Pollack v. CARLYE DRESS CORPORATION
Decision Date | 11 March 1948 |
Docket Number | NO. 4643.,4643. |
Citation | 76 F. Supp. 755 |
Parties | POLLACK v. CARLYE DRESS CORPORATION. |
Court | U.S. District Court — Eastern District of Missouri |
COPYRIGHT MATERIAL OMITTED
Gleick & Strauss and Harry S. Gleick, all of St. Louis, Mo., for plaintiff.
Salkey & Jones, Wilbur B. Jones, Franklin Ferriss and Peter H. Husch, all of St. Louis, Mo., for defendant.
Plaintiff's action for an accounting is based on a written contract dated April 7, 1942, by which defendant employed plaintiff for two years and eleven months, ending June 30, 1945, as a stylist in defendant's ladies ready-to-wear manufacturing business; also for publicity and sales promotion work. Plaintiff's salary was $1,000 per month plus bonus of 10% of net profits for year ending June 30, 1943, 15% for second year, and 20% for last year of contract. The contract "defined" the term "net profits" as "* * * determined by the company's (defendant) auditors without the deduction of plaintiff's bonus but less State and Federal taxes * * *". Defendant is a Missouri corporation. The contract provided for organizing a subsidiary corporation under the laws of New York. Business transacted in New York by defendant was in the name of the subsidiary corporation and net profits were those realized from consolidation of financial statements of the two corporations.
The petition alleges performance of the contract by plaintiff; acknowledges receipt of monthly salary and a check each year as bonus under the contract. Plaintiff claims payments received as bonus are only a small part of the net profits due him under the contract. The charge is made: defendant's auditors, working in collusion with defendant, deliberately understated net profits for purpose of defrauding plaintiff, the audits were prepared to conceal true net profits, and this purpose was accomplished by undervaluing inventory, overstating expense, and other practices contrary to the usual course of business contemplated by the parties in execution of the contract. Complaint is also made that excessive amounts were set up for reserves for bad debts and contingent litigation liability.
The answer admits execution of contract but alleges plaintiff was paid all sums due him. Defendant further pleads violation of the contract by plaintiff by failure to devote all of his time, energies and skill to styling, publicity and sales promotion as required by its terms. Defendant also counterclaimed. At conclusion of trial defendant announced abandonment of counterclaim excepting money alleged to have been wrongfully taken by plaintiff from defendant's assets at rate of $250 per month for six months following end of the contract, and a further separate item of $600.
The trial was on questions (1) liability of defendant to plaintiff under the contract, and (2) if such liability is found, whether plaintiff is entitled to a reference and reaudit of defendant's books; and (3) on defendant's counterclaim.
The evidence, although identifying an audit during contract period for each year as of June 30th, was confined solely to audit procedure for year ending June 30, 1945. The record so made places plaintiff's case, as of the hearing, under three headings: (1) that merchandise, principally piece goods, was undervalued in the audit; (2) that shipments of merchandise were not made according to the regular course of defendant's business prior to June 30, 1945, but held in large volume until the morning of July 1, 1945, with result the merchandise in the shipments was carried on the inventory of June 30, 1945, as merchandise on hand and was priced at cost or lower, rather than being represented in financial statement under accounts receivable at the higher invoice price; and (3) that excessive amounts were set up as reserves. These charges, or any one of them, if true, reduced the net profits for fiscal year ending June 30, 1945, and in turn plaintiff's bonus.
Plaintiff's right to recovery must accrue under the written contract. The term "net profits" as used in the contract has a restricted meaning. We find no ambiguity in the language used. We pass to a consideration of the issues in light of the rule — plaintiff has the burden of proof except on the counterclaim.
I. Plaintiff's charge that merchandise was undervalued in inventory, for June 30, 1945 audit, relates principally to piece goods. Defendant priced its inventory at cost or market, whichever was lower. In taking the inventory defendant classified piece goods on hand as "old" and "new". Old piece goods identified materials left over from production of current or past lines. New piece goods were materials purchased for a future line. Plaintiff takes issue with the method of defendant in determining what was "old" piece goods and the resultant determination of the market on such merchandise.
These terms "old" and "new" are generally used in the garment industry to classify merchandise in the same manner defendant employed them. New piece goods were inventoried at approximately cost. Old piece goods were valued at their estimated market by defendant — usually about 50% of cost. This method and policy of pricing piece goods was consistent with the custom and practice of the trade, and was consistent with defendant's custom and practice in years past.
Plaintiff's principal objection to the inventory is that defendant's records show some of the mill numbers inventoried as old piece goods on June 30, 1945, were the subject by mill number of additional purchases by defendant during July and subsequent months of 1945. Plaintiff argues such items should have been inventoried at cost or market based on repurchase price. The weakness of the record to support plaintiff's position is that although bearing the same mill number such piece goods come in different colors, and color determines the usefulness and value of the product. There is no evidence any identical piece goods, color considered, inventoried as "old" was repurchased. There is no evidence any specific article of piece goods inventoried as of June 30, 1945, would have been inventoried at a higher price by one acquainted with and in good faith following the practice and customs of the garment industry, or that defendant varied from its custom and practice.
The contract provides net profits shall be determined by the audit made by defendant's auditors. Of course this carries with it the implication of a fair and honest audit, made in good faith.1 The evidence does not show unfairness, dishonesty, or bad faith, on defendant's part, in preparing the audit.
There is a further presumption that the audit to be made by defendant's auditors would be consistent, that is according to the custom and practice in defendant's business and that of the industry in which defendant was engaged.2
Plaintiff had long been active in the ladies ready-to-wear business when he signed contract with defendant. We believe it reasonable to conclude he knew the customs of the trade. There is evidence he was informed specifically of defendant's custom and practice in pricing inventory. The parties are bound by their contract and its terms, express and implied, must be given force and effect. We cannot rewrite the contract.3
Plaintiff strenuously argues the audit does not meet the requirements of Internal Revenue Code relating to income tax. The petition does not contain this assignment. Assuming, but not deciding, defendant was required to make its audit in accordance with the Internal Revenue Code, relating to income tax, 26 U.S.C.A. Int.Rev.Code, § 21 et seq., we find the record will not sustain plaintiff's claim that defendant did not. The section of the Code relied upon by the plaintiff reads:
Following the regulation appears this explanatory note:
As we read the regulation it places emphasis in taking an inventory for tax purposes on (1) conformation to the best accounting practice in the trade, and (2) consistency of such practices from year to year, and "greater weight" is to be given to consistency than to particular method of inventory if the method is in substantial accord with the regulations. We repeat, the weight of the evidence is defendant followed the practice of the trade in pricing its inventory and the inventory is consistent with the practice of the defendant. There was introduced over plaintiff's objection the report of the Internal Revenue Bureau approving the 1944-45 tax return of defendant. Plaintiff in his brief states it "has been accepted". It is presumed public officers perform their duties in accordance with the law, until the contrary is shown.
Plaintiff urges 1945 was a seller's market, anything in wearing apparel had a ready sale and defendant should have, but did not, recognize this situation in pricing its inventory. All parties now agree 1945 was a seller's market, but knowledge the industry had of the market at the end of 1945 cannot be charged either to the industry or defendant on June 30, 1945. The garment industry is a hazardous one, in contemplating styles and future retail sales. The weight of the testimony is that on June 30, 1945, defendant had no assurance or way of knowing the seller's market would continue. Had the market broken and as a result had defendant...
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