Backus Plywood Corporation v. Commercial Decal, Inc.

• Decision Date: 19 September 1962
• Citation: 208 F. Supp. 687
• Parties: BACKUS PLYWOOD CORPORATION, Plaintiff, v. COMMERCIAL DECAL, INC. and Alfred Duhrssen, Defendants.
• Court: U.S. District Court — Southern District of New York

208 F. Supp. 687

BACKUS PLYWOOD CORPORATION, Plaintiff, v. COMMERCIAL DECAL, INC. and Alfred Duhrssen, Defendants.

United States District Court S. D. New York.

September 19, 1962.

Krause, Hirsch, Gross & Heilpern, New York City, for plaintiff.

M. S. & I. S. Isaacs, New York City, for defendants.

EDELSTEIN, District Judge.

This is a motion for partial summary judgment brought by defendants pursuant to Rule 56(b) and (c), Fed.R.Civ.P. 28 U.S.C.A. For the purposes of this motion the following are the relevant facts.

Defendant corporation (Decal) is in the business of manufacturing decalcomanias for the transferring of designs to ceramic and plastic dishes and glassware. The individual defendant, Alfred Duhrssen, is the president of the corporation and the owner of a substantial amount of stock. In the early part of August, 1958, Duhrssen engaged one Jack Yarmove to act as agent and broker for the sale of the assets and business of the corporate defendant. Yarmove introduced Duhrssen to Alfred H. Sachs, secretary-treasurer of the plaintiff. Sachs allegedly proposed that the parties join together for the purpose of mutually profiting from a reorganization of the corporate defendant. Memoranda containing proposals and counter proposals were submitted by both sides, but no agreement was ever reduced to a writing. Plaintiff does not urge that a written agreement existed, but claims that the negotiations did produce an enforceable oral agreement which it characterizes as a "joint venture agreement."¹

Briefly stated, the purpose of this alleged agreement was to form a new corporation which would acquire certain assets from Decal, continue its business, lease its buildings and improvements, and employ Duhrssen as president and general manager at a fixed salary plus a share of the profits. The agreement was to be reduced to writing within a month from September 24, 1958, the day upon which the terms of the venture were supposedly agreed upon.

More specifically, the alleged agreement contains certain tax and business advantages supposedly designed to benefit all parties. A new corporation using the name of the defendant corporation, Commercial Decal, Inc., was to be organized, with its stock held exclusively by the plaintiff. Duhrssen was to become president and general manager of the new corporation, receiving a salary and a share of the net profits. Sachs was to become treasurer and financial executive of the new corporation. Decal (whose name was to be changed) was to continue to own the real estate, as well as all cash and receivables on its books. The merchandise inventory, machinery and equipment of Decal, having a value of approximately $900,000, was to be transferred to the new corporation for about $300,000, the sum to be furnished by plaintiff. Furthermore, all the tools, dies, decalcomanias, etchings, engravings, forms, systems, customer lists and unfilled orders were to be transferred to the new corporation without compensation. A lease agreement was to be entered into with Decal whereby the new corporation was to pay all the real estate taxes in addition to the rent for the premises.

The transfer of this merchandise and machinery would have resulted in an apparent loss of $600,000 for Decal. In collecting the rents from the new corporate entity, Decal would have had a substantial annual income for at least the first five-year period, which income would have been offset by the loss. Thus, Decal would have been able to accumulate at least the equivalent of a $600,000 loss within a five-year period without any obligation to pay tax thereon. For the new corporation, the rent and real estate taxes which were to be paid by it would have been a deductible business expense in its operating statement. The new corporation would have had a taxable income in the amount it would have received through the sale of the merchandise acquired from Decal over and above the $300,000 cost of the merchandise.

When the alleged arrangements failed to materialize, plaintiff filed suit. The complaint alleges, as a first cause of action, that both defendants entered into a joint venture agreement with the plaintiff on September 24, 1958, for the operation of Decal's business, which agreement they breached by failing to turn over the business. As a second cause of action, plaintiff alleges that Duhrssen agreed to procure the consent of Decal's stockholders and directors to the joint venture agreement, but failed to do so. The third cause of action, which is not the subject of this motion, deals with certain alleged representations made by Duhrssen as to the extent of his control over Decal. Defendants deny the existence of any binding agreement, contending that the parties never proceeded beyond the negotiating stage. Additionally, defendants have pleaded an affirmative defense based upon the statute of frauds.

Defendants now move for summary judgment on the first and second causes of action, claiming that there is no genuine issue as to any material fact. The third cause of action concededly presents a factual issue and is not the subject of this motion. Defendants contend that under any version of the facts put forward by plaintiff, no joint venture agreement came into existence and that if an agreement did exist, it is void and unenforceable under the statute of frauds.

