Opinion
June 4, 1915.
Edward W. Hatch [ William M. Parke with him on the brief], for the appellant.
Charles E. Rushmore, for the respondent.
This is an action against the executrix of John B. McDonald, deceased, for an accounting with respect to his profits under a contract between him and the city of New York for the construction of the original subway for the transportation of passengers; and it is based upon a parol agreement alleged to have been made between the plaintiff and McDonald, by which the plaintiff advanced to McDonald the sum of $30,000 to make up a fund of $150,000, which was required to be deposited in cash with a proposal for the work, upon an agreement by him to return it to plaintiff if it should not be forfeited to the city, and to give the plaintiff as compensation for advancing the money and for the risk of forfeiture thereof a one-fifth interest in the net profits received by McDonald.
McDonald died on the 17th day of March, 1911, and this action was commenced on the 25th day of January, 1912. The trial court found that the only cause of action established in favor of the plaintiff was one at law, and that it was barred by the Statute of Limitations, which was duly pleaded. The learned counsel for the plaintiff does not question the correctness of the decision if the plaintiff had only a cause of action at law for his share of the profits, or for an amount equal thereto; but it is contended that, by virtue of the agreement, the bid and contract became a joint adventure between the plaintiff, and others who similarly contributed to the fund, and McDonald, and that plaintiff became the equitable owner of one-fifth of the profits, and that in making the bid and conducting the enterprise McDonald became in effect the agent or trustee for, and assumed a fiduciary relation toward the plaintiff and the others similarly situated, which gave plaintiff an absolute right to a full accounting, notwithstanding the fact that he and the others similarly situated received and accepted a portion of the profits, which at the time they supposed was all they were entitled to receive, and without regard to whether there is evidence that there remained other profits undistributed.
It was evidently assumed on the trial that any testimony offered by the plaintiff with respect to a personal transaction with the decedent would be objected to and excluded as incompetent, for he was not called as a witness. It was shown, however, that on the 12th day of January, 1900, a check drawn by the plaintiff for $15,000 to his own order and indorsed by him in blank, and another check drawn by a corporation, with which he was identified, to the order of McDonald, were indorsed by McDonald and the proceeds used to make up the cash deposit of $150,000 accompanying McDonald's bid. The contract for the construction of the subway was awarded to McDonald sometime prior to January 20, 1900, and on that day he assigned the fund thus deposited to August Belmont Co. as security for their undertaking to deposit $1,000,000 with the city as security for the performance of the contract and to aid in financing it. On the 19th of February, 1900, McDonald formally assigned in writing a five per cent interest in his profits to August Belmont as compensation for the organization by the latter of a construction company for the construction of the subway and the furnishing of said cash deposit of $1,000,000. Mr. Belmont, pursuant to his agreement, organized the Rapid Transit Subway Construction Company and on the 21st of February, 1900, McDonald entered into an agreement with it by which it agreed to furnish the $1,000,000 cash deposit and to execute as surety, or to procure sureties to execute bonds required by the city aggregating $6,000,000, for McDonald's faithful performance of the contract with the city, and he assigned to it all payments to be made by the city under the contract and agreed that he would not sublet any part of the work or purchase any materials without its approval, and that he would also assign to it the lease for the operation of the road which the city was to execute to him; and it agreed to distribute the surplus of the moneys received by it from the city, over and above the amount necessary to pay for the construction, in accordance with another agreement between the same parties bearing the same date, which provided that the construction company should retain seventy-five per cent of the net profits for its services, and pay the remaining twenty-five per cent thereof to McDonald; and the agreement contained provisions for determining the profits on the lease, which were also included. It was stipulated that these two contracts superseded the contract of January 20, 1900, with August Belmont Co. The fund of $150,000 deposited by McDonald with his bid was released, and the plaintiff and the other contributors thereto received back the amounts they contributed. There is no evidence of any express agreement by McDonald to assign any interest in the profits to plaintiff. On the day McDonald made the contracts with the construction company he executed participation certificates, by which he undertook to divide the twenty per cent of the net profits which he was to receive from the construction company, after the deduction of the