Professor Andrej Thomas Starkis

Carr P. COLLINS et al., Appellants, 302

v. 302

John L. LEWIS et al., Appellees. 302

No. 12831. 302

Court of Civil Appeals of Texas, Galveston. 302

Oct. 13, 1955. 302

Rehearing Denied Nov. 3, 1955. 302

HAMBLEN, Chief Justice. 302

This suit was instituted in the District Court of Harris County by the appellants, who, as the owners of a fifty per cent (50%) interest in a partnership known as the L-C Cafeteria, sought a receivership of the partnership business, a judicial dissolution of the partnership, and foreclosure of a mortgage upon appellees' interest in the partnership assets. Appellees denied appellants' right to the relief sought, and filed a cross- action for damages for breach of contract in the event dissolution should be decreed. Appellants' petition for receivership having been denied after a hearing before the court, trial of the issues of dissolution and foreclosure, and of appellees' cross-action, proceeded before the court and a jury. At the conclusion of such trial, the jury, in response to special issues submitted, returned a verdict upon which the trial court entered judgment denying all relief sought by appellants. 302

The facts are substantially as follows: 302

In the latter part of 1948 appellee John L. Lewis obtained a commitment conditioned upon adequate financial backing from the Brown-Bellows-Smith Corporation for a lease on the basement space under the then projected San Jacinto Building for the purpose of constructing and operating a large cafeteria therein. Lewis contacted appellant Carr P. Collins, a resident of Dallas, proposing that he (Lewis) would furnish the lease, the experience and management ability for the operation of a cafeteria, and Collins would furnish the money; that all revenue of the business, except for an agreed salary to Lewis, would be applied to the repayment of such money, and that thereafter all profits would be divided equally between Lewis and Collins. These negotiations failed to materialize because of the inability of Lewis to conclude satisfactory terms with the building owners. Thereafter, in 1949, negotiations along substantially the same terms were reopened, and culminated in the execution between the building owners, as lessors, and Lewis and Collins, as lessees, of a lease upon such basement space for a term of 30 years. Thereafter Lewis and Collins entered into a partnership agreement to endure throughout the term of the lease contract. This agreement is in part evidenced by a formal contract between the parties, but both litigants concede that the complete agreement is ascertainable only from the verbal understandings and exchanges of letters between the principals. It appears to be undisputed that originally a corporation had been contemplated, and that the change to a partnership was made to gain the advantages which such a relationship enjoys under the internal revenue laws. The substance of the agreement was that Collins was to furnish all of the funds necessary to build, equip, and open the cafeteria for business. Lewis was to plan and supervise such construction, and, after opening for business, to manage the operation of the cafeteria. As a part of his undertaking, he guaranteed that moneys advanced by Collins would be repaid at the rate of at least $30,000, plus interest, in the first year of operation, and $60,000 per year, plus interest, thereafter, upon default of which Lewis would surrender his interest to Collins. In addition Lewis guaranteed Collins against loss to the extent of $100,000. In the partnership agreement fifty per cent interest therein is reflected to be owned by Collins and certain members of his family, in stated proportions, and the other fifty per cent is reflected to be owned by Lewis and members of his family. However, in their conduct of the business of the partnership, it is conceded by all litigants that Lewis and Collins completely controlled the respective equal fifty per cent interests in the business to the same extent *260 as if the actual ownership were so vested. For the purpose of this opinion, they are treated as if that were in fact the case. 302

Immediately after the lease agreement had been executed Lewis began the preparation of detailed plans and specifications for the cafeteria. Initially Lewis had estimated, and had represented to Collins, that the cost of completing the cafeteria ready for operation would be approximately $300,000. Due to delays on the part of the building owners in completing the building, and delays in procuring the equipment deemed necessary to opening the cafeteria for business, the actual opening did not occur until September 18, 1952, some 2 1/2 years after the lease had been executed. The innumerable problems which arose during that period are in part reflected in the exchange of correspondence between the partners. Such evidence reflects that as to the solution of most of such problems the partners were in entire agreement. It further reflects that such disagreements as did arise were satisfactorily resolved. It likewise appears that the actual costs incurred during that period greatly exceeded the amount previously estimated by Lewis to be necessary. The cause of such increase is disputed by the litigants. Appellants contend that it was brought about largely by the extravagance and mismanagement of appellee Lewis. Appellees contend that it resulted from inflation, increased labor and material costs, caused by the Korean War, and unanticipated but necessary expenses. Whatever may have been the reason, it clearly appears that Collins, while expressing concern over the increasing cost, and urging the employment of every possible economy, continued to advance funds and pay expenses, which, by the date of opening for business, had exceeded $600,000. 303

