Buie v. Kennedy

• Decision Date: 13 December 1913
• Citation: 80 S.E. 445,164 N.C. 290
• Parties: BUIE ET UX. v. KENNEDY ET AL.
• Court: North Carolina Supreme Court

80 S.E. 445

164 N.C. 290

BUIE ET UX. v. KENNEDY ET AL.

Supreme Court of North Carolina

December 13, 1913

Appeal from Superior Court, Robeson County; Ferguson, Judge.

Action by M. A. Buie and wife against Angus Kennedy and another. From a judgment against plaintiffs, they appeal. Judgment modified.

The amount by which the capital of a partnership, consisting of turpentine trees, has been reduced in value by use in the business, as by the sale of the manufactured product, should be deducted from the gross returns in making settlement in determining the profits to be divided.

Plaintiffs' fourth assignment was "that his honor overruled plaintiffs' exceptions Nos. 1, 2, 3, 4, 5, 6, 7, 8, and 9."

This action was brought by the plaintiffs to enjoin the sale of certain real property under a power of sale contained in a mortgage given by them to the defendants. The real controversy, though, arose out of the settlement of their partnership dealings. Defendants being the owners of lands chattels, and turpentine leases in the state of Florida conveyed a one-half undivided interest therein to the plaintiffs for the sum of $8,000, under an existing agreement to form a copartnership for the purpose of carrying on a turpentine business, and this was to constitute the capital of the firm. This was in November, 1907. The mortgage was given to secure the payment of $5,000 of the $8,000 indebtedness. The business was entered upon and continued by the firm of Kennedy Brothers and Buie until April 18, 1910 when it was dissolved. The partners contributed equally to the capital, but agreed to share unequally in the profits, M A. Buie to receive three-fourths thereof, and defendants the other fourth, the excess of one-fourth over defendant's share going to Buie on account of personal services to be rendered by him. The case was referred to Mr. S. F. Mordecai to take and state an account of the copartnership, the sale having been enjoined until the amount due on the $5,000 note could be ascertained. The referee found the balance due Dec. 1, 1912, to be $4,778.25. Exceptions were duly taken to his findings of fact and law, and upon a review of his report, under the exceptions, the court found the balance to be $5,394.03. The principal items in dispute between the parties were as to what constituted profits of the business, and whether, in estimating the same, depreciation of the capital by its use in the business should be counted as a loss, or whether the profits to be divided should be ascertained simply by deducting the costs and expenses of operation from the gross returns of the business. The referee was of the opinion that no loss or depreciation of capital should be considered in making the computation, and, upon this basis, he found the profits to be $1,279.60, while the judge was of the opposite opinion, and held that, under the facts of the case as found by the referee and approved by him, the amount by which the capital had been reduced in value by use in the business should be considered and deducted from the gross returns, and, under this view, he found the profits to be $174.03. There was another question of importance in the case, which, perhaps, does not enter strictly into the partnership account, but should be considered as a separate and independent item of charge against the defendants, if plaintiff's claim is held to be well founded. They alleged that, at the time they entered into the partnership arrangement, the defendants orally represented and agreed, as a part of the terms of the purchase of the land, chattels, and turpentine interests or leaseholds, that the timber on the land would "cut not less than 13 crops of ten thousand (10,000) boxes each," and that any deficiency in this amount would be deducted from the purchase price. That the timber failed by actual test to cut more than 10 crops of 10,000 boxes each, and by reason thereof plaintiffs are entitled to a credit of $4,500 on the price, leaving only a balance of $3,500 due originally thereon, without any deduction on account of their subsequent partnership transactions. The referee held, the court affirming the finding, that the claim for the deficiency in the crops varied or contradicted the writing, and therefore excluded it from consideration. Evidence as to it was taken under objection by defendants, but finally ruled out for the reason just given.

There are some other subsidiary questions, which will be noticed in the further development of the case. The court gave judgment against the plaintiffs for $5,394.03, with interest on the principal, $5,000, from April 10, 1910, and the costs, and ordered a sale of the property described in the mortgage. Plaintiff, having assigned errors, appealed to this court.

