Prince v. Harting

Decision Date09 February 1960
Docket NumberNo. 18383,18383
Citation2 Cal.Rptr. 545,177 Cal.App.2d 720
CourtCalifornia Court of Appeals Court of Appeals
PartiesDouglas R. PRINCE and Ralph M. Powers, Plaintiffs and Respondents, v. Lester E. HARTING, Defendant and Appellant.

Montgomery & Jorgensen, Monterey, for appellant.

Jensen & Zavlaris, San Jose, Peter B. Zavlaris, San Jose, of counsel, for respondents.

DUNIWAY, Justice.

In this action for dissolution of two partnerships, an accounting and damages designated as 'secret profits,' plaintiffs had judgment and defendant appeals. He does not claim that the evidence does not support the findings. His complaints are that the findings do not support the judgment in certain respects and that in any event the money judgment entered against him is improper because, as yet, the final balance has not been determined in the partnership accounting.

The Facts Found

An understanding of appellant's points requires that we set out the principal facts found by the court, supplemented, where we deem necessary, by the evidence behind the findings.

The defendant Lester E. Harting ('Lester') has a brother Wesley A. Harting ('Wesley'). Lester lived at Monterey; Wesley lived in Kansas City, Missouri, where he was a business opportunity broker. Sometime before September 21, 1951, the two brothers entered into a conspiracy to create for themselves an 'opportunity,' by obtaining money from and making secret profits at the expense of, the plaintiffs, through inducing them to enter a partnership with Lester. The partnership was to be the body from which the conspirators proposed to draw their sustenance. Plaintiffs had little money, but did have a source from which they could borrow, and the brothers knew this. As an inducement to have the plaintiffs enter into the partnership with Lester, Lester made numerous fraudulent representations to the plaintiffs and others. Some (but by no means all) of these representations were: Lester was in contact with a syndicate of wealthy men in Kansas City (the University Testing Laboratories of Missouri, a corporation) which had been for some time organized to promote and assist various types of business enterprises, and it was interested in expanding to the west coast in the soft water business. It had acquired patents and processes for a water softener system that was superior to anything then on the market, had formed the United States Soft Water Company as a division of the corporation, and had between 300 and 400 dealers in the eastern and midwestern United States. It manufactured all of its materials and equipment and sold the same to these franchise dealers. It had an engineer, L. C. Lind, who had engineered and developed other well known water softening systems. The syndicate had offered Lester a franchise for the 11 western states, without cost.

The representations were false. There was no syndicate. The Missouri corporation was a shell, formed on June 16, 1951, with an initial capital of $500, owned 50% by Wesley, 49% by Wesley's wife, and 1% by a third person. It was Wesley's alter ego, and the United States Soft Water Company was mere shadow of a shell, being a 'division' of this corporation. It had substantially no dealers. Lind was an independent manufacturer, and had no connection with the Kansas City operation of Wesley, which owned no patents or processes and did no manufacturing or assembling whatsoever.

Induced by the fraudulent representations, the plaintiffs entered into a partnership with Lester on September 21, 1951, the stated purpose being to conduct a soft water business and distributorship in the 11 western states. Plaintiffs had no previous experience in the business. They borrowed money to help finance it. Each of the partners had a one-third interest in the partnership and it profits or losses. On December 31, 1952, the plaintiff Prince Withdrew and the plaintiff Powers, with Lester, continued the business in partnership until May 16, 1957. The two remaining partners each had a 50% interest in the partnership and its profits and losses.

