pursuing the first theory the basis of plaintiff's claim is the provision in the Partnership Law relating to limited partnerships already referred to and which provides that if any false statement be made in the certificate or affidavit essential to the formation of such a partnership "the persons interested therein shall all be liable as general partners." Then planting himself upon this provision he says "the essential claim * * * in this case is that these defendants are the ones who actually contributed the special capital to the partnership of Megargel Company" and each of said defendants "had a legal interest in said alleged limited partnership as a special partner therein at the time of its attempted formation." Thus the fundamental question becomes one of interpretation of the words "persons interested," in the statute just quoted, as a means of reaching the decision whether these defendants were such persons interested and who, therefore, became liable as general partners because of false certificates and false affidavits as alleged in the complaint.

In the consideration of defendants' liability counsel have discussed the somewhat general question whether the words "persons interested" in the statute should ever be interpreted to mean any one other than him who would be a general partner unless he secured a limited liability under the statutes by compliance with the terms thereof. Under the claims advanced by plaintiff we think that the controversy before us may be decided by the determination of what is perhaps a more concrete question. If the defendants other than Megargel did not contribute capital to the limited partnership in the sense claimed by plaintiff, then we fail to see how on any theory they were "persons interested" within a reasonable interpretation of the statute. We do not think that they did contribute special capital to the partnership in any such manner or with any such result as is claimed.

Clearly they did not contribute capital in the manner, under the conditions and with the results contemplated by the statute as necessary to establish the status of a special partner. The statute provides that one who desires to enter a copartnership as a special partner shall not only contribute in his own name a specific sum as capital but that he shall establish his status and relationship with the other individuals who are to be copartners by entering into an agreement with them which is to be filed, recorded and published and in which, amongst other things, is to be stated the names of all the partners, including the special partner and the amount of capital which such special partner has contributed; that the name of the special partner shall be posted and that he shall have certain rights to examine into the state and progress of the partnership business and advise as to its management and to receive interest and profits on his investment. These defendants come within none of these provisions. As between them and the other members of the copartnership they made no contribution of capital, signed no partnership agreement and established no relationship with the copartnership, but were expressly debarred therefrom, and secured no benefit from such copartnership except as it might come in an indirect way through accountability of the special partner for the profits which he had received from the copartnership. On the face of the written agreement they were wholly disconnected from the partnership and utter strangers to its members, its affairs and its capital save in the one instance that in case of the death of their trustee and the dissolution of the firm they were entitled to receive from the firm the residue, if any, of the moneys to which their trustee would have been entitled if living. But this was the arrangement which equity would have enforced without any specific agreement and did not change the effect of their agreement.

Neither did they in our opinion contribute capital in a manner which, while not such as contemplated by the words of the statute, nevertheless came within its spirit and purpose. Of course we do not intend to negative the proposition made by the plaintiff that an arrangement might be made by one who was not named as special partner which would be so designed to evade the statute and give him the rights of that status that he would be held liable under the penalties of the law. Such was the basis of the decision in Buckley v. Bramhall (24 How. Pr. 455), greatly relied on by the plaintiff. The court held in that case that the person sought to be charged with a general liability had attempted to evade the law by what was characterized a "flimsy contrivance to evade the statute" and, whether this interpretation of the facts was correct or not, that was the theory on which the defendant was held. No such situation is presented to us by the present complaint. While as we have stated there are various allegations of liability upon the part of the defendants under the statute these are conclusions based upon an interpretation of a written instrument and that instrument, read as it is written, establishes between the subscribers and the partnership no contribution of capital, no relation of partners and no contact with or supervision over partnership affairs. The trust is an insurmountable barrier raised between them and the partnership and separating them from an interest in its affairs, and it seems to us to be a valid arrangement and to come within the principles which have been approved both by eminent text writers and the decisions of various jurisdictions in the case of so-called commercial or business trusts as substitutes for business corporations. (Burdick on Partnerships [3d ed.], pp. 43, etc.; Thompson on Business Trusts, etc., p. 28; Rhode Island Hospital Trust Co. v. Copeland, 39 R.I. 193; Williams v. Milton, 215 Mass. 1;Home Lumber Co. v. Hopkins, [Kansas Sup. Ct.] 190 Pac. Rep. 601.)

Nor if that could be potential to change our outlook are we able to perceive that this view results in any defeat of a public policy as evinced in the statute relating to limited partnerships. The object of that statute and its predecessors in enactment was to provide for a combination of capital and skill and to enable those who had the former to contribute it to a partnership without other liability than loss of their investment so long as they complied with the statute and refrained from exercising the powers and privileges of general partners. The interest of a creditor like the plaintiff is that the special capital shall be honestly and fully contributed as provided by the statute and he has no legal or direct interest in the identity of the special partner so long as he contributes his capital and observes all of the requirements of the statute. (White v. Eiseman, 134 N.Y. 101; Webster v. Lanum, 137 Fed. Rep. 376.) We fail to see how he is interested in the fact that the special partner has borrowed the capital which he contributes or has received it under some other form of arrangement even less compelling upon him than a loan, so long as the arrangement does not result in a violation or evasion of the statute and of the requirement that the special capital shall be contributed and that the special partner shall not assume the status of a general partner.

