Maguire v. Osborne

121 A.2d 147, 384 Pa. 430, 1956 Pa. LEXIS 571

• Court: Supreme Court of Pennsylvania
• Decided: March 13, 1956
• Docket: Appeal, 204
• Status: Published

Opinions

Opinion by

Mr. Justice Jones,

The plaintiff, acting individually and as the administratrix of her deceased husband’s estate, filed her complaint in equity as a minority stockholder of the Fibreflex Packing and Manufacturing Co., Inc., a Pennsylvania corporation, against Arthur Osborne, the majority stockholder, Charles A. Hofmann and Joseph C. Hofmann, Jr., employees and directors, and the corporation itself, seeking a decree to compel the Hofmanns to return to the corporation certain moneys received by them as additional compensation, under a written agreement with the corporation, in an aggregate amount which the plaintiff alleges was excessive and unconscionable. The defendants filed a joint answer. After hearing, the learned chancellor filed an adjudication containing findings of fact, conclusions of law and a decree nisi dismissing the plaintiff’s complaint at her costs. Extensive exceptions by the plaintiff to the adjudication and decree nisi were, after argument, dismissed by the court en banc which thereupon entered a consonant final decree.

The plaintiff has taken but one appeal, as an individual and as administratrix of her deceased husband’s estate, although such interests are not joint: see Dublin Estate, 375 Pa. 599, 600-601, 101 A. 2d 731. We shall enter a non pros as to the plaintiff individually, leaving the appeal as that of the administratrix. The record shows that the Eibreflex stock which Mrs. Maguire represents is an asset of her husband’s estate and has never been decreed to her individually. Her election as a director of the corporation has at all times been as administratrix of her husband’s estate and it is in that capacity that she has attended directors’ and stockholders’ meetings.

The findings of the learned chancellor are supported by substantial evidence and, having been confirmed by the court en banc, are binding here.

The principal question of law involved is as to the intended meaning of the term “net profits” where used in the written agreements between the corporation and the Hofmanns providing for extra compensation to the latter.

For a proper understanding of the controversy and the chancellor’s treatment of the plaintiff’s contentions, a recital of some of tlie established facts is necessary. The findings reveal an amazing financial success evolved out of a practically defunct company through the ability, industry and faithful service of the defendants Hofmann whom the plaintiff would now deprive of the additional compensation to which they became entitled under their written agreements with the company and whereof the plaintiff long had full knowledge and made no complaint.

Fibreflex Packing and Manufacturing Co., Inc., had a capital of $2,000 represented by forty shares of stock of $50 par value each. From a time prior to 1941, Mrs. Scheer, an aunt of defendant Osborne, had been the owner of the whole of the company’s capital stock. The plaintiff’s decedent, Lawrence Houston Maguire, was then in charge of the business for Mrs. Scheer. In 1941, in recognition of his services, she gave him twelve shares or thirty per cent of the stock of the company. Maguire died March 3, 1946. By that time he was practically the only employee of the company, its business having dwindled to such an extent that the company was verging on insolvency, if not then actually insolvent. It had operated at a net loss for the seven preceding years and, at the time of Maguire’s death, it was unable to meet its debts as they matured. It would seem that the company’s capital was then impaired, indicating that its assets were somewhat less than its liabilities. At least, this is confirmed inferentially by the fact that Mrs. Maguire, as administratrix of her husband’s estate, had his twelve shares of Fibreflex stock appraised as of the date of his death at a total value of $480, or $10 per share less than par. For inheritance tax purposes the value was fixed at $450. And, no one has suggested that either appraisal was an undervaluation.

Following Mr. Maguire’s death in March of 1946, Mrs. Scheer, who was president of Fibreflex, called on her nephew, the defendant Osborne, for advice concerning the company’s future, which to Osborne looked hopeless. Together, Mrs. Scheer and Osborne conferred with the Hofmanns with a view to having them take over the management and operation of the business — a relationship soon thereafter consummated. By March of 1947, it was apparent from the current increase in net earnings over the previous years that, under the Hofmanns’ management and personal services, the prospects for the company’s success were good. As an inducement to the Hofmanns, and another employee named Gray, to remain with the company and devote their time and energy to the promotion of its business, the company entered into a written agreement with them on March 25, 1947, whereby it was agreed that one-half of the net profits of the company from January 1, 1947, until the termination of the agreement should be paid to the Hofmanns and Gray in specified proportions as compensation.

Mrs. Scheer, who, as president, had executed the agreement of March 25, 1947, in behalf of the company, died in July 1947, and her nephew, Osborne, became the owner of her twenty-eight shares of Fibreflex stock which represented a seventy per cent interest in the company. The management contract of March 25, 1947,. was modified by a further agreement on January 1, 1948, between the company and the Hofmanns, Gray no longer being a party. Stated salaries to the Hofmanns in the January 1, 1948, agreement were fixed at $3,900 per year to Charles A. Hofmann, as general manager, and $1,040 a year to Joseph 0. Hofmann, Jr., as accountant; the provision for the payment to them of one-half of the net profits of the company as extra compensation ivas continued. This agreement was ratified by the stockholders at their meeting on November 28, 1948, at which the plaintiff was present and voted in the affirmative after the agreement had actually been read to her. It was at the same meeting that the Hofmanns, to each of whom Osborne had assigned a share of Fibreflex stock for qualifying purposes, were first elected directors and executive officers of the corporation. Osborne had become the president after Mrs. Scheer’s death and so remained throughout the subsequent times herein involved.

