Crawford v. Lugoff
| Decision Date | 20 July 1928 |
| Docket Number | 26,670 |
| Citation | 220 N.W. 822,175 Minn. 226 |
| Parties | JAMES L. CRAWFORD v. NICHOLAS E. LUGOFF AND OTHERS |
| Court | Minnesota Supreme Court |
Defendants Thomas A. Gall and William W. Wells appealed from an order of the district court for St. Louis county, Grannis J. denying their motion for a new trial. Modified.
Secret bargaining for profits by members of joint adventure not permitted.
1. The rule that parties negotiating for the organization of a partnership or joint adventure deal at arm's length in transferring their own property cannot be extended so as to permit any one of them to bargain secretly for a share in the profits to be made by an agent of the association from his agency.
New trial granted because conclusion of law was unsupported by finding of fact.
2. A pool was organized January 15 to market a block of corporate stock upon which L had an option expiring May 12. February 10, without any fraud inducing the action, the members of the pool voted to discontinue its operations and authorized a "retransfer" of the option. Accordingly L surrendered the option to the optionor, receiving in consideration $5,000, which he divided with W and G, two members of the pool. In the absence of findings showing an intent otherwise, held that the pool may have had no interest in the option after its dissolution and its authorization of the retransfer. Accordingly a new trial is ordered of the issue whether W and G are liable for the money they received from the surrender of the option.
When objection to plaintiff's capacity to sue is waived.
3. The objection that a plaintiff claiming to sue on behalf of himself and his associates in a joint adventure has no capacity to sue as their virtual representative must be taken by demurrer or answer or it is waived.
Joint Adventures, 33 C.J. p. 851 n. 83; p. 857 n. 70.
New Trial, 29 Cyc. p. 832 n. 60.
Fryberger, Fulton & Boyle, for appellant Gall.
Washburn, Bailey & Mitchell, for appellant Wells.
Stilson & Goldberg, for respondent.
Action for an accounting for alleged secret profits of a joint adventure. After a decision for plaintiff, defendants Gall and Wells appeal from an order denying their motion for amended findings and in part the alternative of a new trial. Defendant Lugoff did not join in that motion and is not a party to the appeal.
Plaintiff sues ostensibly on behalf of himself and the other members of a pool, which included 20 other Duluth gentlemen, among them defendants Gall and Wells. It was organized under a written contract January 15, 1925, to market a block of the stock of the Carnegie Lead & Zinc Company, upon which Lugoff then had an option from the corporation. The undertaking required each subscriber to advance money up to the amount underwritten by him and provided that Lugoff should have "charge of the marketing of said option stock" and any additional shares purchased to aid the undertaking. Any stock so purchased was to be bought at prices fixed by the associates or their trustee, defendant Wells, to whom, the agreement recites, Lugoff had agreed to assign, and to whom he did assign his option forthwith. The agreement provided that the stock should be sold by and through the trustee and that the proceeds should go to him, he being specifically charged with the duty of remitting to the Carnegie company for the option stock. "The balance," the agreement provides, "shall be kept by him for and on behalf of said pool," for distribution "by said trustee to said Lugoff and to the undersigned pro rata as herein provided," Lugoff to have one-third of the net profit as his compensation for selling stock.
The option had been acquired by Lugoff some time before. Gall and Wells, unlike Lugoff, were both members of the pool. They had assisted him in obtaining the option and when the pool was formed held his obligation for two-thirds of any profit realized therefrom. The pool continued until February 10, 1925, when it was dissolved by agreement of the members. A substantial profit had been realized. Lugoff received his one-third and paid to Gall and Wells two-thirds of it; that is, Lugoff, Gall and Wells each received one-ninth of the net profit. The finding is that, as to plaintiff and his associates other than Gall and Wells, the share so received by the latter was a secret profit, which should inure to the benefit of the pool, and judgment was ordered against them accordingly.
