Case Name: William Crofton et al., Respondents, v. Howard S. Bargreen, Appellant
Court: Washington Supreme Court
Jurisdiction: Washington
Decision Date: 1958-12-10
Citations: 53 Wash. 2d 243
Docket Number: No. 34409
Parties: William Crofton et al., Respondents, v. Howard S. Bargreen, Appellant.
Judges: 
Reporter: Washington Reports
Volume: 53
Pages: 243–261

Head Matter:
[No. 34409.
Department Two.
December 10, 1958.]
William Crofton et al., Respondents, v. Howard S. Bargreen, Appellant.
Foster, J., dissents.
Parker Williams and Edward J. Novack, for appellant. Welts & Welts and Clarence J. Coleman, for respondents.
Reported in 332 P. (2d) 1081.

Opinion:
Donworth, J.
This action was brought by William Crofton and his son to recover the balance allegedly due under an option contained in a written partnership agreement which had been exercised by appellant. The trial court entered judgment for respondents in accordance with the prayer of the complaint, and appellant has appealed therefrom.
For convenience, William Crofton will be referred to as though he were the sole respondent, since his son, George, was a party plaintiff as the heir of his mother who had a community interest in the option at the time of her death. The son did not participate in any of the transactions involved in this suit.
In order to understand the legal problem involved, it is necessary to state the basic facts in some detail.
In 1917, respondent married, the maternal aunt of appellant. For more than thirty-five years thereafter, the parties enjoyed a relationship characterized by respondent as "very good," and by appellant as "very close." This litigation appears to be the only substantial dispute which has affected that relationship.
From 1933 to December 31, 1944, appellant, as sole proprietor, operated a wholesale beer distributing business in Everett called Crown Distributing Company. The business was financially successful.
On January 1, 1945, the parties executed articles of co-partnership which form the basis of the present controversy. The material portions thereof provided as follows:
"5. . . . [Appellant] is the present owner of the assets of said Crown Distributing Company and . . . [respondent] desires to buy a 49% interest in said company and further desires to operate said company together with . . . [appellant] as hereinafter provided, . . . [appellant] to own 51% of the assets and . . . [respondent] to own 49% of the assets.
"6. The capital of said co-partnership shall be contributed as follows: . . . [Appellant] will own 51% and . . . [respondent] will own 49% of the assets of said Crown Distributing Company at Everett, Washington. [Respondent] is buying said 49% interest therein under a note and chattel mortgage to carry interest at the rate of 6% per annum to be paid off as provided in said note and mortgage. The purchase price is to be based on the book value, plus the hook value figure for good will, the date of computation to he December 3.1, 1944. . . .
"7. Each of the partners will draw $350.00 a month and all profits after the above drawing accounts are paid are to be divided 51% to . . . [appellant] and 49% to . . . [respondent]. The profits are to be figured at the end of each month, or such other periods as may be deemed proper by the partners. No profits shall be drawn unless it is agreed by both partners. Profits may be used to finance the business if deemed necessary'. All operating and other expenses of the co-partnership shall be shared equally. . . .
"13. As an additional consideration for this agreement, . . . [respondent] grants . . [appéllant] . the option, if . . . [appellant] desires to exercise it, to repurchase the interest of the . . . [respondent] in the co-partnership for the amount. that . . • [respondent] paid . . . [appellant] for his interest therein, said option shall be exercised by giving thirty (30) days notice in writing to ; . . [respondent] of . . . [appellant's] intention to exercise the option. The repurchase price shall be paid in cash and . [respondent] shall execute and deliver proper conveyances of all his interest therein upon the payment of the purchase price. In event of the death of . . . [appellant] this right shall pass to the estate of . . . [appellant] and may be exercised by the executor or administrator of •. . . [appellant], whichever shall be appointed.
"14. Each of the parties shall have their capital investment as heretofore provided, subject to the limitation that . . . [respondent] is purchasing his interest in the business as heretofore described, and in event either party advances or loans to the partnership any further or greater sums, such advances or loan shall be repaid such partner as soon as practical and convenient out of the profits, and upon any dissolution such advance or loan shall be first refunded before any division of capital assets takes place, that is to say, any advance or loan shall be repaid to the party on the same basis as any other creditor of the partnership shall be repaid."
The chattel mortgage mentioned in paragraph six of this agreement was executed by respondent and his wife in favor of appellant. It covered an undivided one-half interest, in all of the assets of the partnership and was given as security for an interest-bearing note for $27,900.90, which repre sented forty-nine per cent of the book value of all assets of the business, including good will, computed as of December 31, 1944. This mortgage provided that all of respondent's forty-nine per cent of the profits in excess of respondent's salary, except those required in the business, should be applied to the payment of the mortgage debt until fully satisfied. Under this arrangement, it was possible for respondent and his then wife to acquire forty-nine per cent interest in a prosperous business without any cash contribution whatever from their own funds.
