Kimberly v. Arms/Opinion of the Court

The first question to be considered on the appeal relates to the effect to be given to the findings of fact and of law contained in the report of the special master. The court below refused to treat them as presumptively correct, so as to impose upon the excepting parties the burden of showing error in them. It considered the case as presented on the pleadings and proofs, without reference to the report, to which there was accorded only the weight due to the careful and well-considered opinion of a lawyer chosen by the parties to act as a judge, with qualifications to justify the selection. What that weight was, and in what appreciable way it could affect the judgment of the court, does not appear. A master in chancery is an officer appointed by the court to assist it in various proceedings incidental to the progress of a cause before it, and is usually employed to take and state accounts, to take and report testimony, and to perform such duties as require computation of interest, the value of annuities, the amount of damages in particular cases, the auditing and ascertaining of liens upon property involved, and similar services. The information which he may communicate by his findings in such cases, upon the evidence presented to him, is merely advisory to the court, which it may accept and act upon, or disregard in whole or in part, according to its own judgment as to the weight of the evidence. Basey v. Gallagher, 20 Wall. 670, 680; Quinby v. Conlan, 104 U.S. 420, 424. In practice it is not usual for the court to reject the report of a master, with his findings upon the matter referred to him, unless exceptions are taken to them, and brought to its attention, and upon examination the findings are found unsupported, or defective in some essential particular. Medsker v. Bonebrake, 108 U.S. 66, 2 Sup. Ct. Rep. 351; Tilghman v. Proctor, 125 U.S. 136, 149, 8 Sup. Ct. Rep. 894; Callaghan v. Myers, 128 U.S. 617, 666, ante, 177. It is not within the general province of a master to pass upon all the issues in an equity case, nor is it competent for the court to refer the entire decision of a case to him, without the consent of the parties. It cannot, of its own motion, or upon the request of one party, abdicate its duty to determine by its own judgment the controversy presented, and devolve that duty upon any of its officers. But when the parties consent to the reference of a case to a master or other officer to hear and decide all the issues therein, and report his findings, both of fact and of law, and such reference is entered as a rule of the court, the master is clothed with very different powers from those which he exercises upon ordinary references, without such consent; and his determinations are not subject to be set aside and disregarded at the mere discretion of the court. A reference, by consent of parties, of an entire case for the determination of all its issues, though not strictly a submission of the controversy to arbitration,-a proceeding which is governed by special rules,-is a submission of the controversy to a tribunal of the parties' own selection, to be governed in its conduct by the ordinary rules applicable to the administration of justice in tribunals established by law. Its findings, like those of an independent tribunal, are to be taken as presumptively correct, subject, indeed, to be reviewed, under the reservation contained in the consent and order of the court, when there has been manifest error in the consideration given to the evidence, or in the application of the law, but not otherwise. The reference of a whole case to a master, as here, has become in late years a matter of more common occurrence than formerly, though it has always been within the power of a court of chancery, with the consent of parties, to ordersuch a reference. Haggett v. Welsh, 1 Sim. 134; Dowse v. Coxe, 3 Bing. 20; Prior v. Hembrow, 8 Mees. & W. 873. The power is incident to all courts of superior jurisdiction. Newcomb v. Wood, 97 U.S. 581, 583. By statute in nearly every state, provision has been made for such references of controversies at law. And there is nothing in the nature of the proceeding, or in the organization of a court of equity, which should preclude a resort to it in controversies involving equitable considerations.

By the consent in the case at bar it was intended that the master should exercise power beyond that of a reporter of the testimony. If there had been such a limitation of his authority, there would have been no purpose in adding to his power 'to hear the evidence' the power to 'decide all the issues between the parties, and make his report to the court, separately stating his findings of law and of fact,' together with the evidence. To disregard the findings, and treat the report as a mere presentation of the testimony, is to defeat, as we conceive, the purpose of the reference, and disregard the express stipulation of the parties. We are therefore constrained to hold that the learned court below failed to give to the findings of the master the weight to which they were entitled, and that they should have been treated as so far correct and binding as not to be disturbed, unless clearly in conflict with the weight of the evidence upon which they were made. That there was no such conflict is manifest. Upon nearly every important particular relating to the partnership between Arms and Kimberly, and its business, there is hardly and discrepancy in the testimony of the parties. It is only as to the circumstances under which Arms obtained his loan from Fairbank, with which he purchased the shares in the Grand Central Mining Company, that there is any serious dispute; and as that transaction is viewed,-as the act of a partner or agent of the tirm, or as the act of the individual without regard to such partnership,-the conclusion is reached as to his liability to account for them. If the findings are taken as correct-there not being sufficient evidence to justify a disregard of them-there is an end to the controversy, for in accordance with them the firm had an interest in the shares purchased, and the complainant an equitable right to his proportion upon its dissolution.

