Plumly's Appeal

A father, who owned a factory, and the machinery in it, with which his business was carried on, gave his son a one third interest in the profits of the business. Subsequently the son placed the sum of $8,625 in the business, and his interest in the profits was then increased to one third. The rent of the factory and machinery was paid to the father out of the profits. After continuing in business together for several years, notice of the dissolution of the partnership relations between them was given by the father and accepted by the son, but a settlement was prevented by the son demanding a share of the real estate and machinery as part of his capital. The father carried on the business, using his own capital and the capital which the son had in the business. On a bill in equity, filed by the son, for an injunction, an account and the appointment of a receiver, the court below held that the son had no claim upon the real estate or machinery as an asset of the business; that he could only claim a return of the money he put into the business, with interest, and his undrawn profits; that, on the cessation of business relations, the father was not a trustee for the son, but simply a debtor, and was only chargeable with interest on the amount due from the time of the dissolution, and was not liable for profits earned after the dissolution. Held, not to be error.

Appeal, No. 24, Jan. T. 1889, from C. P. No. 4, Phila. Co., to review a decree in a bill in equity for an account between partners, at Dec. T. 1884, No. 761. Green, J., absent. Bill in equity, filed Feb. 17, 1885, by Eugene K. Plumly against his father, George ~W. Plumly, for an injunction, the appointment of a receiver, an account and the sale of the real estate and the business described in the bill. On March 9, 1885, a preliminary injunction was awarded, until final hearing, restraining the defendant from announcing to the public that he was the successor of the American Paper Box Co., or of Geo. W. Plumly & Son; and also from using in his own business the assets of the said partnership. On the same day, the Guarantee Trust and Safe Deposit Co. was appointed receiver of all the assets of the firm. On March 12, 1885, the receiver leased to the defendant the machinery and fixtures, which had been used by the partnership, at a rental of $170.42 a month. The case was referred, first to E. Coppee Mitchell, Esq., as master, and, after his death, to E. Hunn Hanson, Esq. The facts, substantially as found by the master, are stated as-follows, in the opinion of the court below, by Arnold, J.: “ It is shown by the evidence that, in the year 1846, the defendant established himself in the business of manufacturing paper boxes that in 1871, he put the business into a stock company called the-American Paper Box Co., and that, in the year 1875, that corporation was dissolved and the defendant continued the business in his own name, using the name of the American Paper Box Co. in connection therewith. “ The plaintiff, who is a son of the defendant, entered into the-service of the defendant sometime about the year 1870. On July 1, 1875, his father gave him an interest of one-fourth of the. profits-of the business, and in 1879 increased it to one-third. On August 27, 1879, the plaintiff placed the sum of $8,628.98 in the business. The real estate in which the business was conducted belonged to the-defendant. It was fitted up with machinery and fixtures adapted * to the use made of it by tbe defendant, and rent therefor was regularly paid out of the profits of the business. On November 29, 1884, the defendant notified the plaintiff that the business relations between them would cease on December 31, 1884, and tendered a settlement and division of the assets according to their respective interests. To this, the plaintiff replied, on December 9, 1884, acquiescing in the dissolution, but demanded that the real estate should be valued or sold, and distributed as an asset of the business in which he claimed an interest. As the defendant denied the claim of the plaintiff to any part of the real estate, an amicable settlement, which ought to have been effected between father and son, was prevented and this litigation ensixed.” The master reported, inter alia, as follows: [ “ When the partnei’ship came to an end, December 31, 1884, it was the plaintiff’s right to have the assets converted into money, to have all liabilities to non-partners satisfied therefrom, and, out of what remained, to have retui’ned to each pai-tner his capital. If there was not sufficient for the return of the capital of each, the sum that was wanting should have been treated as a partnership loss, Nowell v. Nowell, 7 L. R. Eq. 538; and paid as other losses were payable; and, as has appeared, that was two-thii’ds by the defendant and one-third by the plaintiff. “ This course was not pursued; on the contrary, the defendant took into his sole custody all of tlxe assets and which were prima facie of the value set foi’th upon the balance-sheet and books. He continued what had been the firm’s business as his own without a bi’eak or intei’ruption until the exit of the injunction; and the inference is, that, in so doing, he used what after pai’tnership administration would have been the individual properly of the plaintiff. ■ “ Wherever this is done, the owner of property, so used by his former partner, has the right to its return either with