Malley v. Atlantic Fire & Marine Insurance

Pardee, J. This is an action upon a policy of insurance against loss by fire. On the 12th day of May, 1881, the defendant executed and delivered to the plaintiff a policy of insurance against loss by fire, upon his stock of merchandise, for the sum of $2,500, to continue in force one year from that date. It provided that “if the interest of the assured in the property be any other than the entire, unconditional, sole ownership of the property, for the use and benefit of the assured, * * it must be so represented to the company and so expressed in the written part of this policy; otherwise the policy shall be void.” Also, “if the property be sold or transferred * * or any change take place in title or possession, * * whether by legal process or judicial decree, or voluntary transfer or conveyance, * * then, and in every such ease, this policy shall be void.” On January 12th, 1882, the plaintiff completed an inventory. Annexed to it were three statements, under the following heads: — “ Edward Malley, general,” “ Edward Malley, personal,” and “ Edward Malley & Co.” On that day he and William Neely signed the following contract: “ We, the undersigned, Edward Malley, of New Haven, and William Neely, of New York, do hereby enter into the — 245 — following partnership agreement, which shall remain in force three years from the date hereof, January 12th, 1882 : “We hereby agree to become partners in the business now established and being conducted by said Edward Mallejr in New Haven. “ The said Malley hereby agrees to furnish the capital necessary to run the business in its present shape, except as hereinafter elected. Also to furnish the store or stores now occupied by him in the business. The said Neely shall devote his whole time and attention to the business, and not engage in any other business during the continuance of these articles, and will not, during the same length of time, give or indorse any notes, or otherwise become surety for any person or persons whatever, without the consent of said Malley, either in his own private matters or in behalf of the firm. He also agrees to furnish, within the first year, $10,000 capital for the use of the firm. • “ The said Neely shall be entitled, out of the net profits of the business, to receive twelve and a half per cent, thereof; and if the net profits exceed $50,000, shall receive fifteen per cent, thereof; in any event said Neely shall receive $3,000 per year. In estimating the net profits there shall be deducted, as a portion of the expenses, six per cent, on the actual value of the stock and fixtures; also the rent of the old store at $8,000, and the shoe store, if used, at $2,000; said store and fixtures to be kept in repair bjr said Malley himself. “ Said Neely shall not, however, draw out of said concern more than the sum of $2,000 in any one year, until the fund in the concern shall accumulate to the sum of $10,000 over and above that sum put into the concern by said Neely as capital. All the remainder of the profits of the said concern shall belong to said Malley.” On the same day the plaintiff made the following memorandum upon his journal: “ Accounts closed on Sales Ledger K and re-opened on Ledger A of E. Malley & Co.” Since the date of the contract the business has been advertised and conducted in the name of Edward Malley & Co., — 246 — except that the bank account kept at the Merchants’ National Bank of New Haven, remained in the name of Edward Malley, and he signed the notes and checks. Between January 12th and February 28th, 1882, the firm added by purchase to its stock, merchandise of the value of nearly $77,000, and sold therefrom merchandise of the value of nearly $59,000. On February 28th, 1882, the stock was nearly destroyed by fire. William Neely has not contributed to the capital the $10,000 specified in the contract, nor is there any evidence that he had received therefrom any larger sum than at the rate of $2,000 per year. The defendant refusing to pay any portion of the loss, this suit was instituted, and the case is reserved for the advice of this court as to the judgment to be rendered therein. The plaintiff and William Neely signed a contract which in terms declared that they thereby entered into a partnership agreement which should remain in force three years from its date, and that they thereby agreed to become partners in the business established and theretofore conducted by the plaintiff in New Haven. They jointly determine that the plaintiff shall contribute the property and Neely the labor and skill constituting the capital of the partnership. They agree upon the method of management of the “business,” and upon the rule of division of the “profits of the concern” as profits. The agreement is not for a single adventure, but for the creation of the ordinary mercantile partnership. The books of account of the plaintiff as a sole trader are closed; others are opened, merchandise is bought and sold, the business is advertised and- conducted in the name of the partnership. The contract creates a partnership in the fullest legal