242 Pa. 269 | Pa. | 1913
Opinion by
The Smith Construction Company was a corporation
The magnitude of the work involved in the audit will be appreciated when it is understood that 130 meetings were held and 1,850 printed pages of testimony taken. The auditor’s report covers 530 printed pages, and in it he finds a multitude of specific facts in addition to answering many requests; he discusses the testimony, clearly states his reasons for all conclusions reached, and makes various surcharges against the receiver, amounting to $41,310.09. The court below practically set aside the entire report of the auditor and decreed that the receiver should pay $250,409.
The auditor endeavored to surcharge upon the basis of actual values, ’wherever he found the receiver had failed to account or had improperly accounted for assets of the estate and for all credits claimed which he conceived to be insufficiently vouched. The court below acted upon the theory that the estate was solvent when it went into the hands of the receiver, that the account was incomplete, that it had not been properly vouched, and that it was impossible to state an account with sufficient exactness. The amount the accountant was.
Counsel for the appellants state in their printed argument, “The court below disposed of the case upon the basis of general conclusions without making specific findings of fact and without passing specifically upon more than one of the 531 exceptions to the auditor’s findings”; and this statement is substantially correct, particularly is it correct as to all the important underlying facts. The method thus pursued has added greatly to our labors on appeal; but we have examined the record and the testimony with the utmost care, and cannot concur in the general condemnation of the audit contained in the opinion of the learned court below. A detailed discussion of all aspects of the various points involved would unduly extend this opinion; our examination has satisfied us, however, that as a rule the auditor had evidence upon which to base his findings and that his conclusions were justified in most instances; later on we shall treat separately of the cases where we do not deem this to be so.
The one instance above referred to where the court below formally passed “specifically” upon a finding of the auditor, involved the financial condition of the Smith Company at the time of the receivership. The auditor found as a fact that the corporation was insolvent on January 27, 1905, when the receiver was appointed, and the evidence before him justified this finding; hence the court erred when it decided otherwise. It is true that statements were made by Richards and his counsel at that time which indicated their belief in the
Although the court expresses the view that an account could not be stated, yet the auditor not only found that it was possible, but actually stated one, and he refers specifically to evidence in support of the various items contained therein. In addition to the separate treatment of numerous disputed items, the auditor devoted sixteen printed pages of his report to a satisfying demonstration of the reasonable possibility of arriving at a correct accounting under the proofs before him, despite the absence of certain books and papers, and neither the court below nor the appellees refer to any positive testimony or point out the absence of proofs that reasonably refute his position in this respect.
The court below states that the auditor, instead of making the receiver sustain his account, required the creditors to establish inaccuracies therein. While certain expressions in the report, taken by themselves, might suggest this attitude, yet, when the record is viewed as a whole, it is plain that the auditor assumed no such position; on the contrary, in several important instances he surcharged the receiver or refused credits claimed by him upon the express ground that the accountant had not proved the accuracy of the item in question or that the proofs left the point in doubt. If the depositions were unduly extended, this cannot be laid at the door of the auditor. It appears that many of the receiver’s papers were turned over to counsel for the creditors, and that they agreed to designate the items which they desired to dispute. In carrying out this program counsel produced testimony to attack certain items when they might have followed the simple course of calling upon the receiver to sustain them. Under the circumstances, we do not feel that the auditor can be condemned for receiving all the testimony brought be
The record shows that the auditor not only had the aid of a great mass of testimony, but that much documentary evidence was produced,, in the way of books and papers, all of which he considered in reaching the conclusion that the account had been sufficiently vouched to warrant him in passing thereon. A close study convinces us that this conclusion was right and that the court below should have dealt with the different phases of the case upon that basis; but in place of following this course, and passing separately upon the many exceptions filed to the report of the auditor, and thus pointing out wherein it thought he had erred in his facts, the court simply discusses testimony or comments on the lack of evidence or the quality of the proofs, and in most instances satisfies itself by stating conclusions differing from those of the auditor, which conclusions, as a rule, are wholly unsupported by the underlying findings of fact.
The accounts show heavy losses incurred by the receiver in carrying on the business, and probably it would have been better had there been no attempt to finish the work the Smith Company was engaged upon; that, however, was not the consensus of opinion at the time. The auditor specifically traces and explains some of these losses, but where the receiver’s operations resulted in losses which could not be so traced, he refused to attribute them to the negligence or fraud of the accountant, taking the position that under the circumstances of the case there was no sufficient evidence to justify him in so doing; and in this connection he particularly calls attention to the fact that contracting for large operations is a hazardous business, and- states that it is quite believable that such losses “were the result of rash or mistaken bidding by the Smith Company by whom the prices were fixed.” The
“PAY ROLLS” AND “WEST END SPECIAL ACCOUNT.”