The conspiracy--and a campaign of deception and concealment--continued. About October 1, 1951, the Monterey partnership placed an initial order for water softening equipment with Wesley's alter ego, forwarding $53,908.33 to the Kansas City corporation. However, the money was placed by Lester and Wesley in a partnership commercial account with a bank in Kansas City, the two of them being the partners. There was testimony by several witnesses that they were told by Wesley and by Lester that Wesley and Lester were partners in the Kansas City business. The plaintiffs were later told that Wesley had an interest (undefined) in the Kansas City operation, but were not at any material time told, not did they learn, that any of the fraudulent representations were false. Indeed this small gobbet of truth appears to have been artfully dropped into the ken of the plaintiffs as 'mere corroborative detail, intended to give artistic verisimilitude to a bald and unconvincing narrative.' (Gilbert, 'The Mikado,' Act II, Mod.Lib. Ed., p. 49.) Among various things that were not disclosed to plaintiffs were that Lester was receiving commissions from the Kanasa City operation for sales of equipment to the Monterey partnership, that the plaintiffs could have purchased direct from Lind at much lower prices than they paid to the Kansas City operation, that the latter was a dummy company organized to obtain secret profits from the Monterey partnership, and that its sole function was to buy equipment from Lind with money advanced by the Monterey partnership and to sell such equipment to the Monterey partnership at much higher prices.

The court specifically found that the conspiracy continued after the Monterey partnership was formed, during the existence of the partnership and at all times pertinent to the case. The evidence shows that both Wesley and Lester used 'high pressure' methods to persuade the Monterey partnership to place large orders with the Kansas City operation of the conspirators. It also shows that they were both active and astute in seeing to it that plaintiffs did not learn the truth.

The court found that the first Monterey partnership forwarded to the Kansas City operation for the purchase of equipment the total sum of $245,682.74; that equipment was purchased from Lind at a cost of $138,045.66, giving the conspirators a profit of $107,637.08; that in addition, there was forwarded $53,898 for the purchase of resin, which was purchased from a supplier for $42,483.45, giving the conspirators profit of $11,415.55; and that the total profit which the conspirators made at the expense of the Monterey partnership is thus $119,052.63. (The correct figure would be $119,051.63.)

The Judgment

The court made an interlocutory decree whereby it appointed a firm of certified public accountants to state an account of the dealings between the three partners to and including December 31, 1952, and the two partners thereafter. Such an account was rendered and on the basis thereof the court found that the plaintiff Prince was entitled to a total of $54,855.89, with interest at 7% from May 16, 1957, this being made up of his capital account, as augmented by his share of diverted profits, a note payable to him which was given by the remaining partners when he withdrew from the partnership, and accrued interest on the note and on his one-third share of the moneys of which the partnership had been deprived by the conspirators. The court also found that the plaintiff Powers was entitled to a dissolution of the partnership with Lester, effective May 16, 1957. Pursuant to the account stated between those two partners, it gave to the defendant Lester credit for various advances, expenses, etc. in the sum of $31,863.57. Appellant does not assail the correctness of any of these figures.

The accounting and decree were based upon the court's determinationthat Lester owed the partnership, as of May 16, 1957, a total sum of $155,493.60, this being the amount by which the partnership had been defrauded, with interest to May 16, 1957. It rendered a judgment in favor of the two plaintiffs 'on behalf of the first' partnership, against Lester for this amount, with interest thereon from May 16, 1957, until paid. It directed Powers to wind up the affairs of the second partnership. It gave Prince, as the partner who had retired from the first partnership, a lien upon the second partnership for the moneys due him. It then directed Powers, in winding up the second partnership, to liquidate all of the firm's assets, collect its accounts receivable, settle its liabilities, and at the completion of the winding up, divide the remaining assets sets, if any (or the remaining debts, if any), one-half to the plaintiff Powers and one-half to the defendant Lester. It also awarded plaintiffs their costs against Lester.

The Findings Support The Judgment

Lester attacks the judgment on several grounds. He asserts that there is no finding of any act done in furtherance of the conspiracy causing damage to the plaintiffs and that in any event there is no finding on the basis of which defendant could be charged with the entire loss. He also asserts that the court erred in concluding that Lester was jointly and severally liable with Wesley. We find no merit in these contentions.

A partner (here, Lester) is a trustee for his copartners. Corp.Code, § 15021. 'Partners are trustees for each other, and in all proceedings connected with the conduct of the partnership every partner is bound to act in the highest good faith to his copartner, and may not obtain any advantage over him in the partnership affairs by the slightest misrepresentation, concealment, threat, or adverse pressure of any kind. Civ.Code, §§ 2410, 2411. A partner has no right to deal with partnership property other than for the sole benefit of the partnership. ...

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