Doyle-Kidd Dry Goods Co. v. A. W. Kennedy & Co.

• Decision Date: 10 July 1922
• Docket Number: 120
• Citation: 243 S.W. 66,154 Ark. 573
• Parties: DOYLE-KIDD DRY GOODS COMPANY v. A. W. KENNEDY & COMPANY
• Court: Arkansas Supreme Court

243 S.W. 66

154 Ark. 573

DOYLE-KIDD DRY GOODS COMPANY v. A. W. KENNEDY & COMPANY

No. 120

Supreme Court of Arkansas

July 10, 1922

Appeal from Howard Circuit Court; Percy Steel, special judge reversed.

Judgment reversed.

Graves & McFaddin, for appellant.

A joint stock company was created by the articles of agreement entered into by the parties. 125 Ark. 146; 63 Ark. 518; 37 Ark. 308; 138 Ark. 281; 137 Ark. 80; 63 Ark. 581.

Where the language of a contract, when considered as a whole creates the partnership relation, then it should be so construed, even though the parties expressly provide that such was not their intention. 141 Ill. 124; 30 Am. Dec. 596; 30 N.E. 442; 20 Ore. 132; 11 L. R. A. 149; 30 Cyc. 360. The rule is that members of a voluntary association of individuals or an unincorporated company are to be considered as partners in their relation to third persons, and it is immaterial that the proportions in the ownership of the associates in the common property are represented by certificates having a similarity to shares of stock in a corporation, or that the members call themselves stockholders and believe they incur no liability for losses beyond the actual amount paid for the shares. 89 N.E. 434; 133 A. S. R 296; 12 Am. Dec. 495; 28 Am. Dec. 650; 49 Am. Rep. 313; 115 A. S. R. 407; 91 N.E. 439; 98 Tenn. 109; 60 A. S. A. 842; 36 L. R. A. 282; 303 Mass. 311; 89 N.E. 434; 133 A. S. R. 296; 128 Mass. 445; 124 N.E. 32; 23 Cyc. 474. Stockholders who take no active part in the business of a pretended corporation, which is acting without any charter or filed articles, and who supposed the corporation had been duly organized, are exempt from individual liability for debts incurred. 55 Hun 579; 57 N.Y. 23. Defendants are liable for the acts of Kennedy on the principle of agency, as distinct from, and in addition to, the matter of partnership liablity. 111 Ark. 236; 117 Ark. 176.

W. P. Feazel, for appellees.

The partnership relation is always created by agreement between the parties and never by operation of law. 54 Ark. 384; 70 Miss. 193; 66 N.Y. 424; 116 U.S. 461; 118 U.S. 211. In determining whether or not the relation of partnership was created between the parties, their intention must control. 137 Ark. 8; 44 Ark. 423; 63 Ark. 518; 77 Ark. 390; 74 Ark. 437; 87 Ark. 412; 138 Ark. 281; 91 Ark. 206; Story on Partnership, § 49. The mere fact that persons associate themselves together to promote or organize a corporation does not make such person partners for the reason there is no agreement or intention to enter into such relation. 8 Col. App. 110; 96 Ill.App. 200; 9 Mass. 900; 135 Mass. 140; 34 Minn. 355; 62 Minn. 332; 60 Ohio St. 288; 123 Pa. 259; 158 Pa. 197; 121 Ark. 545.

WOOD, J. HART, J., dissenting.

OPINION

WOOD, J.