Cox & Dunn, of Laurinberg, for appellants.

McIntyre, Lawrence & Proctor and McLean, Varser & McLean, all of Lumberton, for appellees.

WALKER, J. (after stating the facts as above).

The first question presented is the one in regard to the profits. The authorities seem to hold it to be clear that an important distinction exists between the terms "profits" and "gross returns."

Profits are the excess of returns over advances--the excess of what is obtained over the cost of obtaining it. Losses, on the other hand, are the excess of advances over returns--the excess of the cost of obtaining over what is obtained. The expressions "net profits" and "gross profits" are met with in the books, but they are inaccurate. "Profits" and "net profits" are, for all legal purposes, synonymous expressions. All profits are necessarily net, and no profits can possibly be gross. But the term "gross profits" is sometimes used to designate the returns. This use of the term, however, is inaccurate. A business is susceptible of "gross returns" and "net returns," and "profits" is the synonym of "net returns." The distinction between profits, on the one hand, and gross returns, on the other, is obvious. George on Partnership, p. 64. It is said by the same author that an agreement to share gross returns does not create a partnership, for the reason that such an agreement is inconsistent with the joint ownership of the profits. In a partnership the profits are shared, because the partners are joint owners of them. If no profits have been made, no partner is entitled to any share as against the others, for there is nothing to share. But where the agreement is to share gross returns, the share is independent of the existence of profits, and may be taken when there is a loss.

It necessarily follows that an agreement to share gross returns creates a debt between the parties, and not a joint proprietorship in the profits. He then quotes Parsons on Partnership (section 62) as follows: "Though the sum may come out of profits, if they are sufficient, it will, nevertheless, come out of somebody, though there be no profits. The fixed amount, which is independent of the success or failure of the business, betrays a stranger's interest, and not a principal's. A proprietor's share springs out of the business, and varies according to its vicissitudes. A principal who made no contribution himself could never take his copartner's, and make gain out of his copartner's loss and the failure of the business." George on Partnership, pp. 64. 65. We deduce the principle, from what is there said, that the word "profits," when used in relation to the final distribution of the partnership effects or to the shares of the members upon a settlement of its affairs, means "net returns," that is, the gross returns after paying its liabilities and taking off the losses in the business and the costs and expenses of operation. But in this case the vital question is whether the amount of the reduction in the value of the capital contributed by the partners by the use of it, that is, by cutting and scraping the boxes, and in other respects, should be deducted from the gross returns.

The partnership, as an entity distinct from its individual members, becomes indebted to them for the capital they advance, and upon a settlement this debt should be paid just as any other liability of the firm, except that it is subordinate to the prior claims of creditors. As between the members and the partnership, it is a debt, and it makes no difference whether the capital was contributed in money or in money's worth, such as property.

Upon this subject the rule is thus stated in George on Partnership, p. 116: "Where the business has resulted in a loss impairing the capital, such loss is prima facie to be equally borne, notwithstanding the fact that the capital was unequally contributed. Thus, in Whitcomb v. Converse, the articles of partnership provided that A. and B. should contribute the whole capital in unequal proportions; that B C. and D. should contribute all their time to the business, and A. 'such time as he may be able to give'; and that each should receive one-fourth of the net profits. The business resulted in a loss of a portion of the capital. It was held that the capital constituted a debt of the partnership, to which all the partners were bound to contribute equally. The fact that the partner contributing services loses them does not affect the question. The doctrine here presented is sustained by the great weight of authority, though there are some contra cases. Of course, the agreement of the parties determines the proportions in which losses are to be shared, and what losses are to be shared. But prima facie, a loss of capital is like any other loss, and is to be borne in like proportions." And at page 117: "Any advances of money to the firm by a partner in excess of his contributon agreed to be made in the contract do not come within the designation of capital; the same being nothing other than a loan...