Pomeroy v. Benton

Sheewood, Judge, delivered the opinion of the court. This was a suit in the nature of a bill in equity. The plaintiff and defendant were for a number of years co-partners, under the name and style of Pomeroy & Benton, engaged in .the wholesale dry goods business, in the city of St. Louis, where the defendant resided and managed the business of the firm, while the plaintiff resided in the city of New York, attended to the affairs of the firm at that point, and seldom visited St. Louis. The petition, in substance, charges that defendant, in vio iation of the articles of co-partnership and of his duty as part tier, and without the knowledge or consent of plaintiff, used the money, credits and assets of the firm in the purchase of government vouchers and whisky, and in various other ways misappropriated the money, credits and property of the firm, whereby he realized immense profits; that he fraudulently omitted to charge any of these matters on the partnership books; that subsequently he forwarded to plaintiff a false bal ance-sheet, purporting to be a correct exhibit of the whole partnership affairs, but it in fact did not mention any of the speculations in which defendant had been engaged, or of the profits he had realized; that this balance-sheet, defendant, though knowing the contrary, assured plaintiff was correct; that by these representations, and other fraudulent conduct and contrivances, defendant induced the plaintiff, tvlio relied solely on the defendant and his representations, to settle with him on the basis of the balance-sheet, and to sell out to him his entire interest in the firm for $275,000, a sum far below its real worth. The petitioner concludes with a prayer for opening the settlement and taking an account as to the matter complained of, and for general relief. All the material allegations of the petition were denied by the answer, which also set up as new matter of defense, that defendant had purchased of plaintiff his entire interest in tlie firms of Pomeroy & Benton, Pomeroy, Benton & Co., Pome-roy, Durkee & Co., and Pomeroy & Durkee, for the sum of $275,000, and received a bill of sale therefor, whereby the — 542 — firm of Pomeroy & Benton was dissolved, and the entire interest of plaintiff in the goods, property and assets of that firm were • conveyed and assigned to defendant, on the first day of January, 1865, and that plaintiff from that time forward had no further interest, right or claim in the firm of Pomeroy'& Benton, or the other firms mentioned, and that plaintiff was thereby barred of having the relief prayed for, etc. There was no reply filed. Laying aside for the present all inquiry as to the sufficiency of the petition and the effect to be given to the defendant’s answer, what the evidence in the cause establishes will be briefly adverted to, and the questions of any practical importance necessarily arising therefrom stated and discussed. Those questions are two, viz: First, did the defendant appropriate the credits or funds of the firm to his own private use in the purchase of government vouchers and whisky? Second, was sitch appropriation made without the consent & in fraud of the rights of the plaintiff? I am forced to the conclusion, after a careful perusal of the evidence, that both these questions must receive a reply in the affirmative, as it is abundantly established by the testimony, that the defendant, prior to the dissolution of the firm, in contravention of the articles of co-partnership and of his duty as partner, appropriated its monies and credits to his own private use, in the purchase of vouchers and highwines, for which he never accounted, but on the contrary, induced the plaintiff to execute to him a bill of sale sufficiently comprehensive in form to embrace the former’s entire interest in the firm ; when the balance-sheet, which was used as the basis on which the sale was effected, made no mention of, and contained not the most distant allusion to the profits fraudulently realized by the defendant, and of which, as shown by the testimony, plaintiff was entirely unaware, reposing as he did in defendant and his representations the most implicit confidence. It is no excuse for, nor does it lie in the mouth of the defendant to aver, that plaintiff might have discovered the wrong and prevented its accomplishment, had he exercised — 543 — watchfulness, because this is but equivalent to saying : “ You trusted me, therefore 1 had the right to "betray you.” Vigi-lantibus et non dormientibus equitas subvenit, is without application here; it only applies where a party being apprised of, slumbers upon his rights. Eor the betrayal of confidence reposed, the skillful lulling to rest of the intended victim, the adroit closing of every avenue through which apprehension might enter — whether this be done by words or by “ expressive silence,” — are the ear-marks of successful fraud the world over. And a court of equity, should it make such a perverse