Swinging from the viewpoint that under this trust agreement, if valid, respondents were contributors of capital to the special partnership, plaintiff next argues that the trust agreement on its face was invalid as providing for the suspension of ownership of personal property for a fixed term in violation of section 11 of the Personal Property Law (Cons. Laws, ch. 41), and that defendants thus became "tenants in common of the fund which was contributed to the capital of the firm and the alleged trustee in contributing it acted as their agent." We believe that there may be various answers to this contention but we shall only consider three of them.

In the first place, we do not think that a fair interpretation of the trust agreement does provide for a suspension of the ownership of the fund which was to be contributed for a fixed period which might outrun two lives. Undoubtedly, as claimed by plaintiff, the trust agreement executed by the defendants and the partnership agreement are to be considered together. The trust agreement provided for the payment of moneys to Megargel as trustee to be contributed by him to the partnership under the articles of agreement for that partnership and those articles did provide primarily for a partnership to continue for the period of five years. Clearly, however, the combined effect of the trust agreement and of the partnership agreement primarily was to limit the former to the life of the trustee and thus any conflict with the statute was avoided. It was, however, secondarily provided in the trust agreement that in case the partnership should be dissolved by the death of the trustee (as undoubtedly would result from said death) "the subscribers agree with each other that with the consent of the surviving partners a new or limited special partnership shall be formed with a special partner to be designated by an appointment in writing to be signed by not less than 51 per centum in amount of the subscribers and that the amount of special capital * * * which as beneficiaries to the trust hereby created they may be severally entitled to receive upon the liquidation of the old firm shall be paid over by them or caused to be paid to such person and the same shall be contributed by him as special capital to the new partnership. The provisions of this section shall apply to successive dissolutions caused by death of the special partner prior to the expiration of the five-year period above mentioned." We think that the only effect of these provisions was an agreement amongst the subscribers, disconnected from the members of the partnership, that if the partnership was dissolved by the death of their trustee, they would enter into negotiations for the formation of a new partnership to which, if the negotiations were successful, they would contribute as capital the moneys which they received upon the dissolution of the old partnership. We think that this secondary provision was too contingent and uncertain to amount to an agreement, when taken into consideration with the other provisions, to suspend the ownership of property for a fixed period of years. The subscribers upon the dissolution of the old firm were entitled to the capital which had been contributed and it thus came into their ownership. It is possible that if they failed to form a new firm as provided they might be liable upon a contract to some one who was injured by such failure, but that, we think, would be the limit of the provisions which they undertook.

In the second place, we are unable to conclude that plaintiff in this action can attack the validity of the trust agreement even if it be subject to successful attack. He is not a party to it. He has no interest in the property which is the subject of the trust. He is not seeking to enforce any lien thereon which is obstructed by the trust agreement. He is not defending himself against any attack which is based upon the trust agreement. He is an utter stranger to the entire proceeding, simply seeking to have an agreement held invalid in order that he may establish a personal liability against the parties who entered into it. No authority has been cited which sustains his right to make such an attack and we know of no principle which authorizes it. (BohnMfg. Co. v. Hollis, 54 Minn. 223; Nat. Fire Proofing Co. v.Mason Builders' Assn., 169 Fed. Rep. 259; Mallory v.Thomas, 71 Kan. 562; First Nat. Bank of Paterson v. Nat.Broadway Bank, 156 N.Y. 459.)

But lastly even if we should adopt plaintiff's view upon both of the foregoing points we do not see how it would carry him forward to any position of success. The subscribers placed their money in the hands of Megargel under an authority contained solely and exclusively in this trust agreement. That was his only warrant for investing the moneys which he had received as special capital in the partnership. If it now should be held that this instrument was void and conferred no such authority we fail to see how the relationship of principal and agent would be established in respect of the contribution of this capital or how an unlawful trustee would be turned into a lawful agent. It would seem that under such a contingency as that Megargel would have in his hands some money contributed by the subscribers without any authority for its use and that the result would be either that he might retain the moneys or that the subscribers might disaffirm everything that he had done with it and demand its immediate repayment.

Thus we are led to the conclusion that in the statement of the two causes of action which we have been discussing the complaint does not state facts sufficient to show any liability upon the part of any of the respondents except the respondent Megargel. As to him the complaint does state a cause of action subject to the consideration of the question now to be discussed in connection with the other two causes of action.

