1. After a partnership contract confessedly against public
policy has been carried out, and money contributed by one of the
partners has passed into other forms -- the results of the
contemplated operation completed -- a partner in whose hands the
profits are cannot refuse to account for and divide them on the
ground of the illegal character of the original contract.
2. Where one partner who is in sound health is made sole agent
of the partnership by another who is not, and who relies on him
wholly for true accounts, and the party thus made agent manages the
business at a distance from the other, communicating to him no
information, the relation of partners, whatever it may be in
general, becomes fiduciary, and the law governing such relations
applies.
Martin filed a bill in equity in the Federal Court of Wisconsin
to set aside a contract of sale which he had made to Brooks of his
interest in a partnership venture and for an account and division
of the profits, the ground of the prayer being his own alleged
embarrassed condition at the time of the sale, his ignorance of the
partnership business, fraud on the part of the defendant, Brooks,
concealment by Brooks of what he knew, misrepresentation in what
he
Page 69 U. S. 71
professed to tell, and want of consideration proportioned to the
real value of the interest which the complainant had in the
concern. The answer admitted the purchase by Brooks but denied the
fraud. The court gave the relief prayed, and from its decree herein
an appeal, the present suit, came here.
The case, as proved by the evidence and as shown and assumed by
this Court after a very careful examination of an immense mass of
testimony -- twelve hundred pages closely printed -- set forth in
part in the opinion, but, as involving very voluminously
controverted issues of fact, not necessary nor indeed possible to
be presented here, [
Footnote 1]
was in substance this.
On the 11th February, 1847, the United States, being then at war
with Mexico, Congress passed a law by which warrants were directed
to be issued to soldiers for a certain quantity of land each; but
in order to protect the soldier entitled to the warrant against the
rapacity of land brokers and others who would profit of his
improvidence, the statute provided, by a ninth section, that any
sale or contract going to affect the title or claim to any such
bounty made
prior to the issue of such warrant, should be
"null and void
to all intents and purposes whatsoever."
[
Footnote 2] Just after the
passage of this statute -- that is to say in June, 1847 -- the
complainant, Martin (who was a banker in New Orleans), Brooks, the
defendant, and a certain Field entered into a partnership at New
Orleans, the
ostensible object of the firm being "the
purchase and sale of bounty land warrants that may have been or
may be issued under the law of Congress" &c. The
purchases and sales were to be conducted by Brooks and Field, and
the money was to be furnished by Martin.
Brooks was the
brother-in-law of Martin, and had been a clerk in his banking
house. Field was a stranger. It was therefore agreed that
Brooks should, in the actual management of affairs, represent
Page 69 U. S. 72
Martin and have full and exclusive control of the business -- an
agreement, of course, by which he obtained a preponderating
influence in the management of the partnership over Field. The bill
indeed alleged that Brooks had a power of attorney from Martin
authorizing him on all occasions to represent him in the
partnership business. This fact was denied in the answer, but the
answer admitted that Brooks was authorized by Martin to control the
business. Martin advanced in cash over $57,000, and large purchases
having been made of soldiers' claims, the parties closed their
operations in New Orleans, where little was done after a few months
in the way of purchasing warrants. Brooks then came to Washington
to attend to the issue of warrants. Field, with two brothers of
his, went to Wisconsin to locate the warrants and sell the lands.
Martin still remained in New Orleans, carrying on his business of
banker. From the time that Brooks and Field left New Orleans,
the management of the entire business fell, apparently, under
the direction of Brooks. None of it was conducted in New
Orleans, nor, except five or six which Brooks bought at the
suggestion of Martin, were any further warrants bought there. The
accounts were kept in Wisconsin, two thousand miles from where
Martin was, and who had no opportunity of hearing anything about
the partnership except as it was communicated to him by Brooks or
Field, or one of the brothers Field, who were employed as clerks or
agents in the business. No reports of the business were made to
Martin, and as the testimony showed, Brooks and Field managed it
entirely without consulting him, irrespectively of his interest.
The firm was known indifferently as Brooks & Field and as
Brooks, Field & Co.
