(212 N. Y. 507) SELWYN & CO. v. WALLER et al. (Court of Appeals of New York. Sept. 29, 1914.) 1. JOINT ADVENTURES (§ 4*) MUTUAL RIGHTS AND LIABILITIES-SECRET PROFITS. Persons in or about to assume the relation of joint adventurers owe to each other the utmost good faith and the most scrupulous honesty, which requires that neither shall make a secret profit out of the undertaking; the rule against secret profits not being limited to cases of agency, trusteeship, and like strictly fiduciary relations. [Ed. Note. For other cases, see Joint Adventures, Cent. Dig. §§ 3-6; Dec. Dig. § 4.*] 2. JOINT ADVENTURES (§ 4*)-RIGHTS AND LIABILITIES OF THIRD PERSONS-ASSIGNEE. Two theatrical producers agreed, as joint adventurers and not as partners, to bring out a certain play on a profit-sharing basis and to pay the author certain royalties. Prior to the agreement one of the producers had acquired an interest in the royalties by assignment, but concealed the fact from his associate, and after the joint agreement had been made such producer assigned to plaintiff a portion of his interest in the royalties, for which plaintiff brought suit against both producers. Held, that plaintiff's assignor was guilty of a breach of legal duty toward his associate, and was bound to account for his proportion of the royalties to the joint business, and that, in the absence of estoppel, plaintiff was subject to the same liability. [Ed. Note.-For other cases, see Joint Adventures, Cent. Dig. §§ 3-6; Dec. Dig. § 4.*] Appeal from Supreme Court, Appellate Division, First Department. Action by Selwyn & Co. against Lewis Waller and another. From an order (142 N. Y. Supp. 1051) sustaining a demurrer to the first and second separate defenses of defendant Lee Shubert, affirmed by the Appellate Division (160 App. Div. 725, 146 N. Y. Supp. 7), Shubert appeals. Reversed, and demurrers overruled. Walter H. Pollak, of New York City (William Klein, of New York City, on the brief), for appellant. Melville H. Cane, of New York City, for respondent. MILLER, J. The question of law involved in this appeal arises from the following facts, to state them as briefly as possible: On the 6th of May, 1911, Charles Frohman entered into a contract with Edward G. Hemmerde and Francis Neilson by which, in consideration of the payment to them of £300 and an agreement to pay certain stipulated authors' royalties, to be computed on the gross weekly receipts, Hemmerde and Neilson granted to Frohman the sole and exclusive right for five years to perform and have performed in the United States and Canada a play entitled "The Butterfly on the Wheel"; in December, 1911, Frohman transferred his rights under said contract to the defendant Waller, who agreed to hold the former harmless against any claim which Hemmerde and Neilson might thereafter assert against him in connection with the said agreement of May 6th; in the meantime, Hemmerde and Neilson had assigned to said defendant a 25 per cent. interest in all authors' royalties earned or to be earned from any and all performances of said play in the United States and Canada under all contracts made or to be made therefor; thereafter, and on the 29th of December, 1911, the defendants Waller and Shubert entered into a contract to produce said play in the United States and Canada, "not as partners," but with a sharing of profits and losses in the percentage of 33% per cent. to the former and 66% per cent. to the latter, the former's losses in no event to exceed $2,500, and the latter agreeing to assume in his two-thirds proportion the former's obligation to Frohman under the contract for the purchase of his rights; Waller concealed from Shubert the fact of his ownership of a one-fourth interest in the authors' royalties; the play was produced as agreed upon, and the authors' royalties under the Frohman contract were paid up to some time in October, 1912, in the belief by Shubert that Hemmerde and Neilson were the sole owners thereof, but Waller secretly retained or received from the authors 25 per cent. of said payments; in October, 1912, Waller assigned to the plaintiff a 221⁄2 per cent. interest in said royalties, and this action is brought to recover that proportion of the royalties alleged to have been thereafter earned. The appellant asserts that Waller's concealment was a fraud upon him, and that by reason thereof equity should impress a trust for the benefit of the joint enterprise on the interest in the authors' royalties secretly held by Waller. The two defenses demurred to are alike, except that, in the second, it is alleged, as it is not in the first