Ray v. Sizer, 75 N.Y. 224 (1878)
A partner who is compelled to pay a partnership debt after dissolution is entitled to indemnification from the remaining partners who continued to benefit from the underlying agreement that created the debt.
Summary
This case concerns a dispute over liability for royalties on steam gauges manufactured after a partnership dissolution. Ray, a former partner in Ray, Sizer & Marvin, sought indemnification from Sizer and Marvin for royalties he paid to Allen, based on a contract originally held by Ray & Sizer. The Court of Appeals held that while the partnership agreement didn’t automatically transfer the burden of the Allen contract, Ray, as a surety, was entitled to reimbursement from Ray & Marvin (the continuing partnership) because they used the Allen patent after he left the firm.
Facts
Ray & Sizer entered into a contract with Allen, granting them the exclusive right to manufacture steam gauges under Allen’s patent, with royalties payable to Allen. Ray, Sizer & Marvin later formed a partnership, with the agreement that the firm could use any inventions secured by the partners. Ray then sold his interest in the partnership (Buffalo Steam Gauge Company) to Sizer and Marvin, who agreed to assume all debts of the company. After Ray’s departure, Ray & Marvin continued to manufacture gauges. Allen then sued Ray & Sizer for unpaid royalties on gauges manufactured by Ray & Marvin, and Ray was compelled to pay.
Procedural History
Ray sued Sizer and Marvin to recover the amount he paid to Allen. The trial court granted a nonsuit against Ray. Ray appealed. The lower appellate court reversed the trial court, granting a new trial. This appeal was from that order.
Issue(s)
Whether Ray, having been compelled to pay royalties on gauges manufactured by Ray & Marvin after he left the partnership, is entitled to indemnification from Ray & Marvin, based on principles of equity rather than the assumption agreement.
Holding
Yes, because Ray, in effect, became a surety when Ray & Marvin continued to manufacture gauges under the Allen contract after he transferred his interest. They could not use the patent without also bearing the burden of paying the royalties associated with it.
Court’s Reasoning
The court found that the assumption agreement between Ray, Sizer, and Marvin did not automatically cover the contingent liabilities under the Allen contract. However, the court reasoned that when Ray transferred his interest in the partnership, including the right to manufacture under the Allen contract, to Ray & Marvin, he essentially became a surety for any royalties owed on gauges they manufactured. The court stated, “The new firm could not manufacture under the Allen contract, and cast upon Sizer the burden of paying the royalties.” Ray & Marvin acquired the right to use the patent and manufacture the gauges, they were obligated to pay the royalties. The court emphasized that the right to indemnity did not depend on Ray & Marvin making a profit. The court also noted that Ray & Marvin’s claim that they were manufacturing in hostility to the patent was irrelevant because the judgment in Allen’s suit against Ray & Sizer conclusively established that the gauges were manufactured under the patent. The court stated, “Having acquired the right to the use, by the purchase of the plaintiff’s interest, what they did, must be deemed to have been done in subordination to Allen’s rights, and not in hostility to them.”