In the winter of 1847-1848, Martin failed in business, and his
health, including specially, it seemed, his nervous condition,
became considerably prostrated. During the winter just named and
when much embarrassed and absorbed about his business, he applied
for information to Brooks, who was then in New Orleans and who gave
him a very discouraging account of everything -- one, the court
assumed,
Page 69 U. S. 73
which might naturally make Martin "glad to escape with a few
thousand dollars which it owed him as a creditor," an account which
the court considered that it was impossible to regard as true.
In June, 1848, Martin at the invitation of Brooks, went to
Pittsburgh, in Pennsylvania, to meet Brooks, who then and there, on
the 28th June, 1848, bought out his interest in the partnership.
Martin at this time had never been in the West, and in fact
knew little or nothing as to the particulars of what had been done
there. There was no evidence, indeed, except the answer of the
defendant, which was discredited by facts, that Martin ever had a
remote conception of the condition of the business. On the
contrary, there were letters in the record begging for statements
on that subject.
On the other hand, when Brooks and Martin met in Pittsburgh,
Brooks had just come from Wisconsin, where he saw Field and his
brothers and where he had the partnership books for examination,
and spent several days in examining them. That
he knew the
real condition of the concern and was fully and minutely informed
as to every item of its business was considered by the court as
"beyond dispute."
It appeared in addition, by letters from Brooks to one George
Field, a brother of Field, the partner, written before the sale was
made, that Martin had directed that all remittances should be made
to
him at Washington, showing by allusions in them to a
remittance which George Field had proposed to make to Martin and to
certain friends and correspondents of his named Lake & Co., in
New York, that Brooks specifically, and apparently with an
interested motive, desired that no remittance should thus be made.
In one letter, written June 20, 1848 -- that is to say eight days
before the sale and after he had invited and was expecting
Martin to meet him at Pittsburgh in contemplation of the purchase
which he there made -- Brooks says:
"I can hardly express to you how much I feel obliged to you for
the soundness of the judgment that dictated to you to remit
directly to me, rather than to New York or any other place, without
my direction. I had been rendered somewhat unamiable
Page 69 U. S. 74
the day before by a letter from George Field in which he
suggested the propriety of remitting directly to New York. I feared
he had so directed you.
It would have greatly embarrassed my
operation. I want all advice, as well as all remittances, to
pass through myself. If Mr. Lake OR ANYONE ELSE ask information in
relation to our matters, refer him to me, advising me of the
circumstance."
The partnership at this date -- as the court,
after a computation made by it on an analysis of
the evidence, showed and assumed -- presented
clear cash profits . . . . . . . . . . . . . . . . . $15,000
It had also, as the court showed, and assumed it
to be proved, 45,000 acres of land, which,
estimated at Government rates -- a low rate of
estimate in view of the fact that they had been
carefully selected by Field and his two brothers,
one of whom had been sent to examine the land
personally before the warrants were located, and
who was early in the field and made judicious
selections -- gave about . . . . . . . . . . . . . . 57,000
-------
Or a total profit of $72,000 . . . . . . . . . . . . .
$72,000
of which Martin's share, for the partnership, by its
terms, was not an equal one,
came to $30,000.
The consideration of Brooks' purchase was an agreement by him to
pay all debts of the partnership, about $45,000, and a payment, as
he alleged, of $3,000 to Martin though, as Martin asserted, a
payment of about one-half a balance due him on another account,
which balance it was evident that Brooks was bound for. Brooks gave
no security for his performance of his agreement to pay these
debts.
At the time when this bill was filed, to-wit, on the 3d of
August, 1857, which was apparently so soon as Martin had examined
into the facts of the case,
all the claims purchased by the
firm had been turned into land warrants, and the warrants had been
sold or located. Where the purchase had been made prior to the date
of the warrant granted, assignments were subsequently made by the
soldier. A portion of the lands thus located had been sold, part
for cash, partly on mortgage, and the assets of the partnership
consisted now almost wholly of cash securities or of land.
