Latta v. Kilbourn, 150 U.S. 524 (1893)
U.S. Supreme CourtLatta v. Kilbourn, 150 U.S. 524 (1893)
Latta v. Kilbourn
Argued November 21-22, 1893
Decided December 11, 1893
150 U.S. 524
A decree in chancery which determines that a partnership existed between the parties, that one partner is entitled to recover of the other a share in the profits of the partnership business, that the defendant partner account to the plaintiff partner, and that the case be referred to a master to state such account upon proofs is not a final decree.
The plaintiff set up in his bill a verbal contract of partnership between the defendant and himself in the buying and selling of real estate, and called for an answer under oath. The defendant answered under oath, denying positively and in direct terms the existence of the alleged contract of partnership. Held that, under well settled rules of equity pleading and practice, this answer could be overcome only by the testimony of at least two witnesses, or of one witness with corroborating circumstances, and that the proofs in this case fail to break down the defendant's denial.
The violation by one partner of his undertaking to give to the firm or his associate an opportunity or option to engage in any particular transaction not within the scope of the firm's business does not entitle his co-partners to convert him into a constructive trustee in respect to the profits realized therefrom.
An agreement by partners that no one of them should engage in the buying and selling of real estate on his own account does not entitle the other partners to share in profits made by one of them in real estate speculations entered into by him without first securing the assent of his co-partners.
Dean v. McDowell, 8 Ch.D. 345, approved and followed.
If a member of a partnership uses information obtained by him in the course of the transaction of the partnership business or by reason of his connection with the firm for purposes wholly without the scope of the partnership business, and not competing with it, the firm is not entitled to an account of any benefit derived therefrom.
The appellees, as members of a dissolved co-partnership, brought this suit against the appellant, another member thereof for an account of profits made by the latter in certain transactions alleged to have been within the scope of the partnership business and which, as claimed, it was his duty to have conducted for the benefit of the firm instead of for his individual advantage.
The material facts of the case, as disclosed by the pleadings and proofs, are as follows: in 1865, there existed in the City of Washington a co-partnership composed of R. M. Hall, C. H. Kirkendall, and Hallet Kilbourn, under the name of Hall, Kilbourn & Co., which was formed for the purpose of carrying on the business of "real estate brokers and auctioneers." The scope of this partnership, as indicated by the nature of its business, was one of agency, and consisted in negotiating and making sales and purchases of real property for the account of others.
In the latter part of 1865, Kirkendall withdrew from the firm, and the appellant, Latta, acquired and succeeded to Hall's interest therein, and thereafter the business of the co-partnership was conducted under the name of Kilbourn & Latta. These changes in the membership of the firm were attended with no change in the nature and scope of the partnership business, which continued the same after Latta came into the firm as before, except that the business of auctioneers was discontinued.
The partnership agreement of the former firm, as well as that of Kilbourn & Latta, was in parol, and the business of each, as proclaimed to the world by their advertising cards in the newspapers, by the sign at the firm's place of business, by letterheads, and as published in the city directory, was that of "real estate and note brokers," and consisted in buying and selling
real estate on commission, renting houses, and negotiating loans. Kilbourn & Latta. as a firm, had no capital and owned no property except a few articles of office furniture of little value; nor was there any agreement, arrangement, or provision made by which capital was to be supplied for the use of the firm, if any should be needed or required in the conduct of its business. The personal services of the partners constituted the only means of carrying on the business of the firm, and each member was to share equally in the profits and losses of the business. Kilbourn was without means, while Latta was possessed of considerable property.
During the existence of this partnership, which continued from 1866 to January 1, 1871, each member of the firm, with the knowledge of his co-partner, purchased real estate and other property on his private or individual account, and no question was ever made by either partner of the right so to do, nor did either partner ever claim that the profits realized on such purchases should be treated as belonging to the firm or were subject to division among its members. By special agreement and as a special venture, the partners purchased on firm or joint account two parcels of land on speculation; the money to make the purchases being advanced by Latta, in whose name the title was taken. In the same way, by special agreement, they purchased bonds and other securities, and special accounts of such transactions were kept upon the firm's books. In several instances, the partners by special and mutual agreement, in lieu of commissions, took a share of the profits in property purchased and sold for the account of others, without assuming or incurring any responsibility for losses.
The two purchases of real estate on joint account, as well as those in which the partners of the firm took a share of profits in lieu of commissions, were special ventures in each case, entered into after special agreement between the partners, and were in no sense within the terms or objects, expressed or implied, of their regular partnership business. The scope and character of the firm's business did not extend to the buying and selling of real estate on account of the firm. It had no capital for that purpose, and no arrangements were
provided by which it was to be supplied. The profits of the business were drawn and distributed as fast as earned.
