
    Edward H. Kelly, Appellant, Respondent, v. John T. Delaney, Respondent, Appellant.
    First Department,
    February 11, 1910.
    Partnership — assignment of partnership interest to copartner — transaction must be fair— concealment of facts by assignee — remedies of assignor — action for damages — waiver and ratification.
    A partner purchasing the interest of ins' copartner must fully and fairly disclose all facts known to him bearing upon the value of the interest purchased, for the relation between them is fiduciary and each must act with, the utmost,good . faith toward the other.
    "VVhere One partner, knowing that actions brought by and against his firm had been settled sq as to increase materially the firm’s assets, purchases the interest of his copartner without disclosing that fact, it is a fraud which entitles the assignor to relief.
    If the sale had been fully executed by a delivery of the assignment and an acceptance of the consideration before the assignor acquired knowledge of the fraud, he may sue in equity to rescind, offering' in his complaint a return of' the consideration, or he may keep the same and bring an action at law for the damages sustained.
    A partner who did not learn that his copartner had fraudulently concealed the fact that the assets of the firm had been largely increased by the settlement of actions until after assigning his interest and receiving the consideration,' cannot be held to have waived his right to .maintain an action at law for damages.
    
      It seems, that there is a waiver of such fraud or ratification of the sale only where the selling partner, having acquired knowledge of the fraud before executing the contract on his part, afterwards consummates the sale.
    Laíjghlin,. J., and Ingraham, P. J., dissented, with opinion.
    ' Appeal by the plaintiff, Edward H. Kelly, from an order of the Supreme Court, made at the New York Trial Term and entered in the office of the clerk of the county of New York on the 25th day of June, 1909, setting aside the verdict of a jury in favor of the plaintiff for $10,000, and granting a new trial, unless the plaintiff stipulate to reduce the verdict to the sum of $666.67.
    Also an appeal by the defendant, John T. Delaney, from, so much of the said order as denies the motion for a new trial provided the plaintiff stipulate to reduce the verdict.
    
      John Thomas Smith, for the plaintiff.
    
      Michael J. Sweeney,, for the defendant.
   McLaughlin, J.:

The facts are set out in the opinion of Mr. Justice Laughlin, and it is unnecessary to repeat them. It is mot disputed that by the settlement of the two actions of McOwen v. Whalen and Whalen v. French the assets of the firm were thereby increased many thousand dollars, and that plaintiff’s share in such increase alone was considerably more than the $3,000 which the defendant paid him for his entire interest. Nor is the fact disputed that several days before tbe defendant acquired the plaintiff’s interest the two actions had been settled by the defendant without .the knowledge of the plaintiff, and there is an abundance of evidence to justify the"finding of the jury -that "he did'not know of- such settlement at the time he delivered the assignment Thé defendant, of-course, could purchase the interest of the plaintiff in the; firm, hut he could only do so hy fully and fairly disclosing to his copartner all the knowledge which he had bearing upon the‘value of the interest to be purchased. ( Wright v. Duke, 91 Hun, 409.) The relation existing between them was one of trust and confidence, ahd each was bound to act with the utmost good faith, to wards the other. (Butler v. Prentiss, 158 N. Y. 49 ; Mitchell v. Reed, 61 id. 123.) When, therefore, the defendant acquired plaintiff’s interest, without disclosing to him that the two actions had been séttled, it was a fraud upon the plaintiff- which entitled him to some relief. If, when the information was acquired, the contract had been fully executed by the delivery of the. assignment and the acceptance of the check, the plaintiff had two remedies —die could bring an action' iir equity to rescind, returning or offering in the complaint to return the .check, or keep the check and commence, an action" at law to recover the damages sustained by'reason of the fraud. (Gould v. Cayuga County National Bank, 99 N. Y. 333.)

