Amherst Sportswear Co., Inc. v. McManus

• Decision Date: 03 April 1989
• Docket Number: No. 88-2193,88-2193
• Citation: 876 F.2d 1045
• Parties: AMHERST SPORTSWEAR COMPANY, INC., Plaintiff, Appellee, v. Mark McMANUS, Defendant, Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1045

876 F.2d 1045

AMHERST SPORTSWEAR COMPANY, INC., Plaintiff, Appellee, v. Mark McMANUS, Defendant, Appellant.

No. 88-2193.

United States Court of Appeals First Circuit.

Heard April 3, 1989.

Decided June 5, 1989.

David A. Ross with whom Ross & Ross, Manchester, N.H., was on brief, for defendant, appellant.

Sterling H. Schoen, Jr., Manchester, N.H., on brief, for plaintiff, appellee.

Before CAMPBELL, Chief Judge, BOWNES and BREYER, Circuit Judges.

LEVIN H. CAMPBELL, Chief Judge.

Defendant McManus, a former sales representative for plaintiff Amherst Sportswear Company ("Amherst"), appeals from a judgment of the United States District Court for the District of New Hampshire ordering him to repay $13,185.40 that Amherst had advanced to him towards expected commissions which he failed subsequently to earn. We vacate the judgment below and remand.

Amherst is engaged in the design, marketing and distribution of women's sportswear. In August 1982 McManus agreed to act as Amherst's sales representative in four states. The following year McManus and Amherst entered into a letter agreement dated June 20, 1983, written by Amherst's president, Ted Gillan, and sent to McManus. The letter provided:

We have agreed that you will be a [regional] Sales Manager.... You have agreed to represent AMHERST SPORTSWEAR CO., INC. exclusively. The commission on your sales will be 8% on regular price shipments and 4% on off-price shipments less market terms.... You will maintain showrooms at your expense in the Charlotte Merchandise Mart and the Atlanta Apparel Mart.... AMHERST will advance you a monthly draw of $3,000.00 towards expected commissions. AMHERST will pay for your Medical and Dental Plan for one (1) year. Mark, please review this agreement and alert me as to any questions you might have....

Per the agreement, Amherst began in June to advance McManus $3,000 per month. Each month Amherst sent McManus a so-called "commission statement" showing the accumulated commissions McManus had earned, the accumulated monthly "draw" advanced to him, and the running balance as between these two items. As McManus did not meet his projected sales, the commission statement by December 1984 showed advances to McManus exceeding his earned commissions by $19,000. This latter net figure appeared in brackets. Gillan and McManus met several times and discussed the fact that the advances were far outpacing the commissions due to McManus. In March 1985 Gillan agreed to write off half of the advances so far made to McManus as a gesture of faith in McManus's ability. This transaction was memorialized in a memo to McManus from an Amherst accountant, which provided, "As you can see, Ted has agreed to write off half of your advance effective with this [commission] statement." McManus verbally thanked Gillan for writing off the advances. Sometime in the spring of 1985 Amherst reduced McManus's advances to $1,000 per month. When matters did not improve, in November 1985 Amherst terminated McManus's advances. McManus voluntarily severed his relationship with Amherst the following January. At that time, McManus's debit balance was $13,185.40. Gillan testified that at the time McManus left, Gillan asked McManus what he intended to do about the debit balance, and that McManus said something to the effect that he would pay the debt. ¹ McManus denied having promised to repay Gillan, testifying that the final meeting was heated and that he only told Gillan that if Gillan wanted to talk further, he could contact McManus at his home. ² McManus testified that Gillan did not contact him again.

Amherst then brought this diversity action to recover the debit balance, Amherst being a New Hampshire corporation with its principal place of business there, and McManus a North Carolina citizen. The parties agreed that the substantive law of New Hampshire would apply. See Moores v. Greenberg, 834 F.2d 1105, 1107 n. 2 (1st Cir.1987) (where parties agree what substantive law applies, federal court sitting in diversity jurisdiction should comply). On the basis of the evidence at the bench trial, the district court found that

Mr. Gillan sent McManus a letter dated June 20, 1983, outlining the agreement between the parties, including a provision that "Amherst will advance you a monthly draw of $3,000 towards expected commissions." Although Gillan asked McManus to review the letter agreement and advise him if there were any questions, McManus never disputed the terms set forth therein during the time he worked for Amherst.