On January 1, 1871, John F. Olmstead, who had been for many years a clerk for Kilbourn & Latta at an annual salary of twelve or fifteen hundred dollars, was admitted as a partner into the firm. The new partnership carried on its business under the same firm name of Kilbourn & Latta, the respective interests of the partners being three-eights of the profits of the business each to Kilbourn and Latta and two-eighths to Olmstead. This new firm, like the former, had no written articles of co-partnership. The scope and character of its business, as well as the respective interests of the partners therein, rested in parol. Olmstead brought no means into the concern, and neither the firm nor any member thereof except Latta possessed any property or capital. There was not only no provision or agreement for the accumulation of firm capital, but the course of business was directly the reverse, the habit of the partners being to draw against their respective shares of the profits, and on December 31 of each year the accounts were adjusted, and whatever balance each member of the firm had to his credit was drawn out of the firm and placed to his individual credit. The profits of the business, in which alone the partners were to share, were thus annually divided and distributed according to their respective interests.
Under this new firm, as under the old, the scope and character of its business, as indicated and made known to the public through the sign over its place of business, in the cards which it advertised, in the city directory, and its letterheads and envelopes, was that of "real estate and note brokers." Aside from the scope and character of the firm's business as thus described and brought to the notice of the public, each of the three partners testified that the new partnership was a continuation of the business of the former firm of Kilbourn & Latta.
Latta states that "there was no change whatever made at the time he [Olmstead] came in as to the terms of the partnership or the scope of the partnership business."
Kilbourn states that he does
"not remember now of any change late in the year 1870 in the firm of Kilbourn & Latta except the agreement to take in Mr. Olmstead and the change in the division of the profits. In all other respects, the firm continued afterwards just as it was before."
"After I became a member of the firm, it was agreed that we should do a brokerage business and a commission business; that we should buy and sell property when opportunity offered and we had the facilities for doing it, and we should buy and sell securities, and do a general brokerage business, and a general commission business -- a general speculative business. I have stated all the stipulations substantially as well as I can recollect them. These stipulations were entered into on one of the last days of December, 1870. I don't know that there was any discussion as to whether the business of the firm was to be different after I entered it from what it was before. I don't know that there was any new arrangement touching the business in which the firm was to embark. The partnership business of the firm was, as I understood, to be just what it had been. They were to go on and do what they had been doing for a year or two, with the same scope and breadth."
It was further testified by Kilbourn and Olmstead that when the latter came into the firm in January, 1871, an arrangement or stipulation was made that all real estate which was considered a bargain was to be first offered to the firm or the members thereof for purchase; that if the firm or any member thereof declined to make the purchase, the others could take it if they so elected, and, if two declined, one could take it; but that the firm was to have the first opportunity, and that it was left optional with the firm, and with each member thereof, to join in such purchase. Olmstead, in his testimony, states this alleged stipulation or arrangement as follows:
"There was an agreement that knowledge of any property that was offered for sale or any property that any of the members of the firm knew about should be communicated to the firm, and if they saw fit and were in condition, they could
buy it, and if either member declined, the other two could, or, two declining, one could; but everything pertaining to real estate was to be for the benefit of the firm and to be communicated to the firm. That was a verbal agreement. The first time I remember of its being fully talked about was a month or six weeks before we moved uptown, somewhere in the latter part of March or 1st April, 1871. After we went uptown, it was talked about several times; it was an express injunction or stipulation of Mr. Latta's."
"There was one stipulation (I call it a stipulation) which was agreed on, a proposition made by Mr. Latta in the office on Seventh Street and F, that I remember."
"Q. Was that after you entered the firm?"
"A. Some little time before we made the purchase of part of lot 5, in square 157. And that was (what I have stated in the bill, as nearly as I can state it now) that the knowledge or information or anything touching real estate should be communicated to the members of the firm; that any purchases of real estate should be for the benefit of the whole firm; that if any member did not wish to come in, or was not conditioned to come in, the other two might, or, if two declined, then one might. The first and foremost was that everything pertaining to real estate operation and speculations was to be for the benefit of the firm. That was one of the conversations with Mr. Latta. . . . He wanted it very emphatically understood that what was done by the members of the firm was for the benefit of the firm in the way of real estate business operations."
"Q. No matter what form it took on?"
"A. He stated what form -- that if he heard of any piece of property being for sale, and saw an opportunity to make a speculation, or going into any interest in any operation, that it should be communicated to the other members."
