Opinion
05-27-1910
UNITED BOXBOARD & PAPER CO. v. McEWAN BROS. CO. et al.
Charles L. Carrick and James Todd, for complainant. John O. H. Pitney and E. V. Frothingham, for defendants.
Suit by the United Boxboard & Paper Company against the McEwan Bros. Company and others. On final hearing on bill, answer, replication, and proofs. Bill dismissed.
Charles L. Carrick and James Todd, for complainant.
John O. H. Pitney and E. V. Frothingham, for defendants.
HOWELL, V. C. The corporation McEwan Bros. Company was incorporated in this state in 1893 for the purpose of manufacturing paper board at Whippany. It succeeded to the business of a partnership which had theretofore borne the same name. It had for its sole stockholders, directors, and officers, four men who were equal shareholders and who had previously been equal owners in the business carried on by them as partners. The profits of the business of the corporation were large, and for many years a large portion thereof was invested in the business as a working capital for the purpose of enlarging the plant and increasing the business. Only one or two small dividends were ever declared among the shareholders. They divided up such amounts as they could spare from their increasing business among the shareholders equally by giving them equal credits on the books of the company, and permitting them to draw against the amounts of these credits. Some time prior to the year 1900 the salaries of the four officers were fixed at $5,000 a year each, and it became the practice to credit the personal account of each one of the four with the sum of $2,500 twice a year as a special credit on account of salary, against which they drew from time to time as they severally saw fit. Usually their accounts showed an overdraft In 1900 the four stockholders, finding that the undivided profits were sufficient for the purpose, agreed among themselves that they would Increase their drawings from the company by the additionalsum of $6,000 per annum. This amount was credited to each of them for that year, and they proceeded to draw against it as they desired. They were informed, however, that there might be question made at some time about the legality of these credits, payments, and overdrafts, and they thereupon in 1901 sought the advice of counsel, who prepared a resolution to be adopted at the forthcoming stockholders' meeting to cure any such irregularity. On March 30, 1901, at a meeting of the stockholders of the company, at which the four stockholders were present, the following resolution was unanimously adopted: "Whereas, the president, vice president and superintendent and treasurer and secretary of this company have been called upon during the past year to perform various services in addition to those which were allotted to said officers; and, whereas, it has been agreed between such officers and stockholders that they should receive additional compensation for the services so to be rendered, said additional compensation to be fixed at this stockholders' meeting; therefore, be it resolved, that the said president, vice president and superintendent, secretary and treasurer, be paid an additional sum of six thousand dollars each for the services so rendered by them, in addition to their salary." Similar action was taken for the following year. On January 25, 1902, the directors of the company held a meeting at which the following resolution was unanimously adopted: "Whereas, the officers of this company have been called upon during the past year to perform work and services for the company other than those which would ordinarily fall upon such officers; therefore, be it resolved that the four officers of this company, viz., president, secretary, treasurer and vice president, who is also the manager, be each paid an additional sum of six thousand dollars for the services so rendered by them as aforesaid." These two resolutions provided for the extra drawings of the four stockholders for the years 1900 and 1901. Following the passage of the resolution of January 25, 1902, $6,000 was credited to each of the four stockholders on January 31, 1902, and to offset the same as a matter of bookkeeping the amount of $24,000 was charged to expense account. In April, 1902, McEwan Bros. Company was approached by Dean & Shibley, who were promoting a combination of boxboard manufacturers, to ascertain whether that company would be willing to join the enterprise. Negotiations were opened which resulted in an agreement with Dean & Shibley, the promoters, made on April 15, 1902, that McEwan Bros. Company would sell their manufacturing property to the United Boxboard & Paper Company, a corporation which had been or which would be organized for the purpose of carrying through the combination,for $300,000 in cash and $375,000 at par of the preferred stock of the United Company. The time for the performance of this agreement was extended from time to time until July 24, 1902. For reasons which need not be referred to here, the promoters and the vendee were not able to and did not complete the purchase of the McEwan Bros. Company property on the day to which performance had been extended, and I find as a matter of fact that all the agreements prior to that date then expired, and that except as hereinafter mentioned the vendors were then under no obligation to make sale of their property to the United Company. However, on that day (July 24, 1902), McEwan Bros. Company entered into a new agreement with the United Boxboard & Paper Company, which had been incorporated on May 28, 1902, to sell to it all the personal property included in a schedule thereto annexed, which also included the real estate and fixtures that had been used by McEwan Bros. Company in the prosecution of their business. That agreement contains the following paragraph: "And the box company for itself, its successors and assigns, by way of further consideration of this transfer hereby further covenants and agrees with the McEwan Company that it will assume and pay all the indebtedness of the McEwan Company contracted since January 1, 1902, in the ordinary course of its business, including the increase of its plant by the erection of buildings and purchase of machinery or otherwise. It is expressly understood that in such indebtedness of the McEwan Company since January 1, 1902, are included the salaries of its directors and officers thereof at the same rates as were allowed during the year 1901."