Shortly after entering into this agreement, respondent, who was about fifty-eight years of age at that time, commenced managing the partnership warehouse under the supervision of appellant, as provided in the articles of co-partnership.
The business thereafter continued to prosper to such an extent that at the end of two years respondent's forty-nine per cent share of the profits was sufficient to completely pay the note secured by his purchase-money mortgage, in addition to his income taxes. After 1946, although partnership profits declined somewhat, respondent's share averaged in excess of twenty-eight thousand dollars per year.
Respondent's wife (appellant's aunt) died January 1, 1949. During the latter part of March, 1953, respondent advised appellant of his intention to remarry. Appellant then told respondent that he wished to repurchase respondent's forty-nine per cent interest. Respondent made no objection to appellant's oral assertion of his right to purchase respondent's interest. Thereafter, the partnership was dissolved, effective April 30, 1953.
An instrument, entitled "Bill of Sale," dated April 27, 1953, purportedly subscribed and verified by respondent before a notary public (an official of the bank in which the partnership account was kept), was delivered to appellant for the purpose of conveying respondent's interest to him. Respondent denied the execution of this document. The trial court did not believe him. A second instrument, dated May 25, 1953, was executed by respondent George Crofton (who claims as an heir of his deceased mother) and appel lant, purporting to authorize respondent to sell George Crof-ton's inherited interest to appellant. A check for $9,141.84, dated May 25, 1953, was drawn on the partnership checking account in favor of respondent as payee. Although the signatures of both appellant and respondent had been required on partnership checks, only appellant signed for the Crown. Distributing Company as maker. A signature purporting to be that of respondent appears as endorser on the instrument. Respondent denied ever endorsing or receiving this check. The trial court found, however, to the contrary.
Extracts from partnership books of account, which were admitted in evidence, show the apportionment of profits during the entire eight years and four months' existence of the partnership. The interest of each partner was set up therein as follows: At the time of the inception of the partnership, a capital account was set up for each of the partners. Respondent's initial capital account credit totaled $27,900.90, the amount which he had contracted to pay for his forty-nine per cent interest in the business. Thereafter, as profits accrued and were apportioned, an appropriate credit entry was made to the capital account of each partner. From this total of capital contribution, plus profits, there was deducted from the account of each partner the amount of withdrawals for salary, income taxes, and accumulated profits.
Respondent's account revealed that from January 1, 1945,. through April 30, 1953, his capital contribution ($27,900.90), plus his share of the profits ($259,885.33), totaled $287,-786.23. But his withdrawals (including the sum of $27,-900.90, together with interest thereon withdrawn and applied to the mortgage debt) during the same period totaled $280,718.17, thereby leaving a capital account credit of only $7,068.06 in his favor. In other words, at the time appellant elected to exercise his option to repurchase respondent's interest, the latter had overdrawn his capital account to the extent of $20,832.84. During this period, appellant's account balance grew (by reason of not withdrawing all of his fifty-one per cent of the profits) from his initial contribution of over twenty-nine thousand dollars to over fifty-four thousand dollars. The "book value" of the business increased about four thousand dollars during the life of the partnership.
• Respondent's share of partnership profits credited annually to his capital account, as reflected by partnership books, is supported substantially by the declarations of income made by respondent in his individual Federal income tax returns filed annually from 1945 through 1953. On the debit side of his capital account, withdrawals charged to respondent are supported by extracts from the partnership check register listing each check with its date, payee, check number, and amount. Many of these checks are in evidence. Some of these checks, drawn in favor of respondent as payee, respondent denied ever having endorsed or received. But he was unable to identify any particular check that he had not received. The trial court made no finding of fact on this point.
The bookkeeper was asked by appellant to compute from the books of account the amount which respondent was entitled to receive for his interest in the partnership. She reported that .the figure should be $7,068.06. Appellant, mistakenly- thinking that this' amount did not include respondent's share of the "book value" for good will, caused this figure to be increased to $9,141.84. A check in this amount, payable to respondent, was signed by appellant and endorsed by respondent. Parenthetically, this resulted in.an overpayment of approximately two thousand dollars, but that is immaterial since no issue - regarding it has been raised.
Appellant testified that, after endorsing this check, respondent handed it to appellant with the suggestion that it be given to appellant's son, who was then operating an automobile sales agency. This disposition of the proceeds of the check was eventually made. Respondent denied endorsing the check or making this suggestion, but the trial court found that he had received $9,141.84 as part'payment for his partnership interest.
