Freeman v. Huttig Sash & Door Co.

In this case we are called upon to determine the correctness of the decision of the Honorable Court of Civil Appeals for the Fifth District in affirming the judgment of the District Court of Dallas County whereby the plaintiff in error, Freeman, was held liable as a partner for certain debts of the Independent Lumber Company, a partnership engaged in the lumber business at Dallas, contracted both before and after his association with it. The suit was instituted by the Huttig Sash and Door Company upon its debt, in connection with which an attachment was sued out and levied. Thereafter a receiver was appointed who took charge of all the assets of the company, including the property attached, all of which was subsequently sold and its proceeds held to abide the final judgment. Other creditors, parties to this appeal, intervened, all seeking to enforce the liability of Freeman as a partner.

The defendants in error contend that Freeman became a partner in the business on July 29, 1908. The debts sued upon are of three classes: (1) for goods ordered and delivered before July 29, 1908; (2) for goods ordered and delivered after July 29, 1908; and (3) for goods ordered before and delivered after July 29, 1908. By the judgment Freeman was held liable for debts of all these classes.

Prior to July 29, 1908, the partnership known as the Independent Lumber Company was composed of C.B. Yost, T.H. Campbell and J.T. Sewell, each owning a third interest. Because of his friendship for Yost, Freeman had endorsed for the firm in a few instances to enable it to borrow money for the conduct of the business. On July 29, 1908, after some negotiation, Freeman, with knowledge that indebtedness was owing by the firm, effected a purchase of Campbell's interest, known and assented to by Yost and Sewell, for the sum of $400.00, evidenced by a bill of sale executed by Campbell reciting the transfer of all his right, title, interest, etc. In making this purchase, Freeman did not agree to assume the payment of any of the firm's existing indebtedness. He did not intend to enter it as a partner; nor was there any agreement that he should become a partner. His purpose was, as it was of Yost and Sewell, that the business should be incorporated; and to that end articles of association were drawn and subscribed on August 6, 1908, but application for a corporate charter was refused by the Secretary of State because the proposed name of the corporation had been appropriated by another corporation. Because of Sewell's absence from the State, new articles were not then drawn. Freeman left the State for a trip on August 16th and was away until September 14th. The incorporation was not perfected on his return, or at any time afterward.

In the interval between July 29th and September 14th, Yost, as its active manager, conducted the business under the same name and in the ordinary course, as it had been conducted by him prior to Freeman's purchase of Campbell's interest, Freeman having no part in its control or management, nor any communication with any creditor; and, so far as shown, it still being the intention of all parties that the corporation should be formed.

A few days after his return to Dallas on September 14th, Freeman discovered that the condition of the business was not as favorable as he had supposed, and informed Yost that he did not care to proceed any further with the matter; that he wanted the business wound up, and that it would be well to sell it if possible. Thereafter he discussed the situation with Yost, advising that only such purchases be made as might be necessary to work off the stock on hand; that sales be made for cash to provide for the payment of creditors, and if possible that a purchaser for the business be found. He gave advice respecting the collection of accounts and other matters affecting the conduct of the business in this manner, but it may be said that other than as stated he took no part in its direction. The business was thereafter so conducted and such was his relation to it to the time of the institution of the suit.

In short, the record presents a case of this character: The purchase, without an express assumption of liability for existing indebtedness, of the interest of a partner in a going concern by one who does not intend to become a partner and is not by agreement received as such, but whose intention, shared by the other owners, is only to become a stockholder in a corporation to be immediately formed for the conduct of the business. The formation of the corporation is deferred and finally abandoned. During the time that the formation of the corporation is merely suspended, from July 29th to September 14th, the purchaser, without any participation in its management, suffers the business to be conducted in the ordinary course, under the same name, by the active manager of the original partnership. About September 14th, he determines to proceed no further and counsels the liquidation of the business or its sale. From that time until December 30th, when a receiver took it in charge, the business is conducted with this end in view, but nevertheless as an existing business, without his active participation in its management, but to some extent with his direction.

