Sangston v. Hack

Miller, J., delivered the opinion of the Court. By the will of James A. Sangston, who died in April, 1851, the testator appointed his brothers, George E. Sangston and Lawrence Sangston, his executors, and directed them to invest and hold all his estate in trust for the benefit of his two children, with certain limitations over in favor principally of his grandchildren. The executors took out letters of administration upon his estate, and thereby accepted the trusts created and imposed upon them by the will. Hanson and Wife vs. Worthington, 12 Md., 418. They then returned to the Orphans’ Court an inventory of the personal property, consisting chiefly of household furniture, appraised at $1622.85, and the inventory then states that: “ In addition to the above the deceased had an interest in the firm of Sangston & Co., not ascertained " At the time of the death of the testator, and since the 1st of August, 1843, the three brothers, James, George and Lawrence, were and had been partners in the commercial firm of Sangston & Co., which carried on the wholesale dry goods business in the City of Baltimore. All the estate of the testator seems to have consisted of the furniture above mentioned and his interest in the partnership property, real and personal, belonging to — 188 — this firm. The estate was never settled up hy the executors in the Orphans’ Court, and on the 16th of June, 1869, more than eighteen years after the testator’s death, the bill in this case was filed by his two children and his grandchildren, beneficiaries under his will, against these executors and trustees for an account. It is not necessary to state at length the averments of this bill or of the answer thereto. Nor shall we stop now to consider and notice in detail the proceedings in the cause prior to the decree for an account. It is sufficient to say that lapse of time and laches have not been relied on in the argument before us, and, in view of the relation in which the parties stood to each other, could not be relied on as an absolute bar to the accounting. The liability to account was conceded by the defendants’ counsel, and the whole difficulty in the case relates to the ascertainment by the account of the testator’s interest in this firm. And as to this many questions have arisen and have been argued with great earnestness and ability. The record is quite voluminous and yet it does not contain some of the exhibits, balance sheets and statements referred to by the witnesses, which might have aided us in reaching proper conclusions on many of the minor points presented hy the numerous exceptions taken by both parties to the auditor’s accounts. Again the auditor, instead of stating the accounts in the mode usually adopted in equity cases, and with which the Court is familiar, has reached results by a series, of schedules or accounts, made out in the mode and on the principles adopted hy professional and expert book-keeping accountants, and this we have found has not diminished the labor attending our investigations. These difficulties were suggested to counsel during the argument, and they then expressed the desire that we should confine ourselves to the decision of certain prominent and controlling questions, and assured us that when these were decided it would not he difficult to re-state the accounts and adjust — 189 — the rights and liabilities of the parties. But apart from this request and assent of counsel, a careful examination of the record has convinced us that this is the only satisfactory mode of now dealing with the case, and we shall accordingly so dispose of it. 1st. The question first in order, if not in importance, is, were the “ Partnership Articles,” under which the partnership between these three brothers was originally formed, in force at the death of James, in 1851 ? These Articles were signed on the 1st of August, 1843, and by their terms the co-partnership thus formed was to continue for the term of three years, unless sooner dissolved by mutual consent. At the expiration of this period, viz., on the 1st of August, 1846, the same three parties by an agreement in writing appended to the articles, agreed “to continue the aforegoing co-partner ship for two years from this date, subject to a charge of twelve per cent, of the net profits to Isaac J. Pollard, in lieu of the salary heretofore allowed him.” It is very plain that by this agreement the partnership under the Articles was expressly continued for two years. At the expiration of this period Pollard left, and the partnership was continued and the business conducted by the three brothers until the death of James, a period of nearly three years, without any further written agreement between them. This is not an unusual occurrence. It frequently happens that a partnership formed under Articles and limited as to time is silently continued after the expiration of the period originally prescribed for its duration, and the business is carried on by the same parties in much the same way with no new Articles and no formal renewal of the old ones. The question then arises under what terms does the law regard the continued partnership to be conducted P “ This question,” says Judge Story (Story on Partnership, sec. 219) “ does not perhaps admit of any uniform or universal answer. It may be affected by various considerations ; by — 190 — the acts of the parties ; by the habits and changes of their business; by implications from their omission to act upon certain terms of the original contract and from apparent qualification and exceptions and restrictions of others, in their dealings and settlements with each other or even with third persons. But in the absence of all acts and circumstances whatsoever to control or vary the original terms, the just legal conclusion seems to be, that the partnership is to be treated as a mere partnership during the joint will and pleasure of all the parties, and therefore dissoluble at the will of any one of