Martin v. Peyton

• Decision Date: 20 July 1927
• Parties: MARTIN v. PEYTON et al.
• Court: New York Court of Appeals Court of Appeals

246 N.Y. 213

158 N.E. 77

MARTIN

v.PEYTON et al.

Court of Appeals of New York.

July 20, 1927.

Action by Charles S. Martin against William C. Peyton and others. A judgment of the Special Term, entered on the report of a referee in favor of the defendants was affirmed by the Appellate Division (219 App. Div. 297, 220 N. Y. S. 29), and plaintiff appeals.

Affirmed.

See, also, 219 App. Div. 812, 220 N. Y. S. 887.Appeal from Supreme Court, Appellate Division, First department.

Charles P. Howland, Walter H. Pollak and John D. Van Cott, all of New York City, for appellant.

Maxwell C. Katz and Otto C. Sommerich, both of New York City, for Rheiniche Credit Bank et al. amici curiae.

Leonard B. Smith and George W. Elkins, both of New York City, for respondents William C. Payton et al.

Lewis L. Delafield and Alfred Gregory, both of New York City, for respondents Evelina B. Perkins et al.

ANDREWS, J.

[1] Much ancient learning as to partnership is obsolete. Today only those who are partners between themselves may be charged for partnership debts by others. Partnership Law (Consol. Laws, c. 39), § 11. There is one exception. Now and then a recovery is allowed where in truth such relationship is absent. This is because the debtor may not deny the claim. Section 27.

[2][3] Partnership results from contract, express or implied. If denied, it may be proved by the production of some written instrument, by testimony as to some conversation, by circumstantial evidence. If nothing else appears, the receipt by the defendant of a share of the profits of the business is enough. Section 11.

[4][5][6][7] Assuming some written contract between the parties, the question may arise whether it creates a partnership. If it be complete, if it expresses in good faith the full understanding and obligation of the parties, then it is for the court to say whether a partnership exists. It may, however, be a mere sham intended to hide the real relationship. Then other results follow. In passing upon it, effect is to be given to each provision. Mere words will not blind us to realities. Statements that no partnership is intended are not conclusive. If as a whole a contract contemplates as association of two or more persons to carry on as co-owners a business for profit, a partnership there is. Section 10. On the other hand, if it be less than this, no partnership exists. Passing on the contract as a whole, an arrangement for sharing profits is to be considered. It is to be given its due weight. But it is to be weighed in connection with all the rest. It is not decisive. It may be merely the method adopted to pay a debt or wages, as interest on a loan or for other reasons.

[8][9] An existing contract may be modified later by subsequent agreement, oral or written. A partnership may be so created where there was none before. And again, that the original agreement has been so modified may be proved by circumstantial evidence-by showing the conduct of the parties.

[10] In the case before us the claim that the defendants became partners in the firm of Knauth, Nachod & Kuhne, doing business as bankers and brokers, depends upon the interpretation of certain instruments. There is nothing in their subsequent acts determinative of or indeed material upon this question. And we are relieved of questions that sometimes arise. ‘The plaintiff's position is not,’ we are told, ‘that the agreements of June 4, 1921, were a false expression or incomplete expression of the intention of the parties. We say that they express defendants' intention and that that intention was to create a relationship which as a matter of law constitutes a partnership.’ Nor may the claim of the plaintiff be rested on any question of estoppel. ‘The plaintiff's claim,’ he stipulates, ‘is a claim of actual partnership, not of partnership by estoppel, and liability is not sought to be predicated upon article 27 of the New York Partnership Law.'

Remitted then, as we are, to the documents themselves, we refer to circumstances surrouding their execution only so far as is necessary to make them intelligible. And we are to remember that although the intention of the parties to avoid liability as partners is clear, although in language precise and definite they deny any design to then join the firm of K. N. & K.; although they say their interests in profits should be construed merely as a measure of compensation for loans, not an interest in profits as such; although they provide that they shall not be liable for any losses or treated as partners, the question still remains whether in fact they agree to so associate themselves with the firm as to ‘carry on as co-owners a business for profit.'

In the spring of 1921 the firm of K. N. & K. found itself in financial difficulties. John R. Hall was one of the partners. He was a friend of Mr. Peyton. From him he obtained the loan of almost $500,000 of Liberty bonds, which K. N. & K. might use as collateral to secure bank advances. This, however, was not sufficient. The firm and its members had engaged in unwise speculations, and it was deeply involved. Mr. Hall was also intimately acquainted with George W. Perkins, Jr., and with Edward W. Freeman. He also knew Mrs. Peyton and Mrs. Perkins and Mrs. Freeman. All were anxious to help him. He therefore, representing K. N. & K., entered into negotiations with them. While they were pending a proposition was made that Mr. Peyton, Mr. Perkins, and Mr. Freeman, or some of them, should become partners. It met a decided refusal. Finally an agreement was reached. It is expressed in three documents, executed on the same day, all a part of the one transaction. They were drawn with care and are unambiguous. We shall refer to them as ‘the agreement,’ ‘the indenture,’ and ‘the option.'

[11] We have no doubt as to their general purpose. The respondents were to loan K. N. & K. $2,500,000 worth of liquid securities, which were to be returned to them on or before April 15, 1923. The firm might hypothecate them to secure loans totaling $2,000,000, using the proceeds as its business necessities required. To insure respondents against loss K. N. & K. were to turn over to them a large number of their own securities which may have been valuable, but which were of so speculative a nature that they could not be used as collateral for bank loans. In compensation for the loan the respondents were to receive 40 per cent. of the profits of the firm until the return was made, not exceeding, however, $500,000, and not less than $100,000. Merely because the transaction involved the transfer of securities and not of cash does not prevent its being a loan, within the meaning of section 11. The respondents also were given an option to join the firm if they, or any of them, expressed a desire to do so before June 4, 1923.

Many other detailed agreements are contained in the papers. Are they such as may be properly inserted to protect the lenders? Or do they go further? Whatever their purpose, did they in truth associate the respondents with the firm so that they and it together thereafter carried on as co-owners a business for profit? The answer depends upon an analysis of these various provisions.

As representing the lenders, Mr. Peyton and Mr. Freeman are called ‘trustees.’ The loaned securities when used as collateral are not to be mingled with other securities of K. N. & K., and the trustees at all times are to be kept informed of all transactions affecting them. To them shall be paid all dividends and income accruing therefrom. They may also substitute for any of the securities loaned securities of equal value. With their consent the firm may sell any of its securities held by the respondents, the proceeds to go, however, to the trustees. In other similar ways the trustees may deal with these same securities, but the securities loaned shall always be sufficient in value to permit of their hypothecation for $2,000,000. If they rise in price, the excess may be withdrawn by the defendants. If they fall, they shall make good the deficiency.

So far, there is no hint that the transaction is not a loan of securities with a provision for compensation. Later a somewhat closer connection with the firm appears. Until the...