Story Case

Fred Flint, Howard Freeman, and Donald Gray were partners in the commission business. At the end of five years, the firm had a surplus fund of $5,000, which Flint, the treasurer, was instructed to invest in five per cent municipal bonds. Flint did not invest the money immediately in bonds, but kept secret possession of it for two months. During this time he successfully transacted two deals in the wheat market, netting to himself $2,000 in profit. He retained possession of this money and at the end of the year accounted to the firm for merely five per cent profit on the municipal bonds. Later, the other members learned of the wheat deal and demanded that Flint share this profit with them. This, Flint refused to do. Can Freeman and Gray compel him to make an accounting?

Ruling Court Case. Bloom Vs. Lofgren, Volume 44 New Hampshire Reports, Page 485

Bloom, Lofgren and others were engaged in business as partners. The partners decided to buy a horse to be used in the firm business. Lofgren informed the partners that one "Walker had a very fine horse for sale, which could be purchased for $1,800. Lofgren was authorized to make the purchase and to pay $1,800 therefor, in case a lower price could not be negotiated. Previous to this time, Lofgren had already purchased this horse from Walker for the sum of $1,200 and he now sold the horse to the firm for $1,800. When his conduct was discovered, the other partners brought this action demanding an accounting for the profit he made in the transaction.

Mr. Justice Collins delivered the opinion of the Court: "The law will not permit him - a partner - to retain and enjoy the fruits of his fraudulent representations: - that Walker was still the owner; that the lowest price was $1,800 cash; and his later representations of the same nature that he had bought the animal and had paid $1,800 for him. In their dealings with each other and with the firm, partners occupy positions of trust, and are required to exercise the utmost good faith with each other and with the firm." It was therefore held, that the plaintiff, Bloom, might recover the profits made by the defendant in the transaction in question; this profit would be held for the benefit of the partnership.

Ruling Law. Story Case Answer

The relation which exists between each individual partner and the firm is of such a character that the law will not permit one partner, without the consent of his co-partners, to have dealings with the firm, whereby he may make any profit, or gain any secret advantage. It follows from this that a partner may not sell to, or buy from the firm, unless it is done openly and with the full consent of the co-partners. Before selling to, or buying from the firm he must not only have the consent of his co-partners, but he must disclose to them every material fact concerning the transaction.

In the Story Case, Freeman and Gray can compel Flint to divide the profit on the wheat deal. Not only is this true, but had he lost, they could have compelled him to suffer all the loss. The transaction was absolutely at Flint's risk, and what he gained he must divide.