Accepting, for purposes of this motion, plaintiff's version of the facts, defendants urge that the agreement set forth is not one of "joint venture." It is defendants' position that the facts do not establish two of the essential elements necessary to constitute a joint venture, i. e., the sharing of profits and losses and joint control. Upon the oral argument, the court raised the question of whether, assuming the sharing of profits and losses to be a necessary element, the kind of agreement here alleged lacks that element. Put another way, the question was whether profit and loss may be construed more broadly than the usual accounting definition so as to include the kind of risks which plaintiff contends are present in the case at bar. Supplemental memoranda were received from the parties on this question. Plaintiff contends that the sharing of losses and joint control over the property of the venture are not necessary in order to constitute an arrangement a joint venture. In the alternative, plaintiff argues that if the elements are necessary, both are present in the arrangement herein.

"A joint venture or enterprise is, in essence, an informal partnership between two or more persons for a limited undertaking or purpose." Wooten v. Marshall, 153 F.Supp. 759, 763 (S.D. N.Y.1957); Leitner v. Wass, 63 N.Y.S. 2d 350, 352 (S.Ct.1946). But it is at best a nebulous concept whose boundaries are not precisely drawn. Defining a joint venture is easier than identifying it, for each case depends upon its own facts.

"Joint ownership by itself is not sufficient to create a joint venture, Bowmaster v. Carroll, 8 Cir., 1928, 23 F.2d 825, nor is a mere community of interest, Hasday v. Barocas, Sup.1952, 115 N.Y.S.2d 209. Many factors are taken into consideration by the courts in determining whether the relationship exists. To begin with, it is a voluntary relationship, the origin of which is wholly ex contractu, i. e., it is not a status created by law. An agreement between the parties to create a joint venture is essential and whether or not a joint venture exists depends entirely upon the intention of the parties, either express or implied. As a general rule joint ventures are thought of in relation to a specific venture, a single undertaking, although the undertaking need not be one susceptible of immediate accomplishment. It is in the nature of a partnership limited to a particular venture, not general in operation or duration. It has been variously defined as an association to carry out a single business enterprise for profit; a common enterprise for mutual benefit; a combination of property, efforts, skill and judgment in a common undertaking. Joint control and management of the property and authority to act each for the other are usual characteristics along with the incurring of joint obligations and the enjoyment of joint rights. An agreement to share joint profits is essential to the creation of a joint venture. The profit accruing must be joint and not several; each must have an equitable interest in the profits themselves. But such an agreement in and of itself is not determinative. The joint sharing of losses is also commonly regarded as essential. Bowmaster v. Carroll, supra; Chapman v. Dwyer, 2 Cir., 1930, 40 F.2d 468; Chisholm v. Gilmer, 4 Cir., 1936, 81 F.2d 120, affirmed 1936, 299 U.S. 99, 57 S.Ct. 65, 81 L.Ed. 63, rehearing denied 1936, 299 U.S. 623, 57 S.Ct. 229, 81 L.Ed. 458; First Mechanics Bank of Trenton v. Commissioner, 3 Cir., 1937, 91 F.2d 275; Tompkins v. Commissioner, 4 Cir., 1938, 97 F.2d 396; Detachable Bit Co. v. Timken Roller Bearing Co., 6 Cir., 1943, 133 F.2d 632; Eagle-Picher Co. v. Mid-Continent Lead & Zinc Co., 10 Cir., 1954, 209 F.2d 917; Potter v. Florida Motor Lines, D.C. S.D.Fla.1932, 57 F.2d 313; United States Fidelity & Guaranty Co. for Use of Reedy v. American Surety Co., D.C.M.D.Penn.1938, 25 F.Supp. 280."

United States v. Standard Oil Co. of Cal., 155 F.Supp. 121, 148 (S.D.N.Y. 1957), aff'd, 270 F.2d 50 (2d Cir. 1959); see Wagner v. Derecktor, 306 N.Y. 386, 390, 118 N.E.2d 570, 572 (1954); 2 Williston, Contracts § 318A (3d ed. 1959); Nichols, Joint Ventures, 36 Va.L.Rev. 425 (1950); Taubman, What Constitutes a Joint Venture, 41 Cornell L.Q. 640 (1956).

An overall view of the cases makes it clear that the elements of loss sharing and joint control over the property of the venture are necessary to constitute an arrangement a joint venture. Plaintiff's contentions to the contrary are without merit. Plaintiff cites no persuasive authority for the proposition that the element of joint control may be absent from a joint...