sense of that term, with all resulting rights to and duties upon each individual entering therein. With the exception of the agreement of Neely not to give or endorse notes in the name of the firm, there is nothing either in the contract or in the acts of the parties after its execution, which restrains or even manifests an — 247 — intent to restrain from its utmost reach, the opening agreement to “ become partners in the business.” Therefore upon the execution thereof the title to the property contributed to the capital of the partnership by the plaintiff instantly vested in himself and Neely jointly. They became joint owners or joint tenants thereof and of all additions thereto, and joint debtors therefor in proportion to their several interests. Each had an interest in every parcel and in the whole; in each was the right to joint possession and care, and the right of disposition for the uses of the firm ; and the name of each became necessary to' any suit for the recovery of the price. A contract which creates a partnership in the most complete sense of that term, which invests each partner with a partnership title to the property contributed to the capital, which gives him the right to receive profits, and compels him to bear losses, in cases where each contributes an equal portion of that property, will have the same force and effect in cases where one contributes the property and the other only skill and labor; inequality in this respect does not control the interpretation of the contract; the ownership is the same in character, differing possibly in degree by agreement. In Story on Partnership, sec. 27, it is said in effect, of eases in which one partner only contributes property to the capital of a partnership, and there is no positive agreement that it shall remain his exclusive property, and no implication from the circumstances of the particular ease leading to a different conclusion, that there will be presumed to be a community of interest in the property as well as in the profit and loss. In Whitcomb v. Converse, 119 Mass., 38, four persons signed articles of partnership, two contributing property and two time and skill only to the capital, profits to be divided equally after paying interest upon the property; the partnership was dissolved by consent, and one of those contributing property closed the business, which ended in a loss. Upon his bill in equity against the others, the court held that the capital constituted a debt of the partnership, to the payment of — 248 — which the partners must contribute equally; and that one being insolvent, the other three must bear the loss equally. The court says: “ When, as is usual in an ordinary mercantile partnership, a partnership is created, not merely in profits and losses, but in the property itself, the property is transferred from the original owners to the partnership, and becomes the joint property of the latter. * * * Those partners who contributed the capital did not contribute merely the use thereof, but the capital itself, and were by express agreement to receive interest at rates specified in the articles of copartnership. The partners were by agreement to receive each one fourth of the net profits, and by implication of law must share in the loss in the same proportion. The capital contributed became the property of the partnership, and the partnership, consisting of all the partners, became liáble to Whitcomb and Converse respectively for the amount of the capital paid in by them.” The proposition that this was not a case of contribution of the use of capital merely, but that the capital became the property of the- partnership, rests upon the fact that certain persons signed “ articles of copartnership * * * for the transaction of a commission business,” by which two agreed to contribute property and two skill only; the profits to be divided by a fixed rule after paying interest. There was no declaration as to losses; none as to ownership of the property; the law took care of these two important matters. In Livingston v. Blanchard, 130 Mass., 341, two signed articles of partnership, one contributing property, the other only skill and time to the capital; profits, after paying interest, to be divided equally. The court says: “The capital became, therefore, partnership property.” This proposition rested, as in the former case, upon the agreement to be partners without mention of losses or of ownership of property. Neely agreed to contribute $10,000 to the capital within one year after the execution of the partnership contract. It was quite within the power of the plaintiff, by special provision to that effect, to have postponed to any day the acqui — 249 — sition by Neely of ownership in the property; to have made it dependent either upon this contribution, or upon the accumulation of a like sum to his credit from profits, or upon both, and to have detained him in the position of agent or clerk. But the plaintiff did not do this. On the contrary, he explicitly agreed that a partnership should have an existence of three full yeqrs, computing from the date of the contract. He protected