But, independently of the findings, the facts, which are undisputed or sustained by a great preponderance of evidence, must, we think, lead to the same conclusion. As already stated, Arms made two visits to Arizona on the business of the partnership, which consisted principally in the purchase and sale of mining properties, and while there, on both occasions, he visited and examined the Grand Central mine, taking long trips for that purpose, accompanied on one of them by an experienced expert, and thus ascertained the great value of the property. The expenses incurred for himself on both trips and for the expert were charged to and paid by the firm. On one of these visits he met Gage and Witherell, who held certain shares in the company owning that mine, which they desired to sell. Upon his return north in October, 1879, he informed Kimberly of the shares thus held, and advised their purchase. How the necessary means for that purpose could be raised was then discussed between them, Kimberly expressing a willingness to act upon the judgment of Arms, and furnish his portion of the money. Arms mentioned that he had a friend in Chicago by the name of Fairbank,-a man of great wealth, whom he thought he could interest in the purchase, and induce to advance the money. After this consultation Arms went to Chicago, and there succeeded in making an arrangement with Fairbank, by which the latter was to furnish the money to purchase the shares held by Gage and Witherell. The arrangement provided that from the moneys first received from the sale or operation of the mine Fairbank should be reimbursed his advances, and that the sum or interest remaining should be equally divided; but, in case the investment proved a failure, he should be paid one-half of his advances. Arms then returned to Youngstown, in Ohio, and, October 13th, telegraphed Kimberly, who was at Sharon, in Pennsylvania, inquiring where he could meet him. Kimberly replied that he would leave for Youngstown that afternoon, and did so, joining Arms at that place. Gage had previously been there, and Kimberly, on his arrival, immediately inquired for him, evidently desirous of seeing him respecting the proposed purchase of shares held by him and Witherell; for it is not suggested that Gage had any other business than the sale of the shares with either member of the firm. Arms told Kimberly that Gage had left that morning or that day, and then informed him of the arrangement with Fairbank, including the agreement to refund one-half the advances in case the investment proved a failure. To this arrangement Kimberly assented. Arms further said that there might be some misunderstanding with Fairbank, and he wished to know if, in that event, Kimberly would raise the necessary funds to make the purchase, mentioning from forty to fifty thousand dollars. Kimberly assured him that he would if Arms thought it advisable; that is, that the property was worth the money. Soon after wards Arms went to Arizona, and purchased from Gage and Witherell 225 shares in the Grand Central Mining Company. They also gave him a bonus of 40 additional shares, which they had agreed to do in case the purchase was made. Arms also effected a purchase of 74 shares from other parties. All these purchases were made while the partnership between Arms and Kimberly continued as originally formed, changed only by the increase in its capital. The partnership was not dissolved until March 4, 1880. Under these circumstances, the purchase must be deemed to have been made in the interest of the partnership. One member of a partnership in a particular business cannot secretly engage on his own account in such business and keep his earnings to himself. Such conduct would inevitably lead to gross abuses, tempting one partner to apply to his own use profitable adventures, and to turn over to the firm those which were failures. The law exacts good faith and fair dealing between partners, to the exclusion of all arrangements which could possibly affect injuriously the profits of the concern. Arms was not merely a partner of Kimberly; he was the agent of the firm for the transaction of its business, and as such was allowed a salary beyond the interest coming to him as partner. He therefore stood, in his relation to Kimberly, clothed in some respects with a double trust, both of which imposed upon him the utmost good faith in his dealings, so that he might never sink the interest of the firm into that of himself alone. Whatever he may have obtained in disregard of such trust a court of equity will lay hold of and subject to the benefit of the partnership. Neither by open fraud nor concealed deception, nor by any contrivance masking his actual relations to the firm, can a member of it, or an agent of it, be permitted to hold to his own use acquisitions made in disregard of those relations, either as partner or agent. In this statement of their duties we are repeating doctrines of common knowledge, which will be found fully set forth and illustrated in approved treatises on partnerships and agency, and in the adjudications of the courts. Thus, in Mitchell v. Reed, 61 N. Y. 123, to cite one instance, the court of appeals of New York held that one member of a partnership could not, during its existence, without the knowledge of his copartners, take a renewal of a lease for his own benefit, of premises leased by the firm, upon which it had made valuable improvements, and enhanced their rental value, although the term of the renewed lease did not begin until the termination of the partnership. And in giving its decision the court said: 'The relation of partners with each other is one of trust and confidence. Each is general agent of the firm, and is bound to act in entire good faith to the other. The functions, rights, and duties of partners in a great measure comprehend those both of trustees and agents, and the general rules of law applicable to such characters are applicable to them. Neither partner can, in the business and affairs of the firm, clandestinely stipulate for a private advantage to himself. He can neither sell nor buy from the firm at a concealed profit for himself. Every advantage which he can obtain in the business of the firm must inure to the benefit of the firm. These principles are elementary.' See Story, Partn. §§ 174-178; Story, Ag. § 211.