The present litigation concerns the proper interpretation of this paragraph. In pursuance of the agreement, and on or about the day on which it bears date, the parties executed all the instruments which were deemed necessary to carry out the contract, and placed the same in the custody of a trust company by which they were to be delivered to the vendor and vendee, respectively, at the time when the vendee was prepared to pay the cash item of $300,000 as part of the consideration. Tins sum was fully and finally paid in November, 1902, and all the documents were then delivered, so that the United Company became the owner of the property mentioned in the schedule attached to the bill of sale of July 24. 1902, and McEwan Bros. Company were paid $300,000 in cash, and had transferred to them $375,000 of the preferred stock of the United Company.
In the final adjustment of the accounts between the parties it was discovered that McEwan Bros. Company had paid to its four officers each such proportion of the $5,000 salary and of the $6,000 special fund as had accrued from January 1 to November 13, 1902, upon the theory that it was all salary which was provided for in the paragraph of the agreement of July 24, 1902, hereinabove copied. The complainant is willing to concede the regular salary at the rate of $5,000 per year for the period named, but claims that the proportion of the $6,000 which was paid to each of them did not come within the meaning of "salaries" "allowed" as specified in the July agreement. This suit is brought for the purpose of recovering the amount so drawn, and the question is whether under the terms of the last sentence of the above-quoted paragraph of the July agreement the officers of McEwan Bros. Company could pay themselves at the enlarged rate as salaries of its directors and officers at the same rate as were allowed during the year 1901. To continue the history of the transaction, it appears that the United Company about December, 1902, discovered that the payments in question had been made, and immediately there arose a controversy over the proper interpretation of the contract. At one time a committee was appointed by the company before whom Richard and Robert McEwan appeared with a statement of their side of the claim, which committee appears to have disallowed the contention of the company. However, the controversy was carried on until June 2. 1906, on which day the secretary of the United Company made a complete report of what was called the "adjustment account" of the company, which included the items in dispute with the McEwan Bros. Company, and at the same time presented certain entries which he recommended to be made on the books of the company for the purpose of clearing up their accounts. It was resolved that the matter be referred to the secretary with power to act, but that he do not make any entries in the books touching the "adjustment account" until he had secured a specific written report of an accountant as to what would be the proper procedure in the premises. The secretary presented the matter to accountants, who reported under date of August 29, 1906, that the claim against McEwan Bros. Company arising out of the matters hereinabove set out, and aggregating $22,237.48, should be written off. This report was presented to the board of directors on August 30, 1906, at which time the board passed a resolution that the report be approved and filed and that the vice president (the former secretary) and assistant treasurer be authorized and directed to carry out the recommendations of the vice president and also to make the necessary entries covered in the accountant's report, as well as other entries for the adjustment of certain accounts upon which all the facts had not yet been ascertained. The record shows that this resolution was adopted unanimously, and the evidence showsthat the entries referred to were made, and that thereby the claim of the complainant was canceled on its own books.
There are some incidental matters appearing in the evidence which are relied upon by the parties and are claimed to throw some light on the transaction. The defendants assert that at the time the contract of July 24, 1902, was being drawn Mr. Edward M. Shepard, Mr. Frothingham, his clerk, Mr. Richard W. McEwan, and Robert B. McEwan had one or more conversations with Mr. Hanrahan, who was in the employ of the promoters, and Mr. Malcolm R. Lawrence and Mr. Hughes, his partner (now deceased), who were the promoters' counsel, wherein they notified the promoters that the salaries of the four officers of McEwan Bros. Company bad been fixed at $11,000, and that they insisted that the actual amount should be inserted in the contract, but that the promoters objected to this for the reason that it would embarrass them in dealing with another group of vendors. Both Mr. Hanrnban and Mr. Lawrence say that they do not remember any such conversation, and express a doubt as to whether or not any such statement was ever made to them. On this question of fact, I am Inclined to the belief that the recollection of the McEwans and their counsel would be likely to be better than that of Air. Hanrahan or Mr. Lawrence, for the reason that the vendors were particularly Interested in this point of the agreement, while Mr. Lawrence and Mr. Hanrahan had their attention more or less drawn away from this particular transaction to a consideration of the general features of the whole business and the negotiations with 25 or 30 other vendors; so that, if the fact is of any moment in the case, in my opinion the doubt should be resolved in favor of the better recollection of the McEwans and their counsel.
