Frost v. Thompson

219 Mass. 360

• Court: Massachusetts Supreme Judicial Court
• Decided: November 25, 1914
• Status: Published

Opinion

Rugg, C. J.

This is a suit in equity wherein the plaintiff seeks to recover from the defendants the balance due on a promissory note signed, “The Buena Vista Fruit Co., G. L. Dunning, Treasurer,” and to obtain further relief. The Buena Vista Fruit Company is a voluntary association of numerous individuals for a business venture. The title to its property and its management are vested in trustees. The interests of the individuals composing the association are represented by assignable certificates resembling in form shares of stock. The original defendants in this suit were six persons who were the trustees of the association when the bill was filed. Later, all the shareholders in the association were made parties defendant on an allegation, admittedly true, that they constituted a class too numerous to be joined individually, and that they were properly represented by certain named, defendants. A decree was entered in favor of the plaintiff, from which the defendants appealed. The case is before us on facts found by a judge of the Superior Court.

Although not stated plainly, it seems fairly inferable that the note was issued in consideration of money advanced, of which the association received the benefit. It further is stated that the purpose of the bill “is to satisfy the obligation that has been incurred by the respondents herein in their representative capacity out of an estate to which such trustees or such defendants could resort for an indemnity.” No exception was taken to this statement and the arguments in this court have proceeded on the assumption that this is the purpose of the suit.

In order to entitle him to relief on the ground on which the bill is brought, the plaintiff must prove that the note was made by the trustees of the Buena Vista Fruit Company in the course of their duty as such. Whether the English doctrine in this connection (as to which see Mason v. Pomeroy, 151 Mass. 164; Dowse v. Gorton, [1891] A. C. 190; Newton v. Rolfe, [1902] 1 Ch. 342, 345; In re Johnson, 15 Ch. D. 548, 553, 555; Dunham v. Blood, 207 Mass. 512, 514; King v. Stowell, 211 Mass. 246), or the doctrine which has obtained in some American States (as to which see Wylly v. Collins & Co. 9 Ga. 223; Cater v. Eveleigh, 4 Desaus. 19; Manderson’s appeal, 113 Penn. St. 631; Willis v. Sharp, 113 N. Y. 586) be the true doctrine, the basis of recovery is the fact that the plaintiff holds an obligation incurred by trustees in the course of their duty in administering the trust fund out of which satisfaction is sought by the plaintiff. The difference between these two doctrines is that under the English rule the plaintiff’s right to obtain satisfaction of his debt is worked out through the trustees’ right to indemnity, and hence depends upon the state of the account between the trustees and the trust fund; while under the other rule the right of the plaintiff is independent of the state of this account.

The note here in suit is not a note made by the trustees in the performance of their duties as trustees. That conclusion follows from an examination of the nature of the Buena Vista Fruit Company. A declaration of trust or other instrument providing for the holding of property by trustees for the benefit of the owners of assignable certificates representing the beneficial interest in the property may create a trust or it may create a partnership. Whether it is the one or the other depends upon the way in which the trustees are to conduct the affairs committed to their charge. If they act as principals and are free from the control of the certificate holders, a trust is created; but if they are subject to the control of the certificate holders, it is a partnership. That was explained at length in Williams v. Milton, 215 Mass. 1. Tested by the principles there laid down, the Buena Vista Fruit Company is a partnership and not a trust. It is a voluntary association organized under two instruments, one called a “declaration of trust” and the other, “by-laws.” These two instruments provide that the shareholders representing two thirds in value of outstanding shares have power to remove either or all of the trustees at any time, without assigning any cause, and to appoint others to fill the vacancy; to terminate the trust at any time earlier than that limited for its duration in the declaration of trust, and to terminate it by requiring conveyance of the property to other trustees upon new trusts, or to a corporation. A majority of the shareholders at any time by vote may amend the declaration of trust. The by-laws may be “altered, amended or repealed” by vote of the majority of the shareholders “at any annual or special meeting of the . . . shareholders.” These provisions demonstrate that this association is a partnership and not a trust. In recognition of the fact that it is a partnership and not a trust, article 3 of the by-laws provides that the treasurer shall “make, sign, endorse, and accept for and in the name and behalf of the company, promissory notes, drafts, and checks in the regular course of its business.” The note in suit was made in accordance with this by-law. It is not signed by the trustees, but by the treasurer of the association in its name.' Article XI of the declaration of trust provides that “All contracts and engagements entered into by the trustees and all conveyances and instruments executed by” the trustees, shall be in the respective names of trustees and shall provide against any personal liability on their part, and shall stipulate that no other property shall be answerable than the property in the hands of trustees. Plainly the note in suit is not the obligation of the trustees executed in accordance with the power thus conferred, but the note of the company executed by its agent pursuant to its by-laws. Neither in fact nor in legal contemplation is it the note of the trustees. It follows that the plaintiff has not brought his case within the principle of law on which his bill is framed and on which he recovered in the Superior Court, viz., that when a trustee has incurred an obligation in conducting the trust, the person to whom that obligation is due can satisfy it out of the trust estate. Hence, the decree in favor of the plaintiff was wrong, founded as it was upon that principle of law.