As already ’said, the verdict of the jury — sustained by an abundance of evidence — establishes the fact that the plaintiff did not learn of the-settlement of the two .actions until after he had executed and delivered the assignment and received the "check in exchange therefor.. How it can be said, under such circumstances, that the plaintiff, in any way, waived his right to maintain ■ this action I am unable to perceive. Nothing then remained to be done so far as the contract was concerned ; it had been entirely executed. .On discovering the fraud, as I understand the la.Wj the plaintiff was not" obliged to disaffirm the Contract, and I am unable to" see how the fact that he did not do so can be tortured into a wai-ver or ratification "of the. fraud practiced upon him. Where á contract has not been fully performed a party who discovers the '"fraud,: Snd thereafter acquiesces in the full performance, may be deemed to have waived a claim for damages by reason of the fraud, but here, as w.e have seen,- the contract had .been fully performed by the delivery of the assignment and the check, and it is of no- importance, whether the fraud were discovered five minutes or five years thereafter. The time when such discovery was made in no way. affected th.Q rights of the parties. Plaintiff then was entitled to treat the contract as valid and maintain this action. None of the authorities cited in the opinion of Mr. Justice Laughlin, as I read them, are to the contrary; on the other hand they support this view.

It is of no importance whether or not the rule of damages adopted by the ti’ial court were the correct one, because the rule was the one which counsel for both parties apparently agreed was the correct one to be applied to the facts as proved. The verdict is fully supported by the evidence and, I think, it should not be disturbed.

For these reasons I am of the opinion that the order appealed from should be reversed and the verdict reinstated, with costs to the plaintiff.

Milleb and Dowling, JJ., concurred; Ingbaham, P. J., and Laughlin, J., dissented.

Laughlin, J. (dissenting):

This is an action to recover damages alleged to have been sustained by the plaintiff, owing to false and fraudulent representations made by the defendant, by which he was induced to sell and assign to the defendant, for the sum of. $3,000, his interest in a certain copartnership. On the 3d day of August, 1905, the plaintiff and the defendant and Patrick II. Whalen formed a copartnership for the purpose of continuing thé law practice of the then late firm of Whalen & Dunn. The copartnership articles merely recited that, this was the object of the parties and that it was agreed that Whalen was to be reimbursed for all sums expended in procuring said business, and the profits arising therefrom, after said sums are deducted and paid to Mr. Whalen, together with the profits on all future business, are to be divided equally between, the parties hereto.” While the parties were signing -these brief copartnership articles Whalen drew the attention of the plaintiff and defendant to two litigations which were then discussed by the parties. One was añ action brought by Anthony McOwen against Whalen as surviving member of the firm of Whalen & Dunn to recover the sum of .$19,000 or $19,500, which McOwen claimed was due and owing to him from the late firm for services in procuring business for the firm. The other was an action brought by Whalen against Lawrence E. French, George Mc'Causlan and the Colonial Trust Company to'restrain the individual defendants from holding' themselves out as successors to or entitled to the business .of the firm of "Whalen & Dunn or asserting any claim to certain fees alleged to be due and owing to the late firm from'its cliénts and payable out of awards 'made in condemnation proceedings and to compel them to surrender certain retainers and papers belonging to the firm'and to account for moneys collected which belonged to the firm. Whalen thereupon said that he would furnish the necessary monqy to carry on the business, but that he would have to be reimbursed for the money he had spent and that the new firni would have to assume these two litigations and bear the expenses thereof, to which the' plaintiff and the defendant assented! The- new firm continued until the 19th day of October, 1907, when the plaintiff sold and assigned his interest.to the defendant, but'the-plaintiff left the office and virtually severed his connection with the firm, but without selling, his "interest or having an accounting, on the 15th day of March, 1907, on account of some friction between him and-Whalen.