' After the dissolution of the' partnership in April, 1953, respondent was retained as a salaried. employee by appellant to perform the same duties as before. This employment continued until the slimmer of 1954. Although the parties saw each other almost daily during this fourteen-month period, respondent never questioned or complained about the termination of their business partnership. About a year after he ceased to work for appellant, respondent met appellant by chance outside his warehouse and asked for the balance of the partnership settlement consummated two and one-half years before. Appellant advised him that he had been paid in full for his partnership interest. A later demand letter from respondent's attorney to appellant proved fruitless, and this action followed.
The original complaint of respondent's contained a prayer for dissolution of the partnership, an accounting, sale of partnership assets and division of the proceeds, and for the appointment of a receiver. Thereafter the complaint was amended, respondent alleging the dissolution of the partnership pursuant to the option contained in the partnership agreement (paragraph 13, above quoted); that, upon der mand of appellant, respondent had turned over the partnership property to appellant, and that appellant failed to pay the sum of $27,900.90, which sum respondent had paid for his interest.
In his answer, appellant denied generally the allegations of the amended complaint, and affirmatively answered:
"That . . . [appellant] did pay unto the . . . [respondent] all of the purchase price of the interest of thé said . . . [respondent] as provided in said partnership agreement, and pursuant to the oral agreement and understanding of the parties at the time, to-wit; on or about the 27th day of April, 1953, and that no further sums of any nature are due therefor, and that payment has been made in full, . . ."
Respondent replied, denying generally the affirmative allegations contained in appellant's answer.
Upon the issues thus joined, the cause proceeded to trial. At the conclusion of all the evidence, the trial court rendered an oral decision, which, after referring to paragraph thirteen of the partnership agreement, reads in part:
". . . Now, if this had read that he could repurchase the interest of the . . . [respondent] for the amount of interest the . . . [respondent] had in the partnership, at the time of the repurchase, there would be no question that all he would have to pay is the amount that was remaining in the capital investment account. But under Paragraph 13, the fact that the capital investment account of . . . [respondent] was below the original 49% value, in my mind does not obviate the necessity of . . . [appellant] having to pay the $27,900.00.
"Taking up this matter, if his withdrawals were greater than his share of the profits, his investment was decreased, and therefore his interest is less at that time. Well, that may be true, that his present interest or the interest as of April. 30, 1953, was decreased, but under the wording of this contract, I don't think that makes any difference. It is clear that he was to pay the amount that . . . [respondent] paid when he purchased his interest, to-wit: the sum of $27,900.90. That is the only interpretation I can give to this agreement.
"The fact that in Paragraph 14 it provides that the advances or loans to the partnership shall first be repaid to the one partner upon dissolution, does not, in my opinion, modify Paragraph 13 when . . . [appellant] was repurchasing the interest of . . . [respondent]. I think that language is definite and certain. It only applies to advances or loans, for one thing. This matter was a matter of excessive withdrawals, if anything, and does not constitute an advance or loan to the partnership, but, rather, was, if anything, an exccesive withdrawal on behalf of the one partner. And, further, I believe that Paragraph 14 only applies in case of dissolution, other than the purchase of one's interest. . . ."
The trial court found that appellant failed to prove a meeting of the minds of the partners on an oral settlement agreement, or any consideration sufficient to support such agreement; that respondent was "unaware of the effect of the provision in the contract as to how much money he was entitled to have and receive" upon the election of the appellant to exercise his option; that respondent had received and endorsed the check for $9,141.84 which constituted part payment upon the indebtedness of $27,900.90. The court further found that there was a balance due respondent of $18,759.06, together with interest thereon from April 30, 1953, and entered judgment accordingly.
The undisputed evidence preponderates against the trial court's finding (No. 5) that:
". . . William Crofton was unaware of the effect of the provision in the contract as to how much money he was entitled to have and receive upon the election of . . . [appellant] to exercise this option as set forth in paragraph 13 of the Partnership. Agreement. . . ."
The record shows that respondent had access to the partnership books of account through the bookkeeper and also the accountant who audited the books. If respondent failed to avail himself of this means of ascertaining the facts as shown by the partnership books or failed to consult an attorney as to his rights under the articles of copartnership, the facts stated in finding No. 5 constitute no legal excuse for his failure to exercise reasonable diligence to inform himself. His lack of knowledge is immaterial. He had the same sources of knowledge as appellant and is chargeable with notice of all the facts which a reasonable investigation would have disclosed.
The only susbtantial issue presented is one of law, namely, the application of the partnership agreement to the facts stated, particularly the intention of the parties in including paragraph thirteen in the partnership agreement.
