Catron v. Watson , 12 Ariz. App. 132 ( 1970 )

DONOFRIO, Presiding Judge.

This is an appeal from a money judgment against the appellant (defendant) in an action brought by the appellee (plaintiff) to recover a share of partnership debts paid by the appellee.

The question to be determined is whether the trial court erred in not requiring that plaintiff first bring an action for accounting before proceeding to recover a money judgment.

Defendant was the owner of a liquor license and operator of a nightclub in Yuma. For several days he and the plaintiff who desired to go into business with him talked of joining together in a partnership. On May 3, 1965 they entered into a partnership agreement which was prepared by legal counsel. Each was to contribute an equal amount of money and to exert his best efforts in the business. They were to share equally in the losses and profits. The agreement provided that books of account were to be kept and that there would be an accounting of the business every six months, or sooner if desired. In the beginning the partners were quite active in their efforts to stimulate business, employing bands and other talent. In spite of their labors, however, the nightclub began experiencing financial difficulties and their relationship was terminated in May 1967. There was a conflict in the evidence as to when the partnership itself was actually dissolved. However, it is agreed that the two principal debts involved in the complaint were incurred prior to a dissolution of the partnership.

At this point, a sequence of pertinent events leading to the trial court’s judgment would prove helpful.

Plaintiff filed a complaint in two counts. In Count I he alleged that a partnership was entered into on May 3, 1965 and that it was terminated on June 30, 1966; that during the partnership the parties became indebted to the bank on a promissory note which plaintiff had to pay; that the Internal Revenue Service collected by execution against plaintiff’s bank account a certain sum due from the partnership for taxes; and that the losses were to be borne equally by the partners. Count II alleged that during the partnership defendant was charged with the management of the business and with the duty of making an accounting every six months; that the defendant mismanaged the partnership and its funds and also failed to make any accounting. The prayer for money judgment in each count was for the same amount and represented defendant’s one-half share of the bank note and tax payments. No accounting was urged.

To this complaint defendant filed an answer and alleged as a first defense that the complaint failed to state a claim upon which relief could be granted. Thereafter the answer joined issue on each of the counts, denying their allegations. Defendant also entered a separate defense, alleging that the parties dissolved the partnership and that the plaintiff agreed to take possession of the partnership assets and assume the payment of the note and taxes involved.

At the time of trial defendant moved for dismissal and for a ruling on whether or not plaintiff should bring an action for accounting. Plaintiff opposed the motion. It was denied by the court and the court proceeded to hear the evidence. At the close of plaintiff’s case, and later at the close of all the evidence, defendant renewed his motion to dismiss. After receiving all the evidence the court made an order that there was no proof of wrongdoing on the part of defendant and dismissed Count II, and took Count I under advisement.

The court rendered its decision on Count I, finding that defendant failed to prove his separate defense, to-wit: that plaintiff agreed to take possession of the partnership assets and assume all the debts. It found in line with plaintiff’s version that when the partnership was losing money the parties agreed that plaintiff would take over the business and endeavor to pay off the debts without releasing the defendant from any of the debts. The court then undertook to render a judgment by placing a value on the partnership assets received by plaintiff which was offset against the debts for which plaintiff sought payment. We quote the court’s final tabulation contained in its decision which formed the basis of the judgment:

“Paid on note $1053.77

Final payment of note from business 750.00

Cabaret tax, penalty and interest 1974.09

TOTAL $3777.86

Less assets taken over 500.00

Net 3277.86

Plaintiff may thereafter have judgment on count one for one-half that amount of $1638.93 upon presentation and signing of a formal judgment. Count 2 is dismissed.”

Plaintiff argues that because of the manner in which the partners conducted their business, the accounting of sorts made at the trial was fair and adequate and that he was within his rights to bring the action against his copartner for contribution.

From the beginning defendant (appellant) urged dismissal on the grounds that plaintiff was seeking a money judgment without first having an accounting. We believe the trial court was in error in denying defendant’s motion.'