Kilbourn states the arrangement as follows:
"Well, the agreement was to continue the future in regard to the real
estate transactions all information with reference to the purchase and sale or negotiation of real estate acquired should be submitted with a view that if the firm desired, they could take advantage of such information, and operate in behalf of the firm, or any members of the firm, if the firm did not wish to take hold as a firm. There were several talks and conversations with regard to the business at various times."
"Q. Was there any agreement as to either member of the firm buying and selling real estate on his own account?"
"A. The only agreement was, as I stated before, that all knowledge or information with reference to the property, whatever developed was in the minds of any one of the members a good investment, it must be submitted to the firm, and, if the firm did not want it, or did not like it, then any member of the firm had the privilege of buying. The first condition precedent was that the firm should be advised of everything in relation to real estate transactions coming within the knowledge of the firm. It was laid down by Mr. Latta himself very emphatically, and after we moved up to Fifteenth and G Streets, he referred to it once or twice."
He further testified:
"The arrangement in 1871, after Mr. Olmstead came in, was that all property which was considered a bargain was to be first offered to the firm for purchase, and if they wanted to go in, well and good. If either one declined, the others could take it if they wanted to; and, if two declined, the third one could take it. But the first consideration was to give the firm the opportunity."
"It was a positive and emphatic agreement that all matters connected with real estate or operations in real estate that suggested themselves as good things to either one of the partners should be presented to the firm; that all information in connection with real estate should be stated to the firm, and that in the matter of purchasing real estate, the firm was to have the first opportunity. If either member declined to go in, then the other two could; and, if two members declined, then the other member had the privilege. That was a positive agreement suggested and laid down by Mr. Latta himself. It
was stated when we were considering the question of taking Mr. Olmstead into the partnership, and it was agreed upon when we entered into the partnership, and reference was made to it two or three times subsequently. It was simply a parol agreement."
Latta, both in his answer and testimony, positively denied this stipulation.
This firm continued in existence from January 1, 1871, to January 1, 1877, when it was dissolved. During this period, one or more parcels of land were purchased as a speculation on joint account by the members of the firm, after special agreement so to do had been entered into between them. These transactions, like those of the former firm, were special ventures, entered into after a special agreement between the partners to make the particular purchases. Bonds and other securities were also purchased from time to time under and in pursuance of special agreement between the partners.
These bond transactions were entered upon the books of the firm under what is called the "Bond Account," while the joint real estate transactions were kept under an account styled or headed "Kilbourn, Latta & Olmstead." This new firm did not, however, in any case make any speculative purchases of real estate on joint account with others, or upon any agreement or arrangement to take a share of the profits in lieu of commissions. All the transactions on either firm or joint account, other than the brokerage business of the co-partnership, were discussed and specially agreed upon before they were entered into.
Purchases on his individual account were made by Latta, the appellant, during the existence of the firm, with the knowledge of one or both of the other partners, and without objection's being made thereto. Among other purchases made by him in his individual name and for his individual account were lots 34, 35, and 36, in square No. 445, in the City of Washington, designated as the "Thyson Lots," on the sale of which profits were made by him. Olmstead knew of the purchase of these lots as early as 1873, and neither made objection thereto nor set up any claim on behalf of the firm or of
the partners thereof to a share of the profits made by Latta from the sale of the same.
In December, 1871, Latta entered into an agreement with Dr. Stearns by which they undertook to engage in the buying and selling of real estate in the District of Columbia on joint speculation, upon the terms that the capital to be invested should be furnished by Stearns, which, with interest, was to be first paid out of the proceeds of the sales of the property to be bought, and after the payment of all expenses the net profits of the speculation should be equally divided between the parties. Each party was to be equally responsible for any losses that might be sustained. Under this arrangement between them, a number of lots and parcels of land were purchased in 1872, the titles to which were taken generally in the name of Stearns, but in one or more instances the title to property purchased was taken in the name of Latta. The purchases and sales of the lots and parcels of ground made by Stearns and Latta on joint account were conducted through the firm of Kilbourn & Latta, and were entered upon their books, and the firm received the regular commissions thereon, which amounted to about $5,000.
Before these purchases on joint account were closed out and the profits thereon were realized and distributed, Stearns, under date of July 30, 1872, executed and delivered to Latta a certificate which recited that the real estate purchased under their arrangement was held by him on joint account, and that the terms of the joint account were as follows:
"The cash payments have been made by me; the future or deferred payments, principal and interest and taxes, are to be paid by me. I am to determine when at what price, and on what terms, any portion of it may be sold, and when any proportion of it is sold I am to be repaid all the money I have paid out on account of that portion, with six percentum interest on the amount. Then, after all costs and expenses of the sale shall have been paid, the net profits are to be divided equally between the said Latta and myself."
