Elmira Iron & Steel Rolling Mill Co. v. Harris

26 N.E. 541, 124 N.Y. 280, 3 Silv. Ct. App. 351, 35 N.Y. St. Rep. 343, 79 Sickels 280, 1891 N.Y. LEXIS 1366

• Court: New York Court of Appeals
• Decided: January 22, 1891
• Status: Published

Opinions

Parker, J.

The question to be determined is presented by an exception taken to the refusal of the court to direct a verdict in favor of the plaintiff.

The plaintiff insisted that it was the duty of the court to determine, as a matter of law, that the defendant while a member of the firm of Blood & Co. was an ostensible partner. The trial court held otherwise, and submitted to the jury the question whether Harris was an ostensible or dormant partner, with the further instruction that if they should find that he was a dormant partner, then the defendant was entitled to a verdict.

Now, it is the general rule that a partner can only relieve himself from liability for subsequent transactions had with his former partners in the partnership name by giving notice of his withdrawal. Austin v. Holland, 69 N. Y. 571; Howell v. Adams, 68 Id. 314; Elkinton v. Booth, 143 Mass. 479. The rule is founded upon the principle governing the liability of a principal for the acts of his agent where an agent has once represented his principal; if the principal would avoid responsibility for his acts in the direction of his original .authority after the agency has ceased, it is incumbent upon him to notify those with whom he has dealt that such relation no longer continues. And a partner in dealing with third parties in behalf of the partnership not only acts for himself but as agent for each of the other members of the firm. So that when a partner withdraws from a firm it is his duty to give notice of that fact in order that it may be understood that his former partners have no longer any right to represent him. And if he fail to discharge that obligation he oannot thereafter avoid liability for an indebtedness incurred in the partnership name to a party unaware of the changed situation.

It appears that a notice of dissolution was, at the time, published in a local paper, but that could only affect those who should deal with the firm for the first time after the withdrawal. It did not operate as a notice to the plaintiff, with whom the firm had had business relations prior thereto. As to it actual notice could alone suffice. It was not given, and, therefore, defendant is chargeable with the indebtedness sought to be recovered, unless he is entitled to the protection of the one exception to the rule continuing the liability of partners after dissolution who fail to give notice. A dormant partner need not give notice, and the jury have been permitted to find that such was Harris’ relation to the firm of Blood & Co. Whether rightly, we must now consider. The first step in that direction is to ascertain what is meant by the term “dormant partner.” Bouvier defines “dormant” as sleeping; silent; not knowing; not acting. “A dormant partner ” (says Collyer in his work on Partnership, 6 ed., p. 11) “ is he whose name and transactions as a partner are professedly concealed from the world, * * * is one who shares in the profits of a business but is not known as a member of the firm.”

A dormant partner is one “ taking no part in the management of the partnership.” Lindley on Part. 16.

“We think, however, the word implies both the quality of secrecy and inactivity.” Pars, on Part. 33.

In National Bank v. Thomas, 47 N. Y. 15, 19, the court said: “ A dormant partner is one who takes no part in the business and whose connection with the business is unknown. Both secrecy and inactivity are implied by the word.” As the court cited North v. Bloss, 30 N. Y. 374, as well as other authorities in support of the definition given, it is clear that it did not understand or intend that the North case should have the effect of altering a rule which had been long settled as asserted by it. It follows that one occupying such a relation to a partnership need not give notice, because his connection with the firm not having been known it cannot have contributed in any degree towards establishing the credit of the firm, and consequently his withdrawal could not take away a single element which helped to build up the business reputation and credit of the partnership. Such we deem the rule and it should not be extended. Credit is a matter of such impqrtance in the mercantile world, and the financial standing of any partner may through various sources be so readily commingled with th at of his firm, that it is essential that he should be required to take the precaution of giving notice of withdrawal unless it clearly appears that his connection with the firm did not add to its reputation for responsibility.

It is not attempted here to establish a partnership liability against Harris on the ground of estoppel,.which would have burdened the plaintiff with the necessity of establishing that he held himself, or knowingly permitted another to hold him out as a partner; that the plaintiff had knowledge of such holding out, and was induced thereby to create the debt, and the authorities applicable to such a situation, of which Thompson v. First National Bank of Toledo, 111 U. S. 529 is a type, need not be considered.

