Welbourn v. Kleinle

Pearce, J., delivered the opinion of the Court: On June 1, 1888, John E. Welbourn and William Kleinle entered into a co-partnership under the firm name of Rennous, Kleinle & Co., for the manufacture of brushes in the city of Baltimore, which partnership continued until the death of Welbourn, May 17, 1896. The articles of co-partnership stipulated that upon the death of either partner the business should continue on joint account till the 1st of June following, and that if death should occur between January 1st and June 1st of any year, the estate of the deceased partner should be credited with the full share of the yearns profits, the same as if he had lived ; and that if the survivor should decide to continue the business, he should take the deceased partner’s share by giving the notes of the new firm in equal amounts, at nine, ten, eleven, twelve, thirteen and fourteen months, to be dated ¹²¹ June ist after such death, with interest, or such equitable modification of terms as the executor should agree to under the advice of the Orphans’ Court. By his will, Welbourn appointed his wife, Lucy H. Welbourn, his executrix, and upon his death she duly qualified as such. On June 29, 1896, Kleinle, the surviving partner, submitted to Mrs. Welbourn, as executrix, what he designated “a statement of the business of the firm of Rennous, Kleinle & Co.,” accompanied by his proposition for settlement of the firm’s affairs.

This statement showed net assets of $108,487.98, from which he deducted twenty per cent on merchandise and fixtures to cover risk of loss, leaving each partner’s share $47,099.91, and his proposition was to give the executrix eight notes for $5,000 each, with interest, maturing in one, two, three, four, five, six, seven and eight years respectively, and to pay the balance, $7,099.91, during the year between June 1, 1896, and June 1, 1897, as collected from debtors of the firm. The executrix accepted this proposition, and on July 18, 1896, conveyed to Kleinle all her testator’s interest in the assets of the firm. Kleinle executed and delivered the notes provided for, all of which have been since paid, as well as the balance above mentioned. In the statement submitted by Kleinle to Mrs. Welbourn, the item of “fixtures and machinery” was stated as amounting to $2,147.10, and the controversy in this case has exclusive reference to the correctness and fairness of this item.

On July 1, 1899, Mrs. Welbourn, as executrix of her husband, filed the bill in this case, setting forth all the above facts, and alleging that her husband, shortly before his death, declared to Mr. Kleinle in her presence that in view of their long time personal friendship and business relations he reposed absolute trust and confidence in his settlement of the partnership affairs after his approaching death, and that he expected and believed that he would make a fair, just and equal division of all the partnership funds and assets; that when she accepted the proposition made to her, she did so in the same confidence, ¹²² and in the belief that the valuation of the fixtures and machinery shown in said statement was a fair and accurate valuation, having then no knowledge nor means of knowledge of any fact which could lead her to think otherwise ; but that she had recently learned that said fixtures and machinery were on May 31, 1896, valued on the books of the firm at $17,848.55, and after deducting twenty per cent as agreed on, were fairly and reasonably worth $14,322.59, on which basis there was still due her as executrix in equity and good conscience $6,087.84, and she prayed that Kleinle should set forth a detailed list of all said fixtures and machinery with the true values thereof, and should account to her for all such values in excess of the $2,147.10 already settled for. The defendant answered fully, alleging that the valuation of the fixtures and machinery was perfectly fair and accurate. He denied that the paper submitted by him with his proposition purported to show the condition of the partnership, the assets thereof, or the interest of the deceased partner therein, in the sense implied by the plaintiff's bill, and avered that it was no more than a proposition on his part to purchase the interest of his deceased partner at a price which in his judgment he could afford to give, and he denied that he had violated or neglected any obligation resting upon him as surviving partner, or that any act of his was in contravention of the partnership agreement, or inequitable towards the plaintiff. Testimony was taken and the Court (Judge Sharp), passed a decree dismissing the bill, from which decree this appeal is taken.

The law governing this case, we think, is free from difficulty, though its application to a transaction between a surviving partner and the personal representative of a deceased partner does not seem to have been considered in any reported case in this State, and from the argument of counsel herein, we apprehend that it is upon the facts alone, that our view differs from that of the learned Judge of the Circuit Court, who filed no opinion with his decree. In Parsons on Partnership, 441, 2, it is said: “Surviving ¹²³ partners are held strictly as trustees, and their conduct in discharging their trust is carefully looked after by Courts of equity.” The law is stated in similar language in Bates on Partnership, sec. 743, and in Perry on Trusts, vol. 1, sec. 178, et sequente. Whether it is technically accurate to designate them trustees is not material, since there is a general concurrence among text writers, and in the decided cases that they are trustees in a certain sense, and that they sustain a fiduciary relation to the representatives of the deceased partner. This doctrine we understood to be tacitly conceded as correct by appellee’s counsel, and we do not think it could be successfully controverted, notwithstanding Lord Westbury’s contrary view in Knox v. Gye, L. R., 5 Eng. and Irish Appeals, 656, which called forth from the Lord Chancellor, Lord Hatherley, “ a protest against language” which, he says, “ was to me entirely novel, that there was no fiduciary relation between the survivor of two partners and the executor of a deceased partner.” An exception to the rule that a trustee can not purchase the trust property is made in the case of a surviving partner, who may purchase the interest of a deceased partner from his executor or administrator, and in the case before us the articles of co-partnership expressly authorize such purchase ; but all such purchases, whether authorized by the articles or not, “on account of the generally dangerous inequality of knowledge with respect to the subject matter of the purchase and sale, are regarded with suspicion, will be carefully scrutinized, and only be allowed to stand, if assailed, where they appear to have been reasonable, fair and just. ” Tennant v. Dunlop, 97 Va. 342 .

