Kidwell v. Carter

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 19030 October 20, 1922 E. V. KIDWELL, executrix of the last will and testament of L. B. Kidwell, deceased plaintiff-appellee, vs. C. B. CARTER, defendant-appellant. PORT LEBAK LUMBER COMPANY, cross-defendant and cross-claimant. Perkins and Kincaid for appellant.

Fisher and De Witt for appellee and for cross-defendant and cross-claimant. STATEMENT L. B. Kidwell was formerly in the lumber business at and a resident of, Cotabato, of the Province of Cotabato. The defendant Carter came to the Philippine Islands as a solider in the United States Army, and afterwards became a lieutenant and later a major in the Constabulary, and at one time was governor of the Province of Cotabato.

Through their personal dealings and intimate relations, the two became warm, personal friends. The defendant understood and spoke native language of the province, and at various times rendered Kidwell valuable and important services which were appreciated by Kidwell and largely compensated in one form or another. Their friendship there covered a period of about eight years.

Later KIdwell constructed a saw mill at Port Lebak, and organized the defendant company of which he became the president and owned all of its corporate stock, with the exception of a few shares that were distributed among the directors. This corporation was a financial success, and was making good money on the investment. Later Kidwell developed a cancer and became a very sick man and realized that in short time he would not be able to manage the business, and that sooner or later he would die from the effects of the cancer.

In this conditions her began to look around and figure out what to do with his business. Having absolute trust and confidence in Carter, he discussed the matter with him, and in the end a contract was drawn between them and in the end a contract was drawn between them in and by which the defendant was given an option on 270 shares of the capital stock of the corporation, out of the 587 of which the plaintiff was the owner, at an agreed price of P80,000. The capital stock of the corporation was P60,000 divided into 600 shares of the par value of the P100 per share.

The actual value of the stock, as it then corresponded to its par value, shows the financial condition of the company. At the time the contract was drawn, the defendant Carter did not invest any money in the business. It provided that one-third of the P80,000 was payable each year.

By its term it recited that Kidwell was desirous of returning to the United States on or before June 30, 1920, and the turning over of the general management of the corporation to Carter for a period of three years from the time that Kidwell left. That at the time of his leaving he would give Carter full and complete management of the company with sufficient funds, merchandise, buildings, tools, supplies and equipment for the proper and efficient administration of the company's business, and that Carter should have all the powers of a general manager, and that among other things, he should "thereafter devote his entire time and attention to the company's business and to the furtherance of its interest and shall in no way engage in outside business or business transactions," and that a meeting for the board of directors should be held at which he should be vested with such powers.

The contract was dated February 26, 1919, and among other things, recites that should Kidwell desire Carter to take over the property prior to June, 30, 1920, he should give him at least four months' notice, and that Carter "shall thereupon resign his then employment and enter upon his duties as general manager as herein specified." It further recites that the defendant should receive a monthly salary P500, and should be reimbursed "for any money expended by him for his actual and necessary travelling expenses, incurred buy him in or upon the company's business, provided, however, that said second party shall not be entitled to a cash advance of more than one month's salary." That he should render "written reports every three months, which said reports shall contain a statement of all business transactions of the company, a statement of the received and expended,"

and of the corporate business in general. That upon Carter's assuming the duties as "general manager, Kidwell shall cause 270 shares of the capital stock, of said company, to be issued to said first party and by him endorsed in favor of the second party, said stock to be deposited in escrow together with a copy of this agreement, in a sealed envelope with Bank of the Philippine Islands in Zamboanga until such time as said stock shall be paid for as hereinafter stipulated and agreed." Section 10 of the contract then further provides: (a) The day said second party assumes the management of said company a full and complete inventory shall be made of all property, assets and liabilities of said company, including the mill, machinery, logs logging equipment tools and equipment, logging accounts, supplies, goods, wares and merchandise lumber on hand and in transit, and bills payable and bills receivable.

(b) Thereupon as between the parties hereto, the mill machinery, logs, logging equipment, logging accounts, tools and equipment and mill supplies on hand shall be considered as the property of the company but the lumber on hand and in transit, and the goods wares and merchandise on hand and in the company stores taken at their invoice price plus any launches now owned by said company or subsequently acquired shall as between the parties hereto be considered the individual property of said first party. (c) As the purchase price of the stock above mentioned said second party shall pay said first party the said eighty thousand pesos (P80,000) plus the inventory value of the property listed as the individual property of said party as set forth in the preceding paragraph with the understanding that said payments shall be made from the profits of the company's business without individual liability on second party and provided further that any payments made to said first party shall be considered as dividends from said company and shall not be considered as an advance to nor a liability from said party of said company.