The plaintiff testified that in the month of August, 1907,' at the' instance of the defendant, an appointment was made between them and pursuant thereto he called upon the defendant at the old office and they" discussed the question "of the plaintiff’s-interest in the firm evidently with, a view to having him sell" it to his fellow-paritners, and that the defendant spoke of the pendency of these two' actions and' of the bad effect their pendency had on the business' of the firm owing to- the -time and attention they required, and asked plaintiff what he thought lie might to receive for his interest, to which plaintiff answered that in" view of the pendency', of these actions and the bad effect they were having on the business he thought he ought to have $4,0.00 for" his interest, whereupon defendant replied that with all liis knowledge of the business, which he intimated was greater than, the' plaintiff’s owing to the fact that plaintiff was no longer there, lie-would'he glad to' get: out for $3,000; Nothing came of these negotiations and the parties' evi-, dently separated without an agreement to meet again. They next met; by accident in the subway on the 9th day of October, 1907, and again! discussed the question with respect to the .plaintiff’s interest in the, firm. Plaintiff testified concerning this interview that defendant, informed him that the McOwen suit was then on trial before a referee and was occupying most of his time, and that McCauslan, one of the defendants in the other case, was a witness for McOwen and was giving very damaging testimony, that McOwen was making out a very good case, that it looked very much as if he would succeed or as if it would go hard with the firm, that an attempt had been made to adjust it which was unsuccessful owing to the attitude of the attorney for McOwen, who would not hear to it or make any proposition or listen to any, and- that “ it looked altogether very bad; ” and that on this occasion the defendant again alluded to the fact that this litigation was a serious interruption and annoyance to the firm business. The parties met again at the plaintiff’s office Mo. 156 Broadway on the 16th day of October, 1907, and the plaintiff testified that he asked the defendant whether he or Whalen was “ giving any consideration to the adjustment of my affair or to acquiring my interest or anything of the kind,” at which the defendant turned around and said, “What will you take for your interest?” to which the plaintiff replied in substance that the defendant had said on a former occasion that he would take $3,000 for his interest and “ I will take $3,000 for mine ; ” that the defendant requested a week to consider it or to take it up with Mr. Whalen and plaintiff acquiesced. At about two-thirty o’clock on the afternoon of the 19th day of October, 1907, the defendant, according to the testimony of the plaintiff, called at his office again and drew from his pocket an assignment of the plaintiff’s interest in the firm to him, which he handed to the plaintiff with the request that he read it. The plaintiff read it and thereupon the defendant asked, “if I had any questions to "ask him,” and the plaintiff suggested some change in the form of the assignment “'to cover some business that I had already had, that I had taken with me to the office at 156 Broadway,” which correction was made, and thereupon at the plaintiff’s request the defendant executed an agreement to indemnify him against the debts of the firm, and the plaintiff executed the assignment and the defendant delivered to him a certified check for $3,000. Prior to this time to the full knowledge of the plaintiff the action brought by Whalen against French and McCauslan had been tried in April, 1906, and decided in April or May, 1907, at Special Term in favor of the plaintiff therein, and the court had adjudicated that the defendants had no interest in the fees to which.they made claim, and they had taken an appeal.

