Hartford Elevator, Inc. v. Lauer

• Decision Date: 15 April 1980
• Docket Number: No. 77-340,77-340
• Citation: 289 N.W.2d 280,94 Wis.2d 571
• Parties: HARTFORD ELEVATOR, INC., Plaintiff-Respondent, v. LaVern A. LAUER and Florence Lauer, his wife, Defendants-Appellants.
• Court: Wisconsin Supreme Court

Page 280

289 N.W.2d 280

94 Wis.2d 571

HARTFORD ELEVATOR, INC., Plaintiff-Respondent, v. LaVern A. LAUER and Florence Lauer, his wife, Defendants-Appellants.

No. 77-340.

Supreme Court of Wisconsin.

Submitted on Briefs Feb. 7, 1980.

Decided March 4, 1980.

As Amended on Denial of Reconsideration April 15, 1980.

George E. Smith and Smith & Sarafiny, Hartford, for defendants-appellants.

Charles O'Meara and O'Meara, O'Meara & Eckert, West Bend, for plaintiff-respondent.

ABRAHAMSON, Justice.

The question on appeal is whether an employer can recover from an employee, in addition to damages for misappropriation, all compensation paid to the employee during that period of employment in which the employee misappropriated funds belonging to the employer. The trial court awarded the employer $45,252.34, which was the entire salary and bonuses paid to the employee during the period in question. We reverse the judgment and remand the case.

I.

The employer, the plaintiff, initiated the suit against the employee, the defendant, filing a complaint stating three causes of action. The first and third causes of action ¹ were dismissed pursuant to a stipulation that provided that the employee pay the employer $50,000 and that the second cause of action continue as a separate cause of action unaffected by the stipulation.

This second cause of action of the complaint alleged that the employee breached his contract of employment by misappropriating funds belonging to the employer and that the employer elected to rescind the contract of employment effective as of the time the first misappropriation occurred. The remedy sought was restitution of all compensation paid to the employee during the period the employee was misappropriating funds.

The parties submitted this second cause of action to the trial court upon a stipulation of facts. The stipulation states: The Hartford Elevator, Inc. (employer-plaintiff) hired LaVern Lauer (employee-defendant) on or about March 1, 1971, to serve as manager of the mill owned by the employer. The duties of mill manager included keeping accurate records of receipts and disbursements, making out invoices, receiving monies, preparing receipts for deposit in the company's bank account, and delivering checks to the corporate agent and cash receipts to the corporate president or secretary. The employee's salary was $1,000 per month, and he was paid bonuses in 1972, 1973 and 1974 totaling $6,477.53. The employment arrangement was terminated on April 7, 1975, because the employee was suspected of misappropriating funds.

The stipulation allows the trial court to take judicial notice of the criminal proceedings for information as to the method used to misappropriate funds. It appears that during the months January 1972 to March 1975 (except for April 1973), the employee apparently issued to customers invoices that were not posted in the corporation's books of account and he personally received cash for the amounts shown on the invoices and did not deliver the cash to the corporate officers. Duplicate copies of these invoices were obtained from various customers and are listed in an exhibit. These duplicate invoices totaled $35,533.10, but the trial court found that this amount was not necessarily the total amount misappropriated by the employee.

A criminal complaint was issued April 17, 1975, alleging a violation of sec. 943.20(1)(b) and (3)(c), Stats., ² during the years 1972 through 1975. The employee pleaded nolo contendere to the criminal charge, which plea was accepted. On April 5, 1976, the judgment of conviction was entered with the prison sentence stayed, and the employee was placed on probation, with the requirements that he make restitution in accordance with the stipulation in this civil action and that he pay a fine of $500.00 plus costs.

The trial court in the case at bar found that the employee had embezzled money from the employer from January 1972 through March 1975.

II.

The trial court in the instant case concluded that the contract of employment imposed a duty of loyalty on the employee with respect to the employer's affairs and that the employee continuously and substantially breached his duty of loyalty by embezzling funds. The employee does not dispute these conclusions on appeal. The employee maintains that the trial court erred in concluding that the employer is entitled to recover from the employee all salary and bonuses paid to the employee after January 1, 1972, the first month during which the breach of duty was proven.

