Opinion
On Petition for Rehearing, Jan. 1, 1916.
Denied by Supreme Court Feb. 1, 1916.
Appeal from Superior Court, City and County of San Francisco; J. J. Trabucco and Adolphus E. Graupner, Judges.
Rehearing denied by Supreme Court, 155 P. 838.
Arthur Crane, of San Francisco, for appellant.
Edward Lande, of San Francisco, for respondent.
HART, J.
This is an appeal by the plaintiff from the judgment on the judgment roll alone.
The action is for an accounting of the property, assets, and transactions of a contract of partnership entered into and existing between the plaintiff and defendant and for a decree dissolving said partnership. The complaint alleges that the parties to this action, on the 17th day of February, 1913, formed a copartnership for the purpose of carrying on and conducting an ice cream factory in the city of San Francisco. The agreement of partnership was reduced to writing and is set out in haec verba in the complaint.
The said agreement recites, stipulates, and covenants, in substance, as follows: That the plaintiff was the owner of an ice cream manufacturing equipment, consisting of a number of enumerated articles, which equipment Miller guaranteed " to be free and clear of debt," and that he would and did by said agreement contribute said manufacturing equipment and set over the same to the " partnership and assigns," free from liability to the defendant; that Kraus was to contribute to the partnership the sum of $600; that each party was to own a one-half interest in the machinery, equipment, money, earnings, and profits of said business, which was to be conducted under the name of the " Union Ice Cream Company"; that the expense of conducting said business was to be equally borne by the parties; that each of the parties would devote his personal undivided attention to said business " in order to make the same a success"; that each party was to be entitled to draw from the partnership funds the sum of $20 per week until such time as the parties might decide that the business justified a larger allowance per week to each partner; that no money should be paid out of the partnership on account of the business of said partnership, except upon the joint check of the two partners, and that both partners should have an equal voice in the hiring of help and the fixing of wages.
The complaint states that the plaintiff and the defendant proceeded under said agreement to carry on as partners the business of manufacturing and selling ice cream and continued to do so until the 2d day of July, 1913, when the defendant, by means not sanctioned by good morals or law, completely " froze" the plaintiff out of the business, or, as the complaint puts it, " without cause, reason, or excuse took possession of the property and business of said partnership, and excluded plaintiff therefrom, and took exclusive possession of the books of said partnership, and refused to account to plaintiff for the profits of said partnership or any thereof or at all, and refused to let plaintiff see said books, and forcibly and wrongfully ejected plaintiff from the premises of said copartnership." The value of the partnership property so alleged to have been taken exclusive possession and control of by the defendant is alleged in the complaint to be the sum of $1,024.10. It is declared that the defendant is insolvent " except for his claim on said partnership property, and plaintiff has no plain, speedy, and adequate remedy at law." It is further alleged that the defendant threatens to and will sell all said property and convert the same to his own use, unless restrained by appropriate judicial process.
The answer, however, as is to be supposed, tells a much different story about the business deal referred to in the complaint. Admitting the partnership agreement as it is set forth in the complaint, the defendant charges that he was induced to and did sign the said agreement and enter into partnership with the plaintiff " upon the false representation and pretense by and on the part of the plaintiff"; that such false representation and pretense consisted of the statement made by the plaintiff to the defendant and which statement is embodied in the written agreement of partnership, that " Max O. Miller contributes to the partnership and assigns and sets over to the same a manufacturing equipment, such as cabinets, ice cream manufacturing machinery and implements, which he represents and guarantees to be his property and to be free and clear of debt and without liability on any account to Frederick W. Kraus or to the said partnership"; that the plaintiff falsely represented to the defendant that he had paid for said described property the sum of $800 cash, and that he was the owner thereof; " that said representation was false and known to be false by said plaintiff at the time he made the same, and was made with the intent to defraud and deceive this defendant, and this defendant, not knowing otherwise, relied upon said representation and was deceived thereby; that a short time after the formation of said partnership, the party who sold said merchandise to said plaintiff levied a writ of attachment thereon for the purchase price of the same and caused said personal property to be seized by the sheriff, and in order to prevent the sheriff from removing said personal property this defendant paid and advanced to the sheriff $105." The defendant avers that but for the false and fraudulent representation of the plaintiff that he owned said property and was able to contribute to said partnership " an asset equal in value to the moneys contributed and actually paid in by this defendant, the defendant would not have entered into said agreement or had any business relations with said plaintiff."