application of one of its fundamental maxims as that seemingly insisted on by defendant’s counsel, would become the efficient ally of the vigilant wrong-doer, and prove recreant to its past history and the principles on which its very jurisdiction rests. That the balance-sheet was the basis of the estimate of plaintiff’s interest in the concern, is sufficiently clear, proven as it is by the testimony of plaintiff, as well as by defendant’s admissions to Wilkerson. It is equally clear that the voucher and whisky transactions were not included in such estimate. These things defendant claimed and still claims as his own. It is not shown by the evidence, that the dealings in the trade-store at Natchez ever embraced transactions in vouchers or whisky; the defendant himself would not assert that they did; so that plaintiff’s consent as to the operations at that point could afford no protection for defendant’s conduct in regal'd to those matters. And besides, the defendant would not venture to deny what the plaintiff positively asserts, that he knew.nothing of the whisky or voucher transactions of the defendant until long after the dissolution of the firm. Manifestly, plaintiff could not yield assent to nor waive that of which he was ignorant. Even if it be conceded for the sake of argument, that the defendant was permitted to withdraw from the capital of the firm a considerable sum for his own use, still this would by no means authorize the speculations into which he plunged ; and this is apparent for several reasons : — 544 — First, the articles of1 co-partnership expressly forbade them. Second, the sums which defendant might have drawn for his individual use were far exceeded in amount by those really employed in such speculations. Third, it nowhere satisfactorily appears in evidence, that the amounts which could have been legitimately drawn, were ever actually embarked in those speculations. And, fourth, that good faith, which should be the animating principle of all mercantile associations, (all the authorities on partnership speak this language) should have restrained the defendant from embarking the funds or credit of the firm, outside of their legitimate scope and for his own individual benefit. For not only are gross frauds committed .by one partner against another prohibited, but transactions of a more plausible nature, as intrigues for private advantage, are held as offenses against the partnership, equally forbidden, and therefore relievable in a court of equity. (Collyer on Fart., § 179; Smith’s Merc. Law, 54; Featherstonhaugh vs. Fenwick, 17 V/, 298; Fawcett vs. Whitehouse, 1 Russ and Myl., 132; Russell vs. Austwich, 1 Sim., 52.) It has accordingly been held that one partner is accountable in equity to his co-partner for his proportion of the profits of a venture, although outside of the firm’s scope of business, if the money (or what is tantamount thereto, the credit) of the firm, is used in such venture. For, as Lord Eldon says: There is an implied obligation among partners, to use the property for the benefit of those whose property it is. (Crawshay vs. Collins, 15 Ves., 218; Brown vs. Litton, 1 P. Wm., 140; Stoughton vs. Lynch, 1 Johns. Ch., 467; Collyer on Part., § 1820 So far has the rule which requires the utmost good faith between co-partners prevailed, that where a partner, in violation of the partnership articles, but without using the partnership funds therefor, embarks in outside enterprises, a court of equity will decree his co-partner as a partner with him in such separate business. (Collyer on Part., §§ 221-249; Somerville vs. McKay, 16 Ves., 382.) And a bill making such allegations has been held maintainable, and that an — 545 — account could be taken, although an action at law would lie for the breach of the articles. At the trial the claim was seemingly urged by the defendant, that as in 1864-, plaintiff was loaning out t.he firm’s money at six or seven per cent, interest, and a considerable amount was also lying idle in bank at New York, that therefore there was no impropriety in his using the firm funds in St. Louis, being charged, as he states he gave strict directions to the book-keeper to do, with 8 per cent, interest on call. But unfortunately for this shallow pretense, evidently an afterthought, no charge against the defendant for interest (only a very inconsiderable sum) was ever made on the books of the firm, notwithstanding the large sums he was constantly using. Even, however, had he been charged with interest on every dollar he misappropriated, still this would not be enough ; he must be held answerable as well for the profits he has derived out of the partnership funds. (Collyer on Part., § 182; Stoughton vs. Lynch, 1 Johns. Ch., 467; Brown vs. Litton, 1 P. Wins., 140; Sto. on Part., § 178; Herrick vs. Ames. 8 Bosw. 115.) To such an extent have courts ot' equity gone in this direction, that if there be any doubt as to whom the funds in such case belong, that doubt will