It is an accepted rule in the law of partnership that one who becomes a member of an existing partnership does not thereby become liable for debts already incurred in the absence of an agreement to that effect, express or implied. The presumption of law is against the assumption of such liability. 1 Bates on Partnership, sec. 507; Story on Partnership, sec. 152; 1 Lindley on Partnership, sec. 206; Baptist Book Concern v. Carswell,46 S.W. 858; Oliver v. Moore, 43 S.W. 812; Sternburg v. Callanan,14 Iowa 251; Wright v. Brosseau, 73 Ill. 381; Gauss v. Hobbs, 18 Kans., 500; Kountz v. Holthouse, 83 Pa., 235; Wolff v. Madden,33 P. 975; Dean v. Collins, 9 L.R.A., note, p. 57 (New Series).

It is not contended that in his purchase of Campbell's interest in this firm there was any express agreement on Freeman's part to assume any liability for the existing indebtedness, nor is there anything in the record from which such an agreement may be fairly implied. In this connection it is only shown that he recognized the property of the firm was subject to its debts; that he did not expect to obtain Campbell's interest free from the debts; that he did expect the intended corporation to pay them in taking over the property, and that he later advised Yost to apply proceeds of sales to their payment irrespective of the time of their creation. But the law will not construct a personal liability upon Freeman's recognition of a legal status of the property imposed by indebtedness with the creation of which he had no connection, nor upon his mere intention that it should be paid by a corporate association that was never formed, which, if effected, would have exempted him from such liability. His liability for these prior debts, if it exists, must rest upon agreement, created either by express assent or resulting by legal implication from proof of such facts or circumstances as fairly indicated a purpose to become personally bound for their payment. There is nothing in this evidence that indicates that such was his intention; its tendency is in support of the contrary conclusion.

Nor will such an agreement be implied from the amount paid by Freeman for Campbell's interest. That amount may have been reckoned as the value of such interest after deducting the liabilities of the firm, but it cannot be said that the purchase of a partner's net interest in a business is of itself sufficient to create an assumption of his individual liability for existing indebtedness. Freeman recognized that he took Campbell's interest in the assets charged under the law with the payment of the debts, but there is a marked distinction between ownership of property burdened with a debt and personal liability for the debt itself. For the same reason the fact that the business as constituted after Freeman's purchase of Campbell's interest received the benefit of goods then on hand for which the old firm was indebted, did not render Freeman personally liable for such debts. If it be considered that the result of such purchase was the creation of a new firm, there was no novation of this indebtedness, and it retained its character as an obligation only of the old firm. The rule has been definitely announced that an incoming partner is not rendered liable for such debts because the new firm receives and uses as stock the old firm's property. Brooke v. Evans, 5 Watts, 196; Duncan v. Lewis, 1 Duvall (62 Ky.), 183; Morlitzer v. Bernard, 10 Heiskell (57 Tenn.), 361; Poindexter v. Waddy, 6 Munf. (Va.), 418.

We now pass to the consideration of the question of whether Freeman became a partner with Yost and Sewell following his purchase of Campbell's interest in the firm, upon the decision of which depends that of his liability for the two other classes of debts sued on. A decision of the question requires first, the ascertainment of their actual relation, and then the determination of whether a partnership was thereby constituted, giving effect to their intention, if possible, but having regard for the rule that parties may intend no partnership and yet form one. Cothran v. Marmaduke, 60 Tex. 370; Beecher v. Bush,45 Mich. 188. There is no doubt but that Freeman had no partnership relation in view when he acquired Campbell's interest, or as to its being his purpose that his only association with the business should be that of a stockholder in a corporation to be formed for its conduct. In this initial stage of his connection it is clear that his status was simply that of a co-owner, having none of the elements of a partnership relation. The intended corporation, however, was not formed. While the purpose to form it still remained, it became necessary to defer it; and it was deferred as by common consent until the return of Freeman from his eastern trip. The business, though, went on, exactly as it had theretofore, under the same name, still under Yost's active management, in the full guise of a going concern, and in the full exercise of its ordinary functions. It did not cease its operations to await the organization of the corporation, and it does not seem to have been considered that it should do so. It continued to make sales and to contract indebtedness for goods as in ordinary course throughout this entire interval; and, with the qualification that its scope was narrowed for the possible purpose of liquidation after Freeman's return in September, it may be said to have been operated as a going concern down to the time of the appointment of the receiver.