Besides a full denial of the offensive allegations, as made by
the bill, the defendant set up as follows:
Page 69 U. S. 75
That notwithstanding the statement in the articles of
partnership that the business of the firm related to the purchase
and sale of bounty land
warrants and scrip, such was not
the true purpose of its formation, nor the business which it really
transacted; but that the partners intended, and really did engage
in buying up the claims of the soldiers, who were then returning
from Mexico by way of New Orleans, for bounty land or scrip,
long before any scrip or land warrants were issued by the
Government [a fact of which there appeared, indeed, by the
evidence, to be no great doubt]; that this was an illegal traffic,
forbidden by the act of Congress of February, 1847, above referred
to, and against public policy; that accordingly, the plaintiff
could have no relief in a court of equity against his co-partner,
even if it were made to appear that the latter realized a large sum
out of the venture, and defrauded the former of his share of the
amount so realized.
2. That no such fiduciary relation existed between the parties,
from the mere fact of
partnership, or from anything shown
in the case, as entitled the complainant to relief.
Page 69 U. S. 78
MR. JUSTICE MILLER, stating the facts of the case, as he
proceeded, and showing that its different parts were proved by the
testimony, delivered the opinion of the Court to the following
effect:
We think that, in point of fact, the allegation of the
answer
Page 69 U. S. 79
-- that the traffic in which this firm engaged was the buying up
of soldiers'
claims, before any scrip or land warrants
were issued, and not the purchase and sale of bounty land warrants
and scrip -- is true. We have as little doubt that the traffic was
illegal. Undoubtedly the main object of the ninth section of the
Act of February 11, 1847, was to protect the soldier against
improvident contracts of the precise character of those developed
in this record. It was a wise and humane policy, and no court could
hesitate to enforce it in a case which called for its application.
If a soldier who had thus sold his claim to Brooks, Field & Co.
had refused to perform his contract, or to do any act which was
necessary to give them the full benefit of their purchase, no court
would have compelled him to do it, or given them any relief against
him. And if they had, by any such means, got possession of the land
warrant or scrip of a soldier, no court would have refused, in a
proper suit, to compel them to deliver up such land warrant or
scrip to the soldier. Or if Brooks, after the signing of these
articles of partnership, had said to Martin "I refuse to proceed
with this partnership, because the purpose of it is illegal,"
Martin would have been entirely without remedy. If, on the other
hand, he had said to Martin "I have bought one hundred soldiers'
claims, for which I have agreed to pay a certain sum, which I
require you to advance according to your agreement," Martin might
have refused to comply with such a demand, and no court would have
given either of his partners any remedy for such a refusal. To this
extent go the cases of
Russell v. Wheeler, [
Footnote 3]
Sheffner v. Gordon,
[
Footnote 4]
Belding v.
Pitkin, [
Footnote 5] and
the others cited by counsel for appellant, and no further.
All the cases here supposed, however, differ materially from the
one now before us. When the bill in the present case was filed, all
the claims of soldiers thus illegally purchased by the partnership
with money advanced by complainant had been converted into land
warrants, and all the warrants had been sold or located. The
original defect in
Page 69 U. S. 80
the purchase had, in many cases, been cured by the assignment of
the warrant by the soldier after its issue. A large proportion of
the lands so located had also been sold, and the money paid for
some of it, and notes and mortgages given for the remainder. There
were then in the hands of defendant, lands, money, notes, and
mortgages, the results of the partnership business, the original
capital for which plaintiff had advanced. It is to have an account
of these funds, and a division of these proceeds, that this bill is
filed. Does it lie in the mouth of the partner who has, by
fraudulent means, obtained possession and control of all these
funds, to refuse to do equity to his other partners, because of the
wrong originally done or intended to the soldier? It is difficult
to perceive how the statute, enacted for the benefit of the
soldier, is to be rendered any more effective by leaving all this
in the hands of Brooks, instead of requiring him to execute justice
as between himself and his partner; or what rule of public morals
will be weakened by compelling him to do so? The title to the lands
is not rendered void by the statute. It interposes no obstacle to
the collection of the notes and mortgages. The transactions which
were illegal have become accomplished facts, and cannot be affected
by any action of the court in this case.
