[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 329 The evidence was abundant to sustain the decision of the referee, and the only question for our consideration arises upon the rejection of the evidence as to the alleged counter-claim. "Counter-claim" was a new term, introduced into the Code, which is limited and defined therein. When the action is upon contract, unless the counter-claim arises out of the contract or transaction set forth in the complaint as the foundation of the plaintiff's claim, or be connected with the subject of the action, it must be a legal or equitable cause of action against the plaintiff arising upon contract and existing at the commencement of the action.
It is manifest, however, that every cause of action existing *Page 331 in favor of the defendant against the plaintiff, arising upon contract, cannot be the subject of a counter-claim. It must be a cause of action, upon which something is due the defendant, which can be applied in diminution of plaintiff's claim. For instance, a cause of action for the specific performance of a contract in reference to real estate arises upon contract, and yet cannot be set up as a counter-claim unless it grew out of or be connected with the cause of action alleged in the complaint.
If A. should sue B. upon a promissory note for $1,000, I entertain no doubt that B. could set up that he and A. had been partners; that the partnership was dissolved, and that A., upon a settlement and adjustment of all the partnership affairs, was justly indebted to him in the sum of $1,000, and claim this balance as a counter-claim. It would be unjust to compel B. to pay A. the amount of the note while A. was owing him the same amount upon the partnership transactions; B.'s claim in such case arises upon contract. Partnerships are created by contract, and the relations of partners are regulated by contract, express or implied. In all partnerships, whether it be embodied in a formal contract or not, there is an implied contract that, at the termination of the partnership, there shall be an accounting, and that the balance found due the one from the other, upon the final adjustment, shall be paid.
The object of introducing counter-claims into the practice under the Code was to enable parties to settle and adjust all their cross-claims in a single action, so far as they could. In the case supposed all the necessary parties should be before the court. No one need ordinarily be made parties to a suit to wind up the affairs of a copartnership, except the partners. If there be creditors, the court will take care of their interests. They need not be made parties to the action. The balance due may be just as well ascertained when it is set up as a counter-claim as if a direct suit were commenced to ascertain and adjust it. I am, therefore, well satisfied with the reasoning and conclusion of Judge ALLEN in the case of Gage v. *Page 332 Angell (8 How. Pr., 335), notwithstanding the contrary conclusion reached by a very able court in Ives v. Miller (19 Barb., 197).
Where a partnership is dissolved, the assets are to be used in the first instance to pay the creditors of the firm, and then to adjust the equities between the partners for inequality of capital and advances, and for other matters provided for in the partnership agreement; and the balance, if any, is to be divided between them. A partner who is indebted to the firm may yet commence an action for the adjustment of the partnership affairs and the distribution of the partnership effects, and has a cause of action for such purpose, and such cause of action arises upon contract. Yet in such case he could not set up his cause of action as a counter-claim, because he would have nothing to go in diminution of plaintiff's claim. Such is the difficulty with the alleged counter-claim in this action. It contains no allegation that upon the settlement of the partnership affairs there would be anything due the defendant, as was contained in the case ofGage v. Angell. There it was alleged that upon a settlement of the accounts "there was a balance due from the plaintiff to the defendant to an amount exceeding the sum claimed by the plaintiff" in the action. For aught that appears in this answer, the defendant may have been indebted to the plaintiff upon the partnership affairs. There is an allegation that the plaintiff has converted some of the partnership effects into money and applied the money to his individual use. This the plaintiff may have had the right to do; and, notwithstanding this, at a final accounting the defendant might have been found indebted to him. There is also an allegation that the defendant is entitled to the moneys collected, received and applied to his own use by the plaintiff. The facts alleged showed that he was not thus entitled. The money, when collected, belonged to the firm; and whether the plaintiff could be compelled to pay any of it to him, depended upon whether a balance was found in defendant's favor upon the final adjustment. There seems to have been in the pleading, *Page 333 which was under oath, a careful avoidance of any allegation that there was or would be any balance due the defendant. Hence, when the plaintiff admitted this alleged counter-claim by not replying to it, he admitted nothing constituting a counter-claim; and as no counter-claim was alleged, no proof was admissible under this portion of the answer.
We are without the reasons for the decision at General Term. This construction of the pleading may, perhaps, seem somewhat strict, but it is clearly allowable for the purpose of upholding a judgment rendered and affirmed by the courts below.
But a majority of my brethren differ with me as to the point last discussed, and are of the opinion that the answer, fairly construed, is sufficient to show that the defendant claimed a balance to be due him upon the partnership accounts; and further, that the objection to the evidence sustained by the court was not that there was any imperfection in the manner in which the counter-claim was set up, but that a balance due upon unsettled partnership accounts could not be set up and urged as a counter-claim in this action.
The judgment should be reversed and new trial granted, costs to abide the event.
All concur.
Judgment reversed.