The answer also denies that the defendant " refused to account to the plaintiff for the alleged profits of said partnership, or that there are profits of said partnership, or at all, refused to let plaintiff see said alleged books or forcibly or wrongfully ejected plaintiff from the premises of said partnership"; denies that " he took possession of any property belonging to said partnership of any kind or character whether the total value of said alleged property of said partnership or belonging thereto is or was on July 2, 1913, the sum of $1,024.10, or that there is any property of any value belonging to said partnership"; denies that he is insolvent " except for his alleged claim on said alleged partnership property and denies that he is insolvent at all"; alleges that the " basis of the alleged cause of action herein is founded upon a fraud upon this defendant, because of the fraud and deceit on the part of plaintiff which induced defendant to sign the alleged partnership agreement."
The court found that the parties to this action entered into a copartnership on February 17, 1913, on the terms and for the purpose specified in the written agreement as pleaded in the complaint; that the plaintiff represented to the defendant that he was the owner of the certain machinery, equipment, and utensils referred to in the partnership agreement; that said property was free from debt and that it was of the value of $800; that it was not true that said personal property was free from debt, or was of the value of $800, but that the plaintiff, at the time of entering into the partnership agreement and the making of the representation to the defendant as to the value of said property and its status as to its ownership, had paid on the purchase price of said property the sum of $13 only, that there then remained unpaid on said price the sum of $88, and that the total value of the said property when the partnership agreement was under negotiation and executed and the representations by the plaintiff to the defendant as to its value and ownership were made, was the sum of $101 only; " that said representations were made by plaintiff, knowing them to be false and for the purpose of inducing defendant to enter into the partnership agreement; * * * that plaintiff was the owner of said personal property, but still owed the vender thereof said sum of $88." The court further found that, upon the execution of the partnership agreement, the defendant " paid the sum of $600 into the partnership account of said business, and plaintiff and defendant devoted the whole of their time and attention to said business from said February 17, 1913, to and including July 1, 1913; that plaintiff has never drawn any money out of said partnership, but has paid the sum of $33 for the benefit of said partnership business during said period from February 17, 1913, to July 1, 1913." The court then found:
" On or about April 15, 1913, it came to the knowledge of defendant that the sum of $88 still remained unpaid upon plaintiff's purchase of said personal property and thereon, and thereafter, July 1, 1913, said defendant took exclusive possession of the business of said partnership and excluded plaintiff therefrom and refused to account to plaintiff for the profits of said partnership."
From its findings the court deduced the following conclusions of law:
" (1) That said partnership had its inception in the fraud of plaintiff and that defendant was entitled to take possession of the business of said partnership and exclude plaintiff therefrom on the discovery of said fraud; (2) that plaintiff does not come into court with ‘ clean hands' and is entitled to no redress; (3) that defendant is entitled to have said partnership dissolved by this court without an accounting to plaintiff of his interest therein; (4) that upon the dissolution of said partnership plaintiff is entitled to nothing, and the defendant is entitled to a judgment for his costs."
In conformity with the conclusions of law so arrived at by the court, judgment was rendered and entered.
The answer in effect admits that the value of the business and its equipment is, as the complaint alleges to be the fact, the sum of $1,024.10. Counsel for the plaintiff contends, however, that even waiving the right of his client to one-half of the value of the partnership business and property as so admitted, he is, nevertheless, under the findings, entitled to a judgment for at least the sum of $426, and that it thus appearing that the findings do not support the judgment, a reversal thereof must follow. The items making up said last-mentioned sum are: Twenty dollars per week for 19 weeks, which the plaintiff was entitled to receive from the partnership funds under the agreement, totaling $380; $33 paid to the partnership, as found by the court, and $13 paid on the equipments contributed by him to the partnership assets.
But the sole theory of the defense interposed by the defendant and upon which the decision proceeded is that the establishment of the copartnership between the parties was the direct result of actual fraud practiced by the plaintiff upon the defendant, and that a court of equity will not grant relief to a party as to a transaction tainted by his own fraud, but will leave or remit him to whatever remedy he may have at law for the injury he claims to have suffered from the act or acts of the defendant.