Section 11 says: In the event that the amount so to be paid first party are not so paid as they become due, then any and all amounts so paid from time to time shall, at the option of said first party, become his absolute property and the present agreement shall become null and void and the stock so deposited in escrow shall be returned to said first party and all further rights or liabilities between the parties hereto shall be terminated. It was agreed during the period of the contract that neither party would mortgage or encumber his stock or interest in the company. That should Carter die or become physically unable within the three-year period without having fully paid the stipulated price of the stock, Kidwell would fully compensate him or his heirs for any money earned under his contract.

Carter assumed his duties as general manager about the 8th of September, 1919, at which time Kidwell with his family went to the United States where he died in a very short time, and later his widow returned to the Philippines Islands, and was duly appointed and qualified as executrix of his last will and testament. Claiming that he had made full payment for his stock and complied with all the terms and conditions, of the contract, Carter wrote the widow a letter asking her consent that the 270 shares of stock should be transferred to, and issued in, his name. Relying upon his statements and representations, the widow gave her consent, and that stock was issued to Carter.

Later on the books of the corporation were examined by an expert accountant who found and reported that Carter had not paid the purchase price of the stock or any part of it, and that he had neglected the affairs of the company. This led to the present action in which the plaintiff, as executrix, alleges that on the 3d day of August, 1920, the defendant "wrongfully contriving and maliciously intending to defraud the estate of the said deceased and acting as the president of said corporation had the aforesaid 270 shares of stock transferred on the books of the corporation in his name and a stock certificate therefor issued to himself." That he had not complied with any of the terms of his contract, and that he had devoted any of his time to the corporate business, and that he was then on a pleasure trip to America, and that since the 8th day of September, 1919, he had fraudulently appropriated to his own use more than P150,000 of the corporate funds.

That the 270 shares of the capital stock were then of the value of P100,000 and are liable to loss unless a receiver is appointed, and prays for a judgment defendant has not complied with any of the terms of the contract; that he had embezzled the funds of said corporation; that he has no right to the 270 shares of stock; and that the defendant be enjoined from disposing of or using it in any manner. The defendant Carter denied all of the material allegations of the complaint, and, as a further and separate answer, and by way of cross-complaint, pleads the inducements which led up and entered into the making of the contract, and the payment to the widow under the contract of P130,000, and the further sum of P90,00 under her instructions to satisfy a mortgage on the property. That he had devoted all of his time and attention to the business, and that a correct accounting between the defendant and the corporation will show that there is a large sum due and owing to the defendant.

That he was unlawfully removed as president of the corporation by the board of directors, and pleads a letter of the deceased to him written October 13, 1919, "on Board the Penn. Limited." That the widow is wholly incompetent to manage the affairs of the corporation, and that he is entitled to a salary of P3,000 per annum, and "earned profits on the shares of stock held by defendant, and prays that the Port Lebak Lumber Company be made a party, and that the proceedings of the boards of directors, removing him as manager and president of the corporation be declared null and void.

That an accounting be had, and that defendant have judgment for any sum which may be found due him, together with the damages which he has sustained. Based upon the order of the court, the Port Lebak Lumber Company appeared and filed an answer, denying all the material allegations of defendant's cross-complaint, and, among other things, alleges that the defendant Carter had taken and appropriated to his own use P188,614.16 "in excess of the money to his credit in his personal account, which said drawing was not authorized by the directors of the corporation," for which amount it prays judgment against the defendant Carter.

The plaintiff also filed a general denial to defendant Carter's cross-complaint.

The Philippine Trust Company was appointed receiver of the 270 shares of stock of the corporation of which it took possession. Upon such issues a large amount of testimony was taken. There was a stipulation as to many of the material facts.

