South Carolina & Georgia Railroad v. Augusta Southern Railroad

33 S.E. 36, 107 Ga. 164, 1899 Ga. LEXIS 29

Opinion

Simmons, C. J.

It appears from the record that the Augusta Southern Railroad Company, in the year 1897, entered into a written contract with the South Carolina and Georgia Railroad Company. In this contract, denominated by the parties as a lease, the former company (which will hereinafter be referred to as the lessor), granted, demised, leased and farm-let to the latter company (hereinafter to be referred to as the lessee) its railroad, right of way, depots, yards, rolling-stock, and all its other property, during the corporate existence of the lessor, with a warranty of quiet enjoyment. The lessee on its part agreed to divers and sundry covenants, among which were that the lessee should assume certain bonded indebtedness of the lessor, maintain the condition of the property, keep it in repair and return it at the termination of the lease in as good condition as it received it, and should pay to the lessor one half of the earnings of the leased road after deducting therefrom (1) the expenses of maintenance and operation, including taxes and liabilities incurred in the operation of the road, (2) the amounts paid out for interest upon the bonds, for the repayment of which interest no recourse was to be had except upon the earnings of the leased road, and (3) such betterments as might be made; certain means being prescribed for ascertaining the amount of the road’s earnings. The instrument further gave to the lessor the right, upon the breach of the covenants, to re-enter and take possession of the property, such reentry not to prejudice the lessee’s right to she for damages for such breach. Provision was made for the arbitration of all differences arising as to the due performance of any of the covenants. It seems that differences did arise, some of which were settled by arbitration, and some of which were, according to the allegations of the petition, never submitted to arbitration. In 1899, the lessor filed its equitable petition against the lessee, charging various breaches of covenant on the part of the lessee, among them that it had failed to pay the interest on the coupons of the bonds according to contract, that it had failed to keep in repair the road-bed and rolling-stock, and that it was mismanaging the road to such an extent as to lose it much of its patronage. Other allegations of misconduct were made, which it is unnecessary here to detail. The allegation that the interest on the bonds had not been paid was not insisted on. An allegation that the lessee was insolvent was made but not sustained. The main object of the petition was •evidently to have a court of equity decree a forfeiture and a right of re-entry on the part of the lessor, on account of the breach by the lessee of conditions and covenants in the lease. Apparently the pleader realized that a court of equity had no jurisdiction to decree the forfeiture of a lease, for it was further alleged that the contract was one of partnership, or that, if this was not so, the contract placed the one corporation in a trust relation with regard to the other as to the income and profits which would accrue to the lessor, and that an accounting between the parties would be necessary. The petition prayed for a decree declaring the léase forfeited, fo.r damages, for a receiver pending the litigation, for an accounting, and for general relief. The lessee demurred to the petition, and also filed .an answer which denied all allegations as to the breach of any of the covenants of the contract. At the preliminary hearing, the trial judge appointed receivers to take charge of the road .and operate it until final decree. To this judgment the lessee •excepted, and the case was brought here for review.

The trial judge predicated his judgment upon the position that the written instrument, termed by the parties a lease, really constituted the two corporations partners, or that, if this were not true, at least the lessee occupied a position of trust towards the lessor. We can not agree with him in either of these positions. It is now settled in this State, and in accordance with the very decided weight of authority in other States, that .a corporation of this character can not enter into a partnership with another corporation or with an individual, except by authority of its charter. Gunn v. Central R. Co., 74 Ga. 509; Ledsinger v. Central Line Steamers, 75 Ga. 567; Parsons, Partn. §24; 7 Am. & Eng. Enc. L. (2d ed.) 794. We believe that this fact shows that the intention of the parties was not to enter into a partnership. We could not suppose that the two intelligent gentlemen who are the presidents of these railroads and the able counsel who prepared this lease would, for a moment, have undertaken to prepare an instrument which would have constituted the two corporations partners in running and operating the leased road. But if these corporations had the authority to form a partnership, did the contract, as evidenced by the written instrument, constitute them partners? We think not. It conveyed to the lessee all the property of every kind and character owned by the lessor for and during the corporate-existence of the latter. When it was executed and the lessee put in possession, the lessee became the absolute owner of the-property for the term of the lease. The lessor had no voice in the management or in the operation of the road, and had no-right to participate in any way in its management or operation. It had no authority to bind the lessee or the property as a member of a partnership may bind the firm and the firm property. It had no joint interest with the lessee in the property, because-it had fully disposed of all of its interest to the lessee for the period of the lease. If the lessee sustained losses in operating the road, the lessor did not share in them; though it did share in any profits there might be after certain charges and expenses-had been deducted from the earnings of the road. These profits are not the joint profits of the two parties. Under our code, “a joint interest in the partnership property or a joint interest-in the profits and losses of the business” is required to constitute a partnership even as to third persons. “ A common interest in profits alone does not.” Civil Code, § 2629. McCay, J., in the case of Sankey & Shorter v. Columbus Iron Works, 44 Ga. 228, in discussing the meaning of this section of the code in a very clear and lucid opinion, said (p. 234): “The language is, that a joint interest in the profits and losses makes a partnership, but a common interest in the profits does not. If the interest is the interest of an owner, if there be-a joint seizure, if the person whose interest is in question has a right, as such owner, to dispose of the profits, then there is a partnership, if the parties be seized per mi et per tout. If one may [dispose] of or control the profits as much as the other, then there is a joint interest. But if the party whose interest is in question have only a ‘ common interest ’ in the profits with the other; that is, if he have no title jointly with the other; if his- position be that of a mere employee, with no right of control as owner over the profits, but with only a common interest in them, that is, interested in common with the other in their increase or decrease because they measure the amount of his tvages, then he is not a partner.” We have shown that in the present •case there was no joint interest or ownership in the partnership property, because the lessor had for the time disposed of all of its interest to the lessee. There was no joint interest in the profits and losses, but only a common interest in the profits over and above certain charges and expenses because such profits fixed the amount to be paid to the lessor as rent at the times fixed in the contract. The learned trial judge in his opinion seems to think that the lessor would share in the losses, to the extent of losing the profits, if the road was so operated as not to produce profit. We think the word “losses” in our code means something more than the mere failure, to realize profits. In order to constitute a partnership by joint interest in the profits and losses, the partners must share in all losses sustained by the partnership. They must share in the net losses. In the present case there was no such participation in losses. Nor was there any mutual agency. Neither party could make a contract which would be binding upon the other. In general, the test of a partnership is the intention of the parties, gathered from the terms of the contract, to form such an associated body as that which the law regards as a partnership, and such an intention does not here appear. For these reasons we think that there was no intention to form a partnership, and that in fact none was created. The instrument is what it is denominated to be — a lease. The lessor conveyed its property to the lessee, which agreed to pay rent during the term for which it held the property. See Warwick v. Stockton, 55 N. J. Eq. 61. “Where the owner of property.leases it for business purposes, agreeing to receive in return a proportion of the profits of the business^ he receives the amount merely as rent, and is not a partner in the business.” Parsons, Partn. (4th ed.) .§ 71, citing a number of cases.

