In re Dant & Dant of Kentucky
| Decision Date | 15 July 1941 |
| Docket Number | No. 13343.,13343. |
| Citation | 39 F. Supp. 753 |
| Parties | In re DANT & DANT OF KENTUCKY. JEFFERSON STORAGE CORPORATION v. KESSLER. |
| Court | U.S. District Court — Western District of Kentucky |
Arthur W. Grafton, of Louisville, Ky., for Dant & Dant.
John E. Tarrant, of Louisville, Ky., for B. & N. Corporation.
D. A. Sachs, Jr., of Louisville, Ky., for trustee.
David R. Castleman, of Louisville, Ky., for Jefferson Storage Corporation.
This matter is before the Court on petitions to review the Referee's order of March 4, 1940 which allowed in part and disallowed in part proof of claim filed by Jefferson Storage Corporation, a creditor, in the total amount of $194,118.20. The Referee's order allowed the claim in the amount of $67,354.51. Petitions for review were filed by both the trustee in bankruptcy who contends that the claim should have been disallowed in its entirety, and by Jefferson Storage Corporation which claims that the claim should have been allowed in its entirety.
The claim arises out of a storage contract between the bankrupt Dant and Dant of Kentucky, a distillery, and the claimant Jefferson Storage Corporation. This contract executed on December 14, 1936, was intended by the parties to provide storage facilities for the whiskey to be produced in the bankrupt's distillery. The distillery and the warehouses of the Storage Corporation were on adjoining tracts of land. The contract imposed upon the Storage Corporation the duty of providing storage facilities for the distillery as therein specified, for a period of ten years, and required the distillery to use a certain minimum of such storage facilities annually, and guaranteed to the Storage Corporation an average monthly income on Dant and Dant storage of not less than $3,000 for each calendar month beginning with the month of January 1938. With the exception of storage of 631 barrels of whiskey for a few months, the storage facilities of Jefferson Storage Corporation were not used by Dant and Dant. The Distillery Company was adjudicated a bankrupt on June 21, 1939. The total claim of Jefferson Storage Corporation in the amount of $194,118.20 is composed of a claim in the amount of $53,825 being guaranteed storage for the period of January 1, 1938 through June 21, 1939, the date of bankruptcy, and of a claim in the amount of $140,293.20, being guaranteed storage as provided by the contract for the period of June 21, 1939 through December 31, 1946, discounted to its present cash value as of June 21, 1939. The Referee construed the storage contract as obligating the bankrupt to pay a minimum guaranteed storage of $25,077.60 per year instead of $36,000 per year as claimed by the Storage Corporation. The first part of the claim was allowed in the amount of $37,629.51. Using the same guaranteed minimum and discounting the future payments at 6%, instead of at 4% as claimed by the Storage Corporation, and estimating future operating expenses at $20,062 per year, instead of $12,000 per year as claimed by the Storage Corporation, the referee liquidated and allowed the future damages as set up by the second part of the claim, in the amount of $29,725.
The trustee contends that the claim should be rejected in its entirety because at the time when the storage contract was entered into, Ganellin, the President of Dant and Dant, required the Storage Corporation to execute a secret collateral agreement by which certain profits of the Storage Corporation would be paid to Ganellin personally, or to his appointee after his death, as long as the storage contract was in existence. The Referee found that such a collateral agreement was secretly entered into, without the knowledge or consent of the stockholders or officers of Dant and Dant, that this made the storage contract a voidable one which could be rescinded by the distillery but the option to rescind had been waived by it failing to take any action to do so for many months after the facts had been brought to the attention of the interested parties. The Trustee contends that the right of the bankrupt to rescind the contract in its entirety was not waived, and that no claim against the bankrupt exists by virtue of the alleged fraudulent storage contract.
It is the settled rule on reviews by the District Court of orders of the referee in bankruptcy that the findings of fact by the referee are conclusive unless clearly erroneous, and that the District Judge should not disturb such findings of fact by the referee unless there is most cogent evidence of mistake or miscarriage of justice. General Orders in Bankruptcy XLVII, 11 U.S.C.A. following section 53; Kowalsky v. American Employers Insurance Co., 6 Cir., 90 F.2d 476; Ohio Valley Bank Co. v. Mack, 6 Cir., 163 F. 155, 24 L.R.A.,N.S., 184; Rasmussen v. Gresly, 8 Cir., 77 F.2d 252. The evidence is conflicting on the issue of whether or not the collateral agreement providing for individual profit to Ganellin was secretly and fraudulently entered into. It appears entirely sufficient to sustain the referee's finding that it was a secret and fraudulent agreement on the part of Ganellin, the bankrupt's president, and this finding of fact by the referee must therefore be sustained.
