
    Thomas C. Watkins, Appellant, v. John Delahunty, Respondent.
    Second Department,
    June 18, 1909.
    Partnership — contract to buy railroad construed — when ho termination of partnership by sale of railroad to corporation.
    Action for an accounting on an alleged partnership agreement to buy a railroad, to. improve and equip it and to share the profits and losses resulting from a sale.. It appeared that the railroad was in. the hands of a receiver, and.had been condemned by the Railroad Commission, that only a few miles were in operation and that part of the road had been sold for taxes. The agreement provided that the parties should purchase the tax titles,-receiver’s certificates and other obligations existing against the railroad or. the receivers thereof, and that on the sale of the properties so purchased the losses and profits should be shared in certain proportions. On all the evidence,
    
      Held, that thé agreement to buy the tax titles and other obligations of the railroad was, under the circumstances, an agreement to buy the railroad itself as the title thereto could be acquired in no other way;
    That, although after the purchase of the obligations of the railroad they were transferred to a corporation organized by the parties to take title .and rehabilitate the road, the original agreement contemplated the continuance of the partnership until a final sale of the railroad, and that it Was not terminated by the organization of the corporation and the transfer of the partnership assets . to-it.Jn view of -the fact that the.stock and bonc[s of the corporation were not distributed to the respective parties, but were pledged to raise money to improve and operate the road prior to the final sale of the whole property to a third person.
    
      It seems, that the partnership would have terminated and merged in the corporation by a distribution of its stock and bonds according to the respective interests of the parties.
    Gaynob, JT., dissented.
    Reargument of appeal by the plaintiff, Thomas 0. Watkins, from a judgment, of the Special Term for Trials, entered in the office of the clerk of the " county of Kings on the 17tli day of April, 1908, dismissing the complaint' upon the merits.
    
      Robert B. Honeyman, for the appellant.
    
      Charles F. Brown [Edmund Luis Mooney with him on the brief], for the respondent.
   Miller, J.:

This appeal presents only questions of fact. The record is voluminous ; the transactions involved are complicated. The learned trial judge was in doubt and dismissed the complaint on the ground that the plaintiff had not established his case by a fair preponderance of the evidence. I think that the documentary evidence and the conceded facts so strongly support the plaintiff’s contention as to require a new trial.

A point is made that the complaint does not fairly allege the cause of action sought to be recovered upon. The point is not of present importance, however, because the court ruled upon the trial that the complaint was sufficient, refused for that reason to allow the plaintiff to amend, and admitted the evidence objected to. If necessary the pleadings should have been amended to conform to the proof, as it is difficult to see how the defendant could well claim surprise.

On the 17th of August, 1899, the defendant on behalf of himself, Charles D. Haines and the plaintiff’s assignor, William C. Roberts, purchased at referee’s sale so much of the Lebanon Springs railroad as was within this State, and on September 21, 1899, organized a corporation, the Chatham and Lebanon Valley Railroad, to which the title was transferred. On July 1, 1901, the defendant and Roberts, Haines having meanwhile released to them his interest, sold the road by a sale of its stock and bonds.

The plaintiff’s contention is that in August, 1898, said parties entered into an agreement to acquire the railroad, to rehabilitate, improve and equip it, and ultimately to sell it and to share the resulting profits or losses. The action is for an accounting.

The defendant denies that there was ever a copartnership, but admits that what he calls a joint venture was formed to purchase, not the railroad, but certain tax titles, receiver’s certificates and other obligations of it, with the view of making a profit on a sale thereof. He asserts that the parties did not originally contemplate the purchase of the railroad itself, and that when it was purchased and transferred to a corporation the original contract was terminated, both by agreement of the parties and by operation of law.

. Thus there are two important questions of fact involved: First, what was the original agreement, and, second, was it terminated by-agreement, if not by operation of law, upon the formation of the corporation.

The railroad extends from Chatham, Columbia county, through Rensselaer county in this State, to Bennington, Vt. When the transaction in suit arose, the part in this State was in the hands of a.recei ver appointed in a creditor’s suit. It had been condemned by the Railroad Commission, only a few miles were in operation, and the part in Rensselaer county had' been sold for taxes.