In this case, there being no record of the evidence taken at the trial, it must be presumed that the finding of the fraudulent representations of the plaintiff and the finding that the defendant was induced to enter into the partnership agreement solely by such fraudulent representations were justified by the proofs. And upon these findings, the court, sitting in equity, was obliged to deny to the plaintiff equitable relief. A court of equity is a court of conscience, and where a suitor appeals for aid in that forum he must go there with clean hands, otherwise he will be incontinently refused the assistance thus sought by him. As is plainly manifest from the findings, a copartnership between the plaintiff and the defendant was established or brought into existence through fraud practiced by the former upon the latter, and certainly the plaintiff is in no position to ask the favor of equity as to a transaction thus brought about by him.
" Whenever a party who, as actor, seeks to set the judicial machinery in motion and obtain some remedy, has violated conscience or good faith, or other equitable principle, in his prior conduct, then the doors of the court will be shut against him in limine; the court will refuse to interfere on his behalf, to acknowledge his right, or to award him any remedy." 1 Pom. Eq. Juris. § 397.
Partnership contracts create a fiduciary relation between the partners and they must be founded in good faith and upon the consent of the parties and for a lawful purpose. And it is a settled as well as a most salutary rule that where one of the parties to an agreement of partnership has been induced to enter into it by the fraudulent representations of the other, the partnership may be declared void and dissolved, or, what in effect amounts to the same thing, the agreement of partnership rescinded. 30 Cyc. of Law, p. 657; Story on Partnership, § 6; Hynes v. Stewart & Owens, 49 Ky. (10 B. Mon.) 429. This rule proceeds from the theory, of course, that where one partner is induced by the fraudulent representations of the other to enter into the partnership the consent of the former to the agreement has not been obtained.
It follows that the court was not only justified upon the findings in refusing to award an accounting, but was likewise warranted in decreeing a dissolution of the partnership.
The judgment is affirmed.
We concur: CHIPMAN, P. J.; BURNETT, J.
On Petition for Rehearing.
Asking a rehearing of this cause, the plaintiff declares that, in the original opinion, we failed to consider sections 1691, 2412, and 2452 of the Civil Code and certain cases expounding those sections. The points made and the sections of the Code and the authorities cited in the petition were not called to our attention in the brief of the appellant. We therefore feel impelled to make some observations in reply to the petition.
Section 1691 of the Civil Code provides that there can be no rescission, where the same is sought to be effected without the consent of the parties, unless the party to the contract desiring to rescind restores or offers to restore everything of value which he has received from the other party under the contract. Section 2412 provides that each member of a partnership is entitled to be reimbursed by such partnership for everything that he has properly expended for the benefit thereof. Section 2452 prescribes the several conditions the existence of any one of which will justify a judgment of dissolution.
In addition to the sections of the Code thus referred to, attention is called to the cases of Cottle v. Leitch, 35 Cal. 434, 440, and Bradley Co. v. Bradley, 165 Cal. 242, 131 P. 750, and also to section 356 of Story on Partnership. In Cottle v. Leitch, it is said that " as an incident to the dissolution there must be an accounting." In Bradley Co. v. Bradley, it is said:
" It is not every wrongful act, nor even every fraud, which prevents a suitor in equity from obtaining relief. His misconduct must be so intimately connected to the injury of another with the matter for which he seeks relief, as to make it inequitable to accord him such relief" --referring to 1 Pomeroy's Equity Jurisprudence, § 399.
Section 356 of Story on Partnership merely declares the rule to be, as obviously it should be, that where a partnership is dissolved by a decree of a court of equity, the court will see that the property of the partnership is properly and equitably divided according to the circumstances of the case, as disclosed by the proofs.
The law as above stated will not be disputed, but it has no application to this case. This is simply a case in which, by reason of the fraud of the plaintiff " in regard to and connected with the matter in litigation," thus affecting " the equitable relations subsisting between the two parties" to the suit and arising out of the transaction on which the action is founded (1 Pomeroy's Eq. Juris. § 399), a court of equity must refuse to interfere in behalf of the plaintiff. It is not, as we conclude upon reconsideration of the case, and as we shall presently see, a case of rescission nor one in which the principles applicable to an adjudication dissolving a partnership may of right be invoked.