The receiver claimed a credit of $180,501.10, to cover wages paid for work upon the various operations of the Smith Company, and the auditor, after making a number of substantial reductions, allowed the greater part thereof; but the court thought the credit had not been properly vouched and decided that the entire claim should be disallowed. We cannot agree with this conclusion. While the court below expresses the opinion that the pay rolls produced by the accountant were “false and padded,” yet it does not indicate any definite
The auditor held that the rolls were prima facie evidence of the payment of the wages therein set forth. Whether, in a strictly legal sense, this be true, it is not necessary to determine; for the auditor’s conclusions do not depend upon the adoption of that theory. There can be no gainsaying the fact that the receiver had an army of men constantly at work, and the market value of the labor actually performed by these men, or the rate of wages paid to them, has not been questioned; moreover, it is apparent from the tangible results accomplished that a vast sum of money must have been paid out in wages. When we accept the finding of the auditor that the rolls were not padded, — that they present a true and correct list of the workmen engaged and the hours of labor performed, — -and when we consider that, although several years elapsed between the performance of the work and the audit of the account, no wage claims
Of course, as the court below properly states, it would have been much better if a different system had been pursued by the receiver, so that a more exact vouching could have been had; but, after a most careful investigation of the testimony and consideration of all that has been said upon the subject, we are convinced that the auditor with painstaking care properly disposed of the issues growing out of this branch of the case, except one, which we now shall proceed to consider.
The pay rolls were made up originally on the respective operations and then sent to the home office of the company, where additional calculations were made and a pay envelope prepared for each man whose name or number appeared thereon. The rolls and the envelopes were then given to the paymasters. All envelopes not claimed on pay day or within a short time thereafter were returned to headquarters; and when they remained unclaimed for a certain length of time the cash contained therein was deposited in a special account in the West End Trust Company, Philadelphia. This course was pursued prior to the receivership and appears to have been continued thereafter. The total deposits in this account amounted to $9,430.51, but the auditor decided that the receiver was only chargeable with so much thereof as was shown to have actually come into his hands. We cannot subscribe to this view.
The auditor found that the receiver was guilty of a fraudulent deception concerning this special account, and he surcharged him $3,675.95, but we feel that under all the surrounding facts the accountant should have been ordered to pay the whole $9,430.51. (For a fuller discussion of the principle upon which this surcharge rests, see “Deposit with Nat’l Ex. Bank,” infra.)
“WEST VIRGINIA ATTACHMENTS.”
The auditor found that after the appointment of the receiver several persons, shown by the books of the Smith Company to be creditors in the total amount of $8,055.67, levied attachments upon its property in West Virginia. The articles attached were part of a plant which the receiver had contracted to sell to a railroad company with an agreement to pay off and discharge all liens thereon. The court below authorized this sale under an arrangement whereby a surety company was to enter its bond in order to get the property released, and to indemnify the surety, against loss the purchase money was to be paid to it. Instead of cariying out this plan, the receiver settled the claims by payments amounting to $6,265.85, thereby affecting a saving of $1,789.80. The
“settlement with west end trust company”
and
“J. T. RICHARDS LOAN AND STOCK LIABILITY.”.
The auditor found that Joseph T. Richards (an uncle of W. R. Richards) loaned a considerable sum of money to the Smith Company, when apparently it was a solvent going concern, and that he held as collateral with its notes some shares of its capital stock and an assignment of certain retained percentages due to it from the Pennsylvania Railroad Company; that the loan from
Before leaving this branch of the case, we take occasion to state that an examination of the testimony shows warrant for all the findings and conclusions of the auditor, including those to the effect that the shares of stock delivered to “T. R. Morgan, Agent,” were not held by him as an owner with a liability on his part, or on the part of his principal, J. T. Richards, as a subscriber for such stock, but were held merely as collateral for the loans made to the Smith Company by J. T. Richards.
“DUNN & GO. SALE” and “STOCK LIABILITY.”