them, but that in all other respects it is to be carried on upon the original terms thereof as to rights, duties, interest, liabilities, and shares of the profits and losses.” And in another part of the same treatise (secs. 197,198,) where the effect of the continuation of a partnership, after the expiration of the original term, without new Articles, is also considered, it is said, “the habits of the trade, and the conduct of the parties may often establish the fact satisfactorily, that some of the Articles have been practically waived, or abrogated, or qualified, while others are necessarily implied as being in full force and operation. In such cases the presumption of the actual state of the partnership contract will necessarily vary with the circumstances, and be governed by them and not govern them.” In Parsons on Partnership, 289, 240, the learned author in treating of the same question, says the answer to it “ must depend mainly on the conduct of the parties. If they go on precisely as before,- or in such a way as to indicate no intentional departure from such a course, the former Articles would have much influence in determining the terms of their present association, and probably their provisions would be held to be those of the present partnership excepting such, if any there were, as were plainly inapplicable to the present state of things. On the other hand, if the firm varied, or departed from these provisions, — 191 — or appeared to adopt new ones, they would be considered as making so far a different bargain from the old one,” but he adds that the renewal of the limitation of time will seldom be presumed from acts or sustained by the law as part of the new bargain on any thing less than proof that the parties had expressly so agreed. The same general rule is also to be found in most of the text books on the Law of Partnership, and it is very clearly and succinctly stated in Lindley on Partnership, 678, thus: “ If a partnership originally entered into for a definite time is continued after the expiration of that time without any new agreement, the Articles under which the partnership was first carried on, continue, so far as they are applicable to a partnership at will, to regulate the rights and obligations of the partners inter se.” The authorities which these authors cite as establishing the doctrine clearly sustain it, though the instances in which the question has been directly presented for adjudication are comparatively few. The cases in which it has been most clearly recognized or expressly determined are Crayshaw vs. Collins, 15 Ves., 228; Booth vs. Parks, 1 Molloy, 466; United States Bank vs. Binney, 5 Mason, 185; Mifflin vs. Smith, 17 Sergt. & Rawle, 165, and Bradley vs. Chamberlin, 16 Verm., 613. The rule as thus stated is not only a convenient, but an equitable and reasonable one, and in our judgment its application, for the purposes of justice in this case, is almost indispensable. It must, therefore, be applied, unless some well founded and unanswerable objection is encountered. The complainants’ counsel has argued that the doctrine applies only in cases where one and the same firm has been continued by the same partners, and that here the intervention of Pollard in 1846 made a new firm, which was dissolved by his retirement in 1848, and that the firm thereafter continued was also in law a new firm. In other words the argument is, that the continuity of the original partnership was broken by a succession of new — 192 — firms, and therefore the presumption of the continuance of the partnership Articles fails. It is however a matter of great doubt whether' Pollard ever became a partner with the Sangstons. The question relates of course to a partnership inter sese and not as to third parties. It is often very difficult to decide whether two or more persons are partners as to each other. The rule is that it is a matter to he determined by the intention of the parties as the same is expressed in the words of their contract, or to be gathered from their acts and all the circumstances which are available for the interpretation of the contract. Parsons on Part., 58; Potter vs. Kerr, 6 Gill, 404; Bull vs. Schuberth, 2 Md., 38. Previous to the 1st of August, 1846, Pollard had been a cleric in the employ of the firm, and he did not sign the agreement of that date as he naturally would if the purpose had been to admit him as a partner. The Sangstons alone sign it and they thereby agree to continue the previous partnership for two years, “ subject to a charge of twelve per cent, of the net profits to Pollard in lieu of the salary heretofore ailoioed him." This plainly means that instead of the fixed salary which they had before allowed him for his services as cleric, the Sangstons, whilst continuing their own partnership, agreed that Pollard should for two years receive twelve per cent, of the net profits of the business, as compensation for his services during that period. It is very clear that this did not make him a partner, for where a per centage of profits is adopted simply as a mode of measuring the amount of wages, salary or remuneration, the fact that it Í3 made contingent upon profits does not create a partnership. Lindley on Part., 15. In the case of Bull vs. Schuberth, (2 Md., 56,) this Court held that the mere fact that remuneration was to depend on the contingency of profits, does not of itself create a partnership, because that is not an uncommon mode of paying agents and servants, and in Crawford vs. Austin, 34 Md., 49, it was decided that an agreement by — 193 — a firm to pay a party one-third of the profits of the business, as compensation for his services as a salesman did not make him a partner. Nor is the case helped by the agreement dated the 17th of April, 1851, endorsed on the Articles and signed by George and Lawrence Sangston, for that simply recites that Pollard’s interest of twelve per cent, had ceased by his withdrawal on the 1st of August, 1848, and that