It must be conceded that the situation presented by the record is rather a peculiar one. The court, although finding that the plaintiff was not, by reason of his fraud in inducing the defendant to join him in the partnership, entitled to an accounting, did, nevertheless, find the several amounts which the plaintiff contributed to the partnership, and further found that he had rendered service for several months to the concern, and that it was agreed that each of the partners was to be privileged to draw from the partnership funds the sum of $20 per week. In the absence of any record of the evidence, it is to be presumed that thus the court found all that the plaintiff was entitled to, if anything at all, from the partnership assets upon a dissolution. So it will be observed that, with the exception of awarding the plaintiff a judgment for the amount so found, there was, in effect, an accounting of the partnership assets, notwithstanding that the court found that " the defendant is entitled to have said partnership dissolved by this court without an accounting to plaintiff of his interest therein."
But we think it is clear that, in this case, the findings, so far as they relate to the several amounts and the personal services contributed by the plaintiff to the partnership, are wholly immaterial and unnecessary. The proposition, as it was presented by the defendant and sustained by the court, was that the plaintiff induced the defendant to enter into the partnership through misrepresentation and fraud. In other words, the very transaction as to which the plaintiff has asked equitable relief was tainted by his own fraud--the creature of his fraudulent practices upon the defendant. Having appealed to a court of equity for aid, and the fraudulent character of the transaction, made so by himself, having been made to appear, the court, acting upon those primary considerations which, in the very nature of things, must necessarily govern such a court in the disposition of causes coming before it, refused to grant the relief sought by the plaintiff. As the court found, the plaintiff did not appeal to it with clean hands as to the subject-matter of the controversy here (1 Pomeroy's Eq. Juris. § 399), and clearly the doors of the court were properly closed to him.
As to that portion of the judgment decreeing a dissolution, it might well be replied to the objection of the plaintiff thereto that, having himself asked for a dissolution, he is no position now to complain of the action of the court in granting it. But there is another and a conclusive answer to the objection. The contract of partnership having been conceived and executed in fraud, it was void ab initio. The effect of the defendant's election to avoid the contract of partnership for the fraud practiced upon him by the plaintiff was that, as between the plaintiff and defendant, there had never existed any copartnership, although the defendant, having held himself out as an apparent member of the firm prior to his ousting the plaintiff from the business rendered himself liable to the creditors of the copartnership. Richards v. Todd, 127 Mass. 167, 173; Story on Partnership (7th Ed.) § 285. It follows that, in contemplation of law, there existed between the parties no partnership as to which a dissolution was necessary or could be decreed. There was in other words, nothing to dissolve. Therefore, that part of the decree which purports to dissolve the partnership may be treated as a nullity, or, since there should be a judicial adjudication of the character of a business association so brought about, it should be, if it may be given any force at all, construed as a declaration in the decree that the partnership agreement was absolutely void, and that, consequently, no partnership ever existed between the parties. Under this view, the observations made in our former opinion respecting the propriety of decreeing a dissolution of a partnership under certain indicated circumstances may be regarded as having no special application to this case.
The suggestion that the plaintiff has no remedy at law or any legal relief against the defendant argues nothing against the right and the duty of a court of equity to refuse to grant aid to a party as to a transaction which has been brought into existence solely by the fraud practiced by him upon the party against whom he seeks relief as to said transaction. A court of equity, in the administration of its principles, does not concern itself about what may or may not be done in another forum. It does not stop to inquire whether the party may or may not have a remedy at law with respect to the matter as to which, under its principles, it is required to refuse relief or aid of any character. To know that the transaction is unconscionable or has been brought about by the party seeking its interposition through his own wrongdoing, misconduct, or fraudulent acts, is an end to the inquiry, so far as that court is concerned; and if it be true that the party has no adequate remedy in the ordinary course of law or none at all, it is, as stated, no argument against the exercise by a court of equity of the jurisdiction made peculiar to it by virtue of the fundamental conceptions of that branch of our jurisprudence.
We adhere to the conclusion arrived at in our former opinion that the court was right in refusing to grant any relief to the plaintiff upon the ground, as assigned by the court, that the transaction as to which he asked for aid was infected with his own fraud.
The petition for a rehearing is denied.
We concur: CHIPMAN, P. J.; BURNETT, J.