Hasberg v. McCarty

J. F. Daly, J.

[After stating the facts as above.]—The relations between the plaintiff and defendant as partners were peculiar. There seems to have been at all times a feeling of the profoundest trust, confidence and dependence on the' part of plaintiff, and the assumption and attitude of protection and patronage on the part of defendant. Defendant was the guiding and ruling spirit in an association which, as far as plaintiff was concerned, seemed to partake as much of a friendly as of a business character.

Whatever defendant proposed, plaintiff appeared to assent to without question. The capital on which they started business seems to have been, in effect, all finally procured by plaintiff, while defendant received the largest share of the profits and never repaid plaintiff either principal or interest of what he was indebted for on the capital account. When the proposed corporation Avas started and defendant approached plaintiff for the purpose of getting the transfer in question, he represented that he was doing it for plaintiff’s benefit and against the wishes of the other corporators, and with a loyal determination to care for plaintiff’s interest as fully as his own and to share with plaintiff the prospective benefits of the new undertaking. Whatever doubt may exist as to the extent of the influence defendant exercised over plaintiff, is removed by a perusal of the agreement which he placed before the latter to sign.

Such an agreement could be proposed only to a person accustomed to a complete surrender of will and discretion to the other party. The plaintiff’s interest, amounting to nearly $30,000, was conveyed away to his partner, and the latter’s “ agreements ” in the paper were to be full payment and satisfaction therefor.

The merchandise was to be turned over to the company for stock at whatever price defendant might agree upon. The stock so received was to be held by defendant, voted upon by him, sold and disposed of by him. If sold, plaintiff was to get what defendant got for it. If he chose to turn it over to plaintiff it settled all claims relating to it. If he died, his representatives were to have three years after demand to deliver it. With such trust and confidence reposed in him, we should expect the highest degree of good faith on the part of the defendant. He denies that he said the company was to have a cash capital of $250,000, but it is certain that he did not confide to plaintiff' how their capital was to be made up. He did not tell him that while they were putting in $58,000 of merchandise, Hall and Nicoll were putting in $97,000 of goods, nor that the “good will” of both firms were put in at $50,000; nor that two patents for the manufacture of fancy articles Avere put in at $25,000, and that the new corporation thus loaded with the stocks of the firms going out of business and with good wills and patents, all aggregating $230,000, had only $20,000 of cash with which to do business.

This suppression of facts so material, even if there were no intention to defraud the plaintiff, would be sufficient to authorize me to set aside the transfer from plaintiff to defendant. “ In equity the right to relief is derived from the suppression or misrepresentation of a material fact, though there be no intent to defraud. This doctrine is substantially grounded on fraud, since the misrepresentation operates as a surprise and imposition ” (Hammond v. Pennock, 61 N. Y. 145, 152).

Equity will scrutinize agreements between partners closely and watchfully, and will not permit them to stand, if it can discover that they were brought about by concealment, unfairness or other unconscionable conduct (Platt v. Platt, 2 Thomp. & C. 25).

The condition of the new corporation from the start was such as to call for the exercise of the best judgment on the part of any person who might be asked to give his goods for its stock. Its chances of being able to pay a dividend depended solely upon the business it proposed to carry on (which was about the same as that in which McCarty & Ilasberg had been engaged) turning out better than they had found it for the two years preceding their dissolution.

Under these circumstances it would be unconscionable and fraudulent in defendant to withhold any material fact from his co-partner. If he doubted the success of the new enterprise, it was grossly unfair to plaintiff to take his share and put it in the business without disclosing every circumstance which would enable him to use his own judgment as to whether he ought or ought not to engage in the risk; and as defendant’s object was to obtain for himself a controlling position and large salary in the new corporation, it would be actually fraudulent to lead plaintiff into any danger of loss for the purpose of accomplishing such object. If, on the other hand, he believed that the corporation would do a profitable business, that it would pay dividends, and that its stock would prove to be of value, he committed an unquestionable fraud upon plaintiff in appropriating to himself the whole $25,000 of stock issued for the good will, and in concealing from plaintiff the fact of his having arranged to do so.

On the question whether the defendant represented that the corporation was to have a cash capital of $250,000, the preponderance of proof seems to be with plaintiff. He swears to it positively; Bahr and Reed swear to a similar statement at other subsequent times, made by defendant to them. Defendant denies it. He points out the impossibility of plaintiff believing such a representation, or defendant making it, when the arrangement then and there made between them was to put in $58,000 of merchandise for stock. This at first seems a plausible argument, but it must be remembered that plaintiff might have assumed that the $250,000 cash capital was over and above the merchandise. A significant fact was also proved by defendant himself, viz, 'that in order to avoid any question as to a strict compliance with the statute, the defendants Hall and Nicoll, the persons organizing the corporation, were advised by their counsel that they must raise the money to subscribe and pay for the whole capital stock in cash, and the various merchandise, good will and patent items should be thereupon purchased by the company. The defendant having this actual cash transaction in mind would, without doubt, mention it as a proof of the good condition of the corporation. But it is clear that such cash subscription, if it were effected, was formal, and that the intent of the parties was to use it all when paid in for the purchase of the property described.

It is contended, as a defense to this action, that the plaintiff, having discovered the truth concerning the formation of the corporation, affirmed the transactions between himself and defendant. This claim is based upon his continuing thereafter to receive a salary from the company as general manager, a position which the defendant obtained for him as soon as the company commenced business, and which he was promised at or about the time of the transfer, as an inducement to make it. This view must be based upon some theory that such salary was a profit or benefit which plaintiff was receiving for the transfer of his interest. I think it cannot be so regarded. It was not a part of the contract which he seeks to disaffirm, but was a separate, independent contract made with a third party—the corporation.

The salary was not a profit derived from the transfer, but was a payment to a servant of the company for services rendered as a full equivalent. If defendant had taken plaintiff into his individual service, or had procured employment for him with a stranger, the services and employment and the wages thereof would be independent of the transaction now sought to be avoided, for plaintiff could be discharged at any time at the will of his employer without affecting the original transfer of property. It is not the same thing as the receipt of dividends upon the stock, which would be deriving a direct profit from the transaction, and therefore inconsistent with an intention to disaffirm it.

Nor does the fact that plaintiff delayed for four or five months bringing this action to disaffirm, amount to a waiver, since it is not apparent that defendant was prejudiced by such delay or that plaintiff was benefited by it. It is only where there is delay, coupled with the retention of property or rights received under the fraudulent transaction, that defeats the right to rescind. Plaintiff had nothing to restore .to defendant as a condition of disaffirmance, for defendant held the stock which was the consideration of plaintiff’s conveyance. The relief prayed for should be granted, and an accounting of the co-partnership will be ordered. Defendant will be charged with the value of the merchandise transferred to him, being its value at the date of the transfer, and with $2,500 on the original capital account, with interest from the date o'f the formation of the co-partnership in 1875.

Judgment for plaintiff accordingly.