Security-First National Bank of Los Angeles v. Lutz

• Decision Date: 19 August 1963
• Docket Number: No. 18174.,18174.
• Citation: 322 F.2d 348
• Parties: SECURITY-FIRST NATIONAL BANK OF LOS ANGELES, as Executor of the Will of Benjamin Harrison Sheldon, Mae Sheldon, and Robert Hohly, Appellants and Cross-Appellees, v. Eva S. LUTZ, as Administratrix of the Estate of Walter A. Lutz, Deceased, Appellee and Cross-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

322 F.2d 348 (1963)

SECURITY-FIRST NATIONAL BANK OF LOS ANGELES, as Executor of the Will of Benjamin Harrison Sheldon, Mae Sheldon, and Robert Hohly, Appellants and Cross-Appellees, v. Eva S. LUTZ, as Administratrix of the Estate of Walter A. Lutz, Deceased, Appellee and Cross-Appellant.

No. 18174.

United States Court of Appeals Ninth Circuit.

August 19, 1963.

Kirtland & Packard, Frederick P. Backer, and Abe Mutchnik, Los Angeles, Cal., for appellant Robert Hohly.

Gerald Bridges, Los Angeles, Cal., for appellant Mae Sheldon.

Lawler, Felix & Hall, and Robert Henigson, Los Angeles, Cal., for appellant Security-First Nat. Bank, as exr. of will of Ben H. Sheldon, Decd.

Joseph T. Enright, Norman Elliott, and Bill B. Betz, Los Angeles, Cal., for appellee.

Before BARNES and MERRILL, Circuit Judges, and ZIRPOLI, District Judge.

MERRILL, Circuit Judge.

This case is back before us, following hearing by the district court upon our remand to that court for determination of damages. The facts upon which liability was founded and the reasons for remand are set forth in our earlier opinion (297 F.2d 159). Following hearing before the district court upon our remand, judgment of that court was rendered in favor of appellee and against appellants Security-First National Bank of Los Angeles (as executor of the will of Ben H. Sheldon, deceased), Mae Sheldon (Sheldon's widow), and Robert Hohly (Sheldon's accountant). Appeals have been taken from those judgments. Since the earlier proceeding plaintiff Dr. Walter A. Lutz has died, and Eva S. Lutz, administratrix of his estate, has been substituted. To maintain continuity with our earlier opinion, however, we shall refer to Dr. Lutz as though he continued as appellee herein.

Appeal of the Bank.

Upon the former appeal the position of the bank was stated in our opinion as follows:

"The bank asserts that at the time of incorporation the partnership owed Sheldon for advances and for unpaid salary; that in lieu of taking cash payment from the partnership, Sheldon had compensated himself by taking additional stock in the corporation. Conceding that he was not entitled to settle the obligations owing him in this unilateral fashion and that the arrangement was thus subject to being set aside, still (the bank contends) if it is to be set aside, credit should be given him for the sums owing."

We agreed, and ruled:

"If Lutz, then, upon equitable principles is to be permitted to avoid the consequences of his consent to incorporation, equitable consideration must be given to the rights of Sheldon, restored to him in the eyes of equity by that very avoidance."

Upon remand of the judgment against the bank, then, the problem was to ascertain the extent of the claims which Sheldon could rightfully make against the partnership at the time the business was taken over by the corporation. Sheldon's claims, as asserted by the bank, were twofold: advances made and salary earned.

As to the advances, there is no dispute as to amount — the sum is $57,200. The district court, upon remand, found that this sum was a part of the capital contribution to the partnership which Sheldon was from the outset obligated to make.

This finding apparently is based upon remarks (made to Lutz prior to the execution of the partnership agreement) by Sheldon (as to what he proposed to put into the business), and by Mrs. Sheldon (as to what had already been put in) at a time when Lutz's partnership interest was tentatively fixed at 3 per cent. By the partnership agreement, the extent of Sheldon's capital contribution was specified. It did not include the $57,200 here in question. The record establishes the value of that contribution, as specified in the agreement, to be $81,655.97, based upon Sheldon's cost investment. That sum constituted 59.3 per cent of the total cash investment in the partnership for which, by the partnership agreement, Sheldon received a 60-per-cent interest. Lutz's interest was, by the agreement, increased from the 3 per cent originally contemplated to 9 per cent.

In our judgment the provisions of this agreement preclude any finding that the sum of $57,200 was paid in satisfaction of Sheldon's original obligations to the partnership. It did, then, remain an obligation of the partnership at the time the corporation took over, and under our prior ruling was a right of Sheldon (and a debt of Lutz to the extent of his 9-per-cent interest) which must be taken into consideration in determining damages for conversion.

