Oteri v. Scalzo/Opinion of the Court

Undoubtedly equity has jurisdiction, where a person has been induced, by fraudulent representations, to enter into a partnership, to rescind the contract at his instance, and put an end to it ab initio. Newbigging v. Adam, 34 Ch. Div. 582; Smith v. Everett, 126 Mass. 304; Fogg v. Johnston, 27 Ala. 432; Story, Partn. §§ 232, 285; 2 Lindl. Partn. (Wentworth's Ed.) 554.

And it is contended that, even though the formation of the partnership may have been free from that taint, there may be such fraud, misconduct, and breach of duty in the conduct of its affairs from the inception as to justify, upon dissolution, as between the parties, the restoration of his capital to the injured partner.

This bill alleged that complainants 'are entitled to be refunded their said capital, with legal interest from 24th day of June, 1884, and they now make demand therefor;' and it prayed, among other things, that the partnership might 'be decreed to be dissolved as if the same had never been made, by reason of the acts of said defendant; that an account of its business may be taken under the direction of this court, and that its legal liabilities may be paid and charged against the said Joseph Oteri, and that the capital of your orators, with interest, [may be] restored to them in the premises, or otherwise, at the discretion of the court.' If the case, upon the evidence, did not entitle complainants to a return of their capital, and to be placed in the same situation, as far as practicable, as if they had never entered into the partnership, but did authorize the ordinary decree for a dissolution and accounting, we are of opinion that relief could be awarded in the latter aspect, even though the bill were not framed with precision, in the alternative for a cancellation or for a dissolution and accounting. If the specific prayer were insufficient, such a decree could be maintained under the prayer for general relief, since it would be conformable to the case made by the bill.

It is argued that the circuit court erred in the rendition of a decree at variance with the conclusions of the master, because the reference was by consent, and the report amounted to a determination by the parties' own tribunal, which could not be disregarded at the mere discretion of the court.

In Kimberly v. Arms, 129 U.S. 512, 524, 9 Sup. Ct. Rep. 355, it was said by Mr. Justice FIELD, delivering the opinion 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.' But here the case was referred to the master 'to pass upon the accounts herein, and to report thereon,' and while the master considered the whole case, apparently without objection, we do not regard the rule laid down in Kimberly v. Arms as applicable. The question whether the partnership should be held void from its inception was not submitted, (Richards v. Todd, 127 Mass. 167,) nor whether on other grounds the whole capital should be returned. If the decree had been in accordance with the conclusions of the master, such concurrent action would, indeed, have been of well-nigh controlling effect. Crawford v Neal, 12 Sup. Ct. Rep. 759. But there was no such concurrence. The circuit court decreed the return of complainants' capital, less two thirds of the amount expended on the European trip in the interest of the partnership, and the decree was evidently based upon the view that defendant had been guilty of such fraud or misconduct or violation of partnership obligations as justified the relief accorded.

The evidence tended to show that proper books of account were not kept, and that monthly trial balances were not furnished, and there is some evidence that towards the last defendant refused complainants access to the books and papers of the firm, but this is denied, and the controversy seems to relate to a letter book. By the partnership articles, Oteri was to have exclusive control and direction of the company's affairs. He was not himself conversant with the keeping of books, and Terni, who had the confidence of all parties, was intrusted with the duty of doing so, and it is a fair inference that Oteri did not question the right of his partners to examine the books and papers, but only demanded a receipt from them for whatever book or paper they wished to take away for examination. It is also objected that Oteri did not furnish his quota to the capital. He was, however, confessedly responsible, and as the manager all the firm's money belonged in his possession, and the record indicates that he raised large amounts upon his own collaterals for the benefit of the business. His accounts cover the entire capital, the proper proportion being credited to each partner. Whethr he technically deposited with himself $5,000 is not especially material. At all events, we find no adequate support to the conclusion that the complainants suffered any loss by reason of the alleged dereliction of duty in these regards, and we do not think that of themselves they furnish sufficient ground for decreeing that complainants are entitled to the return of their capital, within the principle of the rule which has sometimes been applied in such cases. The real gist of the controversy, in this view, lies in the conduct of Oteri after his return from Sicily. It appeared that early in October, 1884, he wrote to European correspondents that the business would be continued in his name; that he had dissolved the partnership; that he had decided to withdraw; that he was awaiting the arrival of Scalzo in order to withdraw; and as reasons for these announcements assigned having learned that one of his partners did not have a good reputation, and that the capital had not been paid in in full, as was indeed the fact. But it also appeared that the firm continued to do business, and that on the 14th of November, 1884, letters were written that the capital had been paid in; that the business would go on under the firm name; and that all had been arranged, etc. These letters were written by Terni, the bookkeeper, and by Di Christina, one of the partners, and perhaps by others, for Oteri, who, as we understand, could neither read nor write Italian. Exactly when the balance of capital to be paid by Scalzo and Randazzo and Di Christina was made up is not clear, but Randazzo testifies that he paid in the balance of his share in November, and Scalzo seems to have done so at about that time.

