U.S. Supreme Court
Hobbs v. McLean, 117 U.S. 567 (1886)
Hobbs v. McLean
Argued March 17-18, 1886
Decided March 29, 1886
117 U.S. 567
Where three persons form a partnership and agree to bear the losses and share the profits of the partnership venture in proportion to their contribution to its capital, and two of the partners furnish all the money and do all the work, they are entitled to be repaid their advances out of its assets before payment of the individual creditors of the partner who paid nothing and did nothing to promote the partnership business.
When a contract is open to two constructions, the one lawful and the other unlawful, the former must be adopted.
When many persons have a common interest in a trust fund and one, for the benefit of all, at his own cost and expense, brings suit for its preservation or administration, a court of equity will order that the plaintiff be reimbursed his outlay from the property of the trust, or by proportional contribution from those who accept the benefit of his efforts.
When one brings adversary proceedings to take trust property from the possession of those entitled to it in order that he may distribute it to those entitled adversely, and fails in his purpose, he cannot demand reimbursement of his expenses from the trust fund, or contribution from those whose property he has sought to misappropriate.
A, having contracted with the United States to furnish supplies of wood and hay to troops in Montana, entered into partnership with B and C for the purpose of executing the contract. A was to furnish half the capital, B and C one-fourth each, and profits and losses were to be divided on that basis, but in fact the capital was furnished by B and C. A delivered the wood according to the contract, but failed to deliver the hay, and, payment being refused, he brought suit in his own name in the Court of Claims against the United States to recover the contract price of the wood. In this suit, B and C each was a witness on behalf of A, and each testified that he had "no interest direct or indirect in the claim" except as a creditor of A, holding his note. Pending the suit, A became bankrupt, and then died. His administratrix was admitted to prosecute the suit, but before entry of final judgment, his assignee in bankruptcy was substituted in her place. Final judgment was then rendered in favor of the assignee, and the amount of the judgment was paid to him. B and C, as surviving partners, then filed a bill in equity against the assignee and the attorneys and counsel to recover their shares in the partnership property.
(1) That the interests of B and C in the partnership property were not affected by the fact that the contract under which they claimed was not made and chanroblesvirtualawlibrary
attested by witnesses after the issue of a warrant for payment, as required by Rev.Stat. § 3477.
(2) That they were not affected by the provisions of Rev.Stat. § 3737 that a transfer of a contract with the United States shall cause an annulment of the contract so far as the United States are concerned.
(3) That the cause of action to recover of the assignee their proportionate shares of the partnership fund in his hands accrued to B and C on the receipt of the money by the assignee.
(4) That B and C were not subject in this suit to the disabilities as witnesses imposed by Rev.Stat. § 858 upon parties to suits by or against executors, administrators, or guardians.
(5) That B and C were not estopped by their declarations in the Court of Claims as to their interest in the claim there in controversy, from setting up the interest in it which they seek to enforce in this suit.
(6) That the assignee was entitled to no allowance for compensation for services, expenses, and attorney's fees in recovering the fund in the Court of Claims from the United States.
The appellees were the plaintiffs in the circuit court. The record showed the following facts:
On August 19, 1876, Major Card, a quartermaster in the army of the United States, advertised for bids for furnishing 6,000 cords of wood and 800 tons of hay at the Tongue River Military Station in Montana Territory. Campbell K. Peck, whose assignee in bankruptcy is the appellant, put in a bid, and, believing that the contract would be awarded to him, on August 19, 1876, entered into articles of co-partnership with the plaintiffs, McLean and Harmon, for the purpose of carrying out the contract with the United States which he expected to make. These articles provided that Peck should furnish one-half the capital necessary to carry on the partnership business and McLean and Harmon each one-fourth, and that the profits and losses of the partnership should be divided in like proportions. Harmon agreed to take charge of the office of this partnership, which was to be at Fort Lincoln, and superintend the business at that place, and McLean agreed to go to the place of delivery on the Yellowstone and superintend the business there, but neither was to make any charges for his services. The articles of partnership further provided that when the contract with the government was completed, a settlement of profits and losses should be made "on the basis of the above terms of chanroblesvirtualawlibrary
partnership," and "if a dissolution is decided on, first all debts shall be paid and then all profits divided in the proportions heretofore mentioned." After the signing of these partnership articles, the bid of Peck was accepted, and on August 25, the contract between him and the United States was signed and delivered.
