Management, Inc. v. Schassberger

• Decision Date: 06 September 1951
• Docket Number: No. 31602,31602
• Citation: 235 P.2d 293,39 Wn.2d 321
• Parties: MANAGEMENT, Inc. v. SCHASSBERGER et al.
• Court: Washington Supreme Court

Page 321

39 Wn.2d 321

235 P.2d 293

MANAGEMENT, Inc. v. SCHASSBERGER et al.

No. 31602.

Supreme Court of Washington, Department 1.

Sept. 6, 1951.

Halverson & Applegate and Jack M. King, all of Yakima, for appellant.

Mark C. Delle, Yakima, for respondent Anne Schassberger.

George W. Wilkins, Yakima, for respondents Bryant and wife.

HILL, Justice.

Two questions are presented: (1) Did the defendants or any of them violate an agreement not to engage in the laundry or dry cleaning business for a period of five years? and, (2) If so, could a covenant to pay liquidated damages of ten thousand dollars for the breach of the agreement be enforced, or did it constitute a penalty?

In March, 1946, Management, Inc., purchased from Anne Schassberger, a widow, and Frank H. Bryant and Carolyn F. Bryant, his wife (the latter being a daughter of Mrs. Schassberger), a laundry and dry cleaning business in the city of Yakima, the purchase price being one hundred thousand dollars. The bill of sale contained the following provision:

'In consideration of the sale of the foregoing business and property, Vendors agree not to engage in the laundry or dry cleaning business in Yakima, Washington, for a period of five (5) years after March 18, 1946, directly or indirectly; Except that Vendor, Frank H. Bryant, shall have the right to engage in such laundry or dry cleaning business as an employee as long as he shall not, directly or indirectly, have an interest in the business as an owner or part-owner thereof.

'In the event either of said Vendors shall breach this agreement, he or she shall be liable to Vendee in the sum of Ten Thousand ($10,000.00) Dollars, which is hereby agreed to be liquidated damages for the breach of said agreement.' (Italics ours.)

In August, 1946, the Bryants purchased for twelve thousand dollars certain real property hereinafter referred to as the Moxee avenue property, which included a building that had been erected to house a dry cleaning and laundry business. In October of that year the Bryants sold the property to Mrs. Schassberger, likewise for twelve thousand dollars. She immediately leased the property for five years to another daughter and her husband, Clarence D. Purkhiser, Jr. The lease required that 'the premises during the term of this lease shall be used for the conduct of a dry cleaning and laundry business and none other,' but Mrs. Schassberger denies any knowledge that that provision was in the lease.

Beginning November 17, 1946, Purkhiser operated a dry cleaning and laundry business on that property, under the name of Star Dry Cleaners and Shirt Laundry, which will be hereinafter referred to as 'the Star,' with Bryant as manager. Five months later (April 12, 1947) the Purkhisers sold the Star to Alvin V. Ross and his wife and terminated their lease with Mrs. Schassberger. By the same instrument that terminated the Purkhiser lease, Bryant was given possession of the premises at a monthly rental of one hundred fifty dollars, with an option to buy the premises, the price again to be twelve thousand dollars '* * * on the first date reasonably possible after said premises have been cleared and released from the probate proceedings of the Estate of the late husband of the Party of the First Part [Mrs. Schassberger] of which said premises are now for certain purposes considered a part of the assets of said estate.'

The Bryants immediately signed their possessory rights and option to purchase to Ross and his wife.

Mrs. Schassberger deeded the Moxee avenue property to the Bryants September 11, 1947, for twelve thousand dollars; and on the same day and for the same consideration, the Bryants deeded the property to Mr. and Mrs. Ross. Ross was employed in a meat packing business in Yakima and, although he was at the Star every day, he devoted no time to the business and Bryant continued as the active manager.

Management, Inc., commenced this action against Mrs. Schassberger, Mr. and Mrs. Bryant, and Mr. and Mrs. Ross, alleging that Mrs. Schassberger and Mr. Bryant had violated the restrictive covenant in conspiracy with Mr. and Mrs. Ross through the operation of the Star. Plaintiff requested injunctive relief and ten thousand dollars as liquidated damages from each of the defendants.

