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MAGUIRE v. OSBORNE. (03/13/56)

March 13, 1956

MAGUIRE, APPELLANT,
v.
OSBORNE.



Appeal, No. 204, Jan. T., 1955, from decree of Court of Common Pleas No. 5 of Philadelphia County, Sept. T., 1953, No. 6520, in equity, in case of Alice Hanson Marguire, Admrx. of Estate of Lawrence Houston Maguire, Dec'd. v. Arthur Osborne, Charles A. Hofmann, Joseph C. Hofmann, Jr., and Fibreflex Packing and Manufacturing Co., Inc. Decree affirmed.

COUNSEL

Dunstan McNichol, for appellant.

Floyd W. Tompkins, with him James A. Peace and Tompkins & McNally, for appellees.

Before Stern, C.j., Stearne, Jones, Bell, Musmanno and Arnold, JJ.

Author: Jones

[ 384 Pa. Page 431]

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

[ 384 Pa. Page 432]

    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 Fibreflex 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,

[ 384 Pa. Page 433]

    a recital of some of the 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.

[ 384 Pa. Page 434]

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 any 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. Th management contract of March 25, 1947, was modified by a further agreement of 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 C. Hofmann, Jr., as accountant; the provision for the payment to them of one-half of the net profits of the company as extra

[ 384 Pa. Page 435]

    compensation was 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 statement 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 195i 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,

[ 384 Pa. Page 436]

    two and one-half time 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

[ 384 Pa. Page 437]

    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 ...


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