Collins' concern over the mounting costs of the cafeteria appears to have been considerably augmented by the fact that after opening for business the cafeteria showed expenses considerably in excess of receipts. Upon being informed, shortly after the cafeteria had opened for business, that there existed incurred but unpaid items of cost over and above those theretofore paid, Collins made demand upon Lewis that the cafeteria be placed immediately upon a profitable basis, failing which he (Collins) would advance no more funds for any purpose. There followed an exchange of recriminatory correspondence between the parties, Collins on the one hand charging Lewis with extravagant mismanagement, and Lewis on the other hand charging Collins with unauthorized interference with the management of the business. Futile attempts were made by Lewis to obtain financial backing to buy Collins' interest in the business. Numerous threats were made by Collins to cause Lewis to lose his interest in the business entirely. This suit was filed by Collins in January of 1953. 303

The involved factual background of this litigation was presented to the jury in a trial which extended over five weeks, and is reflected in a record consisting of a transcript of 370 pages, a statement of facts of 1,400 pages, and 163 original exhibits. At the conclusion of the evidence 23 special issues of fact were submitted to the jury. The controlling issues of fact, as to which a dispute existed, were resolved by the jury in their answers to Issues 1 to 5, inclusive, in which they found that Lewis was competent to manage the business of the L-C Cafeteria; that there is not a reasonable expectation of profit under the continued management of Lewis; that but for the conduct of Collins there would be a reasonable expectation of profit under the continued management of Lewis; that such conduct on the part of Collins was not that of a reasonably prudent person acting under the same or similar circumstances; and that such conduct on the part of Collins materially decreased the earnings of the cafeteria during the first year of its operation. In their briefs the litigants make widely divergent claims relative to the factual conclusions properly to be drawn from the evidence, as well as the legal effect thereof. This Court has been able to resolve such differences only by a most detailed examination of the entire record. From that examination we conclude not only that there is ample support for the findings of the jury which we consider *261 to be controlling, but further that upon the entire record, including such findings, the trial court entered the only proper judgment under the law, and that that judgment must be in all things affirmed. 303

Appellants present seven asserted points of error. Points one to four, inclusive, present appellants' contention that the trial court erred in refusing to dissolve the partnership. Points five to seven, inclusive, present their contention that the trial court erred in refusing to foreclose appellant Collins' lien upon the appellees' interest in the partnership. 304

As we understand appellants' position relative to their points one to four, they contend that there is no such thing as an indissoluble partnership; that it is not controlling or even important, in so far as the right to a dissolution is concerned, as to which of the partners is right or wrong in their disputes; and finally, that whenever it is made to appear that the partners are in hopeless disagreement concerning a partnership which has no reasonable expectation of profit, the legal right to dissolution exists. In support of these contentions appellants cite numerous authorities, all of which have been carefully examined. We do not undertake to individually distinguish the authorities cited for the reason that in no case cited by appellants does a situation analogous to that here present exist, namely, that the very facts upon which appellants predicate their right to a dissolution have been found by the jury to have been brought about by appellant Collins' own conduct, in violation of his own contractual obligations. 304