The written agreement entered into between the Bloods and Harris made the parties actual partners. It neither limited the liabilities or the agency of either. It did not suggest that Harris’ connection with the firm should be kept secret. It did not provide that Harris should, as to its business, be wholly inactive. It required each of the Bloods to give his entire time and attention to the business, for which each was to be paid $600 per annum. While as to Harris, who was engaged in other business, it was agreed that he should “ be consulted in the business and all plans and operation of the firm shall be made and done with the advice of the firm, and the said N. C. Harris is to have and receive from the firm $100 per year for his services for the care and assistance which he may render to the firm,"without giving his personal attention to the business.”

The agreement, therefore, does not indicate that it was the intention of the parties that Harris should be a secret partner, sharing in the profits as a reward for his contribution to the capital without contributing in any other manner to the standing and business of the firm. Neither was he in fact inactive during the seven years that elapsed before his withdrawal. While he did not engage in the purchase of material or the sale of manufactured articles, he did take part to some extent in the financial management of the partnership, and in the settlement of controversies, in which he wrote letters over his own signature as well as that of the firm. During some portions of the partnership period he was frequently about the shops, at times nearly every day, looking over the work, and occasionally speaking to the different foremen about it.

Neither did his partners keep secret the fact of his connection with the firm.

John C. Blood testified: “I presume it was known by quite a number that Mr. Harris was a member of the firm of Blood & Co.; if a person asked me who had a right to know, I told them; those who had a right to know were the men dealing with us, and the men who were dealing with us who asked me were told that Mr. Harris was a member of the firm; I couldn’t tell you how many I did tell.”

Samuel N. Blood testified: “ Q. Was his connection with the firm kept secret by you, or anybody else, to your knowledge ? A. It was not by me at all.

“ Q. Did you tell persons inquiring that he was a member of the firm ? A. I did, sir.

“ Q. And talked of it with persons doing business with you generally ? A. I did, sir, whenever the question came up.”

Again, the adoption of the firm name of Blood & Co. is in opposition to the claim of dormancy on the part of Harris. A dormant partner is one who becomes such by a secret arrangement, while his associates are held out to the world as sole proprietors and managers of the business. Beecher v. Bush, 45 Mich. 188-203.

If the business had been carried on under the firm name of Blood & Blood, or Blood Bros., then the Bloods would have been held out as comprising the entire firm. But the words “ & Co.” indicate an agency and that a principal or principals are-undisclosed, and if credit is given the law presumes that it was given to all the principals. .

In Shamburg v. Ruggles, 83 Pa. St. 148, the court says: “ If A., B. & C. enter into articles of association and agree that the business shall, be conducted by A., and in his name alone, B. & C. in such case are dormant partners, and though liable for the debts and obligations of the firm during its continuance, are not so liable for debts after its dissolution, although notice of such dissolution may not have been given to the public or those previously dealing with it, for it is to be presumed that credit was given upon the responsibility of A. alone, and not upon that of B. & C. If, however, the business be conducted in the name of A. & Co., a different presumption arises, for then it is supposed that credit is given not to A. alone, but to all those composing the company ; in other words, to the firm and not to any one individ ual of it. In such case, if B. & C. retire, notice must be given to those dealing with the firm, or he will continue to be liable for the debts thereof subsequently contracted with former creditors who may be ignorant of the dissolution.” To the same effect is the reasoning of the court in De Ford & Co. v. Reynolds, 36 Pa. St. 325; Podransnik v. Martin, 25 Ill. App. Ct. (111) 300; Deering v. Flanders, 49 N. H. 225; Clark v. Fletcher, 96 Pa. St. 416.

Notwithstanding the terms of the agreement of partnership, the adoption of a firm name which did not exclude the defendant, the announcement by each of the Bloods to those making inquiries and having dealings with the firm that Harris was one of the partners, and the further fact that he, to some extent, participated in the settlement of accounts and the financial management of the business, facts which, standing alone, determine that Harris’ status in the firm was that of an ostensible partner, it is insisted that other evidence presented on the part of the defendant authorized a submission to the jury of the question whether he was a dormant partner.