that the plaintiff obtained its assignment from Waller with the knowledge of his alleged fraud upon Shubert. The only agreement ever made by the appellant Shubert to pay royalties was in his assumption in his two-thirds proportion of Waller's obligation to Frohman. That was an obligation to save the latter harmless from any claim of Hemmerde and Neilson. They could only have had a valid claim to three-fourths of the stipulated royalties as they had assigned the other one-fourth to Waller. Apart from any question of fraud, therefore, it is impossible to discover from the facts pleaded any contract obligation of said appellant to pay more than his share of the royalties due to Hemmerde and Neilson. True, he supposed that he had agreed to pay two-thirds of the royalties stipulated for in the Frohman contract, a circumstance which might bear on the materiality of the fact concealed from him by Waller, but which does not alter the fact that, accord For other cases see same topic and section NUMBER in Dec. Dig. & Am. Dig. Key-No. Series & Rep'r Indexes 106 N.E.-21 ing to the terms of his contract, he was obli- | Devlin, supra. It begs the question to say gated to pay only two-thirds of any claim that it was immaterial to the appellant to which Hemmerde and Neilson could assert against Frohman, namely, for the threefourths of the stipulated royalties which they still owned. Leaving out of view the weakness in the plaintiff's case, we come to the interesting question debated below, namely, whether Waller's concealment of his interest in the authors' royalties was a fraud upon the appellant which entitled him to appeal to the jurisdiction of equity to impress a trust upon that interest for the benefit of the joint venture. Of course, that question is of importance in this case only on the assumption that the appellant did agree to pay twothirds of the royalties stipulated for in the Frohman contract, and I shall proceed on that assumption. [1] It may be admitted that the question lies on the boundary between the domain of law and that of ethics. A majority of the Appellate Division were of the opinion that no duty rested on Waller to disclose his interest because it made no difference to Shubert, to whom the royalties were paid. That position overlooks the fact that in assuming two-thirds of Waller's obligation to Frohman, Shubert was interested in knowing precisely what that obligation was, and it takes a too narrow view of the duties of parties about to engage in a joint adventure, whether as partners inter sese or not. It is now well settled that persons in, or about to assume, that relation owe to each other the utmost good faith and the most scrupulous honesty. Getty v. Devlin, 54 N. Y. 403; Mitchell v. Reed, 61 N. Y. 123, 19 Am. Rep. 252; Kimberly v. Arms, 129 U. S. 512, 9 Sup. Ct. 355, 32 L. Ed. 764. They do not deal at arms' length. The very fact that one conceals his true interest from the other indicates a purpose to gain some advantage at the other's expense, or a belief that disclosure would influence the other in deciding whether and upon what terms to embark on the enterprise. Good faith requires that neither shall make a secret profit out of the undertaking. The rule against secret profits is not limited in its application to cases of agency, trusteeship, and the like strictly fiduciary relations. Its application to a case like this depends on the reciprocal good faith required of joint adventurers, and more precisely upon the mutual burdens and benefits which the relation necessarily implies are to be shared in the stipulated proportions. [2] If Waller had acquired his interest in the authors' royalties after making the contract with the appellant, he would plainly have been bound to give the joint undertaking the benefit of it. That the concealment of his interest at the time of making the contract puts him in the same case is whom the royalties were paid. If the duty of disclosure existed, the law will not impose upon the party wronged the often impossible task of establishing pecuniary damage, or that he would not have embarked on the undertaking if disclosure had been made. The case is precisely the same in principle as though Waller had owned the entire interest in the authors' royalties and, concealing the fact, had induced his coadventurer to purchase it outright from the apparent owners at a large advance over the cost to him, the familiar case of promoter's secret profits. Indeed, in some aspects, Waller's position is worse than that of the typical dishonest promoter who takes his illicit profit at the inception of the