We agree with appellants' premise that there is no such thing as an indissoluble partnership only in the sense that there always exists the power, as opposed to the right, of dissolution. But legal right to dissolution rests in equity, as does the right to relief from the provisions of any legal contract. The jury finding that there is not a reasonable expectation of profit from the L-C Cafeteria under the continued management of Lewis, must be read in connection with their findings that Lewis is competent to manage the business of L-C Cafeteria, and that but for the conduct of Collins there would be a reasonable expectation of profit therefrom. In our view those are the controlling findings upon the issue of dissolution. It was Collins' obligation to furnish the money; Lewis' to furnish the management, guaranteeing a stated minimum repayment of the money. The jury has found that he was competent, and could reasonably have performed his obligation but for the conduct of Collins. We know of no rule which grants Collins, under such circumstances, the right to dissolution of the partnership. The rule is stated in Karrick v. Hannaman, 168 U.S. 328, 18 S.Ct. 135, 138, 42 L.Ed. 484, as follows: 'A court of equity, doubtless, will not assist the partner breaking his contract to procure a dissolution of the partnership, because, upon familiar principles, a partner who has not fully and fairly performed the partnership agreement on his part has no standing in a court of equity to enforce any rights under the agreement.' It seems to this Court that the proposition rests upon maxims of equity, too fundamental in our jurisprudence to require quotation. 304

The basic agreement between Lewis and Collins provided that Collins would furnish money in an amount sufficient to defray the cost of building, equipping and opening the L-C Cafeteria for operation. As a part of the agreement between Lewis and Collins, Lewis executed, and delivered to Collins, a mortgage upon Lewis' interest in the partnership 'until the indebtedness incurred by the said Carr P. Collins * * * has been paid in full out of income derived from the said L-C Cafeteria, Houston, Texas.' 305

The evidence shows that a substantial portion of the money used to build, equip and open the cafeteria was borrowed by Collins from the First National Bank in Dallas. The bank credit was admittedly extended upon Collins' financial responsibility. In the mechanics of arranging for such credit, however, Collins prepared and requested Lewis and his family to execute notes in the total sum of $175,000 payable *262 to the First National Bank in Dallas on demand. Lewis expressed concern at creating an obligation payable on terms which he felt unable to meet, whereupon Collins addressed a signed letter to Lewis, Containing language as follows: '* * * If you are apprehensive because of the fear that there might be a foreclosure of these notes or a failure to renew these notes for a sufficient period of time to liquidate them at a rate of not more than $2,500 per month the first year and $5,000 per month the second year, I can assure you that the notes will be renewed as often as is necessary to protect you on that point. I have never had in mind any arrangement other than that the notes would be carried for an indefinite time. * * * My arrangement with you in regard to this financing would be binding on my estate or until the obligation was fully discharged.' Collins testified that after execution and delivery of the notes to him by Lewis, he endorsed them and guaranteed their payment to the bank. 305

At about the time this suit was instituted, the First National Bank in Dallas made demand upon Lewis for payment of the notes described, thus maturing the liability of Collins upon his endorsement of the notes. The failure of Lewis to pay such notes on demand constitutes the default, by reason of which Collins seeks foreclosure of his mortgage on Lewis' interest in the partnership. We are unable to agree with appellants in this contention, and must overrule their points presenting it. Regardless of the legal relationship between Lewis and the First National Bank in Dallas, created by the notes described, Lewis' obligation to Collins is limited to repaying money advanced by Collins at the minimum rate of $30,000 the first year and $60,000 per year thereafter. Only upon default of that obligation does the right of foreclosure ripen. There is testimony in the record to the effect that Collins, as a director and stockholder in the Dallas Bank had induced the bank to make demand for payment in order to effect foreclosure. That proof appears to us to be entirely immaterial to the determination of the rights of these litigants. The proof is undisputed that the bank, after maturing the notes, took no further steps to effect collection. Aside from that, however, as we construe the partnership agreement, it was Collins' obligation to furnish all money needed to build, equip and open the cafeteria for business. With particular reference to the notes, it was Collins' obligation to protect Lewis against any demand for payment so long as Lewis met his obligation of repaying money advanced by Collins at the rate agreed upon. Failure on Collins' part to protect Lewis on his obligation to the bank would constitute a breach of contract by Collins. 305