The original agreement, if in writing (the point is in dispute), was not produced, but the correspondence between the parties and the surrounding circumstances leave no room to doubt that, their purpose from the start was to acquire the road, to rehabilitate it and to sell it. With that in view, they commenced, in August, 1898, to purchase the'tax titles, receiver’s certificates and other obligations of the road; and the defendant, who is a lawyer,, says that from then until the referee’s sale he spent substantially all of his time straightening Out the legal complications in the way of perfecting title and procuring a sale by the referee. 1

Haines proved to be'unable to contribute anything, and a further agreement in writing was made on Movember 18, 1898. That agreement recites that the parties have theretofore agreed to purchase certain tax titles, receiver’s certificates and other obligations then existing or which may thereafter exist against said railroad or the receivers thereof in this State and in the State of Vermont, “ each of said parties to. Contribute equally to the funds necessary to make such purchases, and bear equally any losses that may arise in consequence thereof,” and that Haines is unable: to contribute his ¡pro rata share, and then provides as follows: How, Therefore; it is agreed between said parties that the party of the first part ” (meaning Roberts) “ shall provide the money which is now necessary on the part óf the party of the second part ” (meaning Haines) “ to contribute for his share of such funds, and that on the sale of the properties thus purchased the Iqsses shall be borne by and the profits divided between said parties as follows : Three-sixths thereof to the party of the first part, one-sixth thereof to the party of the - second part, and two-sixths thereof to the party of the third part ” (meaning the defendant). “ All of the deeds and transfers of -said property on said purchases shall be taken in the name of the party of the first part individually, but it is agreed that the same are held in trust, subject to the terms of this agreement. Before a division of the profits each party shall be reimbursed the full amount which he has contributed to the enterprise.” That agreement was drawn by the defendant, and its recital of an agreement to buy tax titles, etc., is the basis of the claim that the parties originally contemplated the purchase, not of a railroad, but of its obligations. But the tax titles were more than mere obligations of the railroad. Upon acquiring them the parties acquired the railroad itself. Indeed, the defendant himself says that the purchase of such titles prevented any one else from buying the road. Manifestly, the receiver’s certificates and other- obligations were to be acquired for the purpose of clearing up the title. The parties understood that the tax titles, receiver’s certificates and other obligations represented the road. The road was in such condition that it was not practical to acquire ownership of it except in the way adopted by these parties, and it seems to me that the contract of November eighteenth is to be construed precisely as though it had recited an agreement to purchase the road itself. If there could otherwise be any doubt on this point the memorandum drawn and signed by the defendant on ’the purchase at referee’s sale in August, 1899, sets it at rest. That memorandum recites that the signer had purchased the road <c as trustee for Messrs. Wm. C. Roberts, Charles D. Haines-& myself pursuant to an understanding & a certain agreement between us heretofore made with reference to said railroad.” It may be taken as conclúsively established then, notwithstanding the defendant’s denial, that the original agreement contemplated the purchase of the railroad, and the trial court so found.

The defendant says that he thought the transaction had made him rich beyond the dreams of avarice,” and it is evident that in the early stages of it the parties expected to realize handsome profits. Of course they knew that that could only be doné by organizing a corporation to take title, rehabilitate the road and put it in operation, and the trial court found that that was contemplated by them. We may now re-examine the agreement of November eighteenth. That provides, not for the transfer of the property to a corporation, and the issuance of its stock and bonds to the parties in proportion to their contributions and interests, but for the sale of the properties purchased and a sharing of profits or losses resulting therefrom. That actual, not paper, profits were contemplated is further shown by the provision for reimbursement before any division of profits. The trial court found that the transfer of the property to the corporation in exchange for its securities was not the sale contemplated by the parties, but was made, as they understood, to comply with the Railroad Law of the State. The corollary to that finding is that the ultimate sale of .the road, by a sale of the stock and bonds of the corporation to Dr. Webb, was such a sale as the partied contemplated, whereupon profits or losses were to be shared. The argument of the defendant, based upon the fact that the written contracts in evidence, and the complaint are both silent respecting the formation of a corporation to take title and operate the road pending the sale contemplated, is met by the established fact that that was an incident, a mere detail, of the plan, the ultimate result of which was to be a salei of the property and a sharing of actual, not paper, profits or losses.

