Waters v. Cochran

• Decision Date: 30 August 1973
• Citation: 285 So.2d 474,291 Ala. 610
• Parties: Forrest E. WATERS, Jr. v. Shirley H. COCHRAN, Jr. SC 180, 180--X.
• Court: Alabama Supreme Court

Page 474

285 So.2d 474

291 Ala. 610

Forrest E. WATERS, Jr. v. Shirley H. COCHRAN, Jr.

SC 180, 180--X.

Supreme Court of Alabama.

Aug. 30, 1973.

As Modified on Denial of Rehearing Nov. 8, 1973.

[291 Ala 611]

Williamson & Taber, Greenville, for appellant.

Vickers, Riis, Murray & Curran, Mobile, Poole & Poole, Greenville, for appellee.

COLEMAN, Justice.

Respondent, Waters, appeals from adverse decree in suit for partnership accounting and settlement. Complainant, Cochran, has made cross-assignments of error.

In the bill of complaint, complainant avers that in the fall of 1958, he and respondent entered into a partnership agreement for the purpose of real estate development and sales; that the partners were to share equally in profits and losses; that the business resulted in a loss of more than $60,000.00; that complainant executed a deed of trust for benefit of creditors on September 1, 1961; that complainant has subsequently made payments to creditors through the trustee, and respondent has subsequently made payments to one or more creditors in partial satisfaction of partnership debts; and that complainant has made demand on respondent to pay his share of the partnership debts but he has failed and refused to do so.

Complainant prays for an accounting, that the account of each partner with the partnership be stated, that respondent be ordered to pay his share of the debts, and for general relief.

The original bill was filed in Mobile County. Respondent's plea in abatement to the venue was held sufficient and the cause was transferred to Lowndes County.

Respondent filed his answer denying that the parties entered into a partnership and other matters averred in the bill.

The court entered an order on pretrial conference held under Equity Rule 38. As here pertinent, the order states in effect that

1. The parties agree that trial is to be based on original bill and answer, respondent's defense being the general issue and statute of limitations or laches.

2. On the merits, two principal issues are to be decided: (a) Whether a partnership existed, and, if so, what percentage each partner owned; (b) If partnership existed, what partnership debts have been paid by complainant to which respondent should contribute.

3. Complainant claims there existed an equal partnership between the parties. Respondent denies that partnership existed and contends that he was an employee of complainant and had no responsibility for debts incurred in operation of complainant's business.

4. On the question of the debts of the business organization, whether or not a partnership, the parties stipulated that a certain paper, entitled 'Computation of Amounts Claimed on Cochran-Waters Debts,' is a true and correct statement of the debts of the organization as of the time it went out of business, all of which have now been paid by complainant except one item which is not here material.

Evidence was heard ore tenus by the court. In outline, the evidence shows that complainant and respondent were fraternity brothers and roommates at college. Complainant, after leaving college, returned to Mobile. Respondent transferred to another school, and complainant visited respondent there in the spring of 1958. They discussed respondent's coming to Mobile and engaging in business with complainant. After graduation, respondent and his family moved to the Mobile area and he was employed at S. H. Cochran Furniture Company, owned by the Cochran family, as a salesman on a salary of $100 per week and a commission on sales.

In the fall of 1958, respondent went into business with complainant and two others in an insurance and real estate operation. This arrangement lasted about two months. Complainant and respondent then engaged in business under the name: 'Cochran-Waters Real Estate Company.' Complainant obtained a real estate broker's license and respondent obtained a real estate salesmen's license. This business continued until June, 1960. It was a general real estate business engaged in sale of real estate and construction of houses. Complainant was primarily in the sales activity and respondent in the construction activity.

In June, 1960, two corporations were formed. Complainant, respondent, and another were the original stockholders. One corporation was to construct houses and the other was to sell real estate and insurance. Respondent subscribed to twenty per cent of the stock. Complainant and the third party each subscribed to forty per cent. The personal property of the alleged partnership was transferred to the corporations. Respondent contends that complainant received credit for the partnership personal property in satisfaction of his subscription for stock in the corporations. Respondent gave a note for his subscription and later paid the note. Complainant testified as follows:

'Q And your testimony is that in acquiring the stock from the corporation you got credit for the transfers and Forrest did not?