seventy-five per cent which it was to receive and the five per cent which he had assigned to August Belmont; and he thereby gave to August Belmont two twenty-firsts, to Andrew Freedman five twenty-firsts, to C.W. Morse two twenty-firsts, to Cornelius Vanderbilt one twenty-first, to Perry Belmont one twenty-first, to Harry G. Runkle, who contributed $15,000, one twenty-first, to Howard Carroll, who contributed $15,000, one twenty-first, to plaintiff two twenty-firsts, and he executed a certificate to himself for six twenty-firsts. These certificates, pursuant to separate identical agreements dated December 16, 1901, made by the holders thereof, which recited that they were made between McDonald and his associates, who it was also recited were interested in twenty-five per cent of the profits, and Belmont Co., were exchanged for certificates issued by Belmont Co. which entitled the holders thereof to a specified number of shares of 25,000 shares of the stock of the operating company when issued, it being recited in those agreements that 25,000 shares of the capital stock of the operating company were to be issued on account of the twenty-five per cent of the profits to which McDonald and his associates were entitled. The operating company was formed, and the plaintiff and the other certificate holders received stock thereof in accordance with their respective certificates. The certificate issued to August Belmont was not for the one-fifth of the profits which McDonald had assigned to him and the two twenty-firsts of the twenty per cent of the profits represented by the McDonald certificate, but for said two twenty-firsts and one-half of the five per cent, as shown by the agreement of December 16, 1901, signed by him, and the certificate issued to McDonald was for 6,965 shares, being the number called for by the agreement of December 16, 1901, signed by him, the percentage not being specified, but a computation shows that it equals the allotment for said six twenty-firsts and one-fourth of five per cent, and that issued to Andrew Freedman, as shown by his agreement of December 16, 1901, was for one-fourth of five per cent in addition to his McDonald certificate for five twenty-firsts of twenty per cent; but neither the contracts nor the certificates show why this was done. There is nothing to show or indicate on what theory Belmont Co. included in the participation certificate issued to Freedman an interest representing a one-fourth of five per cent of the profits, except that his interest was so stated in the contract of December 16, 1901, signed by him, and it does not appear how he acquired such interest. With respect to McDonald, however, it appears that a letter was written by August Belmont to him under date of February 20, 1900, which is the day after McDonald assigned the five per cent of the profits to him, as follows:
"Referring to the agreement made with you under this date by which you are to pay to me one-fifth (1/5th) of the twenty-five (25) per cent of the profits of the Rapid Transit Construction contract coming to you under the contract of February 21st, 1900, with the Rapid Transit Subway Construction Company, I hereby agree to return to you one-quarter (1/4) of said one-fifth (1/5th) when the same has been paid to me." This letter bears the following indorsement:
"I hereby assign the above to
"(Signed) JOHN B. McDONALD.
"Dated December 24, 1901."
This is the only evidence tending to explain how Belmont Co. came to issue a participation certificate to McDonald for more than six twenty-firsts of the twenty per cent, and it is argued therefrom that by the indorsement McDonald surrendered the letter and that the one-fourth of the five per cent of the profits was included in his certificate in accordance therewith. It was stipulated on the trial that McDonald and his associates were also given the privilege of subscribing for other stock of the operating company at par, and that plaintiff availed himself of that privilege. It appears that the stock was worth double its par value within a couple of years after it was issued. The plaintiff received 1,905 shares of the stock of the operating company on account of his two twenty-firsts of the twenty per cent of the profits; but it does not appear how much he took at par in addition thereto.
In opening the case Mr. Levy, of counsel for plaintiff, stated that plaintiff's claim was that each of McDonald's friends who advanced $15,000 was to receive one-seventh of the ultimate profits received by McDonald, and that on that basis plaintiff was entitled to two-sevenths; and he conceded that it was recognized that there would be disbursements for bankers' services and otherwise that McDonald would have to make, and that the profits that were to be divided were what would be left after such disbursements were made. The theory on which the one-seventh for each $15,000 was claimed was that McDonald himself was to put up $30,000, plaintiff $30,000, Runkle $30,000 and Carroll $15,000, making $105,000; but it appears that Andrew Freedman advanced $45,000 and Runkle only advanced $15,000, and the claim to one-seventh has been abandoned, and it is claimed now that the division of the net profits was to be made in the proportion of one-tenth for each $15,000 of the fund of $150,000.