"Mr. Latta has a copy of this. "
While this certificate of Stearns does not mention losses, it is satisfactorily shown that Latta was to divide the losses in the event the property, when sold, did not realize costs and expenses, and in one instance he did divide with Dr. Stearns the loss upon a parcel of ground purchased on joint account. For some of the purchases made on joint account with Stearns, Latta executed his individual notes, and in the course of the business drew from and deposited with the firm of Kilbourn & Latta funds for the account of Stearns growing out of their joint enterprises.
While Latta did not consult his co-partners, or obtain their assent to his engaging with Stearns in the joint purchases of real estate, he took no means of concealing it, and we are satisfied from the testimony in the case that Olmstead knew of these transactions of Latta with Stearns as early as 1873. He admits that he had a suspicion of it in 1874. The bookkeeper of the concern states that he cannot understand how the other members could fail to know of it, and a disinterested witness, William H. Philip, testified that about May, 1873, when he inquired for Latta at the office of the firm, Mr. Olmstead stated that Mr. Latta had gone to Europe, and in reply to the question whether for business or pleasure, further stated that "Mr. Latta had just closed out some real estate, or perhaps a large amount of real estate, that he and Dr. Stearns were interested in," and that a part of his business in going to Europe was to see Dr. Stearns, and settle up their matters.
This direct testimony, in connection with the facts and circumstances surrounding the transaction of the business, leaves little or no room to doubt that Olmstead knew of the joint enterprises of Stearns and Latta as early as 1873.
This second firm of Kilbourn & Latta was dissolved in January, 1877, and, thereafter, in November, 1877, the appellees filed their bill against the appellant in which, after reciting many of the facts already stated, they claimed that the purchases of the Thyson lots and the joint purchases made with Stearns were properly partnership transactions, and that he
(Latta) was accountable to them for the profits realized out of the same. The bill alleged that the profits realized from the purchases made with Stearns amounted to about the sum of $45,000, which was equally divided between Stearns and Latta, and that no part thereof was turned over to the firm of Kilbourn & Latta, but that it was wrongfully appropriated by Latta to his own use. The complainants further averred that they had no knowledge of these transactions of Latta and Stearns until after the dissolution of the partnership, and that Latta had conducted the same secretly, and thereby had defrauded the complainants.
By the third paragraph of the bill, it was averred that the co-partnership was entered into for the purpose of carrying on the business of real estate agents and brokers and the purchase and sale of real estate in the District of Columbia, and also averred that it was
"further stipulated by said partnership agreement by and between the plaintiffs and defendant that all profits resulting from operations in real estate by said firm of Kilbourn & Latta or by any member thereof during the existence of said partnership should belong to said firm, and be entered upon the books of the firm and paid into the partnership account, and it was further stipulated in said agreement that any information obtained by any member of said firm during the existence of said co-partnership touching real estate with reference to its sale or purchase, or the consent of the owner of said real estate to sell the same, or the desire of any person to purchase real estate in said District, was to be communicated to said firm of Kilbourn & Latta for the consideration of the several members and the action of the firm thereon, and it was expressly agreed in said co-partnership agreement that no member of said firm should, during the existence of said co-partnership, engage in the business of buying and selling real estate in said District on his own account or with any other person or persons except in cases where the proposed transaction had been explained to the firm and said firm had declined to take any part therein. That pursuant to said agreement, the said co-partnership firm of Kilbourn & Latta entered upon the business for which it was formed, and continued
said business for six years, to-wit, from January 1, 1871, to January 7, 1877, on which last-named date the said co-partnership was dissolved."
After considerable proof had been taken, the bill was amended by adding to the first paragraph of section four the averment
"hat by said agreement, after the payment of all expenses, and returning to said Stearns the amount invested by him, with interest thereon, the profits on sales of such real estate purchased for said Stearns were to be equally divided between him and said Latta. That said Latta, under said agreement, in fact was to act as the broker of and for said Stearns, and to receive as compensation for conducting said business and furnishing and using therein the experience, information, and facilities which he possessed and enjoyed, as aforesaid, one-half the net profits on all sales of real estate so purchased for said Stearns."
The prayer of the bill was as follows:
"1st. That the said defendant be ordered and adjudged to pay to the plaintiffs their full share of the profits arising from the said sales of real estate by the said John Stearns and James M. Latta, under and by virtue of their said secret agreement, together with the interest thereon, amounting in all, as plaintiffs are advised and believe, to the sum of sixty-five thousand dollars."
