Wormhoudt Lumber Co. of Ottumwa v. Cloyd, 55983

• Decision Date: 26 June 1974
• Docket Number: No. 55983,55983
• Citation: 219 N.W.2d 543
• Parties: WORMHOUDT LUMBER COMPANY OF OTTUMWA, Appellant, v. Jon CLOYD, Appellee.
• Court: Iowa Supreme Court

Page 543

219 N.W.2d 543

WORMHOUDT LUMBER COMPANY OF OTTUMWA, Appellant, v. Jon CLOYD, Appellee.

No. 55983.

Supreme Court of Iowa.

June 26, 1974.

Johnson, Bauerle & Hester and Max H. Ruschmeyer, Ottumwa, for appellant.

Moreland & Vinyard, Ottumwa, for appellee.

Heard before MOORE, C.J., and RAWLINGS, LeGRAND, UHLENHOPP, and HARRIS, JJ.

UHLENHOPP, Justice.

This case involves the obligation of an agent to be loyal to his principal.

Wormhoudt Lumber Company of Ottumwa, Iowa, employed Jon Cloyd as its agent, paying him a salary plus a bonus computed on the company's profits. His duties included finding construction jobs and bringing property owners and contractors together, whereby the company would sell building materials. In a typical situation Cloyd would locate a property owner who desired certain construction, or such a property owner would himself come to the company. Cloyd would compute the cost of construction, including material, labor, and, apparently, a profit for the contractor. If the owner was satisfied with the price, Cloyd would seek a contractor who would take the contract at that price. If Cloyd found such a contractor, the contract between the property owner and the contractor would be closed, the contractor would perform the contract, the property owner would pay the contractor the price, the contractor would pay the company for the material, and the contractor would receive the profit (or stand the loss) on the contract. If the contractor paid the company its invoices for materials within 30 days, he received a 10% Discount from the list price of the material, in accordance with the custom in the trade.

By virtue of his employment with the company, Cloyd thus found himself to be a bridge between owners who wanted construction done and contractors who wanted jobs. He saw the 10% Cash discount going to the contractors who paid invoices on time and decided he should have part of the discount. He therefore got several contractors secretly to split that 10% With him; they did so to get jobs. The company knew nothing of this. After a contractor settled with the company in its office, the contractor and Cloyd would go to some secluded place in the lumberyard where the contractor would pay Cloyd off.

This practice apparently worked so well that Cloyd exploited another opportunity which his employment provided--taking half of contractor's profits of jobs. He arranged this in the following way. When a property owner wanted construction done, Cloyd obtained a commitment from one of the contractors for a fixed amount for labor. To that Cloyd added the cost of the material at retail and the contractor's profit. He then priced the job accordingly. When the contractor completed the job and the property owner paid the contractor the price, the contractor paid himself the agreed amount for labor and paid the company for the material less 10% Discount. The contractor then secretly 'kicked back' to Cloyd half of the 10% Discount and also half of the profit.

On January 21, 1967, Cloyd left the company's employment. Soon afterward, one of the contractors reported to the company what had been going on. Two of the contractors, Gary Johnson and Jerry McCall, sued Cloyd to recover the payments they had made to him. Cloyd defended, and eventually Johnson and McCall dismissed their suits--understandably, in view of their complicity in Cloyd's breach of loyalty to the company. See Restatement, Restitution, § 140.

The company then brought this suit in equity against Cloyd for an accounting of the secret payments he obtained in the course of his employment. The company brought out at trial the facts we have related. The evidence shows that Cloyd obtained payments from several contractors.

The case presents a flagrant breach by an agent of his duty to be loyal to his principal. If an agent is able to reap extra profits from third persons in the course of his employment--in this case, by getting contractors to take less than they normally would get--the agent must hand over those profits to the principal in whose employment he made them. The agent's duty of undivided loyalty is one of the first and fundamental principles of the law of agency. That duty encompasses the obligation to pass back to the principal any profits which the agent gleans.

The general principle is stated thus in § 387 of the Restatement...