On the facts found by the auditor and not disturbed by the court below his conclusions concerning the transfer of the assets of Dunn & Co. to the Smith Company were justified; particularly that Richards was the owner by purchase from Dunn of all the assets of Dunn & Co. when he transferred them to the Smith Company, and that the price paid therefor by the latter corporation, approximately $68,000, represented a legitimate business deal between the parties. The auditor has gone into the subject of these transactions elaborately, and we shall not attempt to present them in detail. The paper books show the following important facts to be admitted : originally Richards and Dunn were the sole partners and owners of the assets of Dunn & Co.; on January 17, 1903, when the former purchased the latter’s interest in Dunn & Co., Richards and one Jacobs were practically the sole owners of the Smith Company; and this was the state of affairs when the assets of Dunn & Co. were transferred by Richards to the Smith Com
While Richards purchased Dunn’s one-half interest' in Dunn & Co. for a price which might be taken to indicate a value of not over $33,000, and subsequently sold all the assets of that concern to the Smith Company for a much larger sum, this does not necessarily indicate a fraud perpetrated against the latter; for the auditor has found that in connection with the tangible assets thus transferred the Smith Company acquired three contracts between Dunn & Co. and the Pennsylvania Railroad Company, which netted it over $120,000 in profits. Under all the circumstances it cannot be said justifiably that the auditor erred in treating these contracts as a species of “good will”; or that he erred in deciding that the entries in the books of the Smith Company were not conclusive of the actual transactions under investigation. It does not appear why Dunn sold his interest to Richards at such an apparently low price; but railroad construction is at best a hazardous business and he may not have anticipated the real value of the Pennsylvania Railroad contracts. Be this as it may, however, we can find no warrant for the summary reversal by the court below of all the conclusions of the auditor upon this branch of the case; and we feel that, under the findings and the relevant rules of law and practice, the learned court erred in discountenancing the credit of $68,222.10 permitted by the auditor in the personal account of W. R. Richards. In this connection, we need only add that, under the findings, the liquidation of the indebtedness of the Smith Company to Richards by the issuance of certain shares of its full paid capital stock to him, and to Jacobs and others on his order, was neither extraordinary nór wrong and could not be properly so construed.
The auditor found that the receiver had failed to account for various items of machinery valued at $2,-836.70, which belonged to the plant of the Smith Company at the Frenchtown operation, that a blacksmith’s outfit valued at $150 was not accounted for, and that by a pretended sale for $150 the receiver had fraudulently misappropriated property to the value of $3,000 belonging to the plant at York; and he surcharged the accountant accordingly. The evidence as to the real value of the articles included in the fraudulent sale varied considerably, and after summing up all the testimony upon the subject the auditor fixed the value at $3,000. The court below without specifically or formally overruling the auditor’s findings of fact raised the total represented by the three items of surcharge to $11,-821.75. The increase was worked out upon this theory: the receiver was a part owner in a concern known as the Schuylkill Stone Company; certain of the articles included in the surcharge were traced to that company, and it was also proved that its books showed a credit for machinery, etc., amounting to $11,821.75, without showing any payments therefor. After reciting these facts, the court below states, “The only way of fixing the value of the plant misappropriated by the receiver is to adopt the figures in the stone company’s books.” The court then proceeds to deduct the aggregate of the surcharges made by the auditor from this $11,821.75, and thus raises the total amount of such surcharges by $5,-835.05. This was error, and the auditor would have erred had he adopted any such method of valuation. While property belonging to the Smith Company was shown to have been used by the stone company, the testimony indicates clearly that these articles did not constitute the entire plant of the latter concern, and there is nothing to identify them specifically with the item of $11,821.75 in its books. The auditor’s report demonstrates an exhaustive study of the proofs; he apparently
“THE MARYLAND COMPANY.”