The defendants contend that no suit or action can be maintained on the note because that has become merged in a judgment. This contention rests on the fact that before the bringing of this suit the plaintiff brought an action at law on this note against the persons who were trustees when the note was dated and judgment has been entered against five of them (as stated in the judge’s memorandum) "personally instead of as trustees.” Of course no judgment could have been entered against them as trustees and the only legally possible judgment must run against them as individuals. Mayberry v. Sprague, 207 Mass. 508. Doubtless that judgment was rendered on the same theory on which a decree was entered in favor of the plaintiff in the present suit in the Superior Court, namely, that the Buena Vista Fruit Company was a trust and not a partnership and that therefore the note was in contemplation of law the note of the trustees.

The doctrine of merger is that a cause of action, when reduced to a judgment, has ceased to exist as an independent liability, and has changed its nature and is transmuted into the obligation created by the judgment, which is different in kind and essential characteristics from the initial cause of action. It has been said that “A judgment is an absolute merger of a debt by simple contract, so that no action can afterwards be maintained upon the original promise.” Wells, J., in Wyman v. Fabens, 111 Mass. 77, 80. French v. Neal, 24 Pick. 55, 61. Bangs v. Watson, 9 Gray, 211. Pierce v. Eaton, 11 Gray, 398. Wolcott v. Hodge, 15 Gray, 547. Ward v. Johnson, 13 Mass. 148. Connors v. Holden, 152 Mass. 598. Mason v. Eldred, 6 Wall. 231. Schuler v. Israel, 120 U. S. 506, 509. Coles v. McKenna, 51 Vroom, 48.

The doctrine of merger, like res judicata, operates only between parties and their privies. It does not affect strangers to the original proceeding and is not available as a bar in their favor. This is the rule stated in the text books. Black on Judgments, § 673. 1 Freeman on Judgments, § 215. 23 Cyc. 1111, 1206. 24 Am. & Eng. Encyc. of Law, (2d ed.) 717. 13 Laws of England, by Lord Halsbury, § 478. It is supported by the authorities. School District No. 34 v. Thompson, 51 Neb. 857. Wolf v. Wyeth, 11 S. & R. 149. Atlantic Dock Co. v. Mayor & Aldermen of New York, 53 N. Y. 64. Ellis v. State, 2 Ind. 262. United States v. Cushman, 2 Sumn. 426, 437. Cheveront & Co. v. Textor, 53 Md. 295, 308. Harrison v. Remington Paper Co. 72 C. C. A. 405, 414. Randall v. Smith, 1 Denio, 212. See also Low v. Low, 177 Mass. 306. Apart from authority and on reason this conclusion is sound. It is only in proceedings in rem that the judgment of a court has been regarded as affecting those who are not parties or privies. Merger is a doctrine which has been extended “very far” in this Commonwealth, and which “has not received the approval of the Supreme Court of the United States” and of other courts of respectable authority. Attorney General v. American Legion of Honor, 196 Mass. 151, 158, and cases cited. In the course of the judgment in Beckett v. Ramsdale, 31 Ch. D. 177, where, after full discussion, it was held by the Court of Appeal that recovery of judgment against a surviving partner did not bar an action against the estate of a deceased partner, the doctrine was referred to by Lord Bowen as one of “fierce severity.”

