Opinion
09-18-1897
CLAYTON v. DAVETT et al.
Frank E. Bradner, for complainant. Robert H. McCarter, for defendants.
Bill by Charles W. Clayton against Julius T. Davett and another for an injunction and an account. Answer in the nature of a cross bill, setting up a counterclaim on behalf of defendant Alexander H. Ross. Relief under the cross bill denied.
Frank E. Bradner, for complainant.
Robert H. McCarter, for defendants.
STEVENS, V. C. The complainant filed his bill against the defendants for an injunction and account. The evidence shows that on April 20, 1892, the defendants, Julius Davett and Alex. H. Ross, formed a co-partnership to carry on the business of brokers, which was to commence on the 1st day of May, 1892, and to continue for five years, unless sooner dissolved in the manner pointed out in the partnership articles. The partnership lasted for a year only. By the terms of the partnership articles, each of the partners was to contribute the sum of $10,000 in cash. Ross paid in his share of the capital at once. Davett, not having any money of his own to pay in, applied to the complainant to lend him $10,000, which he did. On December 22, 1892, Davett signed a written acknowledgment that he had received the money. In this paper he agreed to put it in the business, and not to draw it out except for the purpose of repaying it to complainant, A few days after, Davett executed to complainant a deed of assignment of his undivided one-half interest in the assets of the firm. This assignment, in terms, purported to be an unconditional assignment. The consideration therefor was stated to be $10,000. But very shortly afterwards, if not contemporaneously, he and complainant executed another sealed instrument, in which, after reciting the assignment, it was agreed that, in consideration of one dollar, so long as complainant retained his interest or share in said business, Davett should collect and take all dividends, income, interest, and profits earned by said share formerly held by him (Davett), but now owned and held by Clayton, and should apply and appropriate the same to his own use, except sufficient to pay said Clayton interest on $10,000. Davett was also empowered to collect and take whatever accumulated income and profits might be coming to the share at that date. The three papers just referred to were nearly contemporaneous in date, and were evidently parts of one arrangement. Taken together, they show that the real transaction was a loan of money by Clayton to Davett, secured by an assignment of Davett's interest in the assets of the partnership. The arrangement was therefore in the nature of a mortgage security, and was so regarded, hot only by complainant and Davett, but—anil this is a matter of considerable importance— by Ross as well. He was asked on the witness stand, "Did you keep any account for [with?] Clayton at all?" And his answer was, "Only to put in the entries when money was paid on Davett's share of the assets, on which Mr. Clayton held a mortgage." At the time of the dissolution of the partnership, on May 1, 1893, Ross was authorized by Davett, who was then insolvent, to get in the assets and pay the debts. According to an account appended to Ross' answer, he realized $20,976. He paid out for debts $7,259.37. Of the balance, he paid to Davett $756.87; he paid to Clayton, on account of Davett's share, $7,553.81; and he retained the balance ($5,405.95) for himself. In addition to the sum which the complainant, Clayton, received from Ross, it appears that he also received $1,675 from Davett He hasthus been paid at least $9,228.81 out of a total of $10,000 owing to him.
The question to be decided arises out of a counterclaim made by Ross against Clayton under the following circumstances: Ross paid the above money to Clayton before one Ward had recovered a judgment of $3,850 against the firm of Davett & Ross, and before one Illingworth had recovered a judgment of $1,941.18 against Ross personally. Ross now claims that, the assets of the firm having been insufficient to satisfy these judgments and yield him an amount of money equal to that which he paid on Davett's account, Clayton is liable to repay to him such sum as would, added to the amount of assets remaining in his hands, make his share of the assets equal to Davett's. The first of the judgments was recovered against the two partners, Davett and Ross, in an action of tort for trover and conversion of certain shares of stock. The second was recovered against Ross alone in an action of deceit grounded on certain false and fraudulent representations made with respect to the solvency of one Graham, whose notes the plaintiff, Illingworth, was thereby induced to take. His claim for contribution in respect of the Illingworth judgment is entirely untenable, whatever view may be taken of the relations between Clayton and Ross. The judgment being rendered in an action of deceit, it was thereby conclusively established that Ross had been guilty of moral fraud in making the misrepresentation which was the foundation of that action. In Cowley v. Smyth, 46 N. J. Law, 383, Mr. Justice Depue expressly says: "In such an action [deceit] a false representation without a fraudulent design is insufficient. There must be moral fraud in the misrepresentation, to support the action." Counsel for Ross cites many cases in equity (where the rule is different), and in other jurisdictions, to show that a judgment in an action of deceit does not necessarily establish moral guilt; but, in view of the decision just quoted, they are without weight here. It was admitted that the rule of law is that, where there is moral guilt, contribution is not enforced, as between wrongdoers. But this is a case in which the sole wrongdoer seeks to have contribution against a person perfectly innocent. The case is much stronger than that of Thomas v. Atherton, 10 Ch. Div. 185, cited on the argument, in which contribution was refused.
