Farris v. Farris Engineering Corp.

• Decision Date: 25 June 1951
• Docket Number: No. A-146,A-146
• Citation: 7 N.J. 487,81 A.2d 731
• Parties: FARRIS v. FARRIS ENGINEERING CORP. et al.
• Court: New Jersey Supreme Court

Page 487

7 N.J. 487

81 A.2d 731

FARRIS v. FARRIS ENGINEERING CORP. et al.

No. A-146.

Supreme Court of New Jersey.

Argued June 4, 1951.

Decided June 25, 1951.

John Milton, Jersey City, argued the cause for the appellants; Milton, McNulty & Augelli, Jersey City, attorneys; Morris M. Ravin, Newark, of counsel.

Walter G. Winne, Hackensack, argued the cause for the respondent; Winne & Banta, Hackensack, attorneys.

The opinion of the court was delivered by

OLIPHANT, J.

This is an appeal by the defendants-appellants from a judgment of the Chancery Division which adjudged that the respondent had a one-half ownership in the stock and properties of the Farris Engineering Corporation and the Farris Industrial Corporation and directing each of these corporations to issue one-half of its stock to the respondent or her nominees bearing a notation that it was issued pursuant to the judgment of the court. The respondent cross-appealed from that part of the judgment which approved a salary of $40,000 a year being paid to the appellant as president and general manager of the Farris Engineering Corporation. These appeals were taken to the Appellate Division and were certified here on our own motion.

The judgment below was entered after trial of the issues in two separate causes which were consolidated for trial by the trial court. The consolidation took place after a pretrial order had been entered in the action brought by the respondent against the appellant.

The appellant instituted an action on June 28, 1948 against the respondent in which he sought an accounting of certain properties held in her hands and asked that a writ of sequestration issue and a receiver be appointed for such properties, and further asking that the respondent be compelled to join in proper instruments to convey her interest in the Farris Engineering Company to the Farris Engineering Corporation and that she execute assignments of the stock of the Farris Industrial Corporation standing in her name, and that she be specifically required to perform her agreement with the appellant and she be further restrained from hypothecating either her interest in the Farris Engineering Company and her stock in the Farris Engineering Corporation and the Farris Industrial Corporation.

Two days later the respondent filed her action in which she alleged that she was a 50% Partner in the Farris Engineering Company and had contributed equal amounts in capital and services to this company which was a partnership and that she had a one-half interest in the assets of the partnership and in its profits and losses. She asked that a receiver be appointed for the corporations and that the officers and accountants of these corporations be compelled to set up on the books of these corporations her respective stock interests. The appellant answered and counterclaimed in this suit, the counterclaim following generally along the lines of the action set forth in his own complaint.

The parties were husband and wife and had lived happily together and helped each other in the various enterprises engaged in by the husband but came to the parting of the ways when, it is alleged, the wife committed a very serious matrimonial offense. Actually this occurrence had a destructive effect upon their business relations which were carried on through a group of corporations and a partnership, which were the conduits and operational bases for the various enterprises carried on in which the husband was the primary operating force. These were admittedly set up for the purpose of reducing income tax payments which might be due under the Federal Income Tax Law and this was particularly true of the partnership.

The case is not without difficulty and requires a determination of what was the basic and underlying intention of the parties as between themselves and this can only be spelled out from an appraisal of the various transactions.

The parties were married in 1931 and up to about 1941 the husband had not been financially successful in business. He had eked out an existence as a salesman in the employ of several companies in the midwest and after seven or eight years they had achieved a gross savings of some $1,500 which was in a joint account in a bank in Chicago. They maintained no home but in their own words 'lived out of suit cases in hotels'. At the trial the wife attempted to show that during this period she contributed considerable skill, knowledge, experience and work so that any and all increments to the family wealth were substantially the result of her joint efforts with those of her husband. But a careful reading of the record fails to substantiate this contention and leaves the definite impression that the husband was the prime producer and the wife's contribution was the normal contribution of a wife who co-operates with and encourages her husband.