interest or with the profit which it has earned in the latter’s hands. Clements v. Hall, 2 DeG. & J. 173-186; Turner v. Major, 3 Giff 442; Parsons v. Hayward, 31 Beav. 199, affirmed, on appeal, in 4 DeG., F. & J. 474. The plaintiff is entitled to the return of his property, and has elected to have that to which he was entitled returned with the profits it has earned from December 31,1884, until it shall come into his possession.] “ The principle stated above and invoked by the plaintiff, is well established; it is exceedingly difficult, howevei’, to ascertain how much of the profits have been earned by the money of the late partner where it has been mingled with other money, and the continuing partner has employed skill, judgment and foresight upon the joint fund. In no two businesses do foresight, management and property combine in the same degree to earn profits, and genei’ally the application of the principle in each case depends upon the peculiar circumstances that attend it. “ But, in whatever degree profits result from the management of the continuing partner, no case is known in which the principle of Willett v. Blandford, 1 Hare, 253 — that of compensation — has been extended to him where he has violated an express trust impressed upon the assets, or where there has been oppression to the former partner beyond that of using moneys due him. Here there has been no violation of an express trust; but, in using assets in face of the demand contained in the bill filed and until the exit of the writ of injunction, it is believed there was such oppression as should preclude the defendant from being permitted to show special circumstances that would entitle him to compensation, or that the profits were chiefly the result of his management, and it is, therefore, reported that he should not be allowed this privilege. There is, then, in this case, nothing to interfere in ascertaining what part of the profits earned, if any were earned, with the application of the rule of proportion, as the whole capital is to the whole profit earned, so should be the plaintiff’s share in the profit to his share of the capital, and it is therefore further reported that this rule should guide in seeking the share due the plaintiff, the share of the plaintiff being diminished by the payments made him on account.” The master accordingly recommended a decree that the defendant render an account, etc. The defendant excepted to the portion of the master’s report included within brackets. The court referred the case back to the master, to state an account, but did not pass upon the exception. The exception was afterward renewed, with the exception to the decree recommended by the master, and was sustained by the court, in the opinion filed on exceptions to the report stating an account. The master, in reporting an account, computed the plaintiff’s capital in the business by taking the sum contributed by him originally and adding its accretions of undrawn profits in each succeeding year, until the dissolution of the partnership. In this way, the master fixed the plaintiff’s capital, at the dissolution, at .$15,927.97. Certain items of loss by depreciation in machinery had been included in the profit and loss account of the firm. The master held that the machinery, fixtures and real estate should not be treated as firm assets, and accordingly added a proportionate part of the loss on depreciation in machinery, to wit, $3,498.15, to the amount due the plaintiff. The amount of capital found to be due the defendant, excluding the real estate, was $16,889.03. In computing the profits after the dissolution, the master added the real ■estate, at $30,000, to the capital of the defendant. The master further reported that the sum of $1,736.84, which was the amount paid to the receiver by the defendant, above the sums paid to and received by plaintiff, should be deducted from plaintiff’s account. This sum, it seems, was paid in to meet expenses of hearings, etc. Partial payments were made to the plaintiff, from time to time, by order of court. On June 21, 1887, while the case was before the master, the defendant paid to the plaintiff $10,619.22, on account, without the order of the court. After the taking of much testimony' on the subject, the plaintiff abandoned his claim to the real estate. The master for this reason recommended that the costs be borne equally by the pai’ties. It appears, but not by the master’s report, that $3,000 were charged on the books against the defendant, after June 21, 1887. The master recommended the following decree: “ It is ordered that the defendant, George W. Plumly, pay to the plaintiff, Eugene IL Plumly, the sum of $14,430.30, with legal interest thereon from the 21st of June, 1887; and that the defendant pay to the plaintiff one half of all the costs of the suit which are directed to be taxed by the prothonotary.” The plaintiff filed exceptions to the master’s report, alleging that the master erred, 1, in including the real-estate as assets of the business and as a source from which profits should be derived by the defendant; 2, in not reporting that the real estate account was kept separate from that of the manufacturing business, as it always had been prior to the dissolution, and that a rent was paid for the said real-estate and charged as expense of the business, and hence that it should be excluded from the assets of the business; 3, in reporting that