We initially observe that the original complaint demanded judgment in the amount of $110,000 actual damages and $200,000 punitive damages, in addition to the return of all compensation paid to the employee after the misappropriation began. The question of compensatory or punitive damages is not before this court. The parties and trial court viewed the compensatory and punitive damages demanded as satisfied upon payment of the $50,000 and dismissal of the first and third causes of action pursuant to the stipulation. The second cause of action was for restitution of compensation paid as shown by the final paragraph of the second cause of action:

"19. That the defendant LaVern A. Lauer, under his contract of employment with the plaintiff, received from the plaintiff compensation in the form of money paid for his services. For the full amount of such compensation paid to LaVern A. Lauer after the time that the first of said misappropriations occurred, the plaintiff has a cause of action for restitution."

The only question before us on appeal is whether the trial court erred in concluding as a matter of law that an employee who breaches his duty of loyalty must return to the employer compensation he received for services rendered during the period of the breach.

III.

The trial court rested its decision on language in three Wisconsin cases ³ that an agent who breaches the duty of loyalty or who wilfully breaches the contract of employment forfeits his compensation. Although there is such language in our opinions this court did not require the employee in any of these cases to forfeit or return any compensation received in excess of the amount misappropriated.

One of the cases upon which the trial court relied was Arthur Koenig Co. v. Graham Glass Co., 170 Wis. 472, 473-474, 175 N.W. 814, 815 (1920). In this action by an agent against his principal to recover the reasonable value of the agent's services, this court stated the applicable rule of law as follows:

"An agent who is guilty of fraud upon his principal or who betrays his trust by acting adversely to the interest of his principal, or is guilty of unfaithfulness, dishonesty, gross misconduct, gross mismanagement, gross unskillfulness, or who fails to follow his principal's instructions, as a general rule forfeits his right to compensation."

This court affirmed the judgment in favor of the agent, because it could "not say upon the record that the (agent) was guilty of such gross misconduct as to forfeit its right to the agreed commissions."

The trial court further relied upon the following language from Hinkley v. Sagemiller, 191 Wis. 512, 519, 210 N.W. 839, 842 (1926):

"It is one of the fundamental principles of agency that an agent guilty of misconduct and fraud in relation to the transaction of his principal's business is not entitled to compensation for his services."

In Hinkley, a suit was brought to remove the general manager of the company from office and to recover misappropriated company funds. The general manager claimed that he was owed compensation for personal services. The trial court concluded that the salary agreed upon and due the general manager for the months during which he was employed and not under suspension was $560.00; that the misappropriation amounted to $760.44; and that the company could have judgment against the general manager in the amount of $200.44.

Although this court reversed the judgment in Hinkley on grounds not material here, the opinion allowed the general manager compensation for the period he worked even though he had misappropriated funds. The language quoted by the trial court in the case at bar comes from that part of the opinion holding that the general manager was not entitled to compensation for services during the period of his suspension. ⁴

The third case upon which the trial court based its decision is Blum v. Palace Garage Co., 214 Wis. 319, 323, 252 N.W. 177, 178 (1934), in which this court stated:

". . . The law respecting the right of an agent or servant to compensation where the agent or servant has been guilty of disloyalty . . . is stated in II Restatement of the Law of Agency, p. 1102, sec. 469, as follows:

" 'An agent is entitled to no compensation for conduct which is disobedient or is a breach of his duty of loyalty; such conduct, if constituting a wilful and deliberate breach of his contract of service disentitles him to compensation for even properly performed services for which no compensation is apportioned.' "

However, this general rule was not applied in Blum to require the agent to reimburse the principal for wages paid. ⁵

In the Blum case, the plaintiff Peter Blum was an employee of Palace Garage Company. In 1927 he had converted funds to his own use, concealed his wrongful acts and destroyed records. He had received a weekly salary during his employment, and he sued for payment of one-third of the annual corporate profits which he claimed he had been promised.

The referee concluded that Blum had forfeited his right to a share of the profits for the year 1927 because he had not met a condition of the agreement for payment of the net profits, namely "that he would diligently and faithfully work for the best interest of the (company) in the management of the business." The employee did not appeal from this part of the referee's decision, and this court did not address the employee's right to a part of the...