In Arizona, generally, the only action which will lie between copartners in regard to partnership business is an action for accounting. In Jacob v. Cherry, 65 Ariz. 307, 180 P.2d 217 (1947), the Supreme Court stated:

“The first count of the defendants’ cross complaint is an action by one who alleges himself to be a partner against one whom he claims is his copartner, based upon an oral partnership agreement, wherein the cross complainants (the defendants) seek a money judgment rather than an accounting. As such, it does not state a cause of action and should have been dismissed by the trial court, if necessary on its own motion, inasmuch as the cross defendant did not attack its sufficiency. This, for the reason it is the general rule that the only action under circumstances such as these, that will lie between copartners in regard to partnership business is an action for an accounting. * * * ” 65 Ariz. at 309, 310, 180 P.2d at 218.

Also in the case of Boyle v. Webb, 54 Ariz. 188, 94 P.2d 642 (1939), in reference to actions between partners, the Supreme Court said:

“It is well settled that ‘an accounting and settlement between copartners is a condition precedent to an action by one against another upon partnership claims and transactions.’ 47 C.J. 804, section 251. In Bertozzi v. Collaso, 21 Ariz. 388, 188 P. 873, 21 A.L.R. 5, this rule is stated to be the law.” 54 Ariz. at 195, 94 P.2d at 645.

In the case of Pejsa v. Bridges, 69 Ariz. 315, 213 P.2d 473 (1950), the Supreme Court stated:

“ * * * It is the settled law of this state that one partner cannot sue another partner at law until after a dissolution and a full accounting and balance has been struck between the partners. (citations omitted).” 69 Ariz. at 320, 213 P.2d at 476.

In Bohmfalk v. Vaughan, 89 Ariz. 33, 357 P.2d 617 (1960), the Supreme Court again reaffirmed the rule, stating that it is the general rule that one partner cannot sue the other at law as distinguished from an action in equity with respect to partnership transactions except after-a full accounting and balance has been had, and such action is on contract, and not ex delicto. This rule is particularly true under the facts of this case since the partnership agreement provided that upon dissolution the business was to be wound up, the debts paid, and any surplus divided between the parties. In such a situation, an accounting is also called for under the provisions of the Uniform Partnership Act, particularly A.R.S. §§ 29-218, 221, 222.

Under certain circumstances, a partner can sue his partner for his pro rata part of a firm indebtedness without an accounting. 68 C.J.S. Partnership § 116. .See also Uniform Partnership Act, Title 29, A.R.S. One instance, as suggested by the plaintiff, occurs when there are no .assets and only one liability. A second such situation arises where, by his conduct, the defendant is precluded from setting up as a defense the lack of a settlement. We are, however, unable to find either of these instances present in the case before us. The partnership here from its inception was an active enterprise. The partners had an understanding that the plaintiff, who possessed some special talent in music, was to control the musical and entertainment aspects of the nightclub and that the defendant was to be the general manager. Several bands appeared at the nightclub. From June 1966 on, plaintiff said he continued the business for the purpose of winding it up. From these facts we cannot find conduct which would preclude an accounting to defendant.

The accountant testified that in preparing certain profit and loss statements he noticed that the business showed a gross of $45,000 during the first six months, with a loss of approximately $2,000, and that it also showed a loss of around $1,000 on a gross of $21,000 during the first half of 1966. Because the business always had assets, an accounting would not be precluded on the basis of an absence thereof.

There is considerable evidence to show that some books were kept, and there is no evidence that an accounting was not possible. The accountant testified that he prepared income tax returns and W-2 forms for the business. Significant in his testimony at the end of his direct examination is the following:

“Q * * * Have you ever — were you ever requested by either of these gentlemen to make up a general accounting for the partnership ?

“A No, sir.

“Q Have you ever been requested by either gentleman to help them wind up the affairs of the partnership?

“A No, sir.

“Q Have you ever made an overall tax or bookkeeping study of the total period of the partnership, or any period of it, from May ’65 until May ’67?

“A None, other than what it took to make the tax returns, sir.

“MR VANCE: All right. I have no other questions.”

Although the trial court endeavored to make the best accounting it could under the circumstances, it was not the accounting required by the facts and the law.

The trial court should have granted the motion to dismiss the complaint. This cause is remanded with instructions to vacate the judgment, enter such order of dismissal, and for such other and further proceedings not inconsistent with this opinion.

Reversed and remanded.

STEVENS, J., concurs.