the profits should cease upon J une 21,1887, at which time, as appears by his report, the plaintiff’s capital in the defendant’s hands had not been exhausted; 4, in refusing to allow the sum of $3,498.15 to be added to the plaintiff’s capital as a source of profit to plaintiff; 5, in allowing the sum of $3,498.15 to be considered as a part of the defendant’s capital in the computation of profits; 6, in not reporting the amount of profits for the year 1887; 7, in not deducting from the defendant’s account the sum of $3,000 paid into the capital of the business after June 21, 1887; and, 8, in deducting from the plaintiff’s account the sum of $1,736.84. The defendant renewed the exception to the original report and also excepted to the decree recommended, quoting it. The exceptions were disposed of by the court in the following opinion, after stating the facts as above quoted, by Arnold, J.: “On June 6, 1887, by an interlocutory decree, the master was directed to state and report an account between the parties, upon such principles as might appear to him to be just and equitable. The master has allowed the plaintiff a share of the profits of the business carried on by the defendant after December 31, 1884. This we think was an error. There are no doubt cases in which a partner continuing a business after dissolution may be required to account to the retired partner for the profits made by using the partnership property or perhaps the capital of the partner who has retired. But we do not conceive that this is such a case. "When it is the duty of the partner in possession to sell the concern and distribute the proceeds, and he does not do so, but, on the contrary, carries on the business with partnership property, the profits must be divided as before the termination of the partnership. Parsons v. ITayward, 31 Beavan, 199, cited by the plaintiff, proves that. And the converse is equally true, that, where there is no duty to sell and distribute, the retired partner will have no right to a share of the profits earned by the other partner, who carries on his own business in his own property, although it may have been previously occupied by the partnership. Here the defendant was under no duty to sell his property; it was his individual property. He was not bound to permit it to remain idle. He had a right to carry on any kind of business in his own property that pleased him. Or he might have leased it for a consideration based on the good will of the stand, and not be accountable for the amount received therefor. Elliot’s Appeal, 60 Pa. 161. What he gave his son was an interest in the profits of the business so long as they continued together, but the business was and continued to be the defendant’s. On the cessation of business relations, the plaintiff was entitled to a return of the money he put into the business and his undrawn profits. The total of these sums, when ascertained, was a debt due to the plaintiff by the defendant. The relation of partners in profits had ceased and that of debtor and creditor had taken its place. There was no such relation as trustee and cestui que trust between them. Interest is the penalty for not paying promptly an amount which is due; the debtor is not a trustee, and he is not liable to account for the profits which he may earn in his own business, by reason of having the use of money due to another. Especially is this so where, as in this case, the amount due is not ascertained at the termination of the partnership' and much time is necessarily occupied in settling the account. The defendant owned ample means to pay the amount which might be found to be due the plaintiff, and he made large payments on accounts while this proceeding had been before the master. To hold him, under these circumstances, to be a trustee, instead of a debtor, would be inequitable. We know of no rule of law which requires us to do so. “ The injustice of charging the defendant as a trustee was manifest to the master, who doubted the wisdom of his previous action recommending that the defendant be so charged. The result of that method of accounting is that while, as partners, the plaintiff received one-third of the profits and the defendant retained two-thirds, yet after the plaintiff had ceased to be a partner, he would, on the basis of capitalization urged by him, be entitled to more of the profits than the defendant. To avoid this result, the master included the value of the real estate as part of the capital contributed by the defendant, although it is not a partnership asset, and has thus called forth the protest and exception of the plaintiff. “Another exception, if allowed, would result in a like wrong. The master awarded the plaintiff an item of $3,198.15, made up of errors in charging the general business account with allowances for renewal and depreciation in machinery prior to the dissolution. As the fixtures and machinery were the exclusive property of the defendant, the plaintiff was improperly charged with losses on them. The master, having found the amount so charged to the plaintiff, awarded it to him in the accounting with interest instead of profits. To this the plaintiff excepts and insists that it should be considered as a part of his capital, and that hé should be allowed profits on it, instead of interest merely, since the dissolution. We think the master treated this claim properly. “Another exception shows the practical impossibility, as