Savage v. Putnam

By the Court, Hogeboom, J. The judgment which the plaintiffs ask in their complaint in this action is, that the co-partnership between them and the defendants Putnam and Yerbeck, may be dissolved; that an account maybe taken of the copartnership dealings, indebtedness and effects; and that the real estate and effects of the copartnership may be sold, and the avails applied to the indebtedness of the co-partnership and the equitable claims of the copartners as between themselves, and if insufficient for that purpose, that the parties may he compelled to contribute their proper proportion of the deficiency. The plaintiffs ask also for general relief. The judgment which the referee has rendered, and iron! which an appeal is taken to this court, is that the complaint be dismissed with costs as to the defendants Putnam and Yerbeck; and that the defendant Putnam recover, as for a valid counter-claim, the sum of $305.46 with interest, against the plaintiffs, and that he have execution therefor; and that the said judgment be without prejudice to any further action or proceeding by the plaintiffs and the defend — 424 — ant Young, or' any of them, as between themselves or any other persons than the defendants Putnam and Verbeck. Although the judgment rendered may possibly not cover the entire relief to which the plaintiffs might be entitled upon the case made by the pleadings and proofs, I shall assume that the only matter really in controversy between the parties is, whether the defendants Putnam and Verbeck are primarily liable, equally with the plaintiffs, in proportion to their interests in the partnership business at the time they sold their stock, -for the then existing debts and liabilities of the copartnership, so as to entitle the plaintiffs to institute this suit against them for contribution; or whether the defendants Putnam and Verbeck, though liable to the creditors of the copartnership for any indebtedness existing during the period of their connection therewith, are in fact merely sureties for the plaintiffs as their principals, and therefore not liable in this action. The defendants were not originally members of the partnership. In 1847 two of the plaintiffs, Bosekrans and Wilcox, together with other persons, entered into a partnership or company and subscribed certain articles of association, forming a company caEed the Saratoga Steam MiE Lumbering Association, with a capital of $10,000 divided into shares of $100 each. The articles provided for officers and directors of the association, and for the mode of carrying on its business. The 12th article provided for a transfer of the stock owned by any member, and in effect authorized such transfer to any third person, on giving the directors three days’ notice of such intended transfer, and allowing any member of the association the first privEege of purchase. They did not declare what should be the effect of such transfer, nor whether the outgoing member should remain Eahle, or the incoming member should become Eahle, for the then existing debts of the copartnership, as between the members of the firm themselves. Nor did they provide what should be the effect of the death of any of the members upon the existence — 425 — or terms of the partnership. Both of these contingencies, however, occurred, and as the parties themselves have not provided for them, the effect which these events produced upon the relations of the parties to each other, must be determined by the rules of law. The ordinary effect of the death of one of the members of a partnership is to work its dissolution. The partnership is ended. The connection has been dissolved, and the future relations of the surviving parties to each other must be determined by some new agreement between them, or by the results which the law pronounces upon their acts and proceedings when no new agreement is in fact made. And so of a change in the concern effected by the transfer of stock. As this is allowed by the articles of association, it follows that the vendor of the stock must cease to be, and the purchaser of the stock must become, a member of the association. If it were a corporation, neither the outgoing member, nor indeed any of the stockholders, would be personally liable for the debts of the concern, unless made so by the law which created the corporation. In the case of a voluntary association, the liability of the outgoing member would depend upon circumstances. In the absence of any agreement upon the subject, or any specification or limitation of time for the continuance of the partnership, the withdrawal of any member of a firm would work its dissolution, and the introduction of a new member would create a new partnership. Here, however, there is an agreement that parties may transfer their stock—in effect that new members may be introduced into the partnership, and existing members may withdraw. The object of this is to continue the association, and to prevent its dissolution. And the effect, I think, must be to make the new stockholder a member of the firm, with all the ordinary rights and liabilities of a partner—■ entitled to all the property, profits and dividends which are represented by his shares of stock, and subject, to the same extent, to all the debts, liabilities and losses of the concern. — 426 — He takes the stock cum onere. The vendor of the stock is supposed to examine all