Court Opinion

ID: 9476533
Source: CourtListenerOpinion
Date Created: 2023-08-05 05:58:24.029752+00
Date Added: 2024-06-11T17:45:22.382028
License: Public Domain

OAKES, Circuit Judge
(dissenting):
I respectfully dissent.
The appellant’s brief in places seems to rely solely on the proposition that because Chemtex had a 36.67% equity in the Egyptian corporation that built the paint plant, its accounting1 necessarily was erroneous and the expenses nondeductible. Understandably, then, the majority has been led into the same trap that I believe the district *633court fell into: taking appellant’s real argument to be that the phrase “pre-tax profits” in the Chemtex-Pashman employment agreement means gross revenues or price of the project, as Pashman testified on deposition. It is obvious that this cannot be correct and that pretax profits means revenues less appropriate costs. A careful reading of the record, however — and especially the deposition of Joseph Bainton, who negotiated the employment agreement on behalf of Chemtex, and of the affidavit of George J. Isaacs, a New York and New Jersey C.P.A. — convinces me that there are genuine issues of fact concerning whether Pashman now, or at some time in the future, may be entitled to further compensation. There are several cost items in the accounting submitted by Chemtex that Isaacs questions and that need to be further substantiated before their deduction should be permitted in arriving at a figure for pretax profits. To be sure, Isaacs questions all the costs for lack of an audit trail, i.e., supporting schedules, original bills of materials, invoices or pertinent source document references. But even absent these questions, I see specific questionable items, not resolvable at this time.
The first item I would question is the item of $470,000 for “Commissions.” While $120,000 is said to have been paid to Indconsult, $350,000 is “estimated” as an obligation to one Nakhleh in connection with his 5% “finders fee” on “equipment” supplied by Chemtex and “raw materials” to be supplied by Chemtex to the Project following the plant’s completion. • It would seem that so much of the “finder’s fee”— we do not know what Nakhleh “found” — as depends on raw materials to be supplied is irrelevant to the calculation of the profits on the plant proper. As to equipment expenses, the Chemtex affidavits simply estimate the cost of equipment to be supplied by Chemtex and Chemtex Austria at $7 million. But the accounting itself, note 1 supra, shows $1,205,066 equipment costs to Chemtex and $3,436,145 costs to Chem-tex Austria, i.e., $4,641,211. It may well be that as the affidavits suggest “certain of the equipment has not yet been supplied.” But how do we know how much remains to be provided?
The next item I would question is, of course, the $1,950,453 item for “Equity or ‘Selling Expense.’ ” While it may be that “[i]t is a regular practice of Chemtex to invest capital or equity on a project as a marketing tool,” the fact is that Chemtex does have an equity and that equity does have a value. While Chemtex says that “when a project is completed, Chemtex values that equity investment at anywhere from zero to 50 percent of the actual amount of the investment, and records that amount as an expense attributable to the project,” this cannot be in accordance with appropriate accounting procedures — C.P.A. Isaacs says the practice “represents a peculiar distortion of accounting terminology.” At best the writeoff of the equity is at this point premature and at worst it suggests the whole project is a bad one. Moreover, according to Bainton, “we all thought in the Egyptian. paint thing, it would have residual value, though God knows what it would be.” It would seem to me that the burden is on Chemtex to show justification for writing off any portion of the equity investment at this time. Interestingly, Chemtex would have it both ways because it asserts that it has paid Nakhleh’s commission in the sum of $178,-630.62 by giving him equity in the Egyptian Paint Co. in the amount of $141,168.12 plus $37,462.50 in cost overruns.
The next item I would question is “Administrative Overhead,” amounting to $972,854. According to Bainton it was never intended to charge administrative — as opposed to project — overhead to the plant project. As he said,
I can also tell you the reason that we did it without the Chemtex overhead is that in one year, the kind of business that Chemtex is, we could sell a lot of plants in one year and end up that the overhead attributable to any one project was negligible, or we could sell only one project in a year and all of the overhead could land on that; and that was the reason for always calculating these things on a stand-alone basis and not putting the general overhead in it.
*634Nor has there been established a basis for such a charge.
Just the omission from costs of the last two items, “Equity or ‘Selling Expense’ ” and “Administrative Overhead,” would show Chemtex’s net profits to be $2,200,-787 as to which Pashman would be entitled to a $220,078 commission as opposed to the $162,750 he has so far been paid. Con-cededly, Chemtex argues that Pashman is presently entitled only to 50% of his commission since the paint plant has not yet been accepted by the customer. This may mean that the present action is premature or at least should be held in abeyance pending acceptance; but there at least seem to me to be sufficient factual issues to warrant denial of summary judgment. The Isaacs affidavit also questions several other items, for example project costs and expenses incurred by and chargeable to Egyptian Paint Co.; charging a $50,000 commission to one Khalil as an expense rather than as a capital expenditure where the payment was made from a $960,000 saving by “the substitution of Cook Paint for Dupont Technology”; and bank charges for letters of credit properly alloca-ble to Egyptian Paint Co. These matters— which seem to me plausible — I would leave for trial.
Repeating, while Pashman and his counsel seemed to proceed on a theory that permits them to be blown out of the water, I would keep them afloat because the financial summary used by Chemtex to show no commission due is facially insufficient to show that nothing is due Pashman under the employment agreement. Accordingly, I respectfully dissent.

.
EGYPTIAN PAINT PROJECT PRETAX PROFITS
CHEMTEX CHEMTEX (AUSTRIA)
CONTRACT REVENUES S5,000,000.00 .S. 89,250,000
PROJECT COSTS Chemtex Labor $222,425.69
Outside Labor and Consulting 1,144,909.70 564,845
Materia! (Equipment) 1,205,066.60 50,992,401[=
$3,436,145]
Freight Packing and Insurance 243,222.45 1,661,891
Blueprints 11,565.81
Telephone and Telex 1,067.33 65,564
Travel and Related Expenses 440,252.48 672,800
Commissions 470,000.00 10,995,820
License and Know-How 190,000.00
CHEMTEX CHEMTEX (AUSTRIA)
Bank Charges 33,262.82 1,351,339
Project Execution Overhead 218,995.28
AWT Fee 1,723,400
Chemtex (Austria) Expenses 719,624
Equity or "Selling Expense” 1,950,453.31
Administrative Overhead 972,854.00
PROJECT COSTS $7,104,078.10 A.S. 68,747,684
A.S. 20,502,316
NET REVENUES $(2,104,078.10) $1,381,558*
TOTAL PRETAX PROFIT OI LOSS $(722,520.10)

 Austrian Schillings converted to dollars at a rate of A.S. 14.84= 1.00, which was the rate reported in the Wall Street Journal on July 31,1986 for July 30, 1986.