Opinion
No. 176, Docket 21228.
March 16, 1949. Writ of Certiorari Denied June 6, 1949. See 69 S.Ct. 1171.
Appeal from the United States District Court for the Southern District of New York.
Action by Herbert D. Stone against the Grayson Shops, Inc. (of California), name changed to Grayson-Robinson Stores, Inc., to recover unpaid installments allegedly due on a contract. Judgment for plaintiff, and defendant appeals.
Affirmed.
See also, D.C., 8 F.R.D. 101.
Plaintiff brought this action to recover unpaid installment due on a contract in which defendant agreed to pay plaintiff $200,000 in consideration of the assignment of an employment contract which plaintiff had as President of S. Klein on the Square, Inc.
The S. Klein Store, at 14th Street and Union Square, New York City, had been run by its founder, S. Klein, for many years. In 1942 Mr. Klein died. His executors operated the business until April, 1944, when a small group of members of the Klein family, employees of long standing, and business associates purchased the stock of the Klein corporation from the estate. Plaintiff, a son-in-law of S. Klein, was elected president of the corporation. He and the corporation made a contract employing plaintiff for five years at $25,000 a year and 5% of the net profits before taxes each year. On December 18, 1944, his salary was raised to $30,000 per year plus the same percentage of profits.
Early in 1946, defendant began negotiating for the purchase of the stock, and on February 28, 1946, defendant did purchase substantially all of it. The sellers agreed to deliver to the defendant the resignations of all directors and officers of the corporation, and also agreed that for 21 years thereafter none of the then officers, directors or stockholders would engage in a competing business under the name "Klein." In a separate agreement, plaintiff agreed to assign to defendant all his "right, title, equity and interest" in his employment contract, to resign as officer and director of the Klein corporation, and to refrain for six years from assuming an executive position in any ladies' apparel department store in the Borough of Manhattan, City of New York; in consideration for the assignment and agreements, defendant agreed to pay plaintiff $50,000 upon the closing of the stock purchase, and $30,000 each year for five more years — a total of $200,000. On February 28, 1946, plaintiff gave his assignment, resigned his positions, and received from defendant the first payment, $50,000. Defendant made no further payments. On January 23, 1947, plaintiff elected (as the agreement permitted in the event of such non-payment) to declare the whole amount due, and began this action.
Testimony on behalf of the defendant showed that on August 11, 1944, while President of the Klein corporation, plaintiff borrowed $50,000 from the corporation without the knowledge of the Chairman of the Board of Directors; that on September 5, 1944, he borrowed $13,000 without consulting the Chairman of the Board; that plaintiff told an employee of the corporation that he had taken a radio belonging to the corporation; and that he took about $5,000 worth of merchandise from the corporation, telling the Board of Directors that he used it for corporate purposes, when in fact he used it for his own personal benefit. Plaintiff admitted borrowing corporate funds in the instance referred to, but testified that he had paid it all back within a few weeks, that the transaction had been entered properly on the corporate books, and that the loans had been informally approved by the executive committee and the board of directors. He testified further that he had told the directors the true facts concerning the merchandise taken from the store, and that they had approved his action. He denied having told anyone he took a radio from the corporation. Plaintiff also proved that defendant had examined the books of the Klein corporation before the purchase.
On direct examination, defendant's witness Diamond testified that, during the negotiations plaintiff said that "he had this contract which was a valuable contract free from infirmities." On cross-examination, Diamond stated that he had not intended to indicate that plaintiff used those exact words. He was then asked: "In other words, what you meant was that was your understanding of what Mr. Stone was saying to you, is that it?" and he answered, "That is right."
Defendant also showed that at a meeting of the Klein board of directors on February 5, 1946, which had approved the assignment of plaintiff's employment contract, there was not a quorum of disinterested directors present.
Lazansky, Callaghan Stout, of New York City (Stephen Callaghan, Ralph Stout, and Thomas A. Gaffney, all of New York City, of counsel), for plaintiff.