enterprise. Waller had secretly arranged to receive a percentage, not of the profits, but of the gross receipts of the business, so long as it continued, although he had stipulated to share profits and losses in stated proportions. It is unnecessary accurately to measure the extent or precisely to determine the nature of the injury which was, or might thus have been, done to Shubert. That injury might have resulted is obvious. It is sufficient to determine that Waller was guilty of the breach of a legal duty, of the failure to conform to the high standard of honesty and good faith which the law exacts of one partner or coadventurer towards the others. In our opinion that standard should not be lowered by putting dubious conduct outside of the domain of law, especially as exact justice can always be done by making the wrongdoer a trustee of his secret interest for himself and his associates. Cases holding that the promoter of an enterprise may openly sell to his company or his associates on the basis of the ordinary vendor and vendee have no application. If Waller had disclosed his interest in the authors' royalties, it doubtless would have been for Shubert to inquire, if he wanted to know, what was paid for it. The respondent does not appear to question the appellant's contention that the plaintiff acquired only what its assignor had to sell. No element of estoppel being involved, it seems plain that the plaintiff took subject to the prior equities, as well of third parties as of the original owners. At any rate, that is the settled law of this state. Bush v. Lathrop, 22 N. Y. 535; Moore v. Metropolitan National Bank, 55 N. Y. 41, 14 Am. Rep. 173; Cutts v. Guild, 57 N. Y. 229; Fairbanks v. Sargent, 104 N. Y. 108, 9 N. E. 870, 6 L. R. A. 475, 58 Am. Rep. 490; Owen v. Evans, 134 N. Y. 514, 31 N. E. 999; Central Trust Co. of N. Y. v. West India Improvement Co., 169 N. Y. 314, 62 N. E. 387. Both questions should be answered in the affirmative, the orders of the Appellate reversed, with costs in all courts, and the | Benjamin Rees and others, constituting the demurrers overruled, with costs. Board of Inspectors of Elections for the Second Election District of the town of Rut WERNER, HISCOCK, CHASE, and HO-land, Jefferson County. From an order of GAN, JJ., concur. WILLARD BARTLETT, the Appellate Division, affirming as matter C. J., not voting. CARDOZO, J., not sit- of law an order of the Special Term, denyting. Orders reversed, etc. (212 N. Y. 514) In re RUPERT et al (Court of Appeals of New York. Oct. 8, 1914.) 1. ELECTIONS (§ 19*) - REGISTRATION CON STITUTIONAL AND STATUTORY PROVISIONS. Election Law (Laws 1909, c. 22, amended by Laws 1911, c. 649) § 159, as amended by Laws 1913, c. 820, provides that, at the first meeting for registration in any election district outside of a city or village having 5,000 inhabitants or more, the inspectors shall place upon the register the names of persons who voted at the last preceding election, and also those presenting themselves in person, except the names of such electors as are proven to the satisfaction of the inspectors to have ceased to be electors in such district, and also the names of all persons proven to the satisfaction of the inspectors, by the affidavits of each such person and of two qualified electors, to be entitled to vote. It further provides that such affidavit shall be in the form there prescribed, which requires the affiants to state on knowledge the date and place of birth of the applicant for registration, the year and court in which he was naturalized, and that he has resided in the election district for the last 30 days, in the county for 4 months, and been an inhabitant of the state for 1 year. Held that, while it was competent for the Legislature to require proof to the satisfaction of the inspectors of the facts required to be stated in the affidavit, the requirement that such proof shall be made by two electors is so arbitrary and unreasonable, and would in so many cases prevent registration without the personal appearance of the applicant, as to exceed the legislative discretion and violate Const. art. 2, § 4, which provides that voters not residing in cities and villages having 5,000 inhabitants or more shall not be required to apply in person for registration at the first meeting of the officers having charge of the registry of voters. [Ed. Note. For other cases, see Elections, Cent. Dig. § 14; Dec. Dig. § 19.