Case ID: ad_140/html/0033-01.html
Source: Caselaw Access Project
Author: {"author": "Spring, J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Henry W. Watson, Appellant, v. Carmelo Gugino, Respondent.
    Fourth Department,
    July 12, 1910.
    Contract — agreement to manage corporation — breach — action for damages.
    Action to recover damages for breach of contract. The defendant who was experienced in the business of manufacturing macaroni induced the plaintiff to purchase an interest in his business with the understanding that a corporation was to be formed in which the plaintiff should own approximately a third interest. The defendant was to be president and manager of the corporation and the plaintiff its secretary and treasurer, the defendant agreeing that if' illness or other cause should compel him to give up the business he would provide a person fully as competent as he to take his place. After the organization of the corporation and while the manufacture and sale of macaroni was being carried on successfully, the defendant left the business under the pretense that he was ill-and installed his brother as manager. Shortly thereafter hp began to erect a large plant for the manufacture of macaroni in close proximity to the other factory and on the completion of the new plant undersold the product of the other corporation so that its business was ruined.
    
      Held, that the plaintiff was entitled to recover for breach of contract;
    That the action was not one brought by a stockholder against another stockholder to recover for corporate losses, but upon the contrary was based upon the written contract fixing the rights of parties, which agreement survived the formation of the corporation.
    Appeal by the plaintiff, Henry W. Watson, from a judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of Erie on the 8th day of March, 1910, upon the dismissal of the complaint by direction of the court at the close of plaintiff’s case upon a trial at the Erie Trial Term, and also from an order made on the 7th day of March, 1910, directing the dismissal of the complaint.
    
      William G. Crosby and Edward C. Randall, for the appellant.
    
      Gordon F. Matthews, for the respondent.
   Spring, J.:

The action is to recover damages for breach of contract. The defendant was experienced in the business of manufacturing maearoni, and with his brother Natale had been profitably carrying on that business in the city of Buffalo. The brother professed a desire to return to Italy, his native country, and at the request of the defendant in October, 1904, the plaintiff purchased the interest of Hatale in the business, paying him therefor $3,400. Shortly thereafter the plaintiff and the defendant entered into a written copartnership agreement which was intended to be and was in fact preliminary to the organization of a corporation in lieu of the copartnership.

By the agreement the entire business was to be transferred to the corporation which was to consist of a capital stock of $10,000, divided into shares of $100 each, and in addition to the property of the firm the defendant was to contribute $800 and the plaintiff $400 to the capital stock. Of the 100 shares of stock the defendant was to hold 65 shares, liis father Antonio 1 share and the plaintiff 1 share, and his brother Hiram 33 shares, which were held as collateral security for a debt of the plaintiff and which were transferred to the plaintiff before the commencement of this action.

The defendant was to be the president and manager of the corporation and the plaintiff its secretary and treasurer. The defendant agreed “ to devote his whole time and attention to the said corporation business,” and the compensation of the officers was fixed by the agreement. The agreement also contained this provision : “ Carmelo .Gugino further agrees that if by reason of illness or other cause of which said Carmelo Gugino does not now know of, which would necessitate his giving up business, said Carmelo Gugino agrees to provide a person fully as competent as he is, and who is acceptable to said Henry W. Watson, to take his place.”

A corporation was duly organized on October 26, 1904, designated the Gugino Macaroni Company. Officers were elected, the capital stock paid in and the certificates of stock issued and distributed, all in conformity to the agreement, and the business . started auspiciously on the Terrace in the city of Buffalo, and so • continued for a .time. The defendant was the master spirit in the management and conduct of the corporate affairs, and such was the expectation when the copartnership agreement was entered into and the corporation organized. The defendant'was not alone familiar with the manufacturing of macaroni but also understood the trade, could speak both the Italian and English languages fluently and was well equipped by long experience to make the business a success, and that fact was the chief inducement for plaintiff’s enlistment in the enterprise as he was not at all familiar with the business.