. It appears that on the 11th.day of October,, 1907, both litigations were settled ;• the action brought by Whalen by discontinuance of an appeal to the Appellate Division taken by the defendants, upon condition that, certain business of the firm be turned ovei to them, and the other on the payment of $6,500. The fraud alleged and sought to be established by the plaintiff consisted in a concealment by the defendant from the plaintiff at the time of the transfer of his interest of the fact that these two litigations had been settled. There is no evidence of any misrepresentation by the defendant with respect.to these settlements, excepting that, perhaps, evidence given in behalf‘of plaintiff tends to show that there were negotiations pending for and with a prospect for a settlement at a time when the defendant led him to believe that such negotiations were permanently broken off, but there was no representation that the cases had not been settled or were pending after they had been settled, and. defendant’s statement, that McOwen’s attorney stood in the way of. a settlement was not disproved". The plaintiff brings this action upon the theory that the defendant as a partner owed him the-duty of a full, disclosure with respect to. his'knowledge concerning the. settlements, and it may "be conceded that such was his legal duty ( Wright v. Duke, 91 Hun, 409), and if he failed to- do so constituted a fraud, upon discovering which the plaintiff Would have been at liberty to elect to have disaffirmed the sale and! return the consideration received "and claim his full interest in the film, or to have affirmed it and retained the proceeds, and to have "brought this action for his damages provided the sale was fully consummated and the affirmance-of the sale was hot made under circumstances indicating a waiver of his right to recover damages. On liis own theory of the case it was incumbent upon the plaintiff, at least, to show by a preponderance of the evidence that he was induced through the fraud of the defendant, in making representations or in concealing material facts, to execute the assignment of his interest in the firm, and to give evidence which would afford a basis for the award of substantial damages. We are of opinion that he failed to do so. According to the testimony of the plaintiff, immediately after the execution and delivery of the. papers and of the check, he invited the defendant, Mr. Darrow, a lawyer who had offices with the plaintiff, and a Mr. Abercrombie, who were in the office at the time, to.a nearby café for the purpose of treating them on account of the fact that he was delighted over the sale of his interest in the firm. It does not expressly appear, but the clear inference is.that the plaintiff had not cashed or parted "with the possession of the check, and that nothing had been done by either party in reliance upon the transfer of the interest at this time. Plaintiff says that after they had been, in the café five or ten minutes, and while they were standing at the bar, the defendant said to him in the presence and hearing of Mr. Darrow — plaintiff says that he knows that Darrow heard it, but does not know whether or not Abercrombie heard it — “ Mow, you have executed your assign’ment to me; you have settled this thing and you have fixed your price,'haven’t you?” to which the plaintiff replied, “We have arrived at a price,” or something to that effect, whereupon the defendant said, “ Mow, I am going to tell you something that I did not tell you before. * * * We have settled the McOwen case and the French and McCausIan case.” On cross-examination the plaintiff told of the visit to the café and what occurred there, that he felt, pretty good over the settlement and did not feel that lie was fooled in any way; that $3,000 amply satisfied him and he ordered a bottle of wine, and while they were standing in front of the bar the defendant said to him, “ Mow, we have settled this and you have fixed your own price, haven’t you ? ” to which the plaintiff replied, “ Well, we have arrived at a price,” or something to that effect, and the defendant said, “Mow, * * * I am going to tell you something that I did not tell you before. We have settled the French and McCausIan case and also the McOwen case.” The plaintiff was then asked, “ Did he tell you the amounts ? ” to which he replied, “ Yes, I think he did. He told me the amounts in regard to the McOwen case. ' The settlement of-the French and McCausIan case involved a great many particulars some of which I think he mentioned, but I do hot now remember all of them.” The plaintiff was then asked, “ What did you say in answer to Mr. Delaney?” to which he replied, “Well, I was very much surprised at what he told me, and I said to him, ‘ Is that so.’ And I said, ‘well, that’s a good thing.’” The next time the . parties met according to plaintiff was at his office a week later, when defendant called for some memoranda which plaintiff had prepared for the purpose of bringing an action to dissolve the firm, and asked to look at them or to take them, and his request was ■granted.-. Plaintiff testifies that he then said to the defendant, “ Why didn’t you tell me about the settlement ? . * * * Why was it you didn’t tell me about the settlement of these actions-before you took my assignment?” to which he says the defendant replied, “ Well, I had some qualms about it, * * * but I was in such a fix ” or “ such a position that I could not do everything the way that I would like to do it.” Neither Darrow nor Abercrombie was called, as a witness. The failure to call Abercrombie in the circumstances perhaps is not'significant, but the failure to call Darrow in view of his friendly relations with the plaintiff, which may be inferred from the fact that they had offices together and of the further fact that the plaintiff assumed to know that he heard the conversation, throws, doubt upon the plaintiff’s testimony with respect to the conversation claimed to have taken place between him and the defendant in the café.. - The defendant testified that he informed the plaintiff on the 19th day of October, 1907,. before the execution and exchange of the papers that the two litigations had been settled, and he denies that he made the statement in the café attributed to him by the plaintiff. The plaintiff relies upon his own testimony to establish the fraud, and it is not only unsupported, where it might if true be supported, and" contradicted by the defendant, but it is highly improbable. If the plaintiff considered that he had been fraudulently induced to assign his interest in the firm by the concealment of the fact that these two actions' had been settled, it would be reasonable to expect some.show of resentment on his part instead of receiving the announcement calmly 'and with no apparent interest, as related by himself, and making no criticism of the" conduct of the defendant,- and making no complaint,, because he had not been sooner informed of these settlements.. There is only one theory upon which his, conduct is consistent with the fact that he did not know that the settlements, had been made until after the execution and delivery of the papers, and that is that with the information; that the cases were settled and the terms upon which they were settled, which he says were disclosed, or at least, sufficiently disclosed to him in the café, he was still satisfied with his bargain and preferred to retain and use the check rather than to rescind the contract, and did not then claim, or consider that he had been deprived of any right or that he" had any grievance for which- he intended to demand redress. It would require an accounting to determine precisely the value of the plaintiff’s interest in the firm. That right, however, he forever parted with when he assigned his interest in the firm, and after discovering the fraud, if fraud there was, affirmed the contract and retained the purchase price. (Gould v. Cayuga County National Bank, 99 N. Y. 333.)