1. This brings us to the first point for appellants, which is that they are not accountable for their profit received from Lugoff. On both sides it is correctly premised that in their relations to each other, as to the obligation of good faith and full disclosure, and the resulting accountability for profits clandestinely made at the expense of the common enterprise, the members of the pool were joint adventurers and subject to the applicable rules of the law of partnership. Church v. Odell, 100 Minn. 98, 110 N.W. 346; 3 Dunnell, Minn. Dig. (2 ed.) § 4949; 33 C.J. 851. But, appellants argue, inasmuch as they had been associated with Lugoff in the acquisition of the option, and at the time the pool was organized had a vested right to share in the profits therefrom, they were entitled to deal at arm's length with their associates; that, as their counsel put it, they could drive as hard a bargain as they wished so long as they indulged in no misrepresentation. They rely upon the rule of Densmore Oil Co. v. Densmore, 64 Pa. 43 () that in the organization of a partnership or association parties deal at arm's length in a sale to the new concern of their own property, and "are not bound to disclose the profit which they may realize by the transaction."
The subject matter of that rule, the only thing it secures to its beneficiaries and in respect to which it absolves them from the duty of disclosure, is the advantage or gain which may be made by them, in the organization of a partnership or similar association, through the transfer of their own property to it. It does not apply, and in the very nature of things cannot apply, to a secret commission or other profit derived from a sale to the new enterprise of the property of another. Church v. Odell, 100 Minn. 98, 110 N.W. 346; Gasser v. Wall, 111 Minn. 6, 126 N.W. 284. A fortiori, it cannot cover a gain to be derived in the future from the operation of the enterprise. The moment they reach that field, and at whatever stage, the parties are under the duty of full and frank disclosure, and one making a secret profit is accountable therefor to his associates. So, while one member may charge what he likes for whatever property he puts into a joint adventure, he may not join it and in addition to his openly allotted share of the gain from operation procure an added portion by sharing secretly in the compensation of an agent, in whose appointment and the terms of which he has joined, without disclosing his interest in that appointment and the amplitude of the return allowed, ostensibly to the agent alone. That is what happened in this case. That it came about inadvertently cannot help the beneficiaries. The absence of bad faith relieves from the taint of moral delinquency but not from the legal consequences.
Appellants cite Murray v. Close, 118 Kan. 51, 234 P. 60. For its law it goes through Withroder v. Elmore, 106 Kan. 448, 188 P. 428, 10 A.L.R. 191, to Densmore Oil Co. v. Densmore, 64 Pa. 43, adopted here, as already stated, in Walker v. Patterson, 166 Minn. 215, 208 N.W. 3, 7. The defendants were sued, not for any gain from the operation of the joint adventure, but for a secret commission on the sale of certain undivided interests in an oil lease to plaintiffs, with whom defendants had been associated in the purchase of the entire lease. Unknown to plaintiffs, the owners had agreed with defendants that if the option were exercised they would get a commission. Recovery was denied under the rule of the Densmore case.
Whether that rule applies where the promoters are not vendors of their own property is open to serious question. Partners anticipate that any owner who sells them property may seek a profit. So far, they know his interest is selfish and antagonistic to their own. Therefore it seems to stretch the Densmore case somewhat to hold that purchasers of an oil lease must expect that an option holder will get a secret rebate or commission out of their money if they join with him as associates in the purchase. Such an extension of the rule is not in harmony with the weight of authority. Burbank v. Dennis, 101 Cal. 90, 98, 35 P. 444; Victor Oil Co. v. Drum, 184 Cal. 226, 193 P. 243; Stenian v. Tashjian, 178 Cal. 623, 174 P. 883; Esmond v. Seeley, 28 A.D. 292, 51 N.Y.S. 36; Dunlop v. Richards, 2 E. D. Smith (N.Y.) 181.
In Victor Oil Co. v. Drum, 184 Cal. 236, 193 P. 243, defendants Drum and Coffin planned to organize a corporation to take over oil lands on which Drum had an option. With others they organized the plaintiff corporation, to which Drum sold at a profit of $32,500, which he divided with Coffin and two other organizers. The other stockholders were ignorant of Drum's profit. The court refused to apply Densmore Oil Co. v. Densmore because:
"The case is not one of a sale by the owner of property * * * in which the understanding * * * is that one of the associates is selling property to the association * * * the essence of the business was that the defendants * * * induced * * * persons to associate with them for the purchase of certain properties for prices greater than the properties could be obtained for, and without any disclosure * * * of the...
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