If the claim to contribution in respect of the Illingworth judgment be thrown out, there remains the Ward judgment, in respect of which, if his account be correct, Ross would be entitled to recover a part of the money paid, as against his co-partner, Davett. This he does not ask. He seeks to recover it against the creditor of that co-partner, on the ground that that creditor, by reason of the assignment which he took, stands in his debtor's shoes. In his answer in the nature of a cross bill he alleges an express agreement on Clayton's part to refund in case of deficiency, but this he fails to prove; and so he based his right of recovery upon Clayton's legal or equitable obligation to contribute by reason of the assignment. His position is that the assignment made Clayton his partner, or quasi partner, and that as such he became subject to a partner's liability. If the legal effect of the assignment were as contended for, this position would be sound. But I do not think that, either in fact or in law, Clayton ever became Ross' partner. Certainly he did not carry on the business as partner, and, as I have already said, the legal effect of the assignment, read in connection with the two other papers already referred to, was merely to put Clayton in the position of an equitable mortgagee. After their execution the firm of Davett & Ross was to continue in the business in that name, as before, and did so continue, and Davett was to take the profits and apply them to his own use. He was only to reserve thereout sufficient to pay Clayton interest on $10,000. But, if Clayton was to be paid interest, it could only be because the relationship of debtor and creditor still continued in respect to that sum. An absolute, unconditional sale of the interest could not have been contemplated, and, as I have said before, Ross himself so construed the writings. He says he "only put in the entries in the account he kept when money was paid on Davett's share of the assets on which Mr. Clayton held a mortgage." Now if Clayton was merely Davett's creditor, secured in the manner I have mentioned, on what principle can he be bound to make contribution to Ross? Davett, the partner, is bound to make such contribution, but why is Clayton? The situation is this: Clayton, to the knowledge of Ross, has a lien, not upon the assets of the partnership, but upon Davett's share of those assets after the partnership debts are paid. Ross is intrusted with the winding up of the partnership affairs. In the ultimate disposition of Davett's share, he acts as Davett's agent. He knows the facts concerning the partnership transactions. Among other things, he knows that Ward has a claim against the firm. He must be presumed to know the facts concerning that claim. If it is good, its payment will diminish the amount to be ultimately distributed among the partners. Now, with knowledge of the existence of this claim, Ross, assuming it to be bad, pays to Clayton a larger sum on Davett's account than he otherwise would have paid. He does not think, it necessary to retain in his own hands money sufficient to satisfy it, if it shall be adjudged good. He voluntarily pays to Clayton more, as the result shows, than he was under any obligation to pay. It is a well-settled rule that money voluntarily paid under a mistake of law cannot be recovered back. This is so held in cases where the mistake has reference to the amount which the creditor may properly demand from the debtor. Skyring v. Greenwood, 4 Barn. & C. 282; Bramston v. Robins, 4 Bing. 11; Higgs v. Scott, 7 C. B. 63. It must be so held with still greater reason wherethe mistake of law has reference, not to the debt itself, or to the amount demandable thereon, but to a collateral question arising between the debtor, or the debtor's agent, and some third person, of which the creditor may know nothing. I think I am safe in asserting that no case has gone the length of deciding that if an agent, through a mistake of law, supposing that he has in his hands more money of his principal than he really has, pays his principal's debt, he can recover back from the creditor as much of the money paid as turns out ultimately to be his own. Indeed, I do not understand counsel to have seriously contended for such a proposition. He rather rested his claim for contribution on the ground that Clayton, by reason of the assignment made to him by Davett, stood in Davett's shoes, and was affected by Davett's liability to reimburse him for partnership debts paid after distribution of the partnership assets among the partners. But this contention fails, of course, as soon as it appears that the effect of the papers signed was merely to give to Clayton a lien upon Davett's share of the assets, and not to make him a partner with Ross. I think Ross is not entitled to contribution from Clayton in respect of the money paid either on the Ward or on the Illingworth judgments.