We áre of opinion that the record before us shows that the plaintiff intended to and did waive any right that he had to bring an action for damages for fraud. The point is not taken by counsel for the defendant, but it appears to be clearly presented by the record and the circumstances of the case are such that we deem it our duty to draw attention to it. ' There is no equity in the plaintiff’s claim. According to his own testimony he was fully informed of the facts of which he now complains as fraud, before he had in any manner changed his position and before the ink on the papers was dry, and before he had collected the check which he received in payment for his interest in the firm. All of his rights could have then been preserved by tendering back thé check and demanding that the assignment of his interest be delivered up and bringing an action for an accounting, if an accounting would not then have been given voluntarily. It was a fair inference that defendant would have consented to a rescission if the matter occurred as plaintiff says, for they were both members of the bar and presumably knew the elemeptary principle conferring such right, and the information would seem to have been imparted to afford plaintiff that opportunity after perpetrating what the defendant, assuming plaintiff’s testimony to be true, evidently regarded as a joke on plaintiff. There would then have been no difficulty in determining his exact rights and in his recovering precisely the amount to which he was entitled. Ho was apparently unwilling to surrender up the check, and it is evident that at the time he had no thought of asserting any further right. He knew perfectly well whether these settlements were more favorable than he had figured on in offering his interest - in the firm for $3,000, or sufficiently more favorable to warrant him in complaining of the concealment of the fact that the actions were settled. Strictly speaking it was doubtless an executed contract, but it was scarcely consummated, and only so technically. It was as if the parties were sitting about the table just having signed and exchanged the papers and the consideration, and lie was then informed of the facts on which he 'relies how to establish the alleged deception. These facts render the case analogous to a contract wholly executory, where the fraud is discovered before the party whose consent was fraudulently obtained enters upon the performance of the contract. In such cases the rule is well settled that if ' he performs the contract with full knowledge of the fraud,, discovered intermediate the making of the contract and his performance, he will be deemed to have waived any right to damages and be.con- . fined to the consideration agreed upon. (Saratoga & Schenectady R. R. Co. v. Row, 24 Wend. 74; Thompson v. Libby, 36 Minn. 287; Nounnan v. Sutter County Land Co., 81 Cal. 1.)

In the case of Saratoga & Schenectady R. R. Co. v. Row (supra) the court, says: “ But when a party has discovered what he deems a fraud before he has entered upon the performance', lie must then decide whether he will stop short or go on with the contract. He cannot say this, is a good contract for the purpose of authorizing me to do the work, but it does not bind me in relation to the rate of compensation.” The general rule as to executed contracts is different, and is that ordinarily the party on discovering the fraud has an election whether to rescind or to affirm and retain the consideration and recover damages; but that rule is not of universal application, and it is subject to the exception that the circumstances may be such as to show an intentionein .affirming the contract to waive any right to recover damages for the fraud. (Pryor v. Foster, 130 N. Y. 171; St. John v. Hendrickson, 81 Ind. 350; People v. Stephens, 71 N. Y. 527; Cooley Torts [3d ed.], 965; 14 Am. & Eng. Ency. of Law [2d ed.], 170. See, also, Cain v. Dickenson, 60 N. H. 371; New York Land Improvement Co. v. Chapman, 118 N. Y. 288; Barr v. N. Y., L. E. & W. R. R. Co., 125 id. 263.)

Under the circumstances of this, case it appears to us that the . plaintiff on his own testimony showed an intention to affirm the sale and waive any right that he had to recover damages on the theory of fraud. Manifestly the rule giving a party an election to rescind or affirm and retain the consideration and bring an action to recover the damages sustained by the fraud was designed for the benefit of a party who by the fraud of another finds himself in a position where a rescission may not afford him full redress, and it was not intended to apply to a case where the fraud was disclosed by the party alleged to have committed it practically simultaneously with the execution of the contract and before the position of the parties had changed or damages could possibly have been suffered. The plaintiff says that he was attorney for Whalen in the action against French and McOauslan, and had tried it, and that he did not when assigning his interest have any doubt.