the parties signing had on that day purchased that interest, which means that they had paid or settled with him for his twelve per cent, of the net profits during the two years. There would he no-difficulty in holding that he was not a partner, were it not for the admission in the answer (which however is by no means explicit on the subject,) and the testimony of Pollard himself which was introduced by the defendants, and in which he says he was a partner. But assuming that this admission and testimony are sufficient to warrant a different construction of the contract, we are still of opinion that his connection with the firm under the circumstances stated, did not prevent the continued operation of the partnership Articles as between the Sangs-tons after his withdrawal. We have found no authority to that effect, and we are not disposed to make a precedent in that direction. Again, a clause in the will of James A. Sangston which was executed in December, 1849, is relied on to show that he did not then regard the Articles as in force. One of the conditions of the Articles is, that if either of the parties should die before the first of February or of August, the partnership should continue until the first days of those months respectively, as the case might be, when the business shall cease, and the survivors shall then have the privilege of taking the stock of goods then on hand at an appraisement to be made by duly sworn appraisers, and to continue the business on their own account. A provision like this for the continuance of the partnership after — 194 — the death of a partner for a short period until the close of the respective business seasons of the year, is neither unreasonable nor unusual in partnership Articles. The agreement of the 17th of April, which was evidently made by the surviving partners after the death of James in that month, seems to have been executed by them for the very purpose of carrying out this condition and providing for a continuance of the partnership under the Articles until the 1st of August following. By his will the testator directs that for three years after, and dating from his decease, his portion of the capital should remain, in the firm, the surviving partners paying him interest for the use thereof, and at the' end of these three years, the principal to he paid to his executors, and he adds that he does this for the convenience of the firm and not as a continuation of his interest or share therein, or as entitling his heirs or representatives to a participation in the profits, or as subjecting them to liability for losses during that time. Now we cannot think that in thus allowing his surviving brothers and partners the use of his capital for three years, he had in view or intended to interfere with the continuance of the partnership for the short period after his death provided for in the Articles. The whole scope and tenor of this clause of the will as well as the purpose it was manifestly intended to subserve could he gratified without interfering with this condition of the Articles, and- in our opinion it does not show that the testator supposed when he wrote it that the Articles were no longer in force. Another condition of the Articles is- that the profits should he divided in the proportion of three-eighths each to James and George, and one-fourth to Lawrence. The answers aver that on the 1st of August, 1848, this condition was by verbal agreement between them changed so that the three should he placed on equal terms as co-partners, and this averment seems to he supported ’by the testimony in the case independent of that of Lawrence — 195 — Sangston himself. Changed in this respect only, we are of opinion the Articles were in force at the death of the testator, and we accordingly so adjudge and determine. 2nd. On the 1st of August, 1851, the defendants, the surviving partners, formed a new co-partnership, under the same name of Sangston & Co., and continued in business for nearly three years when they failed. The proof, however, shows that they have paid all the partnership debts of the old firm, and the next question to be decided is, was the Circuit Court right in directing the account to be stated “from the books still extant”? By this we understand the Court as referring principally to the CashBook and Ledger D, which have been laid before us, and used in the argument. The first is a book of original entries, commencing in January, 1851, but the Ledger (which also contains entries .prior to April, 1851,) of course is not. of that character, and both of them contain entries relating to the settlement of the business of the old firm made after the death of James Sangston. But notwithstanding this, we are of opinion, from considerations pertaining exclusively to the circumstances of this case, there was no error in allowing these books to be used in stating the account, and we shall now state briefly, some of the principal reasons that have led us to this conclusion. It is averred by the ’defendants that all the other books relating to the business of the old firm prior to the death of the deceased partner, consisting of the usual books of an extensive mercantile house, were, after having been preserved for a long time, sold in 1865, by Lawrence Sangston as waste paper. This averment is supported as well as could be expected, without resort to the direct evidence on the subject of Lawrence Sangston himself, by the testimony of the witness Berger, who says he was at that time engaged in buying old books for paper manufacturers, and bought from Lawrence Sangston about one thousand pounds of such books, and made similar purchases from — 196 — various other merchants. We find, nothing in the record, to justify the inference that these hooks were thus disposed of for the fraudulent purpose of destroying them as evidence against the defendants. In July, 1854, shortly after the failure of the new firm, a petition was filed in the Orphans’ Court by the