It likewise appears that in the adjustment of the accounts between the McEwan Bros. Company and the United Company, after the United Company had taken possession of the property purchased by it from the McEwan Bros. Company, Mr. Williamson, a bookkeeper who had been theretofore employed by McEwan Bros. Company, and who was at that time in the employ of the United Company, made up a statement in which it appears that he had deducted the salaries of the four officers of the McEwan Bros. Company at the rate of $11,000 a year, and had ascertained that on that basis there was due to the United Company the sum of $2,820.50, for which McEwan Bros. Company drew a check to the order of the United Company in settlement of the balance so found, and that this check was accepted by the United Company and was paid in the regular course of banking. This, however, can have no effect as an estoppel, for the reason that the deduction was discovered within about a month from the date of this payment, and was at once complained of by the United Company upon the grounds which are now insisted upon. It likewise appears that in 1901 the extra salary for compensation had been duly credited at the rate of $0,000 a year each, but that in the settlement between the officers of the McEwan Company and that company, and an adjustment of their overdrafts, they so arranged their accounts as that they received in all about $14,000. Instead of $24,000; but I think that this can make no difference under the view that I shall take of the case, because the paragraph of the contract in dispute refers not to salaries collected, received, and paid, but to salaries allowed. It is a primary canon of construction of contracts that all the rules are subordinate to the leading principle that the intention of the parties to be collected from the entire instrument must prevail, unless it is subversive of some established rule of law, and that in the case of ambiguity the court may resort to proof of the circumstances under which the contract was made to aid in ascertaining such intention.
The agreement in this case was that the vendee should assume and pay all the indebtedness of the vendor contracted since January 1, 1902, in the ordinary course of its business, and that in such indebtedness should be included salaries of its directors and officers at tlie same rates as were allowed during the year 1901. In order to ascertain what these inclusive words 'mean, we must have recourse to the practice which was adopted in 1901. I pause here to state mat the sale contemplated by the agreement in question was as of January 1, 1902, and that all the accounts and adjustments thereof related back to that date, excepting the agreement to pay the vendor's debts contracted after that date; that from that date the McEwans continued to operate their business as they had done during the year 1901, without change or alteration, each of its officers performing the same services that he had performed during the preceding year, and the bookkeeping and other operations going on without change. Now, going back to 1901, it appears that on January 25, 1902, some three months before the promoters of the United Company approached McEwan Bros. Company, there was a meeting of the directors of the McEwan Bros. Company held at its office in Whippany, at which a resolution was passed reciting that the officers of the company had been called upon during the past year to perform work and services for the company other than those which would ordinarily fall upon them, and it was thereupon resolved that they should be each paid an additional sum of $0,000 for the services which had been so rendered by them, and so the question arises whether this extra compensation is 'salary" that was "allowed" in 1901.
It certainly took the form of compensationfor services rendered. It was in conformity with a practice that had prevailed for the year 1960. It was not for salary which had been stipulated for at the beginning of the term of service or prior thereto, but it was extra compensation which was allowed by the company to its officers after the expiration of the year and after the services had been fully rendered. It was not salary agreed upon. It was compensation allowed, and hence comes within the scope of the disputed paragraph of the agreement. I see no difference between salary paid for services and compensation rendered or allowed for services. Salary in its general sense is a compensation for services rendered by one to another, but because it may be stipulated for beforehand the word gives to the thing no dignity, force, or operation which is not included in the word "compensation." It frequently happens that an employe is paid a stipulated and fixed salary, and, in addition thereto, receives compensation at a fixed percentage on the amount of his sales or other considerations; but, call the extra percentage what you will, it is the compensation or salary allowed to the employe for the specified period, and would be a proper subject for a common-law action and a recovery of both items in one suit. Then there was the statement made by the McEwans at the time the contract was being drawn that their salaries were $11,000 each, and the fact that they insisted upon having this amount inserted in the agreement, and the further fact that the promoters objected to it for reasons above stated. It likewise appears that the amounts of extra compensation provided for by the resolution of January 25, 1902, were credited to the four officers of the McEwan Bros. Company on January 31, 1902, some months before any negotiations with the promoters of the United Company began, and that, when the accountants came to examine the books, the credits were discovered, but were disallowed by them without having placed before them the full statement of facts in relation thereto. These are circumstances which must weigh in favor of the defendants, and quite clearly demonstrate the view which they took of the situation.
We may examine into the things which the parties did after the contract was made for the purpose of finding out how they themselves looked upon the transaction. When we do so, we find that the United Company discovered the payment which it now complains of in December, 1902; that it thereupon laid claim for the repayment of the money now in dispute; that it submitted the whole matter to a special committee before whom the McEwans appeared and to whom they stated their case; that the committee reported against the claim; and that it lay in abeyance until 1906, when it was again taken up by the board of directors, and, in accordance with the report of the accountants, it was written off the books, and, so far as the assets of the United Company were concerned, it was stricken therefrom. While this action does not amount to an estoppel, and does not have the force and effect of a release, it is a set of facts which throws light upon the transaction, and shows particularly in what' small estimation the United Company held its claim. It was an abandonment of its position as claimant, and to this extent is evidence of its acquiescence in the construction given to the contract by the vendors.