'A No, that's not my testimony.

'Q What is your testimony?

'A My testimony is that we both transferred this as on the Bill of Sale, and we put up additional cash and Forrest didn't have cash, and he gave the corporation a note.

'Q Are you stating that Forrest got some equity out of the corporation for his interest in these two documents?

'A Yes.'

Respondent testified as follows:

'Q Now, Forrest, there is in evidence Respondent's Exhibit No. 3, photocopies of two bills of sale, one for a 1958 Ford Pickup Truck and one for a 1952 Ferguson Tractor, showing they are conveyed to Cochran-Waters & Corte, Inc., and they are executed by Cochran-Waters Real Estate Company, and I will ask you did you sign those two bills of sale?

'A Yes I did.

'Q Did you receive any credit for your equity to be applied against what you owed for your equity in the corporation by transferring these properties?

'A I did not.

' 'Q Do you know whether or not Shirley Cochran paid for his equity in his corporation by getting credit twelve hundred and ten dollars on the pickup truck, and twelve hundred and forth dollars on the tractor, some amount for the furniture and fixtures, and paid the balance in cash?

'A Yes.

'Q Did you make any claim to the corporation for some credit against your property, or Cochran-Waters Realty Company property that was transferred to the corporation?

'A No.'

Certain other evidence is summarized in briefs as next set out. Respondent states in brief:

'During the periods of time that Cochran Waters Real Estate Company operated, it sustained business losses each tax year. There was no partnership income tax return filed for this business entity. With Cochran's income tax returns for the years 1959, 1960 and 1961, there was a Schedule C, Profit (or Loss) From Business or Profession, included therein, whereunder Cochran showed Cochran Waters Real Estate Company to be a sole proprietorship and charged, against himself personally, all the business losses incurred, which represented a substantial income tax savings to Cochran. (Tr. pp. 56, 57, 58, 60, and 61). Both Cochran and Waters testified that the salary paid Waters was reflected as a business deduction on Cochran's income tax return and, although Cochran did not recall (Tr. p. 56), Waters testified that social security and other withholding taxes were withheld from his salary each week and his income was reported on W2 forms and income taxes paid thereon. (Tr. p. 98).'

Complainant states in brief:

'There is considerable testimony in the record with respect to the fact that Cochran deducted the entire losses of Cochran-Waters on his individual income tax return. This was done on the advice of a CPA, since Cochran had income from other sources against which he could use the losses as an offset. There was no testimony as to what deductions Waters took for those years.'

Other evidence is hereafter referred to in consideration of the errors assigned.

Two or three months after formation of the two corporations, complainant sold his stock and went into business on his own account. He undertook to sell and did sell the properties of Cochran-Waters Real Estate Company which had not been disposed of, respondent joining in execution of the deeds, the last of which bears date of November 9, 1961.

Respondent left the Mobile area in July, 1961, and returned to Fort Deposit.

The court rendered final decree finding as follows:

1. Beginning in 1958, complainant and respondent formed a partnership and each was obligated to divide equally the profits and losses, and said partnership existed at all material times and has never been dissolved.

2. The partnership business was unsuccessful having no assets and a large indebtedness in the fall of 1961 when the partnership went out of business except for winding up its affairs.

3. The last remaining assets of the partnership were two lots which were conveyed back to the sellers in consideration for the cancellation of the unpaid purchase price.

4. All debts of the partnership were debts to third parties as stipulated in the pretrial order.

5. Complainant ascertained the amount of the partnership debts in August, 1961, and requested respondent to sign note evidencing his obligation to pay his share, but he refused to do so. On September 1, 1961, complainant established a trust for creditors through which he paid all debts of partnership. Last payment was made August 14, 1969.

6. Respondent is obligated to pay to complainant one half of partnership debts paid by complainant, together with interest from date of this decree. Interest on respondent's half of the debts paid prior to the decree by complainant amounts to $12,870.53, but complainant is not entitled to recover this interest.

7. Complainant deducted, for income tax purposes, the entire losses of the partnership on his individual income tax returns, resulting in a benefit to complainant in diminished federal income taxes, which the court is of opinion should be credited against...