Cochrane v. Janigan

• Decision Date: 08 May 1962
• Parties: F. Douglas COCHRANE v. John B. JANIGAN et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 496

182 N.E.2d 496

344 Mass. 296

F. Douglas COCHRANE v. John B. JANIGAN et al.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued March 5, 1962.

Decided May 8, 1962.

No argument nor brief for plaintiff.

George E. Lodgen, Boston (Nathan T. Wolk, Boston, with him), for Westland Corporation and another.

Robert W. Meserve, Boston (John K. P. Stone, III, Boston, with him), for John B. Janigan.

Before WILKINS, C. J., and WILLIAMS, CUTTER, KIRK and SPIEGEL, JJ.

CUTTER, Justice.

This is a bill of interpleader filed in behalf of the partners of a law firm (the escrow agent) to compel the defendants to litigate among themselves their claims to an escrow fund held by the firm. The fund was paid into court. The trial judge made a report of the material facts found by him. A final decree was entered which directed that, after the payment of $840 to the escrow agent, the remainder of the fund be paid to Janigan. Janigan, in turn, was directed to pay to the defendants Westland Corporation (Westland) and Boston Electro Steel Casting, Inc. (New Casting) the sum of $6,689.89 with interest from May 8, 1959. Westland, New Casting, and Janigan appealed. The evidence is reported.

On November 26, 1957, Janigan and Westland executed an agreement (the sale agreement) by which Janigan agreed to sell to Westland, or its nominee, on December 13, 1957, all the outstanding capital stock of Boston Electro Steel Casting, Inc. (referred to, as it existed prior to the stock transfer on December 13, 1957, as 'Old Casting'). On December 13, the stock was transferred to Westland's nominee, Westland Enterprises, Inc., and the purchase price was paid to Janigan. Westland Enterprises, Inc., then liquidated Old Casting to itself and changed its own name to Boston Electro Steel Casting, Inc. (New Casting). Pursuant to the sale agreement Janigan placed $50,000 in the hands of the escrow agent under an escrow agreement. As required by the sale agreement, Janigan also executed an indemnification agreement indemnifying New Casting against certain liabilities.

The sale agreement (par. 2) provided in part that Janigan 'hereby * * * warrants that * * * [t]he balance sheet of [Old] Casting as at October 31, 1957, attached hereto * * * fairly presents the financial position of [Old] Casting as at said date and the net worth and net quick assets of [Old] Casting as at said date were not less than the respective amounts shown therefor on said balance sheet, except in each case that no provision is made for Federal and State income and excise taxes for periods subsequent to September 30, 1956. [Old] Casting had on October 31, 1957, no contingent liabilities not disclosed or reserved against in said balance sheet' ¹ (emphasis supplied). The sale agreement (pars. 7, 11) also contained other pertinent provisions which are set out in the margin. ² Janigan by the indemnification agreement agreed to indemnify Westland and New Casting 'against all * * * liabilities * * * of * * * [Old] Casting * * * existing on the date hereof, except those' reflected in the balance sheet (see fn. 1, supra), 'Federal and State income and excise tax liabilities [of Old Casting], in respect of * * * periods subsequent to September 30, 1956,' and certain other matters not here relevant. Under the escrow agreement, the escrow agent was to pay from the fund to the buyer (Westland or New Casting) the amount of any established 'secured loss' as defined in par. 5 of the escrow agreement. ³

Prior to the closing set for December 13, 1957, Westland engaged the accounting firm of Peat, Marwick & Mitchell Co. (Peat, Marwick) to audit the books of Old Casting for the two preceding years. The trial judge found 'that they made no report of their audit to any of the parties * * * until December 14, 1957--the day after the closing.' He also found that the inventory of Old Casting, as of the last day of its fiscal year ended September 30, 1956, 'had been understated * * * in the sum of $56,079.76,' but that 'no party * * * knew the amount of * * * [the] understatement prior to the date of closing.'

There was no specific liability for 1956 Federal income tax shown on the balance sheet as of October 31, 1957. At the time of Peat, Marwick's examination of Old Casting's books, there had been imposed no additional Federal or State tax in respect of Old Casting's fiscal year ended September 30, 1956. ⁴ There was evidence that prior to the closing, Peat, Marwick had reported orally to Westland (a) the alleged $56,079.96 understatement of Old Casting's inventory as at September 30, 1956 (the $56,000 inventory understatement), and (b) an alleged $11,000 overvaluation by Janigan of Old Casting's inventory as at October 31, 1957. Westland's attorney wrote to Janigan about the $11,000 discrepancy. Janigan's attorney testified that Janigan refused to reduce (because of this $11,000 item) either the purchase price or the reserve for '[o]ther [l]iabilities' shown on the balance sheet (see fn. 1, supra). Despite this refusal, the transaction was closed without adjustment based upon the $11,000 item. A representative of Peat, Marwick testified that the $56,000 inventory understatement had been called orally to the attention of the treasurer of Westland, on December 9, 1957, before the closing. The treasurer admitted that about two days prior to December 13 he had been informed by Peat, Marwick that there appeared to be such an understatement on Old Casting's tax return for the year ending September 30, 1956. The president of Westland also conceded that by December 13 he had received word of the understatement. Westland's counsel conceded that, before the closing, no notice of the $56,000 inventory understatement was given to Janigan.