In a very able and exhaustive opinion, the trial court found that plaintiff should have and recover judgment from the defendant Carter for the 270 shares of the capital stock of the corporation transferred to him on August 3, 1920, free of any claim or interest thereon of the defendant; that the certificate for said shares should be delivered to the corporation by the receiver for cancellation; and that a new certificate for said shares should be delivered to the corporation by the receiver for cancellation; and that a new certificate should be issued to the plaintiff, as executrix and that the corporation should have and recover from defendant Carter the sum of P57,620.70, with interest; and that defendant take nothing by his cross-complaint, which is dismissed, and for the costs of the action, from which the defendant Carter appeals claiming that the lower court erred in sustaining an objection to the testimony of the witness Tillet as to the circumstances under which the contract was executed, and the negotiations, between the parties which culminated in the contract, and in rejecting the testimony of the witness Tillet, and in striking portions of his testimony from the record, and in finding that the defendant made trips to Manila or Hongkong on his personal business, and in disallowing P8,885.22 expended by him as manager in charge of the company.

In finding that P68,155.22 should be charged to his personal account, and that the sum of P381,778.05 credited to the account of Kidwell on the books of the company was composed of dividends earned by Kidwells shares of stock prior to September 1, 1919, and in finding that Carter was addicted to excess of drinking of liquor, and that plaintiff was ignorant of defendant's account in the company and in its interpretation of the contract between them. In holding that the defendant was not entitled to credit or to recover for the payments made to Kidwell and his estate on account of the purchase price of the 270 shares, and that the company was justified in removing him as general manager, or that he ever had breached his contract, or that plaintiff was entitled to treat it as a breach of the contract, or to rescind it, and in entering the respective judgments, and in refusing to enter judgment for the defendant Carter, and in denying his motion for a new trial.

JOHNS,J.: It is very apparent that the contract was made between personal friends. That it was designed to equally protect both parties, and that neither sought an undue advantage over the other, and that it was not hastily signed or prepared. It was dated February 25, 1919, and by its terms a previous contract between them, of January 30, 1919, was "declared of no further force or effect."

Carter was to become manager June 30, 1920, and should Kidwell desire him to assume his duties prior to that time, he was to give him at least four months notice. He assumed his duties September 8, 1919, nearly six months after the contract was signed. Hence, if there was any doubt as to the meaning or construction of the contract them, there was ample time for discussion and settlement before Carter resigned his old and assumed his new position.

Clause (a) of section 10 provides the full and complete inventory of all property of the corporation should be made on the day Carter assumed his duties as manager.

As between the parties, clause (b) specifically defines what shall be deemed the property of the corporation, which includes "mill machinery, log, logging equipment, logging accounts, tools, and equipment and mill supplies on hand," and it then says that "the lumber on hand and in transit, and the goods, was, and merchandise on hand and in the company's stores taken at their invoice price plus any launches now owned by said company or subsequently acquired shall as between the parties hereto be considered the individual property of said first party." It specifies and defines the rights of both parties, and is the basis for the purchase price of the 270 shares of stock.

Carter did not invest any money. It is very apparent that he knew all about the business of the corporation, and was familiar with its assets, revenues, and profits. Also, that in the natural course of events, both parties fully expected that on or before three years Carter could and would fully pay for his stock out of his pro rata share of the profits.

It was for such reason that the three-year limitation was placed on the contract. By its terms, in addition to his salary of P500 per month, he was made the manager of the corporation, the profits of which, in the ordinary course of business, it was thought would be sufficient in three years to pay for the 270 shares of stock. In his letter of October 13, 1919, when he knew his sickness would be fatal, plaintiff says: I have also explained to her to have every confidence in you which she has and not to bother you in regards to your plans in carrying out the business.

By all means see that the mortgage I gave Staples on the plantation amounting to thirty thousand pesos is liquidated as soon as possible and advise Mrs. Kidwell. I hope you have the statement showing just how things stood at the time you took over the business, mailed to me if not please mail same as soon as possible. It serves me much pleasure to know I have two men like you and Wheeler at the head of my business in the conditions I am in.

This was the last letter of a dying man to his trusted and confidential friend. Carter contention that the contract creates a partnership between them is not tenable. The word partner is not used anywhere in it, and the contract itself does not have any of the elements or essentials of partnership.

It is true that the widow gave him a letter of introduction which she referred to him as pa partner, and that the offered and excluded testimony tends to show that Kidwell himself to Carter as his partner. The average person know but little, if anything, about the subtle, legal distinction between a partnership and the stockholders of a corporation, and as used by them, the word partner meant nothing more than that Carter was or would become manager of the corporation with valuable rights as a stockholder. It did not mean that the corporation had been destroyed or dissolved.