It will be remembered that in these causes of action defendants are alleged to have been general partners, and the only question to be discussed is the one whether the judgment recovered by plaintiff in the courts of Massachusetts upon the same causes of action here involved against several other members of the firm of Megargel Company operated to merge the cause of action against these defendants who were not joined because non-residents and not subject to process in said state. The claim that the Massachusetts judgment did so operate is based on the common-law rule that a cause of action against several joint debtors, as copartners are, is merged in a judgment against part of them. There is no allegation that this common-law rule has been changed by statutory enactment in the state of Massachusetts and, therefore, we assume that it exists and we shall assume without deciding that under the full faith and credit clause of the Federal Constitution we are compelled in this action to give to the Massachusetts judgment the effect claimed for it if such would be the effect at common law. We do not, however, think that under the best established rule the judgment under the circumstances set forth did have the effect claimed for it.

This rule of merger of joint obligations is a technical one inherited from the common law, which often has been productive of injustice and which is enforced by courts with more or less restlessness and repugnance. Whatever the origin of the rule, it is qualified to-day by the principle of election, it being held that where a creditor holding the joint obligation of several parties proceeds to recover judgment against part of them it is evidence of a choice to thus hold part and let the others go. Therefore, various exceptions have been engrafted upon the rule to the effect that when the action of the creditor is controlled by circumstances which negative any idea of an election he will be exempted from the effects of the judgment as a merger. (U.S.Printing Lith. Co. v. Powers, 233 N.Y. 143.)

Whatever course of reasoning may have been adopted in various decisions, it is in accordance with this rule that it has been held in many jurisdictions that where a creditor bringing suit upon a joint obligation is unable to get service upon some of the obligors because they are beyond the jurisdiction in which he is acting, his judgment there recovered will not be regarded as a bar against the obligors not served, when he is able to obtain jurisdiction of them in some other forum. That doctrine was accepted by the courts of this state in an early decision which so far as we are aware has never been questioned and directly or in effect has been adopted by the courts of many other states. (Brown v. Birdsall, 29 Barb. 549; Third Nat. Bank of St.Louis v. Graham, 174 App. Div. 503; Campbell v. Steele Co., 11 Penn. St. 394; National Bank v. Peabody Co.,55 Vt. 492; Wood v. Watkinson, 17 Conn. 500; Merriman v.Barker, 121 Ind. 74; Rand v. Nutter, 56 Me. 339; Tibbetts v. Shapleigh, 60 N.H. 487; Yoho v. McGovern, 42 Ohio St. 11;Bradley Eng., etc., Co. v. Heyburn, 56 Wn. 628; Beck Pauli Lith. Co. v. Wackers Birk B. M. Co., 76 Fed. Rep. 10.)

Holding, therefore, that the weight of authority in this country is to the effect that the common-law rule of merger does not apply to a judgment recovered as was plaintiff's, in favor of those who were beyond the jurisdiction of the court which rendered it, we are not bound to give to the Massachusetts judgment the effect claimed by the defendants.

Coming then to the present suit with no such bar in his way the plaintiff's right to proceed is additionally secured by section 1946 of the Code of Civil Procedure which provides: "Where for any cause, one or more partners have not been joined as defendants in an action upon a partnership liability, and final judgment has been taken against the persons made defendants therein, the plaintiff, if, the judgment remains unsatisfied, may maintain a separate action upon the same demand, against each omitted partner." This section clearly authorized the commencement of action against these defendants upon the facts set forth in the cause of action under review unless it be true as claimed by defendants that it required a separate action to be brought against each partner who had been omitted in the Massachusetts action. We should be reluctant to give any such narrow construction as that to this remedial provision and which if adopted would require in the present case a multitude of actions instead of one. That question, however, is not before us for there is no demurrer on the ground of such improper joinder of defendants or causes of action.

Therefore, we conclude that the allegations respectively of the second and fourth causes of action do set forth facts sufficient to constitute a cause of action against these defendants and that the demurrers to them should be overruled.

Accordingly the judgment of the Appellate Division appealed from in so far as it reverses the order of the Special Term overruling the demurrer of each of the defendants to the first and third causes of action and dismissing the complaint, except as to the defendant Ralph Megargel, should be affirmed and said judgment in so far as it reverses the order of the Special Term overruling the demurrer of the defendant Ralph Megargel to said causes of action and in so far as it reverses the order of said Special Term overruling the demurrer of each of the defendants to the second and fourth causes of action and dismissing the complaint should be reversed and the order of the Special Term affirmed, with costs in this court and the Appellate Division and with leave to said defendants to withdraw demurrers and plead over within twenty days on payment of said costs.

HOGAN, CARDOZO, POUND, McLAUGHLIN, CRANE and ANDREWS, JJ., concur.

Judgment accordingly.