Reid Drug Co. v. Salyer

• Decision Date: 14 May 1937
• Citation: 105 S.W.2d 625,268 Ky. 522
• Parties: REID DRUG CO. et al. v. SALYER et al.
• Court: Kentucky Court of Appeals

105 S.W.2d 625

268 Ky. 522

REID DRUG CO. et al. v. SALYER et al.

Court of Appeals of Kentucky

May 14, 1937

Appeal from Circuit Court, Perry County.

Suit by K. N. Salyer and another against Reid Drug Company and others. Judgment for plaintiffs, and defendants appeal.

Reversed with directions.

Craft &amp Stanfill, of Hazard, and Bailey D. Berry, of Lexington, for appellants.

T. E Moore, of Hazard, for appellees.

THOMAS Justice.

For about three years prior to November 15, 1935, S. C. Reid operated a drugstore in Hazard, Ky. in the trade-name of Reid Drug Company. He began with only about $100, and on the day specified the value of his stock and fixtures and other assets, consisting of bills receivable, etc., amounted to about $6,000, over and above his outstanding indebtedness; the latter amounting to about $3,000. On that day the appellants and plaintiffs below, Dr. K. N. Salyer and Dr. J. C. Coldiron, jointly purchased a one-half interest in the business by each of them agreeing to pay on the outstanding indebtedness of Reid the sum of $1,500 or a total sum of $3,000. The balance of his indebtedness, if any, he agreed to pay. Immediately following that purchase, which was evidenced by writing, the parties incorporated under the name of "Reid Drug Company, Incorporated," with a paid-up capital stock of $6,000; $1,500 of which was issued to each of the plaintiffs, and $1,500 to Reid, and the same amount to his wife. The stockholders elected themselves directors and made Reid the manager of the business with power to conduct and operate it as he had theretofore done--he being a graduated pharmacist.

Plaintiffs did not pay the entire amount that they had agreed to--one of them falling short thereof about $218 and the other about $180--but the amount they did pay was devoted to the extinguishment of Reid's indebtedness and there is no complaint that he did not take care of the balance. By agreement of the stockholders and directors, Reid was to be assisted in his management and operation of the store by his wife, and plaintiffs were given the power and authority to fix their compensation, which they did by agreeing to pay Reid $100 per month and his wife $40 per month, with power and authority in Reid to employ whatever help might be necessary to operate the store and the soda fountain installed and maintained in it. Just prior to the sale of stock referred to, and the act of incorporation, Reid had ordered a lot of toys for the forthcoming Christmas holidays, which had not arrived at that time, but was received later and his indebtedness above did not include the amount of the bill for that merchandise. A considerable portion of it was not sold and was boxed and stored away for the next holiday. Reid operated the store under that arrangement until the filing of this action in the Perry circuit court on April 21, 1936, by plaintiffs, against him and his wife--and later against the corporation, which was brought into the case by amendment. A short while before the action was filed, Salyer, who seems to have been the spokesman for himself and Coldiron, began to complain with Reid because, as he claimed, the business was not showing a profit and which he said Reid had promised it would do at the time he and Coldiron became interested in it. He complained at the salary received by Mrs. Reid, and the husband agreed to suspend the payment thereof and to dismiss her as an employee, which he did. Salyer, perhaps, also complained that the compensation of other employees was too much, although there were only two of them--one who received a salary of $11 per week and the other of $17.50. Reid, according to his testimony, put in all of his time since the incorporation from about 7 o'clock a. m. to 10:30 p. m. each of the seven days of all the weeks.

The petition alleged the facts to which we have referred and that the overhead expense, some of which we have stated, amounted to about $437 per month; that no dividends from profits had been realized or paid; and that a corporate indebtedness of about $3,100 had accumulated, but it was not alleged, nor did the proof even tend to show, that the net assets of the concern were less than when plaintiffs became interested therein, and when the corporation was formed. On the contrary, it is conclusively shown that the net value of the assets had increased. A part of the indebtedness existing at the time of the filing of the petition was partially due to the unlisted purchase price of the 1935 Xmas toys above referred to, and which the unsold surplus of that bill of merchandise added to the value of the stock as invoiced about the time plaintiffs acquired their interest. So that, as alleged in the petition, the stock of merchandise at the time of incorporation was of the value of $5,200, and the fixtures valued at $3,140, thus making the stock and fixtures worth $8,340. However, an invoice made on April 17, 1936, showed the stock to be worth at that time $5,196, with furniture and fixtures valued at $3,138.81, bills receivable $733.82, and cash on hand $210.35, making the total assets $9,279.54, from which, deducting outstanding indebtedness, left a net valuation of assets of $5,982.93.

The action was filed in equity by plaintiffs against defendants for the purpose of having a receiver appointed and winding up and dissolving the corporation. No fraud in the management of the corporation was charged or attempted to be proven against Reid, the manager, but there was a general statement that the affairs of the corporation had been "mismanaged." It was not alleged that the corporation was insolvent and Salyer in his testimony admits that it was solvent. But plaintiffs and their counsel emphasize the fact that the alleged statement of Reid as having been made to plaintiffs at the time they purchased their interest that he would earn for each of them $100 per month in the way of profits (but which he denied) had not been complied with and that the overhead expense, including the salaries of Reid and wife (which were fixed and agreed to by plaintiffs alone), was too great, although before filing the action Reid had diminished that expense to the extent of $40 per month theretofore paid to Mrs. Reid. The proof also shows that the rental of the storeroom in which the business was operated was made exclusively by plaintiffs and that they agreed to a monthly rental of $160, which on its face appears somewhat extravagant for a business of that size and character. But whether that amount exceeded the amount for rent that Reid had been paying before the incorporation does not appear. However, what we have stated emphatically confirms the facts that $300 of the overhead expense (salaries of Reid and wife and store rent) were amounts agreed to and fixed by plaintiffs themselves. The balance of the total monthly overhead expense went to defray other necessary clerical hire, lights, telephone, and other necessary matters incident to the operation of the store.

In addition to the foregoing grounds for the appointment of a receiver, it was also alleged that the stockholders as well as the directorate of the corporation were deadlocked--meaning thereby that the stock was equally divided between two of the directors and stockholders, acting together, and the other two directors and stockholders, doing likewise with the stock equally divided; so that no change in the management of the corporate affairs could be made as long as that situation existed. But the only issue developed by the testimony upon which there was a serious division was that plaintiffs were dissatisfied, or professed to be, and desired to get rid of the Reids; but neither side would agree to purchase the stock of the other. However, such a situation will not alone and in and of itself (see post) furnish grounds for the appointment of a receiver, or for dissolution of the corporation. The defensive pleadings put in issue the alleged grounds for the appointment of a receiver, although the court had appointed one in an. ex parte order made at the time of the filing of the petition, but which order he set aside within a day or...