Three basic principles of contract construction recently reaffirmed by this court in Hering v. St. Paul-Mercury Indemnity Co., 50 Wn. (2d) 321, 311 P. (2d) 673 (1957), are: (1) The intention of the parties must control, (2) the intent must be ascertained from reading the contract as a whole, and (3) where the language used is unambiguous, an ambiguity will not be read into the contract.
Paragraph thirteen of this instrument - is ambiguous. It grants appellant the option to "repurchase the interest" of respondent "for the amount that . . . [respondent] paid . . . [appellant] for his interest." The amount so paid was $27,900.90. But, did the parties intend that upon exercising this option appellant would be required to pay $27,900.90 in order to repurchase respondent's forty-nine per cent interest in all assets and profits and disregard an indebtedness to the partnership of $20,073.78, created by respondent's overdrawing his capital account? Or, did they presuppose that respondent's capital account would not be diminished by his own overdrafts during the course of the partnership?
It is well established that:
" 'The court may always consider the surrounding circumstances leading lip to the execution of an agreement, not to evidence an intent contrary to that expressed in the agreement, but to place the court in the same position as the parties. . . . ' " Kelly v. Valley Constr. Co., 43 Wn. (2d) 679, 688, 262 P. (2d) 970 (1953).
This is so because:
"The first and best resort in the construction of contracts is to put oneself in the- place of the parties at the time the contract was executed—to look at it in. prospect rather than in retrospect—for, when money disputes have arisen, the perspective is apt to be clouded by the unexpected chance of gain or self-interest." Carnation Lbr. & Shingle Co. v. Tolt Land Co., 103 Wash. 633, 639, 175 Pac. 331 (1918).
See, also, Boeing Airplane Co. v. Firemen's Fund Indemnity Co., 44 Wm (2d) 488, 268 P. (2d) 654, 45 A. L. R. (2d) 984 (1954).
' The position of the parties at the time of entering into their copartnership agreement may be summarized as follows: '
Appellant wanted to assist his .aunt financially. Her husband (respondent) was not then an owner in any business, but was an employee of the Everett Pacific Company. Appellant was operating several profitable enterprises which involved beer distributorship in this state. In the conduct of one of these businesses (the Crown Distributing Company, of which appellant was sole proprietor), he needed a warehouse manager. For these reasons, he offered respondent a forty-nine per cent interest in the business on a partnership basis without requiring him to make any initial capital investment in the enterprise. In lieu thereof, it was agreed that all of respondent's forty-nine per cent of the profits should be used to retire his promissory note for $27,-900.90 (secured by mortgage on his partnership interest) until his capital contribution to the partnership evidenced by his note was paid in full. This capital contribution was based upon forty-nine.per cent of the "book value" of all business assets. Respondent accepted appellant's proposal by signing the articles of copartnership and the partnership operated very successfully for more than eight years.
The articles of copartnership contained (among other provisions) the option set forth in paragraph thirteen,' quoted above. Appellant reserved the right to' acquire respondent's forty-nine per cent interest in the .partnership property at any time for $27,900.90. This fixed price represented the amount which respondent was obligated to, and did, pay into the capital account from the first profits' received by him after the partnership was created. The purpose of paragraph thirteen was to enable appellant to recapture his former position as sole proprietor of the business upon reimbursing respondent' for his capital contribution, regardless of whether the actual value or "book value" of the capital assets had increased or diminished during the existence of the partnership because of normal business operations. In other words, appellant obligated himself to pay this fixed sum although through the exigencies of business the partnership capital might become' depléted. But it does not follow that he was bound to pay this fixed price for capital assets which had been deliberately depleted by respondent's overdrafts.
To interpret paragraph thirteen as compelling appellant to disregard respondent's overdrafts and pay him the same sum to acquire respondent's interest as though he had maintained his capital account intact, is unreasonable, since it does violence to the intentions of the parties. It was entirely proper for appellant to deduct the amount of respondent's overdrafts ($20,073.78) from the upset price of $27,900.90, leaving a net balance of $7,068.06. Since respondent has received the sum of $9,141.84, he has been paid, and in fact overpaid, for his interest.
The facts of this case appear to be substantially similar to those before this court in Ryan v. Ryan, 48 Wn. (2d) 593, 295 P. (2d) 1111 (1956). We there held that a partner's ad- vanee withdrawal of twenty thousand dollars in partnership funds, before the time of dissolution set forth in a written agreement, was properly considered by the trial court to be part payment on the contract price. The same principle should be here applied.
The judgment is reversed with directions to dismiss respondent's action.
Hill, C. J., Weaver, and Rosellini, JJ., concur.