be resolved in favor of the partnership and they will be held as belonging thereto. That every partner is the agent of his co-partner is a very familiar doctrine, and it arises from the necessities of the co-partnership relation. A doctrine equally well settled, though not yet hackneyed through frequent quotation, is, that the same rules and tests are applied to the conduct of partners as are ordinarily applicable to that of trustees ; and that the duties, functions, rights and obligations of partners may be for the most part comprehended by the same words which define those of trustees and agents. (Collyer on Part., § 182; 1 Sto. Eq. Jur., §§ 468, 623; Kelly vs. Greenleaf, 3 Sto. R., 93.) Mr. Justice Story, in his elaborate work on Equity Jurisprudence (Vol. 1, § 468), has remarked, iu speaking of the duties of agents, as follows: — 546 — “Courts of equity adopt very enlarged views in regard to the rights and duties of agents, and m all cases where the duty of keeping regular accounts and vouchers is imposed upon them, they will take care that the omission to do so shall not be used as a means of escaping responsibility or of obtaining- undue recompense. * * * Upon similar grounds, an agent is bound to keep the property of his principal separate from his own ; if he mixes it up with his own the whole will be taken, both at law and i-a equity, to be the property of his principal, until the agent puts the subject matter under such circumstances that it may he distinguished as satisfactorily as it might have been before the unauthorized mixture on his part. In other words, the agent is put to the necessity of showing clearly what part of the properly belongs to him ; and so far as he is unable to do this, it is treated as the property of his principal. Courts of equity do not in these eases proceed upon the notion that strict justice is doue between the parties, but upon the ground that it is the only justice that can be done; and that it would fye inequitable to suffer the fraud or negligence of the agent to prejudice the rights of liis principal.” At a subsequent period, in the case of Kelly vs. Greenleaf (3 Story Rep., 93) where a member of a firm had failed to keep proper books of account so that the firm property could be distinguished from his own, the learned judge cites the section just quoted with approval, and remarks with emphasis “Every word of this passage is equally applicable to the case of a partner acting as the agent of a partnership,” and this was precisely the status of the defendant. Not only did the law imply, but his own express contract required, that lie should see to it that the books of tlie firm were fairly and honestly kept, and this was especially the case as the plaintiff was acting for the firm in New York, while he had the personal management of the business in St. Louis, and nothing but a flagrant disregard of his partnership obligations could have induced him to so sadly neglect his duty in this particular and afterwards aggravate the wrong thus committed, by taking advantage of his culpable omission — 547 — and neglect. But be will not be permitted to employ bis dereliction from duty “as a means of escaping responsibility” or of obtaining more than bis proper proportion of the partnership effects. What was the exact amount of the partnership funds which the defendant has converted to his own use, in the purchase of the articles referred to, is an inquiry which will probably never receive an answer in anywise approaching exactitude. The defendant testifies that about $70,000 would reach his purchases in high wines ; but the testimony of liis brother-in-law, Sturgis, shows that in one single operation in Chicago he cleared about that amount. His operations in Touchers, he thought, wrould reach $200,000, but without any data to guide his recollection, he is positive they never reached half a million. He tells Catherwood he has cleared $25,000 on whisky under his contract with him, and gives him $5,000 as his share, and at a subsequent period does not deny that he owes him more ; but when testifying he claims to have made only $19,377 on whisky and $26,460 on vouchers. But there is every reason to believe that these statements should not be regarded as importing absolute verity. Defendant indicates to Q-eorge H. Chase, by means of some figures on a piece of paper, that he realized on whisky from $75,000 to $100,000 — and he tells Catherwood that he had been engaged largely in the purchase of whisky, “but only as an agent,” and that he stopped purchasing whisky, giving as a reason that “'he was doing so well with the money in the purchase of vouchers, he preferred to buy them rather than risk it in whisky.” And he tells Munson Beach that he paid for his house, $47,500, with money realized on vouchers. And the defendant’s testimony shows that he paid for the vouchers which he purchased, by the checks of the firm, and never accounted for the profits. The amount expended by defendant