A question arose on the trial with respect to the competency of the testimony of Runkle and Carroll with respect to interviews with McDonald, and the testimony was received over objection as to its competency under section 829 of the Code of Civil Procedure, subject to a motion to strike it out to be made in the brief to be submitted. No ruling appears to have been made by the trial court with respect to such motion, and in the opinion of the court the question was deemed immaterial, on the ground that without it the documentary evidence shows an agreement between McDonald and the contributors to divide his profits in the proportion of one-tenth for each $15,000 advanced. The court arrived at this conclusion on the theory that the participation certificates issued to the Belmonts, Freed man, Morse and Vanderbilt were for bankers' services, which, however, is not shown by the certificates or otherwise than by McDonald's statement to that effect to Runkle, and that the remaining ten twenty-firsts were divided in the proportion of one-tenth for each $15,000 advanced, McDonald evidently taking his certificate for the amount contributed by him and the amount advanced by Freedman and the other $15,000 not advanced by Runkle which evidently was also advanced by McDonald or by another friend of his. There is no evidence showing who composed the firm of Belmont Co. I am of opinion that the documentary evidence does not show the agreement made between McDonald and his friends who contributed to the cash deposit of $150,000, and that if the case rested on that evidence there would be a complete failure of proof showing or tending to show that the contributors were entitled to any more than the shares they received by the participation certificates issued by McDonald. If the plaintiff had a cause of action at law it is clear that it would be competent for the other contributors to testify to interviews with McDonald tending to sustain such cause of action, for they never were and could in no manner be interested in such cause of action. The suit, however, is in equity, and it has been brought on the theory that each contributor had a separate cause of action for an accounting for his share of the profits. If that be so, it is equally clear that it was competent for other contributors to testify to sustain the plaintiff's cause of action, for on that theory they never were, and could not be, interested in his cause of action. If this action were for the benefit of Runkle and Carroll, or could in any manner inure to their benefit, it is quite clear that they would be incompetent to testify to personal transactions with McDonald tending to sustain it; but it is not contended that they are necessary parties, or entitled to be brought in, and it has not even been suggested that they be brought in. No action has been brought by Runkle, and it is quite clear that the Statute of Limitations has run against any right of action in his favor. It appears that a similar action was brought by Carroll on the 8th of November, 1912, and that it was pending when this action was tried. The evidence tends to show that the fund was distributed in 1902, and it is probable that the Statute of Limitations has run against Carroll's action. In order to remove as far as possible any objection to the competency of Carroll as a witness, he expressly waived any right to have his testimony used in his own behalf. As already observed, the testimony of Runkle and Carroll is in the case without any ruling on the motion to strike it out and we will assume, therefore, that for the purposes of this appeal plaintiff is entitled to the full benefit of it without ruling on its competency. Each of them testified in substance that McDonald agreed that the profits should be divided into tenths and that each contributor should receive one-tenth thereof for each $15,000 advanced. Carroll further testified with respect to an interview with McDonald after the distribution from which it is claimed McDonald conceded that the contributors would receive something more; but this is not the effect of his testimony. Runkle also testified that when he received his participation certificate he complained to McDonald that it did not represent one-tenth of the profits and that McDonald replied that the bankers had taken the rest. This statement made by McDonald to Runkle, together with the admission made by Mr. Levy in opening the case, is all that is shown by the record to account for the twenty per cent of the profits not having been divided in the proportion of one-tenth to each contributor of $15,000.
It is quite clear that McDonald and his friends, who contributed to the fund of $150,000 under the agreement as shown by the testimony of Runkle, did not become partners, and I am of opinion that they did not become joint adventurers, for the contributors had no interest in the enterprise other than to receive a share in the net profits or an amount equal to a percentage thereof. They were to render no services, and they were to have no voice in making the contract or in the performance thereof. So far as they were concerned the enterprise was McDonald's and his only. They risked the money they advanced to him on his agreement to divide his profits with them; but the profits were to be his, not theirs. It was not intended that the money they advanced was to continue in the enterprise. It would have been forfeited at the election of the city if the contract had been awarded to McDonald and he had failed to execute and to give the security required by the city on its execution; on his making the contract and furnishing the security required the money would be released, and it was doubtless expected that it would be returned to them as it was. It may be that they would have been entitled to an accounting for the moneys which McDonald received from them ( Marvin v. Brooks, 94 N.Y. 71); but concededly they have had that, and while it is true that they had confidence in and trusted their friend McDonald, he did not in the execution of the contract or in negotiating an assignment thereof assume a fiduciary relation toward them; he did not become a trustee for them or their agent, even if their agreement with him constituted them equitable owners of a percentage of the profits when earned and received by McDonald, which is doubtful, and that they merely became entitled to recover from him their respective proportionate shares of the profits received by him or an amount equal thereto, but not to an accounting. ( Schantz v. Oakman, 163 N.Y. 148; Smith v. Bodine, 74 id. 30; Everett v. De Fontaine, 78 App. Div. 219; Hart v. Garrett Co., 87 id. 536; Stewart v. Auerbach, 148 id. 222; Freeman v. Miller, 157 id. 715.) A different rule has frequently been applied where money or property is invested or services are rendered in an enterprise in which the parties are to share the profits which accrue from the investment of the money or property or the rendition of the services; but in all these cases there was a joint interest in the enterprise. (See Valdes v. Larrinaga, 233 U.S. 705; Marston v. Gould, 69 N.Y. 220; Marvin v. Brooks, supra; Hill v. Curtis, 154 App. Div. 662; China Japan Trading Co., Ltd., v. Provand, 155 id. 171; Weldon v. Brown, 84 id. 482; Rice v. Peters, 128 id. 776; Haight v. Haight Freese Co., 46 Misc. Rep. 501; affd., 112 App. Div. 475; affd., 190 N.Y. 540; Jordan v. Underhill, 91 App. Div. 124; Frethey v. Durant, 24 id. 58; sub nom. Rose v. Durant, 44 id. 381.)