The auditor found that Richards, Jacobs and Blair, all of whom were officers of the Smith Company, formed a partnership, styled the Maryland Company. The ostensible business of this concern was to furnish and care for the housing, etc., of laborers employed by the Smith Company upon its various operations, and it received the privilege of conducting the “commissaries” (the right to supply board, food and stores to these laborers). The Maryland Company, in turn, sublet its privileges to Italian padrones, and “all the work the Maryland Company did in connection therewith was this subletting.” The padrones ran the “company stores” and permitted the Maryland Company a discount upon the laborers’ purchases and board bills. A method of securing payment of the workmen’s bills through tickets given to them by the Smith Company by means of which they made purchases, paid board bills, etc., which were subsequently charges against their wages, was inaugurated and maintained by that company; and thereunder 90 per cent, of such expenditures was paid to the padrones and 10 per cent, to the Maryland Company. This arrangement was discontinued when the receiver was appointed, but a considerable sum had been paid to the Maryland Company prior to that time, and the receiver paid the amount claimed to be due it up to the date of the discontinuance of the system. The auditor carefully considered the last-mentioned payment and surcharged the receiver $563.90; but. he refused to increase this surcharge and declined several others asked by the creditors. The surcharges declined embraced a profit of $4,642.37 made by the Maryland Company through hiring horses to the Smith Company, a profit of $184.30 through the sale of coal by the former to the latter, and,
The auditor’s views in reference to the matters before us present a degree of apparent reasonable justification, and they merit fuller discussion than given by the court below or than we as a court of appeal can afford them, but after consideration we feel that, on the facts as found by him, the 10 per cent, paid to the Maryland concern might have been saved to the Smith Company,— in substance it was nothing more or less than a commission for services that could have been performed directly by the officers of that company. Again, if the Maryland Company could furnish coal and horses to the Smith Company at a profit, it has not been made plain why the men who constituted that concern did not perform this service directly as officers of the latter corporation, and thus save to it the amount of such profits. Cases may be cited where the officers of a corporation have been permitted to make and retain profits for themselves through the formation of outside agencies controlled by them, which profits they could have saved to their constituent company had their thought been only for its welfare; but in such instances the law has ceased to look at the mere form of the device employed, —it now pierces through the surface and seizes upon the evils which lie within. In the case before us, although, as found by the auditor, the evidence may not show an actual fraudulent purpose or scheme to “milk” the Smith Company in the inception of the Maryland Company, — that is, the proofs may not justify the inference as a matter of fact that Richards and his associates knew that they were doing an unlawful thing or intended a fraud against their trust as officers of the former company, yet where, as here, men create artificial conditions which present inevitable temptations and opportunities for wrong, a situation arises which in law
The receiver should be surcharged for his failure to collect the item of $4,642.37, the item of $184.30 and the item of $4,540.61; but he should not be surcharged, as directed by the court below, with the sum of $965.55; we feel that the auditor correctly disposed of all matters connected with this latter item when he ordered the surcharge of $563.90.
“DEPOSIT WITI-I NATIONAL EXCHANGE BANK OF WESTON.”
It appears that some time between December 23,1904, and January 7,1905, $10,000 was deposited by the Smith Company in the National Exchange Bank of Weston, West Virginia. The receiver was appointed January 27, 1905. At the audit the accountant failed to produce any documentary evidence to show what had become of this apparent asset; he testified, however, that the account was exhausted before his appointment. The auditor refused to make a surcharge, stating that, “since he (the receiver) did not get it (the money in question) himself he can hardly be asked to account for it,” and adding, “it seems quite plain that the money was used for the Frenchtown pay roll”; but he made no direct finding that the money was used for that purpose. The court below reversed and decreed that, in the absence of any satisfactory evidence explanatory of his failure to collect this substantial sum, the accountant was-chargeable therewith. The court'calls attention to the fact that the receiver was the former president of the Smith Company, and states, “A receiver is not only chargeable with moneys actually received by him but is equally chargeable and will be surcharged where moneys are due to the estate which are collectible and which have not been collected or attempted to be collected by him”; adding, “that the money was used for the West Virginia pay rolls seems to be entirely an assumption by the learned auditor, if such was the actual fact it
We feel that the court below was right in its view concerning the item under consideration. Our attention has not been directed to and we find no satisfactory evidence explaining what became of this money; while no violent inferences should be drawn against the receiver, yet, since the proofs establish so much dishonest conduct on his part, he is not entitled to assumptions in his favor. The appellant states in his printed argument, that he attached to his return to a certain petition in the court below (filed after the decree from which this appeal was taken) a statement “showing deposits and checks drawn against the funds” in question, and that this paper demonstrates that the bank account was exhausted prior to his appointment as receiver. We are unable to find the document in the paper books; therefore, we cannot judge as to its value. If the court below is of opinion that the statement in question indicates the existence of proper explanatory evidence in relief of the receiver, it can, and no doubt will, deal further with the matter when this record is returned to it; on the other hand, if the court below is not so impressed, the receiver should be surcharged as already indicated by that tribunal in dealing with this branch of the case. But, of course, he should not be so surcharged if it is apparent that he can show by proper evidence that the funds were exhausted by the Smith Company prior to the receivership.
“fourth street national bank claim.”