The management and compensation agreement of January 1, 1948, was amended on December 30, 1950, in a detail not presently material; and on March 13, 1951, it was extended to December 31, 1961, and for a possible additional period thereafter depending upon the happening of a specified contingency.

Mrs. Maguire, the plaintiff, was elected a director of Fibreflex Company on November 18, 1950. From 1946 onward she had annually received financial statements of the company, showing the extra compensation paid the Hofmanns. These statements disclosed the method by which the fifty per cent share of the net profits, payable to the Hofmanns as extra compensation, was computed. Yet, she never made any objection thereto until October 23, 1952, and did not institute the present suit until November 18, 1953.

Under the Hofmanns’ management, the company began in 1947 and 1948 to make money in modest amounts (there were no net profits in 1949) with the result that in 1951 and 1952 the company was able to, and did, pay dividends at the rate of $50 per share for each of those years, such dividends being the first ever paid in the history of the company. The $1,200 in dividends which the plaintiff received was, it may be observed, two and one-half times the value at which she had had her husband’s twelve shares appraised just several years before. Furthermore, at the trial of this case, which began in December 1953, the plaintiff’s financial expert witness testified to a value for her twelve shares of stock in the Fibreflex Company of from $120,-000 to $125,000.

In view of the company’s fairy-like financial achievement, the chancellor’s estimate of the value of the Hofmanns’ services to the Fibreflex Company becomes readily understandable. Thus the chancellor found and the evidence well supports the findings: “19. While the Hofmanns managed the corporation it enjoyed a phenomenal growth; this growth was due entirely to the industry, skill and efforts of the Hofmanns. 20. During the early years, the Hofmanns performed managerial, manual and menial labors, including truck driving and duty as night watchman. 21. From March, 1946, to December, 1952 the net worth of the corporation increased from $16,360 to $91,256.74; assets rose from $22,965.48 to $238,993.19; gross sales from $97,602.73 in 1947, to $582,574.69 in 1952 and $546,950.40 in 1953. ... 31. Under the Hofmann’s management Fibreflex’s success has forced their four principal competitors out of the field; Fibreflex is the largest producer of vegetable fibre sheet in the industry. 32. The success of Fibreflex was due solely to the extraordinary efforts and abilities of the Hofmanns. 33. The monies paid to the Hofmanns were not a bonus, but were additional compensation for services performed.” While Arthur Osborne, the seventy per cent owner of the company, was on the witness stand during the trial, relating in detail the great service the Hofmanns had rendered Fibreflex, the learned chancellor was moved to interpolate, “That sounds like an epic to me” and the witness responded, “It is. It is a miracle.”

So satisfied was Arthur Osborne with the arrangement for the Hofmanns’ services that on November 29, 1949, he personally entered into an agreement with them whereby he placed in escrow twenty-one of his twenty-eight shares of Fibreflex to be delivered unconditionally and absolutely to the Hofmann brothers on June 30, 1957. The recited consideration for this agreement was a loan of $5,000 to the corporation by Charles A. Hofmann who thus demonstrated his faith in the company by which he was employed. At that time, i.e., near the close of the year (1949), it was known that no profits had been made and, of course, no extra compensation had been paid the Hofmanns.

In considering the legal aspects of the controversy, it is to be borne in mind that the appellant does not attack the validity of the compensation agreement between Fibreflex and the Hofmanns. Nor does she charge a breach of fiduciary duty by anyone acting for the company in such connection. The fact is that when the controlling and still extant compensation agreement of January 1, 1948, was entered into, the Hofmanns were but employees of Fibreflex at extremely minimal salaries. It was not until almost a year later (viz., November 28, 1948) that the Hofmanns became directors of the company, being stockholders then only to the extent of one share each which Arthur Osborne (retaining the beneficial interest therein) caused to be transferred to them for qualifying purposes.

It is the appellant’s contention that the term “net profits” as used in the compensation agreement means the company’s net profits after payment of Federal income and excess profits taxes and the State corporate net income tax.

In the court below the plaintiff had argued that the term “net profits” was ambiguous and required judicial construction. The learned chancellor held, however, that net profits, as used in the compensation agreement, meant the balance of the gross income remaining after deducting therefrom operating business expenses and before payment of taxes on the net income. Here, the appellant has altered her position and now contends that net profits is a term of art with a definite meaning in the law that it embraces so much of a company’s net earnings as remain after payment of the income and profits taxes thereon.

