City of Wheeling v. Chester

• Decision Date: 12 April 1943
• Docket Number: No. 7905,7906.,7905
• Parties: CITY OF WHEELING v. CHESTER et al. (two cases).
• Court: U.S. Court of Appeals — Third Circuit

134 F.2d 759 (1943)

CITY OF WHEELING v. CHESTER et al. (two cases).

Nos. 7905, 7906.

Circuit Court of Appeals, Third Circuit.

Argued July 16, 1942.

Decided April 12, 1943.

Rehearing Denied June 4, 1943.

H. F. Stambaugh, of Pittsburgh, Pa., for John N. Chester.

Alexander J. Barron, of Pittsburgh, Pa., for John F. Laboon and others.

Before GOODRICH, Circuit Judge, and SMITH and LEAHY, District Judges.

SMITH, District Judge.

This case is before the court on the appeal (No. 7905) of the defendant John N. Chester, hereinafter referred to as the cross-defendant, and the appeal (No. 7906) of the defendants John F. Laboon, John T. Campbell, D. E. Davis, and Ellis E. Bankson, hereinafter referred to as the cross-plaintiffs, from a judgment entered in the District Court for the Western District of Pennsylvania. A consideration of the ultimate facts as found by the trial judge, which are not disputed, is essential to the determination of the questions here presented, of which the law of Pennsylvania is determinative.

The cross-defendant, John N. Chester, and one Thomas Fleming, Jr., engineers and partners trading as Chester & Fleming, in July of 1918 entered into a written contract of employment with the cross-plaintiff John F. Laboon under which the latter became a "junior member" of the said firm. The pertinent provisions of the contract are quoted in the footnote.¹ In January of 1919 the cross-plaintiff John T. Campbell likewise became a "junior member" of the said firm under a similar oral contract of employment. The said Thomas Fleming, Jr., withdrew from the firm in 1919 and thereafter the cross-defendant continued the business under the name "The J. N. Chester Engineers," and the said cross-plaintiffs continued in his employ under their original agreements. The cross-plaintiffs D. E. Davis and Ellis E. Bankson, in October of 1919 and July of 1920, respectively, entered into similar contracts of employment with the cross-defendant under which they, too, became "junior members" of the firm. The relationship, except as to the cross-plaintiff John F. Laboon, who withdrew from the firm in 1936, remained unchanged until December 22, 1937, when the cross-defendant withdrew from the business under an agreement to which reference is hereinafter made.

The original contracts of employment were amended by written memoranda on January 14, 1926 and September 12, 1929, but these amendments effected no change in the relationship of the parties. It is significant that in each of the said memoranda, and particularly that of September 12, 1929, the cross-defendant reasserted his exclusive ownership of the business. In the latter memorandum the claim of exclusive ownership was reaffirmed in this unmistakable language: "The J. N. Chester Engineers although apparently a Firm or Partnership, nevertheless the sole proprietorship is in J. N. Chester, the so-called partners or Junior Partners being employees on a salary and percentage of the profits, * * *." These memoranda were addressed to each of the cross-plaintiffs and were accepted by them without question.

On May 19, 1922 the City of Wheeling, a municipal corporation, and the J. N. Chester Engineers entered into a written contract under which the latter agreed to prepare the plans and specifications for and to supervise the construction of a purification and filtration plant. Thereafter, the John F. Casey Company, under a contract with the City of Wheeling, undertook the construction of the plant according to the plans and specifications prepared by the J. N. Chester Engineers. The project was completed in 1924, and the plant was put in operation and accepted by the city in 1925. The contract between the City of Wheeling and the J. N. Chester Engineers led to the present litigation.

The John F. Casey Company on February 23, 1929 brought a suit for damages against the City of Wheeling in the District Court of the United States for the Northern District of West Virginia. A judgment in the amount of $106,288.20 in favor of the former and against the latter was entered on June 1, 1932. This judgment was affirmed by the Circuit Court of Appeals for the Fourth Circuit on January 8, 1935, City of Wheeling v. John F. Casey Co., 74 F.2d 794. This suit was predicated upon an alleged breach of contract occasioned by the negligence of the J. N. Chester Engineers, who, although not a party to the litigation, were fully apprised of it.

On November 3, 1933 the cross-defendant, over the protest of the cross-plaintiffs, withdrew from the cash assets of the business the sum of $15,128.45 with which he purchased three United States Treasury bonds, each of the par value of $5,000, which he retained in his possession as a reserve against the possible liability of the J. N. Chester Engineers to the City of Wheeling. The bonds remained in the possession of the cross-defendant until 1940, when they were sold. The proceeds realized from the sale were then paid to the City of Wheeling under an agreement of settlement, to which reference is hereinafter made.

The cross-defendant withdrew from the firm on December 31, 1937, at which time he assigned and transferred to the cross-plaintiffs, except John F. Laboon, who had previously withdrawn from the firm, "all his right, title and interest in all the assets" of the business. This severance of the relationship was accompanied by a written contract in which the cross-plaintiffs, except John F. Laboon, consented to the retention by the cross-defendant of the Treasury bonds pending the determination of their liability to the City of Wheeling, and agreed to the deduction of $3,000 from their respective shares of the profits for the calendar years 1932 to 1937, inclusive. This contract is not without ambiguity, but it appears from a reading of it in its entirety that one-fifth of the sum expended in the purchase of the bonds was charged against and deducted from the share of profits earned by and due to each of the cross-plaintiffs for the said calendar years. The books of the J. N. Chester Engineers were closed as of December 31, 1937, and all claims, except those of the cross-plaintiffs to either their respective shares of the profits for the calendar years 1932 to 1937 or the Treasury bonds (or the proceeds realized from the sale thereof), were adjusted.

On February 14, 1939 the City of Wheeling, having paid $106,288.20 to the John F. Casey Company on the judgment hereinabove referred to, brought the present suit against the cross-defendant and cross-plaintiffs, as partners. The cross-plaintiffs, under the Rules of Civil Procedure, asserted cross-claims against the cross-defendant, demanding: first, judgment against him in the full amount of their liability, if any, to the City of Wheeling; and, second, an accounting for either the Treasury bonds or the proceeds realized from the sale thereof. The...