Bunning v. Kittell — 27 N.Y. St. Rep. 354

Majority

p. 354

Frederick W. Bunning, App’lt, v. Joseph J. Kittell, Resp’t.

(Supreme Court, General Term, First Department,

Filed November 7, 1889.)

Headnote

1. Master and servant—Compensation — Profits of business, how ESTIMATED.

Plaintiff was employed by defendant’s firm at a salary fixed at a certain amount and in addition thereto whatever amount one-sixth of the net profits might exceed such stipulated salary. In an action for his share of the profits, Field, that in estimating them, interest payable under the partnership agreement to one of the partners on his capital, of which arrangement plaintiff had no knowledge and to which he objected when informed thereof, could not be deducted.

2. Same.

The salary paid to the plaintiff was a legitimate expense of the business which should be allowed in estimating such profits.

Appeal from judgment on report of referee.

The following statement of facts, made by the appellant, is adopted as correct.

On the 4th day of January, 1886, plaintiff entered into a written agreement with the defendants, the latter constituting the firm of J. J. Kittell & Co., whereby the latter employed appellant as clerk and salesman for one year from January 1, 1886, at a salary of $2,500 for the year, and if one-sixth of the net profits of the business of the firm during the year should exceed $2,500 the appellant was to receive, as additional compensation, whatever such excess might amount to. He was to be allowed to draw fifty dollars a week until the expiration of the term mentioned in said agreement, when he was to receive the balance that might be due.

The co-partnership between the defendants commenced January 1, 1886, and was to continue, and did continue, for one year from that date. The written contract between the defendants was not signed until March, 1886, but related back to January 1, 1886, and the agreement between the defendants was, in most respects, made verbally before January 1, 1886.

Its terms were discussed frequently between appellant and Loewe, the respondent, and the question of how much capital stock Kittell was to contribute, and how much Loewe, was particularly discussed, and Loewe always informed appellant that Kittell’s contribution was to be $150,000, and his, Loewe’s, whatever stood to his credit on the books of the preceding firm, and appellant’s agreement of hiring was executed upon this representation, and all parties had in contemplation at that time that Kittell was to have six per cent on $150,000 only.

Appellant entered upon the performance of his duties under the agreement of hiring, and performed his obligations thereunder fully.

During the year he drew fifty dollars per week, amounting, in all, to $2,600.

p. 355

In March, 1886, three months after plaintiffs agreement was made and executed, the defendants agreed between themselves that certain fixtures and rights, and the good will of the firm, all belonged to Kittell, individually, and were not a part of his $150,000 capital stock, and were worth $25,000, and that he should be allowed six per cent interest upon that sum in addition to interest on $150,000, and this item was inserted in the co-partnership articles. Kittell had never been allowed anything in previous co-partnership with Loewe for his ownership of such property, although it had been in use by the previous firm.

When appellant was . informed of the foregoing arrangement between the partners as to the six per cent interest on the $25,000 he immediately refused to be bound by it.

After the expiration of the year during which the co-partnership continued the defendants had a settlement together, and Loewe withdrew his interest and Kittell continued the business.

The settlement between the partners was reached by arbitration, in which arbitration the appellant took no part, and was not in any way represented.

The defendant, Kittell, was continuing the business of the co-partnership alone at the time of the commencement of this action, and as he had assumed all the firm’s liabilities, he is practically, though not formally, the sole defendant.

The defendant, Kittell, now seeks to have the settlement reached by the arbitration between the partners declared binding upon the appellant, or, at least, to have the court hold the appellant to that settlement as a proper basis for estimating the profits. And the referee, although he expresses the opinion that the plaintiff is not bound by that arbitration, nevertheless decides that the settlement reached by the arbitration is the correct basis for determining plaintiff’s interest. And as their settlement showed of profits only the sum of $14,644.88, one-sixth of which is less than $2,500, judgment has been rendered dismissing the complaint and also in favor of the defendants for $100 and interest, the appellant having drawn $2,600, or fifty dollars per week, during his year of employment.

The appellant, on the trial of this cause, objected to the following items, which were charged to profit and loss account, and credited to the defendant, Kittell:

Interest on $25,000 at 6 per cent...................$1,500 00

Guaranty account................................ 3,651 19

He also objected to the item charged to expense account, in diminution of the profits of appellant’s salary, $2,500.

He also objected to two items of expense of $400 and $778.28 respectively, which, as a fair man, he is bound to admit the defendants sufficiently explained on the trial.