We do not attach any weight, as against the conclusions reached, to the fact that on the 5th of March, 1880, the day following the dissolution of the partnership, in an instrument executed by Arms, agreeing to convey to Kimberly, on demand, the undivided onehalf interest which he, Arms, had in mining lands or claims, or stocks in mining interests, or claims in the territory of Arizona, purchased or located by him prior to January 1, 1880, he excepted the interest claimed by him in the Grand Central Mining Company, stating that said interest should belong to him absolutely. That instrument was delivered by Arms to Ohl, who kept it in his possession until some time in the following July. It was not shown to Kimberly, nor had he had any knowledge of it until then. So soon as he saw it, after consultation with counsel, he wrote and mailed to Arms a letter, under date of July 22, 1880, notifying him that he would not consent to his holding the interest in the Grand Central Mining Company as his own property, and stating that the said interest belonged to them jointly, and that he, Kimberly, would have half of it, if he was compelled to obtain it by legal proceedings. Though it is not shown that Arms received the letter, yet, as it was mailed to his postoffice address in Youngstown, Ohio, the presumption is that he did receive it. At any rate, Kimberly never in any way assented to the correctness of the statement in the instrument as to Arms' alleged sole interest in the Grand Central Mining Company, but, on the contrary, repudiated it so soon as it was brought to his knowledge. The fact that the transaction with Fairbank and the purchase of the shares were made in the name of Arms alone does not affect the question. All the purchases for Arms and Kimberly were made in his name alone, or in that of Ohl. Not one was made in the firm name of Arms & Kimberly. Nor does it make any difference that no money was advanced by Kimberly for the purchase. None was advanced by Arms; the money was raised by a loan which Arms negotiated upon conditions that proved profitable to the lender as well as to himself, and of course to him partner.

The case of Bissell v. Foss, 114 U.S. 252, 5 Sup. Ct. Rep. 851, does not seem to us to have any bearing on the subject under consideration. There the question was whether a member of a mining partnership, that is, a partnership formed for the development and working of a mine, could acquire the shares of an associate without the knowledge of the other associates, and hold them on his own account; and the court held that it was lawful for him to do so. Mining partnerships or associations, while governed by many rules relating to ordinary partnerships, have some rules peculiar to themselves. One of such rules is that a member may convey his interest or shares to another person without dissolving the partnership, and thus bring into it a new member without the consent of his associates; and may purchase interests in the same or in other mines for his own benefit, without being required to account to the partnership for the property. Kahn v. Smelting Co., 102 U.S. 641.

The partnership between Arms and Kimberly was not a mining partnership, in the proper sense of that term. It was not a partnership for developing and working mines, but for the purchase and sale of minerals and mining lands, and in that respect was subject to the rules governing ordinary trading or commercial partnerships. It can no more be called a mining partnership than a partnership for the purchase of the products of a farm, and the lands upon which those products are raised, can be called a partnership to farm the lands. It follows from the views expressed that the decree of the court below must be reversed, and the cause remanded, with directions to confirm the report of the special master, and to take further proceedings not inconsistent with this opinion; and it is so ordered.