It is a well-settled principle of the law of principal and agent that a contract made by an agent in the name of his principal, in which inures to the agent a secret profit, not known to or acquiesced in by the principal, is a voidable contract on the part of the principal upon discovery of the facts. Wardell v. Union Pacific R. Co., 103 U.S. 651, 26 L.Ed. 509; Thomas, Trustee, v. Brownville, etc., R. Co., 109 U.S. 522, 3 S.Ct. 315, 27 L.Ed. 1018; Bank of Louisville v. Gray, 84 Ky. 565, 2 S.W. 168; Johnson v. Mitchell, 192 Ky. 444, 233 S.W. 884; Louisville Point Lumber Co. v. Thompson, 202 Ky. 263, 259 S.W. 345. Upon the discovery of the fraud the injured party has the option of two remedies, namely — (a) he can disaffirm the contract by tendering back the property received and asking for a rescission of the contract obligation; or (b) he can affirm the contract and seek damages for his injuries either by an action for deceit or by way of defense or counterclaim in a suit brought against him for failure to completely perform the contract. Ades v. Wash, 199 Ky. 687, 251 S.W. 970; Kentucky Electric Development Co.'s Receiver v. Head, 252 Ky. 656, 68 S.W.2d 1. There are some exceptions to the general rule as stated. At times, the injured party can disaffirm the contract without tendering back the property received, as where the property received is less than what he would be entitled to upon the disaffirmance of the contract. Fox v. Hudson's Ex'x, 150 Ky. 115, 150 S.W. 49, Ann.Cas.1914A, 832; Kirchdorfer v. Heer, 189 Ky. 442, 225 S.W. 141. At times, a partially completed transaction can be carried to completion without waiving the right to rescind the remaining portion of the contract, because under the particular conditions existing it is to the interest of both parties that such transactions be not abandoned or junked in their partially completed status. United States Shipping Board Emergency Fleet Corp. v. South Atlantic Dry Dock Co., 5 Cir., 300 F. 56. In the present case the bankrupt learned of the secret profit agreement on or about July 27, 1937. It had the option at that time to either rescind the contract in its entirety or to go ahead with it and recover in damages. Business policies, such as avoidance of litigation, difficulty in arranging for other storage facilities, absence of any material damage, and certain benefits accruing from favorable provisions in the contract, may have influenced and even been the deciding factors in its decision not to rescind the contract. But such factors were essentially ones presenting pure questions of business judgment; they were not cases, as referred to above, which provide an exception to the general rule. From July 27, 1937 to a time subsequent to bankruptcy on June 21, 1939 (almost two years), the bankrupt permitted the contract to remain in force and effect and was assured of the benefits which it provided, which included storage facilities at a 5 cent rate, when the prevailing rate in the industry was from 10 to 12 cents. This was in legal effect a clear exercise of its option to consider the contract as in effect and to rely upon its claim for damages. It is too late for the trustee in bankruptcy to rescind the contract following bankruptcy when the need of its favorable provisions has disappeared.
Construction of the Storage Contract.
The parties differ as to the proper construction of the storage contract with respect to both (a) rate of storage to be charged the bankrupt, and (b) the minimum monthly guarantee for which the bankrupt was liable under the facts as they developed. These two questions must be first disposed of before the amount of the Storage Corporation's claim can be correctly computed. Two fundamental rules govern the Court in the construction of a written contract, namely: (1) The instrument is to be construed in accordance with the intent of the parties, and (2) in construing any written instrument it is to be considered in its entirety.
Applying these rules it seems plain that the bankrupt was to pay the Storage Corporation only 5 cents per barrel per month for storage space. Although the warehouse receipts issued under the contract provide for 10 cents per month, the present claim is not under warehouse receipts, but is by virtue of the provisions of the storage contract. The storage contract at no place calls for the bankrupt to pay 10 cents per month. It refers to "the storage rate of ten cents per month (provided in the warehouse receipts)", Section 17(c), and allots the first 5 cents actually collected to the Storage Corporation. The second 5 cents is allotted to the bankrupt. It was clearly the intention of the parties that the second 5 cents should not be paid by the bankrupt. It would involve useless bookkeeping to...
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