Procter & Gamble Co. v. Powelson

• Decision Date: 05 January 1923
• Docket Number: 60.
• Parties: PROCTER & GAMBLE CO. v. POWELSON.
• Court: U.S. Court of Appeals — Second Circuit

288 F. 299

PROCTER & GAMBLE CO. v. POWELSON.

No. 60.

United States Court of Appeals, Second Circuit.

January 5, 1923

Wing &amp Russell, of New York City (Philip Russell and Burt D. Whedon both of New York City, of counsel), for Proctor & Gamble Co.

Davies Auerbach & Cornell, of New York City (Stephen C. Baldwin, of Brooklyn, N.Y., and Charles H. Tuttle, of New York City, and Bruce Bromley, of Brooklyn, N.Y., of counsel), for Powelson.

Cross-writs of error to a judgment of the District Court for the Southern District of New York, entered upon the dismissal of plaintiff's complaint and six of defendant's counterclaims, and a directed verdict in favor of plaintiff on two counterclaims. The parties will be referred to as aligned below.

Plaintiff an Ohio corporation, brought an action at law to recover $192,500 from defendant, a citizen of New York. The complaint alleged that on November 10, 1919, defendant was the owner or controlled the rights of one Hyatt, under a concession from the republic of Panama to Hyatt, known as the 'Concession Hyatt,' wherein the republic agreed to convey to Hyatt 61,861 acres of land in Panama, and that, at the same date, plaintiff and defendant entered into a contract. This contract was called 'Outline of Understanding.' As the provisions of this contract are vital to an understanding of the rights and relations of the parties, it is quite fully quoted margin. ^[1]

The complaint further alleged that no other contract was entered into between the parties; that in compliance with its obligations under the contract and its reliance upon defendant's promise under paragraph seventh of the contract, plaintiff paid to defendant a total of $192,500 'for the use of said enterprise,' and that this money was expended by defendant in clearing the 5,000 acres, mentioned in paragraph seventh of the 'Outline,' in planting cocoanut trees, and otherwise developing and otherwise improving the land, and 'in connection with said enterprise.' It is then alleged that plaintiff on December 20, 1920, formally demanded that defendant should convey the land as per agreement; defendant having refused on December 10, 1920, to convey these 5,000 acres to himself and defendant jointly, or to a corporation as required by the contract. Plaintiff then demanded damages in the sum of $192,500, with interest.

The answer denied the breach, and set up four affirmative defenses and nine counterclaims, one of which (the ninth) was withdrawn. The defenses need not be set forth, because the plaintiff's case must stand or fall on its own merits, in view of the fact that, at the conclusion of plaintiff's case and before any testimony was adduced by defendant a motion to dismiss was made and granted. The grounds upon which the motion was granted were (1) that the action was, in effect, for rescission, and, as there was no fraud nor mutual mistake in entering into the contract, relief, if any, was in equity for an accounting; and (2) that there was no proof of damages.

The first six counterclaims were dismissed at the conclusion of defendant's case. At the end of the whole case, the court directed a verdict for plaintiff on the seventh and eight counterclaims.

Before ROGERS, MANTON, and MAYER, Circuit Judges.

MAYER Circuit Judge (after stating the facts as above).

Plaintiff's Case. The 'Outline of Understanding' (hereinafter called the 'Outline') must be construed as a joint venture agreement. It was entered into by both parties in good faith. It is true that defendant's estimate of the money necessary for the development of the enterprise turned out to be too optimistic, but there is no doubt that the preliminary negotiations which led up to the signing of the 'Outline' were fairly and honestly conducted by both sides, and, as the District Judge properly held, the 'Outline' was entered into without fraud or mistake.

The testimony on behalf of plaintiff in support of its complaint consisted of (1) the 'Outline' and (2) letters passing between the parties. It was agreed, at the trial, that each party had paid $192,500 into joint account No. 1. It will suffice to note the essential facts which the correspondence evidenced, without setting forth a mass of detail.