In
Sharp v. Taylor, [
Footnote 6] a case in the English Chancery the plaintiff
and defendant were partners in a vessel, which, being American
built, could not be registered in Great Britain, according to the
navigation laws of that kingdom. Nor could the owners, who were
British subjects, residing in England, have her registered in the
United States. They undertook to violate the laws of both countries
by having her falsely registered in Charleston, South Carolina, as
owned by a citizen and resident of that place. In this condition,
she made several trips, which were profitable; and the defendant,
colluding with Robertson, the American agent in whose name the
vessel had been registered, refused to account with plaintiff for
his share of the profits, or to
Page 69 U. S. 81
acknowledge his interest in the ship. When plaintiff brought his
suit in Chancery in England, the defendant set up the illegality of
the traffic, and the violation of the navigation laws of both
governments, as precluding the court from granting any relief, on
the same principle that is contended for by the defendant in the
present case. It will be at once perceived that the principle is
the same in both cases, and that the analogy in the facts is so
close that any rule on the subject which should govern the one
ought also to control the other. The case was decided by Lord
Chancellor Cottenham and from his opinion we make the following
extracts:
"The answer to the objection appears to me to be this -- that
the plaintiff does not ask to enforce any agreement adverse to the
provisions of the act of Parliament. He is not seeking compensation
and payment for an illegal voyage. That matter was disposed of when
Taylor [the defendant] received the money; and plaintiff is now
only seeking payment for his share of the realized profits. . . .
As between these two, can this supposed evasion of the law be set
up as a defense by one against the otherwise clear title of the
other? Can one of two partners possess himself of the property of
the firm, and be permitted to retain it, if he can show that, in
realizing it, some provision or some act of Parliament has been
violated or neglected? . . . The answer to this, as to the former
case, will be, that the transaction alleged to be illegal is
completed and closed, and will not be in any manner affected by
what the court is asked to do between the parties. . . . The
difference between enforcing illegal contracts, and asserting title
to money which has arisen from them, is distinctly taken in
Tenant v. Elliot, [
Footnote 7] and
Farmer v. Russell, [
Footnote 8] and recognized and approved by
Sir William Grant in
Thomson v. Thomson. [
Footnote 9]"
These cases are all reviewed in the opinion of this Court in the
case of
McBlair v. Gibbes, [
Footnote 10] and the language here quoted from the
principal case is there referred to with approbation. We are quite
satisfied that the doctrine thus
Page 69 U. S. 82
announced is sound, and that it is directly applicable to the
case before us.
The plaintiff alleges in his bill, that on the 28th day of June,
1848, he sold his interest in the partnership business to the
defendant Brooks; that in making the sale he was overreached by the
fraud of Brooks, who, by concealment of what he knew, and false
representations in what he professed to tell, took advantage of the
embarrassed financial condition of plaintiff, and his ignorance of
the partnership business, and procured from him the sale for a
consideration totally disproportioned to the real value of his
interest in the concern. The defendant admits the purchase of
plaintiff's interest, but denies the fraud, and insists that the
transaction was in all respects fair and honest. The issue thus
generally stated here, is the one mainly contested in the case; and
so contested that a record of a thousand printed pages is mostly
filled with testimony on this subject.
If the parties are to be regarded in this transaction as holding
towards each other no different relations from those which
ordinarily attend buyer and seller, and as, therefore, under no
special obligation to deal conscientiously with each other, we are
satisfied that no such fraud is proven as would justify a court in
setting aside an executed contract. But there are relations of
trust and confidence which one man may occupy towards another,
either personally, or in regard to the particular property which is
the subject of the contract, which impose upon him a special and
peculiar obligation to deal with the other person towards whom he
stands so related, with a candor, a fairness, and a refusal to
avail himself of any advantage of superior information, or other
favorable circumstance, not required by courts of justice in the
usual business transactions of life. It is contended that the
relation of Brooks towards Martin was of this character; and before
we can dispose of the question of fraud, it is necessary to
determine whether the claim thus set up is well founded; and if it
is, what are the principles upon which courts of equity determine
the validity of contracts between parties so situated. It is argued
that the partnership existing
Page 69 U. S. 83
between the parties constitutes of itself a relation which calls
for the application of the principles which we have alluded to, and
Judge Story in recapitulating the confidential relations to which
they are appropriate, [
Footnote
11] mentions partner and partner as one of them. It is not
necessary to decide here whether, in all cases, a sale by one
partner to another of his interest in the partnership concern, will
be scrutinized with the same closeness which is applied to
fiduciary relations generally, for there are special circumstances
in this case which bring it clearly within the rules applicable to
that class of cases.