In 1936 the appellant was employed with Manning, Maxwell & Moore at a salary of $6,500, but there was little saved from this and in 1937 he obtained employment with Kieley & Mueller, manufacturers of valves, under a salary arrangement. In 1941 he became general manager of this company with a profit sharing arrangement which anticipated considerable income with war work looming up. Within six months thereof his savings went up from $1,500 to $8,500 which was deposited in the joint account in the Chicago bank. Within the next year in addition to that his savings reached the additional sum of $28,000. This money was placed around in various bank accounts which will be referred to later, but there is nothing in the record to indicate that the wife contributed substantially to the production of these savings.

On February 18, 1943, at the expiration of his contract with Kieley & Mueller the appellant decided to go into business for himself and opened an account in the Hudson Trust Company in Hoboken under the trade name of Farris Engineering Company, and there was deposited in this account the sum of $28,298.51. This total was made up of the following amounts: $11,424.94 coming directly from appellant's employment with Kieley & Mueller, also $1,047.77 which came from a brokerage account in his name with J.S. Bache & Co.; $5,875 came from an account in the Hudson Trust Company in the name of the appellant, and $10,000 was drawn out of a joint account in the Northern Valley National Bank in Tenafly, on February 25, 1943, there having been deposited in that account on the same day $8,358.99 from the settlement of his account with Kieley & Mueller. There was a withdrawal from the Hudson Trust Company of $49.20 which accounts for the difference in the figures. On or about this time about $5,500 was withdrawn from the Chicago account and placed in the Northern Valley account over which the appellant held the power of attorney.

At this time the parties had five separate bank accounts, the Chicago bank account was a joint account, there was a joint account in the Northern Valley National Bank in the name of 'Louise and/or Victor Farris' , another account in the same bank in the name of 'Louise Farris, V. W. Farris attorney', and another account in the same bank in the name of 'Louise Farris' individually. The Hudson Trust Company account was in the name of 'V. W. Farris' individually.

At this point the appellant consulted with his lawyers and he was advised it would be better to organize a corporation and not carry on the extensive business which he contemplated merely under the trade name of the Farris Engineering Company. Pursuant to this advice and through the Corporation Trust Company a corporation known as the Farris Engineering Corporation was organized and eight shares of stock were finally issued to the appellant, one share to his wife and one share to Charles J. Thomas, the father of the wife. This was apparently done to qualify the latter two as directors. The business quickly prospered to such an extent that the lawyers and accountants advised the appellant that it would be advisable if the husband and wife form a partnership for tax purposes. The manner in which this partnership was set up is in dispute, the wife contending that it was on a fifty-fifty basis and that she had equally contributed her share of the capital which had accrued to her as a result of her work with her husband over the years preceding. The husband's contention is that the partnership was set up solely for tax purposes and in compliance with the requirements of the Federal Income Tax Law and that there was a definite understanding that the agreement as to equal shares only related to profits.

In the pretrial order entered in the action instituted by the respondent against the appellant it is stated 'the defendant Farris admits the plaintiff had a half interest in the partnership, but contends that the entire business of the partnership was on war work which came to an end with the cessation of hostilities in 1945'. The respondent makes much of this admission but she did not rely on it wholly. At the trial she undertook and endeavored to prove that her contributions, both in capital and services, were such over the period of their married life that it justified a declaration of a half interest in the stock of the corporations which succeeded to the rights of the partnership. Both sides seem to have abandoned the admission and proceeded on the broad theory that the question should be determined on the pleadings and all the facts under the general law applicable to partnerships. On his part the appellant produced a copy of the partnership agreement signed by the respondent which states that the appellant and respondent were in a co-partnership doing business under the name of Farris Engineering Company and it further states that both are to receive a fair and reasonable salary for services, and contained the following provisions 'our liability for co-partnership debts is to be in the same proportion as our respective investments. In the event of the...