About two weeks after the business started the defendant was urgent that his brother Natale be employed in the business and later transferred to him a number of his certificates of stock. In the month of March the defendant, on the pretense that he was ill, left the business temporarily, as it w'as assumed, and Natale took charge. The defendant never returned to the factory and shortly after he commenced the erection of a large plant for the manufacture of macaroni in close proximity to the factory of the corporation 'in which they were already interested. From that- time on the defendant apparently gave no attention to the business of the existing corporation. He assured the plaintiff that the business of the new factory would be in the extensive wholesaling of the product and would not interfere with the sales of the corporation which the parties had- organized. The new plant was completed and the manufacture of macaroni commenced in July, 1906, on an enlarged scale. The corporation had been receiving uniformly three and one-half cents a pound for its production and the new concern promptly reduced the price to three cents a pound. With greater sales, a larger plant, more extensive machinery, and, above all, by reason of the skilled supervision and management of ‘the defendant, the new industry captured the1 trade and the business of the existing corporation rapidly fell off. It was unable to pay expenses and in November closed out entirely. Little was realized from the assets on hand and the greater part of the investment made by the plaintiff was lost, and, as the jury might have found, by reason of the defendant’s failure to perform his part of the copartnership agreement.

It is claimed by the defendant that the action is by one stockholder against another to recover for corporate losses. I do not so understand .the nature of the action. It is based upon the written agreement which fixed the rights of the parties. The formation of the corporation was a mere incident, a medium for making effective their agreement. The organization of the corporation did not terminate the written agreement nor absolve either party from complying with its terms. The plaintiff purchased the stock of Natale and became a.copartner because he'relied upon the sagacity and experience of the defendant and because he expected that the articles of copartnership between them would be fairly carried out.

By his contract the defendant agreed to devote “ his whole time and attention to the said corporation business.” Also, if illness or other cause of which said Carmelo Gugino does not now know of, which would necessitate his giving up business,” another competent man acceptable to the plaintiff was to take the place of the defendant. The defendant did not devote his whole time to the business. That stipulation was one of the chief factors to the success of the project, and when the plaintiff, a tyro in it, purchased his interest he relied upon the defendant’s fidelity to the affairs of the corporation. There was no reasonable cause which necessitated the defendant’s giving up the business, and he did not give up business altogether. The jury may have found that the course adopted by the defendant was in his mind from the inception of the copartners!) ip. He wholly abandoned the project without apparent excuse or justification, he started a new business which inevitably must annihilate the corporation, and then endeavored to induce the plaintiff to join in that enterprise and' subscribe for §10,000 of stock at par. .All these facts would have been significant in enabling the jury to determine whether the defendant violated the .terms of the agreement.

The provision by which, if the defendant was obliged to give up business by reason of ill-health, or similar cause, and in the event of which he was to.employ another competent man, related to business generally. That is, the illness or other cause must have been . ' sufficient to require him to abandon business entirely, and ‘ there is no pretense that he did anything of that kind.

It is contended that no time for the running of the corporation, was provided for and, consequently, the defendant could abandon the business at his election. It is a fair interpretation of the contract that the-parties conteinplated the corporation would continue for-a considerable time. The plaintiff did not anticipate that the busi.ness with $10,000 invested in it and operating profitably would be abandoned in a year or two. Nor was it within the reasonable.construction of the defendant’s agreement to devote his time and attention to the business that within six mouths he should practically withdraw from any active participation in it. These facts and the defendant’s conduct unexplained were proper for the jury to consider in order to ascertain whether the agreement was broken by the defendant to the damage of the plaintiff.

The rule invoked by the defendant that the plaintiff cannot maintain the action because he is suing a stockholder of the corporation has no application. He is not seeking to have money paid into the corporation or to sustain the life of that body. It is a defunct organization, but the agreement in which the obligations of one party to the other are defined still subsists. That instrument may be considered in connection with the corporation and its business. The parties so intended, and the damages sustained by its breach are personal to the plaintiff. The parties to the action are the only parties to the contract, and it was a live instrument all the time.

The defendant now claims his brother was fully as competent as he to manage the business and was acceptable to the plaintiff. The latter testified otherwise, and his evidence is not controverted.

It is also urged that the plaintiff only owned one share of the capital stock and his damages in any event would be trifling. The certificates of stock were held by - the brother of the plaintiff as collateral security. The plaintiff was the real owner of the stock. lie was the secretary and treasurer and active in the business of the corporation. The defendant understood the reason for the issuance of the stock to Hiram Watson instead of the plaintiff.

Possibly the defendant may be able to give a satisfactory explanation of his conduct, but a prima facie case was made out.

The judgment should be reversed/

All concurred.

Judgment reversed and new trial ordered, with costs to appellant to abide event.