If, however, the agreement without creating a fiduciary relation between the contributors and McDonald entitled the former to an accounting on the theory that they had an interest in the profits as such, still I am of opinion that the plaintiff was not entitled to recover. When the plaintiff received from McDonald the participation certificate for two twenty-firsts of the twenty per cent of the profits, it is fairly to be inferred from the evidence that he knew, or is chargeable with knowledge, of the manner in which the remainder of McDonald's profits was distributed. He and McDonald were personal friends, and it is a reasonable inference that McDonald at least gave to him the same explanation that he gave to Runkle and that, like Runkle, he accepted it as satisfactory and thereby approved of the distribution made by McDonald. Moreover, it is to be inferred that plaintiff was familiar with the steps taken subsequently for he was elected a director of the operating company and voted for the resolution directing the issuance of 25,000 shares of stock to McDonald and his associates, including himself, and he, therefore, knew, or was in a position to know, how that stock was issued. The only possible theory, in this view of the case, on which he would be entitled to an accounting would be with respect to the one-fourth of the five per cent of the profits which McDonald received back from Belmont; and with respect to that, as already observed, if he did not know he was in a position to know that stock for that interest was issued to McDonald. The letter from Belmont to McDonald, promising to give back one-fourth of the five per cent gives rise to the suspicion that McDonald may have received that as part of his share of the profits of this enterprise and may have concealed it from plaintiff, but it is at most a suspicion which might have been cleared up by calling Belmont as a witness, for by his testimony it would seem that it could have been shown whether there was an understanding when McDonald assigned the five per cent that he was to receive one-fourth of it back without other consideration. This was not done. Each party saw fit to rest the case on the theory that the burden of proof with respect to this rested on the adverse party. This may have been a gift from Belmont after the assignment, or it may have rested on other consideration, for which a basis existed as shown by an agreement on the part of McDonald when he employed Belmont Co. to finance the enterprise, by which he obligated himself to employ them as his exclusive bankers and financial agents to finance any further construction work for the city undertaken by him during the performance of this contract with the city. This was entirely outside of and beyond the enterprise in question, and McDonald would have had a perfect right to exact for this agreement any consideration he saw fit. I am of opinion that after this distribution of profits with the apparent acquiescence of all parties in interest, the burden of proof rested on the plaintiff, even if he were entitled to an accounting for undistributed profits, which is the most that he would be entitled to in any event, to show that there remained profits in which he was entitled to share which had not been divided. (See Seaward v. Davis, 198 N.Y. 415; Ogden v. Astor, 4 Sandf. 311; Campbell v. Campbell, 16 N.Y. Supp. 165; Myer v. Abbett, 105 App. Div. 537; affd., 186 N.Y. 519; Coit v. Goodhart, 5 App. Div. 444; 30 Cyc. 703, 706. See, also, Corner v. Mackey, 147 N.Y. 574; Turner v. Kouwenhoven, 100 id. 115; Uhlman v. N.Y. Life Ins. Co., 109 id. 421.)
It follows that the judgment should be affirmed, with costs.
INGRAHAM, P.J., McLAUGHLIN and DOWLING, JJ., concurred.
I concur on the first ground that whatever cause of action plaintiff may have had was one at law, and is barred.
Judgment affirmed, with costs.