Hagan v. Dundore

⁴³³ Henderson, J., delivered the opinion of the Court. The appeal in this case is from a decree of the Circuit Court for Baltimore County, in Equity, dismissing the cross-bill of the appellant and awarding to the appellee, on his original bill, the appellant’s interest in the partnership known as Diecraft Engraving Company at its book value on January 14, 1945. Such value was fixed by the decree at $50,941.55. The original bill was before this court on demurrer.

Hagan v. Dundore, 185 Md. 87 , 43 A. 2d 181 , 160 A. L. R. 117. We there held that a right of preemption, or option to purchase at book value, contained in a partnership agreement terminable at will, survived the notice of termination, and that the option was exercised within a reasonable time thereafter. We expressed no opinion as to what was comprehended within the meaning of the term “book value.” In construing the agreement upon demurrer, its validity was, of course, assumed. By his answer and cross-bill, the appellant raised further questions.

He contended that the appellee took advantage of him in procuring his signature to the agreement of May 18, 1944, in violation of the confidential or fiduciary relations then existing and that the agreement was unfair. He prayed that the agreement be rescinded and nullified in its entirety, or alternately, that paragraphs 5 and 6 thereof be reformed and an accounting had on that basis, and for other and further relief. The case went to trial on that issue. In the main, the facts are not disputed, but the inferences to be drawn therefrom are sharply controverted.

The parties to this cause, prior to 1941, were associated in an engraving business known as Hagan Engraving Company. In that year, upon the death of the appellant’s brother, they became equal partners by verbal agreement. The business prospered, and in 1943 they moved to larger quarters, changing the firm name to Diecraft Engraving Company, and engaged in war work of a specialized precision character, as subcontractors. Among the articles manufactured may be mentioned a “tuner” for radar sets, and an escape hatch mechanism ⁴³⁴ for aeroplanes.

The business expanded rapidly, and so did the profits. On April 1, 1944, the partners had a disagreement as a result of which Hagan left the premises and never returned. The true cause of the disagreement remains something of a mystery. The immediate cause seems to have been the presence of two soldiers, friends of Hagan, in the office at about 9 A. M. on that date, who were said to have been somewhat under the influence of liquor.

Dundore demanded that they leave, and Hagan, left also. According to Hagan, he had been dissatisfied with Dundore’s conduct prior to that time. He complained that Dundore had been domineering to him and to the employees, and that he was “fed up” with the bickering and worries connected with the conduct of the expanded business, in which he had an increasingly smaller part. Hagan was the office manager and originally solicited business and kept the books.

Dundore was the production manager, and the design and production of the specialized products were under his supervision. He gradually supplanted Hagan in his contracts with the prime contractors, of whom the most important were the Glenn L. Martin Co., Western Electric Co., May Oil Burner Co., Bendix Radio, and Julian P. Freiz & Sons. A Certified Public Accountant was employed, and counsel for the firm was regularly retained. Hagan stated that the business had reached the point where it required technical knowledge which he did not possess and complained that all his decisions were subject to review by Dundore.

On the other hand, Dundore disclaimed any intention to belittle or supplant Hagan, and maintained that he at all times was working loyally for the best interests of the firm. After Hagan left the premises on April 1, Dundore went to see him at his home, and tried to persuade him to return. Hagan refused to do so, and a few weeks later, at the suggestion of Liepman, the attorney for the firm, went to Florida “for a rest.” In May, Dundore and Liepman went to Florida to see him. After considerable discussion and examination of a statement prepared by ⁴³⁵ the firm accountant in Baltimore, the agreement of May 18, 1944, was drawn by Liepman and executed by both parties.

The agreement recited that the parties were equal partners in the business and that they had mutually agreed to dissolve the partnership as of March 31, 1944, Hagan to retire from active participation and Dundore to continue actively in the management. It was also recited that Hagan agreed to sell a portion of his capital interest for $10,000, and that the parties desired to enter into a new partnership agreement as of April 1, 1944. The agreement provided in paragraph 5 that Hagan should sell “that portion of the book value of his capital interest in said partnership as is represented by the sum of $17,949.50; and the share of the capital interest of the said Harry A. Dundore shall accordingly be increased by the sum of $17,949.50 and the share of James A. Hagan shall be accordingly reduced by the said sum of $17,949.50 in said partnership capital.” Paragraph 6 provided that the capital should comprise “the present assets of the business as of March 31, 1944, amounting to $151,788.12 * * * adjusted on the books of said business to conform with the agreements, terms and conditions contained in this agreement. In said adjustment of partner’s capital, the sum of $8,352.04 withdrawn by said James A. Hagan from March 31, 1944 to May 5, 1944, shall be deemed by said partners to be capital withdrawals by the said James A. Hagan and shall accordingly be charged against his capital interest.” Paragraph 8 of the agreement provided: (a) that Dundore should be entitled to draw a salary of $20,000 per year, but not in excess of the net profits; (b) that the net profits remaining after salary should be divided on the basis of capital interest, e. g. 65 per cent, to Dundore, 35 per cent, to Hagan.