The Doyle-Kidd Dry Goods Company is a domestic corporation, and will be hereafter referred to as the appellant. The appellant instituted this action against A. W. Kennedy, W. G. Gardner, H. B. Gardner, Jesse Johns, H. T. Smith, J. S. Harrison and R. B. Harrison, as copartners trading under the firm name of A. W. Kennedy & Company. The parties named above, except Kennedy, will hereafter be referred to as the appellees. A. W. Kennedy & Company will be hereafter referred to as the company. The appellant alleged in its complaint that it was engaged in the wholesale dry goods business in the city of Little Rock, Pulaski County, Arkansas, and that the appellees were partners trading under the firm name of the company; that the appellees were indebted to the appellant in the sum of $ 1,272.18 for merchandise purchased by them. Appellant alleged that the merchandise was purchased on the 12th of March, __, and at various other times, as shown in an itemized account, which is made an exhibit to its complaint. Kennedy did not answer the complaint, and judgment by default was rendered against him. He has not appealed, and thus passes out of the case. The appellees, in their answer, denied that they were indebted to the appellant in any sum whatever. They set up that some time in the month of November, 1919, A. W. Kennedy proposed to form a joint stock company for the purpose of conducting a mercantile business in their community in Howard County, the stock in the company to be sold at $ 100 per share, and that the appellees purchased stock in the company as represented by the respective number of shares taken by each of the appellees, which they specified, amounting in the aggregate to the sum of $ 6,000. The appellees alleged that it was understood between them and Kennedy at the time they purchased the shares that the business would be incorporated, and that Kennedy should have the exclusive management and operation of the business, subject to the advice of the board of directors; that the appellees took no part toward the organization of the corporation or the management and direction of the business after it was put in operation. They alleged that they did not intend to form a partnership and did not hold themselves out as partners, and did not sign any articles of association, incorporation, or partnership. They alleged that the business was not incorporated, and that, while they knew that the business was in operation, they supposed it had been incorporated by Kennedy, and did not know that Kennedy was attempting to run the business as a partnership, and did not know that it had not been incorporated until immediately prior to the institution of this action. They therefore denied liability.

The cause was, by consent, tried by the court sitting as a jury. The facts developed at the hearing were substantially as follows: A. W. Kennedy, who had been running a small business in the rural community where the appellees resided, agreed with the appellees, who were farmers, that they would establish a new business. Kennedy prepared a document called "articles of agreement" which specified that the stockholders agreed to form a joint stock company for the purpose of conducting a general mercantile business to be styled A. W. Kennedy & Company, stock in the company to be sold at $ 100 per share. Kennedy was to be the president and general manager. The stockholders were to elect three directors, who were to advise with the manager in the conduct of the business. The manager was to do all the buying and selling and keep an accurate account of sales and expenditures, and furnish the directors a report of the business at any time desired. Kennedy was to receive as compensation for his services one-half of the profits of the business after all expenses were paid. The articles further provided that dividends should be declared the first of January, 1921, and that no stockholder should withdraw his stock except the first of each year, without the consent of the majority of the stockholders. The manager was to give a receipt showing that the entire assets of the corporation should stand as security to each stockholder for the amount of his investment, and the manager was to make bond to cover the full amount of the stock. These articles of agreement were circulated among the people, and the appellees and others paid in cash varying sums amounting in the aggregate to $ 6,000. The several amounts were paid by the appellees and others to Kennedy, who issued to them a receipt for so many shares in the company at the rate of $ 100 per share, according to the amounts severally paid. After the above sum had been paid in, Kennedy called a meeting of those who had subscribed and paid the fund and they elected the three directors, as provided in the articles of agreement, and these directors signed the articles of agreement. The other stockholders who had paid did not sign, it being understood that the signatures of the three directors were sufficient. The directors met from time to time in an advisory capacity to Kennedy, who was the manager and had sole control of the business. When the appellant was approached by Kennedy to purchase merchandise, it inquired of him what kind of a company he had, and he told the appellant that it was a joint stock company with a paid-up capital of $ 6,000, and he named the appellees as stockholders in the company. In March, 1920, after the company had been formed and had been operated for some time under the above management, there was a meeting of the directors and some of the stockholders. The directors met from time to time, and some of the stockholders met with them at these meetings. No minutes were kept. At one of the meetings one of the original directors resigned, and W. G. Gardner, one of the appellees, was elected in his place. At the meeting in March, 1920, it was discovered that Kennedy had not incorporated, and it was again decided that the business should be incorporated. The undisputed testimony shows that it was the purpose of the appellees to have the business incorporated in order that they might be severally protected from any liability in excess of the amounts that they had subscribed and paid for shares of stock in the proposed corporation.

In January, 1921, the stockholders had a meeting at which all of the appellees were present except Smith. At that meeting Kennedy submitted a statement of the business of the company. Upon ascertaining that Kennedy was unable to pay any dividends, and that he had not had the business incorporated as he had promised, the appellees sold their interest in the business to him. He paid some of them a small amount in cash and executed his notes for the balance, which notes the appellees still have. Kennedy continued the business in the name of the company until the summer of 1921, when his business failed. The appellant sent a note to Smith, one of the appellees, for the amount of its debt, with a request that Smith and the other appellees...