Neely’s position as a partner during the first year from any possible effect from his failure .to make the contribution by confining that effect to time subsequent. Of course the parties looked for profits, and their contract provides for the division. They did not suppose that loss would result, therefore they made no provision for that contingency ; that was left to the law. The rule of division is a graduated one, depending upon the amount earned, providing in behalf of Neely that his share should not be less than a named sum. But the fact that the proportion must of necessity remain unknown until the termination of the business does not, as a matter of law, postpone the existence of the partnership from the date of the contract; and the plaintiff expressly agreed that' the rule of division should go into operation upon that day. Presumably the stock of dry goods contributed by the plaintiff, constituting the entire property of the partnership upon the day of its inception, was sold to it at the fair market value. Of course the partnership was instantly his debtor to the whole extent of its assets. Neely was joint owner with the plaintiff of these, but the ownership was burdened by the indebtedness. He had the right to be in possession, and to dispose of them; to have the proceeds applied upon partnership debts, and to share in any surplus; a right not on the day of the contract of any value in the market. Therefore, if upon that day an individual creditor of Neely’s had undertaken to enforce payment of his debt from this property, he would have taken nothing by his act; probably there would have been no surplus for him. If upon the same day Neely had died, it would have availed — 250 — his representative little to have inventoried his legal right; it existed, but probably had small value in the market. If, however, within ten days thereafter, there had been an enhancement of commercial values to the extent of fifty per cent., and Neely had died, upon the consequent winding up of the business and realization of this profit his representative would have been entitled to share therein according to the rule of the contract, although Neely had made no contribution of property to the capital. Irrevocable legal title was placed in him by the plaintiff at the moment of signing the contract; a title not depending, in any degree, upon the question whether' Neely’s individual creditor could or could not then gain access to it; nor upon its value in the market on that day. As, however, profits had been earned between the day of the contract and the day of the fire, Neely’s legal right, acquired upon the first, had upon the last day become a valuable property. This ownership is not the less absolute because he consented to a restriction of his right to sign notes in the name of the firm; the effect of that restriction is limited to the exact expression of it. The plaintiff concedes that if Neely had contributed $10,000 to the capital, and had allowed $10,000 from his share of the profits to remain as capital, thereafter his ownership would have been as perfect in kind as that of the plaintiff; and it was possible that Neely should have paid in $10,000 within the first year, and that within the second profits to the amount of $10,000 should have accumulated to his credit; but all this would not have removed the restriction; that, by the terms of the contract, is to continue to the end of three years, regardless of all else; therefore, neither by it nor by the intent of the plaintiff is this restriction to have any bearing upon the matter of ownership. When, therefore, the plaintiff, after the delivery of the policy, executed the recited agreement, and by it formed a partnership between himself and Neely for the prosecution of the dry goods business, and transferred the merchandise insured as his sole property to the partnership as his contribution to its capital, he invested Neely with a partner’s title — 251 — to it which was as absolute in character as his own, although less in value; he did precisely that which he had agreed should make void the contract of insurance. For the defendant had made the continuance of the life of that contract dependent upon this, namely, that the entire burden of ownership, of caring for the property as owner, should be and remain upon the plaintiff; had forbidden him, upon penalty of forfeiture of his right to indemnity, to share this ownership, this duty, with a stranger to .the contract; had refused to insure this- property cared for as owner by a stranger; had refused to owe any duty to a stranger; to come under any obligation to treat with, or indemnify him in case of loss. Wood on Fire Insurance, § 334. It is true that the case of Cowan v. Iowa State Insurance Co., 40 Iowa, 551, determines that the sale of property by the insured to a firm of which he is a member is not such a change of title as works a forfeiture; but we believe this decision is contrary to the weight of reason and precedent. The Superior Court is advised to render judgment for the defendant. In this opinion Park, C. J., and Loomis, J., concurred.