for vouchers, in the short space of time between August 1st, 1864 and the end of that year, as shown by Wilkersou’s statement, was $271,058.25. As to how often the vouchers were turned into cash, whether — 548 — they usually remained on band one day, one week, or one month, we are left totally in the dark — nothing elicited from the defendant throws any light on this subject; and the amount of his profits depend greatly upon the rapidity with which he could cash them, and reinvest their proceeds in other vouchers. And this alternation of purchase and sale would seem to have been the defendant’s usual course of dealing when engaged in business of this description. "Whether the defendant knew that the balance-sheet furnished the plaintiff was incorrect, it is wholly immaterial now to inquire. For the assertion to the injury of another of something not known to be true, is equally reprehensible both in morals and law, as that which is known to be false. (1 Sto. Eq. Jur., § 193.) The defendant denies having asserted the correctness of the balance-sheet, but the seeming lack of candor he exhibits when testifying, the apparently evasive and contradictory replies he gives in response to questions propounded to him; his failure to satisfactorily answer whenever asked to tell of dates, amounts and other facts with which it" would seem he must be familiar, render any statement he may make, open to very jealous observation. But whether he made any such representations or not, does not at all affect his present liability. The relations of trust and confidence existing between the plaintiff and himself placed him under an equitable obligation to communicate all he knew, of the matter then pending, to the plaintiff, to “make a clean breast of it,” to diseíose to him all the material facts within his knowledge touching the negotiation then in progress as fully as though he had stepped upon the witness-stand and kissed the book, and nothing short of a complete disclosure of this sort could exonerate the defendant from the charge of undue concealment, which, under circumstances like the present, is, in the sense of a court of equity, itself a fraud. (1 Sto. Eq. Jur. §§ 204, 205, 207, 213, 214, 215, 216, 220; Bank of the Republic vs. Baxter, 31 Vt., 101; Martin vs. Greene, 10 Mo., 652; Jillett vs. U. N. Bk., 56 Mo., 304; Bruce vs. Ruler, 17 Eng. C. L., 290; Juzan vs. Toulmin, 9 Ala., — 549 — 662; Maddeford vs. Austwick, 1 Sim. 89, 8 B. and Cressw., 586. Tlie doctrine here asserted, that confidence reposed, and the fullest disclosures are, in equity, correlative terms, is one in full accord with the authorities above mentioned and must commend itself to the cordial approval of every just mind, while it rebukes the manifestations of that spirit which, looking to its own advantage, is too prone to disregard the rights of those to whom it owes the fealty incident to intimate and confidential association. In briefly commenting upon the evidence, I have hitherto omitted to make mention of that wonderful booh in which defendant kept the accounts of his whisky operations, or of the peculiar and perilous vicissitudes through which it passed. At one time it was wholly consumed by fire; at another it met with only a partial destruction ; but surviving all the destructive agencies arrayed against it, it is still extant, except that portion which records defendant’s transactions in whisky. It is simply impossible to review this portion of defendant’s testimony and listen to his flimsy excuses and ever varying reasons in reference to this book, without being fully impressed with the idea that he destroyed that portion of it which he did destroy, for far more cogent reasons than any which he has yet seen fit to divulge. And this is made more especially apparent from the fact that the destroyed entries were not contained in any other book. As the point has been referred to rather than pressed in argument, I will refrain from discussing the question whether the rule in odium spoliatoris is applicable to the facts of this case. The rule is certainly one of great stringency, and therefore should not be resorted to but in extreme cases, and where other means of proof fail. Having thus considered the results properly deducible from the evidence, the sufficiency of the petition will next be discussed ; and in reference to this, it may be observed that it states a cause of action, if fraud of the character charged therein and established by that evidence constitutes any ground — 550 — whatever for invoking remedial justice. And the petition concludes with a prayer for general relief which will authorize any relief consistent with the facts alleged. This was true under the old practice, and is more especially the case under the new. As to whether the petition (if the bill of sale, while it. stands, is to be regarded as an insuperable barrier to any relief) should have gone farther in its allegations, asked rescission of the contract and offered to