*] ing as matter of law, and not in the exercise of discretion, a motion for a peremptory writ, requiring the registration of the applicants at the first meeting for registration without their personal appearance before the board of election inspectors, and without giving proof by the affidavits of themselves and two qualified electors in the form prescribed by Laws 1913, c. 820, § 159, the applicants appeal. Reversed, and motion for peremptory writ granted. Elon R. Brown, of Watertown (Henry H. Babcock, of Watertown, of counsel), for appellants. George R. Van Namee, of Watertown (D. Cady Herrick, of Albany, of counsel), for respondents. MILLER, J. Counsel for the respondents waived at the Special Term all objections to the maintenance of the proceedings except on the merits. The need of a prompt decision permits only a brief statement of our views. The question involved is whether the provisions of section 159 of the Election Law (Laws 1909, c. 22, amended by Laws 1911, c. 649), as amended by chapter 820 of the Laws of 1913, requiring proof by the affidavits in the form prescribed of himself and two qualified electors as the condition of the registration of an elector without his personal appearance at the first meeting of the registry board in districts outside a city or village having 5,000 inhabitants or more, violates article 2, section 4, of the Constitution of this state, whereby it is provided that: "Voters not residing in such cities or villages shall not be required to apply in person for registration at the first meeting of the officers having charge of the registry of voters." [1] The prescribed form of affidavit requires the affiants, the two electors, to state 2. STATUTES (§ 64*)-PARTIAL INVALIDITY-on knowledge the date and place of birth of ELECTIONS-REGISTRATION. While the Legislature might have required the affidavit of the persons seeking registration, this requirement is so coupled with that as to the affidavits of two electors as to be inseparable, but these provisions may be separated from the rest of the section; and hence the inspector should place on the register the names of those voting at the last general election, those presenting themselves in person and not proven to have ceased to be electors, and those proven to the satisfaction of the inspectors by affidavit or otherwise to be entitled to vote. the person sought to be registered; if not native born, the year and court in which he was naturalized; that he has resided in the election district for the last thirty days and in the county for four months; and that he has been an inhabitant of the state for one year. Undoubtedly it would be competent for the Legislature to require proof to the satisfaction of the inspectors of the facts required to be stated in the prescribed form of affidavit. The vice of the requirement is that a selection is made of the persons who are to make the affidavits, regardless of the possibility of obtaining such proof and of its Appeal from Supreme Court, Appellate Di- probative value. Such a selection is so arbi vision, Fourth Department. trary and unreasonable as to exceed the legApplication by Homer Rupert and another islative discretion. A man unable to find for a peremptory writ of mandamus against two electors who knew the date of his birth [Ed. Note. For other cases, see Statutes, Cent. Dig. §§ 58-66, 195; Dec. Dig. § 64.*] Hogan, J., dissenting, and Cardozo, J., dissenting in part. For other cases see same topic and section NUMBER in Dec. Dig. & Am. Dig. Key-No. Series & Rep'r Indexes could not be registered without his personal ed to be electors in the district since such appearance, although he might be able to election, and also the names of those proven furnish the affidavit of his mother. A mo- to the satisfaction of such inspectors to be ment's reflection will suggest to any one the then or thereafter entitled to vote at the difficulty of finding two electors in his com- election for which the registration is made, munity who can swear to the date of his which proof may, of course, be made by afbirth. In the case of electors who have mov-fidavit or otherwise. To that extent the stat ed within a year, possibly from remote parts of the state into communities where they were unknown, it would usually be more troublesome to obtain the required affidavits than to appear in person before the registry board, and in many cases it would be impossible to find two electors who could swear on knowledge to the necessary facts respecting either birth or residence, although persons, not electors, might be at hand, whose affidavits would be entitled to the highest probative value. Though the appellants are qualified to vote at the next ensuing election, they are unable to furnish the prescribed affidavits