The partners did not deliver the hay required by the contract because, as they claimed, they were prevented from so doing by the officers of the army of the United States, but did cut and deliver the wood. McLean and Harmon did all the work that was done and advanced all the money that was expected in performing the contract except about $100, which was furnished by Peck.
The wood delivered under the contract amounted in value at the contract price to $51,900, but the United States refused to pay that sum, claiming damages for the failure to deliver the hay, but consented to pay, and did pay, $10,919.37. McLean and Harmon received $10,000 of this sum, and Peck $919.37, which was over $800 more than he advanced for the performance of the contract. The parties interested being dissatisfied with the action of the government in refusing payment in full for the wood delivered, Peck, who was the only person to whom the government was bound, filed, on November 7, 1877, his petition in the Court of Claims against the United States, demanding $55,003.63 damages for the breach of the contract. The United States traversed the petition and, upon final hearing in the Court of Claims, judgment was rendered for Peck, the claimant, for $43,113.63. From this judgment both parties appealed to this Court, which, in February, 1880, affirmed the judgment of the Court of Claims, and allowed the claimant, in addition to the amount already awarded him, the further sum of $2,660, making the entire judgment in favor of the claimant $45,773.63.
While the case was pending in the Court of Claims, to-wit on August 31, 1878, Peck was on his own petition adjudicated a bankrupt in the District Court of the United States for the District of Iowa, and Hobbs, the appellant in the present case, was appointed assignee. Whipt in the District Court of the United States for the District of Iowa, and Hobbs, the appellant in the present case, was appointed assignee. Whipt in the District Court of the United States for the District of Iowa, and Hobbs, the appellant in the present case, was appointed assignee. While the case was pending in this chanroblesvirtualawlibrary
Court, Peck, on December 2, 1879, died, and his widow, Helen A. Peck, was afterwards appointed his administratrix, and in January, 1880, was substituted in the place of her intestate as the plaintiff in the cause. The case still being in this Court, and after Mrs. Peck had, as administratrix, been made party plaintiff, Hobbs, as assignee, moved the Court to be substituted as plaintiff in her stead, which motion was denied. The cause having been remanded to the Court of Claims, Hobbs, the assignee in bankruptcy, moved that court to substitute him as plaintiff in place of the administratrix, which motion was, on May 10, 1880, granted, and the money recovered from the United States was, after deducting about $10,000 attorney's fees, paid over to Hobbs, the assignee.
McLean and Harmon, fearing that Hobbs would distribute the fund thus recovered among the general creditors of Peck, and believing that the fund belonged to them, filed in the Circuit Court for the Southern District of Iowa the bill in the present case, to which they made Hobbs, as assignee in bankruptcy of Peck, and John B. Sanborn and Charles King, lately partners as Sanborn & King, and Edward F. Brownell, defendants, and in which they set out in detail the facts above recited, set up their claim to the fund as surviving partners and prayed that the balance found due them from the partnership on an accounting might be paid them out of the fund, so far as it should be sufficient to pay the same.
The defendant Hobbs, as assignee, answered the bill, and the plaintiffs filed the general replication. Upon final hearing upon pleadings and proofs, the circuit court adjudged and decreed as follows:
After reciting the making of the partnership between the plaintiffs and Peck and the performance by the partnership of the contract made by Peck with the United States, it found that after charging to the partners all the moneys received by them respectively, it appeared that Peck had received more money than he had paid out in performing the contract, and that the plaintiffs had expended for the same purpose $41,032.31 more than they had received; that Hobbs, the assignee, had collected and received on the judgment against the United States recovered by Peck's administratrix chanroblesvirtualawlibrary
$35,773.63, and it was therefore adjudged and decreed that said sum was the money and property of the plaintiffs, and that they recover it of the defendant, Hobbs, who was ordered to pay it to the plaintiffs, with interest on the investment thereof, and that the plaintiffs also recover of Hobbs, as assignee, their costs and disbursements in the suit, to be paid by him out of any money in his hands as assignee. The appeal of Hobbs, as assignee, brings this decree under review. chanroblesvirtualawlibrary