Assuming, but without deciding —for our' impression on this record, as has been seen, is the other way — that the plaintiff had a right in the circumstances to retain and collect the check and recover in an action at law any damages which he sustained by reason of being induced to' assign his interest in the firm, it seems quite clear that he would not have a right to recover the difference between the amount that he received for his interest and its actual value, for that would be giving him by both items the total value of his interest, the same as if he had rescinded and demanded an accounting, and it would seem that he should not be pérmitted in effect to say to defendant, I will retain and collect your check and sue for damages, which will involve an accounting and result in my being charged merely with the amount of the check as if received on account. Moreover, it cannot be ascertained whether the value he agreed to take for his interest was its actual value on the facts as he understood them at the time, or less or more. He may have been willing to take less, and he may have demanded more than the value of his interest on the facts as he understood them. If less, then giving the difference between what he received and what his interest' was worth would be allowing him to recover now what he sacrificed for cash when he made the sale. Assuming that-his interest with the actions pending was worth $5,000, but that he was willing to accept $3,000 for it, and that with the suits settled it was worth $6,000, the rule now under discussion would allow a recovery for $3,000, which would include $2,000 previously voluntarily thrown off the selling price. It wohld seem, therefore, that if this action could be maintained, the plaintiff would be confined to a recovery for the difference between the value of his interest in the fiz-m with these two'litigations pending, one in process of trial and' the other having been tried and decided favorably to the firm and pending on appeal, and with the litigations settled zipon the basis upon which .they were settled.

The rule of damages in actions by vendees to recover daznages for fraud in inducing the purchase of property is the. differeizce between the value as the property was and as it was represented; to be (Vail v. Reynolds, 118 N. Y. 297, 303; Miller v. Barber, 66 id. 558; Hubbell v. Meigs, 50 id. 480), and by analogy itwoizld seemi tó be applicable to such an action by a vendor. I think that the rule; of damages laid down in Gould v. Cayuga County National Bank (supra), with respect to an action for fraud in inducing the se'ttieznent of a disputed claim, which seems to be that the juz-y may detez-mine what the plaintiff would reasonably hav.e exacted and the defendant could reasonably have beeiz'expected to pay on the true state of facts, over and-above-the azzzoiznt hé xeceivéd, is not applicable, for this was a sale of property or property rights no;t; in dispute, the value of which at most was affected by the settlement of the two actions. The diffez-ence between the valzze of plaintiff’s interest as it was,, and as he was led to believe it- was, is the rule of. damages which both counsel agreed upon the trial of this action was applicable. Under that rule' of daznages, however, it is doubtful whether there can be a recovery of more than nominal damages, if oxit is. difficult to figure out a theory upon which a money valued to the firm can be placed, upon the fact that the two litigations were settled instead of pending, with such certainty as to warrant a recovery. The plaintiff is presumed to have been familiar with the merits of those actions, and to have taken into consideration the probability as -to their outcozne izz fixing the selling price of his interest izz the firm. To allow a member of the bar to-testify, &i to allow a jury to speculate, on what was the value in-dollars and dents to the firm of having the litigations tez-minated by a settlement rather than at-the .end of the litigation, involving expenses. which cannot be estimated with any degree of- certainty, would scarcely afford a sufficieiztly definite basis for an award of damages. The settlement ultimately resulted in the release of funds belonging to the firm, aggregating, after deducting the amount paid in settlement of the McOwen case and other charges against the same, the sum of $32,300. But plaintiff and his partners believed all along that the firm was justly entitled to the funds thus released, and the only doubt they had was as -to the amount that McOwen might recover. The plaintiff testified that it had been believed by him and his partners that McOwen would recover about $3,000, which is $3,500 less than he was paid in settlement; but he says that he was led to believe, by what defendant told him that McCauslan had testified to on the trial of that action, that there was danger that McOwen might recover his claim in full. According to his own testimony, however, defendant did not tell him that McCauslan gave favorable testimony for McOwen on all items in controversy, but only on part of those to which it had been supposed the firm had a good defense. We agree, therefore, with the trial court thát there was no basis for the verdict of $10,000, and we are of opinion also that there was no sufficient basis for a recovery even for $666.67.

It follows, therefore, that the order should be modified by striking out the provision giving the plaintiff an election to stipulate that the verdict be reduced, and as so modified affirmed, with costs to the respondent.

Ingbaham, P. J., concurred.

Order reversed and verdict reinstated, with costs to plaintiff.  