Nor do we think that there is any such fiduciary relation on the part of the lessee toward the lessor as to create a trust in favor of the latter. It seems to us that the relation created by the contract is that of landlord and tenant, and that when profits are realized the relation may become that of debtor and creditor. The lessee is bound in any event to pay certain interest on the bonds of the lessor and in certain circumstances it is bound to pay the agreed amount of the earnings after the agreed deductions have been made. If the lessee fails to pay this rent, the lessor has its remedy at law as has any other landlord. If the lessee violates any of the covenants or conditions subsequent contained in the lease, the lessor has its remedy at law by a forfeiture of the lease. It is well settled in this State,, and indeed in all the other states, that equity has no jurisdiction to decree a forfeiture. A suit for a forfeiture is founded upon the breach of a contract or condition, and therefore equity will not take jurisdiction to enforce forfeitures. Equity has jurisdiction to relieve against forfeitures, but not to enforce them. Hence the forfeiture of this lease would be a purely legal remedy. Under our system, legal and equitable causes of action may be joined in the same petition, and the courts will enforce each according to the remedies pertaining to it. The same court, in the same case, will enforce a legal right and an equitable one. The present petition seems to seek equitable relief, but there is nothing to give a court of equity jurisdiction. Certainly there is no trust relation between the parties which would authorize the court of equity to interfere. The lessee-was, for the term of the lease, absolute owner of the property, with the right to use it and operate it as it deemed best. ' The lessee was absolute owner of all the earnings, income and profits that accrued from the operation of the road, though bound under its agreement to. pay to the lessor at stated times a portion of any profits which might remain after certain deductions-were made. The lessor had no legal or equitable right in the profits as profits, but only a contractual right, to have its share paid over when earned and due. . It had no right to the earnings as a particular and separate fund, although its share of the profits was to be assigned to it therefrom. The lessee had only contracted to pay the lessor at certain periods a certain proportion of the profits, if any were made above certain charges to he made upon the gross earnings of the leased road. This was purely a contractual relation between landlord and tenant, which was enforceable at law. In the case of Thomas v. R. Co., 139 N. Y. 163, Andrews, C. J., in discussing a question similar to this, said (p. 168): “The substance of the contract between the corporation and the bondholders is that the interest should be paid out of a particular fund, when it should come into existence and be ascertained in the manner provided in the contract. The earnings of the corporation when received would, of necessity, become the property of the corporation. They might be wholly absorbed in paying expenses and repairing and operating the road. If there was a surplus beyond what was required for these purposes, ascertained as provided in the contract, the corporation obligated itself to apply it to the payment of interest on the bonds. But until the surplus was ascertained and applied by the corporation to the payment of interest, it remained the absolute owner of the fund, and it was subject to disposition for any corporate purpose by the board of directors. The corporation was, by its contract, obligated to apply it to the payment of interest on the bonds, and a breach of the contracts would subject it to liability to the bondholders, and such remedies would be open to them as the law affords for breach of contract in other cases. But the bondholders acquired no title, legal or equitable, to the fund itself. . . The rights and obligations of the parties rested in contract. There was no appropriation of the fund out of which the interest was to be paid, in any sense which worked a transfer of the legal or equitable title thereto . . when it should come into existence and before it had been set apart by the action of the directors to the payment of interest.” See also Day v. R. Co., 107 N. Y. 129, and Uhlman v. Life Ins. Co., 109 N. Y. 421.

Having shown that the law does not permit tw© corporations to enter into a partnership unless they have express charter authority to do so; that, even if it did, this contract was not one of partnership; that the contract was a lease; and that no trust relations were established between the parties which would give a court of equity jurisdiction in the premises, it follows that the petition was predicated solely upon matters over which courts of law have jurisdiction. While, under our system, legal and equitable causes of action may be joined in one action, yet, if the petition contains no equity, the court can not award equitable relief. See in this connection Broomhead v. Grant, 83 Ga. 451. The appointment of a receiver is a distinctly equitable remedy, and was therefore erroneous in a case where legal rights only were involved.

Judgment reversed.

All the Justices concurring.