Kelley v. Greenleaf

14 F. Cas. 238, 3 Story 93

• Court: U.S. Circuit Court for the District of Massachusetts
• Decided: October 15, 1843
• Status: Published

Opinion

STORY, Circuit Justice.

The cause at the argument has been narrowed down to the simple consideration, whether the house near Bow street, called for distinction’s sake the Bow street hous.e, is to be deemed partnership property or not. The principles of law involved in the cause do not, in my judgment, involve any serious doubts. In the first place, it is a general rule in equity, that if a trustee, contrary to his duty, invests the property of his cestui que trust, or beneficiary, in any other property, either real or personal, the beneficiary has a right, if the wrongful conversion shall be clearly made out, and the property can be distinctly traced, to follow it into the hands not only of the trustee, but of any other party claiming under him, who is not a bona fide purchaser thereof for a valuable consideration, without notice. I need not cite particular cases on this point. They will be foimd cited and commented on in 2 Story, Eq. Jur. §§ 1258-1200. In many cases, the same doctrine is upheld at law, wherever the right is of a legal nature; of which the cases of Scott v. Surman, Willes, 400. and Taylor v. Plumer, 3 Maule & S. 574-576, afford striking illustrations, founded upon very different circumstances. The same doctrine is equally as applicable to cases of agents as it is to cases of trustees. Story, Ag. § 205, and authorities there cited. In the next place, partners fall within the same predicament as trustees and agents. Indeed, their functions, rights and duties, in a great measure, comprehend those both of trustees and agents. See Story, Partn. §§ 130, 131, and authorities there cited. The result of tnese principles is, that, if a partner fraudulently or improperly, without the consent of his partners, applies the partnership funds to his own private purposes, or for his own private profit or emolument, or invests the same improperly in his own name and for his own use, the other partners have a right, if they can distinctly trace the investment, and elect so to do, to follow the partnership funds into the new investment, and treat it as trust property held by that partner for the benefit of the firm, and as liable to be accounted for by any person, into whose possession the same may come, who is not a bona fide purchaser for a valuable consideration, without notice. Hence, if the defrauding partner dies, his representatives can stand in no better situation than the partner himself would, if living; and the same rule applies to the private creditors of the deceased partner; they are not entitled to make claim thereto any more than they can to any other mere trust property held by the deceased. Upon these grounds, the mortgagee, Davidson, is entitled, to the extent of his mortgage, to be protected, and to have a priority of right of payment out of the Bow street estate, as being such a purchaser. But neither the widow, nor the children, nor the administrator, nor the' private creditors of Hoyt, are entitled to any such protection or priority.

The whole question here, then, resolves itself into these questions: (1) Whether the partnership funds have been applied to the purchase of the Bow street house. (2) Whether, if so applied, it has been a secret and fraudulent application of those funds; or has been done without the express consent of the plaintiff. (Kelley), or without his implied consent, resulting from his knowledge of the facts, and his acquiescence in the appropriation. In my judgment, both of these questions must be answered in the affirmative, and in favor of the plaintiff. And I will very briefly state the grounds of this opinion.

In the first place, there is direct and positive evidence, that a considerable part of the purchase money for the Bow street estate was actually paid out of the partnership funds. The check drawn on the Phoenix Bank for $300, was clearly so; and the direct evidence of several witnesses proves, that other sums were also paid and admitted by Hoyt to have been paid out of the partnership funds. The whole cost of the investment seems to have been about $8000. Of this $1000 was borrowed of Davidson by Hoyt, for which the mortgage was given; and is now a lien or charge on the estate, entitled to prior satisfaction. This is admitted on all sides. Of the remaining $2000, the presumptive proof seems very strong, that besides the $500 cheek, the $400 paid to Mullikin and the $SOO paid to Evans, were paid out of the partnership funds. Certainly a part of Evans’ bill was so paid. The total absence of all proof of any private funds of Hoyt, capable of being applied, or actually applied, to discharge the debt, seems to furnish aid and strength to this conclusion. The onus probandi is certainly on the representatives of Hoyt, under the circumstances of the case, to show some mode by which these debts were paid out of his private funds, especially as it is manifest, that Hoyt did, in fact, apply the partnership funds to these purposes, and, what is most material, without ever charging himself with a single dollar in the books of the firm, although he exclusively kept them. Upon the death of Hoyt, a large deficit is found in the funds of the firm, all of which were in Hoyt’s hands, and exclusively under his management. How is this deficit accounted for? In no way. Not a scrap of proof to show the time, or the mode, or the occasion of using them. Take then the case in this aspect, and we see, that there is a large deficiency in the assets of the firm, held by Hoyt; we know that a part of the money of the firm was applied to pay for the house; and we have no evidence, that there were any private funds of Hoyt applicable or applied to the purpose. Under such circumstances, the reasonable conclusion is, in the total absence of all counter proof, that the assets of the firm, to the amount of the $2000 remaining a fter deducting the mortgage, were supplied from the partnership funds. Hoyt, at his death, is admitted to have been insolvent.

