Battle Creek Food Co. v. Kirkland

• Decision Date: 30 June 1941
• Docket Number: No. 43.,43.
• Citation: 298 Mich. 515,299 N.W. 167
• Parties: BATTLE CREEK FOOD CO. v. KIRKLAND et al.
• Court: Michigan Supreme Court

298 Mich. 515

299 N.W. 167

BATTLE CREEK FOOD CO.

v.KIRKLAND et al.

No. 43.

Supreme Court of Michigan.

June 30, 1941.

Suit by the Battle Creek Food Company against Bertram C. Kirkland and others for an accounting and repayment of money taken or received by defendants for brokerage or profits together with interest. From a decree for plaintiff, defendants appeal.

Affirmed.Appeal from Circuit Court, Calhoun County; Blaine W. Hatch, judge.

Argued before the Entire Bench, except NORTH, J.

Joseph W. McAuliffe, of Battle Creek (Allen & North, of Battle Creek, of counsel), for appellants.

Hamilton, Cleary, Storkan & Vandervoort, of Battle Creek (Kim Sigler, of Hastings, of counsel), for appellee.

BUTZEL, Justice.

Plaintiff Battle Creek Food Company, a Michigan corporation, is engaged in the manufacture and sale of food products. Its entire capital stock was owned by Dr. John H. Kellogg of Battle Creek, Michigan, and with the exception of a few qualifying shares, stood in his name. He was president and director of the company. Although it is asserted and in a way conceded that profits in the way of dividends from the plaintiff company were turned over by Dr. Kellogg to finance certain eleemosynary organizations, Dr. Kellogg was the sole owner of the stock in plaintiff company, which is a proper plaintiff in this suit.

For many years, including 1928, and successive years thereafter, because of his health and also in order to look after the affairs of the Miami Battle Creek Sanitarium which he owned, Dr. Kellogg spent a large part of the year in Florida. While in Battle Creek, Dr. Kellogg supervised plaintiff company and the other institutions. How he divided his time between his various interests is not shown. Plaintiff company was managed by defendant Bertram C. Kirkland, who was married to an adopted daughter of Dr. Kellogg. Kirkland began working for plaintiff in 1909. He was promoted from time to time and became manager and director of the company. In 1928, when the transactions complained of began, he was receiving an annual salary of $17,010; in 1930, it was increased to $19,845. It was reduced slightly the following year and after that very substantially. Defendant E. Roy Saxton, after being with the company many years, became its sales manager in 1921. His salary for 1928 was $9,921; in 1930, it had been raised to $11,340, then it fluctuated and in 1933, it was materially reduced. Defendant Frank W. LeFevre also had been promoted from time to time and became chief accountant. His salary in 1928 was $7,086.75; in 1930, $8,505, and later it was reduced. Reduction in the salaries was solely due to poor business conditions, during the depression years, and not to any fault or shortcomings of defendants. Dr. Kellogg placed his entire confidence in the three defendants. They were to a very large degree in complete charge of plaintiff. They owned it their full time, effort and faithful devotion. They occupied positions of trust.

In 1928, the company did a large part of its business with customers direct from the home office in Battle Creek. It also had four branch offices in Seattle, Los Angeles, Boston and New York City, from each of which a large amount of territory was serviced. Orders were sent to the branch offices by customers in that territory and also some were sent thereby the home office in Battle Creek. Brokers' offices represented plaintiff in many focal points throughout the country. Such offices in large centers like Philadelphia, Atlanta, St. Louis, Cleveland, Baltimore, Indianapolis, etc., each served local and neighboring territory. For instance, the Atlanta office serviced over five southern States; St. Louis serviced Southern Illinois, Northern Arkansas, Kansas, Oklahoma and other territory. Prior to August 1, 1928, plaintiff rented part of a warehouse in Chicago. It kept a special salesman in Chicago, as well as others in the neighboring territory. As orders were received in Battle Creek for Chicago, Northern Illinois, Wisconsin, Minnesota, North and South Dakota, Iowa, and certain other territory, the orders were approved by the credit department, sent to Chicago where shipments, as a rule, were made from the Chicago warehouse and the freight paid for on a traffic basis. Plaintiff at all times at its own expense both before and after 1928, maintained a large staff of salesmen and demonstrators throughout the country, including the Chicago territory. Plaintiff also furnished stationery, order blanks, paid the expense of warehousing the products in Chicago, and the freight and cartage charges.