of two electors, and it is obvious that their cases are not exceptional. If the statute is valid, electors in such cases must personally appear or they cannot be registered. The requirement is expressed in such plain and positive terms as to leave no doubt of the legislative intent. There is thus no room for construction. This court in Matter of Fraser v. Brown, 203 N. Y. 136, 96 N. E. 365, Ann. Cas. 1913B, 14, condemned as unconstitutional a statute which directly required the personal appearance of voters residing outside of cities or villages having a population of 5,000 or more, whose names do not appear on the poll book of the last general election. We now hold that a statute which indirectly accomplishes the same result is equally void, as being in violation of the express constitutional provision herein before quoted. [2] It remains to consider to what extent the valid provisions of the section in question may be separated from the invalid. The affidavit of the person seeking registration might be required. But the statute so couples the requirement as to his affidavit with that as to the affidavits of the two electors as to make any attempt to sever the two savor of judicial legislation. The language is, “by the affidavits of each such person and of two qualified electors." If the requirement as to the latter be eliminated, the statute would then provide for the registration of a person on his own affidavit alone, although, if that possibility had been contemplated, the Legislature might have provided for, or indeed required, other proof. The phrase just quoted may be eliminated without destroying the legislative scheme. The statute would then require the inspectors at the first meeting to place on the register the names of those who voted at the last preceding general election and also those presenting themselves in person, except such as On behalf of the appellants it was argued that the requirements of the statute under consideration are without the limits of reason, in that the affidavit of two electors, residents of the election district in which furnished. Assuming, for the sake of arguthe person to be registered resides, should be ment, such interpretation of the statute, and that such requirement is unreasonable, it was within the province of the Legislature to require proof by the affidavit of a person whose name is sought to be placed upon the registration list showing that the person sought to be thus registered was a qualified elector, or to require like proofs by the testimony of a third person. By eliminating the the statute can be read: provision criticised in the prevailing opinion, [Ed. Note.-For other cases, see Taxation,. Cent. Dig. §§ 625, 629-631; Dec. Dig. § 376.*1 4. TAXATION (§ 376*)-VALUATION OF SPECIAL FRANCHISE "NET EARNINGS" RULE. ute more harmonious by providing the nature | not used in connection with its franchise was of the proof which should be furnished, properly excluded. rather than to permit inspectors to insist upon proofs satisfactory to them which may vary throughout the districts of the state as the whims of individuals may determine. For that reason I dissent from the conclusion of a majority of the members of the court. In assessing a street railway company's special franchise for taxation under the net earnings rule, percentages of gross earnings and car license fees paid to the city were properly included in the operating expenses, notwithstanding Tax Law, § 48,† providing for the deWERNER, HISCOCK, CHASE, and COL-duction from the tax assessed of any sum based LIN, JJ., concur with MILLER, J. CAR- upon a percentage of gross earnings or any DOZO, J., concurs in the result, but is of the ble property of the company is located, since license fee paid to the city in which the tangiopinion that the provision requiring the affi- the "net earnings" are what is left of the gross davit of the voter is separable from the earnings produced by the company's property provision requiring the affidavit of two qual-tions connected with and arising from its use after the legitimate costs, expenses, and deducified electors, and that the former provision are paid, and such percentages and license fees may be sustained. HOGAN, J., reads diswere costs or charges connected with the use senting opinion. of the property. Orders reversed, etc. (212 N. Y. 472) PEOPLE ex rel. THIRD AVE. R. CO. V. STATE BOARD OF TAX COM'RS (CITY OF NEW YORK, Intervener). PEOPLE ex rel. WALLACE et al. v. SAME. PEOPLE ex rel. KINGSBRIDGE RY. CO. v. SAME. (Court of Appeals of New York. Sept. 29, 1914.) 