Carter's rights were based upon the value of the stock, and he could not become a stockholder unless the corporation continued to exist. This construction is further sustained by the fact that a meeting of the board of directors of the corporation was called at which the contract was ratified, and Carter was elected ,manager and later president of the corporation and that the same board, with Carter as president, declared the dividend and issued direct to him the 270 shares of stock. By his own conduct he is estopped to claim or assert that the contract was partnership.

In its final analysis, it was a three-year contract for the employment of Carter as manager at an agreed salary of P500 per month upon specified terms and conditions defining his powers and duties with a right and option to acquire 270 shares of stock and pay for them out of the profits of the corporation during the period of his contract.

At the time of its signing Carter was receiving a salary of P750 per month with allowances for travelling expenses, a residential house, and an entertainment fund of P2,000 per annum as Provincial Governor, and the contract provides that he should have four months' notice in which to arrange his personal business and resign his old position before assuming the duties of the new. Hence, we must assume that the intended and expected to better his position, and that his right to acquire the 270 shares of stock out of the profits of the corporation was one of the main considerations and inducements for hi signing of the contract, the value of which to him largely depended upon his abilities and the way in which he discharged his duties as manager. It provides that upon Carter assuming his duties, a full and complete inventory should be taken, and as between them, what property shall belong to the corporation and what shall belong to Kidwell.

That Kidwell shall give Carter full management, "together with sufficient funds and merchandise buildings, tools, supplies and equipment", as may be necessary to the efficient administration of the corporate business. That Carter shall devote all of his time to the corporate business and receive a salary of P500 per month and render written reports every three months, and that he shall remain as general manager for three years. That upon assuming his duties Kidwell shall cause 270 shares of the capital stock to be issued in his name and endorsed to Carter to be placed in escrow in the bank which he agreed to sell to Carter upon the terms and conditions provided in the contract.

The important question is the construction of the contract. It recites that the capital stock of the corporation is P60,000 and that Kidwell is the sole owner of the 587 shares of stock in the company of the pa value of P58,700; that, subject to terms, Kidwell desires to sell and that Carter desires to buy 45 per cent of the stock of the corporation for the price of P80,000. Section 10 says that, subject of the provisions of the contract, Kidwell agrees to sell and Carter agrees to buy "270"

shares of the capital stock of the said Port Lebak Lumber Company for the sum of eighty thousand pesos (P80,000)." Clause (a) of section 10 provides that, when Carter assumes his duties as manager, a full and complete inventory shall be taken of all of the assets of the corporation. Clause (b) provides, in effect, that, as between them, all of its liquid assets shall be deemed and treated as the individual property of Kidwell, and that the mill, logs, logging equipment, loggin accounts, tools and equipment and mill supplies should be deemed and treated as the property of the corporation.

On assuming his duties an inventory of all of the property was taken from which it was found that the assets of the corporation known and designated "as the individual property of Kidwell" was of the value of P134,610.13. Clause (c) of section 10 says: As the purchase price of the stock above-mentioned said second party shall pay said first party the said eighty thousand pesos (P80,000) plus the inventory value of the property listed as the individual property of the said first party as set forth in the preceding paragraph, etc.

The plaintiff contends and the trial court found that, under his clause, the P134,610.13 should be added to the P80,000 and that the purchase price of the stock was P214,610.13. That ruling is assigned as error, and is the important question in this case. The language used is somewhat awkward, and its meaning is not definite or certain, and hence, its proper construction must depend upon the relative situation and the purpose and intent of the parties.

It is stipulated that the value of the lumber on hand and in transit, the goods, wares, and merchandise in the company's stores, at the invoice price, and of the launches specified in clause (b) of section 10 of the contract was P134,610.13.

As to Carter, this became the individual property of Kidwell, and was not an asset of the corporation. It appears from the balance sheet of date of August 31, 1919, as certified by the public accountants, that the gross value of all of the assets of the corporation was then P449,486.46, in which the liabilities are as follows: Capital Stock .................................................................... P60,000.00 Forestry dues ...................................................................

3,114.20 Notes payable ................................................................... 15,000.00 Accounts payable .............................................................. 13,115.52 Undivided profit from December 31 .................................

199,364.18 Profit for eight months ending August 31, 1919, as per profit and loss account .......................................... 158,892.56 Making a total of ...................................................