Campbell v. American Fabrics Co.

• Decision Date: 13 July 1948
• Docket Number: No. 232,Docket 20945.,232
• Parties: CAMPBELL v. AMERICAN FABRICS CO.
• Court: U.S. Court of Appeals — Second Circuit

168 F.2d 959 (1948)

CAMPBELL v. AMERICAN FABRICS CO.

No. 232, Docket 20945.

Circuit Court of Appeals, Second Circuit.

May 26, 1948.

As Modified on Rehearing July 13, 1948.

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Campbell & Hills, of New York City (Edgar Hills and Morris A. Marks, both of New York City, of counsel), for plaintiff-appellant.

Frederick S. Duncan, of New York City (Edward K. Hanlon and Bertrand L. Kohlmann, both of New York City, of counsel), for defendant-appellee.

Before SWAN, CLARK, and FRANK, Circuit Judges.

FRANK, Circuit Judge.

1. Plaintiff argues that we should reverse for error in granting the summary judgment on the ground that there was a triable issue of fact. We would agree, if Sirrine were available as a witness at a trial. For then it would have been error to deny plaintiff the opportunity to examine Sirrine in open court, with his demeanor observable by the trial judge.¹ But as Sirrine died before the entry of the summary judgment, such examination is now impossible. There is no showing that, on the issue of the deficiency of Sirrine's award, the testimony of any other witness for either party is needed. Accordingly, we will not reverse for failure to permit a trial of that issue.

2. We think that the record evidence clearly shows that the appraiser very substantially deviated from the standards of the submissions and that the award must therefore be set aside. Whether we consider paragraph (5) of the contract of May 23, 1943, as establishing a formula, or merely as binding instructions, it is plain that, if Sirrine's award did not comply with the language of the contract, it is not binding.² The gist of that paragraph is the provision that Woodstock must be valued "as a going concern in the light of the past, present and prospective future earnings and the net worth of said business."

We have commented before on the difficulty involved in giving a precise meaning to the ambiguous word "value."³ Methods of valuation vary with the legal contexts in which the valuation problems arise.⁴ But this, at least, is clear: When an enterprise is to be valued "as a going concern," the valuer must consider whether it has a "going concern" value, and that value is something other than what results from the mere appraisal value of its assets.⁵ "The commercial value of property consists in the expectation of income from it," Galveston, H. & S. A. Ry. Co. v. Texas, 210 U.S. 217, 226, 28 S.Ct. 638, 639, 52 L. Ed. 1031. "The Supreme Court has several times said that the best test of the value of a going commercial enterprise is its earning capacity." Dudley v. Mealey, 2 Cir., 147 F.2d 268, 270. Where the valuation of a going concern was required for the purposes of a corporate reorganization, the Supreme Court said that the expectation of income was the proper criterion, and added: "Since its application requires a prediction as to what will occur in the future, an estimate, as distinguished from mathematical certitude, is all that can be made. But that estimate must be based on an informed judgment which embraces all facts relevant to future earning capacity and hence to present worth, including, of course, the nature and condition of the properties, the past earnings record, and all circumstances which indicate whether or not that record is a reliable criterion of future performance." Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510, 526, 61 S.Ct. 675, 685, 85 L.Ed. 982.⁶

The appraiser here, in his answers to the interrogatories, maintained that he had estimated the value of Woodstock as a going concern, and had based that value on "what it could be sold for if you had a willing buyer and a willing seller." This latter basis, it might be noted, is the usual test when an appraisal is made of property seized in a condemnation case.⁷ We do not hold that here the test was wrong as such. But it should have been qualified: it should have been "what a willing buyer would pay a willing seller of a going concern." Obviously, a willing buyer would be unlikely to purchase an operating cotton mill without considering its operating costs and profits. But Sirrine's answers show that he came to his conclusion without considering the operating profits or net earnings of Woodstock for the five years of that corporation's operations under its then management, despite the express language of the contract that the value should be "in the light of past, present and prospective future earnings." Whether, in the light of war conditions, Sirrine, if he had considered the operating profits, would have adhered to his conclusion that the enterprise had no prospective earnings, we are not in a position to determine. We can say, however, that, without such consideration, he could not have come to "an informed judgment which embraces all facts relevant to future earning capacity and hence to present worth."⁸ We hold, therefore, that he did not value Woodstock as a going concern, and thus departed from the requirements of the contract.