Without discussing the evidence in detail, we think the master was correct in holding that the preponderance of evidence was to the effect that Oteri's action early in October, in regard to continuing the business in his own name, was condoned, and the difficulties between the partners adjusted for the time being, and whatever business had been transacted in his individual name was treated as if there had been no interruption. It may be that complainants were ignorant of Oteri's action in sending the October letters, but they can hardly be permitted to say that they did not know how the business was being conducted, particularly in view of the fact that Di Christina was employed in the business, and allowed by the contract 2 per cent. as extra compensation for services. Scalzo resided in St. Louis, and Randazzo was unable to read or write; but, nevertheless, through their own observations, and certainly through Di Christina, they ought to have had knowledge of what was going on. It is said that Di Christina was young, and not of strong mind, and easily influenced; but there is no issue of that kind made in the pleadings, and we are not satisfied with that excuse for ignorance. Upon the whole record, we regard the case as one for an accounting rather than necessarily for a return of capital. No fraudulent representations as inducements to the formation of the partnership are alleged to have been made, and, whatever objectionable features may have characterized Oteri's conduct and management, a scheme to defraud his copartners is not shown to have existed. In the absence of satisfactory proof that losses were occasioned by his misconduct, or that the want of success which attended the business is traceable to that cause, complainants should not be reinstated, at his expense, in the same position as if they had not entered upon an enterprise which turned out to be unfortunate.

We cannot, however, accept the cerrectness of the exhibits attached to the answer as so far made out as to justify the ordering a decree to be entered in accordance therewith. The books consisted of the originals, and a new set made from the originals, which seemed in themselves to be practically unintelligible, and the results set forth in the exhibits were arrived at by a friend of the partners, assisted by an accountant. But the new books were made up, the balances struck, and the statements prepared upon the basis of explanations made by Oteri, and we are unwilling to proceed upon these results, in the absence of a specific disposition of them by the circuit court. Amounts are charged against Scalzo and Randazzo and Di Christina, the receipt of which they deny, and which appear to require further investigation as to their accuracy; and so as to the indebtedness of one Zuccas, for which, it is contended on one side and denied on the other, that Oteri ought to be held responsible under the circumstances. We think the item of $2,538.32 was properly allowed, and that it needs no further consideration. We find in the record that a motion was made for an order on Oteri to pay the cash on hand into court, but we are not informed whether such an order was entered and complied with. No reason is perceived why this should not have been done, nor, indeed, why Scalzo and Randazzo and Di Christine should not have received the amounts which Oteri conceded belonged to them. In a further accounting the question of interest on this money, if it has remained in Oteri's hands, will present itself for adjustment. Gridley v. Conner, 2 La. Ann. 87.

We are of opinion that the partnership continued until February 2, 1885, when, it is agreed, complainants filed a bill for dissolution in the state court, (which we assume has been disposed of,) and should be dissolved as of that date; and that an accounting should be had.

The decree is reversed, with costs, and the cause remanded for further proceedings in conformity with this opinion.