"2d. That said defendant be ordered to pay to the plaintiffs their just share of the proceeds of the sale of said lots 35 and 36, square 445, together with the interest thereon."
"3d. That said defendant be ordered to convey to the plaintiffs their just share in and to said lot (34), square 445."
"4th. That he be required to answer this bill under oath as fully and faithfully as if specially interrogated thereto."
"5th. That the plaintiffs may have such other and further relief in the premises as the nature of the case may require and to your honors may seem meet and proper."
The defendant answered the bill under oath and, after admitting its formal allegations in reference to the existence and dissolution of the partnership of Kilbourn & Latta, denied that it was ever agreed, either in writing or by parol, that said
firms, or either of them, was to carry on the business of buying and selling real estate on partnership account, and that at no time in fact did either of said firms undertake to carry on such business; that by the terms of the co-partnership agreement, the scope and character of the business of each of said firms was that of "real estate and note brokers;" that this business continued the same after Olmstead came into the firm as before, and that it was so advertised to the world.
He further denied the allegations of the bill that there was any agreement, either written or in parol, that all profits resulting from operations in real estate by such firm, or any member thereof, should belong to the firm and be entered upon the books thereof, and be paid into the partnership account; or that there was any written or verbal stipulation that information obtained by any member of the firm during the co-partnership and touching real estate with reference to its sale or purchase, or the consent of the owner to sell the same, or desire of any person or persons to purchase real estate in the District of Columbia, should be communicated to the firm for the consideration of the several members, and the action of the firm thereon; or that it was agreed that no member of said firm should during the existence of the co-partnership engage in the business of buying and selling real estate in the District of Columbia on his own account, or with any other person or persons, except in cases where the proposed transaction had been explained to the firm, and it had declined to take part therein.
The answer also denied that either partner was under any disability to engage in the business of buying and selling real estate on his own account, or with any person or persons, without consulting the firm, or the members thereof, and obtaining their consent so to do.
In his answer to the amended bill, the respondent denied that he was to act as the broker of Stearns in their joint transactions; that he was to receive one-half of the profits on the sale of the real estate purchased by them as compensation for conducting the business and using therein the experience, information, and facilities he possessed as a member of the firm of
Kilbourn & Latta, and averred that by the terms of his contract with Stearns, the purchases and sales made in pursuance thereof were to be on joint account, each party being entitled to share equally in the profits and be equally responsible for one-half of the losses that might result. The answer furthermore set up the statute of frauds as a bar to the enforcement of the alleged new stipulations, entered into when Olmstead came into the firm, to the effect that the co-partnership or the members thereof should be first given the option to take bargains in real estate before the individual members should make purchases thereof.
The defendant averred that all the real estate transactions entered into by either the first or the second firm of Kilbourn & Latta were the subjects of special agreements beyond the regular business of the co-partnership, and that there never was a time during the continuance of either firm when, by virtue of the nature or scope of the co-partnership business, and irrespective of special authority, either partner had the right to bind the firm or his co-partners in respect to the purchase and sale of real estate, and further alleged the general facts already mentioned in reference to the co-partnership and its business.
After voluminous proofs had been taken, the cause came on to be heard in the Supreme Court of the District of Columbia, October 27, 1886, when the complainants abandoned all claims against the defendant on account of the matters, set forth in the sixth paragraph of their bill, relating to the Thyson purchases, and covered by the second and third prayers for relief, and thereupon the following decretal order was entered:
"That the complainants are entitled to recover from said defendant their full share, viz., five-eighths of all profits realized by said defendant from said sales of real estate referred to in the pleadings and proof in this cause, made by said John Stearns and said defendant, with interest thereon from the time when the same were so realized, it is, this 27th day of October, A.D. 1886, ordered, adjudged, and decreed that said defendant do account to the complainants for their said share of the profits aforesaid; that this cause be, and the same
hereby is, remanded to the court in special term, with instructions to refer the same to the auditor of the court to state said account upon the proofs in the cause, and such further proofs as the parties may offer, and for such further proceeding as may be lawful and proper under this decree, and that said defendant pay all costs of the cause."
5 Mackey 304.
In accordance with that decree, the cause was referred to the auditor of the court, who, after taking further proof, made his report showing that there was, on January 1, 1888, due the complainants from the defendant on account of the latter's real estate transactions with Stearns the sum of $21,562.59, with interest on $12,030.50 thereof from that date until paid. This report was excepted to, but the exceptions were overruled, and the report was confirmed November 30, 1888, and a decree entered in favor of the complainants against the defendant for the amount reported and costs of the suit. From this decree the present appeal is prosecuted.