The evidence relied on in support of such position was, 1, that it was said at the time of the formation of the partnership that it should not be made public, “ should not be talked about at all.” 2. The testimony of a number of witnesses residing in that locality, some of whom had had dealings with the firm of Blood & Co., to the effect that they did not know that Harris was a partner.

This evidence, it is asserted, tended to show that his relation to the firm of Blood & Co. was not generally known. It may be observed in passing that one of the Bloods denied that there was any understanding at the time of the formation of the partnership that the fact of Harris’ membership should not be talked about, and evidence was adduced on the part of the plaintiff for the purpose of showing that it was quite generally known in the community that Harris was a member of the firm.

For the purpose of this review, however, the plaintiff’s answering evidence cannot be considered, as we are to determine whether the defendant’s evidence was of such a character as to authorize a jury to find that he was a dormant partner, notwithstanding the facts which if standing alone we have asserted require a holding that he was in law an ostensible partner.

The agreement of partnership was reduced to writing. It does not in any manner suggest that the membership of Harris was to be kept from the public. It purports to embrace the entire agreement and the defendant has not attempted to show that in reducing the agreement of the parties to writing anything was omitted by mistake or otherwise which had been agreed upon. It is not asserted that this so-called understanding was made a part of the original contract. It is not pretended that the parties made a subsequent agreement founded upon a new consideration. It does not clearly appear that the matter was spoken of in the presence of all the parties, much less assented to, for Samuel N. Blood says he does not remember any such thing and was not a party to any such agreement, and Harris’ evidence does not necessarily include him. Harris’ testimony on that subject and the whole of it is comprised in an answer to a single question. “ Q. Now you may tell me at the time you entered into this partnership was there anything sáid between you as to whether tins should be made public ? A. There was, sir; it was not to be. talked about at all.” It is we think, clear that this evidence cannot be permitted to effect a change in the legal relation which the parties assumed in writing and by subsequent conduct.

Neither can a general partner, who, in order to relieve himself from a liability which attaches to an ostensible partner, assumes the burden of proving that he was a dormant partner, be deemed to have so well borne it as to destroy the legal effect of acts of the character disclosed by this record by the testimony of his neighbors and others, given years after the dissolution, to the effect that they did not know until after the happening of that event that he was ever a member of the firm, supplemented by the expression of his own opinion that not one in ten in his vicinity knew of it. The question is not whether one knew it, or nearly all, but whether by agreement, the adoption of a firm name, and subsequent conduct, he so held out the Bloods as the only members of the partnership as to prevent his name from contributing to the standing and credit of the firm. If he did not, then he must be visited with the legal consequences of his failure to give notice to those who had, prior to his withdrawal, transacted business with the firm, and the lack of information on the part of some or many persons will not operate to shield him from it.

The plaintiff, it seems, did not know that Harris was a member of the firm, but that fact cannot avail the defendant, because a‘t the time of the commencement of the dealings with the plaintiff he was “ an ostensible and not a secret partner, and was such as to all persons dealing with the firm, and his liability to the plaintiff is not changed by the fact that the plaintiff did not know that he was a partner. He trusted the copartnership, whoever the partners might be, who composed it.” Howell v. Adams, 68 N. Y. 314.

This position is not only supported by authority, but is well founded in the methods largely adopted in business circles for the purpose of ascertaining whether credit shall be given.

The competition in business and rapidity with which orders must be filled, make it necessary for business houses to promptly ascertain whether credit shall be given. This necessity has contributed to the establishment of agencies which undertake to ascertain the financial condition of corporations, firms and individuals engaged in business.

The inquiry addressed naturally is, what is the financial condition of Jones & Co.? For, having no acquaintance with the individuals comprising the firm, information as to membership does not aid the inquirer. So, in this case, the plaintiff’s president testified that no inquiry was made as “ to who constituted the firm of Blood & Co. * * * We-thought the credit of Blood & Co., when we first commenced dealing with them, was good; we inquired and ascertained that the credit of the firm was good.”

The judgment should be reversed.