Smith v. Redd

• Decision Date: 11 December 1991
• Docket Number: No. 89-CA-0476,89-CA-0476
• Citation: 593 So.2d 989
• Parties: Thomas Calvin SMITH v. Gordon REDD.
• Court: Mississippi Supreme Court

Page 989

593 So.2d 989

Thomas Calvin SMITH v. Gordon REDD.

No. 89-CA-0476.

Supreme Court of Mississippi.

Dec. 11, 1991.

Rehearing Denied March 18, 1992.

T. Mack Brabham, McComb, for appellant.

Richard E. Stratton, III, Brookhaven, for appellee.

Before DAN M. LEE, P.J., and PRATHER and BANKS, JJ.

PRATHER, Justice, for the Court:

This appeal and cross-appeal arose from a dispute in the Lincoln County Chancery Court over the existence (or non-existence) of a partnership in a sawmill and pallet-making operation. Thomas Calvin Smith asserted a partnership interest in the business known as Industrial Hardwood Products of Brookhaven, Mississippi, along with Gordon Redd. The chancellor found that no partnership existed between the two men; however, he awarded Smith an equitable sum of money for his contribution to the business. This Court agrees with the chancellor's conclusion that Smith contributed to the business; however, this Court reverses the chancellor in his conclusion of law that the business arrangement was not a partnership and remands for a determination of the percentage of interest.

I.

In 1977 Thomas Calvin Smith and Jackie Lea, were partners in their own logging business, known as L & S Logging. In January 1981, they were approached by Gordon Redd about "going into business together" and running a sawmill. Redd had started getting the business together, but was in need of help to get the mill built and operating. Smith and Lea knew nothing of the sawmill business, but Redd agreed to train them to operate the mill. Redd also agreed to manage the financial matters. No formal written instrument was produced by the three men to evidence this agreement.

Smith and Lea discontinued their logging partnership and joined Redd at the sawmill operation. They brought all of their logging equipment--a knuckleboom loader, trailer, diesel tank, saws and tools--to the mill site and began working to get the mill operating. Smith hauled gravel from his father's land for the mill yard and worked to construct the mill shed. The mill eventually became operational and expanded to include a pallet operation. The operation became known as Industrial Hardwood Products (IHP).

In February 1983, Lea became dissatisfied and left the operation. Redd paid him a lump sum of money on his departure. Smith remained with the operation and gradually began to feel insecure with the nature of the relationship between him and Redd. In September 1986, Smith asked Redd to reduce to writing the agreement into which they entered in 1981. Redd did not produce a writing and, in February 1987, Smith left the operation.

In April of 1987, Smith filed a complaint in the Chancery Court of Lincoln County alleging that he, Lea, and Redd had formed a partnership agreement under Miss.Code Ann. Sec. 79-12-1, et seq. (1972) and that he had acquired all the rights and privileges of a partner in the sawmill operation, including the right to petition for dissolution and be paid his value of the partnership interest. In the alternative, Smith alleged that he had detrimentally relied on the representations made to him by Redd in 1981, suffering actual damages of the loss of business opportunity, loss of income, mental pain and suffering, out-of-pocket expenses, and other damages. Smith also requested punitive damages on the basis that Redd's actions were willful, wanton, or malicious, or made in reckless disregard of Smith's rights and sensibilities. Smith sought total damages of $1,000,000.00.

In his answer Redd denied that any partnership agreement was formed with Smith and Lea, and that they never did business as IHP. Smith amended his complaint to assert that, regardless of the outcome of the other matters, he was entitled to $70,000.00 from Redd for services rendered in starting the mill. Redd denied this assertion and additionally alleged that the claim was barred by the statute of limitations or, if any partnership had existed, it was dissolved by Lea.

On December 3, 1987, the trial commenced. The chancellor first considered the issue of creation of a partnership; he then considered, assuming that no partnership was formed, whether detrimental reliance was evidenced and damages warranted. The evidence surrounding the first issue was disputed. At trial Smith testified he was of the belief the three men, Smith, Lea and Redd, had formed a partnership. He contended that, during the initial meeting, there was discussion of percentages of interests to be held by each of the three men in the business, with Redd offering to Smith and Lea whatever interest in the business they wanted after the bank was paid off and Redd had recouped his investment money.