Paragraph 9 gave Dundore an option to purchase, “at any time during the life of this partnership agreement, upon 10 days notice in writing, any portion or all of the interest of James A. Hagan * * * for a sum not exceeding the book value of ⁴³⁶ the share of the said James A. Hagan.” Paragraph 10 provided that if Dundore did not exercise his option and Hagan desired to sell his interest, Hagan should offer his interest to Dundore “at a price not exceeding the then book value thereof represented by his actual capital investment,” and Dundore should have the right to pay for the same in ten equal yearly installments. Paragraph 11 provided that Dundore “shall keep or cause to be kept under his supervision, proper books of account of all transactions * * * and each partner shall at all times have access to and the right to inspect the same.” Paragraph 12 provided that “upon the death of either of said partners, or upon the purchase of the interest of said James A. Hagan, in whole or in part, by said Harry A. Dundore, or upon the mutual termination of their partnership and a division of the assets thereof, according to their respective shares, the good will of said business shall not be regarded or valued as a partnership asset.” Paragraph 14 provided that all previous partnership agreements between the parties should be terminated and dissolved as of March 31, 1944. Paragraph 15 provided that both parties should be equally liable for any sums which the business might be required to pay in connection with the renegotiation of contracts, or any other claims growing out of the business done prior to March 31, 1944. After the agreement was executed, Dundore and Liepman returned to Baltimore.

In June, 1944, while in Baltimore, Hagan showed his copy of the agreement to .an attorney, Stephen Campbell, and discussed it briefly with him. Campbell told him “this thing, in my opinion, can be cancelled at any time,” and kept the agreement for further study. On November 7, 1944, Hagan wrote Campbell to mail him the agreement and said: “It doesn’t seem likely that anything will happen before the end of the year, * * He subsequently paid Campbell a fee of $300 for his advice in connection with the agreement. On or about December 23,1944, when Hagan was again in Baltimore, Liepman went to see him, and showed him a ⁴³⁷ statement prepared by an accountant for the firm, which indicated that in the event of a renegotiation of contracts by the Federal government, applying the methods least favorable to the firm, his capital interest in the firm might be reduced to less than $8,000.

Hagan was very upset and went to see Dundore. Dundore told him not to worry, that he didn’t think the government would go that far, and if it did, he would pay him $12,000 for his interest. Hagan then consulted his present counsel, and on December 28, 1944, a letter was written to Dundore notifying him that the agreement of May 18, 1944, was terminated and concluded in its entirety, and the partnership thereby purportedly created is hereby dissolved, effective forthwith.” Upon receipt of this letter, and after some fruitless negotiation, Dundore, on January 4, 1945, gave notice of his exercise of the option to purchase contained in paragraph 9 of the agreement, and expressed his readiness to pay the book value of the appellant’s interest on January 14, 1945. The original bill, with exhibits, was filed on January 8, 1945.

After he left the premises on April 1, 1944, Hagan never evinced a willingness to continue as an active member of the firm. He told Dundore “he was never coming back” and that “he was thinking about going into some other business.” Nevertheless, he was entitled to all the rights of an equal partner on May 18, 1944, when the agreement was signed. The mere fact of his leaving did not terminate the partnership. As of that date Hagan had a one-half interest in all the assets including outstanding contracts and good will, subject to liabilities.

As was said in Helvering v. Enright’s Estate, 312 U. S. 636, 641 , 61 S. Ct. 777, 780 , 85 L. Ed. 1093 , “By the terms of the agreement, as would have been necessary anyway, the earned proportion of the unfinished business was to be valued to determine the decedent’s interest in the partnership assets.” See also McClennen v. Commissioner of Internal Revenue, 1 Cir., 131 F. 2d 165, 168, 170 , 144 A. L. R. 1127, in which, by the terms of the partnership agreement the retiring partner, or the estate of a deceased partner, ⁴³⁸ was entitled to receive a share of the entire net profits for eighteen months, in lieu of “The retiring or deceasing member’s interest in the capital, the assets, the receivables, the possibilities and the good will of the Firm,” to which he would have been entitled in the absence of such a provision. In the agreement of May 18, 1944, Hagan released his right to an accounting for his half interest in the partnership, retroactive to March 31, 1944, in exchange for a 35 per cent, interest in the capital and future profits of the business. The method of arriving at this result was unorthodox, from an accounting point of view. Hagan asserts that he thought he was selling Dundore his interest in certain tools and equipment carried on the books at $17,949.50, for $10,000, and that the sum of $8,352.04, which had been paid for his account out of profits after March 31, 1944, and which was treated as a capital withdrawal in the agreement, was to be set up as “a tax reserve,” but it is perfectly clear that he fully understood and agreed that, whatever the method, his interest should be reduced to 35 per cent, in exchange for the payment to him of $10,000.

He admitted in cross-examination that he knew the agreement reduced his partnership interest to that extent. There is nothing patently unfair in this aspect of the bargain, or in the provision that Dundore, continuing the business, should receive a salary before profits. The agreement did contain elements of potential unfairness, however, in at least three particulars: (1) in reducing Hagan’s interest in capital as well as in profits and losses, from 50 per cent, to 35 per. cent., without any assured chance to recoup capital out of profits through a minimum term of the partnership, (2) in reducing his gross interest in assets, but leaving him a’ 50 per cent renegotiation liability, thus making possible a reduction of his net interest below 35 per cent., (3) in providing for purchase by Dundore, in the event that Hagan desired to sell, and payment in installments over ten years without interest on the unpaid balance. The latter provision did not become material.

The out ⁴³⁹ standing element of unfairness was the fact that under the new agreement Dundore could have immediately exercised his option to purchase Hagan’s reduced interest at its book value, excluding good will, and in this way cut off any chance of future profits. It was this absence of any time limitation on the exercise of the option which Hagan, who had no independent legal advice, apparently overlooked. It was not brought to his attention by counsel representing both parties. On the contrary, when he complained that the agreement seemed to be “unbalanced” or one-sided, he was told that “he could get out whenever he wanted to,” or that the agreement could be “broken at any time you want,” if it did not work out to his satisfaction.

He understood this to apply not merely to the option to purchase, but “the whole agreement.” Liepman testified that he may have told Hagan that he could “get out whenever he wanted”; that he did not put