So that the items in the account, as stated by the referee, which are in controversy on this appeal, are:

Interest....................................... $1,500 00

Guaranty...................................... 3,651 19

Salary........................................ 2,500 00

p. 356

The appellant claiming that his salary was not an expense, but was a part of the profits of the concern, just as the share of each partner was a part of the profits and not an item of expense.

The appellant also objects to the referee’s ruling in directing judgment against him on defendant’s counterclaim for $100, that sum having been paid in excess of the salary agreed upon.

Beltz & Large, for app’lt; B. G. Hitchcock, for resp’t.

The opinion of the learned referee in this case covers undoubtedly the respective items objected to and the reasons assigned by him for overruling the objections mentioned, except the sum of $1,500, the interest on $25,000, for what is called the good will, are entirely satisfactory.

The appellant relies for success upon the case of Rishton v. Grissell, L. R., 5 Eq. Cas., 326, and Paine v. Howells, 90 N. Y., 660 . The first of these cases has no application whatever to the facts developed in this case.

The appellant doubtless thinks it an authority showing the impropriety of deducting his salary as a part of the expenses of the business. But this is an erroneous view. By the agreement there, it was distinctly understood that though the plaintiff was to receive 7 1-2 per cent of the profits of the business, it was to be made up to $500 in any year in which the share of the profits should be less than that sum, and the decision that the $500 could not be deducted from the profits rested upon that feature of the agreement, the learned vice chancellor saying: “ But he has undertaken,” speaking of the defendant’s obligation, “ that the 7 1-2 per cent should always amount to at least $500, and he cannot deduct the $500 before he takes the per centage.” There is no other element in the case applicable to the facts here disclosed.

The second case is advantageous inasmuch as it was there held that when the salesman was to receive for his services a share of the net profits of the business, the interest on capital invested by the principal was not an expense to be deducted in ascertaining the profits. But in that case there is nothing to siiow that the plaintiff knew that by the arrangement between the partners interest was to be allowed on the capital.

It is conceded by the plaintiff’s counsel that the plaintiff knew that interest upon the sum of $150,000 was to be allowed upon the capital of the defendant herein and also interest upon the amount of capital which Mr. Loewe, the other partner, had invested. But the principle declared in that case is evidently applicable to any sum upon which interest is allowed of which he had no knowledge, and with reference to which, therefore, his contract could not have been made.

It appears herein that after the plaintiff’s agreement was made with Kittell & Loewe, it was agreed between them that Kittell should have interest in addition to the sum of $150,000, upon what was said to be the good will of the business, which interest amounted to and was allowed at $1,500. The plaintiff, not knowing of that, and objecting to it and refusing to be bound by it when advised in reference thereto, is entitled under the decision

p. 357

of Paine v. Howells, to a deduction of that amount from the expenses of the business, or in other words to its addition to the profits which were found to be $14,644.88.

The item of $3,651.15 arose in this way.

At the dose of the co-partnership the defendants, for the purposes of liquidation, called in two disinterested merchants in the same line of business, to determine the value of the goods on hand and accounts receivable which consisted largely of the renewed notes of customers. These arbitrators fixed the value of the stock and merchandise on hand, and reduced the value of the bills receivable by that sum, and upon that basis the accounts were liquidated and settled, and the profits determined at $14,644.88. The arbitration was made without consultation with the plaintiff, but in entire good faith without collusion and without reference to any claim or right of the plaintiff. Indeed the defendant took no part in it, leaving the disposition of it entirely to the arbitrators.

It may be assumed, for the purposes of this appeal, that the plaintiff was not bound by the determination of the arbitrators, but the fact would then be that the liquidation was incomplete, and that the exact profits could not be determined unless the result of the arbitration is accepted. If the plaintiff rejects the arbitration, then his action is not maintainable until he can show what the one-sixth of the actual profits were, and that they exceeded the amount of his salary.

There does not seem to be any doubt that the salary paid to the plaintiff was a legitimate expense of the business which should be allowed in estimating the amount of the profits.

The result is that the sum of $1,500 was improperly allowed as interest upon the good will and should be added to the profits, making a total of $16,144.88, one-sixth of which is $2,690.81.

This conclusion necessarily disposes of the counterclaim interposed, which amounts to only $100. and renders it necessary to reverse the judgment and order a new trial, with costs to appellant to abide the event, unless the parties consent to the modification herein suggested.

Van Brunt, P. J., and Daniels, J., concur.