Poletti, Diamond, Freidin Mackay, of New York City (David Mackay and Emanuel L. Gordon, both of New York City, of counsel), for defendant.
Before AUGUSTUS N. HAND, CHASE, and FRANK, Circuit Judges.
Defendant asserted as its chief defenses (1) fraud, (2) breach of an express warranty, and (3) breach of an implied warranty. We think the trial judge correctly decided that, in support of these defenses, there was not evidence sufficient to go to the jury. Diamond, an experienced lawyer, who appeared in this suit as defendant's counsel, merely gave his understanding of what plaintiff said to him, but did not narrate what plaintiff said. In the circumstances, it is perhaps arguable that such testimony was not enough to serve as a foundation for a defense of fraud or misrepresentation, or express warranty.
We do not decide whether oral testimony could be considered in support of an express warranty in the face of the written contract and written assignment. Cf. Zacharia v. Osaka Textiles, Inc., Sup., 7 N.Y.S.2d 696.
Nor, as bearing on fraud or misrepresentation, do we take account of the fact that defendant had examined the corporate records and might therefore have known of the alleged infirmities in plaintiff's employment contract.
We shall, however, regard the express warranty as given. But it appears to us to mean only that Stone was surrendering a valuable contract which would not be rescinded by Klein. So understood, the statement was true, for, in assigning his contract and agreeing to the stock sale, Stone was giving up something of great worth to him, something which the Klein company had never questioned. His contract was a good one, in the practical sense that Stone's relationship with the Klein company was such that he could expect employment at the contractual rate for the duration of the contract term. It is inconceivable that the Klein corporation would have tried to rescind the contract on account of the technical irregularities alleged.
To go a step further, we might assume as a fact that the Klein company has a remedy to recover from plaintiff any part of the funds or property allegedly converted. There is no evidence, however, as to how knowledge of this fact would have caused defendant to change the terms of its bargain with plaintiff; and, looking at the whole transaction, we think it would not make a sufficient difference to justify rescission of the contract between plaintiff and defendant. In addition to the desired benefit to defendant of getting rid of plaintiff's employment contract without a dispute or lawsuit, defendant obtained from plaintiff an agreement to refrain from assuming an executive position with any ladies' apparel department store in the borough of Manhattan for a period of six years, and also obtained the consent of plaintiff — an important figure in the negotiations — to the sale of the Klein stock.
Nor, on the facts, was there an implied warranty of the validity of the employment contract. While, ordinarily, an assignor of a contract right makes an implied warranty "that the right, as assigned, actually exists and is subject to no limitations or defenses other than those stated or apparent at the time of the assignment" — Restatement of Contracts, § 175 — this rule applies only where the facts do not show a contrary intention. Assuming, arguendo, that the contract right here was subject to a defense which was not apparent, we think the facts disclose such a contrary intention, since defendant did not intend to exploit the contract. Looking at the whole situation, we agree with the trial judge that defendant obtained just what it bargained for. In purchasing the business, defendant wanted to replace the old officers and directors with its own staff of executives. To do so, it had to be rid of plaintiff, and therefore had to buy up or procure a release of his five-year contract. Obviously, defendant never itself intended to enforce that contract against the Klein corporation. Indeed, it could not have done so, for nothing would be due thereunder unless plaintiff continued to work for the Klein corporation. Patently defendant desired only to be free of plaintiff without a dispute or lawsuit. This the defendant got.
Defendant also argues that the assignment is invalid because there was not a quorum of disinterested directors present when the Klein corporation consented to the assignment. Perhaps such a consent would have been necessary if Grayson, as assignee, had intended to enforce the contract with the Klein company by naming plaintiff's successor. But here the purpose of the assignment was to terminate the contract with the Klein company, thus extinguishing plaintiff's rights thereunder; accordingly, so far as the defendant was concerned, there was no need to obtain the consent of the old management of the Klein corporation to the contract between the plaintiff and the defendant.
Affirmed.