After the closing, the United States tax authorities asserted a claim against Old Casting for a 1956 income tax deficiency amounting to about $28,113.71, plus interest and penalties. This deficiency was based mainly on the alleged understatement of Old Casting's 1956 closing inventory. The additional Federal assessment resulted in a claim against Old Casting by Massachusetts for an additional excise of $3,943.31, plus interest.

On February 5, 1958, a further agreement (the 1956 tax agreement) was executed by Westland, New Casting, Janigan, and the escrow agent. Under this agreement New Casting agreed to admit the existence of the principal amount of the 1956 Federal tax deficiency ($28,113.71) and to consent to a 5% negligence penalty. It was also agreed that the principal amount was 'a proper liability of Old Casting as at September 30, 1956.' New Casting paid this principal amount. Janigan paid an aggregate of $3,566.27, the interest on the tax ($2,065.01) to November 19, 1958, and the negligence penalty ($1,405.69), plus $95.57 of interest on original tax. Janigan now concedes that he remains bound to pay $3,222.54 for certain Federal penalties and, in addition, interest of $709.80 on the Massachusetts tax. New Casting has paid the additional Massachusetts tax of $3,943.31, plus $709.80 interest thereon. ⁵

The trial judge also found that Janigan in Old Casting's balance sheet reserved for 'other liabilities' the sum of $30,000. He ruled that this 'sum [must] be applied in reduction of * * * [the] sum of $36,689.89 [see fn. 5, supra], leaving a balance of $6,689.89 due from Janigan to Westland' and New Casting 'as reimbursement.' He found that Janigan owed them '$6,689.89, together with interest * * * from May 8, 1959, the date of the filing of the [b]ill.'

1. Janigan and Westland and New Casting request that all the controversies between them be disposed of in this litigation. A leading authority on interpleader has presented persuasive support for 'the power of an equity court to admit an additional controversy into the second stage of an interpleader * * * where the court, in its discretion, thinks that such a union would accomplish justice.' Chafee, Broadening the Second Stage of Interpleader, 56 Harv.L.Rev. 541, 562. ⁶ Settlement in this litigation of all the controversies presented, as the parties desire, is consistent with usual equitable principles and will afford the parties complete relief. See Glazer v. Schwartz, 276 Mass. 54, 58, 176 N.E. 613; Greeley v. Flynn, 310 Mass. 23, 28, 36 N.E.2d 394. See also Atlantic Natl. Bank v. Hupp Motor Car Corp., 300 Mass. 196, 202-203, 14 N.E.2d 167; McDade v. Moynihan, 330 Mass. 437, 443-445, 115 N.E.2d 372, 39 A.L.R.2d 1223; Piea Realty Co., Inc. v. Papuzynski, 342 Mass., 172 N.E.2d 841. ^a

2. We assume (without deciding) ⁷ that New Casting, Westland's subsidiary (claiming as Westland's nominee), may proceed against Janigan under the indemnification agreement by which Janigan at the time of the closing undertook to hold New Casting harmless 'against all * * * liabilities * * * of * * * [Old Casting] existing on * * * [December 13, 1957] except those * * * [r]eflected or reserved against in the balance sheet of [Old] Casting' as of October 31, 1957 (see fn. 1, supra), and except certain other items not here pertinent. Even upon this assumption (that Janigan may be liable under the indemnification agreement notwithstanding Janigan's contentions mentioned earlier, see fn. 7), we hold that Westland and New Casting have not established any breach of the indemnification agreement causing damage to Westland or New Casting above the amount of the $30,000 reserve for '[o]ther [l]iabilities' shown on Old Casting's balance sheet of October 31, 1957.

Of the principal amount ($28,113.71) of the 1956 deficiency tax, more than 90% was based upon a $56,079.76 upward adjustment of Old Casting's 1956 closing inventory. Old Casting's Federal income tax for its fiscal year ending September 30, 1957, was necessarily reduced by reason of the increase in the closing inventory as of September 30, 1956, which, of course, caused a like increase in Old Casting's opening 1957 inventory. See Albino v. Commissioner of Internal...