We have it then conclusively established by the evidence and found by the trial court that the original contract contemplated the purehasé of the railroad itself, the formation of a corporation to take title and rehabilitate it, the ultimate sale of it, arid a sharing in the profits of losses resulting from the entire transaction.

As the' original agreement contemplated the continuance of the copartnership itntil the final sale, it was not ipso facto terminated by the organization of the corporation and the transfer of the partnership assets to it. There was a nominal issue of $1,000,000 capital stock for .the title acquired at referee’s sale, and an issue of $350,000 of bonds was authorized, of which $250,000 was nominally issued for the tax titles previously acquired. Thus the copartnership assets Were converted into $1,000,000 stock and $250,000 of bonds. The copartnership might then have been terminated by agreement, and undoubtedly it would have been merged in the corporation by a distribution of the stock and bonds of the corporation according to the respective interests of the parties. (Kennedy v. Porter, 109 N. Y. 550.) Instead of deciding the contrary, as is • contended, that case is a square authority for the proposition that a copartnership may own the stock of a railroad and by means of such ownership operate it. We are now dealing only with questions arising between the parties themselves.

In view of the answer to the first question, I think the burden was on the defendant to prove that the copartnership was merged in the corporation either by agreement of the parties or by a distribution of the copartnership assets. But, as I view the evidence, that question is unimportant.

The defendant says that about the time of the purchase of the road at receiver’s sale, and before the corporation was organized, he informed Roberts that his disbursements amounted approximately to $10,000; that it was then agreed between them that he should have $10,000 of bonds to cover his disbursements and 3,000 shares of stock as his share of profits, and that Roberts should take sufficient bonds to cover his advances, whatever the amount might be, and should take his share of the stock, which was subsequently put at 6,000 shares; and that soon after the organization of the corporation a division of the stock and bonds between him and Roberts was made in accordance with that agreement. The defendant’s claim is that he then regarded his interest in the corporation as a permanent investment, that he supposed Roberts was financing the company by selling bonds, that he had no knowledge of what was done to improve, equip and operate the road, and that his cry was for dividends.”

When that agreement is claimed to have been made, Haines was still a partner, but the agreement took no account of him. If stock had then been divided among the three partners as profits, upon the basis stipulated in their written contract, the ratio would have been three, two and. one, and when Haines was later eliminated, as stated mfra, the ratio would have been three to two, as is conceded by the parties and found by the court. There is no pretense that there was ever a division or an agreement to divide upon either basis.

At the time of the purchase of the railroad Roberts had contributed upwards of $115,000 in cash; the defendant had contributed not to exceed $5,850, besides some small disbursements, in cash, and his individual note for $10,000. Although there is a claim to the contrary, the defendant’s letter in evidence conclusively shows that that note was contributed by him as a part of his advances to the enterprise. He claimed that when the agreement for division was made, Roberts agreed to, and in fact did, take up that note and return it to him with his stock and bonds, or at about the time that he received'his stock and bonds. But it was established that the note was renewed on September 8, 1899,- by a demand note for $10,000 made by the defendant, which, together with other notes, all secured .by bonds, was carried by the bank until the final sale of the road, when Roberts had- to "redeem the bonds in order to deliver them pursuant to his agreement, as hereinafter stated. The defendant attempted to show that he had made a cash contribution of $10,000, but to do that he had to include $2,000 advanced after the making of the alleged, contract, all of his minor disbursements, personal expenses up to the following December, and over $500 interest reckoned to the following December, and then lie fell short $200. ' r

On the twenty-ninth cif ^November, more than two months after the organization of -the corporation, Roberts and the defendant bought out Haines and eliminated him from the enterprise. The agreement to which all were parties was drawn by the defendant. It recited the prior agreements, the commencement of-an action to rescind them so far as the party of the first part (Haines) was con-, cerned, “so that the said agreements shall affect only the parties of the second part" (Roberts and the defendant), an agreement between the parties that said agreements,“ shall so be rescinded so far as concerns the party of the first part," .-and then provided that in consideration of the payment of $3,000, which Roberts and the defendant -agreed to pay. on December 4, 1899, “the party of the first part hereby- agrees to and with the parties of the second part, that said contracts be and the same hereby are, so far as the same relate to said party of the first part, in all things rescinded, vacated, annulled and set aside.” Roberts advanced the $3,000, and it certainly cannot be claimed that that money was loaned by him to the corporation..