The court also found that McManus was an independent contractor. Further, the court found that

[o]n April 25, 1985, Amherst issued a memorandum confirming an earlier conversation between Gillan and McManus in which Gillan told McManus that Amherst would forgive one half of the accumulated debit balance. McManus thanked Gillan for doing so. At no time prior to April 25, 1985, or during his conversation with Gillan concerning the reduction in his debit balance did McManus ever deny the existence of a debit balance, other than to occasionally question specific charges and/or credits.

The court also found that

[a]t no time prior to his termination did McManus claim that he was not required to repay the accumulated debit balance. McManus now claims that from April 25, 1985, to the date of his termination he regarded the advances as salary. There is no credible evidence that the advances made to McManus were ever salary; to the contrary, all of the evidence indicated that the advances were, in essence, loans made as advances against commissions which were to be earned in the future. McManus voluntarily quit his position as an independent sales representative for Amherst in January 1986 without prior warning to Amherst. By his own voluntary act, McManus disabled himself from repaying Amherst out of commissions.

The district court ruled that "[w]here an independent sales representative fails to question the existence of a debit balance which appears repeatedly on his monthly commission statements," and where he "disables himself from repaying a debit balance from commissions by terminating his relationship with the payor ...," "he is obligated to repay the excess of the advances made over the commissions actually earned." Accordingly, the court ruled that McManus must repay Amherst the entire debit balance due at the time McManus terminated the parties' relationship.

In this appeal, McManus contends that the district court applied an incorrect rule of law. McManus urges that, although New Hampshire courts have not yet ruled on this question, the district court should have applied the majority rule in the United States, which is that in the absence of an express or implied agreement to repay any excess of advances over commissions earned, a principal may not recover from his agent the amount of the excess. See Agnew v. Cameron, 247 Cal.App.2d 619, 55 Cal.Rptr. 733, 735-36 (1967) (citing cases). The legal relationships relative to this rule are discussed in the Restatement (Second) of Agency:

Upon termination of the relation, the agent is under a duty to account for all he has received on behalf of the principal and to return to the principal anything which is then due to him. If an agent has received advances from his principal in anticipation of salary or commissions to which he does not subsequently become entitled, he is under a duty to repay such to the principal. Whether or not money given by a principal is given as an advance and is to be repaid by the agent in the event that his commission or other compensation does not amount to the sum advanced, is dependent upon the interpretation of the contract between them.

Restatement (Second) of Agency Sec. 382 comment d (1958).

[While the Restatement recognizes] that the issue is one of interpretation of the contract between the parties, [it] takes no position on whether, in construing the contract, there is a presumption in favor of the agent. However, the overwhelming preponderance of case law is to the effect that while the parties may provide in the agreement for personal liability, in the absence of language, or at least some evidence, indicative of such an intention, it will generally be presumed that no liability was intended, and that the principal's sole source of reimbursement was intended to be the fund [of anticipated commissions].

Annot., Personal Liability of Servant or Agent for Advances or Withdrawals in Excess of Commissions Earned, Bonus, or Share of Profits, 32 A.L.R.3d 802, 806 (1970). Thus, in the absence of evidence of intention to the contrary, most state courts have treated advances on future commissions as if they were in the nature of salary, especially if the advances were made in regular amounts and the agent was required to give full attention to the principal's business interests. Agnew, 55 Cal.Rptr. at 735-36; Argonaut Builders Inc. v. Dare, 145 Colo. 424, 359 P.2d 366, 367 (1961).

The rationale underlying this rule is that the [agent's] undertaking is in the nature of a joint enterprise with the [principal], the main object of which is the furtherance of the [principal's] business, and it is not to be assumed that the [agent] in furnishing his time and ability to the enterprise takes all the risk.

Perma-Home Corp. v. Nigro, 346 Mass. 349, 191 N.E.2d 745, 747 (1963) (citing Shaler Umbrella Co. v. Blow, 199 Wis. 489, 491, 227 N.W. 1, 2 (1929)). The parties' characterization of the funds as a "loan" or an "advance" has been held as not determinative of the agent's liability to repay a debit balance, because such terms do not clarify whether the parties intended the agent to repay excess advances from any fund other than the commissions actually earned. Annot., supra, at 826-32 (collecting cases).

There is no reported case in the State of New Hampshire dealing with this issue. In the absence of controlling state law, a federal court should choose the rule that it...