In such cases, “ the law by which the surviving partner must regulate his conduct is a law of jealousy.” Porter v. Woodruff, 36 N. J. Eq. 174. “ The trustee must clear the transaction of every shadow of suspicion.” 1 Perry on Trusts, sec. 195. “The exception is one difficult to make out.” Per Lord Eldon in Coles v. Trecothick, 9 Vesey, 246. ¹²⁴ As expressed by Le Grand, C. J., in Hoffman Steam Coal Co. v. Cumberland Coal and Iron Co., 16 Md. 506 , “ Permission is given to the trustee to show the perfect bona fides of the transaction, and circumstances relieving it from the censure of the law.” In Pairo v. Vickery, 37 Md. 485 , Bartol, C. J., said of contracts between persons sustaining fiduciary relations : “ The 07ms of showing their perfect fairness is cast upon the party who sets them up, and not upon the cestui que trust-who assails them.” And in Cumberland Coal and Iron Co. v. Parish, 42 Md. 606 , Alvey, C. J., said : “ It is not necessary to establish that there has been actual fraud or imposition practiced by the party holding the confidential or fiduciary relation, the onus being upon him to establish the perfect fairness, adequacy and equity of the transaction.” With these general principles in view, establishing the duty to inquire into this transaction, let us ascertain how the parties are affected by the facts as disclosed by the testimony. The only information, either given or offered by Kleinle to Mrs. Welbourn, as to the state of the partnership accounts and assets, is that contained in the following paper submitted to her by him : Baltii7t07'e, Md., June 29, 1896. Mrs. John E. Welbourn : The following is a statement of the business of the firm of Rennous, Kleinle & Co., and my proposition for a settlement. Assets.

Cash ............... $ 6,491 43 Merchandise......... 69,293 70 Fixtures and Machinery 2,147 10 --- 71,440 80 Debtors............... 46,946 98 $128,879 21 Liabilities. Borrow and Loan acct ....... 13,846 17 Creditors............ •..... 197 17 Reserve fund........ ...... 2,347 35 16,391 23 Surplus due W. K. & J. E. W. 108,487 98 ¹²⁵ Less 20 per cent deducted on merchandise, machinery, and fixtures...'................ 14,288 16 2)94,199 82 Net value of each partner’s share. 47,099 91 My proposition is to give you my • notes at one and eight years, for $5,000 each, with interest from June 1/96, amounting to.. 40,000 00 And balance in equal instalments during the year from June 1, ’96 to June 1, ’97, more or less as shall be collected........ 7,099 91 $47,099 91 Your early attention will oblige, Yours, &c., Wm. Kleinle.” The books of the firm were not tendered for her examination, and no explanation was made as to how the several items were ascertained. The paper, however, upon its face is “ a statement of the business of the firm,” and a “ proposition for settlement,” and there is no ambiguity as to where the statement ends, and the proposition begins.

The deduction of 20 per cent on merchandise, machinery and fixtures is plainly part of the proposition for settlement, though it precedes the verbal statement of the proposition. The statement of the business of the firm ends where the surplus is shown of $108,487.98 due W. K. andj. E. W. The more natural verbal order would have been this : Surplus due W. K. & J. E. W. . $108,487 98 Net value of each partner’s share $54,243 99 My proposition is to deduct 20 per cent from machinery, merchandise, &c., thus : Amt. due J. E. W............ $54,243 99 Less deduction 20 per cent.. 7,144 08 $47,099 91 ¹²⁶ and to give you my notes, at one and eight years, &c.,” as before set out. This shows the same result, but separates more clearly the statement of the business of the firm from the proposition for settlement.

It was his plain duty to render her an accurate statement of the condition of the firm when negotiating with her for the purchase of the interest of his deceased partner, which she represented in her fiduciary relation as executrix of her husband, and such, from its form and designation, she must have understood it to be, and not a mere arbitrary valuation as to any item therein, made by Mr. Kleinle with exclusive reference to his contemplated purchase. In the leading case of Ogden v. Astor, 4 Sandford’s S. C. 350, 334, 335, it is said : “ It is incumbent on surviving partners to give to the administrator of a deceased partner a full statement of all the property of the joint concern ;” and “ to make all the disclosures necessary to enable the administrator to form a correct judgment as to the condition of the partnership affairs,” “ or which in the mind of a prudent person would be likely to affect the question of the accounts.” And in Perry on Trusts, vol.