Collins' right to foreclose, therefore, depends upon whether or not Lewis has met his basic obligation of repayment at the rate agreed upon. Appellees contend, we think correctly, that he has, in the following manner: the evidence shows that Collins advanced a total of $636,720 for the purpose of building, equipping and opening the cafeteria for business. The proof also shows that Lewis contended that the actual cost exceeded that amount by over $30,000. The litigants differed in regard to such excess, it being Collins' contention that it represented operating expense rather than cost of building, equipping and opening the cafeteria. The jury heard the conflicting proof relative to these contentions, and resolved the question by their answer to Special Issue 20, whereby they found that the minimum cost of building, equipping and opening the cafeteria for operation amounted to $697,603.36. Under the basic agreement of the partners, therefore, this excess was properly Collins' obligation. Upon the refusal of Collins to pay it, Lewis paid it out of earnings of the business during the first year of its operation. Thus it clearly appears that Lewis met his obligation, and the trial court properly denied foreclosure of the mortgage. 306

In their brief, appellants repeatedly complain that they should not be forced to endure a continuing partnership wherein there is no reasonable expectation of profit, which they say is the effect of the trial *263 court's judgment. The proper and equitable solution of the differences which arise between partners is never an easy problem, especially where the relationship is as involved as this present one. We do not think it can properly be said, however, that the judgment of the trial court denying appellants the dissolution which they seek forces them to endure a partnership wherein there is no reasonable expectation of profit. We have already pointed out the ever present inherent power, as opposed to the legal right, of any partner to terminate the relationship. Pursuit of that course presents the problem of possible liability for such damages as flow from the breach of contract. The alternative course available to appellants seems clearly legible in the verdict of the jury, whose services in that connection were invoked by appellants. 306

Judgment affirmed. 306

Charles MONIN, Individually and as a Partner in Monin Bros., Appellant, 306

v. 306

Joseph E. MONIN, Individually and as a Partner in Monin Bros., and Sonny Monin, 306

Inc., Appellees. 307

No. 88-CA-753-MR. 307

Court of Appeals of Kentucky. 307

Oct. 13, 1989. 307

Discretionary Review Denied 307

by Supreme Court 307

April 18, 1990. 307

McDONALD, Judge. 307

This is a partnership case. The parties, Charles Monin and Joseph Monin (a/k/a Sonny), are brothers who formed a partnership in 1967 for the purpose of hauling milk. In 1984 the relationship between Charles and Sonny deteriorated such that Sonny no longer desired to continue the partnership. Some efforts were made to resolve their affairs, to no avail. In July, 1984, Sonny notified Charles of his intention to dissolve the partnership, and the next day wrote to Dairymen Incorporated (DI) to notify them that he was canceling the partnership's contract with DI effective October 16, 1984, the annual renewal date of the hauling contract. Sonny also informed DI he wanted to apply for the right to haul milk for DI after the expiration of the partnership's contract. On September 24, 1984, Charles and Sonny executed an agreement to resolve their business arrangement. The document entitled "Partnership Sales Agreement" provided that *500 they would hold a private auction between themselves for all the assets of the partnership "including equipment, and milk routes." As the contract with DI required approval of any sale or transfer of the milk hauling agreement, the sales agreement provided that such approval from DI would be sought and the sales agreement would be "null and void" if approval from DI was not forthcoming. The agreement also contained a covenant not to compete. Charles was the successful bidder at the auction, having bid $86,000. 307

On the same day as the auction, September 27, 1984, DI called a producers meeting at which time those present voted not to approve Charles as their hauler. Instead they voted to have Sonny haul their milk. Sonny accepted the offer and has since hauled milk for DI as Sonny Monin, Inc. As a result Sonny ended up with the major asset of the partnership, the milk hauling contract, at no cost to him. 307

On February 11, 1985, Charles commenced this action in the Nelson Circuit Court alleging that Sonny violated his fiduciary duty to the partnership and that he had tortiously interfered with the partnership's contractual relations with clients and customers. A bench trial was conducted in December, 1986. In its judgment for Sonny the trial court reasoned as follows: 307

When Charles was the high bidder at $86,000.00, the value of the partnership assets, including milk routes, was established as far as Charles was concerned. Sonny had no further say in establishing a value for such assets. When the producers and D.I. rejected Charles as a milk hauler, the value of the partnership assets became adjusted from $86,000.00 to $22,000.00 (the value of the milk hauling equipment). 307

When the producers voted for Sonny to haul their milk, they were not voting on a partnership matter. They were voting on Sonny's individual application. Furthermore, they were privileged to vote for some third person to haul their milk. 307