1. TAXATION (§ 496*)-CERTIORARI TO REVIEW ASSESSMENTS-TESTING EXCESSIVENESS OF ASSESSMENT. On certiorari to review the assessment of a street railway company's special franchise for taxation, where the state board of tax commissioners in their return stated that it availed itself of all tests of value within its reach and all information bearing upon such value, and adopted no certain or fixed rule or method; that it would be impossible to state more definitely the mental operation which prompted it in arriving at the valuation fixed, or to state which of the different elements, theories, or methods considered most influenced the minds of the individual members, or to what extent each test was used, but that the valuation was finally fixed and agreed upon as the combined judgment of the board, irrespective of the individual methods of arriving at it, it was not error to permit the railroad company to show that the assessment was excessive under the net earnings rule, on the theory that as the board was not bound to adopt that rule, error was not proved by showing excessiveness under that rule, since the assessments were not conclusive, but were subject to review, and the courts cannot review the undisclosed and concededly indescribable methods followed by the state board. [Ed. Note. For other cases, see Taxation, Cent. Dig. §§ 890-910; Dec. Dig. § 496.*] 2. TAXATION (§ 376*)-VALUATION OF SPECIAL FRANCHISE-NET EARNINGS RULE. In ordinary cases possessing no unusual or peculiar characteristics, the net earnings rule is a proper method of valuing a special franchise for taxation. [Ed. Note.-For other cases, see Taxation, Cent. Dig. §§ 625, 629-631; Dec. Dig. § 376.*1 3. TAXATION (§ 376*)-VALUATION OF SPECIAL FRANCHISE-NET EARNINGS RULE. In ascertaining the gross earnings of a street railway company for the purpose of assessing its special franchise under the net earnings rule, the rental received from cars owned by it, but rented to subsidiary companies and [Ed. Note.-For other cases, see Taxation, Cent. Dig. §§ 625, 629-631; Dec. Dig. § 376.* For other definitions, see Words and Phrases, First and Second Series, Net Earnings.] 5. TAXATION (§ 376*)-VALUATION OF SPECIAL FRANCHISE-NET EARNINGS RULE. In assessing a street railway company's special franchise under the net earnings rule, the salary paid to a receiver of the company's property for services during the year, the earnings of which were adopted as a basis, was properly included in the operating expenses. [Ed. Note.-For other cases, see Taxation, Cent. Dig. §§ 625, 629-631; Dec. Dig. § 376.*1 6. TAXATION (§ 496*)-CERTIORARI TO REVIEW ASSESSMENTS-REVIEW-QUESTIONS of Fact. In a certiorari proceeding to review the assessment of a street railway company's special franchise, the Appellate Division's finding, that certain expenditures by the company were for new equipment, machinery, etc. and not for ordinary maintenance and repairs, and hence was covered by a stipulated allowance for depreciation and obsolescence, when not arbitrary or without evidence to support it, was conclusive. [Ed. Note. For other cases, see Taxation, Cent. Dig. §§ 890-910; Dec. Dig. § 496.*] 7. TAXATION (§ 496*)-CERTIORARI TO REVIEW ASSESSMENTS STIPULATIONS CIATION. -- "DEPRE In a certiorari proceeding to review the assessment of a street railway company's special franchise, where the parties stipulated that a certain sum was a reasonable allowance to obsolescence of the property used in connection cover the amount of the annual depreciation and with the franchise, and there was no evidence to aid in determining whether this was meant to renewable and repairable parts of individual macover deterioration through use and breakage of chines, implements, or appliances, as well as that depreciation which could not be prevented by maintenance, nor offset by repair, necessitating the replacement of old units with new, it would be assumed that the parties used the word "depreciation" as it had theretofore been used by the Court of Appeals as meaning that deterioration which is not made good by ordinary repairs; and hence a further allowance for ordinary maintenance and repairs was proper. [Ed. Note. For other cases, see Taxation, Cent. Dig. §§ 890-910; Dec. Dig. § 496.* For other definitions, see Words and Phrases, First and Second Series, Depreciate.] 8. EVIDENCE (§ 568*)-WEIGHT AND CONCLUSIVENESS-CERTIORARI TO REVIEW ASSESSMENTS FOR TAXES. On certiorari to review the assessment of a street railway company's special franchise un For other cases see same topic and section NUMBER in Dec. Dig. & Am. Dig. Key-No. Series & Rep'r Indexes † Consol. Laws, c. 60. |