these questions before he sells his stock; and he sells it for a high or low price, accordingly. The same thing occurs to the purchaser. I think, therefore, the vendor of the stock, in the absence of any stipulations to the contrary, from the time of the sale relieves himself, as between him and his former associates, from all liability for the past indebtedness of the concern, as he certainly disentitles himself to any account for the property or profits of the establishment. It is really what the law denominates a continual partnership ; but it is not very material whether it is styled a continuation of the former firm, or a dissolution of the old and the formation of a new one, with an implied or express understanding that the new shall occupy the place of the old one, entitled to its benefits and subject to its liabilities. Prior to July, 1849, various changes had occurred in the membership of the association. Shares of stock had become transferred, sometimes between the members themselves, sometimes to new parties, so that before the period last mentioned Washington Putnam, one of the original shareholders, had died, and all of the present plaintiffs, and also the defendants Putnam and Yerbeck, had become members of the association, holding various and unequal shares of stock. At this time a new written agreement was entered into, subscribed by all the parties to this action, (except Young) recognizing the existence of the association, reciting the lands which belonged to the association, and who were the holders of the shares, (the last named parties and several others,) declaring that said lands were owned by them in proportion to the amount of their shares of stock, and pledging their respective interests in the property and effects of the association to the payment of all the existing and futrn'c debts of the association, and providing further for a sale of such interest by the directors in case of default of such payment, and promising to pay such indebtedness, (past and future,) — 427 — in proportion to the amount of their stock. The agreement further provided that they should not he liable for any debts contracted after they had sold out their stock and left the association, nor for any indebtedness to which they had not given their consent. After the making of this agreement, and before the defendants Putnam and Verbeck retired from the association, various loans Were made and debts incurred, to carry on the business of the association. On or prior to the 25th day of October, 1853, the defendants Putnam and Verbeck had sold out all their stock, and ceased to he connected with the concern. Subsequent to that time, and as the referee finds, with the funds of the association, the plaintiffs paid several of the debts of the association contracted during the period that Putnam and Verbeck were shareholders, and this suit is brought to enforce a contribution to those debts. I have already expressed the opinion that under the original articles of association such liability did not exist. The question is whether the plaintiffs are aided by the new agreement of 1849. By that agreement the existence of the original assoation is recognized, and the terms of those articles of association must he observed, except so far as they are modified by the subsequent agreement. By that agreement, it is stipulated that the subscribers to it will pay the existing and future liabilities of the association, and that their interest in the property and effects of the association may, if necessary, he applied to that object. But I think it must be understood that this was with the qualification that their liability as between themselves should be limited to the period of their membership. And, thus understood, it expressed precisely what would he their legal liability under the original articles. There seems no reason why they should have contracted a liability unlimited in amount and perpetual in duration, in a business over which, after they left it, they had no control, in whose profits they did not participate, and whose assets were properly applicable to the extinguishment of these de — 428 — mands, and had been doubtless applied to such purpose, so far as those demands had been actually extinguished. I am unable to see that the conclusion sought to be drawn by the plaintiffs from the terms of this agreement, reasonably or naturally flows from it; and I am of opinion, therefore, that the report of the referee is right upon that part of the case. [Albany General Term, December 5, 1859. Wright, Gould and Hogeboom, Justices.] It follows also, as a consequence of this construction, that the referee was right in allowing the set-off. Putnam was in legal effect the mere surety for the plaintiffs for the debts which his withdrawal from the concern imposed upon the remaining members of the copartnership. He was, however, liable to the creditors themselves, and being thus compelled to pay, was entitled to his remedy over against his principals. The substance of this defense is set forth in his answer,, and it was a matter of discretion on the part of the referee to allow an amendment so far as to present it in such a formal way as to enable him to obtain the benefit of it at the hearing, as a valid counter-claim. The report of the referee seems to be right in all material respects, and the judgment entered upon it should be affirmed, with costs.