If the agreement claimed had been made, the stock and bonds would have been issued and divided pursuant to it as soon as practicable after the formation' of the corporation, and certainly when Haines was eliminated. It was established that the only certificates of stock issued upon the organization of the corporation were certificates- for a" few shares each to qualify some dummy directors, who do not appear ever to have attended a directors’ meeting. No certificates at all were issued or delivered to the defendant or Roberts until July, 1900, almost a year after the organization of the corpoporation, and the defendant admits that at that time the Vermont end of the road had been acquired, wherefore it was necessary to make out a new set of books to comply with the requirements of the Interstate Commerce Commission and to make it appear that at least $10,000' of stock per mile had been issued. In fact, Roberts and the defendant had attended the receiver’s sale of the Vermont end of the road in April, 1900 ; the defendant had bid in the road in the name of Roberts individually; Roberts paid the purchase price and took a deed in his own name, the defendant attending to all of the legal details, and the title stood in Roberts’ name until the final sale of the road, when he conveyed it to the corporation. It is to be noted, therefore, that the mortgage to secure the bond issue did not cover the Vermont end of the road.

No bonds were delivered at all until December 5,1899, when five $1,000 bonds were delivered to the defendant, and were by him pledged as security for his individual note on which he borrowed $5,000 of his personal friend, Mr. Canfield; on the 28th of December he got five more bonds and gave his receipt for them; on the 1st of May, 1900, he got ten bonds, and pledged them to Mr. Canfield as security for his individual note of $10,000 ; in September, 1900, he got six bonds and pledged them to Mr. Canfield as security for a $6,000 note made by the corporation and indorsed, by him .and Roberts; at other times, which do not appear, he got bonds, and when the road was finally sold, in addition to the bonds pledged to Mr. Canfield, he had, not ten, but fourteen bonds. The bonds not taken by the defendant were all deposited by Roberts in the bank as security for loans.

Manifestly both of the parties knew that there was no market for either the stock or the bonds. While Roberts attended personally to the expenditures in improving and operating the road, I cannot believe that the defendant was ignorant of the fact that the money with which to do that, aside from the small amount raised by ■the defendant, was borrowed by Roberts on his personal credit, using the bonds as collateral. The money which the defendant was able to borrow was not put into the treasury of the company, but was deposited by him in the bank to' the credit of Roberts individually. "

On July 1, 19(31, the road was sold to Dr. Webb for $250,000 free and clear. Roberts agreed to deliver all of the stock and bonds and personally guaranteed the title, and assumed the payment of all claims against' the road. The purchaser retained $25,000 as security for that guaranty, pending the termination' of some suits against the corporation in which the defendant appeared as attorney. Those suits Were not all closed up iintil June, 1906, when the final payment was made on the contract. It was then for the first time possible for the partners to have a final accounting, and-Roberts immediately demanded one. In order to deliver the stock and bonds according to the agreement, Roberts liad to redeem those which had been pledged as security for loans. He says that the' defendant represented to him that $31,300 was required to redeem the stock and bonds pledged to Hr. Oanfield, and a check was made to the defendant for that amount and he obtained and deposited the stock and bonds.

I have undertaken to state what appear to me to be the controlling circumstances in the case. There are many other details, all tending to strengthen the view which I have indicated, but which cannot be enumerated without extending this opinion beyond reasonable limits. It is manifest that as between the parties the corporation was but a paper affair and its issue óf stock and bonds only nominal: The evidence plainly shows that the stock and bonds were never divided between the parties. in accordance' with the agreement as claimed by the defendant, or the actual contributions of the parties, dr the original agreement. The conduct of the parties throughout is consistent with the continuance of the copartnership and irreconcilable with the claim that it was terminated and' merged into the corporation. It seems to me that the established facts, when considered in the light of the original agreement as found by the trial court, admit of but one conclusion, and required a judgment in favor of the plaintiff. Hence, I vote for a new trial.

. Woodward, Jenks and Rich, JJ., concurred; G-aynob, J., voted for affirmance.

Judgment, reversed and new trial granted, costs to abide the final award of costs.  