We conclude, then, that the summary judgment must be reversed because, from what appears on this record, the appraisal was not in accordance with the agreement. Since we base that conclusion on the failure of the appraiser adequately to consider earning figures, we need not consider the following: (1) his alleged failure to make an adequate examination of the mill; (2) his alleged improper consideration of losses suffered by former operators of the mill; (3) his alleged improper use of the accountants' report.⁹

3. As the designated appraiser is dead, we think the district court should hear evidence and itself determine the price, applying the standards of clause (5) which were to govern the appraiser.¹⁰ For here the contract, which constituted a settlement of vexatious litigation, has been fully performed by the plaintiff, who cannot be restored to status quo ante, and the appraisal clause related to but one item of the settlement contract. On those facts the court should "substitute itself" for the deceased appraiser. Gunton v. Carroll, 101 U.S. 426, 430, 432, 25 L.Ed. 985; Texas Co. v. Z. & M. Independent Oil Co., 2 Cir., 156 F.2d 862, 867, 167 A.L.R. 719; Annotation, 167 A.L.R. 727, 743, 759; Cold Metal Process Co. v. United Eng. & Foundry Co., 3 Cir., 107 F.2d 27, 31, 32; Williams v. Cow Gulch Oil Co., 8 Cir., 270 F. 9, 12; Castle Creek Water Co. v. City of Aspen, 8 Cir., 146 F. 8, 11-13, 8 Ann.Cas. 660; Williston, Contracts (Rev. ed.) § 1421; Pomeroy, Specific Performance (3d ed.) 387-389.

Reversed.

CLARK, Circuit Judge (dissenting).

The parties here stipulated for and admittedly obtained the honest and carefully formulated judgment of an experienced arbitrator. I think it just as improper to trip him up on a hostile examination of his mental processes, and set aside his award on the basis of an incomplete answer removed from context, as it would be to reverse a trial judge after a similar grueling. It seems to me to neutralize and negate the strong judicial admonitions that a party who has accepted this form of adjudication must be content with the results. American Almond Products Co. v. Consolidated Pecan Sales Co., 2 Cir., 144 F.2d 448, 154 A.L.R. 1205, with annotation 1210-1215; Mutual Benefit Health & Accident Ass'n v. United Casualty Co., 1 Cir., 142 F.2d 390, certiorari denied 323 U.S. 729, 65 S.Ct. 65, 89 L.Ed. 585. Indeed, as applied to this case the words of Judge Learned Hand in the case first cited take on a fine irony. He said that the parties who have adopted arbitration "must content themselves with looser approximations to the enforcement of their rights than those that the law accords them, when they resort to its machinery." 144 F.2d at page 451. Judicial valuation is a notoriously loose approximation at best. Cf. United States v. Brooklyn Union Gas Co., 2 Cir., 168 F.2d 391. But now it seems (though our final standard is in fact left distressingly vague) that we are about to force upon an ad hoc valuation by agreement a much tighter mechanical procedure than we would think of requiring of a court.

As a matter of fact, the plaintiff has had to shop around until he could find a forum to listen to his plea. This is the third attempt he has made. Two previous proceedings in the state court — one going as far as the Appellate Division of the New York Supreme Court — were summarily dismissed without allowing the cross-examination of the arbitrator which he has obtained in the federal court. I have been a sincere advocate of federal discovery, but its reaches here have surely been far. That, in itself, however, I would not criticize. It is the setting aside of the arbitrator's award upon what really seems to me a quite trivial basis that I find disturbing in its implications. Here the plaintiff resorted to arbitration because he found himself in a bad way with his then extensive litigation. By his agreement to arbitrate he secured the disposal of the pending lawsuits; and now after their threat has been done away with by his submission, he is able coolly to push aside the award which disappoints him and have another try for a prize which up till now has steadily eluded him. Such manipulation of arbitration seems to me destructive of its purposes and sure to bring it into disrepute as a proposed method of settlement of business disputes.

Our result is placed upon the ground that the arbitrator did not follow the formula of valuation of the stock agreed upon in the arbitration contract. The provision of the contract is quoted in full in the statement of facts, but is only sketchily discussed in the opinion itself. When it is examined with care, it is seen to be not a complete manual of valuation, but a caution designed rather to guard against inflated values than to push prices up. Thus the arbitrator (a) is not bound by book value, but (b) is to determine the fair and reasonable value of the stock interests in the business of the Woodstock Corporation as a going...