As noted, no written agreement on the specific percentages of interest to be held by each man exists. However, a tape recording in which Redd mentions that he believes Smith was entitled to a one-third interest exists. Smith and Lea both received $300.00 a week as compensation for their work, which was reported on a federal W-2 form as wages with social security and tax withholdings and workers' compensation benefits. Smith testified that all three had the authority to make decisions at the mill and hire and fire employees. No partnership return was filed for IHP. Occasionally, however, cash money was split among the three (or after Lea left, between the two) men. Smith testified that Redd offered him $70,000.00 to dissolve the partnership. Smith and Lea had not been obligated to invest any money in IHP nor liable for any losses that IHP might suffer. Redd did not draw any wages from IHP, but did withdraw money from the business. Smith and Lea's equipment was used by IHP, and they received no compensation for its use. Lea testified that he understood the arrangement among the three of them to be a partnership. He also stated that there was no discussion on forming a corporation during the original discussion of going into business.

Redd testified that he offered Smith and Lea an opportunity to learn the sawmill business because he needed someone to run the mill. He informed them of loans owed to the bank. He additionally explained that, when the bank note was paid and when he recouped his investment, the men would form a corporation and Smith and Lea could have whatever interest that they wanted. Redd discussed business decisions, such as the purchase of an office and the construction of the pallet shed, with Smith and Lea. Smith and Lea also had check-signing authority. The relationship of the three appeared to others to be a partnership. Trade magazines listed Redd and Smith as "co-owners."

Smith rested his case, and Redd requested a directed verdict on the issue of liability asserting that Smith failed to establish by clear and convincing evidence that a partnership existed. The trial court granted the directed verdict on the issue of liability, but found that there was a showing of an equitable interest held by Smith and that there needed to be a hearing to determine the value of that interest.

Extensive evidence was introduced by both Redd and Smith, by means of documents and expert testimony as to the value, expenses, and liabilities of the mill. Employees of IHP testified that Redd owned the mill, that Smith was an employee, and that they did not believe that Smith owned an interest in IHP. Smith acknowledged that he and Lea were told that they would take an interest in the operation after the bank was paid and Redd got most of his money back. Smith and Lea hauled some 480 loads of gravel, valued at $26,000.00, to the mill, for which they were not reimbursed. Redd acknowledged he owed someone for the gravel and that he owed rent, valued at $8,000.00, for the use of the knuckleboom loader.

At the conclusion of the trial on June 29, 1988, the trial court ruled that there was no partnership, no fraud, and no basis for punitive damages, that Lea and Smith were employees, and that Redd was the employer. He held that the three men did form an agreement, but the agreement provided that as soon as the bank was paid off and Redd was repaid his investment Lea and Smith would be given an interest in the mill. Because Redd was still in debt "nothing was owed" to Smith. The trial court held, however, that it would be inequitable to "send ... Smith ... away empty-handed, and taking into consideration his time in his employment at [IHP]," Smith was awarded $50,000.00.

The chancellor held that Smith was entitled to receive from Redd $50,000.00 compensation for his half interest in the knuckleboom loader ($16,000.00), for the rent on the previous use of the loader ($8,000.00), and for the gravel that Smith hauled to the mill ($26,000.00).

Smith appealed and presented the following issues which warrant discussion: (1) the chancellor erred in holding that he was not a partner and (2) assuming that there was no partnership, the chancellor erred in his measure of damages for his "equitable interest" by not considering or awarding the difference between what Smith could have made logging between 1981 and 1986 and what he actually made working for IHP. Redd cross-appealed, asserting that the chancellor erred in making a monetary award to Smith because the statute of limitations had run and because such relief was not requested in the complaint.

II. DIRECT APPEAL

This Court's standard of review of the findings of a chancery court is limited by the manifest error-substantial evidence rule, which is generally applicable when reviewing the findings of a trial judge sitting without a jury. Croenne v. Irby, 492 So.2d 1291, 1294 (Miss.1986).

Smith asserts that the trial court erred in finding that no partnership existed between himself and Redd. A partnership as defined by statute is "an association of two (2) or more persons to carry on as co-owners a business for profit." Miss.Code Ann. Sec. 79-12-11 (1972). The determination of whether a partnership exists is governed by statute. Miss.Code Ann. Sec....