well as the injustice, of allowing the plaintiff to share in the profits of the defendant’s business after the dissolution. The real estate, machinery and fixtures, as before stated, belong to the defendant. They are not to be sold so as to bring the business to a close, and by that means establish a time when the calculation of profits should cease. The master adopted a day near to the date of the decree for an account, to wit, June 21, 1887, as the time when the allowance of profits should cease and substituted interest thereafter. This meets with objection by the plaintiff, on whose behalf it was urged that the profits should be calculated to a period more approximate to the accounting. But it is plain that, as the business of the defendant cannot be brought to a close by any decree entered in this ease, it will be necessary to fix upon some time when the calculation of profits should cease and the computation of interest begin. We have before shown that the time, legally and equitably appropriate for the purpose, is the day when the plaintiff’s interest in the profits of the business ceased, to wit, December 31, 1881, the day on which he became a creditor and the defendant became his debtor. In short, the claim of the plaintiff, for the return of his capital and undrawn profits before dissolution, is a claim for debt on which interest only should be allowed. “ The defendant has been making payments to the receiver, nearly all of which have been paid over to the plaintiff, and the defendant had also paid a very large sum of money directly to the plaintiff. These sums received by the plaintiff may amount to as much as he is entitled to, or nearly so ; yet, if the plaintiff’s contention is correct, all these payments are to be charged to him as profits merely, thus leaving his capital intact. We cannot approve of this method of settling the accounts. We therefore sustain the exception of the defendant and order the account to be re-stated by allowing the plaintiff interest instead of profits on his money since the date of the dissolution. “The plaintiff’s eighth exception is sustained. The sum of $1736.8J yet in the receiver’s hands should not be charged to the plaintiff. It is there to pay costs and expenses, and the residue will be distributed by the master in accordance with the rights of the parties. It will be noticed that a part of the money paid by the defendant to the receiver, was paid as rent for machinery which belonged to himself, and, so far as it had been withdrawn by the plaintiff on the order of this court, it goes in relief of the obligation of the defendant to the plaintiff. But we see no reason why the defendant should be required to continue paying rent for his own property. “We approve the master’s decree that each party should pay one-half the costs of the proceedings. “ The first seven exceptions of the plaintiff are dismissed and the eighth is sustained. The defendant’s exception, except as to costs, is sustained. The report is referred back to the master to state the account between the parties in accordance with this opinion, and the master is directed to call for a final account from the receiver and proceed to .settle and adjust it and report distribution of the balance.” The master thereupon re-stated an account between the parties allowing to the plaintiff interest, instead of profits, on his money in the partnership since the date of the dissolution on Dec. 31, 1884. After allowing defendant credit for payments made to the plaintiff, the master reported a balance due plaintiff of $4,269.96. Plaintiff filed exceptions, alleging that the master erred, 1, in reporting that there was due to the plaintiff the sum of $4,269.96 only; 2, in not allowing to the plaintiff the amount of profit made by the defendant by the use of the sum of $19,895.58, which was the amount of the capital of the plaintiff in the business of the American Paper Box Co. upon Dec. 31, 1884. On July 26, 1888, a decree was made dismissing the exceptions and ordering the defendant to pay to the plaintiff the sum of $4,269.96. The assignments of error specified the action of the court, 1, in holding that "the relation of the members of the firm of George ~W. Plnmly & Son, after the dissolution of the co-partnership, was that of debtor and creditor, and that the defendant, having continued to use the plaintiff’s capital in his business, against the consent of the plaintiff, was bound only to pay legal interest as compensation therefor; 2, in not holding that, on the dissolution of the firm, it was the right of the plaintiff to have the firm assets turned into money and to receive his share thereof, and that, having been prevented by the defendant from so receiving said share, and the defendant having made use of the plaintiff’s capital and share of the assets in the business, the said defendant became hable to account to the plaintiff for an amount of the profits which bore, to the whole profits made, the same proportion as was borne by the plaintiff’s capital, used by the defendant, to the whole capital used by him in the business; 3, in sustaining the exception of the defendant to the, first report of the master, quoting it as in brackets; 4-10, in not sustaining plaintiff’s exceptions to the second report, quoting them; 11, 12, in not sustaining plaintiff’s exceptions to the third report, quoting them; and, 13, in entering the decree of July 26, 1888.