testator’s son, (one of the present complainants,) who was then of full age, and by Mrs. Hack, the testator’s daughter, through her husband, who, as the record shows, was then a practicing lawyer diligent and active in protecting the interest of his wife and children, calling upon the'defendants as executors for a statement of the then unascertained interest of their father in the old firm. This was promptly met by an answer from the defendants in which they allege in substance, that the old firm was actually insolvent, and that their own failure was caused by their efforts to pay the large indebtedness of that firm, and that upon the final winding up of its affairs the interest of the testator’s estate therein would amount to nothing. After this petition and answer no further proceedings were taken either in that Court or a Court of equity until the filing af this hill, a period of nearly fifteen years. This son of the testator was in the employ of the old firm as assistant book-keeper at the time of his father’s death, and continued with the new firm in the same capacity for some time thereafter, and in his testimony he admits.that after the new firm failed, he with his uncle George made a cursory examination, lasting some two or three hours, of his father’s affairs, and in that examination his uncle showed him a list of bad debts and losses the hulk of which happened in his father’s life-time, and of which witness was himself conversant, and that in the examination of the hooks then made, they went over these debts and losses. It is also clearly shown that for many years thereafter the same party had ample opportunity, if he had chosen to avail himself of it, to make a further and full and thorough examination of these hooks, hut as it — 197 — appears no such examination was ever made. While this long lapse of time, and laches and negligence on the part of the complainants, are not, as we have said, an absolute bar to the account prayed by this bill, they must have weight in considering the complaints now made as to the destruction of the other books, and must have a potent influence in determining the question whether the books now before us ought to be used in stating that account. But more important than all this, it is clearly proved, wholly apart from the books, and the answers, and the testimony of Lawrence Sangston, that the old firm was actually insolvent when James Sangston died. That fact is established by the testimony of Pollard, and the complainants themselves have confirmed it by the introduction in evidence of the letter of the defendants to Mr. Hack of the 24th of June, 1854, in which that insolvency is very explicitly asserted. If then, these books are not to be used what basis is there for an account that would be of any benefit to the complainants ? We have carefully examined the record and can find none. In face of the proved fact that the firm was insolvent when the testator died, we do not see what account could be stated beneficial to the complainants without recourse to these books and the terms of the partnership Articles regulating the liability of the partners for the capital advanced. Of course we are not to be understood as intimating that a trustee, executor or surviving partner can take charge of a trust estate, and in its administration preserve no vouchers of his disbursements, and yet discharge himself simply by entries made by himself in his own books after the trust commenced. In such case the salutary and just rule is to hold the delinquent party to the strictest proof as to disbursements, and the most rigid accountability, where-ever the amount of the estate committed to his charge is once admitted or ascertained. But in this case the difficulty lies in ascertaining the cardinal fact whether any trust — 198 — estate whatever, as respects the interest of the testator in this firm, came to the hands of these defendants as his executors. It seems to us that this fact cannot be ascertained without resort to these books and the partnership Articles. Their use has, in our opinion, become an absolute necessity for the complainants themselves, and is imperatively demanded by the peculiar circumstances of this case. Without them, nothing in the likeness of justice, could be meted out to the parties on either side. While the books may be thus used,.it is of course open to the complainants to controvert any of the items therein. That has been successfully done, as to the charge of $6000 against James Sangston, made as of the 31st of August, 1854, and that item was very properly abandoned by tbe defendants, and does not appear in the auditor’s accounts. But we agree with the Court below, that it is sufficiently shown that the appraisement of the stock of goods on hand, on the first of August, 1851, was made in compliance with the provision of the partnership Articles on that subject, and we are also of opinion that the item of $23,483.40, credited to the old firm in the account between that firm and the new firm, found in Ledger D, represents the amount of such appraisement. 3rd. The next question is, were the defendants, as surviving partners, entitled to compensation for their services in winding up the concerns of the old partnership P That such compensation cannot be allowed, unless it be specially so stipulated, is familiar and elementary law. Story on Part., sec. 331. But in this case, the partnership Articles expressly provide that the surviving partners “ shall be allowed a reasonable compensation for closing the business, said compensation to be fixed by the Orphans’ Court, or by three disinterested persons.” By the terms “ closing the business,” we understand the parties to mean the settlement up of the partnership affairs, or in other words, the collection of its assets, and the application of them to — 199 — the payment of its debts. That this was done by the defendants we have no-doubt, and the fact that while doing it, they formed a new partnership,. and