As a term of art, net profits may mean two different things, depending upon its contextual relation. If the term is used for the determination of the amount of a liability for a business expense, such as compensation to employees, it necessarily means net profits before the payment of income and profits taxes. Such taxes are assessed only on net income after deduction of all operating expenses; necessarily, therefore, a portion of net profits payable to employees as compensation (viz., a business expense) must be determined and deducted 'before the net income subject to tax can be ascertained. If, however, the term net profits is intended to define the earnings available for distribution among stockholders by way of dividends or for allocation to earned surplus, it means the net profits after the payment of the taxes on the ascertained amount of the net income subject to tax.

It follows, therefore, that the term “net profits”, as used in the compensation agreement between Fibreflex and the Hofmanns means the net profits before payment of taxes. As observed in Gallen v. National City Bank of New York, 273 N.Y.S. 87, 113, — “No question is raised in the books but that a corporate officer [here employee] may be paid a percentage of profits . . . and that such compensation, contingent upon net earnings, is a cost of the enterprise and not a distribution of funds exclusively allocated to stockholders.”

What the law thus ascribes as the meaning of the term “net profits”, in relation to the provisions of the compensation agreement, is exactly what the parties intended it to mean. The agreement itself inherently so confirms. It provides that “The said one-half of the net profits payable by ‘Corporation’ [Fibreflex] to ‘Employees’ [Hofmanns] shall be paid to them upon the following terms and conditions: (a) Said net profits shall be paid to ‘Employees’ quarterly commencing the first day of April, 1948,. . . .” This provision negatives any idea that deduction for corporate income and profits taxes could have been in the thinking of the parties at the time of the execution of the contract. Such taxes are assessed on the net income from a year’s operation. How then, it may be asked, could deduction for income and profits taxes be made from a quarter’s earnings when, by the end of the tax year, there might not be any liability for such taxes because of the counterbalancing effect of losses in a subsequent quarter of the year.

If there was any doubt as to the meaning of the January 1, 1948, agreement, the parties’ uniform and unvarying interpretation of it over the years confirms that the net profits, whereof the Hofmanns were to receive fifty per cent, embraced the profits before taxes. The general rule of interpretation, pertinent to the present circumstances, is well stated in 56 Corpus Juris Secundum, §112, p. 547, as follows: “Under an agreement by which profits from the employer’s business are to be included as a basis for compensation, the amount recoverable by the employee depends on the intention of the parties as revealed in the contract and by their conduct under if’ (Emphasis supplied). It has long been established in this State that, where a contract is susceptible of two different interpretations, the one that the parties themselves put upon it is the one that the courts will adopt and enforce. In Gass Appeal, 73 Pa. 39, 46, Mr. Justice Agnew said that “when a contract is capable of two different interpretations, that which the parties themselves have always put upon it, and acted upon, especially as here for a long series of years, a court will follow, because it is the true intent and meaning of the parties . . . .” That statement has since been cited and applied a number of times down to Foulke v. Miller, 381 Pa. 587, 595, 112 A. 2d 124; see, also, Restatement, Contracts, §235 (e).

The appellant’s further contention is that the extra compensation paid the Hofmanns for the years 1950, 1951 and 1952 was excessive and unconscionable. She is plainly without standing to so assert. In any event, the alleged excessiveness of the contractually obligated compensation does not go to the intent of the 1948 agreement which, after all, is the appellant’s only question of any substance. For the years 1947 and 1948, when the company’s profits were relatively small and the Hofmanns’ extra compensation, under the agreements, proportionately likewise (there were no profits at all in 1949), the plaintiff made no complaint whatever of the extra compensation then paid to the Hofmanns. Indeed, even now, the appellant does not contest the extra compensation paid the Hofmanns prior to 1950. • She states in her brief that “the question of reasonableness applies only to 1950 and subsequent years. Amounts paid prior to' 1950 were small. . . and their reasonableness is not questioned . . . .” Nonetheless, such amounts were paid under the compensation agreements on the “net profits” before taxes. The appellant is therefore estopped to raise an issue as to the quantum of the extra compensation payable in 1950 and thereafter under the 1948 agreement when she did not object to the extra compensation paid under the same agreement prior to 1950.

Moreover, the appellant is guilty of laches. Not only did she willingly acquiesce in the company’s acceptance of the Hofmanns’ managerial and laborious services in the first three years of the compensation agreement but for almost three years more she stood by and enjoyed the benefit of their employment with the result that the value of her capital interest in the company was, within six short years, multiplied two hundred and fifty times on the basis of the value testified to by her own expert witness at trial. If she were now permitted to deprive the Hofmanns of the compensation to which they are entitled under the 1948 agreement, the time and energy which they faithfully and unstintingly devoted to the company’s welfare and success could never be restored to them. A plainer case for the application of the doctrine of laches could hardly be imagined. The learned court below was, therefore, warranted in dismissing the plaintiff’s complaint on the additional ground of laches: see Grange National Bank of McKean County v. First National Bank of Bradford, 330 Pa. 1, 3-4, 198 A. 321.

In conclusion, we cannot refrain from echoing the learned chancellor’s comment that “plaintiff’s charge that [the Hofmanns] were ‘milking’ the corporation is unrealistic and comes with ill-grace.”

The appeal of the plaintiff individually is non prossed. Decree affirmed at appellant’s costs. . .