1. The defendant was not only the partner of plaintiff, but he
was his special agent in the management of the business. The bill
alleges that he had a power of attorney from plaintiff, authorizing
him to represent, on all occasions, the interest of plaintiff in
the conduct of the affairs of the firm, and although this is denied
in the answer, and is not proven, the answer does state that at the
time the partnership was formed, it was distinctly agreed between
plaintiff and defendant that the latter was to have the full and
exclusive control of the business, and should so far represent the
plaintiff as to give defendant a preponderating influence in the
management of the partnership over Mr. Field, the third partner.
The record leaves no doubt that he acted throughout in accordance
with this agreement.
2. It is abundantly established by the testimony that, within
some two or three months after the partnership was formed, the
parties closed their operations in New Orleans, after having
invested over $50,000, advanced by Martin in the purchase of
soldiers' claims; and that thenceforth very little was done in the
way of purchasing claims or warrants. That Brooks then came to
Washington to procure the warrants to be issued, and Field went to
Wisconsin to seek a market for their sale. From that time forward,
Brooks and Field had the entire management of the business, mainly
under the directing of Brooks; and none of it was conducted
Page 69 U. S. 84
in New Orleans save the purchase of five or six warrants made by
Brooks on Martin's suggestion, nor were any reports made of the
business to Martin.
Brooks and Field thus managed the entire concern, at a distance
of near two thousand miles from Martin and, as we think the
testimony shows, without consulting him in any way, and with very
little regard for his large interest in the business.
Under these circumstances, Brooks must be held to have been not
only the partner, but the special agent of Martin, and the purchase
made by him of Martin's interest must be tested by the rules which
govern such transactions as between principal and agent.
What are these rules?
"On the whole, the doctrine may be generally stated, that
wherever confidence is reposed, and one party has it in his power,
in a secret manner, for his own advantage, to sacrifice those
interests which he is bound to protect, he will not be permitted to
hold any such advantage. [
Footnote 12]"
Or, to speak more specifically,
"If a partner who exclusively superintends the business and
accounts of the concern, by concealment of the true state of the
accounts and business, purchase the share of the other partner for
an inadequate price, by means of such concealment, the purchase
will be held void. [
Footnote
13]"
Speaking of a purchase by a trustee from his
cestui que
trust, Lord Chancellor Eldon says, in the case of
Coles v.
Trecothick, [
Footnote
14] that though permitted, it is a transaction of great
delicacy, and which the court will watch with the utmost diligence
-- so much that it is very hazardous for a trustee to engage in
such a transaction.
"A trustee may buy from the
cestui que trust, provided
there is a distinct and clear contract, ascertained to be such
after a jealous and scrupulous examination of all the
circumstances, provided the
cestui que trust intended the
trustee should buy, and there is no fraud, no concealment, no
advantage taken by the trustee of information acquired by him in
the character
Page 69 U. S. 85
of trustee."
"I admit," he says, "it is a difficult case to make out,
wherever it is contended that the exception prevails." This has
long been regarded as a leading case, and the above remarks have
been often cited by other courts with approbation. We think them
fully applicable to a purchase, by an agent from his principal, of
the property committed to his agency. [
Footnote 15]
We lay down, then, as applicable to the case before us and to
all others of like character that in order to sustain such a sale,
it must be made to appear first that the price paid approximates
reasonably near to a fair and adequate consideration for the thing
purchased, and second that all the information in possession of the
purchaser, which was necessary to enable the seller to form a sound
judgment of the value of what he sold, should have been
communicated by the former to the latter.
In regard to the adequacy of the price, it is obvious that
Brooks did not pay to Martin anything which he was not bound to pay
before the sale was made, or assume any obligation under which he
did not already rest, nor did Martin receive anything which Brooks
did not then own him, or his promise to do anything for which
Brooks was not previously bound. The only matter in which their
relations were changed was that Martin sold to Brooks his share of
the profits of the business, and Brooks assumed to bear all
Martin's share of the losses.