As to salary, the partnership agreement provided for the compensation of the general partners at "such reasonable compensation for services * * * as shall be agreed upon between said General Partners and a majority in interest of the Limited Partners." The record shows that no agreement was ever reached. The bank contends that under these circumstances Sheldon was entitled to salary in a reasonable amount. The district court has ruled that Sheldon had no rights in this respect.

We agree. Under California law interpreting § 18 of the Uniform Partnership Act (Cal.Corporations Code, § 15018(f)), where a partnership agreement reserves the matter of partner compensation for future determination, an agreement between partners fixing the amount of salary is necessary before any right, legal or equitable, to receive salary even in a reasonable amount can be said to exist. Vangel v. Vangel (1953), 116 Cal.App.2d 615, 254 P.2d 919.

Judgment against the bank, then, must be composed as follows:

$25,042.40 (value of shares and debentures converted), less $5,148, 9 per cent of $57,200, or a net judgment of $19,894.40, plus interest at the rate of 7 per cent per annum from May 8, 1956.

Judgment of the district court was in the sum of $31,566.25, with interest from December 10, 1959. It must be reduced accordingly.

Appeal of Hohly.

Judgment against Hohly, from which the former appeal was taken, was based upon liability for negligence and constructive fraud. It was in a sum equal to the judgment for conversion against the bank ($31,566.25), plus $15,000 exemplary damages. In our former opinion we upheld the district court in its determination of liability for the loss suffered by conversion, but found nothing in the record to support a judgment for exemplary damages. We ordered that portion of the judgment set aside, and the matter was remanded for the same considerations as applied to the judgment against the bank.

The district court has now found Hohly liable in the sum of $55,000. It appears from the findings that this increased sum is based upon two major components.

The first component is detriment (or out-of-pocket loss) to Lutz. This was not calculated, however, in the manner approved by the former appeal: in terms of the value of the converted securities as measured by their sale price. Rather it was calculated in terms of value ascertained by capitalizing the venture's projected profits.

Lutz here contends that the conversion deprived him of his rightful share of the partnership's future profits and that Hohly, because of his negligence, but for which the conversion might never have been accomplished, should be held responsible for this loss. The district court agreed with him.

A similar contention was made on the last appeal in connection with conversion damages to be assessed against the bank and was rejected by us. We there noted that the price paid for the corporation under recognized business practice must have been based in part upon a capitalization of future profits of the business, and that this factor must be assumed to be included in the value of the corporate stock which was converted.

We adhere to that view. The future profits of a business are a factor in determining the value of that business as a going concern. Where judgment has been rendered for conversion of an interest in that business, the future profits of that business cannot be asserted as a detriment suffered in addition to such conversion. To permit appellee to secure a judgment against Hohly based upon this factor is to permit a different valuation to be placed upon identical property in these two judgments.

Lutz contends that he is nevertheless entitled to damages from Hohly (over and above the sale price of the converted securities) because his partnership interest, with the significant voice it gave him in controlling partnership affairs under the agreement, was more valuable than his minority stock interest in a close corporation.

The record does not bear this out. Lutz suffered no detriment by virtue of his minority position. He received the same value per share as did Sheldon's estate for Sheldon's controlling interest.

As a further element in this component of detriment the district court has found that Lutz was entitled (under Cal.Civil Code, § 3336) to "fair compensation for the time and money properly expended in pursuit of" the converted property. The amount of $3,310.07, incurred by Lutz for accounting services, was allowed in this respect.

It may be noted that this item constitutes special damages, National City Finance Co. v. Lynch (1928), 94 Cal. App. 557, 271 P. 540, and as such must be specifically pleaded under both federal rules and California law. Rule 9(g) F.R.Civ.P.; National City Finance Co. v. Lynch, supra. Lutz has failed to make any allegation in this respect. Further he failed to present any evidence on this item of damage until the hearing on remand.

Still further, it appears that the accounting services involved were first rendered on August 11, 1957, some ten months after Lutz had filed his creditor's claim in the Sheldon estate demonstrating that he had successfully traced and identified the converted property. These expenses, then, were incurred in preparation for litigation and not in pursuit of property. Compare Pacific Postal Telegraph Cable Co. v. Bank of Palo Alto (9 Cir. 1901), 109 F. 369, 54 L.R.A. 711 and Viner v. Untrecht (1945), 26 Cal.2d 261, 158 P.2d...