On or about August 1, 1928, the three defendants organized the Midstates Sales, a co-partnership, for the purpose of engaging in the food brokerage business in Chicago, Illinois. The capital of the firm was placed at $800, of which Kirkland and Saxton agreed to furnish $320 each and LeFevre $160. The latter was to receive 20 per cent. of the profits, while the other two were each to receive 40 per cent. The division subsequently was changed so as to give each partner one-third of the profits. The Chicago office was to be operated by a manager appointed and instructed by the partners, each of whom was to give his services without compensation except as might thereafter be agreed upon in writing. While the purpose of the co-partnership, as stated in the partnership agreement, was to sell food products, it was but a short time before it handled principally, if not exclusively, plaintiff's products. Defendants placed a young man 21 years of age in charge of the Chicago office. He had been an accountant and rug salesman and was wholly inexperienced in the food business. It appears that defendants' work in regard to the Chicago office was almost negligible. They remained full time employees of plaintiff and as such it was their duty to do whatever was for the best interest of plaintiff. This included the sale and distribution of goods throughout the United States in the most efficient and economical manner possible. Defendants' Chicago office first received a brokerage fee of 4 per cent. for the business handled by it, but this was reduced to 3 per cent. The fees were the same as were paid to other brokers. Defendants, or some of them, gradually closed many of the other brokerage offices handling plaintiff's products. The St. Louis brokerage office, after being notified of the loss of the agency, was so eager to keep the account that it offered to accept a brokerage of 2 per cent., but defendants claim that for the good of the plaintiff the business was diverted to the Chicago office, that the latter would effect a saving of time and cost in transportation, the goods would be delivered in a fresher state, and that both time and money could be saved in package freight by making Chicago a central point for shipments. Defendants claim they effected a substantial savings amounting to 25 per cent. in the warehousing costs in Chicago. Immediately upon the formation of Midstates Sales, defendants discontinued the factory and warehouse service formerly conducted in Chicago by plaintiff and took over the brokerage service in the States of Northern Illinois, Michigan, Wisconsin, Minnesota, North and South Dakota, parts of Montana, Colorado, all of Nebraska, Iowa, Texas, Louisiana and Mississippi. In their seat of authority in Battle Creek they gradually discontinued many of the other brokerage offices so that gradually the territory thus serviced by Midstates Sales covered approximately over half of the United States. The Chicago office employed no salesmen or demonstrators whatsoever. Again assuming that defendants after the formation of the company effected a savings in the warehousing and freight charges, which plaintiff continued to pay, and a savings of time in the delivery of goods, they did just what they should have done for plaintiff as its officers and without the intervention of Midstates Sales, a so-called entity consisting of themselves.

Plaintiff furnished the stationery for all the brokerage offices and accordingly defendants directed plaintiff to print envelopesaddressed to the Battle Creek Food Company care of the Midstates Sales at the latter's Chicago address for the use of customers, and in one instance, at least, the printed envelopes were addressed to plaintiff at the Chicago address without Midstates Sales even being mentioned. The little time that defendants could have given to the office is illustrated by the fact that when Dr. Kellogg inquired of Kirkland where the Chicago office was located, he first had to look it up before he could give the information. There is no claim made that the Chicago manager obtained any orders nor that Midstates Sales was put to any expense in obtaining orders. Up to and including part of 1936, defendants collected and divided between themselves for brokerage fees the sum of $96,516.33. There never was any action on the part of plaintiff's board of directors authorizing the Chicago office. It is alleged and claimed by Dr. Kellogg that all this was done without the knowledge and consent of the stockholders, he being the sole stockholder; that the entire transactions were fraudulent and kept secret from him; that it was a scheme fraudulently devised and secretly carried out to divert profits from plaintiff. It is claimed that the very method pursued by defendants from the start showed the secrecy with which the scheme was carried out. Books were kept at the homes of defendants Saxton and LeFevre. We pay no attention to the fact stressed by plaintiff that neither a partnership or assumed name certificate was filed by defendants. There is no provision in the Illinois law requiring such certificate, and no business of the partnership was transacted in Battle Creek except the sending of the orders and goods to Chicago, and the division of brokerage fees and the keeping of the books at the homes of Saxton and LeFevre. The method of dividing the profits,...