So the condition of the partnership business, at this time,
shows a balance of $15,000 [
Footnote 16] of profits, all of which was cash, or funds
equal to cash. It further appears, that there were on hand and
unsold over 45,000 acres of land, which, at the Government rate of
$1.25 an acre, gives an aggregate value of $57,000. Add this to the
$15,000 above mentioned, and we have $72,000 as the probable
profits of the partnership venture, at the time of this sale.
Page 69 U. S. 86
It is said that the danger that soldiers would seek to reclaim
the warrants, or the lands on which they had been located, under
the provisions of the act of 1847, already mentioned, must have
detracted largely from the amount which any prudent man would have
given for Martin's interest in the concern. This danger was,
however, a very remote and improbable one, and must have so
appeared, when we consider that these claims have been bought from
young men scattered over the different states of the Union, with no
means of ascertaining where the warrants were located, or in whom
the title was vested, and that the amount, in each case separately,
was not worth the trouble and expense of the search and subsequent
litigation. But while these considerations might have some weight,
if the question of adequate price were otherwise in doubt, they can
go but a little way to establish that point, in the circumstances
of the present case.
Martin's share of the profits were $30,000, for which Brooks
gave him substantially nothing.
Was Martin placed by Brooks in possession of all the information
known to himself, and which was necessary to enable Martin to form
a sound judgment of the value of what he was selling?
[His honor here examined the evidence on this question of fact
-- some of it of an inferential kind -- minutely, and went on
thus]:
But we are not left alone to this negative and inferential
testimony on the subject. We have letters from Brooks to the
Fields, written before the sale was made, in which he urges that
all remittances shall be made to him at Washington, showing from
the allusions in them to a proposed remittance to Martin and to
Lake & Co., who were Martin's correspondents in New York, that
his intention was that no remittance should be made to Martin. When
we consider that the letter of June 20th was written at a moment
when he was expecting in a few days an interview with Martin which
he had himself suggested, and that he was no doubt then
contemplating the very purchase which he made at the
Page 69 U. S. 87
interview, and that he knew that Lake was the other partner in
the firm of Martin & Co., we look upon it as remarkable;
pointing clearly to one conclusion, namely, a determination to keep
from Martin all the funds of the concern, and all information of
its condition, in order that he might perform the
operation of buying Martin's interest at a sacrifice.
We are of opinion, from a careful examination of the testimony,
that Brooks occupied towards Martin a relation of confidence and
trust, being his partner, his agent, and his brother-in-law, and
having also entire control of the partnership business; that he
took advantage of this position to conceal from Martin the
prosperous condition of the concern, and purchased from him his
interest, for a price totally disproportioned to its real value,
and that, under such circumstances, it is the unquestionable duty
of a court of chancery to set aside the contract of sale.
Decree affirmed with costs.
MR. JUSTICE CATRON dissented briefly; on the ground that the
partnership, having been formed for the purpose of speculating in
soldiers'
claims to warrants, the original transaction was
a fraud upon the act of Congress, violating public policy, and that
in such a case equity does not interfere.
[
Footnote 1]
The printed record made a book of 1,201 pages of long primer,
solid, a volume, of itself, larger than any volume of reports of
this Court ever published.
[
Footnote 2]
9 Stat. at Large 125.
[
Footnote 3]
17 Mass. 281.
[
Footnote 4]
12 East 304.
[
Footnote 5]
2 Caines 149.
[
Footnote 6]
2 Phillips' Ch. 801.
[
Footnote 7]
1 Bosanquet & Puller 3.
[
Footnote 8]
Ibid., 29.
[
Footnote 9]
7 Vesey 473
[
Footnote 10]
58 U. S. 17 How.
232.
[
Footnote 11]
Equity Jurisprudence, § 323.
[
Footnote 12]
1 Story's Equity § 323.
[
Footnote 13]
Ibid., § 220.
[
Footnote 14]
9 Vesey 234.
[
Footnote 15]
See also Michoud v.
Girod, 4 How. 503;
Bailey v. Teakle, 2
Bockenborough 51-54;
Hunter v. Atkyns, 3 Mylne &
Keene, 113;
Maddeford v. Austwick, 1 Simons 89.
[
Footnote 16]
The court here made a computation giving this result.