continued the same business at the same place, as the Articles contemplated or permitted, furnishes no good reason why they should he deprived of the benefit which this express stipulation gave them. It would he peculiarly unjust so to do, if in their efforts to pay all the debts of the old firm the defendants devoted, as it appears they did, a portion of their own means to the purpose, and thereby brought about their own financial failure and ruin. The mode of ascertaining the compensation prescribed in the Articles, cannot now he carried out, and the only way in which a Court of equity can arrive at it is by receiving the testimony of witnesses as to what, in their judgment, the services rendered were worth. That was done in the Court below, hut the circumstances under which the testimony of the three witnesses on that subject was given, are such that the complainants ought not to be precluded from examining witnesses on. their side, and when the cause is remanded that privilege must he allowed them. We are also of opinion that in the adjustment of this compensation no commission, or percentage should he allowed on the amount advanced by the defendants to pay debts. Such services are not within the terms of the Articles, and if in the accounting the defendants are allowed the sum so advanced, with interest, it is all they are entitled to on that score. 4th. The next question relates to the statement of the capital account and the rights and liabilities inter sese of the several partners, in respect to the capital advanced by each. We think it clear that this question must he settled by the terms and provisions of the partnership Articles. By those Articles it was agreed that James and George should bring in capital coming from a certain source to an amount not to exceed the sum of $30,000 — 200 — each, for which they were “ to he allowed interest at the rate of sis per cent, per annum from the time it is paid in,” and that Lawrence should bring in, as soon as realized, all his means and interest in a certain other firm, “to bear a like interest of sis per cent.” There was actually brought in by James and George the sum of $47,298.61, each contributing an equal part thereof, but it is conceded that nothing was ever brought in by Lawrence. This, therefore, is not the case of a partnership in- which it is agreed that one partner shall contribute his services, labor, or skill as against the capital of the others, hut the usual case in which each agrees to contribute and put at the risk of profit or loss, money as capital. In such a case where the enterprise proves a failure, and the capital is lost and absorbed by debts, it is equitable and just that the partner who has failed to comply with his engagement, and has brought in nothing, should make good to his co-partners the proportionate share he agreed to furnish, .or in other words, should be made to share equally with them in the loss of capital. We have been referred to no authority, and have found none in which a different doctrine has been announced. Then as to the allowance of interest on the capital contributed by James and George. That too we think is covered by the terms of the Articles. It is to hear interest from the time it is paid in, and in our opinion the defendants have no good ground of complaint as to the period for which interest has been calculated by the auditor in the statement of the capital account. 5th. The amount appearing in the auditor’s schedules as having been advanced by the defendants out of their own means to pay the debts of the old firm, is derived from the account, found in Ledger D, between that firm and the new one. Some of the items of disbursements in the latter part of this account were made at so late a period after the dissolution of the old firm by the death of James — 201 — A. Sangston, as to give rise to a reasonable doubt whether they could have been on account of tbe debts of that firm. We shall, therefore, leave the question of amount open for further investigation, and further proof on the part of the complainants, if they may have any to adduce. But whatever this amount when definitely ascertained may be, we entirely agree with the defendants’ counsel that the accounts “must provide for its payment with interest, out of the remaining assets of the old firm before the capital is taken care of. These assets consist of the warehouse on Baltimore street, and the house and lot on Edward street. The decree directs them to be sold, and we are of opinion this sale should be made before the accounts are finally stated, for by so doing the amount of such assets will be definitely ascertained and the adjustment of the accounts will thereby be greatly facilitated. (Decided 20th June, 1879.) 6th. In considering tbe case we have not relied upon the testimony of either of the defendants, and we are satisfied the objection to their competency as witnesses is well taken. It is sufficiently sustained by the decision in McKaig vs. Hebb, et al., 42 Md., 227. We have thus disposed of the leading and most important questions in the case, and shall add but a word upon another point. It was alleged in argument that in the auditor’s schedules interest has in some cases been compounded. But it is answered that as this has been done on both sides no harm has resulted. All that we propose to say on this question is, that in the re-adjustment of the accounts to be hereafter made, no compounding of interest or calculation of it by rests should be made to the prejudice of either party. It follows that the decree appealed from must be reversed, and the cause remanded for further proceedings in accordance with the views expressed in this opinion. Decree reversed, and cause remanded. — 202 — Judges Robinson and Irving dissent from so much of the foregoing opinion, as decides that the hooks and entries of the defendants are admissible in evidence, to charge the complainants in regard to the settlement of the old firm of 'Sangston & Oo.