In summary, the affairs of the Monin Brothers partnership were finally settled on September 27, 1984. As a result of the actions of that date, the assets of the partnership were finally valued at $22,000.00. When Charles was rejected as the D.I.'s milk hauler on that date, the partnership had no interest in the milk routes and neither partner had any claim to same as part of their partnership interests. 307

We conclude the trial court's reasoning is flawed in that it ignores Sonny's duties to the partnership with respect to the most valuable asset of that entity, the milk hauling contract. As stated in Van Hooser v. Keenon, Ky., 271 S.W.2d 270, 273 (1954), "[T]here is no relation of trust or confidence known to the law that requires of the parties a higher degree of good faith than that of a partnership. Nothing less than absolute fairness will suffice." (emphasis added.) Importantly, that decision holds that a partner's fiduciary duties extend beyond the partnership "to persons who have dissolved partnership, and have not completely wound up and settled the partnership affairs." Sonny's continuing duty was especially applicable here as he agreed to sell his interest to Charles so Charles could continue the partnership business. See 59A Am.Jur.2d Partnership § 431 (2nd Ed.1987). Nothing in the Uniform Partnership Act (KRS Chapter 362) changes the high degree of good faith partners must maintain in their relations with one another. See Marsh v. Gentry, Ky., 642 S.W.2d 574 (1982). 308

Thus, when Sonny failed to withdraw his application with D.I. for the milk routes after agreeing to allow Charles to buy his interest in those routes and continue the partnership business, Sonny obviously breached his duties to the partnership. As the court found, the value of the partnership assets dropped from $86,000 to $22,000 when Sonny was awarded the contract by D.I. While it is possible D.I. would not have awarded the contract to Charles even if Sonny had withdrawn his name from contention, there is no evidence that any other person or entity was available or willing to take over the route. The law is clear that one partner cannot benefit at the expense of the partnership. Van Hooser, supra. Sonny, by agreeing to sell *501 his share of the assets to Charles and by actively pursuing those same assets from D.I., positioned himself such that whatever D.I. did, he could not lose. Understandably, Charles believes he was abused by the obvious conflict of interest. Thus, the trial court's dismissal of Charles's breach of fiduciary duty claim is reversed and remanded for entry of judgment in favor of Charles. We do not believe a new trial on damages is required; nor do we believe Charles is entitled to an accounting from Sonny for profits made since 1984. The value of the asset at issue was determined by the parties at or very near the time of Sonny's breach of duty to the partnership ($86,000 minus $22,000, or $64,000), and that should form the measure of damages to which Charles is entitled. 308

Finally, the trial court's findings concerning the tortious interference with contractual relations are supported by substantial evidence and will not be disturbed. CR 52.01. The evidence of Sonny's behind-the-back efforts to convince producers not to work with or accept Charles as their hauler was conflicting, and the trial court, as fact finder, could believe Sonny's version of the facts on that claim. 308

Accordingly, the judgment of the Nelson Circuit Court is reversed and remanded for entry of a new judgment consistent with this opinion. 308

HOWARD, J., concurs. 308

EMBERTON, J., dissents. 308

EMBERTON, Judge, dissenting. 309

I respectfully dissent. 309

I cannot agree with the majority that Sonny's actions constitute a breach of his fiduciary obligation to Charles. Evidence indicates that numerous efforts toward resolution of the problem--which efforts appeared to be made in good faith by Sonny--were summarily rebuffed by Charles. There is no evidence but that both parties were genuinely bidding at the September 27 private auction. Both understood that the successful bidder won equipment, the routes and the other assets only if DI approved the new contract. 309

Upon polling the affected producers, only 1 out of 12 indicated a preference for Charles. In fact, evidence was strong that most of the producers would not allow Charles to haul their milk; that the DI field representative stated DI could not work with Charles; and, that drivers stated they would quit before driving for Charles. The trial court, having heard the evidence, found that none of such positions taken by DI, or by the producers, were the result of actions taken (or statements made) by Sonny. DI, having such information, made a decision in its own best interest--not as a result of influence from Sonny. 309

I find nothing in the record to support a reversal of the trial court's decision. I would affirm. 309