On September 20, 1920, defendant reported to plaintiff at great length in respect of the development of the venture. He stated that, owing to Hyatt's death, there had been delay in obtaining the deed, but that the Panamanian government was ready to 'issue a deed' to the Concession Hyatt, as soon as the court would adjudge Hyatt's mother (his sole heir) the owner of the concession, and then Mrs. Hyatt would give a deed to defendant or his nominee. He regretted his inability to transfer at that time the 5,000 acres. 'I agreed to transfer,' but hoped 'within a short time to be able to make the transfer, to our joint account of the 5,000 acres. ' He made clear, with elaborate detail, that to plant 5,000 acres would require more money than originally estimated. Only 1,300 acres had been cleared for cocoanut culture, and he suggested several courses of action; i.e.: (1) To finish planting the 1,300 acres and 'quit additional development'; or (2) plant new areas up to 3,000 acres, which would require more money for upkeep during the nonproductive period; or (3) finish the 5,000 acres, which would, in his opinion, require 'an additional $175,000."

On December 10, 1920, defendant wrote plaintiff that he had the deed from the republic of Panama to the San Blas Development Company, a corporation organized under the laws of Panama at the instance of defendant to take title to the land; that he and plaintiff had agreed that the accomplishment of the enterprise was impossible, and he was unwilling to proceed further under the 'Outline'; that his proposals for modifying the agreement had been rejected, and that he rejected plaintiff's proposals. He then proposed 'a physical division of the property subject to joint ownership,' but that the land thus subject would be 'no greater in area than the land that can be planted for the $500,000 subscribed pursuant' to the 'Outline'-- in other words, much less than 5,000 acres.

On December 14, 1920, in answer to the foregoing, defendant wrote plaintiff that 'we have not agreed, as you state,' that the accomplishment of the enterprise was impossible. Plaintiff further stated in this letter that it was willing, not only to complete its part of the existing subscription, but to put up additional moneys to complete the enterprise, 'you (Powelson), of course, to put up your share. ' Plaintiff continued:

'We claim that the enterprise is entitled to receive a deed of 5,000 acres under' the seventh paragraph of the 'Outline.'

On December 18, 1920, defendant, in answer to plaintiff's letter of December 14, 1920, wrote: 'I intended my letter to you of December 10th to be notice that I consider that I am under no obligation to proceed further under the 'Outline of Understanding of November 10, 1919.''

And defendant concluded by stating that a fair division would be to give plaintiff 'some 350 acres already planted to cocoanuts. ' Defendant offered no testimony, but then moved to dismiss.

From the foregoing, it is plain that defendant broke his agreement by failing to comply with the seventh paragraph, and the question is whether plaintiff can recover in a law action $192,500 as damages.

We need not enter into any extended discussion as to when, in considering the law of contracts generally, an action at law may be brought on the theory of rescission. Usually there must be fraud in inducing a party to enter into the contract. Freer v. Denton, 61 N.Y. 492.

When dealing with partnership or joint venture agreements, the general rule is that the remedy of the complaining partner or coventurer is in equity for an accounting and a settlement of the partnership affairs. 30 Cyc. 461, 465. The 'Outline' was a New York contract, and the New York courts seem consistently to have held to the principle stated in Hollister v. Simonson, 36 A.D. 63, at page 65, 55 N.Y.Supp. 372, at page 374 (appeal dismissed 170 N.Y. 357, 63 N.E. 342), where Van Brunt, P.J., said:

'We have been unable to find any rule established by which, because of the misconduct of a partner, his copartner can rescind the agreement of copartnership and recover back his contributions of capital unless such misconduct consisted of gross fraud or gross misrepresentation, by which the plaintiff has been induced to enter into the copartnership, so that there was fraud in the inception of the contract. * * * It seems to us that the learned referee has failed to observe the rule above stated in the conclusion at which he has arrived. He has allowed a recovery in this action as for money had and received upon the ground of rescission, which seems to be an erroneous rule in respect to controversies as between partners. A proper judgment would have been for an accounting as between these partners in respect to their copartnership enterprise, upon which accounting the plaintiff could prove the damages which he had sustained by reason of the misconduct of the defendant Simonson in selling the property in violation of his duties towards his joint adventure.'

See, also, Arnold v. Arnold, 90 N.Y. 580; Mitchell v. Tonkin, 109 A.D. 165, 95 N.Y.Supp. 669; Worms v. Lake, 198 A.D. 776, 191 N.Y.Supp. 113 (which seems quite in point).

There is an exception to the general rule, in addition to that noted in Hollister v. Simonson, supra, where one partner assumes wrongfully to dissolve a partnership before the end of the term. In such circumstances, the aggrieved partner has an action at law, as in Bagley v. Smith, 10 N.Y 489, 61 Am.Dec. 756, and Zimmerman v. Harding, 227 U.S. 489, 33 Sup.Ct....