Then, íd the next place, were the funds so applied, withdrawn and applied with the consent of the plaintiff (Kelley), or with his knowledge or consent, or were they fraudulently so withdrawn and applied? In the first place, we must look at the means of knowledge possessed by the plaintiff (Kelley), and whether there is any reason to suppose, that the funds had been or were about to be applied. No cross bill has been filed to sift his conscience on this point; and therefore, we may presume, that the inquiry has been waived, because he has not been examined on oath, as a defendant to a cross bill; and he has, on oath, sworn to the original bill, and averred his total want of knowledge of the facts. In the next place, it is clear, that Hoyt was what is called the indoor partner. He exclusively kept the books; he received all the money of the firm, and he paid all the disbursements and debts incurred by the firm. The plaintiff, on the other hand, confined his attention entirely to the outdoor business and superintendence of the stone cutting operations. He appears to have had unbounded confidence in Hoyt, and does not appear ever to have examined the books; and indeed seems to have been an ignorant man in all such business. Besides, if he had examined the books, he would not have been able to find there a single charge made by Hoyt for moneys taken, or advanced to himself. So that unless the fact, that there were no such charges there could have aroused suspicions on his own part, which it certainly did not, he could not have any means of detecting any misapplication of the partnership funds. In truth, there is no reason to suppose, that he ever made any examination or inquiries into the subject. He took for granted, that Hoyt was honest, and. as it is manifest, until Hoyt's death, he does not seem to have been aroused to a state of inquiry or suspicion. But then it is said, that he knew, that the house was building: by and for Hoyt. Certainly he did; but it is plain, that Hoyt might be fairly presumed by him to have had personal credit to raise the requisite funds; and, in an easy indolent confidence, he was lulled to indifference as to the mode in which Hoyt obtained the funds, since he had no doubt of his actual solvency. Upon the whole of this matter, the statement of the witness Welch, is most significant to the 4th direct interrogatory. He there says: “Sometime in 1839, I can’t mention the exact date. I told Mr. Hoyt, that his books were not kept proply, so that any body could understand them. He told me then, that all he wanted me to do was, to write down what he told me to. Por a little while, I did that. I then asked him why Morris Kelley was charged with cash, and none charged to him. He said he understood all about that; he kept his own account of cash received out of the concern. I then asked him if he kept a cash account with the concern, and he said he did. I asked him to let me see it. He handed out a pile of bills from his secretary, and said that was his cash account. I mean by bills, receipts. I told him, that was not right. I then told him if he would hand me that pile of bills. I would open a cash account from them. He brought the pile of bills about a week after into my store, with a book, and asked me to open a cash account. I did so; but in this pile of bills were his own private bills, which I did not enter. After I had entered all the bills he had paid for the concern, and debited all cash received, which I took from the day-book, I asked him to come into the store and we would try to strike a balance. He went into the store with me, but he would not agree to that, and said he did not care any thing about striking a balance now, and took up his book and bills and went out of the house. About a week after, he wanted me to go on posting his books, but I refused to do it. on the ground, that I did not wish to have it said, that X had any thing to do with such books, but proposed to him to open a new set of books by double entry. He agreed to it, and authorized me to purchase books. X bought .a couple of books, suitable for double entry, which I gave him; but he returned them, and took another book in place of them, and asked me to copy from an old ledger he had; which I did. This was done with a view to open a new set of books by double entry, which was never done. I saw my cash account, a year after I made it, and no additions had been made to it.”

Now upon such a subject, under such circumstances. it is only necessary to advert to the general doctrine of courts of equity. It will be found summed up. and the authorities cited, in section 4US of Story on Equity Jurisprudence. as follows: "Courts of equity adopt very enlarged views, in regard to the rights and duties of agents: and in 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. If, therefore, an agent does not. under such circumstances, keep regular accounts and vouchers, he will not be allowed the compensation, which otherwise would belong to his agency. Upon similar grounds, as an agent is bound to keep the property of his principal distinct from his own. if he mixes it up with his own, the whole will be taken, both at law and in equity, to be the property of the principal, until the agent puts the subject matter under such circumstances, that it may be distinguished, as satisfactorily, ns 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 property 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 cases, proceed upon the notion, that strict justice is done between the parties; but upon the ground, that it is the only justice, that can be done; and that it would be inequitable to suffer the fraud or negligence of the agent to prejudice the rights of his principal.” Every word of this passage is equally applicable to the case of a partner acting as the agent of a partnership. The statements and conversations of Hoyt on his death bed strongly corroborate the view of the facts already taken. It is suggested, that, as these conversations and statements took place near the close of his illness, (he died of consumption), that he was probably insane at the time, and they ought not to be relied on as evidence. My opinion is. that the evidence clearly shows, that he was at the time in full possession of his senses and understanding. In one of these conversations Hoyt stated. “The house belongs as much to Kelley as to him;” and Kelley was present at the conversation.

Upon the whole, my opinion is, that tln> Bow street house was purchased with the partnership funds without the knowledge or consent of Kelley to the appropriation, and was a secret, and in a legal sense, a fraudulent appropriation of those funds, to the amount of 82.000; and that a decree puglit to be rendered in favor of the plaintiff, and the house near Bow street, and the store on Charlestown square, and the lot of land on Causeway street, mentioned in the bill, be sold under the direction of the court, by a master, and that the proceeds be brought into court, first to apply so much thereof as are necessary to discharge the mortgage, and to apply the residue thereof to the discharge of the debt owing by Hoyt to the partnership. And let it be referred to the same master to state an account of the partnership debts and credits, and the balance due by Hoyt to Kelley on the partnership account, with the usual powers given to the master on such occasions to examine eitlier party on oath, and to require the production of the partnership hooks, and all documents and vouchers in the possession of either party, touching the premises.