The point is raised by the complainant that the defendants by their answer admitted that the salaries which were paid by the McEwan Bros. Company to its officers was only $5,000 a year, and an examination of the original answer in the cause shows this to be true. The original answer was filed in the summer of 1906. In the autumn of the same year the complainant obtained from the defendants their consent to file an amended bill. This bill was filed on October 7, 1909, and on December 28, 1909, there was filed an answer to the amended bill. This answer was not excepted to, nor was any objection made to it touching any of its contents or any of the defenses set up. On the other hand, the complainant out of time, but with the consent of the solicitors of the defendants, filed a general replication, and thus all the material and relevant matters which were contained in the answer to the amended bill were put in issue. There is abundant authority for holding that, when a complainant obtains leave to amend his bill after answer filed, such amendment, however trivial and unimportant, authorizes the defendant to put in an answer making an entirely new defense, even to the extent of contradicting his former answer. 1 Daniel's Ch. Pr. 409, citing the case of Bolton v. Bolton, a MS. opinion, in which Sir Lancelot Shadwell refused to take an answer to an amended bill off the files, although it was filed nearly three years after the bill had been amended and eight years after the original answer, and contradicted the original answer, introducing no less than four new issues and defenses. This was followed by Chancellor Cooper In Dillon v. Davis, 3 Tenn. Ch. 394, and by Chancellor Walworth in Trust & Fire Insurance Company v. Jenkins, 8 Paige (N. Y.) 589, which latter case was approved by Chancellor Runyon in Angel v. P. R. R., 37 N. J. Eq. 93. Whether this be proper practice or not it is unnecessary at present to decide for the reason that this court has held in Burgin v. Giberson, 23 N. J. Eq. 403, that the court will order an answer amended by inserting omitted matter which might constitute a defense, but which was omitted for the reason that the defendant had been told by counsel that it would constitute no defense, and that he did not therefore mention it to the solicitor who prepared the answer. It appears by the testimony in this case thatthe solicitor and counsel who filed the answer herein in which was made the admission now relied upon by the complainant did so under what he now claims, and what the defendants at the time claimed was a misunderstanding by him of the facts before him and of their effect as defenses in the cause. I am therefore of the opinion that the point can he of no avail to the complainant, and that the first answer cannot be given the force attributed to it by the complainant.
It was held by our Court of Errors and Appeals in Lutjen v. Lutjen, 64 N. J. Eq. 773, 53 Atl. 625, that "lapse of time alone is deemed by the authorities to be a sutlieient ground of estoppel in cases like the present, when the court cannot feel confident of its ability to ascertain the truth now as well as it could when the subject for investigation was recent, and before the memories of those who had knowledge of the material facts have become faded and weakened by time. To constitute estoppel of this description, it is not essential that any actual loss of testimony through death or otherwise, or means of proof or changed relations, to the prejudice of the other party, should be proved to nave occurred, but the estoppel arises because the court cannot after so great a lapse of time rely upon the memory of witnesses to reproduce the details that entered into the final execution of the instrument of settlement." The case in hand is an excellent example of a situation to which the above-quoted rule applies. The transaction occurred nearly eight years before the witnesses were called upon to testify in relation thereto. Nearly all of them are prominent business men whose minds have been engrossed during that wfoole period with matters entirely foreign to the subject-matter of this suit. The record shows that on many points the witnesses have lost recollection of the incidents which they were called upon to testify to, and frankly acknowledged that such was the case. In addition to that, two of the most important witnesses have died—Mr. Hughes, who was a member of the firm of Lawrence & Hughes, counsel to the promoters, and who had much to do with the consummation of the transaction, and Mr. Dean, the promoter of the enterprise—and the court is thus deprived of the benefit of the very important testimony which they would otherwise have been able to give. Mr. Lawrence said that the claim had been in his office for several years, but without prosecution.
The defense of laches is insisted upon by the defendants in their answer to the amended bill. They say that all matters between the two companies were fully and finally adjusted and settled to the satisfaction of the parties years ago, and that the said settlement should not, after so long a lapse of time, be opened or disturbed; that on account of the long delay, which has operated to their prejudice in making their defense, the complainant should be barred of any remedy. With this statement I fully concur. The delay has been great. It has probably operated to the detriment of both parties. There is nothing in the pleadings or evidence which excuses it, nor do I remember any effort made on the part of the complainant to explain or palliate it. One of Vice Chancellor Van Fleet's favorite sayings was the pronouncement of Lord Camden in Smith v. Clay, 3 Bro. C. C. 646: "Nothing can call forth this court into activity but conscience, good faith, and reasonable diligence. Where these are wanting, the court is passive and does nothing." The maxim applies to this case.
The result is that the bill must be dismissed.