After the commencement of the action, the Moxee avenue property, together with the laundry and dry cleaning business conducted thereon, was sold, so that, when the case was tried, none of the defendants had any interest therein and there was no necessity for injunctive relief.

The testimony on behalf of the plaintiff, which takes up 316 pages of the statement of facts, is practically all from defendants Frank H. Bryant, Anne Schassberger, and Alvin V. Ross, who were called as adverse witnesses. At the conclusion of the plaintiff's case, all the defendants challenged the sufficiency of the evidence.

Referring to the sufficiency of the evidence against Mrs. Schassberger, the trial court said: 'I believe that the evidence fails to establish that Mrs. Schassberger was engaged in the dry cleaning or laundry business, this business which is shown to have existed here the Star Dry Cleaning and Shirt Laundry. I don't believe that she had an interest in that business, and I think that the evidence utterly fails to show that she did have an interest in that business.'

As to Mrs. Schassberger, the challenge was sustained and the action was dismissed.

The order defendants presented no additional evidence, and the trial court found that Mr. Bryant had acquired an interest as part owner of the Star and that there had been a violation of the covenant not to enter into the laundry or dry cleaning business as owner or part owner, and that Mr. and Mrs. Bryant and Mr. and Mrs. Ross had conspired to violate the restrictive provision of the bill of sale. The trial court, however, held that the ten thousand dollars referred to as liquidated damages in the bill of sale was actually a penalty, and, there being no proof of any actual damage, it allowed nominal damages only, to wit, a judgment of ten dollars against Mr. and Mrs. Bryant and Mr. and Mrs. Ross. The plaintiff affpealed.

There was ample evidence to support the conclusion of the trial court and the dismissal of the action as to Mrs. Schassberger. On that phase of the case the trial court relied upon McKeighan Wachter Co. v. Swanson, 138 Wash. 682, 245 P. 10, which is directly in point. In the two cases urged by the appellant as a basis for holding that Mrs. Schassberger had violated the restrictive covenant against engaging in the dry cleaning and laundry business by acquiring the Moxee avenue property and leasing the building for the purpose of conducting a dry claning and laundry business therein, Merager v. Turnbull, 2 Wash.2d 711, 99 P.2d 434, 127 A.L.R. 1142; Lyle v. Haskins, 24 Wash.2d 883, 168 P.2d 797, we had situations in which the persons held liable were actively participating in the conduct of the competing business. The trial court in its memorandum opinion quite properly distinguished those cases on that basis. We affirm the dismissal of Mrs. Schassberger.

We come now to a consideration of whether Bryant violated the restrictive covenant, and that depends upon whether he became the owner or part owner of the Star. There was evidence which would have supported a conclusion that Bryant was always an employee, first of Purkhiser and then of Ross; but there was also ample evidence to support the trial court's conclusion that he became a part owner of the business. We are content to accept the facts as found by the trial court, and to hold that Bryant did become a part owner of the Star and that, consequently, he violated the restrictive covenant against engaging in the laundry and dry cleaning business.

We find no merit in the claim by the Bryants of estoppel or laches as barring the prosecution of this action.

There remains the question of whether the appellant was entitled, as it contends, to a judgment of ten thousand dollars against the Bryants, and that, in turn, depends upon whether the ten-thousand-dollar payment provided for in the bill of sale in the event of a breach of that covenant, was intended as liquidated damages or as a penalty.

The distinction between liquidated damages and a penalty is well stated in 15 Am.Jur. 672, Damages, § 241: 'As distinguished from liquidated damages, a penalty is a sum inserted in a contract, not as the measure of compensation for its breach, but rather as a punishment for default, or by way or security for actual damages which may be sustained by reason of nonperformance, and it involves the idea of punishment. It is the payment of a stipulated sum on breach of contract, irrespective of the damage sustained. Its essence is a payment of money stipulated as in terrorem of the offending party, while the essence of liquidated damages is a genuine covenanted pre-estimate of damages.'

We are loathe to interfere with the rights of parties to contract as they please between themselves, and the fact that the parties to a contract call a sum stipulated to be paid in case of breach of the contract liquidated damages is a circumstance to be given serious consideration in determining whether it is in fact liquidated damages. However, the fact that the parties have so designated the sum to be paid is not necessarily controlling or conclusive. Courts...