The Fourth Street National Bank claimed an allowance of $15,207.97; $10,000 was asked as a fee for counsel who represented the bank, $4,000 for services rendered by an expert accountant, and the balance to reimburse it for money paid to cover other expenses in connection with efforts started and pursued by this particular creditor for the recovery of assets which enlarged the gen
Our rulings have materially increased the fund for distribution over the amount determined by the auditor, and some of the items affected represent additions attributable to the efforts of the bank, but we have not adopted in to to the views of the court below; hence, since both the auditor and the court were guided largely in determining their respective awards by the gross sum realized through the efforts of the bank, logically, there should be an increase in the amount fixed by the former but the allowance should not be as great as the award of the latter. After weighing the matter in detail, we feel that $8,800 would be fair and equitable, and we so order.
In considering whether or not the receiver should be surcharged a sum sufficient to meet this item, we must start with the thought that it is a proper charge against' the estate, for it was incurred in the creation of a part
“COUNSEL fees.”
The auditor allowed $5,150 paid by the receiver to his general attorney in Philadelphia, but disallowed a claim for an additional $5,500 to the same counsel, stating that the necessity for the services covered by this additional fee arose from the negligence and fraud of the receiver, hence, it should be borne by the accountant individually. The court below concluded that, under the view it took of the case as a whole, the receiver ought not to have been allowed any credit whatever on this account, and that he should be surcharged with the sum already paid. It appears that neither the propriety nor reasonableness of the $5,150 fee was questioned before the auditor or raised by exception below. If the court felt that there was not sufficient evidence to show whether the fee paid by the receiver was reasonable and proper, it should have referred the matter back to the auditor so that counsel might appear and prove their services in detail. It is quite certain that counsel rendered services which would have been required under a proper administration of the estate, and for such the fund is liable. The printed argument of the appellant indicates that had the fees paid been questioned they could have been fully sustained by evidence. The court below is directed to afford counsel the opportunity to present proofs in support of the fees paid to them; or if, without further proofs, it feels that, in the light of the dis
The auditor also allowed the receiver credit for $1,-500 paid to counsel at York. As to this the court states, “It does not appear that any of the expenses incurred at York were necessary and for the benefit of the estate”; and it suggests that the receiver should be surcharged the entire $1,500. In view of the difference of opinion between the auditor and the court on the subject of these fees, and owing to the lack of proofs showing exactly what services were rendered in the conservation of the estate, and how much of the fees paid are chargeable thereto and how much are chargeable to useless services connected with the ancillary receivership at York (that receivership having been declared by this court to be unnecessary and unlawful), we feel it impossible, as the record now stands, to pass judgment upon this part of the case. The findings of the auditor seem to indicate that, at least, a portion of the $1,500 covered services in connection with the ancillary receivership that were of no benefit to the estate, and we agree with the court below that this part of the fee is properly chargeable directly against the receiver; but we feel that so much thereof as covered services in aid of the conservation of assets stands on a different footing, and that such services are entitled to reasonable compensation out of the fund for distribution; this is true even though the attorney was employed by the local York receiver. The court, below is directed to afford counsel an opportunity to present proofs, and to adjust the matter of these fees in accordance with the
“AUDIT EXPENSES.”
The expenses of the audit amounted to $2,553.28, and the auditor requested a fee of $10,000; although it was not objected to, the court cut the fee to $5,000, and decided that Richards, personally, would have to pay both of these items, in all $7,553.28. The amount of the fee to be paid to the auditor is peculiarly for the appointing court to determine, since he is its officer; but, considering the difference in the views entertained by this court and those expressed by the learned coux't below upon the general conduct of the audit and in relation to many of the items involved therein, we suggest that the subject of the auditor’s fee should be x*econsidered in the light of the present opinion; this, however, we leave to the wise judgment of the court below. The expenses charged against the receiver include a number of items properly payable out of the funds of the estate. We feel that, since the conduct of the accountant in the management of his trust was largely responsible for the complexity and consequent costliness of the audit, a large proportion of the expenses should be borne by him, but that at least $1,000 thereof should be paid by the estate; further, that one-third of the auditor’s fee as finally fixed should be assessed against the receiver and two-thirds against the estate, and we so direct.
After the long delays already encountered, it is to be regretted that we cannot pass final judgment upon every point involved in this appeal; we have endeavored, however, to cover the case as thoroughly as possible and to state our views on each of the several subjects touched upon by the court below, so that when the record is returned to it they may be treated accordingly. There are a number of items referred to in the printed argument of the appellees which are not discussed in the opinion of the court below or specifically adverted to here. Most of these items are comparatively small and
The record is remitted to the Common Pleas with instructions to dispose of the case and modify its decree in accordance with the views expressed and directions contained in this opinion; two-thirds of the costs to be paid out of the fund and the balance by the appellant Richards.