The question that arises is, did Freeman remain simply a naked co-owner during this period, or by such operation of the business with his knowledge and acquiescence, as is shown by the record, did the relationship of the parties undergo such change and assume such a nature as to create a partnership in law? There is nothing in the record to indicate that the continuance of the business in this manner was merely for the benefit of Yost and Sewell, or that its operation was other than for the equal benefit of the three owners and their common profit. Freeman, as has been stated, knew that it was being actively conducted, and permitted it, if not with approval, certainly without interference. He entrusted the management of his interest to Yost, and must have known that it was being devoted to the common object of the business. As completely as did either Yost or Sewell in respect to their interests, he dedicated his interest to its purposes and aims, not by express direction, it is true, but by tacit agreement, having all the force of positive authorization. No other interference can be indulged than that his intention was that it should share the general fate of the business during this entire period. It amounted to a contribution to the capital, and it will not be supposed that he thus permitted its use without the expectation of sharing in whatever profits it might help to produce, in which his right to participate must, at all events, be conceded. Manson v. Williams,213 U.S. 453. The result, necessarily, was the creation of a relation between Yost, Sewell and himself, as principals, that amounted to an agreed joinder of their interests in a common enterprise, its prosecution for their joint account, and an ensuing right in each of them to share in its net returns as such. He ceased to be a naked co-owner when, by a clearly implied agreement, he permitted his interest to be put to work as capital in the business. He thereby became a partner under elementary principles of the law upon the subject. It is immaterial that the business yielded no profits, and that in consequence Freeman shared in none. There existed by his tacit agreement a community of interests, the common enterprise, its operation for the joint account, and a right in the owner of each interest to share as a principal in its profits as such, which under the established rule in this State is a recognized test of the relation. Miller v. Marx, 65 Tex. 131; Stephens and Andrews v. Bank, 62 Tex. 499 [62 Tex. 499]; Kelley, etc., Company v. Masterson,100 Tex. 38; Dilley v. Abright, 19 Texas Civ. App. 487[19 Tex. Civ. App. 487], 48 S.W. 548. The law recognizes that partnership is the creature of contract, but it is not essential that parties agree to become partners by name, or that their agreement be an express one. If by implied agreement they assume a relation that the law constitutes a partnership, they become partners in fact.

It is unnecessary to review the authorities, which are numerous, covering many different aspects of the relationship, and have been diligently presented in the able briefs of counsel for both the plaintiff and defendants in error. The question is resolved at last by a general principle, which furnishes an accurate and conclusive test and is as safe and authoritative a guide as an imposing number of adjudicated cases. Holding as we do that Freeman became a partner in the business, he was liable for the indebtedness sued on that was contracted after July 29, 1908.

We likewise hold that the new firm, and Freeman as a member of it, were liable for the third class of debts here involved; that is, those contracted before July 29, 1908, for goods delivered thereafter, as those transactions were equivalent to a direct purchase of such goods by the new firm.

The debt of the plaintiff below, Huttig Sash Door Company, was that of the first class we have discussed, for which Freeman was not liable. Its debt being due by the old firm, it acquired no lien upon the property of the new firm seized under its attachment. 1 Bates on Partnership, sec. 555; Schneider v. Roe,25 S.W. 58; Meyberg v. Steagall, 51 Tex. 351.

Freeman should not be held liable, in our opinion, for the first class of debts herein discussed — that is, those that were contracted prior to July 29, 1908, for goods delivered before that date; but we approve the holding of the Honorable Court of Civil Appeals that he should be held liable for the second and third classes — that is, those contracted after July 29, 1908, for goods ordered and delivered subsequent to that date; and those contracted before July 29, 1908, for goods ordered before and delivered after that date. As the record furnishes us with no finding of fact that enables us to accurately classify the debts of all the defendants in error, it becomes necessary to remand the case. The judgments of the District Court and the Court of Civil Appeals are therefore reversed and the cause remanded with instructions that judgment be rendered upon the claims of the several defendants in error in accordance with this opinion.

Reversed and remanded.