surrender the $275,000, the consideration specified in the bill, as a condition precedent to having an account taken of the matter complained of, a ready and satisfactory reply is, that the petition passed unchallenged at the hands of the defendant, and it is rather late in the day, after he has pleaded to the merits and had a trial in %vhich he eujoved all the benefits which he could have had, even if the petition had been a model of perfection, for him to now come forward with the assertion that the petition is faulty in the particular referred to. It is a fact, it would seem, not generally recognized, or at least, frequently ignored, that we have in this State, a code; that by that code are provided the forms of all pleadings, and the rules by which they are to be tested, (Wagn. Stat., 1012, § 1) and under the rules thus laid down in our practice act, if the petition, however inartíficially drawn, do but state a cause of action, and no objections are taken to the formal sufficiency of its allegations, either by demurrer or by answer, “ the defendant shall be deemed to have waived the same.” (Id., § 10, p. 1015.) “ If the substantial averments are there and the adversary overlooks mere formal defects, his statutory right to indulge in critical objections is swallowed- up in his statutory waiver; thenceforward he must address himself to the merits of the case.” (Elfrank vs. Seiler, 54 Mo., 134; Russell vs. State Ins. Co., 55 Mo., 585.) And “if the allegations of the petition entitle the plaintiff to any measure of redress,a deaf ear will not be turned to his complaint, simply because he thinks justice should be dispensed to him in a particular way, other than and different from that to which he — 551 — is actually entitled.” (Biddle vs. Ramsey, 52 Mo., 153.) And out' legislature, as if determined, by “ line upon line and precept upon precept,” to inculcate a liberal construction of pleadings, lias, in a subsequent chapter, given, among others, this additional mandate: “ The court shall, in every stage of the action, disregard any error or defect in the pleadings or proceedings which shall not affect the substantial rights of the adverse party.” (Wagn. Stat., § 5, p. 1034.) Now it is difficult to conceive in what way the “substantial rights” of the defendant could have been prejudicially' affected by the failure of the petitioner to allege plaintiff’s willingness to surrender the proceeds of the sale, conceding for the moment that such allegation was necessary. But this concession will not be made, and among others, for the reason that a court of equity looks not so much to the legal formalities with which a transaction is clothed, as to its very pith and substance. So that even if the bill of sale were broad enough in form to comprehend all the interests which the defendant claims it did, yetas it is conclusively manifest from the evidence, that the minds of the plaintiff and of the defendant never met and concurred in the sale of those matters of which the plaintiff was ignorant, and which the defendant concealed, equity, in consideration of the fraud practiced, and disregarding mere technical forms, will hold that nothing passed by the hill of sale, only such matters as both parties had in view at the time of its execution and delivery. Thus, it has been held, if an instrument is so general in its terms as to reloase the rights of a party to property to which he was totally ignorant that he had any title, 'and which was not within the contemplation of the bargain at the time it was made — in such cases the instrument will be restrained to the purposes of the bargain and the release confined to the right intended to he released or extinguished. (Ramsden vs. Hylton, 2 Ves. Sr., 304; 1 Sto. Eq. Jur., § 145.) But it is with no small degree of inconsistency that the defendant at one moment claims that the bill of sale, until set aside is a complete bar to plaintiff’s action, because it pur — 552 — ports to convey all of plaintiff’s interest in tbe partnership ; and then in the next vehemently asserts that the ventures in vouchers and whisky were defendant's oion individual spec- ( ulations. For the reasons heretofore given, there existed no necessity for rescinding the sale, or that the present action should have been brought for that purpose, and with that theory in. view. The evident object of the petition is to have an account taken as to those matters which were in reality outside and independent of the sale, although apparently embraced within its terms. There was no new matter set up in defendant’s answer, so that a repty was unnecessary. The answer only set forth the sale with greater formality than had been already done in the petition. Judgment reversed and cause remanded, with directions to the court below to have an account taken in conformity to this opinion, and in'thus taking the account the defendant is to be treated in all respects as a trustee. Judge Lewis not sitting; the other judges concur.