It does not affect liabilities collateral or subsidiary to the original cause of action and yet separable from it, for example, like that of surety. As was said by Holmes, J., in Vanuxem v. Burr, 151 Mass. 386, 388, “Instances are too numerous and familiar to need extended mention, where the mere recovery of a judgment is held no bar to another action, although the satisfaction of it would be. . . . This principle is applied, not only to actions against different parties, such as the maker and indorser of a note, or joint tortfeasors, but to actions against the same individual when he has given different obligations in respect of what is in substance the same debt.” Byers v. Franklin Coal Co. 106 Mass. 131, 136, 137. Gilmore v. Carr, 2 Mass. 171. Porter v. Ingraham, 10 Mass. 88. Ward v. Johnson, 13 Mass. 148. Campbell v. Phelps, 1 Pick. 62. New York Land Improvement Co. v. Chapman, 118 N. Y. 288, 296.

A further limitation of the doctrine is that it does not apply unless the action was brought against the party defendant in the same capacity as was the earlier action. In this respect also it is like res judicata. First National Bank of Amsterdam v. Shuler, 153 N. Y. 163, 173. Troxell v. Delaware, Lackawanna & Western Railroad, 227 U. S. 434. Lander v. Arno, 65 Maine, 26. McBurnie v. Seaton, 111 Ind. 56. Dibert v. D’Arcy, 248 Mo. 617, 661.

The doctrine of merger, therefore, would not prevent the relief which was granted to the plaintiff in the Superior Court, if the note had been signed by the trustees of the Fruit Company. The holder of a personal obligation incurred by trustees in the performance of their duty in the management of trust property, may pursue both his rights on the note against the trustees and his right to satisfaction out of the trust estate.

But a different situation is presented in the case at bar. It appears from the record that three of the five trustees against whom that judgment was rendered, namely, Thompson, Dunning and Carleton, are shareholders in the association. Whether they were shareholders at the date of the note and of the writ in the action at law and at the time of the rendition of the judgment does not appear on this record. However that may be, the plaintiff has recovered judgment on the note against three who now are shareholders on the ground that they were makers of the note. It is plain from what has been said as to merger that, if none of the trustees against whom the judgment has been rendered had been shareholders, the judgment would not be an obstacle to relief in this suit. But difficulty is presented by the fact that the plaintiff already has secured judgment against three of the shareholders, not on the ground that they are shareholders, but on the ground that they as trustees were makers of the note. Whether that judgment obtained on that ground stands in the way of maintaining a bill, against all the shareholders as partners, or, to reach and apply partnership assets in payment of the note as a partnership debt; and, if it does, whether, if at all, and in what manner, it can be removed, are questions which have not been argued and upon which we express no opinion.

The earlier action at law against the trustees was not an election to hold them to the exclusion of the trust estate. The two positions are not inconsistent, or, if inconsistent, it is not a defense open to the defendants. Holman v. Updike, 208 Mass. 466, and like cases, do not apply. The rule of election allows the simultaneous employment of remedies not mutually repugnant, looking toward the satisfaction of a single claim. Connihan v. Thompson, 111 Mass. 270. Snow v. Alley, 156 Mass. 193. Miller v. Hyde, 161 Mass. 472. Hewitt v. Hayes, 205 Mass. 356, 363. Corbett v. Boston & Maine Railroad, ante, 351. Indeed, the doctrine of election has no appropriate place upon this branch of the case.

The property of the association is not so peculiar in its nature that it cannot be sold by the means open to a court of equity. Alexander v, McPeck, 189 Mass. 34. Biggert v. Straub, 193 Mass. 77. Clarke v. Fay, 205 Mass. 228, 236. Sale of the title of the trustees would not affect the rights of purchasers of interests from the trustees.

If the plaintiff wishes to amend this bill so as to convert it into a bill to reach and apply in payment of this partnership debt property which cannot be attached at law, or to make other appropriate amendments, he ought to be allowed to do so. If he does not wish to amend this bill, he ought to be at liberty to bring a new bill on that ground or to bring an action or suit to enforce the note as a partnership note of the Buena Vista Fruit Company, and the decree should be made without prejudice to such action on his part.

Decree reversed.